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 March 31, 2010





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


For the
transition period from _______ to _______





001-33674


(Commission
file number)





AGFEED
INDUSTRIES, INC.


(Exact
name of registrant as specified in its charter)




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





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





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





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


Yes           x           No            ̈





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  ̈  No  ̈





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


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





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


Yes            ̈   No           x





On May 7,
2010, 45,053,263 shares of the registrant's common stock were
outstanding.





TABLE
OF CONTENTS





PART
      I – FINANCIAL INFORMATION
              3Item
      1.
              Financial
      Statements
              3Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              20Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              29Item
      4.
              Controls
      and Procedures
              29Part
      II.
              OTHER
      INFORMATION
              30Item
      1.
              Legal
      Proceedings
              30Item
      1A.
              Risk
      Factors
              30Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              30Item
      3.
              Defaults
      Upon Senior Securities
              30Item
      4.
              (Removed
      and Reserved)
              30Item
      5.
              Other
      Information
              30Item
      6.
              Exhibits
              30SIGNATURES
              31


2


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





PART
I – FINANCIAL INFORMATION





Item
1.          Financial
Statements





March 31,
                                  
                                  
                                  December 31,2010
                                  
                                  
                                  2009(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                  
                                  $
                                  28,620,027
                                  
                                  
                                  $
                                  37,580,154Accounts
      receivable, net of allowance for doubtful accounts of $498,612 and
      $415,765
                                  
                                  
                                  22,999,966
                                  
                                  
                                  
                                  14,397,793Advances
      to suppliers
                                  
                                  
                                  813,242
                                  
                                  
                                  
                                  1,173,941Other
      receivables
                                  
                                  
                                  4,658,159
                                  
                                  
                                  
                                  2,186,643Inventory
                                  
                                  
                                  25,649,502
                                  
                                  
                                  
                                  23,835,412Prepaid
      expenses
                                  
                                  
                                  974,950
                                  
                                  
                                  
                                  1,325,150Debt
      issue costs
                                  
                                  
                                  27,287
                                  
                                  
                                  
                                  34,706Total
      current assets
                                  
                                  
                                  83,743,133
                                  
                                  
                                  
                                  80,533,799PROPERTY
      AND EQUIPMENT, net
                                  
                                  
                                  27,508,016
                                  
                                  
                                  
                                  26,991,851CONSTRUCTION-IN-PROCESS
                                  
                                  
                                  10,570,727
                                  
                                  
                                  
                                  7,615,132INTANGIBLE
      ASSETS, net
                                  
                                  
                                  43,910,857
                                  
                                  
                                  
                                  43,808,499OTHER
      ASSETS
                                  
                                  
                                  4,072,546
                                  
                                  
                                  
                                  3,998,739TOTAL
      ASSETS
                                  
                                  $
                                  169,805,279
                                  
                                  
                                  $
                                  162,948,020LIABILITIES AND EQUITYCURRENT
      LIABILITIES:Short-term
      loan
                                  
                                  $
                                  4,401,000
                                  
                                  
                                  $
                                  4,401,000Accounts
      payable
                                  
                                  
                                  10,070,537
                                  
                                  
                                  
                                  6,162,385Other
      payables
                                  
                                  
                                  4,039,693
                                  
                                  
                                  
                                  1,892,858Unearned
      revenue
                                  
                                  
                                  415,373
                                  
                                  
                                  
                                  582,266Accrued
      expenses
                                  
                                  
                                  73,207
                                  
                                  
                                  
                                  83,649Accrued
      payroll
                                  
                                  
                                  649,280
                                  
                                  
                                  
                                  975,485Tax
      and welfare payable
                                  
                                  
                                  610,336
                                  
                                  
                                  
                                  396,370Interest
      payable
                                  
                                  
                                  137,919
                                  
                                  
                                  
                                  120,419Total
      current liabilities
                                  
                                  
                                  20,397,345
                                  
                                  
                                  
                                  14,614,432CONVERTIBLE
      NOTES, net of debt discount of $64,215 and $81,675
                                  
                                  
                                  935,785
                                  
                                  
                                  
                                  918,325TOTAL
      LIABILITIES
                                  
                                  
                                  21,333,130
                                  
                                  
                                  
                                  15,532,757COMMITMENTS
      AND CONTINGENCIES (Note 10)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -EQUITY:AgFeed
      stockholders' equity:Common
      stock, $0.001 per share; 75,000,000 shares authorized; 45,270,558 issued
      and 44,903,263 outstanding at March 31, 2010 44,510,558 issued and
      44,143,263 outstanding at December 31, 2009
                                  
                                  
                                  45,271
                                  
                                  
                                  
                                  44,511Additional
      paid-in capital
                                  
                                  
                                  112,828,305
                                  
                                  
                                  
                                  109,281,086Deferred
      compensation
                                  
                                  
                                  (3,462,280
                                  )
                                  
                                  
                                  -Other
      comprehensive income
                                  
                                  
                                  4,177,214
                                  
                                  
                                  
                                  4,176,450Statutory
      reserve
                                  
                                  
                                  4,984,833
                                  
                                  
                                  
                                  4,685,115Treasury
      stock (367,295 shares)
                                  
                                  
                                  (1,811,746
                                  )
                                  
                                  
                                  (1,811,746
                                  )Retained
      earnings
                                  
                                  
                                  31,978,263
                                  
                                  
                                  
                                  31,210,563Total
      AgFeed stockholders' equity
                                  
                                  
                                  148,739,860
                                  
                                  
                                  
                                  147,585,979Noncontrolling
      interest (deficit)
                                  
                                  
                                  (267,711
                                  )
                                  
                                  
                                  (170,716
                                  )Total
      equity
                                  
                                  
                                  148,472,149
                                  
                                  
                                  
                                  147,415,263TOTAL
      LIABILITIES AND EQUITY
                                  
                                  $
                                  169,805,279
                                  
                                  
                                  $
                                  162,948,020




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




3





AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME





Three Months Ended March 31,2010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)Revenues
                      
                      $
                      52,859,067
                      
                      
                      $
                      33,429,274Cost
      of goods sold
                      
                      
                      46,539,785
                      
                      
                      
                      27,625,869Gross
      profit
                      
                      
                      6,319,282
                      
                      
                      
                      5,803,405Operating
      expensesSelling
      expenses
                      
                      
                      1,030,623
                      
                      
                      
                      863,867General
      and administrative expenses
                      
                      
                      3,664,385
                      
                      
                      
                      1,757,172Total
      operating expenses
                      
                      
                      4,695,008
                      
                      
                      
                      2,621,039Income
      from operations
                      
                      
                      1,624,274
                      
                      
                      
                      3,182,366Non-operating
      income (expense):Other
      expense
                      
                      
                      (96,373
                      )
                      
                      
                      192,681Interest
      income
                      
                      
                      48,011
                      
                      
                      
                      60,562Interest
      and financing costs
                      
                      
                      (124,911
                      )
                      
                      
                      (152,914
                      )Foreign
      currency transaction gain (loss)
                      
                      
                      13,803
                      
                      
                      
                      (1,831
                      )Total
      non-operating income (expense)
                      
                      
                      (159,470
                      )
                      
                      
                      98,498Income
      before provision for income taxes
                      
                      
                      1,464,804
                      
                      
                      
                      3,280,864Provision
      for income taxes
                      
                      
                      453,580
                      
                      
                      
                      215,550Net
      income including noncontrolling interest
                      
                      
                      1,011,224
                      
                      
                      
                      3,065,314Less:
      Net income (loss) attributed to noncontrolling interest
                      
                      
                      (56,194
                      )
                      
                      
                      46,474Net
      income attributed to AgFeed
                      
                      
                      1,067,418
                      
                      
                      
                      3,018,840Other
      comprehensive incomeForeign
      currency translation gain (loss)
                      
                      
                      764
                      
                      
                      
                      (153,854
                      )Comprehensive
      Income
                      
                      $
                      1,068,182
                      
                      
                      $
                      2,864,986Weighted
      average shares outstanding :Basic
                      
                      
                      44,869,485
                      
                      
                      
                      37,933,141Diluted
                      
                      
                      45,213,024
                      
                      
                      
                      37,933,141Earnings
      per share attributed to AgFeed common stockholders:Basic
                      
                      $
                      0.02
                      
                      
                      $
                      0.08Diluted
                      
                      $
                      0.02
                      
                      
                      $
                      0.08




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


4


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS




Three Months Ended March 31,2010
                        
                        
                        2009(unaudited)
                        
                        
                        (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income including noncontrolling interest
                        
                        $
                        1,011,224
                        
                        
                        $
                        3,065,314Adjustments
      to reconcile net income including noncontrolling interest  to
      net cash used in operating activities:Depreciation
                        
                        
                        811,899
                        
                        
                        
                        610,706Amortization
                        
                        
                        23,191
                        
                        
                        
                        12,779Stock
      based compensation
                        
                        
                        75,281
                        
                        
                        
                        138,531Issuance
      of common stock for services
                        
                        
                        375,720
                        
                        
                        
                        -Amortization
      of debt issuance costs
                        
                        
                        7,419
                        
                        
                        
                        28,193Amortization
      of discount on convertible debt
                        
                        
                        17,460
                        
                        
                        
                        66,349(Increase)
      / decrease in assets:Accounts
      receivable
                        
                        
                        (8,599,242
                        )
                        
                        
                        (2,523,056
                        )Other
      receivables
                        
                        
                        (2,466,242
                        )
                        
                        
                        (623,691
                        )Inventory
                        
                        
                        (1,813,472
                        )
                        
                        
                        985Advances
      to suppliers
                        
                        
                        360,605
                        
                        
                        
                        30,505Prepaid
      expenses
                        
                        
                        350,014
                        
                        
                        
                        301,104Other
      assets
                        
                        
                        (73,782
                        )
                        
                        
                        208,976Increase
      / (decrease) in current liabilities:Accounts
      payable
                        
                        
                        3,906,822
                        
                        
                        
                        1,202,475Other
      payables
                        
                        
                        2,142,963
                        
                        
                        
                        (3,866,938
                        )Unearned
      revenue
                        
                        
                        (166,837
                        )
                        
                        
                        (204,837
                        )Accrued
      expenses
                        
                        
                        (12,304
                        )
                        
                        
                        (306
                        )Accrued
      payroll
                        
                        
                        (326,087
                        )
                        
                        
                        (173,358
                        )Tax
      and welfare payable
                        
                        
                        213,894
                        
                        
                        
                        (229,655
                        )Interest
      payable
                        
                        
                        17,500
                        
                        
                        
                        (74,628
                        )Net
      cash used in operating activities
                        
                        
                        (4,143,974
                        )
                        
                        
                        (2,030,552
                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of property and equipment
                        
                        
                        (4,282,474
                        )
                        
                        
                        (2,211,649
                        )Purchase
      of intangible assets
                        
                        
                        (125,514
                        )
                        
                        
                        (35,294
                        )Net
      cash used in investing activities
                        
                        
                        (4,407,988
                        )
                        
                        
                        (2,246,943
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Offering
      costs paid
                        
                        
                        -
                        
                        
                        
                        (276,885
                        )Capital
      contributed by noncontrolling interest holders
                        
                        
                        -
                        
                        
                        
                        118,664Purchase
      of noncontrolling interest in majority owed hog farms
                        
                        
                        (406,103
                        )
                        
                        
                        -Net
      cash used in financing activities
                        
                        
                        (406,103
                        )
                        
                        
                        (158,221
                        )Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        (2,062
                        )
                        
                        
                        (20,991
                        )NET
      DECREASE IN CASH & CASH EQUIVALENTS
                        
                        
                        (8,960,127
                        )
                        
                        
                        (4,456,707
                        )CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
                        
                        
                        37,580,154
                        
                        
                        
                        24,839,378CASH
      & CASH EQUIVALENTS, ENDING BALANCE
                        
                        $
                        28,620,027
                        
                        
                        $
                        20,382,671SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                        
                        $
                        64,969
                        
                        
                        $
                        133,000Income
      taxes paid
                        
                        $
                        210,860
                        
                        
                        $
                        176,640
 
 The
accompanying notes are an integral part of these consolidated financial
statements.


5


AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 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 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
three months ended March 31, 2010 are not necessarily indicative of the results
to be expected for the full year ending December 31, 2010.





Organization and Lines of
Business





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





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





Basis of
Presentation





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





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





Noncontrolling
Interest





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





Certain
amounts presented for prior periods previously designated as minority interest
have been reclassified to conform to the current year presentation. Effective
January 1, 2009, the Company adopted Financial Accounting Standards
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,”
which established new standards governing the accounting for and reporting of
noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and
the loss of control of subsidiaries. Certain provisions of this standard
indicate, among other things, that NCIs (previously referred to as minority
interests) be treated as a separate component of equity, not as a liability (as
was previously the case), that increases and decreases in the parent’s ownership
interest that leave control intact be treated as equity transactions rather than
as step acquisitions or dilution gains or losses, and that losses of a partially
owned consolidated subsidiary be allocated to the NCI even when such allocation
might result in a deficit balance. This standard also required changes to
certain presentation and disclosure requirements. The provisions of the standard
were applied to all NCIs prospectively, except for the presentation and
disclosure requirements, which were applied retrospectively to all periods
presented.


6


AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





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





Foreign Currency
Translation





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





Note
2 – Summary of Significant Accounting Policies





Use of
Estimates





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





Reclassification





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





Cash and Cash
Equivalents





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





Accounts
Receivable





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





Advances to
Suppliers





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


7


AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





Inventory





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





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





March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(audited)Raw
      material
                    
                    $
                    8,001,734
                    
                    
                    $
                    7,638,999Work
      in Process
                    
                    
                    109,948
                    
                    
                    
                    84,494Finished
      Goods - feed
                    
                    
                    637,050
                    
                    
                    
                    460,349Finished
      Goods - hogs
                    
                    
                    17,015,106
                    
                    
                    
                    15,703,12725,763,838
                    
                    
                    
                    23,886,969Less:
      reserve for obsolescence
                    
                    
                    (114,336
                    )
                    
                    
                    (51,557
                    )$
                    25,649,502
                    
                    
                    $
                    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 March 31, 2010 and
December 31, 2009:




March
      31,
                  
                  
                  December 31,2010
                  
                  
                  2009(audited)Office
      equipment
                  
                  $
                  536,668
                  
                  
                  $
                  525,991Operating
      equipment
                  
                  
                  5,411,516
                  
                  
                  
                  4,655,298Vehicles
                  
                  
                  903,696
                  
                  
                  
                  871,058Swines
      for reproduction
                  
                  
                  12,548,736
                  
                  
                  
                  13,432,353Buildings
                  
                  
                  12,625,226
                  
                  
                  
                  11,659,693Total
                  
                  
                  32,025,842
                  
                  
                  
                  31,144,393Less
      accumulated depreciation
                  
                  
                  (4,517,826
                  )
                  
                  
                  (4,152,542
                  )$
                  27,508,016
                  
                  
                  $
                  26,991,851


8


AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





Construction-in-Process





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





Long-Lived
Assets





The
Company applies the provisions of ASC Topic 360, “Property, Plant, and
Equipment,” which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. ASC 360 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair value of the long-lived assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair values are reduced for the
cost of disposal. Based on its review, the Company believes that as of March 31,
2010 and December 31, 2009, there was no significant impairment of its
long-lived assets.





Intangible
Assets





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




March
      31,
                  
                  
                  December
      31,2010
                  
                  
                  2009(audited)Right
      to use land
                  
                  $
                  913,484
                  
                  
                  $
                  825,007Customer
      list
                  
                  
                  293,400
                  
                  
                  
                  293,400Computer
      software
                  
                  
                  192,428
                  
                  
                  
                  159,894Intangible
      related to hog farm acquisitions
                  
                  
                  42,744,247
                  
                  
                  
                  42,744,247Total
                  
                  
                  44,143,559
                  
                  
                  
                  44,022,548Less
      Accumulated amortization
                  
                  
                  (232,702
                  )
                  
                  
                  (214,049
                  )Intangibles,
      net
                  
                  $
                  43,910,857
                  
                  
                  $
                  43,808,499




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





Revenue
Recognition





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


9




AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





Advertising
Costs




The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the three months
ended March 31, 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 months ended March 31, 2010 and 2009 were not
significant.





Stock-Based
Compensation




The
Company records stock-based compensation in accordance with ASC Topic 718,
“Compensation – Stock Compensation.” ASC 718 requires companies to measure
compensation cost for stock-based employee compensation at fair value at the
grant date and recognize the expense over the employee’s requisite service
period. The Company recognizes in the statement of operations the grant-date
fair value of stock options and other equity-based compensation issued to
employees and non-employees. There were 210,000 options outstanding as of March
31, 2010.




Income
Taxes




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




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





Foreign Currency
Transactions and Comprehensive Income




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




Basic and Diluted Earnings
Per Share




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


10





AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings per share computations for the three months ended
March 31, 2010 and 2009:





2010
                
                
                2009Per Share
                
                
                
                
                
                Per ShareShares
                
                
                Amount
                
                
                Shares
                
                
                AmountBasic earnings
      per share
                
                
                44,869,485
                
                
                $
                0.02
                
                
                
                37,933,141
                
                
                $
                0.08Effect
      of dilutive stock options and warrants
                
                
                343,539
                
                
                
                -
                
                
                
                -
                
                
                
                -Diluted
      earnings per share
                
                
                45,213,024
                
                
                $
                0.02
                
                
                
                37,933,141
                
                
                $
                0.08





Statement of Cash
Flows




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





Segment
Reporting





ASC Topic
280, “Segment Report,” requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance.  The Company determined it has two
reportable segments (See Note 9).  The Company had previously reported
its feed operations as three separate segments since the three operations were
located in different Provinces.  The Company determined its feed
operations should be reported as one segment.





Fair Value of Financial
Instruments





For
certain of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, 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.




11





AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





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




The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.





As of
March 31, 2010, 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.




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





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





Note
3 – Convertible Notes and Warrants





On
February 25, 2008, the Company entered into a Securities Purchase Agreement with
Apollo Asia Opportunity Master Fund, L.P., Jabcap Multi-Strategy Master Fund
Limited, J-Invest Ltd., and Deutsche Bank AG London Branch (collectively the
“Investors”) in connection with a private placement transaction providing for,
among other things, the issuance of senior convertible notes (the “Notes”) for
aggregate gross proceeds of $19 million and warrants (the “Warrants”) to
purchase up to an aggregate of 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% per annum and are convertible into shares of the Company’s common stock at
an initial conversion price of $10.00 per share. The conversion price is subject
to a “weighted average ratchet” anti-dilution adjustment. The conversion price
is also subject to adjustment on a proportional basis, to the extent that the
Company’s audited net income for the fiscal years ending 2008 and 2009 is less
than $30 million and $40 million, respectively; subject to a per share floor
price of $5.00.  Due to the Company not generating $30 million net
income for the year ended December 31, 2008, the conversion price on the 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%.


12





AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





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 months ended
March 31, 2010 and 2009, the Company amortized $7,419 and $28,193, 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 in excess of 9.99% of the Company’s outstanding shares of common
stock. In addition, the Notes provide no conversion may be made if the
conversion would cause the Company to breach of its obligations under the rules
and regulations of the Nasdaq Global Market, unless the Company obtains
stockholder approval for such issuances as required by such rules and
regulations.




The
Warrants are immediately exercisable, expire on February 25, 2011 and entitle
their holders, in the aggregate, 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 in excess of 9.99% of the Company’s outstanding shares of common
stock. In addition, the Warrants provide that no exercise may be made if it
would cause the Company to be in breach of its obligations under the rules and
regulations of the Nasdaq Global Market, unless the Company obtains stockholder
approval for such issuances as required by such rules and
regulations.





The
Warrants granted to the Investor on February 25, 2008 and conversion feature in
the above Notes are not considered derivative instruments that need to be
bifurcated from the original security since the Warrants and the conversion
price of the Notes have a floor of $5.00, which means the Company can determine
the maximum shares that could be issued upon conversion. The Company determined
the fair value of the detachable warrants issued in connection with the Notes to
be $1,269,442, using the Black-Scholes option pricing model and the following
assumptions:  expected life of 1 year, a risk free interest rate
of 2.10%, a dividend yield of 0% and volatility of 70%. In addition,
the Company determined the value of the beneficial conversion feature to be
$2,770,442. The combined total discount for the Notes is $4,039,885 and is
being amortized over the term of the Notes. For the three months ended March 31,
2010 and 2009, the Company amortized $17,460 and $66,348, respectively, of the
aforesaid discounts as interest and financing costs in the accompanying
consolidated statements of operations.


13





AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





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





Note
4 – Short-Term Loans





Short
term loans at March 31, 2010 and December 31, 2009 are follows:





March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009(audited)Short
      term bank loan payable to Shanghai Pudong Development Bank.  The
      loan accrues interest at 5.84% and is due May 24, 2010.  The
      loan is collateralized by buildings and land use rights.
                  
                  $
                  4,401,000
                  
                  
                  $
                  4,401,000





Note
5 – Stockholders’ Equity





Common
Stock





On
January 4, 2010, the Company approved grants of 760,000 shares of restricted
stock to certain officers, directors and key employees.  The restricted
stock awards have vesting schedules ranging from 1 to 3 years.  The
value of the awards granted was $3,838,000 which was calculated using the fair
market value of the Company’s stock price at the date of grant.  This
amount is being expensed over the vesting period as the restrictions
lapse.  The expense recognized during the three months ended March 31,
2010 was $375,720.  The amount that has not been expensed is shown as
deferred compensation as a contra-equity account in the accompanying
consolidated balance sheet.





Equity Credit
Agreement





On
September 9, 2009, the Company entered into an Equity Credit Agreement with
Southridge Partners II, LP (“Southridge”), which was amended and restated as of
November 9, 2009, providing for, among other things, the issuance of shares of
its common stock at any time and from time to time during the next two years for
gross proceeds of up to $50,000,000. In connection with the closing of the
transaction, the Company also issued Southridge a warrant to purchase an
additional 400,000 shares of its common stock during a five year period at an
exercise price of $5.75 per share.  The fair value of the warrant was
charged to additional paid in capital as it was issued in connection with an
equity instrument.  This transaction closed on September 9,
2009.  No shares have been issued under the terms of the Equity Credit
Agreement.  See the discussion in Note 12 “Subsequent Events” for a
description of the transaction relating to the surrender of Southridge’s
existing warrant to the Company.





Note
6 – Employee Common Welfare





The total expense for the employee common welfare was $101,530
and $117,065 for the three months ended March 31, 2010 and 2009,
respectively.  The Company recorded welfare payable of $544 and $1,940
at March 31, 2010 and December 31, 2009, respectively, which is included in tax
and welfare payable in the accompanying consolidated balance
sheet.


14





AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





Note
7 – Statutory Common Welfare Fund





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





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





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





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





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





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





The
Company appropriated $299,718 and $344,382 as reserve for the statutory surplus
reserve and welfare fund for the three months ended March 31, 2010 and 2009,
respectively.





Note
8 – Stock Options and Warrants





Stock
Options





Following
is a summary of stock option activity:





Options
                    outstanding
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Weighted
                    average
                    remaining
                    contractual life
                  
                  
                  Aggregate
                    Intrinsic ValueOutstanding,
      December 31, 2009
                  
                  
                  210,000
                  
                  
                  $
                  8.42
                  
                  
                  
                  3.74
                  
                  
                  $
                  51,000Granted
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      March 31, 2010
                  
                  
                  210,000
                  
                  
                  $
                  8.42
                  
                  
                  
                  3.49
                  
                  
                  $
                  33,600Exercisable,
      March 31, 2010
                  
                  
                  53,332
                  
                  
                  $
                  9.20
                  
                  
                  
                  3.29
                  
                  
                  $
                  -




15


AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





The
exercise price for options outstanding at March 31, 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
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -Outstanding,
      March 31, 2010
                      
                      
                      2,607,635
                      
                      
                      $
                      4.72
                      
                      
                      
                      3.37
                      
                      
                      $
                      1,104,000Exercisable,
      March 31, 2010
                      
                      
                      2,607,635
                      
                      
                      $
                      4.72
                      
                      
                      
                      3.37
                      
                      
                      $
                      1,104,000




The
exercise price for warrants outstanding at March 31, 2010 is as
follows:





Number of
                          Warrants
                        
                        
                        Exercise
                          Price575,000
                        
                        
                        $
                        2.501,409,435
                        
                        
                        $
                        4.503,200
                        
                        
                        $
                        5.00400,000
                        
                        
                        $
                        5.75220,000
                        
                        
                        $
                        10.002,607,635





Note 9 – 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 two segments:  animal feed nutrition and hog
production.


16





AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





The
Company’s feed company in Shanghai is located in the Qingcun town, Fengxian
district, Shanghai and sells its products to 661 customers, consisting of 435
distributors and 226 large scale pig farms. Its feed company in Guangxi is
located in Coastal Industrial Park, Liangqin district, Nanning city, Guangxi
Province and sells its products to 704 customers, consisting of 482 distributors
and 222 large scale pig farms. Its feed company in Nanchang is located in Chang
Bei District Industrial Park, in Nanchang, Jiangxi province and sells its
products to 713 customers, consisting of 495 distributors and 218 large scale
pig farms. The hog farms are engaged mainly in raising, breeding, and sale of
pigs all over the country and are located in the PRC provinces of Jiangxi,
Shanghai, Hainan, Guangxi and Fujian.





The following tables summarize
segment information for the three months ended March 31, 2010 and 2009:


17





AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





Three Months Ended March 31,2010
                                                            
                                                            
                                                            2009Revenues
      from unrelated entitiesAnimal
      feed nutrition
                                                            
                                                            $
                                                            24,289,749
                                                            
                                                            
                                                            $
                                                            10,113,256Hog
      production
                                                            
                                                            
                                                            28,569,318
                                                            
                                                            
                                                            
                                                            23,316,018$
                                                            52,859,067
                                                            
                                                            
                                                            $
                                                            33,429,274Intersegment
      revenuesAnimal
      feed nutrition
                                                            
                                                            $
                                                            3,769,922
                                                            
                                                            
                                                            $
                                                            2,670,406Hog
      production
                                                            
                                                            
                                                            517,131
                                                            
                                                            
                                                            
                                                            88,262$
                                                            4,287,053
                                                            
                                                            
                                                            $
                                                            2,758,668Total
      RevenuesAnimal
      feed nutrition
                                                            
                                                            $
                                                            28,059,671
                                                            
                                                            
                                                            $
                                                            12,783,662Hog
      production
                                                            
                                                            
                                                            29,086,449
                                                            
                                                            
                                                            
                                                            23,404,280Less
      Intersegment revenues
                                                            
                                                            
                                                            (4,287,053
                                                            )
                                                            
                                                            
                                                            (2,758,668
                                                            )$
                                                            52,859,067
                                                            
                                                            
                                                            $
                                                            33,429,274Gross
      profitAnimal
      feed nutrition
                                                            
                                                            $
                                                            4,464,074
                                                            
                                                            
                                                            $
                                                            2,584,943Hog
      production
                                                            
                                                            
                                                            1,855,208
                                                            
                                                            
                                                            
                                                            3,218,462Holding
      Company
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -$
                                                            6,319,282
                                                            
                                                            
                                                            $
                                                            5,803,405Income
      from operationsAnimal
      feed nutrition
                                                            
                                                            $
                                                            2,667,353
                                                            
                                                            
                                                            $
                                                            1,387,631Hog
      production
                                                            
                                                            
                                                            225,810
                                                            
                                                            
                                                            
                                                            2,159,629Holding
      Company
                                                            
                                                            
                                                            (1,268,889
                                                            )
                                                            
                                                            
                                                            (364,894
                                                            )$
                                                            1,624,274
                                                            
                                                            
                                                            $
                                                            3,182,366Interest
      incomeAnimal
      feed nutrition
                                                            
                                                            $
                                                            33,443
                                                            
                                                            
                                                            $
                                                            31,748Hog
      production
                                                            
                                                            
                                                            6,590
                                                            
                                                            
                                                            
                                                            5,036Holding
      Company
                                                            
                                                            
                                                            7,978
                                                            
                                                            
                                                            
                                                            23,778$
                                                            48,011
                                                            
                                                            
                                                            $
                                                            60,562Interest
      and financing costsAnimal
      feed nutrition
                                                            
                                                            $
                                                            82,532
                                                            
                                                            
                                                            $
                                                            -Hog
      production
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Holding
      Company
                                                            
                                                            
                                                            42,379
                                                            
                                                            
                                                            
                                                            152,914$
                                                            124,911
                                                            
                                                            
                                                            $
                                                            152,914Income
      tax expenseAnimal
      feed nutrition
                                                            
                                                            $
                                                            453,580
                                                            
                                                            
                                                            $
                                                            215,550Hog
      production
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -Holding
      Company
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            -$
                                                            453,580
                                                            
                                                            
                                                            $
                                                            215,550Net
      IncomeAnimal
      feed nutrition
                                                            
                                                            $
                                                            2,173,643
                                                            
                                                            
                                                            $
                                                            1,482,400Hog
      production
                                                            
                                                            
                                                            197,065
                                                            
                                                            
                                                            
                                                            2,030,329Holding
      Company
                                                            
                                                            
                                                            (1,303,290
                                                            )
                                                            
                                                            
                                                            (493,889
                                                            )$
                                                            1,067,418
                                                            
                                                            
                                                            $
                                                            3,018,840Provision
      for depreciationAnimal
      feed nutrition
                                                            
                                                            $
                                                            107,042
                                                            
                                                            
                                                            $
                                                            36,261Hog
      production
                                                            
                                                            
                                                            704,857
                                                            
                                                            
                                                            
                                                            574,445$
                                                            811,899
                                                            
                                                            
                                                            $
                                                            610,706




18





AGFEED INDUSTRIES, INC.AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009


(unaudited)





As of
                            
                            
                            As ofMarch 31,
                            
                            
                            December 31,2010
                            
                            
                            2009Total
      assets
                            
                            
                            
                            
                            (audited)Animal
      feed nutrition
                            
                            $
                            40,786,115
                            
                            
                            $
                            38,142,821Hog
      production
                            
                            
                            117,597,757
                            
                            
                            
                            110,718,199Holding
      Company
                            
                            
                            11,421,407
                            
                            
                            
                            14,087,000$
                            169,805,279
                            
                            
                            $
                            162,948,020Intangible
      assetsAnimal
      feed nutrition
                            
                            $
                            3,369,777
                            
                            
                            $
                            3,419,141Hog
      production
                            
                            
                            40,541,080
                            
                            
                            
                            40,389,358Holding
      Company
                            
                            
                            -
                            
                            
                            
                            -$
                            43,910,857
                            
                            
                            $
                            43,808,499





Note
10 – Commitments and Contingencies





At March
31, 2010, the Company had commitments to expend approximately $2,000,000 for
construction in process.





Note
11 – Acquisition and Dispositions





During
the three months ended March 31, 2010, the Company purchased the non-controlling
interest of 10% and 20% in two hog farms for $230,063 and $176,040,
respectively.  As a result of the purchase of the non-controlling
interest, the excess of the purchase price over the carrying value of the
non-controlling interest of $219,158 and $146,144, respectively, was recorded
against additional paid in capital.





Note
12 – Subsequent Events





On April
23, 2010, the Company issued and delivered 150,000 shares of its common stock to
Southridge in exchange 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.


19




CAUTIONARY
STATEMENT FOR FORWARD-LOOKING STATEMENTS





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





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





Overview




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




Our
animal nutrition business consists of the research and development, manufacture,
marketing and sale of premix, concentrate and complete feed for use in the
domestic animal husbandry markets almost exclusively for hog production in
China. Premix is an animal feed additive that is broadly 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 aggressively expanding our concentrate and complete
feed lines to meet the growing demand of commercial producers as they modernize
their production technology and focus on the requirements of the food safety
laws.




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




We have
developed a system of centralized raw material purchases, accounting and
internal control management, corporate marketing strategies and brand building.
We have created, and centrally manage, an animal disease control response team.
This team consists of experienced Chinese and international hog industry
professionals that are used by each of our subsidiaries across both of our lines
of business.




We had
revenues of $52.86 million for the three months ended March 31, 2010 compared to
revenues of $33.43 million for the three months ended March 31, 2009. The
increase (58.1%) was the result of expanding market share in our feed business
and the production of our hog farm.





Pork
prices have been on a decline since September 2009. Corn prices in the first
quarter of 2009 averaged RMB 1,500 ($220) per ton and were RMB 1,800 ($264) by
the fourth quarter of 2009. Soybean meal price in the first quarter of 2009 was
RMB 2,800 ($411) per ton rose to RMB 3,800 ($557) by the fourth quarter of
2009.  In the first quarter of 2010, corn has continued to increase to
over RMB 2,000($293) per ton. During the same period, soybean meal has eased to
RMB 3,300 ($484) per ton.


20


This,
coupled with the pork price weakness for 14 consecutive weeks, has compressed
the average hog price 11% from the same period last year. Most farmers are
operating at a loss and many farms are struggling to withstand this
downturn.
 
 This
has resulted in the margins of both the Company and our customers being
reduced.  In order to support its animal nutrition customers and
cement its market position, AgFeed has chosen to exploit its relative financial
strength by extending payment terms to its customers.  Facing similar
pressures in our hog division we were able to sell hogs at relatively
advantageous prices by accepting payment terms from certain long-standing and
credit worthy customers.
  Animal
Nutrition Business
  We
manufacture, distribute, market and sell three main product lines - premix,
concentrate and complete feeds for use in all stages of a pig’s life. We conduct
these operations through our subsidiaries Nanchang Best, Shanghai Best, Guangxi
Huijie, Shandong Feed, and HopeJia. We also provide educational, technical and
veterinary support to our customer base
  Our feed
operating companies operate manufacturing facilities in Nanchang, Shanghai,
Nanning, Shandong, and Hainan provinces, primarily serving the hog industry.
Each subsidiary independently conducts local marketing and sales efforts under
the direction of a central executive management team. Nanchang Best and Guangxi
Huijie are primarily responsible for our ongoing research and development
efforts and share their expertise in this area with all of our manufacturing
operations.
  During
the first quarter 2010, we added 8 independent owned feed distribution chain
stores now totaling 1,310 that sell our products exclusively. During the
quarter, we added 7 commercial farms now totaling 788. Backyard and small farms
that raise less than 100 hogs per year per family supply 75% of China’s total
annual hog production. Through our network of distributors and direct sales, we
are able to market our premix feed to the producers of more than 65% of China’s
annual hog production.
 
 We are
one of a handful of companies that received “Green Certification” from the
Minister of Agriculture of PRC for our premix products under the brand label
“BEST.” This means that these products are safe, environmentally friendly, and
can effectively promote the healthy growth of pigs. According to current
government regulations, pork cannot be accredited by the government as “green”
unless it is produced using government certified green feed. Having our feed
certified as green requires us to adhere to strict operational controls and
procedures. This green certification laid the 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 first quarter of 2010, revenue in the feed division increased to $24.29
million from $10.11 million in the first quarter of 2009, an increase of 140%,
fully recognizing sales from the feed division to the hog division. During the
first quarter of 2010, revenue continued in line with the results achieved for
the previous calendar quarter.
 
 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 quarter of 2010, we sold a total of
42,300 metric tons as compared to the first quarter of 2009 when we sold 20,200
metric tons, representing an increase of 109%.  Our plans for 2010
call for us sell 180,000 metric tons without considering the impact of any
acquisitions.
 
 During
2010, we intend to introduce a bulk delivery system for hog feed to the market,
a value solution for large commercial farms.
  21
 
 Hog
Production Business
  In our
hog production business, we have grown our business through strategic
acquisitions of current producing commercial hog farms and organic growth. We
own two breeder hog farms and 29 meat producing hog farms located in Jiangxi,
Shanghai, Hainan, Guangxi, and Fujian provinces, which are strategically located
in or near the largest pork consumption areas in the PRC.
  We
entered the hog farming business on November 9, 2007 as a result of our
acquisition of ninety percent (90%) of the capital stock of Lushan Breeder Pig
Farm Co., Ltd. and acquired the remaining 10% in the first quarter of 2010 for
$230,063. Lushan owns and operates a breeder hog farm in Jiangxi Province.
Lushan is a mid-scale hog farm engaged in the business of raising, breeding and
selling hogs in the PRC for use in the pork production market in the PRC. In
2008, we acquired at least a majority interest in 29 meat hog producing farms in
the Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces through our
subsidiaries - Nanchang Best, Shanghai Best, Guangxi Huijie and Best Swine. Our
meat hog producing farms generate revenue primarily from the sale of meat hogs
to processors. Our meat hogs are sold primarily in Jiangxi, Shanghai, Hainan,
Guangxi, Fujian, Guangdong and other neighboring provinces. In November 2009, we
broke ground on our first "Western-model" farm in the city of Da Hua, Guangxi
Province. We also completed the construction of a nucleus farm in the city of
Wuning, Jiangxi Province in November 2009. This farm will be operated by Hypor
AgFeed Breeding Company.
 
 In
February 2010, we entered into negotiations to participate in a hog production
project in conjunction with Xinyu City in Jiangxi Province.  The
proposed project is a plan to build 5 western model hog farms with the initial
phase of the project to encompass an investment of $18 million for the
construction of  two 5,000 head sow farms, one 200 head boar stud farm
and one 2,600 head multiplier facility.  Upon completion the initial
phase, the project is expected to have an annual production capacity of 230,000
hogs.  In April of 2010 these negotiations were successfully completed
and construction will begin in May 2010.
  Our
breeder farms generate revenue primarily from the sale of breeder hogs to
commercial hog farms and, to a lesser extent, the sale of meat hogs to hog
slaughterhouses. They also generate revenue by providing consulting services to
hog farmers in the areas of feed production, feed formulation and veterinary
services. 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.
 
 First
quarter capital spending consisted of $2.1 million for building renovations and
$1.7 million for equipment purchases, environmental and other expenditures.
Additionally, deposits and advance payments of $1.4 million were made to
suppliers for building materials and equipment related to construction of the
western model farm in Da Hua city and its supporting genetic transfer
facility.
 
 During
the first quarter of 2010 we sold 174,000 head with an average selling price of
$166 per head at an average weight of 91.9kg (202 lbs.)  as compared
to the first quarter of 2009 when we sold 133,000 head with an average selling
price of $174 per head at an average weight of 91.2kg (201 lbs.).
 
 As a
result of our strategic direction to introduce modern western hog production
technologies to our existing farm base, we have begun to realize improved
operating efficiencies.  We have reduced our operating costs by $8 per
head.  During the first quarter of 2009, the benefit of these
operating efficiencies off set the high cost of corn and soy and weak market
prices for hogs.  These efficiencies were achieved in large part as a
direct result of our alliances with Hypor and M2P2.
 
 Our
strategic alliance with Hypor, announced in April of 2009, has four phases: (1)
upgrading the genetic base of our existing herds; (2) creating a sow
farrow-to-finish nucleus facility (Wuning Farms) to supply superior breeding
stock to be utilized in our production systems and for sale to outside
commercial hog farms; (3) establishing high health, top quality genetics to the
farms being developed by AgFeed International Protein; and (4) developing gene
transfer centers to maximize the use of the top performing boars in China across
AgFeed's production system. On December 17, 2009, we formed Hypor AgFeed
Breeding Company with Hypor to develop, operate and market a genetic nucleus
farm in Wuning, China. Hypor AgFeed Breeding Company is owned 85% by us and 15%
by Hypor.
  22
  On July
13, 2009, together with M2P2, we formed AgFeed International Protein, a joint
venture focused on enhancing hog production systems for Chinese and other Pan
Asian clients based on modern western standards to increase productivity and
ensure the highest bio-security health standards in the Pan Asian hog industry.
The joint venture was formed to take advantage of the commercialization and
consolidation of the hog industry being fostered by the Chinese central and
local governments. We are AgFeed International Protein's first client. We own
65% of AgFeed International Protein, certain affiliates own an additional 15.1%
and M2P2 owns the remaining 19.9%. On November 9, 2009, construction began on of
our first large western model farm in Da Hua, China (Jiangxi Province). This is
the first of seven farms that will be constructed in South China that will house
an additional 35,000 genetically superior sows and 400 boars. When fully
operational, we anticipate that these farms will produce 750,000 – 850,000 pigs
per year. It is anticipated that the cost to build the seven farms will be
approximately $50 million over the next two years. AgFeed International Protein
has completed all phases of design and blueprints for these farms and has been
working with international and local construction firms to ensure
success.
  Our
current strategic plan calls for us to develop, during 2009 -2012, a production
platform capable of producing 2 million hogs per year by 2015. The key element
to this future growth is modern hog production technologies and science based
genetics, which is underscored by our joint ventures with Hypor and
M2P2.  Our Lushan and Ganda Breeding Farm are now fully stocked with
the Hypor Large White Pureline Sows, the Hypor Landrace Pureline Boars and the
Duroc Terminal Sire.
 
 The
demand for safe food is the key driver in our strategy “AgFeed, Government and
Farmer”. The local governments have partnered with AgFeed in the cities of Dahua
and Xinyu to build agricultural industrial parks that will produce top health
and safe pork meat for the Chinese consumer.
 
 Chinese
Vice Premier Li Keqiang said, "Food is essential, and safety should be a top
priority. Food safety is closely related to people's lives and health and
economic development and social harmony," at a State Council meeting in Beijing.
In June 2009, food safety laws were passed in China and passed down to the local
governments for implementation.
 
 According
to the China Feed Industry Association, China has the world's largest and most
profitable market for hog production, which processed 625 million hogs in 2009,
compared to approximately 100 million in the U.S. More than 1.2 billion Chinese
consume pork as their primary source of meat. 62% of all meat consumed in China
is pork. Chinese consumers consume more pork each year than the rest of the
world combined. China’s pork consumption is forecast to increase to 47.0 million
metric tons in 2010 up from 44.9 million metric tons in 2008, an increase of
about 5%. Projected pork demand by 2015 is estimated to approach 68.0 million
metric tons, an increase of 51%
  The
Chinese government supports hog producers with favorable tax status and
subsidies, insurance, vaccines, caps on feed costs and land use grants. Hog
production is exempt from all taxes and sow owners receive government grants and
subsidies.
  Critical
Accounting Policies
  In
presenting our financial statements in conformity with accounting principles
generally accepted in the United States, 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.
  23
  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 accounting principles
generally accepted in the United States of America.  The preparation
of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities.  On an ongoing basis, we evaluate our estimates,
including those related to impairment of long-lived assets and allowance for
doubtful accounts.  We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates under
different assumptions or conditions; however, we believe that our estimates,
including those for the above-described items, are reasonable.
  Areas
that require estimates and assumptions include valuation of accounts receivable
and inventory, determination of useful lives of property and equipment,
estimation of certain liabilities and sales returns.
  Allowance
For Doubtful Accounts.   We continually monitor customer
payments and maintain a reserve for estimated losses resulting from our
customers’ inability to make required payments. In determining the reserve, we
evaluate the collectability of our accounts receivable based upon a variety of
factors. In cases where we become aware of circumstances that may impair a
specific customer’s ability to meet its financial obligations, we record a
specific allowance against amounts due. For all other customers, we recognize
allowances for doubtful accounts based on our historical write-off experience in
conjunction with the length of time the receivables are past due, customer
credit worthiness, geographic risk and the current business environment. Actual
future losses from uncollectible accounts may differ from our
estimates.
 
 Inventories.  Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. We evaluate our ending inventories for estimated
excess quantities and obsolescence. Our evaluation includes the analysis of
future sales demand by product, within specific time horizons. Inventories in
excess of projected future demand are written down to net realizable value. In
addition, we assess the impact of changing technology on inventory balances and
writes-down inventories that are considered obsolete. Inventory obsolescence and
excess quantities have historically been minimal.
 
 Long-Lived
Assets. We periodically assess potential impairments to our long-lived
assets  We perform an impairment review whenever events or changes in
circumstances indicate that the carrying value may not be fully recoverable.
Factors we considered include, but are not limited to: significant
underperformance relative to expected historical or projected future operating
results; significant changes in the manner of use of the acquired assets or the
strategy for our overall business; and significant negative industry or economic
trends. When we determine that the carrying value of a long-lived asset may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we estimate the future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future undiscounted cash flows and eventual disposition is less than
the carrying amount of the asset, we recognize an impairment loss. An impairment
loss is reflected as the amount by which the carrying amount of the asset
exceeds the fair market value of the asset, based on the fair market value if
available, or discounted cash flows. To date, there has been no impairment of
long-lived assets.
  Property
and Equipment. Useful lives of property and equipment is based on
historical experience and industry norms. Changes in useful lives due to changes
in technology or other factors can affect future depreciation
estimates.
  24
  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.
  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.
  25
  Results
of Operations
  Comparison
of Three Months Ended March 31, 2010 and March 31, 2009
 
 Three Months Ended March 31,
                    
                    
                    $
                    
                    
                    %2010
                    
                    
                    2009
                    
                    
                    Change
                    
                    
                    ChangeRevenue
                    
                    $
                    52,859,067
                    
                    
                    $
                    33,429,274
                    
                    
                    $
                    19,429,793
                    
                    
                    
                    58.1Cost
      of goods sold
                    
                    
                    46,539,785
                    
                    
                    
                    27,625,869
                    
                    
                    
                    18,913,916
                    
                    
                    
                    68.5Gross
      profit
                    
                    
                    6,319,282
                    
                    
                    
                    5,803,405
                    
                    
                    
                    515,877
                    
                    
                    
                    8.9Operating
      expenses
                    
                    
                    4,695,008
                    
                    
                    
                    2,621,039
                    
                    
                    
                    2,073,969
                    
                    
                    
                    79.1Interest
      and financing costs
                    
                    
                    124,911
                    
                    
                    
                    152,914
                    
                    
                    
                    (28,003
                    )
                    
                    
                    (18.3
                    )Net
      income
                    
                    
                    1,067,418
                    
                    
                    
                    3,018,940
                    
                    
                    
                    (1,951,522
                    )
                    
                    
                    (64.6
                    )
 
 Revenues. The increase was
due to volume sales of both hogs and animal feed products. Hog sales of 174,000
for three months ended March 31, 2010 exceeded total hog sales of 133,000 hogs
for the three months ended March 31, 2009.  Animal feed sales volume
for three months ended March 31, 2010 exceeded 42,300 metric tons representing a
118% 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.
  Cost of Goods Sold. We
experienced increases in the unit cost of goods sold for our two business lines
during the three months ended March 31, 2010 driven primarily by a 20.0%
increase in corn prices over the same period in 2009
  In order
to provide excellent customer service and differentiate ourselves from our
competition, at our customers’ request, we supply them with customized
formulations of our products. In any given month, the cost of various additives
used in our production fluctuates, which can result in temporary increases in
the unit cost of goods sold. These increased costs offset our increases in
revenues. Even though this may have an adverse effect on our short term profits,
we take the long-term view that this practice results in increased customer
loyalty, builds the “AgFeed” brand and will ultimately lead to increased sales
and gross profits. In addition, we are presently experiencing more stable
pricing in these additives, which we anticipate will stabilize our cost of goods
sold.
 
 Gross Profit. Gross margins
decreased to 12.0% from 17.4% during the three months ended March 31, 2010 as
compared to the same period in 2009. The decrease in gross margin can be
attributed to the 20.0% increase in corn cost and a reduction in the selling
price for our hogs over the same period in 2009. The increase in the cost of
corn was offset somewhat by actions taken in the first quarter of 2010,including
our entry into long-term contracts for key product ingredients which locked in
favorable pricing.
  Selling, General and Administrative
Expenses. Selling, general and administrative expense includes overhead
expenses such as rent, management and staff salaries, general insurance,
marketing, accounting, legal and offices expenses. Our selling expenses for the
three months ended March 31, 2010 increased by approximately $167,000 compared
to the corresponding period in 2009. General and administrative expenses for our
feed segment increased by approximately $426,000 or 119% from the corresponding
period in 2009 principally due to the overall expansion of the feed segment that
included increased salary and utility costs. Our corporate expenses also
increased by approximately $904,000 or 248% due to higher professional fees,
stock incentive compensation, and officer and director
compensation.  General and administrative expenses for our hog farms
for the three months ended March 31, 2010 increased by approximately $557,000 or
56% 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.
  Interest and Financing Costs.
We incurred interest and financing costs of approximately $125,000 and $153,000
during the three months ended March 31, 2010 and 2009, respectively.
  26
  Income Taxes. Hog production
is an income tax exempt sector in China and sow owners receive government grants
and subsidies. Some of our feed manufacturing companies benefit from exemption
from value-added tax.
  Net Income. The decrease in
our net income was due to the increase in cost of goods sold and higher
operating expenses. We continued to benefit from the tax-exempt status for our
hog production business. The higher sales and the benefits from economies of
scale in our business resulting in a modest increase in operating efficiency was
offset by higher cost of sales. We continued to benefit from the tax-exempt
status for our hog production business.
 
 EBITDA. Income before
interest, taxes, depreciation and amortization was $2.5 million and $4.0 million
for the three months ended March 31, 2010 and 2009. The decrease for the three
months ended March 31, 2010 compared to the same period in 2009 was principally
due to the increase in cost of goods sold and higher operating
expenses.
  Off-Balance
Sheet Arrangements
  There
were no off-balance sheet arrangements during the three months ended March 31,
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 March
31, 2010, we had $28.6 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.  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 $3,432,670 related to the sale of shares and $1,716,666 related to the
issuance of the convertible notes.
  On April
16, 2008, we entered into a Securities Purchase Agreement with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 625,000 shares of our common stock at price
of $16.00 per share for aggregate gross proceeds of $10,000,000.  We
paid $703,472 in 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 the Company’s Common
Stock at $19.05 per share for aggregate gross proceeds of $25.2
million.  We paid $1,772,752 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.
  From
October 6, 2008 through October 31, 2008, the Company repurchased 367,295 shares
of our common stock for $1,811,746. No additional shares have been
repurchased.
  27


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 $50,000,000. 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.  No
shares have been issued under the terms of the Equity Credit
Agreement.





During
2009, certain warrant holders exercised 3,225,004 warrants that resulted in
gross proceeds of $8,062,510.




As of
March 31, 2010, we had short-term loans outstanding of $4,401,000. The loan was
entered into during the second quarter of 2009 and is due in May
2010.




During
the three months ended March 31, 2010, we used $4.1 million of cash from our
operating activities. The cash generated was generated primarily through the net
income including noncontrolling interest, an increase in accounts receivable,
other receivables and inventory offset by an increase in accounts payable and
other payables.




We used
approximately $4.4 million in investing activities during the three months ended
March 31, 2010; of which $4.3 million was for the acquisition of property and
equipment.




We used
$0.4 million in cash from financing activities as a result of the purchase of
the noncontrolling interest in two subsidiaries.




At March
31, 2010, our accounts receivable balance was approximately $23.0 million, an
increase of $8.6 million from December 31, 2009.




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 expect our
genetics program to be accretive to earnings in the near future.





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





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




Contractual
Obligations




No
contractual obligation occurred during the three months ended March 31, 2010 and
therefore it is not expected to have any effect on our liquidity and cash flow
in future periods.


28





Inflation
and Seasonality





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





Item
3.           Quantitative
and Qualitative Disclosures About Market Risk





Disclosures
About Market Risk




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





Currency
Fluctuations and Foreign Currency Risk




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




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




Interest
Rate Risk




We have
interest rate risk related to the short-term notes entered into during the
quarter ended March 31, 2010; 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.




29





Part
II.   OTHER INFORMATION
 
 Item
1.           Legal
Proceedings




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





Item
1A.        Risk Factors





There
have been no material changes from the disclosure provided in Part 1, Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2009, as
amended.





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





None





Item
3.           Defaults
Upon Senior Securities





None.





Item
4.           (Removed and
Reserved)





Item
5.           Other
Information





None.





Item
6.           Exhibits





(a)
            Exhibits





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


30





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.May
      10, 2010
                  By:
                  /s/ Xiong JunhongXiong
      Junhong
                    Chief
      Executive Officer (Principal Executive Officer)May
      10, 2010
                  By:
                  /s/ Selina JinSelina
      Jin
                    Chief
      Financial Officer
                    (Principal
      Financial and Accounting
Officer)


31