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, 2009





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


For the
transition period from _______ to _______





001-33674


(Commission
file number)





AGFEED
INDUSTRIES, INC.


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





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





Rm.
A1001-1002, Tower 16


Hengmao
Int'l Center


333
S. Guangchang Rd.


Nanchang,
Jiangxi Province


China
330003


(Address of principal
executive offices)





011-86-0791-6669093


(Issuer’s telephone
number)





N/A


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





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


Yes           x           No            ̈





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


Large accelerated filer  ̈
                Accelerated
      filer 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 6,
2009, 38,293,141 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
                    21Item
      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.
                    Submission
      of Matters to a Vote of Security Holders
                    30Item
      5.
                    Other
      Information
                    30Item
      6.
                    Exhibits
                    30SIGNATURES
                    32


2


PART
I – FINANCIAL INFORMATION
 
 Item
1.          Financial
Statements
 
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 AS
OF MARCH 31, 2009 AND DECEMBER 31, 2008
 
 
 March
      31,
                                                  
                                                  
                                                  December
      31,2009
                                                  
                                                  
                                                  2008(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                                  
                                                  $
                                                  20,382,671
                                                  
                                                  
                                                  $
                                                  24,839,378Accounts
      receivable, net of allowance for doubtful accounts of $282,958 and
      $520,413
                                                  
                                                  
                                                  11,972,363
                                                  
                                                  
                                                  
                                                  9,462,380Advances
      to suppliers
                                                  
                                                  
                                                  487,620
                                                  
                                                  
                                                  
                                                  518,829Other
      receivable
                                                  
                                                  
                                                  2,687,318
                                                  
                                                  
                                                  
                                                  2,066,030Inventory
                                                  
                                                  
                                                  20,587,466
                                                  
                                                  
                                                  
                                                  20,616,560Prepaid
      expense
                                                  
                                                  
                                                  864,025
                                                  
                                                  
                                                  
                                                  1,166,646Debt
      issue costs
                                                  
                                                  
                                                  218,030
                                                  
                                                  
                                                  
                                                  246,223Total
      current assets
                                                  
                                                  
                                                  57,199,493
                                                  
                                                  
                                                  
                                                  58,916,046PROPERTY
      AND EQUIPMENT, net
                                                  
                                                  
                                                  22,754,806
                                                  
                                                  
                                                  
                                                  20,810,094CONSTRUCTION-IN-PROCESS
                                                  
                                                  
                                                  10,466,343
                                                  
                                                  
                                                  
                                                  10,853,389INTANGIBLE
      ASSETS
                                                  
                                                  
                                                  43,796,461
                                                  
                                                  
                                                  
                                                  43,833,705OTHER
      ASSETS
                                                  
                                                  
                                                  2,429,339
                                                  
                                                  
                                                  
                                                  2,641,902TOTAL
      ASSETS
                                                  
                                                  $
                                                  136,646,442
                                                  
                                                  
                                                  $
                                                  137,055,136LIABILITIES AND EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                                  
                                                  $
                                                  6,409,881
                                                  
                                                  
                                                  $
                                                  5,214,596Other
      payables
                                                  
                                                  
                                                  1,892,659
                                                  
                                                  
                                                  
                                                  5,766,741Unearned
      revenue
                                                  
                                                  
                                                  116,401
                                                  
                                                  
                                                  
                                                  321,664Accrued
      expenses
                                                  
                                                  
                                                  164,064
                                                  
                                                  
                                                  
                                                  164,558Accrued
      payroll
                                                  
                                                  
                                                  643,587
                                                  
                                                  
                                                  
                                                  818,052Tax
      and welfare payable
                                                  
                                                  
                                                  235,600
                                                  
                                                  
                                                  
                                                  465,875Interest
      payable
                                                  
                                                  
                                                  46,511
                                                  
                                                  
                                                  
                                                  121,139Total
      current liabilities
                                                  
                                                  
                                                  9,508,703
                                                  
                                                  
                                                  
                                                  12,872,625CONVERTIBLE
      NOTES, net of debt discount of $513,095 and $579,444
                                                  
                                                  
                                                  3,286,905
                                                  
                                                  
                                                  
                                                  3,220,556TOTAL
      LIABILITIES
                                                  
                                                  
                                                  12,795,608
                                                  
                                                  
                                                  
                                                  16,093,181COMMITMENTS
      AND CONTINGENCIES (Note 10)
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -EQUITY:AgFeed
      stockholders' equity:Common
      stock, $0.001 per share; 75,000,000 shares authorized; 38,300,436 issued
      and 37,933,141 outstanding at March 31, 2009 38,300,436 issued and
      37,933,141 outstanding at December 31, 2008
                                                  
                                                  
                                                  38,300
                                                  
                                                  
                                                  
                                                  38,300Additional
      paid-in capital
                                                  
                                                  
                                                  90,764,907
                                                  
                                                  
                                                  
                                                  90,903,261Other
      comprehensive income
                                                  
                                                  
                                                  4,013,363
                                                  
                                                  
                                                  
                                                  4,167,217Statutory
      reserve
                                                  
                                                  
                                                  3,580,436
                                                  
                                                  
                                                  
                                                  3,236,054Treasury
      stock (367,295 shares held in treasury)
                                                  
                                                  
                                                  (1,811,746
                                                  )
                                                  
                                                  
                                                  (1,811,746
                                                  )Retained
      earnings
                                                  
                                                  
                                                  24,985,716
                                                  
                                                  
                                                  
                                                  22,311,258Total
      AgFeed stockholders' equity
                                                  
                                                  
                                                  121,570,976
                                                  
                                                  
                                                  
                                                  118,844,344Noncontrolling
      interest
                                                  
                                                  
                                                  2,279,858
                                                  
                                                  
                                                  
                                                  2,117,611Total
      equity
                                                  
                                                  
                                                  123,850,834
                                                  
                                                  
                                                  
                                                  120,961,955TOTAL
      LIABILITIES AND EQUITY
                                                  
                                                  $
                                                  136,646,442
                                                  
                                                  
                                                  $
                                                  137,055,136
  The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 
 2009
                            
                            
                            2008(unaudited)
                            
                            
                            (unaudited)Revenues
                            
                            $
                            33,429,274
                            
                            
                            $
                            12,147,084Cost
      of goods sold
                            
                            
                            27,625,869
                            
                            
                            
                            8,714,123Gross
      profit
                            
                            
                            5,803,405
                            
                            
                            
                            3,432,961Operating
      expensesSelling
      expenses
                            
                            
                            863,867
                            
                            
                            
                            753,622General
      and administrative expenses
                            
                            
                            1,757,172
                            
                            
                            
                            954,221Total
      operating expenses
                            
                            
                            2,621,039
                            
                            
                            
                            1,707,843Income
      from operations
                            
                            
                            3,182,366
                            
                            
                            
                            1,725,118Non-operating
      income (expense):Other
      income (expense)
                            
                            
                            192,681
                            
                            
                            
                            (14,571
                            )Interest
      income
                            
                            
                            60,562
                            
                            
                            
                            50,175Interest
      and financing costs
                            
                            
                            (152,914
                            )
                            
                            
                            (326,642
                            )Foreign
      currency transaction loss
                            
                            
                            (1,831
                            )
                            
                            
                            (224,473
                            )Total
      non-operating income (expense)
                            
                            
                            98,498
                            
                            
                            
                            (515,511
                            )Income
      before provision for income taxes
                            
                            
                            3,280,864
                            
                            
                            
                            1,209,607Provision
      for income taxes
                            
                            
                            215,550
                            
                            
                            
                            96,263Net
      income including noncontrolling interest
                            
                            $
                            3,065,314
                            
                            
                            $
                            1,113,344Less:
      Net income attributed to noncontrolling interest
                            
                            
                            46,474
                            
                            
                            
                            194,047Net
      income attributed to AgFeed
                            
                            $
                            3,018,840
                            
                            
                            $
                            919,297Other
      comprehensive incomeForeign
      currency translation gain (loss)
                            
                            
                            (153,854
                            )
                            
                            
                            1,011,701Comprehensive
      Income
                            
                            $
                            2,864,986
                            
                            
                            $
                            1,930,998Weighted
      average shares outstanding :Basic
                            
                            
                            37,933,141
                            
                            
                            
                            27,802,640Diluted
                            
                            
                            37,933,141
                            
                            
                            
                            28,046,455Earnings
      per share attributed to AgFeed common stockholders:Basic
                            
                            $
                            0.08
                            
                            
                            $
                            0.03Diluted
                            
                            $
                            0.08
                            
                            
                            $
                            0.03
  The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
  2009
                          
                          
                          2008(unaudited)
                          
                          
                          (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income including noncontrolling interest
                          
                          $
                          3,065,314
                          
                          
                          $
                          1,113,344Adjustments
      to reconcile net income including noncontrolling interest to net cash used
      in operating activities:Depreciation
                          
                          
                          610,706
                          
                          
                          
                          185,753Amortization
                          
                          
                          12,779
                          
                          
                          
                          12,598Loss
      on disposal of assets
                          
                          
                          -
                          
                          
                          
                          16,774Stock
      based compensation
                          
                          
                          138,531
                          
                          
                          
                          16,108Amortization
      of debt issuance costs
                          
                          
                          28,193
                          
                          
                          
                          54,821Amortization
      of discount on convertible debt
                          
                          
                          66,349
                          
                          
                          
                          129,011(Increase)
      / decrease in assets:Accounts
      receivable
                          
                          
                          (2,523,056
                          )
                          
                          
                          (2,082,250
                          )Other
      receivable
                          
                          
                          (623,691
                          )
                          
                          
                          (641,521
                          )Inventory
                          
                          
                          985
                          
                          
                          
                          (3,077,865
                          )Advances
      to suppliers
                          
                          
                          30,505
                          
                          
                          
                          304,242Prepaid
      expense
                          
                          
                          301,104
                          
                          
                          
                          490,590Other
      assets
                          
                          
                          208,976
                          
                          
                          
                          -Increase
      / (decrease) in current liabilities:Accounts
      payable
                          
                          
                          1,202,475
                          
                          
                          
                          1,482,467Other
      payables
                          
                          
                          (3,866,938
                          )
                          
                          
                          539,211Due
      to related party
                          
                          
                          -
                          
                          
                          
                          287,055Unearned
      revenue
                          
                          
                          (204,837
                          )
                          
                          
                          (54,019
                          )Accrued
      expenses
                          
                          
                          (306
                          )
                          
                          
                          177,017Accrued
      payroll
                          
                          
                          (173,358
                          )
                          
                          
                          (40,086
                          )Tax
      and welfare payable
                          
                          
                          (229,655
                          )
                          
                          
                          92,948Interest
      payable
                          
                          
                          (74,628
                          )
                          
                          
                          125,409Net
      cash used in operating activities
                          
                          
                          (2,030,552
                          )
                          
                          
                          (868,393
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                          
                          
                          (2,211,649
                          )
                          
                          
                          (635,952
                          )Acquisition
      of intangible assets
                          
                          
                          (35,294
                          )
                          
                          
                          (70,654
                          )Cash
      paid for purchase of subsidiary
                          
                          
                          -
                          
                          
                          
                          (5,290,747
                          )Net
      cash used in investing activities
                          
                          
                          (2,246,943
                          )
                          
                          
                          (5,997,353
                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the sale of common stock
                          
                          
                          -
                          
                          
                          
                          22,000,032Offering
      costs paid
                          
                          
                          (276,885
                          )
                          
                          
                          (3,432,670
                          )Proceeds
      from the issuance of convertible notes
                          
                          
                          -
                          
                          
                          
                          19,000,000Issuance
      costs for convertible notes
                          
                          
                          -
                          
                          
                          
                          (1,716,666
                          )Capital
      contributed by noncontrolling interest holders
                          
                          
                          118,664
                          
                          
                          
                          -Net
      cash provided by (used in) financing activities
                          
                          
                          (158,221
                          )
                          
                          
                          35,850,696Effect
      of exchange rate changes on cash and cash equivalents
                          
                          
                          (20,991
                          )
                          
                          
                          242,976NET
      INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
                          
                          
                          (4,456,707
                          )
                          
                          
                          29,227,926CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
                          
                          
                          24,839,378
                          
                          
                          
                          7,696,209CASH
      & CASH EQUIVALENTS, ENDING BALANCE
                          
                          $
                          20,382,671
                          
                          
                          $
                          36,924,135SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                          
                          $
                          133,000
                          
                          
                          $
                          51,223Income
      taxes paid
                          
                          $
                          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, 2009 AND 2008
 (unaudited)
 
 Note
1 - Organization and Basis of Presentation
 
 The
unaudited consolidated financial statements have been prepared by AgFeed
Industries, Inc. pursuant to the rules and regulations of the Securities
Exchange Commission (“SEC”).  The information furnished herein
reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in the Company’s Annual Report on Form 10-K.  The results for
the three months ended March 31, 2009 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2009.
 
 Organization and Lines of
Business
 
 AgFeed
Industries, Inc. formerly known as Wallace Mountain Resources Corp.,
(hereinafter referred to as the “Company” or “AgFeed”) was incorporated in the
State of Nevada on March 30, 2005.
 
 On
October 31, 2006, the Company entered into and closed a share purchase agreement
with Nanchang Best Animal Husbandry Co., Ltd., a corporation formed under the
laws of the People’s Republic of China (“Nanchang Best”), and each of Nanchang
Best’s shareholders (the “Nanchang Purchase Agreement”). Pursuant to the
Nanchang Purchase Agreement, the Company acquired all of the issued and
outstanding capital stock of Nanchang Best from the Nanchang Best shareholders
in exchange for 16,128,000 shares of common stock.
 
 Contemporaneously,
on October 31, 2006, the Company entered into and closed a share purchase
agreement with Shanghai Best Animal Husbandry Co., Ltd., a corporation formed
under the laws of the People’s Republic of China (“Shanghai Best”), and each of
Shanghai Best’s shareholders (the “Shanghai Purchase Agreement”). Pursuant to
the Shanghai Purchase Agreement, the Company acquired all of the issued and
outstanding capital stock of Shanghai Best from the Shanghai Best shareholders
in exchange for 3,072,000 shares of common stock.
 
 The
exchanges of shares with Nanchang Best and Shanghai Best were accounted for as a
reverse acquisition under the purchase method of accounting since the
stockholders of Nanchang Best and Shanghai Best obtained control of the Company.
On November 17, 2006, Wallace Mountain Resources Corp. changed its name to
AgFeed Industries, Inc.  Accordingly, the merger of Nanchang Best and
Shanghai Best into the Company were recorded as a recapitalization of Nanchang
Best and Shanghai Best, with Nanchang Best and Shanghai Best being treated as
the continuing entities. Nanchang Best and Shanghai Best had common shareholders
and common management. The share exchange agreements have been treated as a
recapitalization and not as a business combination; therefore, no pro forma
information is disclosed. At the date of this transaction, the net assets of the
legal acquirer were $59,762.
 
 As a
result of the reverse merger transactions described above, the historical
financial statements presented are those of Nanchang Best and Shanghai Best, the
operating entities.
 
 In 2008,
the Company has purchased an additional 29 producing hog farms and one
feed company.  The Company’s ownership interest in these hog farms
range from 55% to 100%.
 
 The
Company is engaged in the research and development, manufacturing, marketing,
distribution and sale of pre-mix fodder blended feed and feed additives
primarily for use in China's domestic pork husbandry market. The Company
operates production plants in Nanchang, Shanghai, Nanning, Shandong, and Hainan
provinces..  The Company sells to distributors and large-scale swine
farms.  The Company is also engaged in the business of raising,
breeding and selling hogs for use in China's pork production and hog breeding
markets through one breeder farm and 29 meat hog producing farms located in
Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces.
  6
  AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 Basis of
Presentation
 
 The
accompanying consolidated financial statements include the accounts of AgFeed
Industries, Inc. and its wholly-owned and majority-owned subsidiaries.  All
significant inter-company accounts and transactions have been eliminated in
consolidation.
 
 The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company’s functional currency is the RMB; however the accompanying
consolidated financial statements have been translated and presented in
USD.
  Noncontrolling
Interest
 
 In 2008,
the Company purchased interest in 29 producing hog farms and one feed
company ranging from 55% to 100%.  As a result of these purchases, the
Company recognized initial noncontrolling interest on its consolidated balance
sheet in the amount of $508,150. The net income (loss) attributed to
noncontrolling interest has been separately designated in the accompanying
statement of income and other comprehensive income.
  Certain
amounts presented for prior periods that were previously designated as minority
interest have been reclassified to conform to the current year presentation.
Effective January 1, 2009, the Company adopted SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51,” which established new standards governing the accounting for
and reporting of noncontrolling interests (NCIs) in partially owned consolidated
subsidiaries and the loss of control of subsidiaries. Certain provisions of this
standard indicate, among other things, that NCIs (previously referred to as
minority interests) be treated as a separate component of equity, not as a
liability (as was previously the case); that increases and decreases in the
parent’s ownership interest that leave control intact be treated as equity
transactions, rather than as step acquisitions or dilution gains or losses; and
that losses of a partially owned consolidated subsidiary be allocated to the NCI
even when such allocation might result in a deficit balance. This standard also
required changes to certain presentation and disclosure requirements. The
provisions of the standard were applied to all NCIs prospectively, except for
the presentation and disclosure requirements, which were applied retrospectively
to all periods presented. As a result, upon adoption, the Company retroactively
reclassified the “Minority interest” balance previously included in the “Other
liabilities” section of the consolidated balance sheet to a new component of
equity with respect to NCIs in consolidated subsidiaries. The adoption also
impacted certain captions previously used on the consolidated statement of
income and other comprehensive income, largely identifying net income including
NCI and net income attributable to AgFeed.
  Foreign Currency
Translation
 
 The
accounts of the Company’s Chinese subsidiaries are maintained in the Chinese
Yuan Renminbi (RMB) and the accounts of the U.S. parent company are maintained
in the U.S. Dollar (USD).   The accounts of the Chinese
subsidiaries were translated into USD in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," with the
RMB as the functional currency for the Chinese subsidiaries. According to the
Statement, all assets and liabilities were translated at the exchange rate on
the balance sheet date, stockholders’ equity are translated at the historical
rates and statement of operations items are translated at the weighted average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, "Reporting
Comprehensive Income”.
 
 Note
2 – Summary of Significant Accounting Policies
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
  7
  AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 Reclassification
 
 Certain
prior period amounts have been reclassified to conform to the current
presentation.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
 
 Accounts
Receivable
 
 The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves.
 
 Advances to
Suppliers
 
 The
Company makes advances to certain vendors for purchase of its material. The
advances to suppliers are interest free and unsecured.
 
 Inventories
 
 Inventory
is stated at the lower of cost, as determined by weighted-average method, or
market. Management compares the cost of inventories with the market value, and
allowance is made for writing down the inventories to their market value, if
lower. Costs of raised animals include proportionate costs of breeding,
including depreciation of the breeding herd, plus the costs of maintenance
through the balance sheet date. Purchased cattle are carried at purchase cost
plus costs of maintenance through the balance sheet date.
 
 Property &
Equipment
 
 Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the
 respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives as follows:
 
 Office
      equipment
                  5
      yearsOperating
      equipment
                  10
      yearsVehicles
                  5
      yearsBuildings
                  20
      years
  8
 
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 The
following are the details of the property and equipment at March 31, 2009 and
December 31, 2008:
 
 March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008Office
      equipment
                    
                    $
                    504,692
                    
                    
                    $
                    433,157Operating
      equipment
                    
                    
                    2,801,170
                    
                    
                    
                    2,042,522Vehicles
                    
                    
                    699,784
                    
                    
                    
                    655,853Swines
      for reproduction
                    
                    
                    14,753,721
                    
                    
                    
                    13,137,425Buildings
                    
                    
                    6,735,881
                    
                    
                    
                    6,673,822Total
                    
                    
                    25,495,248
                    
                    
                    
                    22,942,779Less
      accumulated depreciation
                    
                    
                    (2,740,442
                    )
                    
                    
                    (2,132,685
                    )$
                    22,754,806
                    
                    
                    $
                    20,810,094
 
 Depreciation
expense for the three months ended March 31, 2009 and 2008 was $610,706 and
$185,753, respectively.
 
 Construction-in-Process
 
 Construction-in-process
consists of amounts expended for building construction. Once building
construction is completed, the cost accumulated in construction-in-process is
transferred to property and equipment.
 
 Long-Lived
Assets
 
 The
Company applies the provisions of Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
the Results of Operations for a Disposal of a Segment of a Business.” The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal. Based on its review, the Company believes
that, as of March 31, 2009  there were no significant impairments of
its long-lived assets.
  9
  AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 Intangible
Assets
 
 Net
intangible assets at March 31, 2009 and December 31, 2008 are as
follows:
 
 March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008Right
      to use land
                    
                    $
                    808,071
                    
                    
                    $
                    809,174Customer
      list
                    
                    
                    293,000
                    
                    
                    
                    293,400Computer
      software
                    
                    
                    143,279
                    
                    
                    
                    108,135Intangible
      related to hog farm acquisitions
                    
                    
                    42,685,975
                    
                    
                    
                    42,744,247Total
                    
                    
                    43,930,325
                    
                    
                    
                    43,954,956Less
      Accumulated amortization
                    
                    
                    (133,864
                    )
                    
                    
                    (121,251
                    )Intangibles,
      net
                    
                    $
                    43,796,461
                    
                    
                    $
                    43,833,705
 
 Per the
People's Republic of China's (“PRC”) governmental regulations, the PRC
Government owns all land. The Company leases land per real estate contracts with
the government of the PRC for 50 years.  Accordingly, the right to use
land for these feed companies is amortized over a period of 50 years and the
computer software is amortized over nine years.  For hog farms, the
Company generally signed land leasing contracts with original owners of the
farms.
 
 Revenue
Recognition
 
 The
Company's revenue recognition policies are in compliance with 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 collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue. The Company is not subject to VAT withholdings.  The Company
gives volume rebates to certain customers based on volume achieved. The Company
accrues sales rebates based on actual sales volume.
 
 Advertising
Costs
 
 The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place.  Advertising costs for the
three months ended March 31, 2009 and 2008 were not significant.
 
 Stock-Based
Compensation
 
 The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No.
123.”  The Company recognizes in the statement of operations the
grant-date fair value of stock options and other equity-based compensation
issued to employees and non-employees.  There were 180,000 options
outstanding at March 31, 2009.
 
 Income
Taxes
 
 The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
  10
  AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, the company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. As a result of the implementation of Interpretation 48, the Company
recognized no material adjustments to liabilities or stockholders’ equity. When
tax returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon
examination.  Interest associated with unrecognized tax benefits are
classified as interest expense and penalties are classified in selling, general
and administrative expenses in the statements of income. The adoption of FIN 48
did not have a material impact on the Company’s financial
statements.
 
 Foreign Currency
Transactions and Comprehensive Income
 
 Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain statements, however, require entities to
report specific changes in assets and liabilities, such as gain or loss on
foreign currency translation, as a separate component of the equity section of
the balance sheet. Such items, along with net income, are components of
comprehensive income. The functional currency of the Company’s Chinese
subsidiaries is Chinese Renminbi. The unit of Renminbi is in Yuan. Translation
gains of $4,013,363 and $4,167,217 at March 31, 2009 and December 31, 2008,
respectively, are classified as an item of other comprehensive income in the
stockholders’ equity section of the consolidated balance
sheet.  During the three months ended March 31, 2009 and 2008, other
comprehensive income in the consolidated statements of income and other
comprehensive income included translation gain (loss) of $(153,854) and
$1,011,701, respectively.
 
 Basic and Diluted Earnings
Per Share
 
 Earnings
per share is calculated in accordance with the Statement of financial accounting
standards No. 128 (SFAS No. 128), “Earnings Per Share”. SFAS No. 128 superseded
Accounting Principles Board Opinion No.15 (APB 15). Net earnings per share for
all periods presented has been restated to reflect the adoption of SFAS No. 128.
Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period..
  11
 
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings per share computations for the three months ended
March 31, 2009 and 2008:
 
 March
      31, 2009
                    
                    
                    March
      31, 2008Per
      Share
                    
                    
                    
                    
                    
                    Per
      ShareShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    AmountBasic  earnings
      per share
                    
                    
                    37,933,141
                    
                    
                    $
                    0.08
                    
                    
                    
                    27,802,640
                    
                    
                    $
                    0.03Effect
      of dilutive stock options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    243,815
                    
                    
                    
                    -Diluted
      earnings per share
                    
                    
                    37,933,141
                    
                    
                    $
                    0.08
                    
                    
                    
                    28,046,455
                    
                    
                    $
                    0.03
 
 Statement of Cash
Flows
 
 In
accordance with Statement of Financial Accounting Standards No. 95, “Statement
of Cash Flows,” cash flows from the Company’s operations are calculated based
upon the local currencies. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
 
 Segment
Reporting
 
 Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure About
Segments of an Enterprise and Related Information” requires use of the
“management approach” model for segment reporting. The management approach model
is based on the way a company’s management organizes segments within the company
for making operating decisions and assessing performance. The Company has
determined that it has four reportable segments (See Note 9).
 
 Fair value of financial
instruments
 
 On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
“SAS 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and current liabilities each qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest.  The three levels are defined
as follow:
 
 ·
              Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 ·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.
 
 As of
March 31, 2009, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.
 
 Recent
Pronouncements
 
 In
April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair
Values When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly.”  This FSP provides guidance on (1) estimating the fair value
of an asset or liability when the volume and level of activity for the asset or
liability have significantly declined and (2) identifying transactions that
are not orderly. The FSP also amends certain disclosure provisions of SFAS
No. 157 to require, among other things, disclosures in interim periods of
the inputs and valuation techniques used to measure fair value. This
pronouncement is effective prospectively beginning April 1, 2009. The
Company is currently evaluating the impact of this standard, but would not
expect it to have a material impact on the Company’s consolidated results of
operations or financial condition.
  12
  AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
  In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments” (FSP 115-2).
This FSP modifies the requirements for recognizing other-than-temporarily
impaired debt securities and changes the existing impairment model for such
securities. The FSP also requires additional disclosures for both annual and
interim periods with respect to both debt and equity securities. Under the FSP,
impairment of debt securities will be considered other-than-temporary if an
entity (1) intends to sell the security, (2) more likely than not will
be required to sell the security before recovering its cost, or (3) does
not expect to recover the security’s entire amortized cost basis (even if the
entity does not intend to sell). The FSP further indicates that, depending on
which of the above factor(s) causes the impairment to be considered
other-than-temporary, (1) the entire shortfall of the security’s fair value
versus its amortized cost basis or (2) only the credit loss portion would
be recognized in earnings while the remaining shortfall (if any) would be
recorded in other comprehensive income. FSP 115-2 requires entities to initially
apply the provisions of the standard to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulated other comprehensive income. This pronouncement is effective
April 1, 2009. The Company does not believe this standard will have a
material impact on the Company’s consolidated results of operations or financial
condition.
  In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments.” This FSP essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the FSP requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. These additional disclosures will be required
beginning with the quarter ending June 30, 2009. The Company is currently
evaluating the requirements of these additional disclosures.
 
 Note
3 – Convertible Notes and Warrants
 
 On
February 25, 2008, the Company entered into a Securities Purchase Agreement with
Apollo Asia Opportunity Master Fund, L.P., Jabcap Multi-Strategy Master Fund
Limited, J-Invest Ltd., and Deutsche Bank AG London Branch (the “Investors”) in
connection with a private placement transaction providing for, among other
things, the issuance of senior convertible notes for aggregate gross proceeds of
$19 million (the “Notes”) and warrants to purchase up to an aggregate of 380,000
shares (the “Warrants”) of the Company’s $0.001 par value per share common
stock.  The notes mature on the third anniversary of the issuance
date, bear interest at 7% per annum and are convertible into shares of the
Company’s common stock at an initial conversion price of $10.00 per
share.  The conversion price is subject to a “weighted average
ratchet” anti-dilution adjustment. The conversion price is also subject to
adjustment on a proportional basis, to the extent that the Company’s audited net
income for the fiscal years ending 2008 and 2009 is less than $30 million and
$40 million, respectively; subject to a per share floor price of
$5.00.  Due to the Company not generating $30 million net income for
the year ended December 31, 2008, the conversion price on the convertible notes
was reduced to $5.00.  Due to the re-pricing of the conversion price,
the Company recorded financing cost of $267,748 during the year ended December
31, 2008 which represents the difference between the fair value of the
conversion feature at a $5.00 conversion price and the original $10.00
conversion price.  The fair value was determined by using the
Black-Scholes pricing model with the following assumptions: expected life
of 2.2 years, a risk free interest rate of 2.0%, a dividend yield of
0% and volatility of 102%.
  13
  
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (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 being amortized over the life of the Notes.  For the
three months ended March 31, 2009 and 2008, the Company amortized $28,193 and
$54,821, respectively, of the aforesaid issuance costs as interest and financing
costs in the accompanying consolidated statements of operations.
 
 The Notes
contain certain limitations on conversion. For example, they provide that no
conversion may be made if, after giving effect to the conversion, the Investor
would own in excess of 9.99% of the Company’s outstanding shares of common
stock. In addition, the Notes provide that no conversion may be made if the
conversion would cause the Company to be in breach of its obligations under the
rules and regulations of the Nasdaq Global Market, unless the Company obtains
stockholder approval for such issuances as required by such rules and
regulations.
 
 The
Warrants are immediately exercisable, expire on the third anniversary of their
issuance and entitle their holders, in the aggregate, to purchase up to
$3,800,000 worth of shares of common stock at an initial exercise price of
$10.00 per share.
 
 The
exercise price of the Warrants is subject to a “weighted average ratchet”
anti-dilution adjustment. The exercise price is also subject to adjustment, on a
proportional basis, to the extent that the Company’s audited net income for the
fiscal years ending 2008 and 2009 is less than $30 million and $40 million,
respectively; subject to a per share floor price of $5.00.  Due to the
Company not generating $30 million net income for the year ended December 31,
2008, the exercise price on the Warrants was reduced to $5.00.  Due to
the re-pricing of the exercise price, the Company recorded financing cost of
$22,782 which represents the difference between the fair value of the $5.00
exercise price and the original $10.00 exercise price.  The fair value
was determined by using the Black-Scholes pricing model with the following
assumptions: expected life of 2.2 years, a risk free interest rate
of 2.0%, a dividend yield of 0% and volatility of 102%.
 
 The
Warrants contain certain limitations on exercise. For example, they provide that
no exercise may be made if, after giving effect to the exercise, the Investor
would own in excess of 9.99% of the Company’s outstanding shares of common
stock. In addition, the Warrants provide that no exercise may be made if it
would cause the Company to be in breach of its obligations under the rules and
regulations of the Nasdaq Global Market, unless the Company obtains stockholder
approval for such issuances as required by such rules and
regulations.
 
 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 Notes since 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, 2009 and 2008, the Company amortized $66,348 and
$129,011, respectively, of the aforesaid discounts as interest and financing
costs in the accompanying consolidated statements of operations.
 
 During
the year ended December 31, 2008, $15,200,000 of the Notes were converted into
1,520,000 shares of common stock.
  14
 
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 Note
4 – Stockholders’ Equity
 
 Treasury
Stock
 
 During
the year ended December 31, 2008, the Company purchased 367,295 shares of its
own common stock on the open market (treasury shares) for gross proceeds of
$1,811,746.  The Company has accounted for the purchase of these
treasury shares using the cost method.
 
 Note
5 – Employee Common Welfare
 
 The total
expense for the employee common welfare was $117,065 and $38,028 for the three
months ended March 31, 2009 and 2008, respectively.  The Company has
recorded welfare payable of $7,646 and  $3,336 at March 31, 2009 and
December 31, 2008, respectively, which is included in tax and welfare payable in
the accompanying consolidated balance sheet.  The Chinese government
abolished the 14% welfare plan policy at the beginning of 2007.  The
Company is not required to establish welfare and common welfare reserves. The
balance of welfare payable is remaining amount due under the welfare plan
provided for prior to 2007.
 
 Note
6 – Statutory Common Welfare Fund
 
 As
stipulated by the Company Law of the People’s Republic of China (PRC), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:
 
 i.
              Making
      up cumulative prior years’ losses, if
any;
 
 ii.
              Allocations
      to the “Statutory surplus reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company’s registered
  capital;
 
 iii.
              Allocations
      of 5-10% of income after tax, as determined under PRC accounting rules and
      regulations, to the Company’s “Statutory common welfare fund”, which is
      established for the purpose of providing employee facilities and other
      collective benefits to the Company’s employees;
  and
 
 iv.
              Allocations
      to the discretionary surplus reserve, if approved in the stockholders’
      general meeting.
 
 Pursuant
to the new Corporate Law effective on January 1, 2006, there is now only one
"Statutory surplus reserve" requirement. The reserve is 10 percent of income
after tax, not to exceed 50 percent of registered capital.
 
 The
Company has appropriated $344,382 and $59,560 as reserve for the statutory
surplus reserve and welfare fund for the three months ended March 31, 2009 and
2008, respectively.
  15
 
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 Note
7 – Stock Options and Warrants
 
 Stock
Options
 
 Following
is a summary of the stock option activity:
 
 Options
                                outstanding
                              
                              
                              Weighted
                                Average
                                Exercise
                                Price
                              
                              
                              Weighted
                                average
                                remaining
                                contractual
      life
                              
                              
                              Aggregate
                                Intrinsic
      ValueOutstanding,
      December 31, 2008
                              
                              
                              180,000
                              
                              
                              $
                              9.27
                              
                              
                              
                              4.65
                              
                              
                              $
                              -Granted
                              
                              
                              -
                              
                              
                              
                              -Forfeited
                              
                              
                              -
                              
                              
                              
                              -Exercised
                              
                              
                              -
                              
                              
                              
                              -Outstanding,
      March 31, 2009
                              
                              
                              180,000
                              
                              
                              $
                              9.27
                              
                              
                              
                              4.40
                              
                              
                              $
                              -Exercisable,
      March 31, 2009
                              
                              
                              6,666
                              
                              
                              $
                              8.85
                              
                              
                              
                              3.67
                              
                              
                              $
                              -
 
 The
exercise price for options outstanding at March 31, 2009 is as
follows:
 
 Number
      of
                            Options
                          
                          Exercise
                            Price20,000
                          
                          $
                          8.85160,000
                          
                          $
                          9.32180,000
 
 Warrants
 
 Following
is a summary of the warrant activity:
 
 Outstanding,
      December 31, 2008
                      
                      
                      4,323,204Granted
                      
                      
                      -Forfeited
                      
                      
                      -Exercised
                      
                      
                      -Outstanding,
      March 31, 2009
                      
                      
                      4,323,204
 
 The
exercise price for warrants outstanding at March 31, 2009 is as
follows:
 
 Number
      of
                              Warrants
                            
                            Exercise
                              Price3,800,004
                            
                            $
                            2.50343,200
                            
                            $
                            5.00180,000
                            
                            $
                            5.604,323,204
  16
 
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 Note
8 – Taxes
 
 Local PRC
Income Tax
 
 Pursuant
to the tax laws of China, general enterprises are subject to income tax at an
effective rate of 25%.
 
 On June
5, 2007, Shanghai Best received a tax exemption certificate from the local tax
bureau and is exempt from income tax from January 1, 2007 to December 31, 2008,
followed by a reduced tax rate of 15% for the next three years.
 
 Hog
production is an income tax exempt sector in China and sow owners receive
government grants and subsidies.
  The
effect of the change of tax status has been accounted for in accordance with
SFAS No. 109, par. 28, which states that the effect of a change in tax status is
computed as of the date of change and is included in the tax provision for
continuing operations. Management believes that the local tax authorities would
not have waived past taxes had it not been for the change in the Company’s
subsidiary’s tax status.
 
 If the
Company had not been exempt from paying income taxes, income tax expense for the
three months March 31, 2009 would have been approximately $364,000 and earnings
per share would have been reduced from $0.08 to $0.07; and income tax expense
for the three months ended March 31, 2008 would have been approximately $373,000
and earnings per share would have been reduced from $0.03 to $0.02.
 
 Note
9 – Segment Information
 
 The
Company’s predominant businesses are the research and development, manufacture,
marketing, distribution, and sale of pre-mix fodder blended feed and feed
additives primarily for use in China’s domestic pork husbandry market and the
raising, breeding, and selling of pigs.  The Company operates in four
segments:  Shanghai, Guangxi, Nanchang, and hog farms.
 
 Shanghai
is located in the Qingcun Town, Fengxian district, Shanghai and sells its
products to approximately 593 customers, consisting
of 383 distributors and 210 large scale pig farms.  Guangxi
is located in Coastal Industrial Park, Liangqin district, Nanning city, Guangxi
Province and sells its products to approximately 626 customers, consisting
of 432 distributors and 194 large scale pig farms.  Nanchang is
located in Chang Bei District Industrial Park, in Nanchang, Jiangxi province and
sells its products to approximately 638 customers, consisting of 438
distributors and 200 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.
  17
 
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 The
following tables summarize segment information for the three months ended March
31, 2009 and 2008:
 
 Three
      Months Ended March 31,2009
                                            
                                            
                                            2008Revenues
      from unrelated entitiesShanghai
                                            
                                            $
                                            1,746,671
                                            
                                            
                                            $
                                            3,503,801Guangxi
                                            
                                            
                                            5,113,371
                                            
                                            
                                            
                                            1,269,478Nanchang
                                            
                                            
                                            3,253,214
                                            
                                            
                                            
                                            4,239,022Hog
      farms
                                            
                                            
                                            23,316,018
                                            
                                            
                                            
                                            3,134,783$
                                            33,429,274
                                            
                                            
                                            $
                                            12,147,084Intersegment
      revenuesShanghai
                                            
                                            $
                                            316,334
                                            
                                            
                                            $
                                            148,891Guangxi
                                            
                                            
                                            1,578,871
                                            
                                            
                                            
                                            -Nanchang
                                            
                                            
                                            775,201
                                            
                                            
                                            
                                            441,565Hog
      farms
                                            
                                            
                                            88,262
                                            
                                            
                                            
                                            4,492$
                                            2,758,668
                                            
                                            
                                            $
                                            594,948Total
      RevenuesShanghai
                                            
                                            $
                                            2,063,005
                                            
                                            
                                            $
                                            3,652,692Guangxi
                                            
                                            
                                            6,692,242
                                            
                                            
                                            
                                            1,269,478Nanchang
                                            
                                            
                                            4,028,415
                                            
                                            
                                            
                                            4,680,587Hog
      farms
                                            
                                            
                                            23,404,280
                                            
                                            
                                            
                                            3,139,275Less
      Intersegment revenues
                                            
                                            
                                            (2,758,668
                                            )
                                            
                                            
                                            (594,948
                                            )$
                                            33,429,274
                                            
                                            
                                            $
                                            12,147,084Income
      from operationsShanghai
                                            
                                            $
                                            180,118
                                            
                                            
                                            $
                                            646,689Guangxi
                                            
                                            
                                            490,783
                                            
                                            
                                            
                                            188,032Nanchang
                                            
                                            
                                            716,730
                                            
                                            
                                            
                                            704,904Hog
      farms
                                            
                                            
                                            2,159,629
                                            
                                            
                                            
                                            503,648Holding
      Company
                                            
                                            
                                            (364,894
                                            )
                                            
                                            
                                            (318,155
                                            )$
                                            3,182,366
                                            
                                            
                                            $
                                            1,725,118Interest
      incomeShanghai
                                            
                                            $
                                            544
                                            
                                            
                                            $
                                            730Guangxi
                                            
                                            
                                            2,479
                                            
                                            
                                            
                                            1,038Nanchang
                                            
                                            
                                            28,725
                                            
                                            
                                            
                                            13,286Hog
      farms
                                            
                                            
                                            5,036
                                            
                                            
                                            
                                            617Holding
      Company
                                            
                                            
                                            23,778
                                            
                                            
                                            
                                            34,504$
                                            60,562
                                            
                                            
                                            $
                                            50,175Interest
      and financing costsShanghai
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -Guangxi
                                            
                                            
                                            -
                                            
                                            
                                            
                                            4,835Nanchang
                                            
                                            
                                            -
                                            
                                            
                                            
                                            12,566Hog
      farms
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Holding
      Company
                                            
                                            
                                            152,914
                                            
                                            
                                            
                                            309,241$
                                            152,914
                                            
                                            
                                            $
                                            326,642Income
      tax expense (benefit)Shanghai
                                            
                                            $
                                            20,887
                                            
                                            
                                            $
                                            -Guangxi
                                            
                                            
                                            120,604
                                            
                                            
                                            
                                            52,925Nanchang
                                            
                                            
                                            74,059
                                            
                                            
                                            
                                            43,338Hog
      farms
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Holding
      Company
                                            
                                            
                                            -$
                                            215,550
                                            
                                            
                                            $
                                            96,263Net
      IncomeShanghai
                                            
                                            $
                                            157,252
                                            
                                            
                                            $
                                            650,968Guangxi
                                            
                                            
                                            658,620
                                            
                                            
                                            
                                            130,929Nanchang
                                            
                                            
                                            666,528
                                            
                                            
                                            
                                            436,818Hog
      farms
                                            
                                            
                                            2,030,329
                                            
                                            
                                            
                                            294,703Holding
      Company
                                            
                                            
                                            (493,889
                                            )
                                            
                                            
                                            (594,121
                                            )$
                                            3,018,840
                                            
                                            
                                            $
                                            919,297Provision
      for depreciationShanghai
                                            
                                            $
                                            5,830
                                            
                                            
                                            $
                                            21,373Guangxi
                                            
                                            
                                            17,701
                                            
                                            
                                            
                                            12,991Nanchang
                                            
                                            
                                            12,730
                                            
                                            
                                            
                                            6,216Hog
      farms
                                            
                                            
                                            574,445
                                            
                                            
                                            
                                            145,173$
                                            610,706
                                            
                                            
                                            $
                                            185,753
  18
 
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (unaudited)
 
 As
      Of
                      
                      
                      As
      OfMarch
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008Total
      AssetsShanghai
                      
                      $
                      6,418,264
                      
                      
                      $
                      8,633,418Guangxi
                      
                      
                      13,219,876
                      
                      
                      
                      14,356,062Nanchang
                      
                      
                      11,664,367
                      
                      
                      
                      8,087,484Hog
      farms
                      
                      
                      96,460,402
                      
                      
                      
                      96,454,117Holding
      Company
                      
                      
                      8,883,533
                      
                      
                      
                      9,524,055$
                      136,646,442
                      
                      
                      $
                      137,055,136
 Note
10 – Commitments and Contingencies
 
 At March
31, 2009, the Company had commitments to expend $5,357,292 in connection to
building construction currently in process.
 
 Note
11 – Subsequent Events
 
 Note
Conversions
 
 Subsequent
to March 31, 2009, $1,800,000 of the Notes were converted into 360,000 shares of
common stock.
  19
 
 Private
Placement
 
 On May
11, 2009, the Company closed a private placement offering of its common stock by
issuing 2,329,645 shares of common stock for gross proceeds of $10
million.  The Company also issued 1,164,822 common stock purchase
warrants to the investors and 244,613 common stock purchase warrants to the
placement agent.  The warrants are exercisable immediately, have an
exercise price of $4.50 per share and expire five years from the date of
issuance.
  20


CAUTIONARY
STATEMENT FOR FORWARD-LOOKING STATEMENTS





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





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





Overview





We are a
Nevada corporation engaged in the feed and commercial hog producing business in
China through our operating subsidiaries.




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




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




We were
incorporated as Wallace Mountain Resources Corp. on March 30, 2005 in
Nevada.  Since October 31, 2006, our principal place of business has
been based in China.  As a result of a merger into a wholly-owned
subsidiary, we changed our name to AgFeed Industries, Inc. on November 17,
2006.




AgFeed
had revenues of $33.4 million for the three months ended March 31, 2009 compared
to revenues of $12.1 million for the three months ended March 31,
2008.  The increase (175%) we experienced in this period was the
result of organic growth in our feed business and the hog farm acquisitions we
made beginning in late 2007 and throughout 2008.




Feed
Business




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


21


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




As of
March 31, 2009, we had established relationships with over 1,189 independently
owned feed distribution chain stores that sell our products exclusively,
targeting backyard and small hog farms. These complement our direct sales to
more than 680 large size commercial hog farms. We rely on the distributors to
market and sell our products to the smaller hog farms.  Approximately
95% of China’s total annual hog production is supplied by backyard and small
farms that raise less than 100 hogs per year per family. Through our network of
distributors and direct sales, we are able to market our premix feed to the
producers of more than 90% of the annual hog production in China.




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




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




The
increase in our revenues during the three months ended March 31, 2009 was due to
increases in the volume of products sold as a direct result of new products
launched and our expansion into new markets thanks to a stronger AgFeed brand
name.  In addition, AgFeed negotiated a number of agreements with
dealers and suppliers to ensure that we receive supplies of key raw materials at
a discount to market.  This is an important aspect of our ongoing
strategy to mitigate price disruptions with respect to two of our main raw
materials - corn and soybean meal.  As a result, although we
experienced an increase in our cost of goods sold during the three months ended
March 31, 2009, our cost of corn remained stable and the cost of our soybean
meal was only up slightly.





Hog
Production Business




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




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


22




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




We have
effectively marketed our products through a team-based approach, sharing sales
leads and referrals. Due to centralized procurement processes, we have been able
to offset production costs related to corn, soybean meal, veterinary drugs and
animal health products.




For 2009,
AgFeed plans to achieve a production capacity of up to 650,000
hogs.  This capacity is based on a projected average sow population of
31,500 head at an average production per sow of 17.6 hogs (554,400 hogs
estimated), coupled with the potential purchase and finishing of baby pigs as
market conditions warrant.  We believe this could add an additional
100,000 to 150,000 hogs to our sale total.




Subsequent
to the end of the first quarter of 2009, AgFeed entered into an agreement with
Hypor, a leading genetics company, resulting in our entrance into a genetics
program that can potentially significantly improve hog productivity and
profitability through a higher number of piglets born per sow and lower feed
costs due to improved feed to meat conversion ratios as better hog types grow
faster while consume less feed.




AgFeed's
three year strategic plan calls for development of a platform for the production
and sale of approximately 2,000,000 hogs into the Chinese market during
2010-2011. The key element to this future growth is scientific breeding which is
underscored by our arrangement with Hypor. We have begun this growth by stocking
the 1200 sow farrow to finish Lushan with the Hypor Large White Pureline Sows,
the Hypor Landrace Pureline Boars and the Duroc Terminal Sire and building on
our "Green" certification status by producing "Green" high quality pork
products. We believe the genetics program will be accretive to our earnings in
the near future.




AgFeed's future investment plans
include modernization of our pork production facilities, investment in reporting
and cash management systems and the training of our employees, environmental and
health safety programs including an emphasis on upgrading bio security. These
actions are part of our effort to improve on the standards of the new proposed
China Safety Law to be implemented on June 1, 2009 and to assure consistent high
quality and safe pork.




According
to the China Feed Industry Association, the PRC has the world's largest and most
profitable markets for hog production with approximately 600 million hogs
produced annually, compared to approximately 100 million in the US. More than
1.2 billion Chinese consume pork as their primary source of meat. 65% of all
meat consumed in the PRC is pork. Chinese consumers consume more pork each year
than the rest of the world combined. Pork production in China is a key
political, social and security issue for consumers. The PRC Government supports
hog producers with favorable tax status and subsidies, insurance, vaccines, caps
on feed costs and land use grants. Hog production is exempt from all taxes and
sow owners receive government grants and subsidies.




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


23





Critical
Accounting Policies




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




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




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




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





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





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


24





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




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




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





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





Recent
Accounting Pronouncements




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




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


25




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




Results
of Operations




Comparison
of Three Months Ended March 31, 2009 and March 31, 2008





For
      the Three Months EndedMarch
      31,
                    
                    
                    $
                    
                    
                    %2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    ChangeRevenues
                    
                    $
                    33,429,274
                    
                    
                    $
                    12,147,084
                    
                    
                    $
                    21,282,190
                    
                    
                    
                    175.20
                    %Cost
      of Goods Sold
                    
                    
                    27,625,869
                    
                    
                    
                    8,714,123
                    
                    
                    
                    18,911,746
                    
                    
                    
                    217.02
                    %Gross
      Profit
                    
                    
                    5,803,405
                    
                    
                    
                    3,432,961
                    
                    
                    
                    2,370,444
                    
                    
                    
                    69.05
                    %Operating
      expenses
                    
                    
                    2,621,039
                    
                    
                    
                    1,707,843
                    
                    
                    
                    913,196
                    
                    
                    
                    53.47
                    %Interest
      and financing costs
                    
                    
                    152,914
                    
                    
                    
                    326,642
                    
                    
                    
                    (173,728
                    )
                    
                    
                    -53.19
                    %Net
      income
                    
                    
                    3,018,840
                    
                    
                    
                    919,297
                    
                    
                    
                    2,099,543
                    
                    
                    
                    228.39
                    %




Revenues. The
increase in revenues was due to an increase in the volume of feed products that
we sold.  The increase in feed product sales was a result of expanding
our distribution channels by the opening of additional exclusive distribution
stores for our products.   We experienced favorable market conditions
that increased the demand for our feed products.  A stronger “AgFeed”
brand name fueled our sales. However, as a result of economies of scale, we were
able to cut hog production cost through centralized raw materials purchases,
sales and marketing channels, and finance and internal control
management.  In addition, our increase in revenue described above is
offset by a reduction in the selling price for our hogs during the latter part
of 2008 and the first quarter of 2009.




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, 2009 compared to the same period in
2008.  These raw materials constitute approximately 60 - 75% of our raw
material costs.




Gross Profit. Gross
margins decreased to 17.4% from 28.3% during the three months March 31, 2009 as
compared to the same period in 2008.  The decrease in gross margin can be
attributed to the increase in the cost of hog feed that began in the last half
of 2008 and continued into 2009 and a reduction in the selling price for our
hogs.  The increase in the cost of hog feed was modified somewhat by
actions taken in the first quarter of 2009, including expansion of our product
distribution channels, and our entry into long-term contracts for key product
ingredients which locked in favorable cost savings.




Selling, General and Administrative
Expenses.  General and administrative expense includes overhead
expenses such as rent, management and staff salaries, general insurance,
marketing, accounting, legal and offices expenses. The increase in our
selling, general and administrative expense also reflects the addition of our
new subsidiaries, which had a total of approximately $1.06 million in selling,
general and administrative expenses during the three months ended March 31,
2009. Selling, general and administrative expenses for the period increased
by 53.5% due to costs associated with the aggressive expansion into markets in
neighboring provinces, and the costs associated with the absorption of our new
subsidiaries.


26





Other income (expense).
Included in other income (expense) is approximately $260,000 of a value added
tax refund received during the three months ended March 31, 2009.





Interest and Financing Costs.
We incurred interest and financing costs of $152,914 and $326,642 during the
three months ended March 31, 2009 and 2008, respectively, principally as a
result of the issuance of $19 million principal amount of convertible notes
issued during February 2008.  $15.2 million of the convertible notes
were converted into shares of common stock during 2008.




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
increase in our net income was due to higher sales and the benefits from
economies of scale in our business resulting in a modest increase in operating
efficiency. This was offset by higher cost of sales. We continued to benefit
from the tax exempt status for our hog production business.




Off-Balance
Sheet Arrangements




There
were no off-balance sheet arrangements during the year ended March 31, 2009 that
have, or are reasonably likely to have, a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our
interests.




Liquidity
and Capital Resources




At March
31, 2009, we had $20,382,671 in cash and cash equivalents on hand.




During
first quarter of 2008, we completed a $41,000,000 financing.  We
received aggregate gross proceeds of $22,000,032 through the sale of 2,444,448
shares of common stock at $9 per share.  We received aggregate
proceeds of $19,000,000 through the issuance of three year convertible notes
bearing interest at 7% per annum and convertible into common stock at $10 per
share.  In connection with the convertible notes, we issued 380,000
warrants which are exercisable immediately and have a $10 strike
price.  The exercise price on the warrants were subsequently reduced
to $5 per share.  We paid $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.




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




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.




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





27


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




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





Subsequent
to the end of the quarter, on May 11, 2009, we closed a private placement
offering of our common stock by issuing 2,329,645 shares of common stock for
gross proceeds of $10 million to certain institutional investors.  We
also issued 1,164,822 common stock purchase warrants to the investors and
244,613 common stock purchase warrants to the placement agent for the
transaction.  The warrants are exercisable immediately, have an
exercise price of $4.50 per share and expire five years from the date of
issuance. We will be using the proceeds of this transaction to advance specific
strategic growth initiatives.




As of
March 31, 2009, we had no outstanding loans.  The loans that we
entered into in 2006 and 2007 were paid in full during the second quarter of
2008.




During
the three months ended March 31, 2009, we used $2,030,552 of cash from our
operating activities. The cash used was generated primarily through an increase
in accounts receivable and a decrease in other payables offset by net income
including noncontrolling interest of $3,065,314.




We used
$2,246,943 in investing activities during the three months ended March 31, 2009;
of which $2,211,649 was for the acquisition of property and
equipment.




We used
$158,211 in cash from financing activities as a result of paying $276,885 for
offering costs related to the December 2008 equity offering offset by a
contribution from a noncontrolling interest holder of
$118,664.




At March
31, 2009, our accounts receivable balance was approximately $11.97 million, an
increase of $2.51 million from December 31, 2008. There are minimal accounts
receivable for hog sales because most of the farmers purchasing hogs from us
generally pay cash.




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


28


We intend
to meet our liquidity requirements 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, 2009 and
therefore it is not expected to have any effect on our liquidity and cash flow
in future periods.




Inflation
and Seasonality




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





Item
3.        Quantitative and Qualitative
Disclosures About Market Risk





Disclosures
About Market Risk




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





Currency
Fluctuations and Foreign Currency Risk




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




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




Interest
Rate Risk




We do not
have significant interest rate risk, as loans we had entered into in 2006 and
2007 were paid in full during the second quarter of 2008.




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.


29


Item
4.        Controls and
Procedures





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




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





Part
II.       OTHER INFORMATION





Item
1.        Legal Proceedings





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




Item
1A.     Risk Factors





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





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





None





Item
3.        Defaults Upon Senior
Securities





None.





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





None.





Item
5.        Other Information





None.





Item
6.        Exhibits


30





(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).


31


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
      11, 2009
                By:
                /s/ Xiong JunhongXiong
      Junhong
                  Chief
      Executive Officer (Principal
                  Executive
      Officer)May
      11, 2009
                By:
                /s/ Selina JinSelina
      Jin
                  Chief
      Financial Officer
                  (Principal
      Financial and Accounting
Officer)


32