UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-Q





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





For the
quarterly period ended September 30, 2009





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


For the
transition period from _______ to _______





001-33674


(Commission
file number)





AGFEED
INDUSTRIES, INC.


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





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


Rm.
A1001-1002, Tower 16


Hengmao
Int'l Center


333
S. Guangchang Rd.


Nanchang,
Jiangxi Province


China
330003


(Address of principal
executive offices)





011-86-0791-6669093


(Issuer’s telephone
number)





N/A


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





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


Yes      x           No       ̈





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


Large
accelerated filer  ̈                                                                    Accelerated
filer x


Non-accelerated
filer  ̈                                                                      Smaller
reporting company ̈


(Do not
check if a smaller reporting company)





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


Yes       ̈      No     x





On
November 5, 2009, 43,925,263 shares of the registrant's common stock were
outstanding.









TABLE
OF CONTENTS





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


2


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





PART
I – FINANCIAL INFORMATION





Item
1.        Financial
Statements





September
      30,
                                    
                                    
                                    December
      31,2009
                                    
                                    
                                    2008(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                    
                                    $
                                    36,480,253
                                    
                                    
                                    $
                                    24,839,378Accounts
      receivable, net of allowance for doubtful accounts of $246,847 and
      $520,413
                                    
                                    
                                    16,222,992
                                    
                                    
                                    
                                    9,462,380Advances
      to suppliers
                                    
                                    
                                    1,211,852
                                    
                                    
                                    
                                    518,829Other
      receivables
                                    
                                    
                                    408,620
                                    
                                    
                                    
                                    2,066,030Inventory
                                    
                                    
                                    22,019,710
                                    
                                    
                                    
                                    20,616,560Prepaid
      expenses
                                    
                                    
                                    1,506,462
                                    
                                    
                                    
                                    1,166,646Debt
      issue costs
                                    
                                    
                                    42,291
                                    
                                    
                                    
                                    246,223Total
      current assets
                                    
                                    
                                    77,892,180
                                    
                                    
                                    
                                    58,916,046PROPERTY
      AND EQUIPMENT, net
                                    
                                    
                                    23,060,443
                                    
                                    
                                    
                                    20,810,094CONSTRUCTION-IN-PROCESS
                                    
                                    
                                    10,276,793
                                    
                                    
                                    
                                    10,853,389INTANGIBLE
      ASSETS
                                    
                                    
                                    43,819,722
                                    
                                    
                                    
                                    43,833,705OTHER
      ASSETS
                                    
                                    
                                    2,887,066
                                    
                                    
                                    
                                    2,641,902TOTAL
      ASSETS
                                    
                                    $
                                    157,936,204
                                    
                                    
                                    $
                                    137,055,136LIABILITIES AND EQUITYCURRENT
      LIABILITIES:Short-term
      loans
                                    
                                    $
                                    4,401,000
                                    
                                    
                                    $
                                    -Accounts
      payable
                                    
                                    
                                    6,738,882
                                    
                                    
                                    
                                    5,214,596Other
      payables
                                    
                                    
                                    1,104,883
                                    
                                    
                                    
                                    5,766,741Unearned
      revenue
                                    
                                    
                                    365,163
                                    
                                    
                                    
                                    321,664Accrued
      expenses
                                    
                                    
                                    452,612
                                    
                                    
                                    
                                    164,558Accrued
      payroll
                                    
                                    
                                    685,234
                                    
                                    
                                    
                                    818,052Tax
      and welfare payable
                                    
                                    
                                    385,503
                                    
                                    
                                    
                                    465,875Interest
      payable
                                    
                                    
                                    102,531
                                    
                                    
                                    
                                    121,139Total
      current liabilities
                                    
                                    
                                    14,235,808
                                    
                                    
                                    
                                    12,872,625CONVERTIBLE
      NOTES, net of debt discount of $99,524 and $579,444
                                    
                                    
                                    900,476
                                    
                                    
                                    
                                    3,220,556TOTAL
      LIABILITIES
                                    
                                    
                                    15,136,284
                                    
                                    
                                    
                                    16,093,181COMMITMENTS
      AND CONTINGENCIES (Note 11)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -EQUITY:AgFeed
      stockholders' equity:Common
      stock, $0.001 per share; 75,000,000 shares authorized;43,917,558
      issued and 43,550,263 outstanding at September 30, 200938,300,436
      issued and 37,933,141 outstanding at December 31, 2008
                                    
                                    
                                    43,918
                                    
                                    
                                    
                                    38,300Additional
      paid-in capital
                                    
                                    
                                    107,654,125
                                    
                                    
                                    
                                    90,903,261Other
      comprehensive income
                                    
                                    
                                    4,187,956
                                    
                                    
                                    
                                    4,167,217Statutory
      reserve
                                    
                                    
                                    4,230,516
                                    
                                    
                                    
                                    3,236,054Treasury
      stock (367,295 shares)
                                    
                                    
                                    (1,811,746
                                    )
                                    
                                    
                                    (1,811,746
                                    )Retained
      earnings
                                    
                                    
                                    28,458,229
                                    
                                    
                                    
                                    22,311,258Total
      AgFeed stockholders' equity
                                    
                                    
                                    142,762,998
                                    
                                    
                                    
                                    118,844,344Noncontrolling
      interest
                                    
                                    
                                    36,922
                                    
                                    
                                    
                                    2,117,611Total
      equity
                                    
                                    
                                    142,799,920
                                    
                                    
                                    
                                    120,961,955TOTAL
      LIABILITIES AND EQUITY
                                    
                                    $
                                    157,936,204
                                    
                                    
                                    $
                                    137,055,136





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


3





AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME





Three
      Months Ended September 30,
                      
                      
                      Nine
      Months Ended September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008(unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)Revenues
                      
                      $
                      45,115,442
                      
                      
                      $
                      49,426,274
                      
                      
                      $
                      117,072,486
                      
                      
                      $
                      97,208,685Cost
      of goods sold
                      
                      
                      37,554,278
                      
                      
                      
                      37,124,058
                      
                      
                      
                      98,486,258
                      
                      
                      
                      70,438,683Gross
      profit
                      
                      
                      7,561,164
                      
                      
                      
                      12,302,216
                      
                      
                      
                      18,586,228
                      
                      
                      
                      26,770,002Operating
      expensesSelling
      expenses
                      
                      
                      960,574
                      
                      
                      
                      970,268
                      
                      
                      
                      2,823,783
                      
                      
                      
                      2,597,470General
      and administrative expenses
                      
                      
                      2,888,845
                      
                      
                      
                      2,021,549
                      
                      
                      
                      6,606,537
                      
                      
                      
                      4,364,858Total
      operating expenses
                      
                      
                      3,849,419
                      
                      
                      
                      2,991,817
                      
                      
                      
                      9,430,320
                      
                      
                      
                      6,962,328Income
      from operations
                      
                      
                      3,711,745
                      
                      
                      
                      9,310,399
                      
                      
                      
                      9,155,908
                      
                      
                      
                      19,807,674Non-operating
      income (expense):Other
      expense
                      
                      
                      (387,979
                      )
                      
                      
                      (257,493
                      )
                      
                      
                      (384,503
                      )
                      
                      
                      (283,063
                      )Interest
      income
                      
                      
                      75,344
                      
                      
                      
                      44,860
                      
                      
                      
                      188,460
                      
                      
                      
                      171,095Interest
      and financing costs
                      
                      
                      (192,963
                      )
                      
                      
                      (605,391
                      )
                      
                      
                      (970,391
                      )
                      
                      
                      (5,244,592
                      )Foreign
      currency transaction loss
                      
                      
                      (18,121
                      )
                      
                      
                      (10,007
                      )
                      
                      
                      (14,819
                      )
                      
                      
                      (553,753
                      )Total
      non-operating income (expense)
                      
                      
                      (523,719
                      )
                      
                      
                      (828,031
                      )
                      
                      
                      (1,181,253
                      )
                      
                      
                      (5,910,313
                      )Income
      before provision for income taxes
                      
                      
                      3,188,026
                      
                      
                      
                      8,482,368
                      
                      
                      
                      7,974,655
                      
                      
                      
                      13,897,361Provision
      for income taxes
                      
                      
                      292,647
                      
                      
                      
                      201,904
                      
                      
                      
                      794,155
                      
                      
                      
                      414,993Net
      income including noncontrolling interest
                      
                      
                      2,895,379
                      
                      
                      
                      8,280,464
                      
                      
                      
                      7,180,500
                      
                      
                      
                      13,482,368Less:
      Net income (loss) attributed to noncontrolling interest
                      
                      
                      (962
                      )
                      
                      
                      64,309
                      
                      
                      
                      39,067
                      
                      
                      
                      425,403Net
      income attributed to AgFeed
                      
                      
                      2,896,341
                      
                      
                      
                      8,216,155
                      
                      
                      
                      7,141,433
                      
                      
                      
                      13,056,965Other
      comprehensive incomeForeign
      currency translation gain
                      
                      
                      168,640
                      
                      
                      
                      315,925
                      
                      
                      
                      20,739
                      
                      
                      
                      3,104,053Comprehensive
      Income
                      
                      $
                      3,064,981
                      
                      
                      $
                      8,532,080
                      
                      
                      $
                      7,162,172
                      
                      
                      $
                      16,161,018Weighted
      average shares outstanding :Basic
                      
                      
                      42,420,914
                      
                      
                      
                      33,267,815
                      
                      
                      
                      39,984,438
                      
                      
                      
                      31,049,732Diluted
                      
                      
                      43,329,228
                      
                      
                      
                      33,557,457
                      
                      
                      
                      40,641,679
                      
                      
                      
                      31,377,267Earnings
      per share attributed to AgFeed common stockholders:Basic
                      
                      $
                      0.07
                      
                      
                      $
                      0.25
                      
                      
                      $
                      0.18
                      
                      
                      $
                      0.42Diluted
                      
                      $
                      0.07
                      
                      
                      $
                      0.24
                      
                      
                      $
                      0.18
                      
                      
                      $
                      0.42





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


4


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Nine
      Months Ended September 30,2009
                        
                        
                        2008(unaudited)
                        
                        
                        (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income including noncontrolling interest
                        
                        $
                        7,180,500
                        
                        
                        $
                        13,482,368Adjustments
      to reconcile net income including noncontrolling interestto net cash provided by operating activities:Depreciation
                        
                        
                        1,952,213
                        
                        
                        
                        973,164Amortization
                        
                        
                        49,286
                        
                        
                        
                        35,240Loss
      on disposal of assets
                        
                        
                        882,854
                        
                        
                        
                        16,774Stock
      based compensation
                        
                        
                        427,551
                        
                        
                        
                        55,962Amortization
      of debt issuance costs
                        
                        
                        203,932
                        
                        
                        
                        1,441,624Amortization
      of discount on convertible debt
                        
                        
                        479,920
                        
                        
                        
                        3,392,619(Increase)
      / decrease in assets:Accounts
      receivable
                        
                        
                        (6,759,546
                        )
                        
                        
                        (3,439,556
                        )Other
      receivables
                        
                        
                        1,201,329
                        
                        
                        
                        (1,837,551
                        )Inventory
                        
                        
                        (1,777,302
                        )
                        
                        
                        (8,312,612
                        )Advances
      to suppliers
                        
                        
                        (716,870
                        )
                        
                        
                        (478,535
                        )Prepaid
      expenses
                        
                        
                        (340,333
                        )
                        
                        
                        (261,938
                        )Other
      assets
                        
                        
                        (244,980
                        )
                        
                        
                        (1,552,469
                        )Increase
      / (decrease) in current liabilities:Accounts
      payable
                        
                        
                        1,624,279
                        
                        
                        
                        3,454,401Other
      payables
                        
                        
                        (2,347,476
                        )
                        
                        
                        2,849,755Unearned
      revenue
                        
                        
                        43,465
                        
                        
                        
                        118,530Accrued
      expenses
                        
                        
                        287,838
                        
                        
                        
                        571,447Accrued
      payroll
                        
                        
                        (132,716
                        )
                        
                        
                        374,101Tax
      and welfare payable
                        
                        
                        (80,312
                        )
                        
                        
                        213,163Interest
      payable
                        
                        
                        (18,608
                        )
                        
                        
                        251,319Net
      cash provided by operating activities
                        
                        
                        1,915,024
                        
                        
                        
                        11,347,806CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of property and equipment
                        
                        
                        (7,486,470
                        )
                        
                        
                        (9,052,476
                        )Acquisition
      of intangible assets
                        
                        
                        (35,314
                        )
                        
                        
                        (72,262
                        )Cash
      paid for purchase of subsidiaries
                        
                        
                        (2,518,089
                        )
                        
                        
                        (65,134,359
                        )Cash
      from the sale of subsidary
                        
                        
                        835,770
                        
                        
                        
                        -Net
      cash used in investing activities
                        
                        
                        (9,204,103
                        )
                        
                        
                        (74,259,097
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the sale of common stock
                        
                        
                        10,000,000
                        
                        
                        
                        57,200,058Offering
      costs paid
                        
                        
                        (1,740,072
                        )
                        
                        
                        (6,079,530
                        )Proceeds
      from short-term loans
                        
                        
                        4,541,500
                        
                        
                        
                        -Proceeds
      from exercise of warrants
                        
                        
                        6,580,010
                        
                        
                        
                        2,138,848Proceeds
      from issuance of convertible notes
                        
                        
                        -
                        
                        
                        
                        19,000,000Issuance
      costs for convertible notes
                        
                        
                        -
                        
                        
                        
                        (1,716,666
                        )Payment
      on note payable
                        
                        
                        -
                        
                        
                        
                        (1,161,297
                        )Capital
      contributed by noncontrolling interest holders
                        
                        
                        118,664
                        
                        
                        
                        936,320Repayment
      of contribution of noncontrolling interest holder
                        
                        
                        (586,800
                        )
                        
                        
                        -Net
      cash provided by financing activities
                        
                        
                        18,913,302
                        
                        
                        
                        70,317,733Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        16,652
                        
                        
                        
                        462,472NET
      INCREASE IN CASH & CASH EQUIVALENTS
                        
                        
                        11,640,875
                        
                        
                        
                        7,868,914CASH
      & CASH EQUIVALENTS, BEGINNING BALANCE
                        
                        
                        24,839,378
                        
                        
                        
                        7,696,209CASH
      & CASH EQUIVALENTS, ENDING BALANCE
                        
                        $
                        36,480,253
                        
                        
                        $
                        15,565,123SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                        
                        $
                        212,414
                        
                        
                        $
                        164,810Income
      taxes paid
                        
                        $
                        616,693
                        
                        
                        $
                        209,582





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 NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (unaudited)
  Note
1 - Organization and Basis of Presentation





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





Organization and Lines of
Business





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





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





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





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





On
December 20, 2006, the Company acquired 100% of the capital stock of Guangxi
Huijie Sci. & Tech. Feed Co, Ltd. (“Guangxi Huijie”).  On November
6, 2007, the Company acquired 90% of the capital stock of Lushan Breeder Pig
Farm Co., Ltd. (“Lushan”).  In 2008, the Company purchased 29 more hog
producing farms and one feed company.  The Company’s ownership
interest in these hog farms ranges from 80% 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 NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (unaudited)


Basis of
Presentation





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





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




Noncontrolling
Interest





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




Certain
amounts presented for prior periods that were previously designated as minority
interest have been reclassified to conform to the current year presentation.
Effective January 1, 2009, the Company adopted SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51” (codified in Financial Accounting Standards (“FASB”) Accounting
Standards Codification (“ASC”) Topic 810), 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 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 SFAS No. 52, "Foreign Currency Translation"
(codified in FASB ASC Topic 830), 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” (codified in
FASB ASC Topic 220).


7




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)


Note
2 – Summary of Significant Accounting Policies





Use of
Estimates





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





Reclassification





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





Cash and Cash
Equivalents





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





Accounts
Receivable





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





Advances to
Suppliers





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





Inventories





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





Property &
Equipment





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





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


8




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)


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





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Office
      equipment
                  
                  $
                  525,041
                  
                  
                  $
                  433,157Operating
      equipment
                  
                  
                  2,978,045
                  
                  
                  
                  2,042,522Vehicles
                  
                  
                  818,872
                  
                  
                  
                  655,853Swines
      for reproduction
                  
                  
                  13,332,849
                  
                  
                  
                  13,137,425Buildings
                  
                  
                  9,104,282
                  
                  
                  
                  6,673,822Total
                  
                  
                  26,759,089
                  
                  
                  
                  22,942,779Less
      accumulated depreciation
                  
                  
                  (3,698,646
                  )
                  
                  
                  (2,132,685
                  )$
                  23,060,443
                  
                  
                  $
                  20,810,094





Depreciation
expense for the three and nine months ended September 30, 2009 and 2008 was
$669,254 and $1,952,213, and $424,729 and $973,164, respectively.





Construction-in-Process





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





Long-Lived
Assets





The
Company applies the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (codified in FASB ASC Topic 360), 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 No. 144. SFAS No. 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 September 30, 2009 there were no significant impairments of its
long-lived assets.


9




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)


Intangible
Assets





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





September
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Right
      to use land
                  
                  $
                  825,007
                  
                  
                  $
                  809,174Customer
      list
                  
                  
                  293,400
                  
                  
                  
                  293,400Computer
      software
                  
                  
                  143,475
                  
                  
                  
                  108,135Intangible
      related to hog farm acquisitions
                  
                  
                  42,744,247
                  
                  
                  
                  42,744,247Total
                  
                  
                  44,006,129
                  
                  
                  
                  43,954,956Less
      Accumulated amortization
                  
                  
                  (186,407
                  )
                  
                  
                  (121,251
                  )Intangibles,
      net
                  
                  $
                  43,819,722
                  
                  
                  $
                  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 varying period ranging from 30 years to 50
years.  Accordingly, the right to use land for these feed companies is
amortized over 50 years or the lease term, if shorter, and the computer software
is amortized over three to nine years.  For hog farms, the Company
generally signed land leases with original owners of the farms.





Revenue
Recognition





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





Advertising
Costs





The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place.  Advertising costs for the
three and nine months ended September 30, 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” (codified in
FASB ASC Topic 718).  The Company recognizes in the statement of
operations the grant-date fair value of stock options and other equity-based
compensation issued to employees and non-employees.  There were
210,000 options outstanding at September 30, 2009.




10


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (unaudited)


Income
Taxes


The
Company utilizes SFAS No. 109, “Accounting for Income Taxes” (codified in FASB
ASC Topic 740), 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.





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 is
classified as interest expense and penalties are classified in selling, general
and administrative expenses in the statements of income. The adoption of FIN 48
has no material impact on the Company’s financial statements.





Foreign Currency
Transactions and Comprehensive Income





US GAAP
requires that recognized revenue, expenses, gains and losses be included in net
income. Certain statements, however, require entities to report specific changes
in assets and liabilities, such as gain or loss on foreign currency translation,
as a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. The functional
currency of the Company’s Chinese subsidiaries is the RMB. The unit of Renminbi
is in Yuan. Translation gains of $4,187,956 and $4,167,217 at September 30, 2009
and December 31, 2008, respectively, are classified as an item of other
comprehensive income in the stockholders’ equity section of the consolidated
balance sheet.  During the three and nine months ended September 30,
2009 and 2008, other comprehensive income in the consolidated statements of
income and other comprehensive income included translation gain of $168,640 and
$20,739, and $315,925 and $3,104,053, respectively.





Basic and Diluted Earnings
Per Share





Earnings
per share is calculated in accordance with the SFAS No. 128, “Earnings Per
Share”. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB
15) (codified in FASB ASC Topic 260). 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 NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)


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





Three
      Months Ended
                  
                  September
      30, 2009
                  
                  
                  September
      30, 2008Per
      Share
                  
                  
                  
                  
                  
                  Per
      ShareShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  AmountBasic  earnings
      per share
                  
                  
                  42,420,914
                  
                  
                  $
                  0.07
                  
                  
                  
                  33,267,815
                  
                  
                  $
                  0.25Effect
      of dilutive stock options and warrants
                  
                  
                  908,314
                  
                  
                  
                  -
                  
                  
                  
                  289,642
                  
                  
                  
                  (0.01
                  )Diluted
      earnings per share
                  
                  
                  43,329,228
                  
                  
                  $
                  0.07
                  
                  
                  
                  33,557,457
                  
                  
                  $
                  0.24





Nine
      Months Ended
                  
                  September
      30, 2009
                  
                  
                  September
      30, 2008Per
      Share
                  
                  
                  
                  
                  
                  Per
      ShareShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  AmountBasic  earnings
      per share
                  
                  
                  39,984,438
                  
                  
                  $
                  0.18
                  
                  
                  
                  31,049,732
                  
                  
                  $
                  0.42Effect
      of dilutive stock options and warrants
                  
                  
                  657,241
                  
                  
                  
                  -
                  
                  
                  
                  327,535
                  
                  
                  
                  -Diluted
      earnings per share
                  
                  
                  40,641,679
                  
                  
                  $
                  0.18
                  
                  
                  
                  31,377,267
                  
                  
                  $
                  0.42





Statement of Cash
Flows





In
accordance with SFAS No. 95, “Statement of Cash Flows” (codified in FASB ASC
Topic 230), cash flows from the Company’s operations are calculated based upon
the local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.





Segment
Reporting





SFAS No.
131, “Disclosure About Segments of an Enterprise and Related Information”
(codified in FASB ASC Topic 280) requires use of the “management approach” model
for segment reporting. The management approach model is based on the way a
company’s management organizes segments within the company for making operating
decisions and assessing performance. The Company determined it has two
reportable segments (See Note 10).  The Company had previously
reported its feed operations as three separate segments since the three
operations were located in difference Provinces.  The Company has
determined that its feed operations should be reported as one
segment.





Fair Value of Financial
Instruments





On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(codified in FASB ASC Topic 820).  SFAS No.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.


12


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (unaudited)


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





Joint Venture /
Alliance





On April
15, 2009 a strategic alliance was signed between the Company and Hypor, a
Hendrix Genetics company, to complement the Company’s growth strategy through
genetics. Hypor will provide top line breeding stock to the Company’s existing
base of 22,125 breeding sows and 4,043 gilts and will provide genetically
superior animals to a new to- be-constructed sows farrow-to-finish nucleus unit
known as the Wunnin farm. Hypor will join AgFeed International Protein (defined
below) in establishing a western style of production taking the role as a
long-term supplier of high health top quality genetics. This arrangement could
lead to a multi level joint venture serving the Pan Asian market.





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





Recent Accounting
Pronouncements





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





In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Company’s financial position, results of
operations or cash flows.


13


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 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,” which is
codified in FASB ASC Topic 320-10. 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. This FSP 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. The Company adopted FSP
No. SFAS 115-2 and SFAS 124-2 beginning April 1, 2009. This
FSP had no material impact on the Company’s financial position, results of
operations or cash flows.




In
April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” which is codified in
FASB ASC Topic 825-10-50.  This FSP essentially expands the disclosure
about fair value of financial instruments that were previously required only
annually to also be required for interim period reporting. In addition, the FSP
requires certain additional disclosures regarding the methods and significant
assumptions used to estimate the fair value of financial instruments. These
additional disclosures are required beginning with the quarter ending
June 30, 2009.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” codified in FASB ASC
Topic 855-10-05, which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
No. 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS No. 165 is effective for interim and annual periods ending after June 15,
2009, and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS No. 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued. The Company
has evaluated subsequent events through November 8, 2009.




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





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


14




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)





Note
3 – Convertible Notes and Warrants





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





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





In
connection with the issuance of the Notes and the Warrants issued to the
Investors on February 25, 2008, the Company paid $1,716,666 in debt issuance
cost which is amortized over the life of the Notes.  For the three and
nine months ended September 30, 2009 and 2008, the Company amortized $7,584 and
$203,932 and  $148,766 and $1,441,624, respectively, of the aforesaid
issuance costs as interest and financing costs in the accompanying consolidated
statements of operations.





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





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





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





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


15


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (unaudited)


The
Warrants granted to the Investor on February 25, 2008 and conversion feature in
the above Notes are not considered derivative instruments that need to be
bifurcated from the original security since the Warrants and the conversion
price of the Notes have a floor of $5.00, which means the Company can determine
the maximum shares that could be issued upon conversion. The Company determined
the fair value of the detachable warrants issued in connection with the Notes to
be $1,269,442, using the Black-Scholes option pricing model and the following
assumptions:  expected life of 1 year, a risk free interest rate
of 2.10%, a dividend yield of 0% and volatility of 70%. In addition,
the Company determined the value of the beneficial conversion feature to be
$2,770,442. The combined total discount for the Notes is $4,039,885 and is
being amortized over the term of the Notes. For the three and nine months ended
September 30, 2009 and 2008, the Company amortized $17,848 and $479,920 and
$350,096 and $3,392,619, respectively, of the aforesaid discounts as interest
and financing costs in the accompanying consolidated statements of
operations.





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





Note
4 – Short-Term Loans





Short
term loans at September 30, 2009 are follows:





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





Note
5 – Stockholders’ Equity





Treasury
Stock





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





Private
Placement





On May 8,
2009, the Company closed a private placement offering by issuing 2,329,645
shares of common stock for gross proceeds of $10 million.  The Company
paid $1,103,835 in costs related to this offering which was offset against the
offering proceeds.  The Company also issued 1,164,822 common stock
purchase warrants to the investors and 244,613 common stock purchase warrants to
the placement agent.  The warrants are exercisable immediately; have
an exercise price of $4.50 per share and expire on May 8, 2014. The Company
determined the fair value of the 1,409,435 warrants issued in connection with
this private placement offering to be $4,379,181, using the Black-Scholes option
pricing model and the following assumptions:  expected life of 5
year, a risk free interest rate of 2.50%, a dividend yield of 0% and
volatility of 109%.  The value of the warrants was recorded
directly to additional paid in capital as these warrants were issued in
connection with the sale of the Company’s equity securities.


16




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)


Exercise of
Warrants





During
the nine months ended September 30, 2009, certain warrants holders exercised
300,000 warrants in connection with a cashless exercise provision in the warrant
agreement that resulted in the issuance of 95,473 shares of the Company’s common
stock.  In addition, during the nine months ended September 30, 2009,
certain warrant holders exercised 2,632,004 warrants that resulted in gross
proceeds to the Company of $6,580,010.





Equity Credit
Agreement





On
September 9, 2009, the Company entered into an Equity Credit Agreement with an
institutional investor, which was amended and restated as of November 9, 2009,
providing for, among other things, the issuance of shares of its common stock at
any time and from time to time during the next two years for gross proceeds of
up to $50,000,000. In connection with the closing of the transaction, the
Company also issued warrants to purchase an additional 400,000 shares of its
common stock during a five year period at an exercise price of $5.75 per share.
The
fair value of these warrants was charged to additional paid in capital as they
were issued in connection with an equity instrument.  This
transaction closed on September 9, 2009.  No shares have been issued
under the terms of the Equity Credit Agreement.





Note
6 – Employee Common Welfare





The total
expense for the employee common welfare was $44,548 and $259,747, and $12,009
and $101,426 for the three and nine months ended September 30, 2009 and 2008,
respectively.  The Company has recorded welfare payable of $1,938 and
$3,336 at September 30, 2009 and December 31, 2008, respectively, which is
included in tax and welfare payable in the accompanying consolidated balance
sheet.  The Chinese government abolished the 14% welfare plan policy
at the beginning of 2007.  The Company is not required to establish
welfare and common welfare reserves. The balance of welfare payable is remaining
amount due under the welfare plan provided for prior to 2007.





Note
7 – Statutory Common Welfare Fund





As
stipulated by the Company Law of the 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 appropriated $392,124 and $994,462 and $296,845 and $1,145,668 as
reserve for the statutory surplus reserve and welfare fund for the three and
nine months ended September 30, 2009 and 2008, respectively.


17




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)


Note
8 – Stock Options and Warrants





Stock
Options





Following
is a summary of stock option activity:





Options
                          outstanding
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Weighted
                          average
                          remaining
                          contractual
      life
                        
                        
                        Aggregate
                          Intrinsic
      ValueOutstanding,
      December 31, 2008
                        
                        
                        180,000
                        
                        
                        $
                        9.27
                        
                        
                        
                        4.65
                        
                        
                        $
                        -Granted
                        
                        
                        30,000
                        
                        
                        
                        3.30Forfeited
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Outstanding,
      September 30, 2009
                        
                        
                        210,000
                        
                        
                        $
                        8.42
                        
                        
                        
                        3.99
                        
                        
                        $
                        61,200Exercisable,
      September 30, 2009
                        
                        
                        6,666
                        
                        
                        $
                        8.85
                        
                        
                        
                        3.42
                        
                        
                        $
                        -





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





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





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





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





For
options granted during 2009 where the exercise price equaled the stock
price at the date of the grant, the weighted-average fair value of such options
was $2.61 and the weighted-average exercise price of such options
was $3.30.  No options were granted during 2009, where the
exercise price was less than the stock price at the date of the grant or the
exercise price was greater than the stock price at the date of
grant.  At September 30, 2009, the unamortized compensation costs
related to nonvested options amounted to $473,134, which will be expensed
through the second quarter of 2012.


18




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)


Warrants





Following
is a summary of the warrant activity:





Outstanding,
      December 31, 2008
                  
                  
                  4,323,204Granted
                  
                  
                  1,809,435Forfeited
                  
                  
                  -Exercised
                  
                  
                  2,932,004Outstanding,
      September 30, 2009
                  
                  
                  3,200,635





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





Number
      of
                        Warrants
                      
                      Exercise
                        Price1,168,000
                      
                      $
                      2.501,409,435
                      
                      $
                      4.503,200
                      
                      $
                      5.00400,000
                      
                      $
                      5.75220,000
                      
                      $
                      10.003,200,635





Note
9 – Taxes





Local PRC
Income Tax





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





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





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





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





For
      the Three Months EndedSeptember
      30,
                    2009
                  
                  
                  September
      30,
                    2008Tax
      provision at statutory rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %Foreign
      tax rate difference
                  
                  
                  (9
                  )%
                  
                  
                  (9
                  )%US
      NOL for which no benefit is realized
                  
                  
                  2
                  %
                  
                  
                  -Effect
      of tax holiday/tax exemption
                  
                  
                  (18
                  )%
                  
                  
                  (23
                  )%9
                  %
                  
                  
                  2
                  %


19


AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (unaudited)


For
      the Nine Months EndedSeptember
      30,
                    2009
                  
                  
                  September
      30,
                    2008Tax
      provision at statutory rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %Foreign
      tax rate difference
                  
                  
                  (9
                  )%
                  
                  
                  (9
                  )%US
      NOL for which no benefit is realized
                  
                  
                  2
                  %
                  
                  
                  1
                  %Effect
      of tax holiday/tax exemption
                  
                  
                  (17
                  )%
                  
                  
                  (23
                  )%10
                  %
                  
                  
                  3
                  %





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





If the
Company had not been exempt from paying income taxes, income tax expense for the
three and nine months September 30, 2009 would have been approximately $956,000
and $2,251,000 and earnings per share would have been reduced by $0.02 and
$0.05; and income tax expense for the three and nine months ended September 30,
2008 would have been approximately $2,711,000 and $4,309,000 and earnings per
share would have been reduced by $0.08 and $0.13, respectively.





Foreign
pretax earnings approximated $9,600,000 and $18,900,000 for the nine months
ended September 30, 2009 and 2008 respectively. Pretax earnings of a foreign
subsidiary are subject to U.S. taxation when effectively repatriated. The
Company provides income taxes on the undistributed earnings of non-U.S.
subsidiaries except to the extent that such earnings are indefinitely invested
outside the United States. At September 30, 2009, approximately $38,300,000 of
accumulated undistributed earnings of non-U.S. subsidiaries was indefinitely
invested. At the existing U.S. federal income tax rate, additional taxes of
$3,400,000 would have to be provided if such earnings were remitted
currently.





Note
10 – Segment Information





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





The
Company’s feed company in Shanghai is located in the Qingcun Town, Fengxian
district, Shanghai and sells its products to approximately 651 customers,
consisting of 425 distributors and 261 large scale pig
farms.  Its feed company in Guangxi is located in Coastal Industrial
Park, Liangqin district, Nanning city, Guangxi Province and sells its products
to approximately 686 customers, consisting of 471 distributors and 215
large scale pig farms.  Its feed company in Nanchang is located in
Chang Bei District Industrial Park, in Nanchang, Jiangxi province and sells its
products to approximately 693 customers, consisting of 474 distributors and
219 large scale pig farms. The hog farms are engaged mainly in raising,
breeding, and sale of pigs all over the country and are located in the PRC
provinces of Jiangxi, Shanghai, Hainan, Guangxi and Fujian.


20




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)


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





Three
                                                  
                                                  
                                                  Three
                                                  
                                                  
                                                  Nine
                                                  
                                                  
                                                  NineMonths
                                                  
                                                  
                                                  Months
                                                  
                                                  
                                                  Months
                                                  
                                                  
                                                  MonthsEnded
                                                  
                                                  
                                                  Ended
                                                  
                                                  
                                                  Ended
                                                  
                                                  
                                                  Ended9/30/2009
                                                  
                                                  
                                                  9/30/2008
                                                  
                                                  
                                                  9/30/2009
                                                  
                                                  
                                                  9/30/2008Revenues
      from unrelated entitiesAnimal
      feed nutrition
                                                  
                                                  $
                                                  17,150,476
                                                  
                                                  
                                                  $
                                                  12,434,506
                                                  
                                                  
                                                  $
                                                  38,400,249
                                                  
                                                  
                                                  $
                                                  33,664,079Hog
      production
                                                  
                                                  
                                                  27,964,966
                                                  
                                                  
                                                  
                                                  36,991,768
                                                  
                                                  
                                                  
                                                  78,672,237
                                                  
                                                  
                                                  
                                                  63,544,606$
                                                  45,115,442
                                                  
                                                  
                                                  $
                                                  49,426,274
                                                  
                                                  
                                                  $
                                                  117,072,486
                                                  
                                                  
                                                  $
                                                  97,208,685Intersegment
      revenuesAnimal
      feed nutrition
                                                  
                                                  $
                                                  3,343,116
                                                  
                                                  
                                                  $
                                                  3,275,020
                                                  
                                                  
                                                  $
                                                  9,789,287
                                                  
                                                  
                                                  $
                                                  5,115,566Hog
      production
                                                  
                                                  
                                                  232,027
                                                  
                                                  
                                                  
                                                  659,209
                                                  
                                                  
                                                  
                                                  550,882
                                                  
                                                  
                                                  
                                                  665,191$
                                                  3,575,143
                                                  
                                                  
                                                  $
                                                  3,934,229
                                                  
                                                  
                                                  $
                                                  10,340,169
                                                  
                                                  
                                                  $
                                                  5,780,757Total
      RevenuesAnimal
      feed nutrition
                                                  
                                                  $
                                                  20,493,592
                                                  
                                                  
                                                  $
                                                  15,709,526
                                                  
                                                  
                                                  $
                                                  48,189,536
                                                  
                                                  
                                                  $
                                                  38,779,645Hog
      production
                                                  
                                                  
                                                  28,196,993
                                                  
                                                  
                                                  
                                                  37,650,977
                                                  
                                                  
                                                  
                                                  79,223,119
                                                  
                                                  
                                                  
                                                  64,209,797Less Intersegment revenues
                                                  
                                                  
                                                  (3,575,143
                                                  )
                                                  
                                                  
                                                  (3,934,229
                                                  )
                                                  
                                                  
                                                  (10,340,169
                                                  )
                                                  
                                                  
                                                  (5,780,757
                                                  )$
                                                  45,115,442
                                                  
                                                  
                                                  $
                                                  49,426,274
                                                  
                                                  
                                                  $
                                                  117,072,486
                                                  
                                                  
                                                  $
                                                  97,208,685Income
      from operationsAnimal
      feed nutrition
                                                  
                                                  $
                                                  2,105,772
                                                  
                                                  
                                                  $
                                                  2,621,737
                                                  
                                                  
                                                  $
                                                  5,231,919
                                                  
                                                  
                                                  $
                                                  6,319,700Hog
      production
                                                  
                                                  
                                                  2,265,649
                                                  
                                                  
                                                  
                                                  6,913,473
                                                  
                                                  
                                                  
                                                  5,452,101
                                                  
                                                  
                                                  
                                                  14,276,685Holding
      Company
                                                  
                                                  
                                                  (659,676
                                                  )
                                                  
                                                  
                                                  (224,811
                                                  )
                                                  
                                                  
                                                  (1,528,112
                                                  )
                                                  
                                                  
                                                  (788,711
                                                  )$
                                                  3,711,745
                                                  
                                                  
                                                  $
                                                  9,310,399
                                                  
                                                  
                                                  $
                                                  9,155,908
                                                  
                                                  
                                                  $
                                                  19,807,674Interest
      incomeAnimal
      feed nutrition
                                                  
                                                  $
                                                  19,911
                                                  
                                                  
                                                  $
                                                  27,372
                                                  
                                                  
                                                  $
                                                  68,770
                                                  
                                                  
                                                  $
                                                  80,524Hog
      production
                                                  
                                                  
                                                  8,780
                                                  
                                                  
                                                  
                                                  5,420
                                                  
                                                  
                                                  
                                                  19,093
                                                  
                                                  
                                                  
                                                  12,820Holding
      Company
                                                  
                                                  
                                                  46,653
                                                  
                                                  
                                                  
                                                  12,068
                                                  
                                                  
                                                  
                                                  100,597
                                                  
                                                  
                                                  
                                                  77,751$
                                                  75,344
                                                  
                                                  
                                                  $
                                                  44,860
                                                  
                                                  
                                                  $
                                                  188,460
                                                  
                                                  
                                                  $
                                                  171,095Interest
      and financing costsAnimal
      feed nutrition
                                                  
                                                  $
                                                  85,632
                                                  
                                                  
                                                  $
                                                  27,270
                                                  
                                                  
                                                  $
                                                  100,991
                                                  
                                                  
                                                  $
                                                  35,055Hog
      production
                                                  
                                                  
                                                  64,011
                                                  
                                                  
                                                  
                                                  209
                                                  
                                                  
                                                  
                                                  71,156
                                                  
                                                  
                                                  
                                                  211Holding
      Company
                                                  
                                                  
                                                  43,320
                                                  
                                                  
                                                  
                                                  577,912
                                                  
                                                  
                                                  
                                                  798,244
                                                  
                                                  
                                                  
                                                  5,209,326$
                                                  192,963
                                                  
                                                  
                                                  $
                                                  605,391
                                                  
                                                  
                                                  $
                                                  970,391
                                                  
                                                  
                                                  $
                                                  5,244,592Income
      tax expenseAnimal
      feed nutrition
                                                  
                                                  $
                                                  292,647
                                                  
                                                  
                                                  $
                                                  201,904
                                                  
                                                  
                                                  $
                                                  794,155
                                                  
                                                  
                                                  $
                                                  414,993Hog
      production
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Holding
      Company
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -$
                                                  292,647
                                                  
                                                  
                                                  $
                                                  201,904
                                                  
                                                  
                                                  $
                                                  794,155
                                                  
                                                  
                                                  $
                                                  414,993Net
      IncomeAnimal
      feed nutrition
                                                  
                                                  $
                                                  1,756,494
                                                  
                                                  
                                                  $
                                                  2,439,622
                                                  
                                                  
                                                  $
                                                  4,689,193
                                                  
                                                  
                                                  $
                                                  5,399,943Hog
      production
                                                  
                                                  
                                                  1,802,712
                                                  
                                                  
                                                  
                                                  6,564,762
                                                  
                                                  
                                                  
                                                  4,677,829
                                                  
                                                  
                                                  
                                                  13,577,045Holding
      Company
                                                  
                                                  
                                                  (662,865
                                                  )
                                                  
                                                  
                                                  (788,229
                                                  )
                                                  
                                                  
                                                  (2,225,589
                                                  )
                                                  
                                                  
                                                  (5,920,023
                                                  )$
                                                  2,896,341
                                                  
                                                  
                                                  $
                                                  8,216,155
                                                  
                                                  
                                                  $
                                                  7,141,433
                                                  
                                                  
                                                  $
                                                  13,056,965Provision
      for depreciationAnimal
      feed nutrition
                                                  
                                                  $
                                                  33,626
                                                  
                                                  
                                                  $
                                                  62,380
                                                  
                                                  
                                                  $
                                                  202,685
                                                  
                                                  
                                                  $
                                                  143,540Hog
      production
                                                  
                                                  
                                                  635,628
                                                  
                                                  
                                                  
                                                  362,349
                                                  
                                                  
                                                  
                                                  1,749,528
                                                  
                                                  
                                                  
                                                  829,624$
                                                  669,254
                                                  
                                                  
                                                  $
                                                  424,729
                                                  
                                                  
                                                  $
                                                  1,952,213
                                                  
                                                  
                                                  $
                                                  973,164
  21
 AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (unaudited)
 As
      of
                                    
                                    
                                    As
      of9/30/08
                                    
                                    
                                    12/31/08Total
      AssetsAnimal
      feed nutrition
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    36,025,899
                                    
                                    
                                    $
                                    31,076,964Hog
      production
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    104,471,526
                                    
                                    
                                    
                                    96,454,117Holding
      Company
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    17,438,779
                                    
                                    
                                    
                                    9,524,055$
                                    157,936,204
                                    
                                    
                                    $
                                    137,055,136





Note
11 – Commitments and Contingencies





At
September 30, 2009, the Company had commitments to expend approximately $732,000
in connection to building construction currently in process.





Note
12 – Acquisition and Dispositions





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





During
the three months ended September 30, 2009, the Company purchased the
non-controlling interest of 40% and 40% in two hog farms for $987,655 and
$264,060, respectively.  As a result of the purchase of the
non-controlling interest, the excess of the purchase price over the carrying
value of the non-controlling interest of $639,754 and $248,713, respectively was
recorded against additional paid in capital.





Also,
during the three months ended June 30, 2009, the Company sold its 70% interest
in a subsidiary for $307,650.  This subsidiary had not commenced
operations.  In addition, during the three months ended September 30,
2009, the Company sold its 60% interest in a subsidiary for $528,120 and
recognized a gain on disposition of $54,382.


22




AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


(unaudited)





Note
13 – Subsequent Events




The
Company has evaluated subsequent events through November 8, 2009, the date
management and audit committee approved the financial
statements.





In
October 2009, in connection with the construction of its first large western
model farm in Da Hua, China, the Company placed $4,000,000 in a separate bank
account for the construction of this farm.  In addition, the Company
paid a construction deposit of $1,001,050 to an international construction
company for the construction of the Da Hua farm.





Subsequent
to September 30, 2009, the Company issued 375,000 shares of its common stock for
as
a result of the exercise of warrants.




23





CAUTIONARY
STATEMENT FOR FORWARD-LOOKING STATEMENTS





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





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





Overview





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




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




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




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




AgFeed
had revenues of $117.07 million for the nine months ended September 30, 2009
compared to revenues of $97.21 million for the nine months ended September 30,
2008.  The increase (20.4%) was the result of expanding market share
in our feed business and the hog farm acquisitions and expansions we made
beginning in late 2007 and throughout 2008.




Animal
Nutrition Business




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


24




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




As of
September 30, 2009, we have established relationships with approximately 1,286
independently owned feed distribution chain stores that sell our products
exclusively, targeting backyard and small hog farms. These complement our direct
sales to approximately 775 large commercial hog farms. We rely on the
distributors to market and sell our products to smaller hog
farms.  Approximately 80% 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 65% of China’s annual hog
production.




AgFeed is
one of a handful of companies that 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 foundation for our Hog Farms to
produce hogs providing high quality “Green” pork products. It is also an
incentive for other commercial hog farms to enter into sales contracts with our
feed operations.




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.




Revenue
increased in our animal feed lines due to our aggressive sales practices and the
anticipated increases of corn and soy prices by hog farmers due to the country
wide drought suffered in the past year.





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




Hog
Production Business




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




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


25




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




Capital
spending for the first nine months of 2009 consisted of approximately $3.97
million on building renovations, equipment purchases and environmental
expenditures, $1.84 million on swine purchases for reproduction and $3.51
million related to construction in progress.  Our current capital
spending plans over the next two and a half years include an estimated $4.2
million for bio security, $4.0 million for environmental compliance and projects
and $8.3 million for genetics programs.  For 2009, AgFeed plans to
achieve a production capacity of up to 650,000 hogs.  In the first
nine months of 2009 AgFeed sold approximately 409,000 head with an average
selling price of $166 per head as compared to sales of 410,000 hogs with an
average selling price of $219 per head for all of 2008 for market weight (lard)
pigs. There were additional pigs sold at various weights so the cumulative total
is 511,000 total head for the nine months ended September 30, 2009.




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




On July
13, 2009, we formed a joint venture with M2P2. This joint venture, AgFeed
International Protein Technology Corp., will focus on enhancing hog production
systems for Chinese and other Pan Asian clients based on modern western
standards to increase productivity and ensure the highest bio-security health
standards in the Pan Asian hog industry.  The joint venture was formed
to take advantage of the coming commercialization and consolidation of the hog
industry being fostered by the Chinese central and local
governments.  We will be the joint venture's first
client.  AgFeed International Protein is owned 80.1% by us and certain
affiliates and 19.9% by M2P2. On November 9, 2009 a groundbreaking ceremony will
be held in Da Hua, China (Jiangxi Province) celebrating the start of
construction of our first large western model farm. This is the first of six
farms that will be constructed in South China. AgFeed International Protein
Technology Corp.has completed all phases of design and blueprints for these
farms and has been working with international and local construction firms to
ensure success.




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




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


26




According
to the China Feed Industry Association, the PRC has the world's largest and most
profitable market for hog production, which processed 625 million hogs in 2008,
compared to approximately 100 million in the US. More than 1.2 billion Chinese
consume pork as their primary source of meat. 63% of all meat consumed in the
PRC is pork. Chinese consumers consume more pork each year than the rest of the
world combined. Pork production in China is a key political, social and security
issue for consumers. The Chinese government supports hog producers with
favorable tax status and subsidies, insurance, vaccines, caps on feed costs and
land use grants. Hog production is exempt from all taxes and sow owners receive
government grants and subsidies.  The Food Safety Law, which went into
effect on June 1, 2009, provides a legal basis for the government to strengthen
food safety control “from the production line to the dining table.”




The
importance the PRC puts on hog production is 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. China
needs a minimum of 410,000,000 live hogs to balance the anticipated consumption
rate for 2009. As of June 2009, China had 450,000,000 live hogs to meet that
demand.





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




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


27


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.




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




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




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.




28




Recent
Accounting Pronouncements


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





In April
2009, the FASB issued FSP No. SFAS 157-4, “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on our financial position, results of operations
or cash flows.




In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments,” which is
codified in FASB ASC Topic 320-10. 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. This FSP 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. The Company adopted FSP
No. SFAS 115-2 and SFAS 124-2 beginning April 1, 2009. This
FSP had no material impact on our financial position, results of operations or
cash flows.




In
April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” which is codified in
FASB ASC Topic 825-10-50.  This FSP essentially expands the disclosure
about fair value of financial instruments that were previously required only
annually to also be required for interim period reporting. In addition, the FSP
requires certain additional disclosures regarding the methods and significant
assumptions used to estimate the fair value of financial instruments. These
additional disclosures are required beginning with the quarter ending
June 30, 2009.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” codified in
FASB  ASC Topic 855-10-05, which provides guidance to establish
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. SFAS No. 165 also requires entities to disclose the date
through which subsequent events were evaluated as well as the rationale for why
that date was selected. SFAS No. 165 is effective for interim and annual periods
ending after June 15, 2009, and accordingly, we adopted this pronouncement
during the second quarter of 2009. SFAS No. 165 requires that public entities
evaluate subsequent events through the date that the financial statements are
issued. We have evaluated subsequent events through November 8,
2009.


29





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140,” codified as FASB ASC
Topic 860, which requires entities to provide more information regarding
sales of securitized financial assets and similar transactions,
particularly if the entity has continuing exposure to the risks related to
transferred financial assets. SFAS No. 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets and requires additional disclosures. SFAS No.166 is
effective for fiscal years beginning after November 15, 2009. We do not believe
the adoption of SFAS No.166 will have an impact on our financial condition,
results of operations or cash flows.





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





Results
of Operations





Comparison
of Three Months Ended September 30, 2009 and 2008:





Three
      Months Ended
                    September
      30,
                  
                  
                  $
                  
                  
                  %2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  ChangeRevenues
                  
                  $
                  45,115,442
                  
                  
                  $
                  49,426,274
                  
                  
                  $
                  (4,310,832
                  )
                  
                  
                  (8.72
                  )Cost
      of goods sold
                  
                  
                  37,554,278
                  
                  
                  
                  37,124,058
                  
                  
                  
                  430,220
                  
                  
                  
                  1.16Gross
      profit
                  
                  
                  7,561,164
                  
                  
                  
                  12,302,216
                  
                  
                  
                  (4,741,052
                  )
                  
                  
                  (38.54
                  )Operating
      expenses
                  
                  
                  3,849,419
                  
                  
                  
                  2,991,817
                  
                  
                  
                  857,602
                  
                  
                  
                  28.66Interest
      and financing costs
                  
                  
                  192,963
                  
                  
                  
                  605,391
                  
                  
                  
                  (412,428
                  )
                  
                  
                  (68.13
                  )Net
      income
                  
                  
                  2,896,341
                  
                  
                  
                  8,216,155
                  
                  
                  
                  (5,319,814
                  )
                  
                  
                  (64.75
                  )




Revenues. The
decrease of $4.3 million was primarily due to a decrease in the selling price of
hogs plus the high quantity sold (183,878 versus 96,415) which was offset by the
increase in animal feed sales. On a year-over-year basis hog sales declined by
$9.1 million of which $3.6 million is attributed to the quantity sold (weight)
and $5.5 million was due to actual sales prices.





Feed
revenues were up by $3.5 million although the average sales price per unit was
lower than last year due to aggressive sales programs and the increases in price
of corn and soy.  A key milestone is the increase in the sales of
complete feed.  Our total feed sales in the third quarter of 2009 were
approximately 23.3 thousand metric tons which added to our first half of 2009 of
43.5 thousand metric tons which equals 76.8 thousand metric tons for the nine
months ended September 30, 2009.  Our goal for 2009 is 100,000 metric
tons.





The
decrease in revenues as described above was due to a sell off of hog inventory
sell off,  consumer reaction to H1N1A scare, the country wide drought,
an increased in corn prices of 7% and soybeans by 4%, and aggressive sales
programs all had negative effects of results of operations.




Cost of Goods Sold. We
experienced increases in the unit cost of goods sold for our two business lines
during the three months ended September 30, 2009 compared to the same period in
2008.  These raw materials constitute approximately 60 - 75% of our raw
material costs.   Corn and soybean meal cost rose 7% and 4%,
respectively, versus the 3rd quarter of 2008. China has implemented programs to
mitigate additional price increases in order to stabilize these
markets.


30




In order
to provide excellent customer service and differentiate ourselves from our
competition, at our customers’ request, we supply them with customized
formulations of our products.  In any given month, the cost of various
additives used in our production fluctuates, which can result in temporary
increases in the unit cost of goods sold.  These increased costs
offset our increases in revenues.  Even though this may have an
adverse effect on our short term profits, we take the long-term view that this
practice results in increased customer loyalty, builds the AgFeed brand and will
ultimately lead to increased sales and gross profits.  In addition, we
are presently experiencing more stable pricing in these additives, which we
anticipate will stabilize our cost of goods sold.




Gross Profit. Gross
margins decreased to 16.8% from 24.9% during the three months September 30, 2009
as compared to the same period in 2008.  The decrease in gross margin can
be attributed to the increase in the cost of hog feed and the lower sales price
as compared to 2008 selling prices that averaged $0.45 per kilogram
higher.  This was offset somewhat by actions taken at the beginning of
2009, including expansion of our product distribution channels, and our entry
into long-term contracts for key product ingredients which locked in favorable
cost savings.




Selling, General and Administrative
Expenses.  Selling, general and administrative expense includes
overhead expenses such as rent, management and staff salaries, general
insurance, marketing, accounting, legal and offices expenses. Our selling
expenses for the three months ended September 30, 2009 were approximately 1%
less than the corresponding period in 2008.  General and
administrative expenses for our feed business increased by approximately
$400,000 or approximately 94% from the corresponding period in 2008 principally
due to the overall expansion of our feed business and the increase of our
allowance for doubtful accounts of approximately $210,000.  Our
corporate expenses also increased by approximately $430,000 due to higher
professional fees.  General and administrative expenses for our hog
farms for the three months ended September 30, 2009 increased by approximately
3% over the corresponding period in 2008 due to more hog farms being in
operation in 2009.




Interest and Financing Costs.
We incurred interest and financing costs of $192,963 and $605,391during the
three months ended September 30, 2009 and 2008, respectively, principally as a
result of the interest on our of convertible notes issued during February 2008
and short-term loans.  During the three months ended September 30,
2009 and 2008, $0 and $1.5 million, respectively, of the convertible notes were
converted into shares of common stock which resulted in accelerated amortization
of the debt discounts and debt issue costs associated with the convertible
debt.




Due to
appreciation in RMB against the USD in 2008, we incurred a loss on foreign
translation of $10,007 during the three months ended September 30, 2008, as we
could not timely convert USD deposits into RMB as a result of bank policies and
related banking rules in the PRC. This was a one time, non-recurring charge for
the period.





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




Net Income.  The
decrease in our net income was due to a decrease in our sales, the increase in
our cost of sales and higher operating expenses.  We continued to
benefit from the tax exempt status for our hog production
business.


31


Comparison
of Nine Months Ended September 30, 2009 and 2008:





Nine Months Ended
                  September 30,
                
                
                $
                
                
                %2009
                
                
                2008
                
                
                Change
                
                
                ChangeRevenues
                
                $
                117,072,486
                
                
                $
                97,208,685
                
                
                $
                19,863,801
                
                
                
                20.43Cost
      of goods sold
                
                
                98,486,258
                
                
                
                70,438,683
                
                
                
                28,047,575
                
                
                
                39.82Gross
      profit
                
                
                18,586,228
                
                
                
                26,770,002
                
                
                
                (8,183,774
                )
                
                
                (30.57
                )Operating
      expenses
                
                
                9,430,320
                
                
                
                6,962,328
                
                
                
                2,467,992
                
                
                
                35.45Interest
      and financing costs
                
                
                970,391
                
                
                
                5,244,592
                
                
                
                (4,274,201
                )
                
                
                (81.50
                )Net
      income
                
                
                7,141,433
                
                
                
                13,056,965
                
                
                
                (5,915,532
                )
                
                
                (45.31
                )





Revenues. The
increase was due to volume sales of both hogs and animal feed products. Hog
sales of 511,000 for nine months ended September 30, 2009 exceeded total hog
sales of 410,000 hogs for all of 2008. Animal feed sales volume for nine months
ended September 30, 2009 exceeded 73,000 metric tons doubling the volume for the
comparative period of 2008. However, the increase in revenue described above was
offset by lower sales prices, an increase in ingredient costs, consumer reaction
to the H1N1A scare and the country wide drought.





Cost of Goods Sold. We
experienced increases in the unit cost of goods sold for our two business lines
during the nine months ended September 30, 2009 compared to the same period in
2008.  These raw materials constitute approximately 60 - 75% of our raw
material costs.   Corn and soybean meal cost rose 7% and 4%,
respectively, versus the nine months ended September 30, 2008. China has
implemented programs to mitigate additional price increases in order to
stabilize these markets.





In order
to provide excellent customer service and differentiate ourselves from our
competition, at our customers’ request, we supply them with customized
formulations of our products.  In any given month, the cost of various
additives used in our production fluctuates, which can result in temporary
increases in the unit cost of goods sold.  These increased costs
offset our increases in revenues.  Even though this may have an
adverse effect on our short term profits, we take the long-term view that this
practice results in increased customer loyalty, builds the AgFeed brand and will
ultimately lead to increased sales and gross profits.  In addition, we
are presently experiencing more stable pricing in these additives, which we
anticipate will stabilize our cost of goods sold.




Gross Profit. Gross
margins decreased to 15.9% from 27.5% during the nine months September 30, 2009
as compared to the same period in 2008.  The decrease in gross margin can
be attributed to the increase in the cost of hog feed that began in the last
half of 2008 and continued into 2009 and a reduction in the selling price for
our hogs.  The increase in the cost of hog feed was offset somewhat by
actions taken in the first quarter of 2009, including expansion of our product
distribution channels, and our entry into long-term contracts for key product
ingredients which locked in favorable cost savings.




Selling, General and Administrative
Expenses.  Selling, general and administrative expense includes
overhead expenses such as rent, management and staff salaries, general
insurance, marketing, accounting, legal and offices expenses. Our selling
expenses for the nine months ended September 30, 2009 were approximately 9% more
than the corresponding period in 2008 due to the expansion of our feed and hog
farm operations and related increases in sales.  General and
administrative expenses for our feed segment increased by approximately $530,000
or approximately 52% from the corresponding period in 2008 principally due to
the overall expansion of our feed business and the increase of our allowance for
doubtful accounts of approximately $210,000.  Our corporate expenses
also increased by approximately $740,000 due to higher professional
fees.  General and administrative expenses for our hog farms for the
nine months ended September 30, 2009 increased by approximately $965,000 for 52%
over the corresponding period in 2008 to due to more hog farms being in
operations in 2009.


32





Interest and Financing Costs.
We incurred interest and financing costs of $0.97 million and $5.24 million
during the nine months ended September 30, 2009 and 2008, respectively,
principally as a result of the issuance of $19 million principal amount of
convertible notes issued during February 2008.   During the nine
months ended September 30, 2009 and 2008, $2.8 million and $15.2 million,
respectively, of the convertible notes were converted into shares of common
stock which resulted in accelerated amortization of the debt discounts and debt
issue costs associated with the convertible debt.





Due to
appreciation in RMB against the USD in 2008, we incurred a loss on foreign
translation of $553,753 during the nine months ended September 30, 2008, as we
could not timely convert USD deposits into RMB as a result of bank policies and
banking rules in the PRC. This was a one time, non-recurring
charge.




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




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




Off-Balance
Sheet Arrangements




There
were no off-balance sheet arrangements during the nine months ended September
30, 2009 that have, or are reasonably likely to have, a current or future effect
on our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to our
interests.




Liquidity
and Capital Resources




At
September 30, 2009, we had $36.5 million in cash and cash equivalents on
hand.




During
first quarter of 2008, we completed two financings.  We received
aggregate gross proceeds of $22 million through the sale of 2,444,448 shares of
common stock at $9 per share.  We received aggregate proceeds of $19
million through the issuance of three year convertible notes bearing interest at
7% and convertible into common stock at $10 per share.  In connection
with the convertible notes, we issued 380,000 warrants which are exercisable
immediately and have a $10 strike price.  The exercise price on the
warrants was subsequently reduced to $5 per share.  We paid offering
costs of $3,432,670 related to the sale of shares and $1,716,666 related to the
issuance of the convertible notes.




On April
16, 2008, we entered into a Securities Purchase Agreement with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 625,000 shares of our common stock at price
of $16.00 per share for aggregate gross proceeds of $10,000,000.  We
paid $703,472 in costs related to this offering.




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





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


33




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




On May 8,
2009, we closed a private placement by issuing 2,329,645 shares of common stock
for gross proceeds of $10 million to certain institutional
investors.  We also issued 1,164,822 common stock purchase warrants to
the investors and 244,613 common stock purchase warrants to the placement agent
for the transaction.  The warrants are exercisable immediately have an
exercise price of $4.50 per share and expire on May 8, 2014. We paid costs
related to this offering of $1.1 million.





On
September 9, 2009, we entered into an Equity Credit Agreement with an
institutional investor, which was amended and restated as of November 9, 2009,
providing for, among other things, the issuance of shares of its common stock at
any time and from time to time during the next two years for gross proceeds of
up to $50,000,000. In connection with the closing of the transaction, we also
issued warrants to purchase an additional 400,000 shares of its common stock
during a five year period at an exercise price of $5.75 per
share.  This transaction closed on September 9, 2009.  No
shares have been issued under the terms of the Equity Credit
Agreement.





During
the third quarter of 2009, certain warrant holders exercised 2,632,004 warrants
that resulted in gross proceeds of $6,580,010.




As of
September 30, 2009, we had short-term loans outstanding of
$4,401,000.  The loan was entered into during the second quarter of
2009 and is due in May 2010.




During
the nine months ended September 30, 2009, we generated $1,915,024 of cash from
our operating activities. The cash generated was generated primarily through the
net income including noncontrolling interest, a decrease in other receivables
and an increase in accounts payable offset by an increase in accounts receivable
and inventory and a decrease in other payables.




We used
approximately $9.2 million in investing activities during the nine months ended
September 30, 2009; of which $7.5 million was for the acquisition of property
and equipment and $2.5 million was for the purchase of the noncontrolling
interest in two subsidiaries.  We also sold our interest in two
subsidiaries for $835,770.




We
generated $18.9 million in cash from financing activities as a result of the
sale of 2,329,645 shares of our common stock for gross proceeds of $10 million
and the exercise of 2,632,004 warrants for proceeds of $6.6
million.    We generated cash of $4,541,500 from issued
short-term loans.




At
September 30, 2009, our accounts receivable balance was approximately $16.2
million, an increase of $6.8 million from December 31, 2008.




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





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


34





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




Contractual
Obligations




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




Inflation
and Seasonality




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





Item
3.            Quantitative
and Qualitative Disclosures About Market Risk





Disclosures
About Market Risk




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





Currency
Fluctuations and Foreign Currency Risk




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




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




Interest
Rate Risk




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




Credit
Risk




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





Item
4.            Controls
and Procedures




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


35




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





PART II
– OTHER INFORMATION





Item
1.             Legal
Proceedings





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







Item
1A.          Risk
Factors





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





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





None





Item
3.            Defaults
Upon Senior Securities





None.





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





None





Item
5.            Other
Information





None.





Item
6.            Exhibits





(a)
            Exhibits





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


36





SIGNATURES





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





AgFeed
      Industries, Inc.November
      9, 2009
              By:
              /s/ Xiong JunhongXiong
      Junhong
                Chief
      Executive Officer (Principal
                Executive
      Officer)November
      9, 2009
              By:
              /s/ Selina JinSelina
      Jin
                Chief
      Financial Officer
                (Principal
      Financial and Accounting
                Officer)


37