UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 
 x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
quarterly period ended: June 30, 2010
 
  ̈
              TRANSITION REPORT PUR SUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 Commission
File Number: 000-49608
 
 CHINA AGRITECH,
INC.
 (Exact
name of small business issuer as specified in its charter)
 Delaware
                
                75-2955368(State
      or other jurisdiction of incorporation or
                  organization)
                
                (I.R.S.
      Employer Identification No.)
 
 Room 3F
No. 11 Building, Zhonghong International Business Garden, Future Business
Center,
 Chaoyang
North Road, Chaoyang District, Beijing, China 100024
 People’s Republic of
China
 (Address
of principal executive offices, Zip Code)
 
 (86)
10-59621278
 (Registrant’s
telephone number, including area code)
 
 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 Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.  Yes x No  ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every, Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes  ̈ No  ̈
 
 Indicate
by check mark whether the registrant is a larger accelerated filer, an
accelerated file r, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer” , “ accelerated filer” and “ small
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer  ̈
                    Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                    Smaller
      Reporting Company x
 
 (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 o No x
 
 The
number of shares outstanding of each of the issuer’s classes of common equity,
as of August 12, 2010 is as follows:
 Class of Securities
                    
                    Shares OutstandingCommon
      Stock, $0.001 par value
                    
                    20,766,243
  
  Contents
                    
                    Page(s)PART
      I: FINANCIAL INFORMATIONItem
      1 Financial statements
                    
                    1-16Item
      2 Management Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    17-27Item
      3 Quantitative and Qualitative Disclosure about Market
Risk
                    
                    27Item
      4 Controls and Procedures
                    
                    27PART
      II : OTHER INFORMATIONItem
      1 Legal Proceedings
                    
                    28Item
      2 Unregistered Sales of Equity Securities and Use of
    Proceeds
                    
                    28Item
      3 Defaults Upon Senior Securities
                    
                    28Item
      4 Other Information
                    
                    28Item
      5 Exhibits
                    
                    28SIGNATURES
                    
                    29
  
  PART
I: FINANCIAL STATEMENTS
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 June30,
                                                  2010
                                                
                                                
                                                December31,
                                                  2009(Unaudited)ASSETSCurrent
      AssetsCash
      and cash equivalents
                                                
                                                $
                                                51,738,535
                                                
                                                
                                                $
                                                20,313,089Accounts
      receivable, net
                                                
                                                
                                                51,203,710
                                                
                                                
                                                
                                                39,256,098Inventories
                                                
                                                
                                                18,424,145
                                                
                                                
                                                
                                                6,606,095Advances
      to suppliers
                                                
                                                
                                                13,800,659
                                                
                                                
                                                
                                                25,348,687Prepayments
      and other receivables
                                                
                                                
                                                5,175,062
                                                
                                                
                                                
                                                2,287,220Total
      Current Assets
                                                
                                                
                                                140,342,111
                                                
                                                
                                                
                                                93,811,189Property,
      plant and equipment, net
                                                
                                                
                                                6,117,778
                                                
                                                
                                                
                                                5,980,696Construction
      in progress
                                                
                                                
                                                493,433
                                                
                                                
                                                
                                                424,006Intangible
      assets, net
                                                
                                                
                                                368,421
                                                
                                                
                                                
                                                397,507Total
      Assets
                                                
                                                $
                                                147,321,743
                                                
                                                
                                                $
                                                100,613,398LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable
                                                
                                                $
                                                1,532,487
                                                
                                                
                                                $
                                                62,616Accrued
      expenses and other payables
                                                
                                                
                                                2,554,517
                                                
                                                
                                                
                                                1,394,357Warrant
      liabilities
                                                
                                                
                                                —
                                                
                                                
                                                
                                                20,157,869Taxes
      payable
                                                
                                                
                                                2,293,808
                                                
                                                
                                                
                                                1,695,665Total
      Current Liabilities
                                                
                                                
                                                6,380,812
                                                
                                                
                                                
                                                23,310,507Stockholders’
      EquityPreferred
      stock: $0.001 par value, 10,000,000 shares authorized, none
      issued
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Common
      stock: $0.001 par value; 100,000,000 shares authorized, 20,766,243 and
      17,002,542* shares issued and outstanding as of June 30, 2010 and December
      31, 2009, respectively
                                                
                                                
                                                20,766
                                                
                                                
                                                
                                                17,003Additional
      paid in capital
                                                
                                                
                                                85,862,597
                                                
                                                
                                                
                                                34,698,079Statutory
      reserves
                                                
                                                
                                                2,195,818
                                                
                                                
                                                
                                                2,195,818Accumulated
      other comprehensive income
                                                
                                                
                                                6,402,728
                                                
                                                
                                                
                                                5,723,265Retained
      earnings
                                                
                                                
                                                46,459,022
                                                
                                                
                                                
                                                34,668,726Total
      Equity
                                                
                                                
                                                140,940,931
                                                
                                                
                                                
                                                77,302,891Total
      Liabilities and Stockholders’ Equity
                                                
                                                $
                                                147,321,743
                                                
                                                
                                                $
                                                100,613,398
  *as
retroactively adjusted for the 1-for-4 reverse stock split on September 8, 2009
and the 2-for-1 forward stock split on February 1, 2010.
  The
accompanying notes are an integral part of these consolidated financial
statements.
  1
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME
 
 FortheThreeMonthsEndedJune30,
                  
                  
                  FortheSixMonthsendedJune30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      revenue
                  
                  $
                  34,268,842
                  
                  
                  $
                  20,988,611
                  
                  
                  $
                  54,182,722
                  
                  
                  $
                  28,335,987Cost
      of revenue
                  
                  
                  (22,384,633
                  )
                  
                  
                  (12,033,792
                  )
                  
                  
                  (35,799,677
                  )
                  
                  
                  (16,012,477
                  )Gross
      profit
                  
                  
                  11,884,209
                  
                  
                  
                  8,954,819
                  
                  
                  
                  18,383,045
                  
                  
                  
                  12,323,510Operating
      expenses:Selling
      expenses
                  
                  
                  (1,286,505
                  )
                  
                  
                  (624,993
                  )
                  
                  
                  (1,846,274
                  )
                  
                  
                  (1,030,712
                  )General
      and administrative expenses
                  
                  
                  (2,617,216
                  )
                  
                  
                  (871,838
                  )
                  
                  
                  (7,551,820
                  )
                  
                  
                  (1,855,513
                  )Total
      operating expenses
                  
                  
                  (3,903,721
                  )
                  
                  
                  (1,496,831
                  )
                  
                  
                  (9,398,094
                  )
                  
                  
                  (2,886,225
                  )Income
      from operations
                  
                  
                  7,980,488
                  
                  
                  
                  7,457,988
                  
                  
                  
                  8,984,951
                  
                  
                  
                  9,437,285Other
      income (expense)Interest
      income
                  
                  
                  17,095
                  
                  
                  
                  3,451
                  
                  
                  
                  28,441
                  
                  
                  
                  6,024Exchange
      gain (loss)
                  
                  
                  1,231
                  
                  
                  
                  (2,609
                  )
                  
                  
                  1,066
                  
                  
                  
                  (3,056
                  )Gain
      on extinguishment of warrant liability
                  
                  
                  1,629,465
                  
                  
                  
                  —
                  
                  
                  
                  1,629,465
                  
                  
                  
                  —Changes
      in fair value of warrants classified as derivatives
                  
                  
                  13,307,462
                  
                  
                  
                  —
                  
                  
                  
                  3,829,985
                  
                  
                  
                  —Other
      income
                  
                  
                  (18,024
                  )
                  
                  
                  —
                  
                  
                  
                  (18,024
                  )
                  
                  
                  —Total
      other income (expense)
                  
                  
                  14,937,229
                  
                  
                  
                  842
                  
                  
                  
                  5,470,933
                  
                  
                  
                  2,968Income
      before income taxes
                  
                  
                  22,917,717
                  
                  
                  
                  7,458,830
                  
                  
                  
                  14,455,884
                  
                  
                  
                  9,440,253Provision
      for income taxes
                  
                  
                  (1,504,609
                  )
                  
                  
                  (1,601,958
                  )
                  
                  
                  (2,665,588
                  )
                  
                  
                  (2,316,236
                  )Net
      income
                  
                  
                  21,413,108
                  
                  
                  
                  5,856,872
                  
                  
                  
                  11,790,296
                  
                  
                  
                  7,124,017Net
      income attributable to non-controlling interest in a
      subsidiary
                  
                  
                  —
                  
                  
                  
                  (267,169
                  )
                  
                  
                  —
                  
                  
                  
                  (481,452
                  )Net
      income attributable to China Agritech’s common
stockholders
                  
                  
                  21,413,108
                  
                  
                  
                  5,589,703
                  
                  
                  
                  11,790,296
                  
                  
                  
                  6,642,565Other
      comprehensive income:Foreign
      currency translation adjustment
                  
                  
                  624,896
                  
                  
                  
                  (22,528
                  )
                  
                  
                  679,463
                  
                  
                  
                  (124,341
                  )Comprehensive
      income
                  
                  
                  22,038,004
                  
                  
                  
                  5,567,175
                  
                  
                  
                  12,469,759
                  
                  
                  
                  6,518,224Comprehensive
      income attributable to non-controlling interest in a
      subsidiary
                  
                  
                  —
                  
                  
                  
                  (8,814
                  )
                  
                  
                  —
                  
                  
                  
                  8,403Comprehensive
      income attributable to China Agritech’s common
stockholders
                  
                  $
                  22,038,004
                  
                  
                  $
                  5,558,361
                  
                  
                  $
                  12,469,759
                  
                  
                  $
                  6,526,627Net
      income per share:-
      Basic
                  
                  $
                  1.15
                  
                  
                  $
                  0.44
                  *
                  
                  $
                  0.66
                  
                  
                  $
                  0.53
                  *-
      Diluted
                  
                  $
                  1.08
                  
                  
                  $
                  0.44
                  *
                  
                  $
                  0.61
                  
                  
                  $
                  0.53
                  *Weighted
      average number of shares outstanding:-
      Basic
                  
                  
                  18,594,916
                  
                  
                  
                  12,656,621
                  *
                  
                  
                  17,952,950
                  
                  
                  
                  12,504,062
                  *-
      Diluted
                  
                  
                  19,749,122
                  
                  
                  
                  12,656,621
                  *
                  
                  
                  19,306,827
                  
                  
                  
                  12,504,062
                  *
  *as
retroactively adjusted for the 1-for-4 reverse stock split on September 8, 2009
and the 2-for-1 forward stock split on February 1, 2010.
  The
accompanying notes are an integral part of these consolidated financial
statements.
  2
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENT OF CASH FLOWS FOR SIX MONTHS ENDED
 JUNE
30, 2010 AND 2009
  FortheSixMonthsEndedJune30,2010
                        
                        
                        2009Cash
      flows from operating activities:Net
      income
                        
                        $
                        11,790,296
                        
                        
                        $
                        7,124,017Adjustments
      to reconcile net income to cash provided by operating
      activities:Share-based
      compensation
                        
                        
                        4,224,382
                        
                        
                        
                        2,703Changes
      in fair value of warrants classified as derivatives
                        
                        
                        (3,829,985
                        )
                        
                        
                        —Gain
      on extinguishment of warrant liability
                        
                        
                        (1,629,465
                        )
                        
                        
                        —Depreciation
      and amortization of property, plant and equipment
                        
                        
                        348,240
                        
                        
                        
                        320,109Amortization
      of intangible assets
                        
                        
                        31,393
                        
                        
                        
                        —Reversal
      of allowance for doubtful debts
                        
                        
                        (659
                        )
                        
                        
                        —Decrease
      / (Increase) in current assets:Accounts
      receivable
                        
                        
                        (11,647,188
                        )
                        
                        
                        (8,937,538
                        )Inventories
                        
                        
                        (11,712,387
                        )
                        
                        
                        (4,967,706
                        )Advances
      to suppliers
                        
                        
                        13,088,615
                        
                        
                        
                        3,601,066Prepayments
      and other receivable
                        
                        
                        (1,675,598
                        )
                        
                        
                        276,024Increase
      in current liabilities:Accounts
      payable
                        
                        
                        1,462,049
                        
                        
                        
                        7,467,145Tax
      payables
                        
                        
                        581,076
                        
                        
                        
                        1,038,862Accrued
      expenses and other payables
                        
                        
                        17,390
                        
                        
                        
                        2,114,634Net
      cash provided by operating activities
                        
                        
                        1,048,159
                        
                        
                        
                        8,039,316Cash
      flows from investing activities:Acquisition
      of 10% interest of Pacific Dragon
                        
                        
                        —
                        
                        
                        
                        (1,000,000
                        )Acquisition
      of property, plant and equipment
                        
                        
                        (449,954
                        )
                        
                        
                        (2,200,669
                        )Construction
      in progress
                        
                        
                        (66,601
                        )
                        
                        
                        163,161Net
      cash used in investing activities
                        
                        
                        (516,555
                        )
                        
                        
                        (3,037,508
                        )Cash
      flows from financing activities:Issuance
      of shares for cash in public offering
                        
                        
                        20,828,197
                        
                        
                        
                        —Proceeds
      from exercise of warrants
                        
                        
                        10,000,074
                        
                        
                        
                        —Net
      cash provided by financing activities
                        
                        
                        30,828,271
                        
                        
                        
                        —Net
      increase in cash and cash equivalents
                        
                        
                        31,359,875
                        
                        
                        
                        5,001,808Effect
      of exchange rate change on cash and cash equivalents
                        
                        
                        65,571
                        
                        
                        
                        (438,639
                        )Cash
      and cash equivalents, beginning of period
                        
                        
                        20,313,089
                        
                        
                        
                        11,952,235Cash
      and cash equivalents, end of period
                        
                        $
                        51,738,535
                        
                        
                        $
                        16,515,404Supplement
      disclosure of cash flow information:Cash
      paid for interest
                        
                        
                        —
                        
                        
                        
                        —Cash
      paid for income tax
                        
                        $
                        2,271,296
                        
                        
                        $
                        2,316,236
  The
accompanying notes are an integral part of these consolidated financial
statements.
  3
 
 CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  1.           ORGANIZATION
AND DESCRIPTION OF BUSINESS
  China
Agritech Inc. (the “Company” or “China Agritech”) is a
holding company whose direct and indirect subsidiaries manufacture and sell
organic liquid compound fertilizers, organic granular compound fertilizers and
related agricultural products. The Company conducts its business operations
primarily through its subsidiaries including Anhui Agritech Agriculture
Development Limited (“Anhui Agritech”),
Beijing Agritech Fertilizer Ltd. (“Beijing Agritech”),
China Tailong Holdings Company Limited (“Tailong”) and Pacific
Dragon Fertilizers Co. Ltd. (“Pacific Dragon”). The
Company’s revenues are derived from the sale of fertilizers and related
agricultural products to customers.
  Changes
in Capital Structure
  On
September 8, 2009, the Company effected a reverse split of its common stock on
the basis of one share for every four outstanding shares, so that every four
outstanding shares of common stock before the reverse stock split was converted
into one share of common stock after the reverse stock split. On February 1,
2010, the Company effected a 2 for 1 forward split of its common stock on the
basis of two shares for every one outstanding shares, so that every outstanding
share of common stock before the forward stock split was converted into two
shares of common stock after the forward stock split. Except as otherwise noted,
all references to common share and per common share amounts (including warrant
and option shares, shares reserved for issuance and applicable exercise prices)
for all periods presented in these consolidated financial statements have been
retroactively restated to reflect the reverse and forward splits.
  2.           BASIS
OF PRESENTATION
  These
consolidated financial statements include the accounts of China Agritech and all
of its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation.
 
 These
interim consolidated financial statements for the three and six month periods
ended June 30, 2010 and 2009 are unaudited. In the opinion of management, all
adjustments and disclosures necessary for a fair presentation of these interim
consolidated financial statements have been included.  The results
reported in the consolidated financial statements for any interim periods are
not necessarily indicative of the results that may be reported for the entire
year.  These interim consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and do not include all information and footnotes necessary
for a complete presentation of financial statements in conformity with
accounting principles generally accepted in the United States. These unaudited
interim consolidated financial statements should be read in conjunction with the
Company’s consolidated financial statements for the years ended December 31,
2009 and 2008, and accompanying footnotes included in Company’s annual report on
Form 10-K for the year ended December 31, 2009.
  4
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  3.           RECENT
ACCOUNTING PRONOUCEMENTS
  Effective
January 1, 2010, the Company adopted the provisions in ASU 2009-17,
“Consolidation (ASC Topic 810): Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities”, which changes how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
adoption of the provisions in ASU 2009-17 did not have an impact on the
Company’s consolidated financial statements.
  Effective
January 1, 2010, the Company adopted ASU 2010-01, “Equity (ASC Topic 505):
Accounting for Distributions to Shareholders with Components of Stock and Cash”,
which clarifies that the stock portion of a distribution to shareholders that
allow them to elect to receive cash or stock with a potential limitation on the
total amount of cash that all shareholders can elect to receive in the aggregate
is considered a share issuance that is reflected prospectively in earnings per
share and is not considered a stock dividend for purposes of ASC Topic 505 and
ASC Topic 260. The adoption of the provisions in ASU 2010-01 did not have an
impact on the Company’s consolidated financial statements.
  Effective
January 1, 2010, the Company adopted the provisions in ASU 2010-06, “Fair Value
Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair
Value Measurements, which requires new disclosures related to transfers in and
out of levels 1 and 2 and activity in level 3 fair value measurements, as well
as amends existing disclosure requirements on level of disaggregation and inputs
and valuation techniques. The adoption of the provisions in ASU 2010-06 did not
have an impact on the Company’s consolidated financial statements.
  Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.
  4.           EARNINGS
PER SHARE
  Basic
earnings per share is based upon the weighted average number of common shares
outstanding. Diluted earnings per share is based on the assumption that all
dilutive warrant 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.
  On
September 8, 2009, the Company effected a 1-for-4 reverse split of its common
stock.  On February 1, 2010, the Company effected a 2-for-1 forward split
of its common stock. The weighted average number of shares for the purposes of
calculating the earnings per share has been retroactively adjusted as if the
reverse split and the forward split had taken effect as of the beginning of the
earliest period presented.
  5
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  4
              EARNINGS
      PER SHARE (CONTINUED)
  The
following table is a reconciliation of the net income and the weighted average
shares used in the computation of basic and diluted earnings per share for the
periods presented:
  
 ThreemonthsendedJune30
                  
                  
                  SixmonthsendedJune302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Income
      available to common stockholders for calculation of basic and diluted
      EPS
                  
                  $
                  21,413,108
                  
                  
                  $
                  5,589,703
                  
                  
                  $
                  11,790,296
                  
                  
                  $
                  6,642,565Weighted
      average number of shares:-
      Basic
                  
                  
                  18,594,916
                  
                  
                  
                  12,656,621
                  
                  
                  
                  17,952,950
                  
                  
                  
                  12,504,062-
      Effect of dilutive securities – options and warrants
                  
                  
                  1,154,206
                  
                  
                  
                  −
                  
                  
                  
                  1,353,877
                  
                  
                  
                  −-
      Diluted
                  
                  
                  19,749,122
                  
                  
                  
                  12,656,621
                  
                  
                  
                  19,306,827
                  
                  
                  
                  12,504,062
  The
dilutive earnings per share computation for both three and six months ended June
30, 2010 excluded options to purchase up to 760,000 shares of common stock,
because their effects were anti-dilutive.
  The
dilutive earnings per share computation for both three and six months ended June
30, 2009, excluded options and warrants to purchase 271,960 shares of common
stock because their effects were anti-dilutive.
  6
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  5.             FAIR
VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
  ASC Topic
820, Fair Value Measurement
and Disclosures, defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This topic also
establishes a fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. The fair value
hierarchy distinguishes between assumptions based on market data (observable
inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy
consists of three levels:
  Level one
— Quoted market prices in active markets for identical assets or
liabilities;
  Level two
— Inputs other than level one inputs that are either directly or indirectly
observable; and
  Level
three — Unobservable inputs developed using estimates and assumptions, which are
developed by the reporting entity and reflect those assumptions that a market
participant would use.
  Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.
  The
Company had no assets and liabilities measured at fair value on a recurring
basis as of June 30, 2010.
  The
following tables present the Company’s assets and liabilities measured at fair
value on a recurring basis as of June 30, 2010 and December 31,
2009:
  
 December 31, 2009
                    
                    Carrying
                    
                    
                    Using Inputvalue
                    
                    
                    Level 1
                    
                    
                    Level 2
                    
                    
                    Level 3Warrant
      Liability
                    
                    $
                    20,157,869
                    
                    
                    $
                    —
                    
                    
                    $
                    20,157,869
                    
                    
                    $
                    —Total
                    
                    $
                    20,157,869
                    
                    
                    $
                    —
                    
                    
                    $
                    20,157,869
                    
                    
                    $
                    —
  There
were no assets or liabilities measured at fair value on a non-recurring basis as
of June 30, 2010 or December 31, 2009.
  The
carrying values of cash and cash equivalents, trade and other receivables, trade
and other payables approximate their fair values due to the short maturities of
these instruments.
  7
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  5.           FAIR
VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS – CONTINUED
 
 Derivative
Instruments – Warrants
 
 As of
December 31, 2009, the Company’s only derivative instruments included warrants,
the exercise price of which are denominated in a currency other than the
Company’s functional currency, as follows:
 
 ▪
              1,857,024
      warrants (“2009 Warrants”) exercisable at approximately $5.385 per share
      at any time during the period from April 19, 2010 through April 2012, that
      were issued in conjunction with a private placement of the Company’s
      common stock completed in October
2009.
  Effective
January 1, 2009, the Company adopted the guidance provided in FASB ASC
815-40-15-5 through 815-40-15-8 (formerly EITF 07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”). ASC
815-40-15-5 through 815-40-15-8 applies to any freestanding financial
instruments or embedded features that have the characteristics of a derivative,
as defined in ASC paragraph 815-10-15-83 (formerly SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,”) and to any freestanding
financial instruments that are potentially settled in an entity’s own common
stock.
 The 2009
warrants are not considered indexed to the Company’s own stock and were recorded
at their fair value as derivative liabilities. In addition, they did not qualify
for hedge accounting, and as such, all changes in the fair value of these
warrants were recognized as other income or expenses. These warrants were
reported as liability until such time as they were exercised or
expire.
 
 As of
June 21, 2010, a total of 1,857,024 warrants were exercised at $5.385 per share,
with total consideration of $10,000,074. Carlyle Asia Growth Partners IV, L.P
and CAGP IV Co-Investment, L.P received 1,705,249 common shares and 151,775
common shares respectively as a result of their exercise of the
warrants.
 
 As of
June 21, 2010, the Company estimates the fair value of warrants using the
Black-Scholes option pricing model based on the following
assumptions:
 
 On June
21, 2010, all of the 2009 Warrants were exercised at $5.385 each in cash. The
Company accounted for the exercise of these warrants as extinguishment of debts
in accordance with ASC 815-10-40-1, “Derivatives and Hedges – De-recognition”.
In accordance with ASC 470-50-40, “Debt – Modification and Extinguishments –
De-recognition”, a gain of $1,629,465 in aggregate was recognized as the
difference between the reacquisition price (determined based on the closing
price of the common stock of $13.3 each issued to settle the warrant liabilities
less the exercise price of $5.38 each received) and the fair value of the
warrants of $8.7925 each at the date of exercise. The fair values of the 2009
Warrants on June 21, 2010 and December 31, 2009 were determined using the
Black-Scholes option pricing model based on the following
assumptions:
 June 21, 2010
                      
                      
                      December 31, 2009(Unaudited)Exercise
      price per share
                      
                      $
                      5.385
                      
                      
                      $
                      5.385Remaining
      contractual life (years)
                      
                      
                      1.83
                      
                      
                      
                      2.3Dividend
      yield
                      
                      
                      —
                      
                      
                      
                      —Expected
      volatility (based on historical volatility)
                      
                      
                      106.65
                      %
                      
                      
                      112.21
                      %Risk
      free interest rate
                      
                      
                      0.63
                      %
                      
                      
                      1.29
                      %Estimated
      fair value per share
                      
                      $
                      8.793
                      
                      
                      $
                      10.855
 
 The
risk-free rate of return reflected the interest rate for U.S. Treasury Note with
similar time-to-maturity to that of the warrants.
  8




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




6.
            ACCOUNTS
      RECEIVABLE




Accounts
receivable consist of the following:





June 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Accounts
      receivable
                
                $
                51,976,476
                
                
                $
                40,025,063Less:
      Allowance for doubtful accounts
                
                
                (772,766
                )
                
                
                (768,965
                )$
                51,203,710
                
                
                $
                39,256,098




7.
            INVENTORIES




Inventories
consist of the following





June 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Raw
      Materials
                
                $
                13,728,522
                
                
                $
                4,166,380Work
      in progress
                
                
                6,319
                
                
                
                —Packing
      materials
                
                
                376,098
                
                
                
                85,342Finished
      goods
                
                
                4,313,206
                
                
                
                2,354,373$
                18,424,145
                
                
                $
                6,606,095


9




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


8.
              PROPERTY,
      PLANT AND EQUIPMENT
  Property,
plant and equipment consist of the following:





June 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Building
                
                $
                1,066,452
                
                
                $
                1,060,298Manufacturing
      machinery
                
                
                6,075,222
                
                
                
                5,840,901Leasehold
      improvements
                
                
                442,636
                
                
                
                440,092Office
      equipment
                
                
                256,545
                
                
                
                223,298Motor
      vehicles
                
                
                853,258
                
                
                
                629,5878,694,113
                
                
                
                8,194,176Less:
      Accumulated depreciation and amortization
                
                
                (2,576,335
                )
                
                
                (2,213,480
                )Net
      book value
                
                $
                6,117,778
                
                
                $
                5,980,696





Depreciation
expense for the three months ended June 30, 2010 and 2009 was $134,274 and
$167,789, respectively. Depreciation expense for six months ended June 30, 2010
and 2009 was $348,240and $320,109,
respectively.




9.
            INTANGIBLE
      ASSETS




Intangible
assets consist of the following:


June 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)License
      for manufacture and sale of fertilizer products
                
                $
                440,100
                
                
                $
                440,100Less:
      Accumulated amortization
                
                
                (73,986
                )
                
                
                (42,593
                )Effect
      of foreign currency exchange difference
                
                
                2,307
                
                
                
                —Net
      book value
                
                $
                368,421
                
                
                $
                397,507




Amortization
expense for three months ended June 30, 2010 and 2009 was $15,928 and nil
respectively. Amortization expense for six months ended June 30, 2010 and 2009
was $ 31,393 and nil respectively.




10.
            ACCRUED
      EXPENSES AND OTHER PAYABLES




Accrued
expenses and other payables consist of the following:


June 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Accrued
      expenses
                
                $
                830,150
                
                
                $
                439,028Other
      payables
                
                
                1,724,367
                
                
                
                955,329$
                2,554,517
                
                
                $
                1,394,357




10




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




11.
            TAXES
      PAYABLE




Taxes
payable consist of the following:


June 30,
                  2010
                
                
                December 31,
                  2009(Unaudited)Income
      tax payable
                
                $
                1,702,114
                
                
                $
                1,281,775Value
      added tax payable
                
                
                566,810
                
                
                
                397,118Others
                
                
                24,884
                
                
                
                16,772$
                2,293,808
                
                
                $
                1,695,665




12.
            INCOME
      TAXES




The
entities within the Company file separate tax returns in the respective tax
jurisdictions that they operate.




The
Company’s operating subsidiaries are subject to PRC enterprise income tax
(“EIT”).  Before January 1, 2008, the PRC EIT rate was generally 33%.
In March 2007, the PRC government
enacted a new PRC Enterprise Income Tax Law, or the New EIT
Law, and promulgated related regulation, Implementation Regulations for the PRC Enterprise Income Tax
Law. The New EIT Law and
Implementation Regulations became effective from January 1, 2008. The New EIT
Law, among other things, imposes a unified income tax rate of 25% for both
domestic and foreign invested enterprises registered in the PRC. The New
EIT Law provides for a grandfathering and five-year transition period from its
effective date for those enterprises which were established before the
promulgation date of the New EIT Law and which were entitled to a preferential
EIT treatment. Accordingly, Beijing Agritech and AnhuiAgritech as wholly foreign-owned
enterprises have continued to be entitled to tax exemption for the two years
ended December 31, 2009 and 2008 and a 50% reduction on its EIT rate for the
ensuing three years ended December 31, 2010 through 2012.





The provision for income taxes for three and six
months ended June 30, 2010 and 2009 consistedof the following:





ThreemonthsendedJune30
                
                
                SixmonthsendedJune 302010
                
                
                2009
                
                
                2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Provision for current income tax–China
                
                $
                1,504,609
                
                
                $
                1,601,958
                
                
                $
                2,665,588
                
                
                $
                2,316,236




As of June 30, 2010 and December 31,
2009, the Company did not have any significant temporary differences and carry
forwards that may result in deferred tax.


The
following table reconciles the theoretical tax expense calculated at the
statutory tax rate to the Company’s effective tax expense for the three and six
months ended June 30, 2010 and 2009:
 
 (in
      thousands)
                          
                          Three
      months ended June 30
                          
                          
                          Six
      months ended June302010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009(Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)
                          
                          
                          (Unaudited)Theoretical
      tax expense at PRC statutory tax rate of 25%
                          
                          $
                          5,729
                          
                          
                          $
                          1,865
                          
                          
                          $
                          3,614
                          
                          
                          $
                          2,360Non-deductible
      expenses
                          
                          
                          562
                          
                          
                          
                          8
                          
                          
                          
                          1,654
                          
                          
                          
                          211Non-taxable
      income
                          
                          
                          (3,734
                          )
                          
                          
                          -
                          
                          
                          
                          (1,365
                          )
                          
                          
                          -Tax
      holiday
                          
                          
                          (1,052
                          )
                          
                          
                          (271
                          )
                          
                          
                          (1,237
                          )
                          
                          
                          (255
                          )Effective
      tax expense
                          
                          $
                          1,505
                          
                          
                          $
                          1,602
                          
                          
                          $
                          2,666
                          
                          
                          $
                          2,316
 
 Non-taxable
income for the three months ended June 30, 2010 consisted of the change in fair
value of warrants of $13,307,462 and gain on extinguishment of warrant liability
of $1,629,465.  Non-taxable income for the six months ended June 30,
2010 consisted of the change in fair value of warrants of $3,829,985 and
gain on extinguishment of warrant liability of $1,629,465.
 
 Non-deductible
expenses for the three months ended June 30, 2010 primarily consisted of the
share-based compensation of $812,025 and other operating expenses incurred in
other tax jurisdiction where no tax benefit would be realized. Non-deductible
expenses for the six months ended June 30, 2010 primarily consisted of the
share-based compensation of $4,224,382 and other operating expenses incurred in
other tax jurisdiction where no tax benefit would be realized.
  Currently,
the Company has considered share based compensation to be a non-deductible
expense and has treated it as such in the computations of the estimated tax
provisions.  The Company intends to pursue the deductibility of this
expense with appropriate government officials and if successful negotiations
ensue, these expenses could at least in part be deductible. Should this occur,
future tax provisions would reflect the change in this treatment and the
revised treatment would be applied to those expenses currently considered
non-deductible.”


11




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




13.
            COMMON
      STOCK AND WARRANTS




Common
Stock Transactions





On April 28, 2010, the Company entered
into anunderwriting with
Rodman & Renshaw Capital Group, Inc. (the “Underwriter”), pursuant to which the Company agreed
to issue and sell 1,243,000 shares of our common stock (the “Firm Shares”), to the Underwriter at a price per
share of $16.10. In addition, the Company granted the Underwriter an
option to purchase up to an additional 186,450 shares to cover over-allotments
(“Option
Shares”), if any, at the
same price as the Firm Shares. The sale of the Firm Shares and Option Shares was
consummated on May 4, 2010. Net proceeds to the Company from the
offering, after deducting underwriting discounts and commissions and estimated
offering expenses, were approximately $21 million.





During the six months ended June 30,
2010,the Company issued150,627 and
1,857,024shares of common stock for the cashless
exercise of277,000options and for the exercise of warrants
at $5.385 per share for cash, respectively.




Common
Stock Purchase Warrants




A summary
of the warrants outstanding as of June 30, 2010, and changes during the six
months ended June 30, 2010 are presented below:


Numberof
                  underlying
                  shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Average
                  Remaining
                  Contractual
                  Life(years)Outstanding
      at December 31, 2009
                
                
                1,857,024
                
                
                $
                5.385
                
                
                
                2.50Issued
                
                
                —Forfeited
                
                
                —Exercised
                
                
                (1,857,024)
                
                
                $
                5.385Outstanding at June 30,
      2010
                
                
                —


12




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




14.
            STOCK
      OPTIONS AND SHARE-BASED
COMPENSATION




A summary
of the stock options, which were granted under the Company’s 2008 Equity Incentive Plan (the
“Plan”), and changes during the six
months ended June 30, 2010 are presented below:





Underlying
                                shares
                              
                              
                              Weighted
                                Average
                                Exercise
                                Price
                              
                              Weighted- Average
                                Remaining
                                Contractual Term
                              
                              Aggregate
                                Intrinsic ValueOutstanding at December 31,
      2009*
                              
                              
                              517,500
                              
                              
                              $
                              11.64
                              
                              4.80
      yearsGranted
                              
                              
                              781,100
                              
                              
                              $
                              14.01Exercised
                              
                              
                              (277,000
                              )
                              
                              $
                              11.48Outstanding at June 30, 2010
                              
                              
                              1,021,600
                              
                              
                              $
                              13.45
                              
                              4.77
      years
                              
                              $
                              16,975Exercisable at June 30, 2010
                              
                              
                              2,500
                              
                              
                              $
                              3.36
                              
                              3.90
      years
                              
                              $
                              16,975




*
            As
      retroactively adjusted for the 1-for-4 reverse stock split on September 8,
      2009 and the 2-for-1 forward stock split on February 1,
    2010.




On
January 12, 2010, the Company awarded an aggregate of 326,600 shares (as
adjusted for the 2-for-1 forward stock split on February 1, 2010) common stock
to certain directors and officers in consideration for services rendered to the
Company, with varying vesting periods among different grantees in accordance
with the terms of the agreements entered into by the Company and the
grantees.




The fair value of the options granted
during the six months ended June 30, 2010 has been estimated on the date of
grant using the Black-Scholes option-pricing model that uses the
weighted-average assumptions noted in the following table. Expected
volatilities are based on
historical volatility of the Company’s stock, and reflect the assumption that
the historical volatilities are indicative of future trends, which may not
necessarily be the actual outcome. Expected term of each option award represents
the period of time that options granted
are expected to be outstanding and is estimated based on the historical exercise
behavior of separate groups of employees or officers. The risk-free ratereflects the interest rate for United States Treasury Note with similar
time-to-maturity to that of the options.





Expected term
      (year)
                
                1Expected
      volatility
                
                
                145.6
                %Expected dividend
      yield
                
                
                0
                %Risk-free
    rate
                
                
                0.36
                %




As of
June 30, 2010, a total of $7.6 million unrecognized compensation cost related to
non-vested options and restricted shares of common stock under the Plan is
expected to be recognized over a weighted average period of 3 years. The total
fair value of options and common stock vested under the Plan and recognized as
administrative expenses forthe six
months ended June 30, 2010 and 2009 was $4,224,382 and $2,703,
respectively.


13




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




15.
            RELATED
      PARTY TRANSACTIONS




On
January 6, 2005, the Company’s subsidiary Pacific Dragon entered into a license
agreement with Mr. Yu Chang, our Chairman, Chief Executive Officer and
President. Under this license agreement, Mr. Chang granted an exclusive license
to Pacific Dragon for the use of certain know-how in manufacturing organic
liquid compound fertilizer on a royalty-free basis. The Company continues to
refine the manufacturing know-how of the product at its expense. In order to
translate such know-how to practicable applications in commercial production,
the Company has continued to develop the manufacturing know-how of the product
at its expense. The Company considers that the know-how would have had an
insignificant value without the Company’s development initiatives. On December
3, 2005, Mr. Chang and Pacific Dragon entered into another license agreement
pursuant to which the term of the license was extended to a permanent license.
In accordance with the Securities Purchase Agreement, dated June 29, 2007, among
the Company, Mr. Chang, and the investors named therein, an additional license
agreement was entered into for this know-how between Mr. Chang and Pacific
Dragon, confirming that the license has been extended until December 31,
2011.




On April
28, 2010, the Company’s subsidiary, Beijing Agritech entered into a similar
license agreement with Mr. Yu Chang regarding granted an exclusive license to
Beijing Agritech for the use of certain know-how in manufacturing organic liquid
compound fertilizer on a royalty-free basis for three years period from the date
of agreement.  The Company continues to refine the manufacturing
know-how of the product at its expense. In order to translate such know-how to
practicable applications in commercial production, the Company has continued to
develop the manufacturing know-how of the product at its expense. The Company
considers that the know-how would have had an insignificant value without the
Company’s development initiatives.




Pacific
Dragon has entered into a tenancy agreement with a related party, Yinlong
Industrial Co. Ltd. (“Yinlong”), the former minority shareholder previously
holding 10% equity interest in Pacific Dragon, to lease two factory plants and
one office building with a total floor area of 7,018 sq. meters for a term of 10
years from January 1, 2004 to December 31, 2013 at an annual rent of RMB
1,200,000 (equivalent to $144,578). The tenancy agreement was revised by
increasing the annual rent to RMB 3,600,000 (equivalent to $518,940) effective
from July 1, 2005. Yinlong is owned and controlled by Mr. Yu Chang and Ms.
Xiaorong Teng, who are both directors of the Company.




On July
2, 2007, Beijing Agritech entered into a tenancy agreement with Ms. Xiaorong
Teng (a director of the Company) to lease an office with a total floor area of
780 sq. meters for a term of 5 years from February 1, 2007 to February 1, 2012
at an annual rent of RMB492,000 (equivalent to approximately $70,922) effective
from July 2, 2007.




16.
            RISK
      OF CONCENTRATIONS




Four
customers accounted for 30.4% of the Company’s net revenue for six months ended
June 30, 2010, each individually accounting for approximately 12.9%, 6.9%, 5.8%
and 4.8% respectively of the Company’s net revenue. There was no individual
customer that accounted for 10% or more of the Company’s net revenue for the six
months ended June 30, 2009.




Five
suppliers provided 49.5% of the Company’s dollar value of raw materials
purchased for the six months ended June 30, 2010, with each individually
accounting for approximately 11.5%, 10.9%, 9.9%, 8.9% and 8.3% respectively.
Four suppliers provided approximately 68% of the Company’s raw materials for the
six months ended June 30, 2009 with each individually accounting for
approximately 22%, 20%, 15%, and 11% respectively.


14


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




17.
              SEGMENT
      AND ENTITY-WIDE INFORMATION




The
Company operates in one business segment, manufacturing and sale of organic
fertilizer products. The Company also operates only in one geographical segment
– China, as all of the Company’s products are sold to customers located in China
and the Company’s long-lived assets are located in China.




The
Company’s major product categories are (i) organic liquid fertilizers, and (ii)
organic granular fertilizers. The sale of granular fertilizers was officially
launched in the second quarter of fiscal year 2009.




Management
evaluates performance based on several factors, of which net revenue and gross
profit by product are the primary financial measures:





ThreemonthsendedJune30
                  
                  
                  SixmonthsendedJune302010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Net
      revenue from unaffiliated customers:Organic
      liquid fertilizers
                  
                  $
                  19,957,040
                  
                  
                  $
                  13,955,756
                  
                  
                  $
                  28,912,412
                  
                  
                  $
                  21,303,132Organic
      granular fertilizers
                  
                  
                  14,311,802
                  
                  
                  
                  7,032,855
                  
                  
                  
                  25,270,310
                  
                  
                  
                  7,032,855Total
                  
                  $
                  34,268,842
                  
                  
                  $
                  20,988,611
                  
                  
                  $
                  54,182,722
                  
                  
                  $
                  28,335,987Gross
      profit:Organic liquid
      fertilizers
                  
                  $
                  8,984,733
                  
                  
                  $
                  7,431,612
                  
                  
                  $
                  13,428,449
                  
                  
                  $
                  10,832,710Organic granular
      fertilizers
                  
                  
                  2,899,476
                  
                  
                  
                  1,523,207
                  
                  
                  
                  4,954,596
                  
                  
                  
                  1,490,800Total
                  
                  $
                  11,884,209
                  
                  
                  $
                  8,954,819
                  
                  
                  $
                  18,383,045
                  
                  
                  $
                  12,323,510




15




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


18.
              ADJUSTMENTS
      TO PREVIOUSLY REPORTED THREE MONTHS ENDED MARCH 31, 2010
      RESULTS
  On
January 12, 2010, the Company awarded an aggregate of 326,600 shares (as
adjusted for the 2-for-1 forward stock split on February 1, 2010) consisting of
158,620 shares of restricted common stock and 167,980 shares of unrestricted
common stock to certain directors and officers in consideration for services
rendered, with varying vesting periods among different grantees in accordance
with the terms of the agreements entered into by the Company and the grantees.
The shares of common stock were valued by using the closing share price of
$17.61 per share at approximately $5,751,426 and amortized over the vesting
period.  The Company omitted to record the stock compensation expense
of $3,257,410 for three months ended March 31, 2010.
  Also, the
Company incorrectly eliminated the inter-company sales and cost of sales for
three months ended March 31, 2010 and as a result, the sales and cost of sales
were understated and the profit on inter-company sales of $115,200 was
incorrectly recorded as other operating income offset against operating
expenses. The incorrect treatment of the inter company transactions had no
impact on net income.
  The
comparison of income statements for three months ended March 31, 2010, which
presented in Form 10-Q and filed with the SEC with the revised income statements
for three months ended March 31, 2010; income statements for three months ended
June 30 and six months June 30, 2010 as follows:




Three
      Months Ended March 31, 2010 as Reported
                                                
                                                
                                                Three
      Months Ended March 3, 2010 as Revised
                                                
                                                
                                                Three
      Months Ended June 30, 2010 As Reported
                                                
                                                
                                                Six
      Months Ended June 30, 2010 As ReportedNet
      revenue
                                                
                                                
                                                15,353,857
                                                
                                                
                                                
                                                19,913,880
                                                
                                                
                                                
                                                34,268,842
                                                
                                                
                                                
                                                54,182,722Gross
      profit
                                                
                                                
                                                6,383,636
                                                
                                                
                                                
                                                6,498,836
                                                
                                                
                                                
                                                11,884,209
                                                
                                                
                                                
                                                18,383,045Total
      operating expenses
                                                
                                                
                                                (2,121,770
                                                )
                                                
                                                
                                                (5,494,373
                                                )
                                                
                                                
                                                (3,903,721
                                                )
                                                
                                                
                                                (9,398,094
                                                )Income
      from operations
                                                
                                                
                                                4,261,866
                                                
                                                
                                                
                                                1,004,463
                                                
                                                
                                                
                                                7,980,488
                                                
                                                
                                                
                                                8,984,951Other
      Income/ (expenses)
                                                
                                                
                                                (9,466,296
                                                )
                                                
                                                
                                                (9,466,296
                                                )
                                                
                                                
                                                14,937,229
                                                
                                                
                                                
                                                5,470,933Income/
      (loss) before income taxes
                                                
                                                
                                                (5,204,430
                                                )
                                                
                                                
                                                (8,461,833
                                                )
                                                
                                                
                                                22,917,717
                                                
                                                
                                                
                                                14,455,884Provision
      for income taxes
                                                
                                                
                                                (1,160,979
                                                )
                                                
                                                
                                                (1,160,979
                                                )
                                                
                                                
                                                (1,504,609
                                                )
                                                
                                                
                                                (2,665,588
                                                )Net
      Income/(loss)
                                                
                                                
                                                (6,365,409
                                                )
                                                
                                                
                                                (9,622,812
                                                )
                                                
                                                
                                                21,413,108
                                                
                                                
                                                
                                                11,790,296Net
      Income attributable to China Agritech common stockholders
                                                
                                                
                                                (6,365,409
                                                )
                                                
                                                
                                                (9,622,812
                                                )
                                                
                                                
                                                21,413,108
                                                
                                                
                                                
                                                11,790,296Comprehensive
      income/ (loss)
                                                
                                                
                                                (6,310,842
                                                )
                                                
                                                
                                                (9,568,245
                                                )
                                                
                                                
                                                22,038,004
                                                
                                                
                                                
                                                12,469,759Basic
      weighted average shares outstanding
                                                
                                                
                                                17,002,542
                                                
                                                
                                                
                                                17,293,860
                                                
                                                
                                                
                                                18,594,916
                                                
                                                
                                                
                                                17,952,950Basic
      net earnings per share
                                                
                                                
                                                (0.37
                                                )
                                                
                                                
                                                (0.56
                                                )
                                                
                                                
                                                1.15
                                                
                                                
                                                
                                                0.66Diluted
      weighted average shares outstanding
                                                
                                                
                                                17,002,542
                                                
                                                
                                                
                                                17,293,860
                                                
                                                
                                                
                                                19,749,122
                                                
                                                
                                                
                                                19,306,827Diluted
      net earning per share
                                                
                                                
                                                (0.37
                                                )
                                                
                                                
                                                (0.56
                                                )
                                                
                                                
                                                1.08
                                                
                                                
                                                
                                                0.61
  16


ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





Introductory
Note




Except as
otherwise indicated by the context, references in this Quarterly Report on Form
10-Q (this “Report”) to the “Company,” “China Agritech,” “we,” “us” or “our” are
references to the combined business of China Agritech, Inc. and its consolidated
subsidiaries. References to “Tailong” are references to our wholly-owned
subsidiary, China Tailong Holdings Company Limited; references to “Pacific
Dragon” are to Tailong’s wholly owned subsidiary, Pacific Dragon Fertilizers Co.
Ltd.; references to “CAI” are to our wholly owned subsidiary, CAI Investment
Inc.; references to “Beijing Agritech” are to our wholly-owned indirect
subsidiary, Agritech Fertilizer Ltd.; references to Anhui Agritech are to our
wholly-owned subsidiary, Anhui Agritech Development Co. Ltd., and references to
“Beijing Agritech” are to Xinjiang Agritech Agricultural Resources Co. Ltd., our
wholly owned indirect subsidiary.  References to “China” or “PRC” are
references to the People’s Republic of China. References to “RMB” are to
Renminbi, the legal currency of China, and all references to “$” and dollar are
to the United States dollar, the legal currency of the United
States.




Special
Note Regarding Forward Looking Statements




This
Report contains forward-looking statements and information relating to China
Agritech that are based on the beliefs of our management, as well as assumptions
made by and information currently available to us.  Such statements
should not be unduly relied upon.  When used in this Report,
forward-looking statements include, but are not limited to, the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar
expressions, as well as statements regarding new and existing products,
technologies and opportunities, statements regarding market and industry segment
growth and demand and acceptance of new and existing products, any projections
of sales, earnings, revenue, margins or other financial items, any statements of
the plans, strategies and objectives of management for future operations, any
statements regarding future economic conditions or performance, uncertainties
related to conducting business in China, any statements of belief or intention,
any of the factors mentioned in the “Risk Factors” section of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009, filed with the
U.S. Securities and Exchange Commission (the “SEC”) on March 23, 2010, and any
statements or assumptions underlying any of the foregoing.  These
statements reflect our current view concerning future events and are subject to
risks, uncertainties and assumptions.  There are important factors
that could cause actual results to vary materially from those described in this
Report as anticipated, estimated or expected, including, but not limited to,
competition in the fertilizer industry and the impact of such competition on
pricing, revenues and margins, volatility in the securities market due to the
general economic downturn; SEC regulations which affect trading in the
securities of “penny stocks,” and other risks and
uncertainties.  Except as required by law, we assume no obligation to
update any forward-looking statements publicly, or to update the reasons actual
results could differ materially from those anticipated in any forward- looking
statements, even if new information becomes available in the
future.  Depending on the market for our stock and other conditional
tests, a specific safe harbor under the Private Securities Litigation Reform Act
of 1995 may be available.  Notwithstanding the above, 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” )
expressly state that the safe harbor for forward-looking statements does not
apply to companies that issue penny stock.  Because we may from time
to time be considered to be an issuer of penny stock, the safe harbor for
forward-looking statements may not apply to us at certain
times.


17




Our
Business




We
manufacture and sell organic liquid compound fertilizers, organic granular
compound fertilizers and related agricultural products in the PRC through our
direct and indirect subsidiaries: Anhui Agritech Development Co.
Ltd.  (“Anhui Agritech”), Agritech Fertilizer Limited (“Beijing
Agritech”), China Tailong Holdings Company Limited (“Tailong”), Pacific Dragon
Fertilizer Co. Ltd. (“Pacific Dragon”), and Xinjiang Agritech Agriculture
Resources Co., Ltd (“Xinjiang Agritech”).





Our
annual liquid fertilizer production capacity in 2008 was approximately 13,000
metric tons of organic liquid compound fertilizers. We commenced sales of our
organic granular compound fertilizers in the third quarter of
2008.  Until September 2009, our annual production capacity for
granular fertilizers was approximately 150,000 metric tons, consisting of
100,000 metric tons in Anhui and 50,000 metric tons in Harbin.  In
September 2009, we expanded our annual production capacity for granular
fertilizers to approximately 200,000 metric tons by completing another 50,000
granular plant in Xinjiang.Our Xinjiang
granular plant commenced its commercial production in the second quarter of
2010.




We
believe that our brand reputation and ability to tailor our products to meet the
requirements of various regions of the PRC affords us a competitive advantage.
We purchase the majority of our raw materials from suppliers located in the PRC
and use suppliers that are located in close proximity to our manufacturing
facilities, which helps us to contain our cost of revenue.





The
demand for our products has steadily increased. Our half year production
capacity as of June 30, 2010 was approximately 5,809 metric tons of organic
liquid compound fertilizers whereas our annual production capacity for granular
fertilizers was approximately 73,881 metric tons.





We
currently plan to build and operate approximately 10 and 45 branded
large-scale distribution centers in central and eastern provinces in 2010 and
2011, respectively, to sell our organic fertilizers and third party sourced
products, including seeds, pesticides, and other agricultural products to
franchised retail stores, and intend to expand into southern and western
provinces starting from 2012. We anticipate that each distribution center will
cost approximately $1 million to build and can supply 80 to 100 franchised
retail stores in its geographic area. Because we do not expect that the
distribution centers will sell products on a retail basis, we intend to
initially engage our current distributors to become the franchisees of such
retail stores.  We will not own the retail stores and will not receive
any franchise fees from the stores, but we will provide product sourcing,
training, expertise and logistic services to our franchisees  In
return, the retail stores will be required to commit to sell our organic
fertilizers, together with third party products sourced by us.  We
believe that our planned distribution centers and franchised retail stores in
the PRC could enable us to introduce farmers, especially individual
farmers, to our products, educate them about the benefits of organic fertilizer
over chemical fertilizer, and teach them how to properly use our products in a
more cost effective manner. We believe that these franchised stores could also
introduce our products to a vast network of farmers who otherwise operate
outside of our existing distribution network and outside of the reach of
traditional advertising media. Our anticipated schedule of building and
operating these branded distribution centers depends upon a variety of
factors, many of which are outside of our control. Accordingly, our current
build-out schedule, may change.





18





Results
of Operations





Comparison
of Three Months Ended June 30, 2010 and 2009





The
following table summarizes the results of our operations during the three month
period ended June 30, 2010 and 2009 and provides information regarding the
dollar and percentage increase or (decrease) from the 2010 fiscal period to the
2009 fiscal period:





(All
amounts, other than percentages, in thousands of U.S. dollars)





Three Months
                              EndedJune 30,
                            
                            
                            Dollar ($)
                              Increase
                            
                            
                            Percentage (%)
                              Increase2010
                            
                            
                            2009
                            
                            
                            (Decrease)
                            
                            
                            (Decrease)Net
      Revenue
                            
                            
                            34,269
                            
                            
                            
                            20,989
                            
                            
                            
                            13,280
                            
                            
                            
                            63
                            %Cost
      of Revenue
                            
                            
                            (22,385
                            )
                            
                            
                            (12,034
                            )
                            
                            
                            10,351
                            
                            
                            
                            86
                            %Gross
      Profit
                            
                            
                            11,884
                            
                            
                            
                            8,955
                            
                            
                            
                            2,929
                            
                            
                            
                            33
                            %Selling
      Expenses
                            
                            
                            (1,287
                            )
                            
                            
                            (625
                            )
                            
                            
                            662
                            
                            
                            
                            106
                            %General
      and Administrative Expenses
                            
                            
                            (2,617
                            )
                            
                            
                            (872
                            )
                            
                            
                            1,745
                            
                            
                            
                            200
                            %Income
      From Operations
                            
                            
                            7,980
                            
                            
                            
                            7,458
                            
                            
                            
                            522
                            
                            
                            
                            7
                            %Other
      Income/(expenses)Change
      in fair value of warrants
                            
                            
                            13,307
                            
                            
                            
                            —
                            
                            
                            
                            13,307
                            
                            
                            
                            100
                            %Gain
      on extinguishment of warrants liability
                            
                            
                            1,630
                            
                            
                            
                            —
                            
                            
                            
                            1,630
                            
                            
                            
                            100
                            %Others
                            
                            
                            1
                            
                            
                            
                            1
                            
                            
                            
                            —
                            
                            
                            
                            —Income
      Tax
                            
                            
                            (1,505
                            )
                            
                            
                            (1,602
                            )
                            
                            
                            (97
                            )
                            
                            
                            (6
                            )%Net
      income
                            
                            
                            21,413
                            
                            
                            
                            5,857
                            
                            
                            
                            15,556
                            
                            
                            
                            266
                            %Net
      income attributable to non-controlling interest in a
      subsidiary
                            
                            
                            —
                            
                            
                            
                            (267
                            )
                            
                            
                            (267
                            )
                            
                            
                            (100
                            )%Net
      income attributable to common stockholders
                            
                            
                            21,413
                            
                            
                            
                            5,590
                            
                            
                            
                            15,823
                            
                            
                            
                            283
                            %Earning
      per Share-
      Basic
                            
                            
                            1.15
                            
                            
                            
                            0.44-
      Diluted
                            
                            
                            1.08
                            
                            
                            
                            0.44Weighted
      average shares outstanding*-
      Basic
                            
                            
                            18,595
                            
                            
                            
                            12,657-
      Diluted
                            
                            
                            19,749
                            
                            
                            
                            12,657





*
              As
      retroactively adjusted for the 1-for-4 reverse stock split on September 8,
      2009 and the 2-for-1 forward stock split on February 1,
    2010.




Net
Revenue.




Our net
revenue rose to $34.3 million for the three-months period ended June 30, 2010,
an increase of approximately $13.3 million, or 63% as compared to $21 million
for the same period in 2009. The increase in our net revenues was mainly
attributable to the increase in sales in both organic liquid fertilizer and
organic granular compound fertilizer. Sales of organic liquid fertilizer
recorded $20 million, whereas organic granular compound fertilizer attributed
$14.3 million for the three-months period ended June 30, 2010 which was an
increased of 43% and 103% respectively as compared to last year same period,
which recorded $14 million and $7 million sales of organic liquid fertilizer and
organic granular compound fertilizer respectively. The increase in sales was
mainly due to the introduction of a new product, organic granular compound
fertilizer in the second quarter of 2009.  The Company received good
market response since the product was launched, especially the first half 2010.
Higher market demand on organic granular compound in first half year due to
organic granular compound fertilizer used as base manure before seeding, whereas
organic liquid fertilizer used when the plantation to grow, normally the demand
on organic liquid fertilizer will increase from May onwards. The introduction of
organic granular compound fertilizer solved the seasonality problem which
normally occurs in the first half of year during the traditionally slow period
for organic liquid fertilizer.


19




The
increase in sales of our traditional organic liquid compound fertilizer products
was mainly due to the expansion of our customer base to newly established
markets in the central and southern regions of China.





Cost of
Revenue.




Our cost
of revenue for the three-month period ended June 30, 2010 increased by $10.4
million, or 86%, as compared to the same period in 2009. Cost of goods sold
reported $22.4 million whereas the same period in 2009 recorded $12 million. Our
cost of revenue primarily consists of the cost of our raw materials, direct
labor and manufacturing overhead expenses. Our increase in cost of revenue is
generally consistent with the increase in sales especially for granular
fertilizer which contributed 42% of total sales and with a higher cost of
materials used as compared to organic liquid fertilizer.




Gross
Profit.




Our gross
profit for three-month period ended June 30, 2010 recorded $11.9 million,
increased by $2.9 million or 33%, as compared to the same period in 2009 which
was reported $9 million. Overall gross profit margin for the three-month period
ended June 30, 2010 was 34.7%, as compared to 42.7% for the same period in 2009.
The decrease in overall gross profit margin was mainly due to the increase in
organic granular compound fertilizer‘s sales which granular fertilizer sales
incurred higher material costs and recorded a lower profit margin than liquid
fertilizer.




Our
organic granular compound fertilizer products recorded a gross profit margin of
20.3% for three-month period ended June 30, 2010, there was no significant
change as compared with same period 2009, which recorded as 21.7%. There was
slight decrease of gross profit margin organic liquid fertilizer products, which
recorded a gross profit margin of 45% for the three-month period ended June 30,
2010, as compared with 53.3% for the same period in 2009. The decrease in gross
profit margin was mainly due to the company has improved its formula of organic
liquid fertilizer.  More raw materials used in new formula to enhance the
quality of product, thus, the material costs increase accordingly.





Selling
Expenses.





Our selling expenses consist primarily
of advertising and promotion expenses, freight charges salaries and travelling
expenses.  Our selling expenses were $1.3 million for the three-month
period ended June 30, 2010 as compared to $0.6 million for the same period in
2009, an increase of $0.7 million. The increase in selling expenses was mainly
due to significant increase in promotion expenses which were reported at $0.4
million, an increase of $0.37 million compared to the three-month period ended
June 2009. This increase is in line with the increase in sales volume, and
handling charges accordingly. There was slight increase in selling expenses as a
percentage to net revenue, from approximately 3% for the three months ended June
30, 2009 to approximately 4% for three months ended June 30, 2010.





General and Administrative
Expenses.





Our
general and administrative expenses were $2.6 million for the three-month period
ended June 30, 2010, an increased of $1.7 million, representing a 200% increase
as compared to $0.87 million for the same period in 2009. General and
administrative expenses consist primarily ofstaff costs,
such as salaries and bonus, stock-based compensation expenses for management,
professional fees, audit fees, rental and others. The increase in administrative
expenses was primarily due to non-cash charges $0.81 million which related to
shares option and stock granted to our director and management. Besides,
franchise tax, insurance expenses, research and development costs  and
audit fees increased by $0.18 million, $0.12 million, $0.26 million, $0.17
million, and $ 0.19 million respectively.


20





Income from
Operations.




Income
from operations was $8.0 million for the three months period ended June 30, 2010
and increased by $0.5 million or 7%, as compared to $7.5 million for the same
period in 2009.  The increase was primarily because of the increase in
gross profit by $2.9 million but offset by the increase in selling and general
and administrative expenses by $0.7 million and $1.7 million
respectively.





Other
Income





Other
income consists of the change in fair value of warrant classified as
derivatives, recognition of gain on extinguishment of warrants classified as
derivatives, interest income and exchange gain/loss. The increase in other
income was mainly attributable to a non-cash charge of $13.3 million resulting
from the change in the fair value of the warrants classified as derivative
instruments and recognition of gain on extinguishment of warrants classified as
derivatives of $1.6 million.





Income
tax.




The
Company incurred income tax expense of $1.5 million, representing an effective
tax rate of 6.6%, for the three-month period ended March 31, 2010, as compared
to 21.5% for the same period in 2009. The decrease in the effective tax rate was
primarily caused by the non-taxable income from the gain on extinguishment of
warrant liability of $1.6 million and gain on changes in fair value of warrants
of $13.3 million, which in aggregate had a tax effect of 16.6% on the Company’s
income before tax.


Net
Income





We
recorded a net income attributable to common shareholders of $21 million for the
three-month period ended June 30, 2010 as compared to a net income of $5.9
million for the same period in 2009, increase of $15.6 million, or 266%. If we
excluded the non-cash gain resulting from the change in the fair value of the
warrants of $13.3 million, the gain on extinguishment of warrants classified as
derivatives $1.6 million, and share based compensation expenses $1.3 million, we
would have recorded a net income of $7.4 million, an effective increase of $1.4
million, or 24.4% growth, as compared to the same period in
2009.




21




Comparison
of Six Months Ended June 30, 2010 and 2009




The
following table summarizes the results of our operations during the six-month
period ended June 30, 2010 and 2009 and provides information regarding the
dollar and percentage increase or (decrease) from the 2010 fiscal period to the
2009 fiscal period:





(All
amounts, other than percentages, in thousands of U.S. dollars)





Six
      Months
                                Ended
      June 30,
                              
                              
                              Dollar ($)
                                Increase
                              
                              
                              Percentage (%)
                                Increase2010
                              
                              
                              2009
                              
                              
                              (Decrease)
                              
                              
                              (Decrease)Net
      Revenue
                              
                              
                              54,183
                              
                              
                              
                              28,336
                              
                              
                              
                              25,847
                              
                              
                              
                              91
                              %Cost
      of Revenue
                              
                              
                              (35,800
                              )
                              
                              
                              (16,012
                              )
                              
                              
                              19,788
                              
                              
                              
                              124
                              %Gross
      Profit
                              
                              
                              18,383
                              
                              
                              
                              12,324
                              
                              
                              
                              6,059
                              
                              
                              
                              49
                              %Selling
      Expenses
                              
                              
                              (1,846
                              )
                              
                              
                              (1,031
                              )
                              
                              
                              815
                              
                              
                              
                              79
                              %General
      and Administrative Expenses
                              
                              
                              (7,552
                              )
                              
                              
                              (1,856
                              )
                              
                              
                              5,696
                              
                              
                              
                              307
                              %Income
      From Operations
                              
                              
                              8,985
                              
                              
                              
                              9,437
                              
                              
                              
                              (452
                              )
                              
                              
                              (5
                              )%Other
      IncomeChange
      in fair value of warrants
                              
                              
                              3,830
                              
                              
                              -
                              
                              
                              
                              3,830
                              
                              
                              
                              100
                              %Gain
      on extinguishment of warrants
                              
                              
                              1,629
                              
                              
                              -
                              
                              
                              
                              1,629
                              
                              
                              
                              100
                              %Others
                              
                              
                              11
                              
                              
                              
                              3
                              
                              
                              
                              8
                              
                              
                              
                              267
                              %Income
      Tax
                              
                              
                              (2,665
                              )
                              
                              
                              (2,316
                              )
                              
                              
                              349
                              
                              
                              
                              15
                              %Net
      income
                              
                              
                              11,790
                              
                              
                              
                              7,124
                              
                              
                              
                              4,666
                              
                              
                              
                              65
                              %Net
      income attributable to non-controlling interest in a
      subsidiary
                              
                              -
                              
                              
                              
                              (481
                              )
                              
                              
                              481
                              
                              
                              
                              (100
                              )%Net
      income attributable to common stockholders
                              
                              
                              11,790
                              
                              
                              
                              6,643
                              
                              
                              
                              5,147
                              
                              
                              
                              77
                              %Earning
      per Share-
      Basic
                              
                              
                              0.66
                              
                              
                              
                              0.53-
      Diluted
                              
                              
                              0.61
                              
                              
                              
                              0.53Weighted
      average shares outstanding*-
      Basic
                              
                              
                              17,953
                              
                              
                              
                              12,504-
      Diluted
                              
                              
                              19,307
                              
                              
                              
                              12,504





*
              As
      retroactively adjusted for the 1-for-4 reverse stock split on September 8,
      2009 and the 2-for-1 forward stock  split on February 1,
      2010.




Net
Revenue.




Our net
revenue rose to $54.2 million for the six-month period ended June 30, 2010, an
increase of approximately $25.8 million, or 91% as compared to $28.3 million for
the same period in 2009. The increase in our net revenues was mainly
attributable to the increase in sales of organic granular compound fertilizer
which was reported as $25.3 million, increase by $18.2 million, or representing
259%, as compared with same period in 2009. Our traditional organic liquid
fertilizer product reported net revenue of $28.9 million for six-month period
ended June 30, 2010, an increase of $7.6 million, or 35.7%, as compared to $21
million for the same period in 2009. The increase in sales was mainly due to the
introduction of a new product, organic granular compound fertilizer in second
quarter of 2009. The Company received good market response since product
launched, especially in the first half of 2010. Higher market demand on organic
granular compound in first half year due to organic granular compound fertilizer
used as base manure before seeding, whereas organic liquid fertilizer used when
the plantation to grow, normally the demand on organic liquid fertilizer will
increase from May onward. The introduction of organic granular compound
fertilizer solved the seasoning problem which first half of 2010 is a slack
season for traditional products, especially organic liquid
fertilizer.


22




Cost of
Revenue.




Our cost
of revenue for the six-month period ended June 30, 2010 was recorded as $35.8
million, an increased by $19.8 million, or 124%, as compared to the same period
in 2009. Our cost of revenue primarily consists of the cost of our raw
materials, direct labor and manufacturing overhead expenses. The increase in the
cost of revenue generally consistent with increase in sales, especially granular
fertilizer, which has contributed 46.7% of total sales with higher material
costs




Gross
Profit.




Our gross
profit for the six-month period ended June 30, 2010 increased by $6 million or
49%, the is generally in line with increased sales. Overall gross profit margin
for the six-month period ended June 30, 2010 was 34%, where it was recorded as
43% for the same period in 2009. The slight decrease was due to increase in
sales of organic granular compound fertilizer which has a lower profit margin
earned.




Our
organic granular compound fertilizer products recorded a gross profit margin of
19.6% for the six-month period ended June 30, 2010, whereas our traditional
organic liquid fertilizer products recorded a gross profit margin of 46.4%.
Organic granular compound fertilizer products and organic liquid fertilizer
products recorded 21.2% and 51% of gross profit margin respectively for the same
period 2009. The Company has improved the composition of the organic liquid
fertilizer products where more raw materials are used in new formula, thus the
profit margin decreased accordingly.





Selling
Expenses.





Selling expenses consist primarily of
advertising and promotion expenses, freight charges and related
compensation.  Our selling expenses were $1.8 million for the
six-month period ended June 30, 2010 as compared to $1 million for the same
period in 2009 representing an increase of $0.8 million, or 79%. The increase in
selling expenses was mainly due to the increase in promotion expenses which
reported as $0.44 million, an increase of $0.4 million as compared to the six
months period ended June, 2009. There was slight decrease in selling expenses as
a percentage to net revenue, from approximately 3% for the six months ended June
30, 2009 to approximately 4% for six months ended June 30, 2010.





General and Administrative
Expenses.





Our
general and administrative expenses were $7.6 million for the six-month period
ended June 30, 2010, increased of $5.7 million, representing a 307% increase as
compared to $1.9 million for the same period in 2009. General and administrative
expenses consist primarily ofstaff costs,
such as salaries and bonus, stock-based compensation expenses for management,
professional fees, audit fees, rental and others. The increase in general and
administrative expenses was primarily due to increase in non-cash compensation
charge of $4.2 million as a result of the amortization of the stock granted to
our directors and management under our option plan, and franchise tax of $0.2
million. In addition, increase in legal and professional fees, listing fees and
audit fees were also incurred as a result of the successful listing of our
shares on the NASDAQ Global Market.





Income from
Operations.




Income
from operations was $9.0 million for the six-month period ended June 30, 2010,
as compared to $9.4 million for the same period in 2009, decrease of
approximately $0.4 million, or 5%. See note 12 - Income Taxes - for the
explanation of why the effective tax rate varied from the statutory
rate.
  23




Other
Income.





Other
income was consisted of the change in fair value of warrant classified as
derivatives, interest income and exchange gain/loss. The increase in other
income was mainly attributable to a non-cash charge of $3.8 million resulting
from the change in fair value of warrants classified as derivative instruments
and recognition of gain on extinguishment of Carlyle warrant liability of $1.6
million in June 2010.





Income
tax.




We
incurred income tax expense of $2.7 million, representing an effective tax rate
of 18.4%, for the six-month period ended June 30, 2010, as compared to 24.5% for
the same period in 2009. See note 12 - Income Taxes - for the explanation of why
the tax rate varies from the statutory rate.


Net
Income.





We recorded a net income of $11.8
million for the six-month period ended June 30, 2010 as compared to the net
income of $7.1 million for the same period in 2009. If we excluded the non-cash
charge resulting from the change in fair value of the warrants liability of $3.8
million, gain on extinguishment of warrant liability of $1.6 million, and stock
compensation costs $4.2 million, we would have recorded a net income of $10.6
million, an effective increase of $3.5 million, or 49% growth, as compared to
the same period in 2009.





Liquidity
and Capital Resources





As of
June 30, 2010, we had cash and cash equivalents of $51.7 million, an increase of
$31.4 million, from $20.3 million as at December 31, 2009, which is principally
attributable to the cash proceeds from public offering transaction in May, 2010
and the exercise of the warrants in June 2010. Our current assets totaled $140.3
million as of June 30, 2010, while our current liabilities totaled $6.4 million,
which results in a current ratio of 20 times.





We had no bank loans or other interest
bearing borrowings outstanding as of June 30, 2010.





We believe that our currently available
working capital will be sufficient to maintain our operations at the current
level and for at least the next twelve months.




24





Results
of Operations (continued)




The
following table sets forth a summary of our cash flows for the periods
indicated:




Six months ended June 30(in
      U.S. dollars)
                  
                  2010
                  
                  
                  2009Net
      cash generated in operating activities
                  
                  
                  1,048,159
                  
                  
                  
                  8,039,316Net
      cash used in investing activities
                  
                  
                  (516,555
                  )
                  
                  
                  (3,037,508
                  )Net
      cash provided by financing activities
                  
                  
                  30,828,271
                  
                  
                  
                  -Net
      increase in cash and cash equivalent
                  
                  
                  31,359,875
                  
                  
                  
                  5,001,808Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  65,571
                  
                  
                  
                  (438,639
                  )Cash
      and cash equivalents at the beginning of the period
                  
                  
                  20,313,089
                  
                  
                  
                  11,952,235Cash
      and cash equivalents at the end of the period
                  
                  
                  51,738,535
                  
                  
                  
                  16,515,404




Operating
Activities





We generated $1 million of net cash
from operating activities for the six-month period ended June 30, 2010, as
compared to net cash generated of $8 million from operating activities for the
same period in 2009. The decrease in net cash from operating activities was
mainly attributable to the increase in advances to suppliers, increase in other
payables, accrued expenses which amounted to $1.4 million, $4.4 million, $2
million respectively. The increase was offsetting with the decrease in accounts
receivable, other receivable and accrued expenses.





Investing
Activities:





Net cash used in investing activities
was $0.52 million for six months ended June 30, 2010, which was an decrease
of $2.5 million from the $3 million net cash used in investing activities for
the same period in 2009. Net cash used in investing activities decreased was due
to reduce in additional fixed assets and no acquisition of subsidiary activity
as compared to the same period of last year.





Financing
Activities





Net cash generated from financing
activities increase of $30.8 million, which is principally attributable to
the cash proceeds from the public offering of 1,243,000 shares of our common
stocks and the exercise of the warrants 186,450 shares with exercise price
$16.10 per share with total consideration $20.1 million and on June 21, 2010,
the Company received net proceeds $10 million from the exercise of the 2009
warrants, with 1,857,024 shares, exercise price $5.385 per share. The proceeds
was netting off with listing expenses. No cash provided from financing
activities in the same period of last year due to no financing activities
incurred.




Critical
Accounting Policies




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) requires our
management to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We consider our critical
accounting policies to be those that require the most significant judgments and
estimates in the preparation of financial statements, including the
following:




·
            Accounts
      Receivable.  Our policy is to maintain 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.


25




·
            Inventories.
       Inventories are valued at the lower of cost (determined on a
      weighted average basis) or net market value. Our management compares the
      cost of inventories with the net realizable value and an allowance is made
      for inventories with the net realizable value and an allowance is made for
      inventories with net realizable value, if lower than the
    cost.




·
            Impairment.
       We apply the provisions of ASC 360-10-35, “Impairment or Disposal of
      Long-Lived Assets Subsections” (formerly Statement of Financial Accounting
      Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets’), issued by the Financial Accounting Standards Board
      (“FASB”).  ASC Impairment or Disposal of Long-Lived Assets
      Subsections require that long-lived assets be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying
      amount of an asset may not be recoverable through the estimated
      undiscounted cash flows expected to result from the use and eventual
      disposition of the assets. Whenever any such impairment exists, an
      impairment loss will be recognized for the amount by which the carrying
      value exceeds the fair value.




·
            Fixed
      Assets. We test long-lived assets, including property, plant and
      equipment and intangible assets subject to periodic amortization, for
      recoverability at least annually or more frequently upon the occurrence of
      an event or when circumstances indicate that the net carrying amount is
      greater than its fair value. Assets are grouped and evaluated at the
      lowest level for their identifiable cash flows that are largely
      independent of the cash flows of other groups of assets. We consider
      historical performance and future estimate results in our evaluation of
      potential impairment and then compare the carrying amount of the asset to
      the future estimated cash flows expected to result from the use of the
      asset. If the carrying amount of the asset exceeds estimated expected
      undiscounted future cash flows, we measure the amount of impairment by
      comparing the carrying amount of the asset to its fair value. The
      estimation of fair value is generally measured by discounting expected
      future cash flows at the rate we utilize to evaluate potential
      investments. We estimate fair value based on the information available in
      making whatever estimates, judgments and projections are considered
      necessary.




·
            Revenue
      Recognition.  Sales revenue is recognized at the date of
      shipment from the Company’s facilities to customers when a formal
      arrangement exists, the price is fixed or determinable, the delivery is
      completed, no other significant obligations of our 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. Our revenue consists of invoiced value of goods, net of
      a value-added tax (“VAT”). No product return or sales discount allowance
      is made as products delivered and accepted by customers are normally not
      returnable and sales discounts are normally not granted after products are
      delivered.




·
            Foreign
      currency translation. We use U.S. dollars for financial reporting
      purposes. Our subsidiaries maintain their books and records in their
      functional currency, RMB, being the primary currency of the PRC, the
      economic environment in which their operations are conducted. In general,
      for consolidation purposes, we translate our subsidiaries’ assets and
      liabilities into U.S. dollars using the applicable exchange rates
      prevailing at the balance sheet date, and the statement of income is
      translated at average exchange rates during the reporting period. Gain or
      loss on foreign currency transactions are reflected on the income
      statement. Gain or loss on financial statement translation from foreign
      currency are recorded as a separate component in the equity section of the
      balance sheet, as component of comprehensive income. The functional
      currency of our Company is RMB. Until July 21, 2005, RMB had been pegged
      to the U.S. dollar at the rate of RMB 8.28:$1.00. On July 21, 2005, the
      PRC government reformed the exchange rate system into a managed floating
      exchange rate system based on market supply and demand with reference to a
      basket of currencies. In addition, the exchange rate of RMB to U.S.
      dollars was adjusted to RMB 8.11:$1.00 as of July 21, 2005. The People’s
      Bank of China announces the closing price of a foreign currency such as
      U.S. dollar traded against RMB in the inter-bank foreign exchange market
      after the closing of the market on each working day, which will become the
      unified exchange rate for the trading against RMB on the following working
      day. The daily trading price of U.S. dollars against RMB in the inter-bank
      foreign exchange market is allowed to float within a band of 0.3% around
      the unified exchange rate published by the People’s Bank of China. This
      quotation of exchange rates does not imply free convertibility of RMB to
      other foreign currencies. All foreign exchange transactions continue to
      take place either through the People’s Bank of China or other banks
      authorized to buy and sell foreign currencies at the exchange rates quoted
      by the People’s Bank of China. Approval of foreign currency payments by
      the People’s Bank of China or other institutions require submitting a
      payment application form together with invoices, shipping documents and
      signed contracts.


26




·
            Stock-based
      Compensation.  The Company accounts for stock-based
      compensation arrangements in accordance with ASC 718-10 (formerly SFAS No.
      123R “Share-Based Payment”) and measures the cost of services received as
      consideration for equity instruments issued or liabilities incurred in
      share-based compensation transactions based on the grant-date fair value
      of the equity instruments issued or the liabilities settled, net of any
      amount that an employee pays for that instrument when it is granted. The
      Company recognizes compensation cost for an award with only service
      conditions that has a graded vesting schedule on a straight-line basis
      over the requisite service period for the entire award, provided that the
      compensation cost recognized for any date must at least equal the portion
      of the grant-date value of the award that is vested at that date. No
      compensation cost is recognized for awards that do not vest (i.e. awards
      for which the requisite service is not rendered). If an award is
      cancelled, any previously unrecognized compensation cost is recognized
      immediately at the cancellation date. However, if the cancellation is
      accompanied by the concurrent grant of a replacement award, an incremental
      compensation cost is recognized and measured as the excess of the fair
      value of the replacement award over the fair value of the cancelled award
      at the cancellation date.




Off-Balance
Sheet Arrangements




None.




ITEM
3      Quantitative and Qualitative Disclosures
About Market Risk





We do not
use derivative instruments for any speculative, trading or hedging purposes. As
of June 30, 2010, we did not have any interest bearing investment or borrowings.
Because most of our transactions including sales and purchases are denominated
and settled in RMB, any exchange rate change of RMB against U.S. dollar could
have an effect on our financial results which are reported in U.S. dollars. If
the RMB were to depreciate against the U.S. dollar, amounts reported in U.S.
dollars would correspondingly be reduced. If the RMB were to appreciate against
the U.S. dollar, amounts reported in U.S. dollars would correspondingly be
increased.


ITEM
4 Controls and Procedures
  Disclosure
Controls and Procedures
 
 Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness, as of June 30, 2010, of the design and
operation of our disclosure controls and procedures, as such term is defined in
Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our
principal executive officer and principal financial officer have concluded that,
as of June 30, 2010, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in our Exchange Act
reports was recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms, and that such information was
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
  Changes
in Internal Controls over Financial Reporting.
  During
the course of the evaluation of the disclosure controls and procedures as of
June 30, 2010 and in connection with the preparation of this Quarterly Report on
Form 10-Q for the quarter ended June 30, 2010, management discovered it was
necessary to adjust the previously reported results for the first quarter ended
March 31, 2010 as a result of two accounting errors, which were the failure by
the Company to account for 326,600 shares of common stock awarded to directors
and officers for services during the quarter ended March 31, 2010 and
incorrectly accounting for certain intercompany transactions for the quarter
ended March 31, 2010.
  As a
result of these errors, management subsequently concluded that there was a
material weakness in its disclosure controls and procedures and internal
controls over financial reporting as of March 31, 2010. Management has
identified this material weakness to be inadequate supervision and review of the
financial reporting process relating to the preparation of US GAAP based
financial statements. As a result, management has determined it is necessary to
make changes in its internal controls over financial reporting, which would
specifically entail providing further training to the Company’s finance team to
improve their reporting skill levels with respect US GAAP technical issues.
Additionally, management will enhance controls over the review of  its US
GAAP prepared financial statements prior to their release giving added emphasis
 to the identification and accounting  of unusual
 transactions.


Due to
the material weakness described above, management has determined to provide
further training to the Company’s finance team and other relevant personnel of
the Company in respect of identification of U.S. GAAP accounting guidance
applicable to the Company’s financial statements in order to address the
material weaknesses in our internal control over financial
reporting.
  27




PART
II  OTHER INFORMATION




ITEM
1.     LEGAL PROCEEDINGS




None




ITEM
1A.  RISK FACTORS




Not
applicable to smaller reporting companies




ITEM
2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None




ITEM
3.   DEFAULT UPON SENIOR SECURITIES




None




ITEM
4 OTHER
INFORMATION




None





ITEM
5.  EXHIBITS




ExhibitNo.
                          
                          Description31.1
                          
                          Certification
      of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
                          
                          Certification
      of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
                          
                          Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
                          
                          Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200210.1
                          
                          Purchase
      Agreement by and between Sinochem Fertilizer Co., Ltd. and the Company,
      dated as of May 5,
2010.(1)




(1)
            Incorporated
      by reference to the Current Report on Form 8-K filed with the SEC on
      August 12, 2010.




28




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





CHINA
      AGRITECH, INC.Date:
      August 13, 2010
              By:
              /s/
      Yu ChangYu
      ChangChief
      Executive Officer, President, Secretary and ChairmanDate:
      August 13, 2010
              By:
              /s/
      Yau-Sing TangYau-Sing
      TangChief Financial Officer and Controller (Principal Financial Officer)




29