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: March 31, 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 o




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




Indicate
by check mark whether the registrant is a 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 o
            Accelerated
      filer oNon-accelerated
      filer o
            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 May 7, 2010 is as follows:




Class
      of Securities
            
            Shares
      OutstandingCommon
      Stock, $0.001 par value
            
            18,909,219









Contents
              Page(s)PART
      I: FINANCIAL INFORMATIONItem
      1 Financial statements
              1-13Item
      2 Management Discussion and Analysis of Financial Condition and Results of
      Operations
              14-25Item
      3 Quantitative and Qualitative Disclosure about Market
Risk
              25Item
      4 Controls and Procedures
              26PART
      II : OTHER INFORMATION
              26Item
      1 Legal Proceedings
              26Item
      2 Unregistered Sales of Equity Securities and Use of
    Proceeds
              26Item
      3 Defaults Upon Senior Securities
              26Item
      4 Removed and Reserved
              26Item
      5 Other Information
              26Item
      6 Exhibits
              26SIGNATURES
              27







PART
I: FINANCIAL STATEMENTS
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 March 31,2010
              
              
              December 31,
      2009ASSETS
              
              (Unaudited)Current
    AssetsCash and cash
      equivalents
              
              $
              28,670,837
              
              
              $
              20,313,089Accounts receivable,
    net
              
              
              43,341,716
              
              
              
              39,256,098Inventories
              
              
              13,607,662
              
              
              
              6,606,095Advances to
      suppliers
              
              
              12,889,971
              
              
              
              25,348,687Prepayments and other
      receivables
              
              
              2,864,593
              
              
              
              2,287,220Total Current
      Assets
              
              
              101,374,779
              
              
              
              93,811,189Property, plant and
      equipment,net
              
              
              5,836,267
              
              
              
              5,980,696Construction in
      progress
              
              
              424,128
              
              
              
              424,006Intangible assets,
      net
              
              
              381,926
              
              
              
              397,507Total
Assets
              
              $
              108,017,100
              
              
              $
              100,613,398
 
 LIABILITIES AND
      STOCKHOLDERS’S EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              4,014,855
              
              
              $
              62,616Accrued expenses and other
      payables
              
              
              1,603,498
              
              
              
              1,394,357Warrant
      liabilities
              
              
              29,635,346
              
              
              
              20,157,869Taxes
    payable
              
              
              1,616,406
              
              
              
              1,695,665Total Current
      Liabilities
              
              
              36,870,105
              
              
              
              23,310,507Stockholders’EquityPreferred stock: $0.001 par value,10,000,000shares authorized,
      none issued
              
              
              —
              
              
              
              —Common stock: $0.001 par value;
      100,000,000 shares authorized, 17,002,542* shares issued and outstanding
      as ofMarch31, 2010andDecember 31,2009,
    respectively
              
              
              17,003
              
              
              
              17,003Additional paid in
      capital
              
              
              34,853,025
              
              
              
              34,698,079Statutory
      reserves
              
              
              2,195,818
              
              
              
              2,195,818Accumulated other comprehensive
      income
              
              
              5,777,832
              
              
              
              5,723,265Retained
      earnings
              
              
              28,303,317
              
              
              
              34,668,726Total
Equity
              
              
              71,146,995
              
              
              
              77,302,891Total Liabilities and
      Stockholders’Equity
              
              $
              108,017,100
              
              
              $
              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 condensed consolidated
financial statements
  1
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 UNAUDITED
CONDENSEDCONSOLIDATED STATEMENTS OF INCOME
  For the Three Months
      Ended
                March, 31,2010
              
              
              2009Net revenue
              
              $
              15,353,857
              
              
              $
              7,347,376Cost of
    revenue
              
              
              (8,970,221
              )
              
              
              (3,978,685
              )Gross
profit
              
              
              6,383,636
              
              
              
              3,368,691Operating
      expenses:Selling
      expenses
              
              
              (559,769
              )
              
              
              (405,719
              )Operating and administrative
      expenses
              
              
              (1,562,001
              )
              
              
              (983,675
              )Total operating
      expenses
              
              
              (2,121,770
              )
              
              
              (1,389,394
              )Incomefrom
    operations
              
              
              4,261,866
              
              
              
              1,979,297Other
      income/(expenses):Interest
    income
              
              
              11,346
              
              
              
              2,573Exchange loss,
      net
              
              
              (165
              )
              
              
              (447
              )Changes in fair value of warrants
      classified as derivatives
              
              
              (9,477,477
              )
              
              
              -Total other income/(expense),
      net
              
              
              (9,466,296
              )
              
              
              2,126(Loss)/Income before income
      taxes
              
              
              (5,204,430
              )
              
              
              1,981,423Income tax
      expenses
              
              
              (1,160,979
              )
              
              
              (714,278
              )Net (loss)/
      income
              
              
              (6,365,409
              )
              
              
              1,267,145Net income attributable to
      non-controlling interest
              
              
              -
              
              
              
              (214,283
              )Net (loss)/income attributable to China
      Agritech stockholders
              
              $
              (6,365,409
              )
              
              $
              1,052,862Other comprehensive
      incomeForeign currency translation
      adjustment
              
              
              54,567
              
              
              
              (101,813
              )Comprehensive
      income
              
              
              (6,310,842
              )
              
              
              951,049Comprehensive incomeattributable to non-controlling
      interest in a subsidiary
              
              
              -
              
              
              
              17,217Comprehensive income attributable
      to China Agritech stockholders
              
              
              (6,310,842
              )
              
              
              968,266(Loss)/Earnings per
      share*:- Basic
              
              $
              (0.37
              )
              
              $
              0.09- Diluted
              
              $
              (0.37
              )
              
              $
              0.09Weighted average shares
      outstanding*:- Basic
              
              
              17,002,542
              
              
              
              12,349,808- Diluted
              
              
              17,002,542
              
              
              
              12,349,808
  *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 condensed consolidated
financial statements.
  2
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
 For the Three Months Ended
      31,2010
              
              
              2009Cash flows from operating
      activities:Net(loss)/income
              
              $
              (6,365,409
              )
              
              $
              1,267,145Adjustments to reconcile net
      income to net cash used in operating activities:Share-based
      compensation
              
              
              154,947
              
              
              
              —Depreciation and amortization
      of property, plant
      and equipment
              
              
              190,116
              
              
              
              152,442Amortization of intangible
      assets
              
              
              15,708
              
              
              
              —Allowance for doubtfuldebts
              
              
              (437
              )
              
              
              —Changes in fair value of warrants
      classified as derivatives
              
              
              9,477,477
              
              
              
              —Decrease / (Increase) in current
      assets:Accounts
      receivable
              
              
              (4,085,181
              )
              
              
              (1,287,193
              )Inventories
              
              
              (7,001,568
              )
              
              
              (6,460,298
              )Advances to
      suppliers
              
              
              12,458,716
              
              
              
              215,676Prepayments and other
      receivable
              
              
              (577,372
              )
              
              
              170,089(Decrease) / Increase in current
      liabilities:Accounts
      payable
              
              
              3,952,239
              
              
              
              369,294Tax
payables
              
              
              (79,259
              )
              
              
              13,053Accrued expenses and other
      payables
              
              
              209,142
              
              
              
              154,357Net cash generated from (used in)operatingactivities
              
              
              8,349,119
              
              
              
              (5,405,435
              )Cash flows from investing
      activities:Acquisition of property, plant and
      equipment
              
              
              (45,687
              )
              
              
              (598
              )Deposit paid for acquisition of noncontrolling
      interest
              
              
              —
              
              
              
              (1,000,000
              )Net cash used in investingactivities
              
              
              (45,687
              )
              
              
              (1,000,598
              )Effect of exchange rate change on
      cash and cash equivalents
              
              
              54,316
              
              
              
              (62,947
              )Netincrease/ (decrease) in cash and
      cash equivalents
              
              
              8,357,748
              
              
              
              (6,468,980
              )Cash and cash equivalents,
      beginning of period
              
              
              20,313,089
              
              
              
              11,952,235Cash and cash equivalents, end of
      period
              
              $
              28,670,837
              
              
              $
              5,483,255Supplemental disclosure of cash
      flow
      information:Cash paid for
      interest
              
              
              —
              
              
              
              —Cash paid for income
      tax
              
              $
              1,282,063
              
              
              $
              714,278Non cash Investment and Financing
      ActivityAcquisition
      of noncontrolling interest funded by issuance of
    stock
              
              $
              —
              
              
              $
              (1,000,000
              )
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  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 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 these reverse and forward splits.
  2.
                BASIS
      OF PRESENTATION
  These
condensed 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 condensed consolidated financial statements for the three-month periods
ended March 31, 2010 and 2009 are unaudited. In the opinion of management, all
adjustments and disclosures necessary for a fair presentation of these interim
condensed 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 condensed 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 condensed 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  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.
                (LOSS)
      / EARNINGS PER SHARE
  The
following table is a reconciliation of the net (loss) income and the weighted
average shares used in the computation of basic and diluted (loss) earnings per
share for the periods presented:
 For
      Three Months
                  Ended
      March 31,2010
                
                
                2009(Loss)/
      Income available to common stockholders for calculation of basic and
      diluted EPS
                
                $
                (6,365,409
                )
                
                $
                1,052,862Weighted
      average number of shares:-
      Basic
                
                
                17,002,542
                
                
                
                12,349,808-
      Effect of dilutive securities – options and warrants
                
                
                –
                
                
                
                –-
      Diluted
                
                
                17,002,542
                
                
                
                12,349,808
  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.
  The
dilutive earnings per share computation for the three months ended March 31,
2010 excludes
options and warrants to purchase up to 189,791 shares of common stock because
the Company incurred net loss for the period. The dilutive earnings per share
computation for the three months ended March 31, 2009 excludes options
and warrants to purchase up to 269,460 shares of common stock because their
effects were anti-dilutive.
  5
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  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
following tables present the Company’s assets and liabilities measured at fair
value on a recurring basic as of March 31, 2010 and December 31,
2009:
  Using
      InputMarch
      31, 2010
                    
                    Carrying
      value
                    
                    
                    Level
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Warrant
      Liability
                    
                    $
                    29,635,346
                    
                    
                    $
                    —
                    
                    
                    $
                    29,635,346
                    
                    
                    $
                    —Total
                    
                    $
                    29,635,346
                    
                    
                    $
                    —
                    
                    
                    $
                    29,635,346
                    
                    
                    $
                    —
  Using
      InputDecember
      31, 2009
                    
                    Carrying
      value
                    
                    
                    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 March 31, 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.
  6
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  5.
                FAIR
      VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS –
  CONTINUED
 
 Derivative
Instruments – Warrants
 
 The
Company’s only derivative instruments as of March 31, 2010 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 $5.38 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
Warrants are not considered indexed to the Company’s own stock and have been
recorded at their fair value as derivative liabilities. In addition, they do not
qualify for hedge accounting, and as such, all changes in the fair value of
these warrants have been recognized as other income or expenses. These warrants
will continue to be reported as liability until such time as they are exercised
or expire.
 
 The
Company estimates the fair values of the 2009 Warrants as of March 31, 2010 and
December 31, 2009 using the Black-Scholes option pricing model based on the
following assumptions:
  March
      31, 2010
                
                
                December
      31, 2009(Unaudited)Exercise
      price (per share)
                
                $
                5.38
                
                
                $
                5.38Remaining
      contractual life (years)
                
                
                2.05
                
                
                
                2.3Dividend
      yield
                
                
                —
                
                
                
                —Expected
      volatility (based on historical volatility)
                
                
                97.95
                %
                
                
                112.21
                %Risk
      free interest rate
                
                
                1.04
                %
                
                
                1.29
                %Estimated
      fair value (per share)
                
                $
                7.937
                
                
                $
                10.855
  The
risk-free rate of return reflects the interest rate for U.S. Treasury Note with
similar time-to-maturity to that of the warrants.
  7
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  6.
                ACCOUNTS
      RECEIVABLE
  Accounts
receivable consist of the following:
 
 March
      31,
                  2010
                
                
                December
      31,
                  2009(Unaudited)Accounts
      receivable
                
                $
                44,110,244
                
                
                $
                40,025,063Less:
      Allowance for doubtful accounts
                
                
                (768,528
                )
                
                
                (768,965
                )$
                43,341,716
                
                
                $
                39,256,098
  The
activity in the Company’s allowance for doubtful accounts is summarized as
follows:
 
 For
      the Three Months
                  Ended
      Ended March 31,2010
                
                
                2009(Unaudited)Balance
      at the beginning of the period
                
                $
                768,965
                
                
                $
                448,606(Reversal
      of provision)/ provision made for the period
                
                
                (437
                )
                
                
                320,359Balance
      at the end of the period
                
                $
                768,528
                
                
                $
                768,965
  7.
                INVENTORIES
  Inventories
consist of the following:
 
 March
      31,
                  2010
                
                
                December
      31,
                  2009(Unaudited)Raw
      Materials
                
                $
                9,678,013
                
                
                $
                4,166,380Work
      in progress
                
                
                22,744
                
                
                
                —Packing
      materials
                
                
                689,892
                
                
                
                85,342Finished
      goods
                
                
                3,217,013
                
                
                
                2,354,373$
                13,607,662
                
                
                $
                6,606,095
  8
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  8.
                PROPERTY,
      PLANT AND EQUIPMENT
  Property,
plant and equipment consist of the following:
 
 March
      31,
                  2010
                
                
                December
      31,
                  2009(Unaudited)Building
                
                $
                1,060,604
                
                
                $
                1,060,298Manufacturing
      machinery
                
                
                5,842,585
                
                
                
                5,840,901Leasehold
      improvements
                
                
                440,217
                
                
                
                440,092Office
      equipment
                
                
                230,973
                
                
                
                223,298Motor
      vehicles
                
                
                665,484
                
                
                
                629,5878,239,863
                
                
                
                8,194,176Less:
      Accumulated depreciation and amortization
                
                
                (2,403,596
                )
                
                
                (2,213,480
                )Net
      book value
                
                $
                5,836,267
                
                
                $
                5,980,696
  Depreciation
expenses for the three months ended March 31, 2010 and 2009 was $190,116 and
$152,320, respectively.
  9.
                INTANGIBLE
      ASSETS
  Intangible
assets consist of the following:
 March
      31,
                  2010
                
                
                December
      31,
                  2009(Unaudited)License
      for manufacture and sale of fertilizer products
                
                $
                439,477
                
                
                $
                440,100Less:
      Accumulated amortization
                
                
                (57,551
                )
                
                
                (42,593
                )Net
      book value
                
                $
                381,926
                
                
                $
                397,507
  Amortization
expenses for three months ended March 31, 2010 and 2009 was $15,708 and $nil
respectively.
  10.
                ACCRUED
      EXPENSES AND OTHER PAYABLES
  Accrued
expenses and other payables consist of the following:
 March
      31,
                  2010
                
                
                December
      31,
                  2009(Unaudited)Accrued
      expenses
                
                $
                708,349
                
                
                $
                439,028Other
      payables
                
                
                895,149
                
                
                
                955,329$
                1,603,498
                
                
                $
                1,394,357
 
 9
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  11.
                TAXES
      PAYABLE
  Taxes
payable consist of the following:
 March
      31,
                  2010
                
                
                December
      31,
                  2009(Unaudited)Income
      tax payable
                
                $
                1,161,103
                
                
                $
                1,281,775Value
      added tax payable
                
                
                437,879
                
                
                
                397,118Others
                
                
                17,424
                
                
                
                16,772$
                1,616,406
                
                
                $
                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 Anhui
Agritech as wholly foreign-owned enterprises have continued to be
entitled to tax exemption for the two years ended December 31, 2009 and 2008and
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 months ended March 31, 2010 and
2009consisted of the following:
 For
      Three Months Ended March 31,2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)Provision
      for current income tax – China
                
                $
                1,160,979
                
                
                $
                714,278
 
 As of March 31, 2010 and December 31,
2009, the Company did not have any significant temporary differences and
carryforwards that may result in deferred tax.
 
 The
following table reconciles the theoretical tax benefit (expense) calculated at
the statutory rates to the Company’s effective tax expense for the three months
ended March 31, 2010 and 2009 respectively.
 
 Reconciliation
of effective tax expense
 For
      Three Months Ended March 31,2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)Theoretical
      tax benefit (expense) calculated at PRC statutory enterprise income tax
      rate of 25%
                
                $
                1,301,108
                
                
                $
                (495,356
                )Tax
      effect of non-deductible expenses
                
                
                (2,623,339
                )
                
                
                (218,922
                )Tax
      holiday
                
                
                184,345
                
                
                
                —Other
                
                
                (23,093
                )
                
                
                —Effective
      tax expense
                
                $
                (1,160,979
                )
                
                $
                (714,278
                )
  10
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  12.
                INCOME
      TAXES (Cont’d)
  Non-deductible
expenses for the three months ended March 31, 2010 primarily consist of the
change in fair value of warrants classified as derivative of $9,477,477,
share-based compensation expense of $154,947 and others.  The
non-deductible expenses for three months ended March 31, 2009 are the result of
various net operating losses in other tax jurisdictions for where no benefit is
realized.
  13.
                COMMON
      STOCK AND WARRANTS
  Common
Stock Purchase Warrants
  A summary
of the warrants outstanding as of March 31, 2010, and changes during the three
months ended March 31, 2010 are presented below:
  Number of underlying
      shares
                
                
                Weighted Average Exercise
      Price
                
                
                Average Remaining Contractual Life
      (years)Outstanding
      at December 31, 2009
                
                
                1,857,024
                
                
                $
                5.38
                
                
                
                2.50Issued
                
                
                −Forfeited
                
                
                −Exercised
                
                
                −Outstanding at March 31,
      2010
                
                
                1,857,024
                
                
                $
                5.38
                
                
                
                2.05Exercisable at March 31,
      2010
                
                
                −
  14.
                STOCK
      OPTIONS AND SHARE-BASED
COMPENSATION
  A summary
of the stock options activity, which were granted under the Company’s 2008 Equity Incentive Plan (the
“Plan”), and changes during the three
months ended March 31, 2010 are presented below:
 
 Underlying
      shares
                
                
                Weighted
      Average Exercise Price
                
                
                Weighted-
      Average Remaining Contractual Term
                
                
                Aggregate
      Intrinsic ValueOutstanding at December 31,
      2009*
                
                
                517,000
                
                
                $
                11.64
                
                
                
                4.80
      yearsGranted
                
                
                —Exercise
                
                
                —Outstanding atMarch 31,
    2010
                
                
                517,500
                
                
                $
                11.64
                
                
                
                4.55
      years
                
                
                $
                6,840,850Exercisable atMarch31, 2010
                
                
                279,500
                
                
                $
                10.40
                
                
                
                4.40
      years
                
                
                $
                3,761,130
  *
                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.
  As of
March 31, 2010, a total of $891,521 of unrecognized compensation cost related to
non-vested options under the Plan is expected to be recognized over a weighted
average period of 1.75 years. The total fair value of options vested under the
Plan and recognized as administrative expenses forthe three
months ended March 31, 2010 and 2009 was $154,947 and $nil,
respectively.
  11
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  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.
  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
  Three
customers which accounted for 31.4% of the Company’s net revenue for three
months ended March 31, 2010, which each individually accounting for
approximately 12%, 10% and 10% respectively of the Company’s net revenue for the
same period. There was no individual customer which accounted for 10% or more of
the Company’s net revenue for the three months ended March 31,
2009.
  Five
suppliers provided approximately 52% of the Company’s dollar value of raw
materials purchased for the three months ended March 31, 2010, with each
individually accounting for approximately 14%, 13%, 9%, 8% and 8% respectively.
Five suppliers provided approximately 82% of the Company’s raw materials for the
three months ended March 31, 2009 with each individually accounting for
approximately 22%, 19%, 15%, 13% and 13% respectively.
  12
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
  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:
 
 For
      Three Months Ended
                  March
      31,2010
                
                
                2009(Unaudited)
                
                
                (Unaudited)Net
      revenue from unaffiliated customers:Organic
      liquid fertilizers
                
                $
                8,181,470
                
                
                $
                7,347,376Organic
      granular fertilizers
                
                
                7,172,387
                
                
                
                —Total
                
                $
                15,353,857
                
                
                
                7,347,376Gross
      profit:Organic
      liquid fertilizers
                
                $
                4,318,423
                
                
                $
                3,368,691Organic
      granular fertilizers
                
                
                2,065,213
                
                
                
                —Total
                
                $
                6,383,636
                
                
                $
                3,368,691
  18.
                SUBSEQUENT
      EVENT
  On April
28, 2010, we entered into an underwriting 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, we 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.
  13






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 dollars 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.





14




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 main
products include spray, water-flush, dip and granular fertilizer products and
other customized, crop specific fertilizers that are tailored to our customers’
specific requirements. Our liquid fertilizer products can be applied on a
widespread basis via spraying by machine or aircraft.  Our products
have been recognized for their quality and effectiveness by leading industry
associations and have been certified by the PRC government at the national
level, which is an endorsement of the effectiveness of the products in all
regions of the PRC.




Our
products:




·
            promote
      photosynthesis, root system growth and transmission of nutrients to
      seeds;




·
            equilibrate
      absorption of nutrients to speed a plant’s
  maturity;




·
            eliminate
      the damage of harmful radicals to
plants;




·
            increase
      protein and vitamin content levels;




·
            accelerate
      the accumulation of photosynthesis materials and cell
      concentration;




·
            increase
      plants’ reservation ability to resist drought, resistance and the
      utilization rate of basic fertility;
and




·
            foster
      the development of plant life along with neutral or acidic
      pesticides.




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 annual production capacity
as of December 31, 2009 was approximately 13,000 metric tons of organic liquid
compound fertilizers whereas our annual production capacity for granular
fertilizers as of December 31, 2009 was approximately 200,000 metric tons,
consisting of 100,000 metric tons in Anhui, 50,000 metric tons in Harbin, and
50,000 tons in our newly completed plant in Xinjiang.





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 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.




15




China is
the principal market for our products, which are primarily sold to farmers
through distributors in 28 provinces in China: Hainan, Anhui, Hubei, Jiangsu,
Jiangxi, Guangxi, Liaoning, Shanxi, Heilongjiang, Hebei, Jilin, Shandong, Inner
Mongolia, Henan, Sichuan, Guangdong, Xinjiang, Yunnan, Chongqing, Beijing,
Shanghai, Tianjin, Ningxia, Shan'xi, Hunan, Fujian, Zhejiang and
Guizhou.




Our
Industry and Our Principal Markets




China




Arable
land, which is defined as land that is capable of being cultivated and
supporting agricultural production has been steadily reduced as a result of
industrialization/urbanization, soil degradation and the availability of water.
While China accounts for approximately 20% of the world’s population; the
country’s total available arable land represents only 7% of global
supply.  This disparity has been exacerbated over the past 20 years as
the population has continued to grow, adding 12–13 million net new inhabitants
on an annual basis while total arable land has shrunk from 133 million hectares
to 121 million hectares today. On a relative basis, China has 40% less per
capita arable land than the global average and nearly 1/8th that of the United
States. These statistics highlight the fact that if China is to become/remain
self sufficient from agricultural basis, farmers will have to largely increase
yields to meet future demand.




Fertilizers
are used by farmers as a means to supplement naturally occurring soil components
in an effort to aid the growth and yield of agricultural products. These
elements are comprised largely of nutrients such as nitrogen, phosphorus,
potassium, and sulfur, as well as the trace elements such as iron, zinc, and
magnesium.




China is
the world’s largest fertilizer market, both in production and consumption,
accounting for approximately 1/3 of the total global market. Growing at a
compound annual growth rate of 2.5% over 1998-2007, the country’s total
fertilizer consumption reached 51.1 million metric tons in 2007 compared to 40.8
million metric tons a decade ago, according to the China Statistical Year Book.
Fertilizer demand throughout China has continued to grow as a result of both
increased food volume demands but also low yield comparison with other producer
nations and a decrease in arable lands.




Organic versus Chemical
Fertilizers




Fertilizers
fall into two broad categories, Organic and Inorganic, also known as chemical.
Organic fertilizers are a combination of materials derived from living things:
animal manures, compost, bone meal and blood meal represent typical organic
fertilizers; while chemical fertilizers are manufactured from nonliving
materials; such as rock phosphate which is a common source of phosphorus in
chemical fertilizers.




Chemical
fertilizers have long been a “fast and dirty” solution as the components are
already in inorganic form and can be immediately absorbed by plants. It is
important to note that there is no nutritional quality differentiation found in
crops using either organic or chemical fertilizers. Potassium provided to a
plant root is no different if it is the result of wood ash found in organic
fertilizer or muriate in the potash component of chemical fertilizer. However,
chemical fertilizers have three main disadvantages relative to organic
fertilizers. First they are subject to leaching, which occurs when the
fertilizers are washed by rain or irrigation water down below the level of the
plant roots. Second, a heavy application of chemical fertilizers can “burn”
seedlings and young plants. This is a result of drying out, or desiccation, due
to the presence of chemical salts within the commercial fertilizers. The third
problem associated with the use of chemical commercial fertilizers is that
overly heavy applications can build up toxic concentrations of salts in the soil
and create chemical imbalances.




Organic
fertilizers require a digestion period prior to making nutrients available to
plants. Before the plants can use them, they must be broken down by soil
microorganisms into simpler, inorganic molecules and ions. In contrast, the
nutrients in chemical fertilizers are already in inorganic form and so can be
immediately used by the plants. The use of organic fertilizers contributes not
only vital nutrients to plant growth, but also improves the soil structure, or
tilth, and increases its ability to hold both water and nutrients. As
microorganisms in the soil break down the organic material into an inorganic
soluble form, a slow release of nutrients is provided over a longer period of
time. With organic fertilizers a buildup of toxicity in the soil is unlikely, as
long as the amount of organic material incorporated into the soil is fully
decomposed. There are relative disadvantages to the use of organic fertilizers.
As noted above, they are not immediately available to the plants. An example of
this can be the application of manure to a vegetable garden in the spring may
not provide useful nutrients to the plants until it has been broken down into
organic form by soil bacteria, which could take several months. Also there is
less of an ability to measure the exact nutrient components and volume that are
added to the soil. The amount of nutrients and the exact type of elements
available from a given amount of manure, compost or other inorganic fertilizer
is difficult to distinguish and is dependent on such factors as: the age of the
manure or compost; its origin (chicken, cow, horse, sawdust, garden residue,
grass clippings); and weather conditions such as temperature and
rainfall.




16




Years of
chemical fertilizer overuse have led to environmental pollution, soil quality
degradation and crop yield impacts. China’s Ministry of Agriculture, therefore,
is actively promoting and creating awareness among farmers about application of
compound fertilizers to help an environment friendly and sustainable future. The
awareness about compound fertilizers has been increasing – especially in areas
like southern and eastern China, where industrial crops are more
dominant.




Compound
fertilizers help in achieving optimal agricultural yield as these include all
the nutrients needed by different types of soils and crops. However, the 2008
China Statistical Year Book indicates that the use of compound fertilizers
account for less than 30% of the total fertilizer consumption in China, far
below the 50-80% average in developed countries. This is due to the fact that
compound fertilizers are relatively new to the market and Chinese farmers are
accustomed to using more conventional varieties. Nevertheless, demand for
compound fertilizers are estimated to grow at a compound annual growth rate over
7% in the coming years, according to the China National Chemical Information
Centre (CNCIC). In 2008, Chinese farmers reduced their usage of traditional
fertilizers by approximately 30% year over year because of surging prices, thus
impacting the fertility of the farmlands. Factors like these are expected to
increase demand for compound fertilizers in order to boost fertility
rapidly.




Although
we recently began to distribute our products into several other Asian and
Southeast Asian countries, the PRC is the principal market for our organic
compound fertilizers and related agricultural products.




The
PRC’s “Green Food” Industry




Crops
grown with the use of our products are eligible to qualify for the “AA Green
Food” rating administered by the China Green Food Development Center, an agency
under the jurisdiction of the Ministry of Agriculture of the PRC. The green food
rating system consists of an “A” rating and a more stringent “AA” rating. The
“AA” rating indicates that the crops contain minimal chemical residue from
fertilizers (however, our products themselves do not bear the “AA green food”
designation). “Green Food” is food that is deemed safe, free from pollutants and
harmful chemicals, and of good quality.




In 1990,
the PRC Ministry of Agriculture began to encourage the production of “Green
Food”. In 1992, the PRC Ministry of Agriculture established the China Green Food
Development Center to oversee food quality and the development and management of
Green Food at the national and provincial level in the PRC. In 1993, the
Ministry of Agriculture established regulations on the use of Green Food
labeling. In 1996, an identifying trademark for Green Food was registered in the
PRC and put into use. More information regarding the China Green Food
Development Center, including the green food regulatory and authentication
process, is available at the Center’s website at
http://www.greenfood.org.cn/sites/GREENFOOD. The contents of this website are
not incorporated by reference herein.




17




Our
Growth Strategy




We
believe that our increased capacity to produce organic granular compound
fertilizer products, which have a lower price point and greater market appeal
than our premier organic liquid compound fertilizer products, makes us well
positioned to expand sales and increase revenues. We have focused on the
expansion of our granular production because the market for organic granular
fertilizer is almost ten times larger than the current market for organic liquid
fertilizer due to the familiarity and tradition of farmers’ using granular
fertilizers. In addition, the per unit amount of granular fertilizer used for
sowing coverage is much higher than the amount used for liquid
fertilizer.




Our goal
is to further expand our products’ market share throughout the PRC by building
and operating branded, large-scale distribution centers, and engage franchisees
to own and operate retail chain stores which will sell our own branded
products (e.g., organic fertilizers) and international and local sourced
products (e.g., seeds, pesticides and other agricultural products). Our growth
strategy includes the following strategies:




Continue Organic Growth
Initiatives. We believe that the current fertilizer market is fragmented
and represents an excellent opportunity for us to gain additional market share
from our competitors, mainly chemical fertilizer manufacturers. We intend to
establish branded chain stores by converting our current offices into a flagship
store and distribution center and inviting our current distributors to join in
our line as franchisees to operate chain stores under our brand. We also intend
to leverage our strong brand, quality customer services and quality of our
products to gain incremental business in the fertilizer market. Finally, we
strongly believe that as we continue to grow, economies of scale and enforced
brand awareness will allow us to continue to be profitable.




Expand the lines of our
products. Beside our current organic fertilizers, we will seek to source,
either internally or locally, other agricultural products, like seeds,
pesticides, agricultural equipments and tools to expand the lines of our
products to meet all the necessities of farmers in the PRC. All these products
will be sold through our branded chain stores directly to farmers, who are the
end customers.




Capitalize upon Strong Industry
Dynamics in the PRC. Continued economic growth in the PRC, coupled with
evolving government policy on preservation of farmlands by promoting use of
organic fertilizers on one hand and improvement of farmers’ income on another
hand, present us with significant future growth opportunities. We believe that
with continued strong government commitment, we will continue to benefit from
it.




Execute Strategic Acquisitions.We intend to acquire certain domestic targets that are accretive and
synergistic to our growth strategy.




Competitive
Advantages




We
believe we are well-positioned to continue to be the largest manufacturer of
organic compound fertilizers in the PRC and to become a leading distributor of
organic compound fertilizers in the PRC and beyond.  We believe we
have several competitive advantages, including the following:




·
            Well
      established brand name products;




·
            Established
      distribution channel in northern and eastern  provinces of the
      PRC; and




·
            Food
      grown with our products may be eligible to receive a AA Green Food
      rating.




18




Our
Competitive Strengths




We
believe that the following competitive strengths enable us to compete
effectively in the fertilizer market in the PRC:




·
            Strong
      Market Position. We are a leading manufacturer of
      fertilizer products and, more specifically, organic fertilizer products in
      liquid form, in the PRC.




·
            Recognized
      and Certified Product Offerings.  Our Tailong liquid
      brand of fertilizer products was favorably recognized by the China
      Association for Quality Supervision and the China Quality Standard
      Research Center in 2006 for product quality, brand reputation and customer
      loyalty.  Our fertilizer products also have been certified by
      the Ministry of Agriculture.




·
            Established
      Distribution Network.   We sell the majority of our
      fertilizer products through an extensive distribution network of regional
      factories, which help us to establish a local presence in each community
      we serve with multi-level sales support and to educate local retailers and
      farmers on the benefits of our fertilizer products. Since 2007 we have
      sold our Green Vitality products to a subsidiary of Sinofert Holdings
      Limited, the PRC’s largest integrated agricultural company, which utilizes
      its own distribution network to distribute our
  products.




·
            Efficient
      Infrastructure.   We have created a flexible and
      responsive infrastructure, which allows us to efficiently manufacture and
      deliver high-quality fertilizer products within a short delivery
      time




·
            Broad
      Customer Base.   We developed a diversified customer base
      of farmers and retailers located throughout the PRC and are not dependent
      on, or heavily concentrated in, any single customer or customer
      base.




Our
Strategy




We
believe that our strong competitive position, our ability to meet customer
demands and our well-regarded product offerings will enable us to benefit from
the anticipated growth in the PRC fertilizer market.  We are committed
to enhancing our sales, profitability and cash flows through the following
strategies:




·
            Capitalize
      on our brand reputation to increase sales of new and existing
      products.   We intend to leverage the favorable
      reputation of our fertilizer products through collaboration with academic
      and governmental institutions which can attest to the quality of our
      current product offerings.  We plan to develop new compounds to
      better meet the changing needs of the PRC’s agricultural communities by
      tailoring our product offerings to meet the local needs of the farmers and
      to create greater reliability of fertilizer products nationwide. Over the
      past year we added an organic granular compound fertilizer to our product
      lines and constructed a granular fertilizer line near each of our existing
      factories, located in Harbin, Beijing and
  Xinjiang.




·
            Expand Our
      Domestic Operation.  We intend to build or acquire
      additional organic granular fertilizer factories in strategic locations in
      the PRC to serve new agricultural areas in Hebei and Sichuan provinces.
      Our recently completed Xinjian facility commenced commercial production in
      2010, bringing our organic granular compound fertilizer production
      capacity to approximately 200,000 metric
tons.




·
            Build &
      Operate Franchised Retail Stores in the PRC.  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 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.




19




·
            Enhance
      Brand Awareness.   Our core future focus will be to build
      and enhance brand awareness of our “Lvlingbao” and “Tailong” products, as
      well as our “Green Vitality” product line and organic granular compound
      fertilizer by launching an extensive advertising campaign to educate
      retailers and farmers on the benefits of our liquid organic compound
      products.  We expect to combine these marketing efforts with our
      planned retail store expansion into locations that have little or no
      current exposure to our products. We believe that this strategy will allow
      us to expand our distribution and sales outside of our traditional base in
      northeast regions of the PRC and capture a larger market
      share.




·
            Increase Sales into Select
      Foreign Markets.   We plan to leverage our product
      offerings and brand reputation to expand our product sales into select
      markets outside of the PRC.   We are currently
      negotiating  with Odyssey International (Trading) Group Ltd., a Hong
      Kong corporation (“Odyssey”)  to define the specific terms and
      conditions of the exclusive marketing and distribution rights we granted
      them for the Company’s Lvlingbao series of organic liquid compound
      fertilizers in certain target markets, including, but not limited to,
      Central and South America, South Africa and Asian countries. In the
      event that the terms are not finalized, the Company will have to seek
      to terminate the agreement and find a new third party distributor to
      market its products outside the
PRC.




Overview




We
manufacture and sell organic liquid compound fertilizers; organic granular
compound fertilizers and related agricultural products in the PRC. 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.




For three
months ended March 31, 2010, our revenue primarily derived from sale of our
organic fertilizer. As of March 31, 2010, approximately 53% of our revenues were
derived from the sale of our liquid organic fertilizer products, while
approximately 47% of our revenues were derived from the sale of our granular
organic fertilizer products.  Revenue from sales of liquid fertilizer
has a lower cost of revenue than that of granular fertilizer.  Our
cost of revenue primarily consists of the cost of our raw materials, direct
labor and manufacturing overhead expenses.




For the
period March 31, 2010 we achieved net revenue of $15.3 million, representing
110% higher than same period for last fiscal year which recorded $7.3 million.
Our gross profit increased by $3 million for the period.




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 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.




20





Results
of Operations - Three Months Ended March 31, 2010 and 2009





The
following table summarizes the results of our operations during the three-month
period ended March 31, 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
              Ended March
      31,
            
            
            Dollar
      ($)
              Increase
            
            
            Percentage (%)
      Increase2010
            
            
            2009
            
            
            (Decrease)
            
            
            (Decrease)Net
      Revenue
            
            
            15,354
            
            
            
            7,347
            
            
            
            8,007
            
            
            
            109Cost
      of Revenue
            
            
            (8,970
            )
            
            
            (3,979
            )
            
            
            4,991
            
            
            
            125Gross
      Profit
            
            
            6,384
            
            
            
            3,368
            
            
            
            3,016
            
            
            
            90Selling
      Expenses
            
            
            (560
            )
            
            
            (405
            )
            
            
            155
            
            
            
            38Operating
      and Administrative Expenses
            
            
            (1,562
            )
            
            
            (984
            )
            
            
            578
            
            
            
            59Income
      From Operations
            
            
            4,262
            
            
            
            1,979
            
            
            
            2,283
            
            
            
            115Other
      (Expenses)/IncomeChange
      in fair value of warrants
            
            
            (9,477
            )
            
            
            -
            
            
            
            (9,477
            )
            
            
            N/AOthers
            
            
            11
            
            
            
            2
            
            
            
            9
            
            
            
            450Income
      Tax
            
            
            (1,161
            )
            
            
            (714
            )
            
            
            447
            
            
            
            63Net
      (loss)/ income
            
            
            (6,365
            )
            
            
            1,267
            
            
            
            (7,632
            )
            
            
            N/ANet
      income attributable to non-controlling interest in a
      subsidiary
            
            
            -
            
            
            
            (214
            )
            
            
            214
            
            
            
            100Net
      (loss)/income attributable to common stockholders
            
            
            (6,365
            )
            
            
            1,053
            
            
            
            (7,418
            )
            
            
            N/A(Loss)/Earning
      per Share-
      Basic
            
            
            (0.37
            )
            
            
            0.09-
      Diluted
            
            
            (0.37
            )
            
            
            0.09Weighted
      average shares outstanding*-
      Basic
            
            
            17,002,542
            
            
            
            12,349,808-
      Diluted
            
            
            17,002,542
            
            
            
            12,349,808





*
            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 $15.3 million for the three-month period ended March 31, 2010,
an increase of approximately $8 million, or 109% as compared to $7.3 million for the
same period in 2009. The increase in our net revenues was mainly attributable to
the successful launch of our new product, organic granular compound fertilizers
in the second quarter of fiscal year 2009.




Our new
organic granular compound fertilizers contributed $7.2 million to our net
revenue for the three-month period ended March 31, 2010, whereas there was no
sale of this new product in the same period of 2009.




Our traditional organic liquid compound
fertilizer products reported net revenue of $8.1 million for the three-month
period ended March 31, 2010, increased by $0.8 million, or 11% as compared to
$7.3 million for the same period in 2009. The increase in net revenue from our
traditional organic liquid compound fertilizer products is mainly attributable
to the expansion of our customer base to newly established markets in the
central and southern regions of China.




21




Cost of
Revenue.




Our
cost of revenue for the three-month period ended March 31, 2010 increased by $5
million, or 125%, 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. Our cost of revenue generally increased as a
result of increased sales.




Gross
Profit.




Our gross
profit for the three-month period ended March 31, 2010 increased by $3 million
or 90%, generally in line with increased sales. Overall gross profit margin for
the three-month period ended March 31, 2010 was 42%, as compared to 46% for the
same period in 2009. The slight decrease was due to the introduction of our new
organic granular fertilizer products in the second quarter of 2009.




Our new
organic granular compound fertilizer products recorded a gross profit margin of
29% for the three-month period ended March 31, 2010, whereas our traditional
organic liquid fertilizer products recorded a gross profit margin of 53%, as
compared to 46% for the same period in 2009. The increase in the gross profit
margin of our traditional organic liquid fertilizer products was mainly
attributable to improvements in our inventory management and manufacturing costs
control processes.





Selling
Expenses.





Our selling expenses consist primarily
of advertising and promotion expenses, freight charges and related
compensation.  Our selling expenses were $0.6 million for the
three-month period ended March 31, 2010 as compared to $0.4 million for the same
period in 2009. The increase in selling expenses was mainly due to increases in
sales commission which is driven by increased in sales. Notwithstanding the
increase in selling expenses, leveraging on well established sales network,
there was a decrease in selling expenses as a percentage to net revenue, from
approximately 6% for three months ended March 31, 2009 to approximately 4% for
three months ended March 31, 2010.





Operating and Administrative
Expenses.





Our
operating and administrative expenses were $1.6 million for three-month period
ended March 31, 2010, increased by $0.58 million, representing a 59% increase as
compared to $0.98 million for the same period in 2009. Operating and
administrative expenses consisted primarily ofstaff costs,
such as salaries and bonus, stock-based compensation expenses for management,
professional fees, audit fees, rental and others. The increase in operating and
administrative expenses was primarily due to non-cash compensation charge of
$0.15 million as a result of the amortization of the stock options granted to
our directors and management under our option plan. In addition, to recognize
our staff’s contributions to our growing operating results, we increased the
staff bonus paid during the first quarter of 2010 by approximately $0.1 million
as compared to the first quarter of 2009. Increased legal and professional fees,
listing fees and audit fees have also been incurred as a result of the
successful listing of our shares on the NASDAQ Global Market.





Income From
Operations.





Income
from operations was $4.3 million for the three-month period ended March 31,
2010, as compared to $2 million for the same period in 2009, an increase of
approximately $2.3 million, or 115%.





The
growth in income from operations was primarily attributable to the increase in
net revenue as higher sales, which was in turn attributable to the sales
generated from our new organic granular compound fertilizer products and
appropriate measures to contain operating expenses.




22




Other
(Expense) Income.





Other
(expenses)/ income consisted of the change in fair value of warrant classified
as derivatives, interest income and exchange gain/loss. The increase in other
expenses was mainly attributable to a non-cash charge of $9.5 million resulting
from the change in fair value of warrants classified as derivative
instruments.





Income
tax.





The
Company incurred income tax expenses of $1.2 million for the three–month period
ended March 31, 2010, an increase of $0.5 million or 63% from $0.7 million for
the same period in 2009. In excluding the non-deductible charge for the change
in fair value of warrants of $9.5 million, our effective tax rate for the
three-month period ended March 31, 2010 would have been 27%, as compared to 36%
for the same period in 2009. The decrease in our effective tax rate was because
our gross profit increased at a much greater rate than other non-deductible
expenses such as professional fees incurred by the parent company in the U.S.
where no future tax benefit is
expected to be realized.





Net
(Loss)/Income.





We recorded a net loss was $6.4 million
for the three-month period ended March 31, 2010 as compared to a net income of
$1.3 million for the same period in 2009. If excluding the non-cash charge
resulting from the change in fair value of the warrants of $9.5 million, we
would have recorded a net income of $3.1 million, an effective increase of $1.8
million, or 72% growth, as compared to the same period in 2009.





Liquidity
and Capital Resources





As of
March 31, 2010, we had cash and cash equivalents of $28.7 million, an increase
of $8.4 million, or 41% from $20.3 million as at December 31, 2009. The increase
was mainly attributable to the cash flows of $8.3 million generated from our
operating activities for the recent three months. Our current assets totaled
$101.3 millionas
of March 31, 2010, while our current liabilities (excluding warrant liabilities
of $29.6 million) totaled $7.3 million, which results in a current ratio of
13.9.





We had no
bank loans or other interest bearing borrowings outstanding as of March 31,
2010.





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




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





Results
of Operations (continued)




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






Three months Ended March
      31(in thousands of U.S.
      dollars)
              
              2010
              
              
              2009Net cash generated/ (used) in
      operating activities
              
              
              8,349
              
              
              
              (5,405
              )Net cash used in investing
      activities
              
              
              (45
              )
              
              
              (1,001
              )Net cash provided by financing
      activities
              
              
              —
              
              
              
              —Effect of exchange rate changes on
      cash and cash equivalents
              
              
              54
              
              
              
              (63
              )Net increase/(decrease) in cash
      and cash equivalent
              
              
              8,357
              
              
              
              (6,469
              )Cash and cash equivalents at the
      beginning of the period
              
              
              20,313
              
              
              
              11,952Cash and cash equivalents at the
      end of the period
              
              
              28,671
              
              
              
              5,483




23




Operating
Activities





We generated $8.3 million of net cash
from operating activities for the three-month period ended March 31, 2010, as
compared to net cash of $5.4 million used in operating activities for the same
period in 2009. The increase in cash generated from operating activities was
mainly due to the decrease in advances to our suppliers and the increase in
account payables.




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.




·
            Inventories.
       Inventories are valued at the lower of cost (determined on a
      weighted average basis) or net marketvalue. 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
      collectibility 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.




24




·
            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.




·
            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 March 31, 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 todepreciate 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.




25




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 March 31, 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 such date, our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms, and that such information is 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.




There has
been no change in our internal control over financial reporting during the first
quarter of 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




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.  REMOVED AND
RESERVED




ITEM 5. 
OTHER INFORMATION




None




ITEM
6.  EXHIBITS





Exhibit
              No.
            
            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 2002




26




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:
      May 7 , 2010
            By:/s/ Yu
      ChangYu
      ChangChief
      Executive Officer, President, Secretary and ChairmanDate:
      May 7, 2010
            By:/s/
      Yau-Sing TangYau-Sing
      TangChief
      Financial Officer and Controller (Principal Financial
    Officer)




27




EXHIBIT
INDEX





ExhibitNumber
            Description31.1
            Certification
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            Certification
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
            Certification
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




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