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, 2009





o  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from ______ to ______





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 is a larger accelerated filer, an
accelerated filer, 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 oNo x




The
number of shares outstanding of each of the issuer’s classes of common equity,
as of May 14, 2009, is as follows:





Class of Securities
                Shares OutstandingCommon
      Stock, $0.001 par value
                24,699,615








TABLE OF
CONTENTS




PagePART
      I - FINANCIAL INFORMATION
                3Item
      1 Financial Statements
                3Item
      2 Management's Discussion and Analysis of Financial Condition and Results
      of Operations
                20Item
      3 Quantitative and Qualitative Disclosure about Market
Risk
                26Item
      4T 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 Submission of Matters to a Vote of Security Holders
                26Item
      5 Other Information
                27Item
      6 Exhibits
                27SIGNATURES
                29


2




PART
I




FINANCIAL
INFORMATION




ITEM
1. FINANCIAL STATEMENTS.





CHINA
AGRITECH, INC. AND SUBSIDIARIES


UNAUDITED
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2009 AND DECEMBER 31,
2008





MARCH 31, 2009
                                              
                                              
                                              DECEMBER 31, 2008(Audited)ASSETSCurrent
      AssetsCash
      and cash equivalents
                                              
                                              $
                                              5,483,255
                                              
                                              
                                              $
                                              11,952,235Accounts
      receivable, net
                                              
                                              
                                              36,017,638
                                              
                                              
                                              
                                              34,773,115Inventories
                                              
                                              
                                              12,904,898
                                              
                                              
                                              
                                              6,452,618Advances
      to suppliers
                                              
                                              
                                              10,567,608
                                              
                                              
                                              
                                              10,795,357Deposit
      paid
                                              
                                              
                                              1,000,000
                                              
                                              
                                              
                                              -Prepayments
      and other receivables
                                              
                                              
                                              2,299,241
                                              
                                              
                                              
                                              2,484,346Total
      Current Assets
                                              
                                              
                                              68,272,640
                                              
                                              
                                              
                                              66,457,671Property
      and equipment, net
                                              
                                              
                                              4,338,877
                                              
                                              
                                              
                                              4,496,045Deposit
      for equipment
                                              
                                              
                                              747,706
                                              
                                              
                                              
                                              749,799Construction
      in progress
                                              
                                              
                                              980,056
                                              
                                              
                                              
                                              961,551Total
      Assets
                                              
                                              $
                                              74,339,279
                                              
                                              
                                              $
                                              72,665,066LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent
      LiabilitiesAccounts
      payable
                                              
                                              $
                                              3,692,492
                                              
                                              
                                              $
                                              3,327,281Accrued
      expenses and other payables
                                              
                                              
                                              360,389
                                              
                                              
                                              
                                              221,954Taxes
      payable
                                              
                                              
                                              1,400,246
                                              
                                              
                                              
                                              1,388,897Total
      Current Liabilities
                                              
                                              
                                              5,453,127
                                              
                                              
                                              
                                              4,938,132Commitments
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Stockholders'
      EquityChina
      Agritech’s stockholders’ equityCommon
      stocks; $0.001 par value, 100,000,000 shares authorized; 24,699,615 shares
      issued and outstanding
                                              
                                              
                                              24,700
                                              
                                              
                                              
                                              24,700Additional
      paid in capital
                                              
                                              
                                              26,148,879
                                              
                                              
                                              
                                              26,148,879Statutory
      reserves
                                              
                                              
                                              5,617,891
                                              
                                              
                                              
                                              5,425,407Accumulated
      other comprehensive income
                                              
                                              
                                              5,736,104
                                              
                                              
                                              
                                              5,837,917Retained
      earnings
                                              
                                              
                                              26,221,974
                                              
                                              
                                              
                                              25,361,597Total
      China Agritech’s stockholders’ equity
                                              
                                              
                                              63,749,548
                                              
                                              
                                              
                                              62,798,500Non-controlling
      interest in subsidiary
                                              
                                              
                                              5,136,604
                                              
                                              
                                              
                                              4,928,434Total
      stockholders’ equity
                                              
                                              
                                              68,886,152
                                              
                                              
                                              
                                              67,726,934Total
      Liabilities and Stockholders’ Equity
                                              
                                              $
                                              74,339,279
                                              
                                              
                                              $
                                              72,665,066





The
accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.


3




CHINA
AGRITECH, INC. AND SUBSIDIARIES


UNAUDITED
CONSOLIDATED INCOME STATEMENTS


FOR
THREE MONTHS ENDED MARCH 31, 2009 AND 2008




MARCH 31,2009
                                            
                                            
                                            2008Net
      revenue
                                            
                                            $
                                            7,347,376
                                            
                                            
                                            $
                                            7,317,083Cost
      of revenue
                                            
                                            
                                            (3,978,685
                                            )
                                            
                                            
                                            (3,681,006
                                            )Gross
      profit
                                            
                                            
                                            3,368,691
                                            
                                            
                                            
                                            3,636,077Operating
      expensesSelling
      expenses
                                            
                                            
                                            (405,719
                                            )
                                            
                                            
                                            (706,590
                                            )Operating
      and administrative expenses
                                            
                                            
                                            (983,675
                                            )
                                            
                                            
                                            (873,554
                                            )Total operating expenses
                                            
                                            
                                            (1,389,394
                                            )
                                            
                                            
                                            (1,580,144
                                            )Income
      from operations
                                            
                                            
                                            1,979,297
                                            
                                            
                                            
                                            2,055,933Other
      income (expense)Interest income
                                            
                                            
                                            2,573
                                            
                                            
                                            
                                            61,673Exchange gain (loss)
                                            
                                            
                                            (447
                                            )
                                            
                                            
                                            5,227Total other income (expense)
                                            
                                            
                                            2,126
                                            
                                            
                                            
                                            66,900Income
      before income taxes
                                            
                                            
                                            1,981,423
                                            
                                            
                                            
                                            2,122,833Provision
      for income taxes
                                            
                                            
                                            (714,278
                                            )
                                            
                                            
                                            (717,280
                                            )Net
      income
                                            
                                            
                                            1,267,145
                                            
                                            
                                            
                                            1,405,554Net
      income attributable to non-controlling interest in a
      subsidiary
                                            
                                            
                                            (214,283
                                            )
                                            
                                            
                                            (215,184
                                            )Net
      income attributable to China Agritech’s common
stockholders
                                            
                                            
                                            1,052,862
                                            
                                            
                                            
                                            1,190,370Other
      comprehensive incomeForeign currency translation adjustment
                                            
                                            
                                            (101,813
                                            )
                                            
                                            
                                            1,318,663Comprehensive
      income
                                            
                                            
                                            951,049
                                            
                                            
                                            $
                                            2,509,033Comprehensive
      income attributable to non-controlling interest in a
      subsidiary
                                            
                                            
                                            17,217
                                            
                                            
                                            
                                            (201,881
                                            )Comprehensive
      income attributable to China Agritech
                                            
                                            $
                                            968,266
                                            
                                            
                                            $
                                            2,307,152Basic
      and diluted weighted average shares outstanding
                                            
                                            
                                            24,699,615
                                            
                                            
                                            
                                            24,699,615Basic
      and diluted net earnings per share
                                            
                                            $
                                            0.04
                                            
                                            
                                            $
                                            0.05




The
accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.


4





CHINA
AGRITECH, INC. AND SUBSIDIARIES


UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THREE MONTHS ENDED MARCH 31, 2009 AND 2008





MARCH 31,2009
                                  
                                  
                                  2008Cash
      flows from operating activities:Net income
                                  
                                  $
                                  1,267,145
                                  
                                  
                                  $
                                  1,405,554Adjustments to reconcile net income to net cash used in operating
      activities:Depreciation
                                  
                                  
                                  152,442
                                  
                                  
                                  
                                  169,073(Increase)
      decrease in current assets:Accounts
      receivable
                                  
                                  
                                  (1,287,193
                                  )
                                  
                                  
                                  (4,878,589
                                  )Prepayments
      and other receivables
                                  
                                  
                                  170,089
                                  
                                  
                                  
                                  508,620Inventories
                                  
                                  
                                  (6,460,298
                                  )
                                  
                                  
                                  (343,047
                                  )Advances
      to suppliers
                                  
                                  
                                  215,676
                                  
                                  
                                  
                                  1,972,398Increase
      (decrease) in current liabilities:Accounts
      payable
                                  
                                  
                                  369,294
                                  
                                  
                                  
                                  198,230Other
      payable
                                  
                                  
                                  32,867
                                  
                                  
                                  
                                  (265,113
                                  )Tax
      payable
                                  
                                  
                                  13,053
                                  
                                  
                                  
                                  (461,731
                                  )Accrued
      liabilities and other payables
                                  
                                  
                                  121,490
                                  
                                  
                                  
                                  201,256Net
      cash used in operating activities
                                  
                                  
                                  (5,405,4350
                                  )
                                  
                                  
                                  (1,493,349
                                  )Cash
      flows from investing activities:Acquisition
      of property and equipment
                                  
                                  
                                  (598
                                  )
                                  
                                  
                                  (385,342
                                  )Deposit
      paid for acquisition of 10% interest in Pacific Dragon
                                  
                                  
                                  (1,000,000
                                  )
                                  
                                  
                                  -Net
      cash used in investing activities
                                  
                                  
                                  (1,000,598
                                  )
                                  
                                  
                                  (385,342
                                  )Cash
      flows from financing activities:Net
      cash provided by financing activities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Net
      decrease in cash and cash equivalents
                                  
                                  
                                  (6,406,033
                                  )
                                  
                                  
                                  (1,878,691
                                  )Foreign
      currency translation adjustment
                                  
                                  
                                  (62,947
                                  )
                                  
                                  
                                  (229,840
                                  )Cash
      and cash equivalents, beginning of period
                                  
                                  
                                  11,952,235
                                  
                                  
                                  
                                  11,852,636Cash
      and cash equivalents, end of period
                                  
                                  $
                                  5,483,255
                                  
                                  
                                  $
                                  9,744,105Supplement
      disclosure of cash flow information:Income
      taxes paid
                                  
                                  $
                                  698,041
                                  
                                  
                                  $
                                  1,093,804Non-cash 
      Investment and Financing ActivityOffset
      of amounts due to/from stockholders
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  330,985





The
accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.


5




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




1.   ORGANIZATION
AND DESCRIPTION OF BUSINESS




Except as
otherwise indicated by the context, references in this Quarterly Report on Form
10-Q to the “Company”, “China Agritech”, “we”, “us” or “our” are references to
the combined business of China Agritech, Inc. and its subsidiaries.





China
Agritech, Inc. is a holding company whose direct and indirect subsidiaries
manufacture and sell organic liquid compound fertilizers; organic granular
compound fertilizers and related agricultural products. Our business operations
are primarily conducted through the following direct and indirect
subsidiaries:  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").  Our revenues are derived from the sale of our
fertilizers and related agricultural products to our customers.





We
acquired the line of business in which we now operate by entering into a
transaction with Tailong and the shareholders of Tailong pursuant to the
Reorganization Agreement (defined below) on February 3, 2005.  We were
originally incorporated on January 5, 1925, under the laws of the State of
Nevada as Argyle Mining Company. We changed our name to Argyle Corporation in
January 1960, Basic Empire in November 1963, Basic Empire Corp in December 1976
and finally to China Agritech, Inc. in May 2005. On August 10, 2004, we changed
our corporate domicile from Nevada to Delaware. Throughout our existence, we
have changed our business model several times, and conducted no substantive
business from 1986 until February 2005, when we closed the transaction pursuant
to the Reorganization Agreement.





On
December 25, 2004, we entered into the Agreement and Plan of Reorganization (the
"Reorganization Agreement"), as amended with Tailong, and the stockholders of
Tailong (the "Tailong Stockholders") We acquired all of the issued and
outstanding Tailong shares from the Tailong Stockholders in exchange for
10,606,158 shares of our newly issued restricted common stock, whereby the
Tailong Stockholders obtained control of the Company and Tailong became our
wholly-owned subsidiary.





As a
result of the acquisition we took on the business of our operating subsidiaries
and became a fertilizer manufacturer conducting operations in the People's
Republic of China (the "PRC") through Tailong and Tailong's 90% owned
subsidiary, Pacific Dragon.





Tailong
was incorporated on October 27, 2003 under the laws of Hong Kong. On October 9,
2004, Tailong acquired 90% of Pacific Dragon, which conducts Tailong's only
business operations. Pacific Dragon is a foreign investment joint venture and
was incorporated in the PRC on May 20, 1994. Pacific Dragon is classified as a
Foreign Invested Enterprise ("FIE") in the PRC and is subject to the FIE laws of
the PRC. Its legal structure is similar to that of a limited liability company
organized under state laws in the United States.





On June
29, 2006, we established a wholly owned subsidiary, Anhui Agritech. Anhui
Agritech engages in the business of manufacturing and marketing a series of
organic liquid compound fertilizers.





On
November 1, 2006,we entered into an equity transfer agreement with stockholders
of CAI Investment, Inc (the “CAI stockholders”). The CAI stockholders
transferred 100% equity interest in CAI Investment, Inc. (“CAI”) to the Company
in exchange for $1,000.  Prior to the equity transfer, CAI established
a wholly owned subsidiary, Beijing Agritech.  Beijing Agritech engages
in the business of manufacturing and marketing a series of organic liquid
compound fertilizers.





2.   BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The
unaudited consolidated financial statements were prepared in accordance with
U.S. generally accepted accounting principles (“U.S. GAAP”).  These
unaudited consolidated financial statements for interim periods are
unaudited.  In the opinion of management, the consolidated financial
statements included all adjustments, consisting only of normal, recurring
adjustments, necessary for their fair presentation.  The results
reported in these unauidted consolidated financial statements are not
necessarily indicative of the results that may be reported for the entire
year.  The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.  The
Company regularly evaluates estimates and assumptions related to allowances for
doubtful accounts, sales returns and allowance, and inventory reserves. Although
management believes these estimates and assumptions are adequate and reasonable
under the circumstances, actual results could differ from those
estimates.  U.S. GAAP differs from that used in the statutory
financial statements of the major operating subsidiaries of the Company, which
were prepared in accordance with the relevant accounting principles and
financial reporting regulations in the PRC.  Certain accounting
principles stipulated under U.S. GAAP are not applicable in the
PRC.





Unless
otherwise noted, all references to "$" and dollar are to the United States
dollar, the legal currency of the United States.


6


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.   BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)





a.  
Principles of
consolidation




The
unaudited consolidated financial statements include the accounts of China
Agritech, Inc. and all of its subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.




b.  
Cash and cash
equivalents




For
Statement of Cash Flows purposes, the Company considers all cash on hand and in
banks, including accounts in book overdraft positions, certificates of deposit
and other highly-liquid investments with maturities of three months or less,
when purchased, to be cash and cash equivalents.




c.  
Accounts
receivable




The
Company's 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
creditworthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reserves. The Company gives most
clients an extended credit policy for up to one year. The Company extends credit
to its customers based upon its assessment of their credit worthiness and
generally does not require collateral. Credit losses have not been
material.





d.  
Inventories




Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. Management compares the cost of inventories with market value and an
allowance is provided to reduce the value of inventories to their net market
value.




e.  
Advances to
suppliers




The
Company provides advances to certain vendors for purchase of its material.
Advancing of funds to vendors is common practice in China and the Company
expects to realize these advances in the form of inventory receipts within a
one-year period.




f.  
Property and
equipment




Property
and equipment are recorded at cost. Gains or losses on disposals are reflected
as gain or loss in the year of disposal. The cost of improvements that extend
the life of property and equipment are capitalized. These capitalized costs may
include structural improvements, equipment and fixtures. All ordinary repair and
maintenance costs are expensed as incurred.




Depreciation
and amortization for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets: 5 to 15
years for machinery; 3 to 5 years or shorter of the lease period for leasehold
improvement, 5 to 10 years for office equipment; and 5 to 8 years for motor
vehicles.





g.  
Construction in
Progress





Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company's plant facilities. No depreciation is
provided for construction in progress until such time as the relevant assets are
completed and are ready for their intended use.


7


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.   BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)





h.  
Impairment




The
Company applies the provisions of 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"). SFAS No.
144 requires 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.




The
Company tests long-lived assets, including property and equipment subject to
periodic amortization, for recoverability at least annually during the fourth
quarter, 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. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
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, the Company measures 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 as the rate the Company utilizes to evaluate
potential investments. The Company estimates fair value based on the information
available in making whatever estimates, judgments and projections are considered
necessary. The Company has not identified any incidence that may indicate the
carrying value of its long-lived assets may not be recoverable for three months
ended March 31, 2009 and 2008.




i. Revenue
recognition




The
Company's revenue recognition policies are in compliance with Staff Accounting
Bulletin 104. Sales revenue is recognized at the date of shipment to customers
when a formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company exist and
collectibility is reasonably assured.




The
Company's revenue consists of the invoiced value of goods, net of a value-added
tax (“VAT”) and marketing rebate.





j. Advertising
costs




The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place.  Advertising costs for three
months ended March 31, 2009 and 2008 were $110,213 and $101,454,
respectively.




k. Shipping and
Handling




The
Company classifies shipping cost under selling expenses. Shipping costs for
three months ended March 31, 2009 and 2008 were $112,298 and $141,004,
respectively.


8


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.   BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)





l. Income
taxes




The
Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.




The
Company accounts for income taxes using an asset and liability approach which
allows for the recognition and measurement of deferred tax assets based upon the
likelihood of realization of tax benefits in future years. Under the asset and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future deductibility is uncertain.




The
Company records a valuation allowance for deferred tax assets, if any, based on
its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company’s
net income. The Company does not have any significant deferred tax assets or
liabilities in the PRC tax jurisdiction.





The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN
48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a
recognition threshold and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition.




Based on
our evaluation, we have concluded that there are no significant uncertain tax
positions requiring recognition in our financial statements.  We may
from time to time be assessed interest or penalties by major tax jurisdictions.
In the event we receive an assessment for interest and/or penalties, it will be
classified in the financial statements as tax expense.





m.  
Foreign currency
translation




The
Company uses the United States dollar for financial reporting purposes. The
Company's subsidiaries maintain their books and records in their functional
currency, being the primary currency of the economic environment in which their
operations are conducted. Such financial statements were translated into U.S.
dollars in accordance with SFAS No. 52, “Foreign Currency Translation.”
According to SFAS No. 52, all assets and liabilities is translated at the
current exchange rate, stockholder’s equity are translated at the historical
rates and income statement items are translated at the average exchange rate for
the period. The resulting translation adjustments are reported under other
comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive
Income,” as a component of shareholders’ equity.




n.  
Fair values of
financial instruments




SFAS No.
107, "Disclosures about Fair Value of Financial Instruments," requires that the
Company disclose estimated fair values of financial instruments. The Company's
financial instruments primarily consist of cash and cash equivalents, accounts
receivable, other receivables, advances to suppliers, accounts payable, other
payables, taxes payable, and related party advances and borrowings.




As of the
balance sheet dates, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented on the balance
sheet. This is attributed to the short maturities of the instruments and to the
interest rates on the borrowings approximating those that would have been
available for loans of similar remaining maturity and risk profile at respective
balance sheet dates.


9


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.   BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)





p.  
Earning per share
(EPS)




Earnings
per share is calculated in accordance with the SFAS No. 128, “Earnings per
share.” Basic earnings per share is based upon the weighted average number of
common shares outstanding. Diluted earnings per share is based on the assumption
that all dilutive warrant and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.




The
following table is a reconciliation of the weighted average shares used in the
computation of basic and diluted earnings per share for the periods
presented (amounts in thousands, except per share data):





For three months ended March 31,
                          2009 and 2008
                        
                        
                        2009
                        
                        
                        
                        
                        
                        2008Weighted
                        
                        
                        
                        
                        
                        WeightedAverage
                        
                        Per
                        
                        
                        
                        Average
                        
                        PerIncome
                        
                        Shares
                        
                        Shares
                        
                        Income
                        
                        Shares
                        
                        SharesEarning
      per share - basicIncome
      available to common stockholders
                        
                        $
                        1,053
                        
                        
                        
                        24,700
                        
                        
                        $
                        0.04
                        
                        
                        $
                        1,190
                        
                        
                        
                        24,700
                        
                        
                        $
                        0.05Effect
      of dilutive options and warrants
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        -Earning
      per share - dilutedIncome
      available to common stockholders
                        
                        $
                        1,053
                        
                        
                        
                        24,700
                        
                        
                        $
                        0.04
                        
                        
                        $
                        1,190
                        
                        
                        
                        24,700
                        
                        
                        $
                        0.05





The
dilutive earnings per share computation for three months ended March 31, 2009
excludes options and warrants to purchase 538,920 shares of common stock
and for three months ended March 31, 2008 excludes options and warrants to
purchase 438,920 shares of common stock because the impact was
anti-dilutive.




q.  
Segment
reporting




SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information,"
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way a company's management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company.




SFAS No.
131 has no effect on the Company's unaudited consolidated financial statements
as the Company operates in one reportable business segment.




r.  
Statement of cash
flows




In
accordance with SFAS No. 95, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash
flows may not necessarily agree with changes in the corresponding balances on
the balance sheets.


10


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.   BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)





s.  
Stock-based
compensation





On
December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”, which
replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R
requires all share based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
the grant date fair value of the award. The Company has adopted the
requirements of SFAS No. 123R for the fiscal year beginning on December 26,
2005, and recorded the compensation expense for all unvested stock options
existing prior to the adoption during the period





t.  
Recent Accounting
Pronouncements





Effective
January 1, 2009, the Company adopted Statement of Financial Accounting Standards
No. 160 ("SFAS 160"), "Non-controlling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51." SFAS 160 amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity
in our Consolidated Financial Statements. Among other requirements, this
Statement requires that the consolidated net income attributable to the parent
and the non-controlling interest be clearly identified and presented on the face
of the consolidated income statement. SFAS 160 was effective beginning in the
Company’s fiscal 2009. The provisions of SFAS 160 were applied prospectively,
except for the presentation and disclosure requirements, which were applied
retrospectively to all periods presented. As a result, upon the adoption of SFAS
160, the Company reclassified the “minority interest” balance previously
included in other liabilities of the Company’s Consolidated Balance Sheet to a
new component of equity. The adoption also impacted certain captions previously
used on the consolidated statement of income, largely identifying net income
including non-controlling interest and net income attributable to the Company’s
common stockholders.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. In February 2008,
the FASB deferred the effective date of SFAS 157 by one year for certain
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). On January 1, 2008, the Company adopted the
provisions of SFAS 157, except as it applies to those non-financial assets and
non-financial liabilities for which the effective date has been delayed by one
year, which the Company adopted on January 1, 2009. The adoption of SFAS 157 did
not have a material effect on the Company’s financial position or results of
operations.


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 book values of cash, accounts and other receivable,
accounts and other payables approximate their respective fair values due to the
short-term nature of these instruments. There were no assets or liabilities
measured at fair value on a non-recurring basis during the three months ended
March 31, 2009.


11


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.   BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)





t.  
Recent Accounting
Pronouncements (Cont’d)


In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This
Statement improves the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects by establishing
principles and requirements for how the acquirer (i) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree, (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. The Company must apply prospectively SFAS No.
141(R) to business combinations for which the acquisition date is on or after
the beginning of 2009. The impact that adoption of SFAS No. 141(R) will have on
the Company’s financial condition, results of operations and cash flows is
dependent upon many factors. Such factors would include, among others, the fair
values of the assets acquired and the liabilities assumed in any applicable
business combination, the amount of any costs the Company would incur to effect
any applicable business combination, and the amount of any restructuring costs
the Company expected but was not obligated to incur as the result of any
applicable business combination. Thus, the Company cannot accurately predict the
effect SFAS No. 141(R) will have on acquisitions until such acquisitions are
consummated.





In March
2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities.” SFAS No. 161 requires enhanced disclosures about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. The objective of SFAS No. 161 is to provide adequate
information about how derivative and hedging activities affect an entity’s
financial position, financial performance and cash flows. SFAS No. 161 took
effect in the first quarter of fiscal 2009.The adoption of SFAS No.
161 did not have any material impact on the Company’s unaudited consolidated
financial statements.





In May
2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles.” SFAS No. 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with U.S. GAAP. SFAS No. 162 became effective 60 days following
September 16.2008, the date of SEC’s order approving the Public Company
Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, “The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles.”
The adoption of
SFAS No. 162 did not have any material impact on the Company’s unaudited
consolidated financial statements.





In May
2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts.” SFAS No. 163 requires that an insurance enterprise recognize a claim
liability prior to an event of default (insured event) when there is evidence
that credit deteriorations have occurred in an insured financial obligation.
SFAS No. 163 is effective for financial statements issued for fiscal years
beginning after December 15, 2008.  The adoption of SFAS No. 163 did
not have a material impact on the Company’s unaudited consolidated financial
statements.





In April
2009, the FASB issued FASB Staff Position Financial Accounting Standard
141R-1 ("FSP FAS 141R-1"), "Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies." FSP FAS 141R-1
amends SFAS 141R to require that an acquirer recognize at fair value, at the
acquisition date, an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period. If the
acquisition-date fair value of such an asset acquired or liability assumed
cannot be determined, the acquirer should apply the provisions of SFAS 5,
"Accounting for Contingencies", to determine whether the contingency should be
recognized at the acquisition date or after such date. FSP FAS 141R-1 is
effective for business combinations whose acquisition date is on or after the
first reporting period beginning after December 15, 2008. Accordingly, the
Company adopted this FSP during the first quarter of 2009. The adoption of
FSP FAS 141R-1 did not have a material impact on the Company’s
Condensed Consolidated Financial Statements.





As a result of the recent credit
crisis, on October 10, 2008, the FASB issued FSP No. FAS 157-3,
“Determining the Fair Value of a Financial Asset in a Market That is Not
Active.” This FSP clarifies the application of SFAS No. 157 in a market
that is not active. The FSP addresses how management should consider measuring
fair value when relevant observable data does not exist. The FSP also provides
guidance on how observable market information in a market that is not active
should be considered when measuring fair value, as well as how the use of market
quotes should be considered when assessing the relevance of observable and
unobservable data available to measure fair value. This FSP is effective upon
issuance, including prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique or its
application will be accounted for as a change in accounting estimate in
accordance with SFAS No. 154, “Accounting Changes and Error Corrections.”
Adoption of this standard had no effect on our results of operations, cash flows
or financial position.


12





CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.   BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)





u.  
New Accounting
Pronouncements to be Adopted





In
December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 (“FSP FAS
132(R)-1”), “Employers’ Disclosures about Postretirement Benefit Plan Assets.”
The FSP expands the disclosure requirements about plan assets for defined
benefit pension plans and postretirement plans. The Company is required to adopt
FSP FAS 132(R)-1 in the fourth quarter of 2009. The Company is currently
assessing the impact that this FSP may have on the disclosures in the Company’s
Consolidated Financial Statements.




In April
2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 ("FSP FAS
107-1 and APB 28-1"), "Interim Disclosures about Fair Value of Financial
Instruments." The FSP amends SFAS 107, "Disclosure about Fair Value of Financial
Instruments," and Accounting Principles Board Opinion No. 28, "Interim Financial
Reporting," to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. The Company is required to adopt FSP FAS
107-1 and APB 28-1 in the second quarter of 2009. The Company does not currently
believe that adopting this FSP will have a material impact on the Company’s
Consolidated Financial Statements.




In April
2009, the FASB issued FASB Staff Position No. FSP FAS 115-2 and FAS 124-2 ("FSP
FAS 115-2 and FAS 124-2"), "Recognition and Presentation of Other-Than-Temporary
Impairments." The FSP amends the other-than-temporary impairment guidance in
U.S. GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements. This FSP does not amend
existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. The Company is required to adopt FSP FAS 115-2
and FAS 124-2 in the second quarter of 2009.  The Company does not
currently believe that adopting this FSP will have a material impact on the
Company’s Consolidated Financial Statements.




In April
2009, the FASB issued FASB Staff Position No. FAS 157-4 ("FSP FAS 157-4"),
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." The FSP provides additional guidance for estimating fair value in
accordance with FASB Statement No. 157, "Fair Value Measurements" , when the
volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. The Company is required to adopt FSP FAS
157-4 in the second quarter of 2009.  The Company does not currently
believe that adopting this FSP will have a material 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.


13


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





3.   ACCOUNTS
RECEIVABLE





Accounts
receivable consist of the following as of March 31, 2009 and December 31,
2008





March 312009
                                    
                                    
                                    
                                    December 312008Accounts
      receivable
                                    
                                    $
                                    36,465,694
                                    
                                    
                                    $
                                    35,221,721Less:
      Allowance for doubtful accounts
                                    
                                    
                                    (448,056
                                    )
                                    
                                    
                                    (448,606
                                    )$
                                    36,017,638
                                    
                                    
                                    $
                                    34,773,115





4.   INVENTORIES




Inventories
consist of the following as of March 31, 2009 and December 31,
2008:




March 31
                
                
                December 312009
                
                
                2008Raw
      Materials
                
                $
                10,067,935
                
                
                $
                4,941,787Packing
      Materials
                
                
                951,115
                
                
                
                107,053Finished
      goods
                
                
                1,885,848
                
                
                
                1,403,778$
                12,904,898
                
                
                $
                6,452,618




5.   DEPOSIT
PAID




Deposit
paid represents the initial deposit paid toward the $7,980,000 purchase price
for the acquisition of 10% interest in Pacific Dragon by Tailong from Yinlong
Industrial Co. Ltd. (“Yinlong”) pursuant to the share purchase agreement entered
between Pacific Dragon, Yinlong and Tailong on February 12, 2009.  The
balance of the aggregate purchase price is to be paid by an unsecured,
interest-free promissory note in the principal amount of $6,980,000 upon the
consummation of the acquisition.





6.
  PREPAYMENTS AND
OTHER RECEIVABLES




Prepayments
and other receivables primarily include prepaid rent, prepaid advertising and
advanced travel expenses to employees.




7.   PROPERTY
AND EQUIPMENT




Property
and equipment consist of the following as of March 31, 2009 and December 31,
2008:




March 31
                        
                        
                        December 312009
                        
                        
                        2008Manufacturing
      machinery
                        
                        $
                        4,729,949
                        
                        
                        $
                        4,735,761Leasehold
      improvement
                        
                        
                        438,802
                        
                        
                        
                        439,341Office
      equipment
                        
                        
                        222,294
                        
                        
                        
                        220,031Motor
      vehicles
                        
                        
                        618,389
                        
                        
                        
                        619,1496,009,434
                        
                        
                        
                        6,014,282Less:
      Accumulated Depreciation
                        
                        
                        (1,670,557
                        )
                        
                        
                        (1,518,237
                        )$
                        4,338,877
                        
                        
                        $
                        4,496,045





Depreciation
expense for three months ended March 31, 2009 and 2008 was $152,320 and
$169,073, respectively.


14


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





8.   DEPOSIT
FOR EQUIPMENT





Deposit
for equipment consists of advances to the supplier for the purchase of machinery
for granular organic fertilizer plant.





9.   CONSTRUCTION
IN PROGRESS





The
construction in progress consists of property and equipment for the organic
granular compound fertilizer plant in Harbin.





10.   TAXES
PAYABLE




Taxes
payable consist of the following as of March 31, 2009 and December 31,
2008:




March 312009
                                        
                                        
                                        
                                        December 31
                                            2008Income
      tax payable
                                        
                                        $
                                        872,509
                                        
                                        
                                        $
                                        857,324VAT
      tax payable
                                        
                                        
                                        522,840
                                        
                                        
                                        
                                        529,313Others
                                        
                                        
                                        4,897
                                        
                                        
                                        
                                        2,260$
                                        1,400,246
                                        
                                        
                                        $
                                        1,388,897





11.   INCOME
TAXES




Local PRC income
tax




The
Company is governed by the Income Tax Law of the PRC concerning Chinese
registered limited liability companies. Under the Income Tax Laws of the PRC,
Chinese enterprises are generally subject to an income tax at an effective rate
of 25% for the periods ended March 31, 2009 and 2008 on income reported in the
statutory financial statements after appropriate tax adjustments, unless the
enterprise is located in a specially designated region for which more favorable
effective tax rates are applicable. The provision for income taxes for three
months ended March 31, 2009 and 2008 consisted of the following:





Three month periods ended March 31,2009
                  
                  
                  2008Provision
      for China income and local tax
                  
                  $
                  714,278
                  
                  
                  $
                  717,280




The
following table reconciles the statutory rate to the Company’s effective tax
rate at March 31, 2009 and 2008 respectively;


2009
                                    
                                    2008Tax
      at statutory rate
                                    
                                    
                                    25
                                    %
                                    25
                                    %Net
      operating loss in other tax jurisdiction for where no benefit is
      realized
                                    
                                    
                                    11
                                    %
                                    9
                                    %36
                                    %
                                    34
                                    %


15


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





12.   NON-CONTROLLING
INTEREST IN A SUBSIDIARY




Non-controlling
interest in a subsidiary represents the 10% interest of our minority
shareholder, Yinlong, a related party of the Company, in Pacific
Dragon.





13. CURRENT
VULNERABILITY DUE TO CERTAIN CONCENTRATIONS




The
Company’s operations are all carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy.




The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among other things, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.





14.   MAJOR
CUSTOMERS AND VENDORS




There
were no major customers which accounted for more than 10% of the total net
revenue for the three-month periods ended March 31, 2009 and 2008.




Five
vendors provided approximately 82% of the Company’s raw materials for the three
month-period ended March 31, 2009, with each vendor individually accounting for
approximately 22%, 19%, 15%, 13% and 13%.  Four vendors provided
approximately 83% of the Company’s dollar value of raw materials for three
months period ended March 31, 2008, with each individually accounting for
approximately 30%, 30%, 12% and 11%.




15 .   STOCK
OPTIONS AND WARRANTS





The
Company adopted SFAS No. 123 (Revised 2004), “Share Based Payment,” under
the modified-prospective transition method on January 1, 2006. SFAS
No. 123R requires companies to measure and recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value. Share-based compensation recognized under the
modified-prospective transition method of SFAS No. 123R includes
share-based compensation based on the grant-date fair value determined in
accordance with the original provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation,” for all share-based payments granted prior to and not
yet vested as of January 1, 2006 and share-based compensation based on the
grant-date fair-value determined in accordance with SFAS No. 123R for all
share-based payments granted after January 1, 2006. SFAS No. 123R
eliminates the ability to account for the award of these instruments under the
intrinsic value method proscribed by Accounting Principles Board ("APB") Opinion
No. 25, “Accounting for Stock Issued to Employees,” and allowed under the
original provisions of SFAS No. 123. Prior to the adoption of SFAS
No. 123R, the Company accounted for stock option plans using the intrinsic
value method in accordance with the provisions of APB Opinion No. 25 and
related interpretations.




As a
result of adopting SFAS No. 123R, the Company recognized $0 and $0 in
share-based compensation expense for the three months ended March 31, 2009 and
2008, respectively.  There was no impact of this share-based
compensation expense on the Company's basic and diluted earnings per share. The
fair value of our stock options was estimated using the Black-Scholes option
pricing model.


16


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


15.   STOCK
OPTIONS AND WARRANTS (Cont’d)





The
Company’s 2008 Equity Incentive Plan (“the Plan”) permits the grant of options,
stock appreciation rights, restricted stock, restricted stock units, and other
share-based awards as the administrator may determine for the employees,
directors and consultants of the Company.  Up to a maximum of three
million six hundred thousand (3,600,000) shares of the Company’s common stock
were available for issuance under the Plan, of which 100,000 were issuable upon
exercise of the options.  The Company believes the Plan will
promote the success of the Company’s business, advance the interests of the
Company, and attract and retain the best available personnel for positions of
substantial responsibility.  The exercise price per share with respect
to the Plan will be determined by the administrator provided that the
exercise price per share cannot be less than the fair market value of a share on
a grant date and the administrator will establish and set forth in the award
agreement the times, installments or conditions upon which the option, stock
appreciation rights, restricted stock, restricted stock units, and other
share-based awards will vest and become exercisable, which may include, among
other things, the achievement of the Company, business units and individual
goals (including, but not limited to, continued employment or
services).





The
Company did not issue any stock options and warrants for the three-month period
ended March 31, 2009.





Options




In
connection with the appointment of the Company’s new CFO, which occurred on
October 17, 2008, the Company granted the CFO options to purchase 100,000 shares
of its common stock. The options vested immediately upon signing of the
employment contract. The exercise price of the options is $2.00 per
share.




The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option- pricing model are as follows:





Risk-free
      interest rate
                
                
                1.34
                %Expected
      life of the options
                
                1 yearExpected
      volatility
                
                
                99
                %Expected
      dividend yield
                
                
                0
                %





Following
is a summary of the stock option activity:




Options
                                  outstanding
                                
                                
                                Weighted
                                  Average Exercise
                                  Price
                                
                                
                                Grant Date
                                  Fair
                                  Market
                                  Value
                                  of a ShareOutstanding,
      December 31, 2006
                                
                                
                                50,000
                                
                                
                                $
                                3.50GrantedForfeitedExercisedOutstanding,
      December 31, 2007
                                
                                
                                50,000
                                
                                
                                $
                                3.50Granted
                                
                                
                                100,000
                                
                                
                                
                                2.00
                                
                                
                                $
                                0.13Forfeited
                                
                                
                                -
                                
                                
                                
                                -ExercisedOutstanding,
      December 31, 2008
                                
                                
                                150,000
                                
                                
                                
                                2.50Granted
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                $Forfeited
                                
                                
                                —
                                
                                
                                
                                —Exercised
                                
                                
                                —
                                
                                
                                
                                —Outstanding,
      March 31, 2009
                                
                                
                                150,000
                                
                                
                                $
                                2.50


17


CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





15.   STOCK
OPTIONS AND WARRANTS (Cont’d)





Following
is a summary of the status of options outstanding at March 31,
2009:




Outstanding Options
                    
                    Exercisable OptionsExercise Price
                    
                    Number
                    
                    Average
                      Remaining
                      Contractual Life
                    
                    Average
                      Exercise Price
                    
                    
                    Number
                    
                    
                    Average Exercise
                      Price$3.50
                    
                    
                    50,000
                    
                    2.4
      years
                    
                    $
                    3.50
                    
                    
                    
                    50,000
                    
                    
                    $
                    3.50$2.00
                    
                    
                    100,000
                    
                    4.8
      years
                    
                    
                    2.00
                    
                    
                    
                    100,000
                    
                    
                    
                    2.00




As of
March 31, 2009, our options had no intrinsic value.





Warrants




In
connection with a private placement which occurred on July 5, 2007, the Company
granted the private placement consultant warrants to purchase 388,920 shares of
its common stock. The warrants vested immediately. The exercise price of the
warrants is $2.70 per share.




The
assumptions used in calculating the fair value of warrants granted using the
Black-Scholes option- pricing model are as follows:




Risk-free
      interest rate
                
                
                5.02
                %Expected
      life of the options
                
                5
      yearsExpected
      volatility
                
                
                83
                %Expected
      dividend yield
                
                
                0
                %





Following
is a summary of the warrants activity:




Warrants
                                    outstanding
                                  
                                  
                                  Weighted
                                    Average Exercise
                                    Price
                                  
                                  
                                  Grant Date
                                    Fair Market
                                    Value of a
                                    ShareOutstanding,
      December 31, 2006
                                  
                                  
                                  —
                                  
                                  
                                  $
                                  —Granted
                                  
                                  
                                  388,920
                                  
                                  
                                  $
                                  2.70
                                  
                                  
                                  $
                                  2.31Forfeited
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Exercised
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Outstanding,
      December 31, 2007
                                  
                                  
                                  388,920
                                  
                                  
                                  $
                                  2.70GrantedForfeitedExercisedOutstanding,
      December 31, 2008
                                  
                                  
                                  388,920
                                  
                                  
                                  $
                                  2.70GrantedForfeitedExercisedOutstanding,
      March 31, 2009
                                  
                                  
                                  388,920
                                  
                                  
                                  $
                                  2.70




Following
is a summary of the status of warrants outstanding at March 31,
2009:




Outstanding Warrants
              
              Exercisable WarrantsExercise Price
              
              Number
              
              Average
                Remaining
                Contractual Life
              
              Average
                Exercise Price
              
              
              Number
              
              
              Average Exercise
                Price$2.70
              
              
              388,920
              
              3.5
      years
              
              $
              2.70
              
              
              
              388,920
              
              
              $
              2.70




As of
March 31, 2009, our warrants had no intrinsic value.


18


CHINA AGRITECH, INC. AND
SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED





16.   STATUTORY
RESERVES




As
stipulated by the Company Law of the People's Republic of China (“PRC”), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:




i)
            Making
      up cumulative prior years' losses, if
any;





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





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





iv)
            Allocations
      to the discretionary surplus reserve, if approved in the shareholders'
      general meeting.





In
accordance with the Company Law of the People’s Republic of China, the Company
has allocated 10% of its net income to the above-mentioned PRC statutory
reserves. The amount included in the statutory reserves as of March 31, 2009 and
December 31, 2008 amounted to $5,617,891 and $5,425,406, respectively, and are
appropriations of retained earnings.





17 .   RELATED
PARTY TRANSACTIONS AND COMMITMENTS AND LEASES




On
January 6, 2005, our subsidiary, Pacific Dragon, entered into a license
agreement with Mr. Yu Chang, our Chairman, Chief Executive Officer, President
and Secretary.  Under this license agreement, Mr. Chang granted an
exclusive license to Pacific Dragon for the use of know-how in manufacturing
organic liquid compound fertilizer on a royalty-free basis.  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 the know-how mentioned above between Mr. Chang
and Pacific Dragon confirming that the license has been extended until December
31, 2011. The Company continues to refine the manufacturing know-how of the
product at its expense.




The
Company's PRC subsidiary, Pacific Dragon, entered into a tenancy agreement with
a related party, Yinlong, the joint venturer who held a 10% equity interest in
Pacific Dragon at the time, 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 amended by increasing the annual rent to
RMB 3,600,000 (equivalent to $518,940) effective July 1, 2005. Yinlong is owned
and controlled by Mr. Yu Chang and Ms. Xiao Rong Teng, who is one of the
directors of the Company.





On July
2, 2007, BeijingAgritech entered into a
tenancy agreement with Ms. Xiao Rong Teng to lease an office with a total floor
area of 780 meter square for a term of 5 years from February 1, 2007 to February
1, 2012 at an annual rent of RMB 480,000 (equivalent to approximately $68,800)
effective July 2, 2007.





On
February 12, 2009, Tailong entered into a share purchase agreement with
Pacific Dragon and Yinlong and a supplemental purchase agreement among
Yinlong, Pacific Dragon, Mr. Yu Chang and Ms. Xiao Rong Teng pursuant to which
Tailong agreed to acquire Yinlong’s 10% interest in Pacific Dragon for an
aggregate purchase price of $7,980,000.  Mr. Chang has an 85% equity
interest in Yinlong and Ms. Teng owns the remaining 15% equity
interest.  The transaction is expected to close in mid May of
2009.





As of
March 31, 2009, we have approximately $220,000 in capital commitments for the
purchase of organic granular compound fertilizer’s production
facilities.





19





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 90%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, Beijing Agritech Fertilizer Ltd.; and references to Anhui Agritech
are to our wholly-owned subsidiary, Anhui Agritech Development Co. Ltd.
References to "China" or "PRC" are references to the People's Republic of China.
References to "RMB" are to Renminbi, the legal currency of China, and all
references to "$" and dollar are to the United States dollar, the legal currency
of the United States.





Special
Note Regarding Forward Looking Statements





This
Report contains forward-looking statements and information relating to China
Agritech that are based on the beliefs of our management, as well as assumptions
made by and information currently available to us.  Such statements
should not be unduly relied upon.  When used in this Report,
forward-looking statements include, but are not limited to, the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar
expressions, as well as statements regarding new and existing products,
technologies and opportunities, statements regarding market and industry segment
growth and demand and acceptance of new and existing products, any projections
of sales, earnings, revenue, margins or other financial items, any statements of
the plans, strategies and objectives of management for future operations, any
statements regarding future economic conditions or performance, uncertainties
related to conducting business in China, any statements of belief or intention,
any of the factors mentioned in the “Risk Factors” section of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008, filed with the
U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2009, 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.





Our
Business




China
Agritech, Inc. is a holding company whose direct and indirect subsidiaries
manufacture and sell organic liquid compound fertilizers; organic granular
compound fertilizers and related agricultural products. Our business operations
are primarily conducted through the following direct and indirect
subsidiaries:  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"). Our revenues are derived primarily from the sale of our
organic fertilizer products.  We are a leading manufacturer of
fertilizer products and, more specifically, organic fertilizer products in
liquid form, in China. We have been producing organic liquid compound fertilizer
products in China since 1994.





Our main
products include “LvLingBao III,” “LvLingBao IV,” “Tailong I,” “Green Vitality”
and other customized, crop specific fertilizers that are tailored to our
customers' specific requirements. Our products promote photosynthesis, root
system growth and transmission of nutrients to seeds; equilibrate absorption of
nutrients and speed a plant's maturity; eliminate the damage of harmful radicals
to plants and increase protein and vitamin content levels; accelerate the
accumulation of photosynthesis materials and cell concentration; increase
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. Our 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 China.





China is
the principal market for our products, which are primarily sold to farmers in 20
provinces in China: Hainan, Anhui, Hubei, Jiangsu, Jiangxi, Guangxi, Liaoning,
Shanxi, Heilongjiang, Hebei, Jilin, Shandong, Inner Mongolia, Henan, Sichuan,
Guangdong, Xinjiang, Yunnan, Chongqing and Guizhou.


20




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





To
capitalize on the increased demand for our products and geographic expansion of
our sales throughout China, we organized two operating subsidiaries in 2007,
Anhui Agritech and Beijing Agritech. Our Anhui facility, which is part of Anhui
Agritech, manufactures and sells our fertilizer products to customers generally
in the Anhui, Hubei, and Henan provinces of China which are in the central and
southern areas of China. Our Beijing Agritech facility, which is part of Beijing
Agritech, is our primary research and development center, syrup production
center and converting factory and also distributes our products to the central
and southern areas of China.  Our Harbin facility, which is part of
Pacific Dragon, primarily distributes our products to the northern areas of
China.




Our
annual production capacity in 2008 was approximately 13,000 metric tons of
organic liquid compound fertilizers. In 2008, we expanded our operations to
include granular fertilizers.  Our annual production capacity for
granular fertilizers in 2008 was approximately 100,000 metric tons.





We plan
to expand our product mix by introducing organic granular compound fertilizer in
the second quarter of 2009 to our product Lines and expect to construct an
organic granular compound fertilizer line near each of our existing factories,
located in Harbin, Beijing, Anhui and Xinjiang.





Recent
Developments





On
February 12, 2009, Tailong entered into a share purchase agreement with
Pacific Dragon, and Yinlong Industrial Co. Ltd., or Yinlong, and a
supplemental purchase agreement among Yinlong, Pacific Dragon, Mr. Yu Chang, the
Company’s Chief Executive Officer, President, Secretary and Chairman, and Ms.
Xiao Rong Teng, one of the Company’s directors, pursuant to which Tailong agreed
to acquire Yinlong’s 10% interest in Pacific Dragon for an aggregate purchase
price of $7,980,000.  Mr. Chang has an 85% equity interest in Yinlong
and Ms. Teng owns the remaining 15% equity interest.  The transaction
is expected to close in mid May of 2009.





In April
2009, we completed the construction of our granular production facilities in
Anhui.  The production plant will commence its commercial production
in mid May 2009.





Overview





Net revenue during the first quarter of
2009 was approximately 3.9% higher than net revenue (after reclassification of
marketing rebate of approximately $249,000 from selling expenses to net
revenues) during the first quarter of 2008.   The Company’s unaudited
consolidated balance sheet as of March 31, 2009 included current assets of
$68,272,640 and total assets of $74,339,279. The Company had no long-term debt
as of March 31, 2009.


21





Results
of Operations





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





The
following table summarizes the results of our operations during the three month
period ended March 31, 2009 and 2008 and provides information regarding the
dollar and percentage increase or (decrease) from the 2008 fiscal period to the
2009 fiscal period:





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




Three Months
                    Ended
                    3/31/09
                  
                  
                  Three Months
                    Ended
                    3/31/08
                  
                  
                  Dollar ($)
                    Increase
                    (Decrease)
                  
                  
                  Percentage (%)
                    Increase
                    (Decrease)Net
      Revenue
                  
                  
                  7,347
                  
                  
                  
                  7,068
                  *
                  
                  
                  279
                  
                  
                  
                  3.9Cost
      of Revenue
                  
                  
                  (3,979
                  )
                  
                  
                  (3,681
                  )
                  
                  
                  298
                  
                  
                  
                  8.1Gross
      Profit
                  
                  
                  3,368
                  
                  
                  
                  3,387
                  
                  
                  
                  (19
                  )
                  
                  
                  (0.6
                  )Selling
      Expenses
                  
                  
                  (405
                  )
                  
                  
                  (458
                  )*
                  
                  
                  (53
                  )
                  
                  
                  (11.6
                  )Operating
      and Administrative Expenses
                  
                  
                  (984
                  )
                  
                  
                  (873
                  )
                  
                  
                  111
                  
                  
                  
                  12.7Income
      From Operations
                  
                  
                  1,979
                  
                  
                  
                  2,056
                  
                  
                  
                  (77
                  )
                  
                  
                  (3.7
                  )Other
      Income (Expenses)
                  
                  
                  2
                  
                  
                  
                  67
                  
                  
                  
                  (65
                  )
                  
                  
                  (97.0
                  )Income
      Tax
                  
                  
                  (714
                  )
                  
                  
                  (717
                  )
                  
                  
                  (3
                  )
                  
                  
                  (0.4
                  )Net
      income
                  
                  
                  1,267
                  
                  
                  
                  1,406
                  
                  
                  
                  (139
                  )
                  
                  
                  (9.9
                  )Net
      income attributable to non-controlling interest in a
      subsidiary
                  
                  
                  (214
                  )
                  
                  
                  (215
                  )
                  
                  
                  (1
                  )
                  
                  
                  (0.5
                  )Net
      income attributable to common stockholders
                  
                  
                  1,053
                  
                  
                  
                  1,190
                  
                  
                  
                  (137
                  )
                  
                  
                  (11.5
                  )





*  Re-classification
of marketing rebate of approximately $249,000 from selling expenses to net
revenue.





Net
Revenue. Our net revenue for three months ended March 31, 2009 amounted
to $7,347,000, an increase of approximately $279,000 or 3.9%, as compared to
$7,068,000 for three months ended March 31, 2008.  The increase was
primarily attributable to the increase in average selling price of our organic
liquid fertilizers.  Our net revenue was all generated from sales of
our organic liquid fertilizer products.No granular fertilizers
were sold for the periods.





Cost of
Revenue. Our cost of revenue was $3,979,000 for three months ended March
31 2009, an increase of approximately $298,000 or 8.1%, as compared to
$3,681,000 for three months ended March 31, 2008.  Our cost of revenue
was primarily comprised of the cost of raw materials, direct labor and
manufacturing overhead expenses.  The cost of revenue increased
because of the increase in the price of raw materials.  The
percentages of the costs of revenue to total revenues were 54.2% and 52.1% for
the three-month period ended March 31, 2009 and 2008, respectively.




Gross
Profit. Our gross profit was $3,368,000 for the three-month period ended
March 31, 2009, a decrease of approximately $19,000 or 0.6%, as compared to
$3,387,000 for the three-month period ended March 31, 2008.  Gross
profit as a percentage of net revenues was 45.8% for the three-month period
ended March 31, 2009, as compared to 47.9% for the three-month period ended
March 31, 2008. The decrease in gross profit resulted from the increase in cost
of revenue as mentioned above.





Selling
Expenses. Our selling expenses consisted primarily of sales commission,
advertising and promotion expenses, freight charges and related
compensation.  Our selling expenses were $405,000 for the three-month
period ended March 31, 2009, as compared to $458,000 for the same period ended
March 31, 2008, a decrease of approximately $53,000 or 11.6%. The decrease was
primarily attributable to efficient management of our sales
network.  Also, we cancelled the reimbursement of travel and
miscellaneous expenses for our sales representatives, but at the same time,
increased their commission scales for the three-month period ended March 31,
2009.





Operating
and Administrative Expenses. Our operating and administrative
expenses consisted primarily of rental expenses, salaries and related benefits,
business development, depreciation and travelling expenses, and legal and
professional expenses.  Our general and administrative expenses were
$984,000 for the three-month period ended March 31, 2009, as compared to
$873,000 for the same period ended March 31, 2008, an increase of approximately
$111,000 or 12.7%, primarily due to the inclusion of non-recurring legal
and professional consulting fees, associated with the
Sarbanes-Oxley Act Section 404 advice, introduction of the 2008 Incentive Equity
Plan and acquisition for 10% interest in Pacific Dragon, as well as for
continuous SEC reporting requirements and general legal advice for long-term
company planning.




22





Income From
Operations.
Income from operations was about $1,979,000 for the three-month period ended
March 31, 2009, as compared to $2,056,000 for the same period ended March 31,
2008, a decrease of approximately $77,000 or 3.8%. This decrease was primarily
attributable to the increase in cost of revenue and operating and administrative
expenses despite an increase in sales for the three-month period ended March 31,
2009.





Other Income
(Expense).Other income (expense) consists of interest income
received.  Other income (expense) was $2,000 for the three months
ended March 31, 2009, as compared to $67,000 for the same period ended March 31,
2008, a decrease of approximately $65,000, or 97.0%.  Decrease in
other income (expense) was primarily due to a decrease in bank interest income
resulting from a decrease in bank deposits and interest rate.





Income tax.The Company’s operating subsidiaries in China are governed by the PRC
income tax laws and are subject to a uniform PRC enterprise income tax rate of
25% for fiscal 2009 and 2008. Income tax expense was $714,278, representing an
effective tax rate of 36.0%, for three months ended March 31, 2009, as compared
to $717,280, representing an effective tax rate of 33.8%, for three months ended
March 31, 2008. The primary cause for the increased effective tax rate is the
increase in professional fees and other operating expenses leading to a widening
of net operating loss in other tax jurisdictions where no future tax benefit is
expected to be realized.





Net
Income.  Net income was $1,267,000 for three month ended March
31, 2009.  There was a decrease of approximately $139,000, or 9.9%,
from a net income of $1,406,000 for three month ended March 31,
2008.  The decrease was as a result of higher general and
administrative expenses incurred for the period.





Net Income
Attributable to Non-controlling Interest in a Subsidiary.  Net
income attributable to non-controlling interest in a subsidiary was
approximately $214,000 for three months ended March 31, 2009, as compared to
$215,000 for the same period ended March 31, 2008, a decrease of approximately
$1,000 or 0.5%.The
decrease was in line with the decrease in net income of Pacific
Dragon.





Net Income
Attributable to Common Stockholders. Net income attributable to
common stockholders was $1,053,000 for the three-month period ended March 31,
2009. This was a decrease of approximately $137,000, or 11.5%, from our net
income attributable to common stockholders during the same period ended March
31, 2008 of about $1,190,000 mainly due to higher general and administrative
expenses as explained above.





Liquidity
and Capital Resources





As of
March 31, 2009, we had cash and cash equivalents of $5.5 million. Our current
assets were $68.3 million, which mainly consisted of accounts receivable, net of
$36.0 million; inventories of $12.9 million; and advances to suppliers of $10.6
million.  Our current liabilities were $5.5 million as of March 31,
2009.  This results in a current asset to liability ratio of
approximately 12.5 times. Our total stockholders’ equity as of March 31, 2009
was $63.7 million. We had no bank loans or other interest bearing borrowings as
of March 31, 2009. We believe that our currently available working capital will
be sufficient to maintain our operations at our current levels for the next
twelve months.As
of March 31, 2009, we had approximately $219,718 in capital commitment for the
purchase of organic granular compound fertilizer production
facilities.


23




Cash
Flows (in U.S. Dollars)




Three Months
                    Ended March 31,2009
                  
                  
                  2008Net
      cash used in operating activities
                  
                  
                  (5,405,435
                  )
                  
                  
                  (1,493,349
                  )Net
      cash (used in) investing activities
                  
                  
                  (1,000,598
                  )
                  
                  
                  (385,342
                  )Net
      cash provided by financing activities
                  
                  
                  -
                  
                  
                  
                  -Net
      (decrease)/increase in cash
                  
                  
                  (6,406,032
                  )
                  
                  
                  (1,878,691
                  )





Operating
Activities




Net cash
used in operating activities was $5,405,435 for the three-month period ended
March 31, 2009, which was an increase of $3,912,086 from the $1,493,349 net cash
used in operating activities for the same period in 2008. The increase was
primarily attributable to an increase in the inventory of raw materials for
our newly constructed organic granular compound fertilizer’s production
facilities of $6,117,251 which was offset by the decrease in our accounts
receivable by $3,591,396.





Investing
Activities





Net cash
used in investing activities was $1,000,598 for the three-month period ended
March 31, 2009, which was an increase of $615,256 from the $385,342 net cash
used in investing activities for the same period in 2008.  The
increase was primarily attributable to the payment of $1,000,000 deposit for the
acquisition of 10% interest in Pacific Dragon that was offset by the decrease in
the acquisition of property and equipment by $385,342.





Financing
Activities





The
Company did not have any financing activity for the three-month period ended
March 31, 2009.





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
      first-in first-out basis) or net realizable value. Our management compares
      the cost of 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 Statement of Financial Accounting
      Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” issued by the Financial Accounting Standards Board
      (“FASB”). SFAS No. 144 requires 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.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 as 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.




24




·
            Revenue
      Recognition.  Our revenue recognition policies are in
      compliance with Staff Accounting Bulletin 104. Sales revenue is recognized
      at the date of shipment 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.




·
            Foreign
      currency translation. We use U.S. dollars for financial reporting
      purposes. Our subsidiaries maintain their books and records in their
      functional currency, RMB.  It is the primary currency of the
      PRC, the economic environment in which our subsidiaries’ 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 is
      reflected on the income statement. Gain or loss on financial statement
      translation from foreign currency is 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 becomes 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.


25





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.





Seasonality





We may
experience seasonal variations in our future revenues and our operating costs
due to seasonality, but we do not believe that these variations will be
material. However, demand for our organic liquid compound fertilizer products
fluctuates significantly with weather conditions, which may delay the
application of the fertilizer or render it unnecessary and thereby reducing
demand for our products.




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.




Not
applicable to smaller reporting companies.





ITEM
4T. 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, 2009, 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 2009 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.  DEFAULTS UPON SENIOR SECURITIES





None.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.


26





ITEM
5.  OTHER INFORMATION





As
disclosed in the Company’s Form 8-K, filed with the SEC on March 19, 2009,
effective as of March 13, 2009, Ms. Xiao Rong Teng resigned as the Chief
Operating Officer of the Company and Mr. Ming Fang Zhu began serving as the new
Chief Operating Officer of the Company.  Mr. Zhu has an employment
agreement with the Company, effective as of March 18, 2009 (“Mr. Zhu’s
Employment Agreement”), which was recently finalized.  Pursuant to Mr.
Zhu’s Employment Agreement, his term of employment began March 18, 2009 and will
end on March 17, 2012.  He will be paid a base salary of US$36,000 per
annum, payable in advance on a monthly basis.  Mr. Zhu is entitled to
reimbursement for all reasonable out-of-pocket expenses
incurred.  Among other terms, Mr. Zhu may terminate his employment
with the Company at any time for any reason or no reason at all upon one month
prior written notice to the Company.  The Company has the option, in
its sole discretion, to make his termination effective at any time prior to the
end of such notice period as long as the Company pays his salary to which he is
entitled up through the last day of the one month notice period.





Furthermore,
as disclosed in the Company’s Form 8-K, filed with the SEC on May 7, 2009,
effective as of May 1, 2009, Mr. Kelviz Lim Kok Siak resigned as Vice President
of Finance of the Company and Ms. Ling Xiao Dai began serving as the new Vice
President of Finance of the Company.  Ms. Dai has an employment
agreement with the Company, effective as of May 1, 2009 (“Ms. Dai’s Employment
Agreement”), which was recently finalized.  Pursuant to Ms. Dai’s
Employment Agreement, her term of employment began May 1, 2009 and will end on
April 30, 2012.  She will be paid a base salary of US$36,000 per
annum, payable in advance on a monthly basis.  Ms. Dai is entitled to
reimbursement for all reasonable out-of-pocket expenses
incurred.  Among other terms, Ms. Dai may terminate her employment
with the Company at any time for any reason or no reason at all upon one month
prior written notice to the Company.  The Company has the option, in
its sole discretion, to make her termination effective at any time prior to the
end of such notice period as long as the Company pays her salary to which she is
entitled up through the last day of the one month notice period.




ITEM
6.  EXHIBITS







EXHIBITS













10.1
                                Employment
      Agreement, dated March 18,, 2009, between Ming Fang Zhu and China
      Agritech, Inc.10.2
                                Employment
      Agreement, dated May 1, 2009, between Ling Xiao Dai and China Agritech,
      Inc.10.3
                                Industrial
      Product Purchase Contract, dated December 2, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Beijing Zhongxin Chemical Development
      Company10.4
                                Industrial
      Product Purchase Contract, dated December 5, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Harbin Hai Heng Chemical Distribution Co.,
      Ltd.10.5
                                Industrial
      Product Purchase Contract, dated December 8, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Shenzhen Hongchou Technology
    Company10.6
                                WangZou
      Center Lease Agreement, dated November 21, 2008, between Li Hua and China
      Tailong Holdings Company Limited10.7
                                Plant
      Lease Agreement, dated June 4, 2007, between ZhongYun Instrument Sales
      Limited, High-Tech Industrial Development Zone, Urumqi and Beijing
      Agritech Fertilizer Limited, Xinjiang Branch10.8
                                Plant
      Lease Agreement, dated July 13, 2006, between Beijing Xinggu Investing
      Center and Beijing Agritech Fertilizer Limited10.9
                                Plant
      Lease Agreement, dated May 18, 2006, between Management Committee of
      Bengbu Industrial Park of Anhui Water Resources Development Co., Ltd. and
      Anhui Agritech Agriculture Development Limited10.10
                                Plant
      Lease Agreement, dated April 1, 2007, between Sanheshiye Development
      Company Juilongpo District Chongqing and Beijing Agritech Fertilizer
      Limited, Chongqing Branch10.11
                                Plant
      Lease Agreement, dated December 30, 2007, between Xinggu Economic
      Development Zone Administration Committee and Beijing Agritech Fertilizer
      Limited




27




10.12
                                                        Office
      Building Lease Agreement, dated February 1, 2007, between Teng Xiao Rong
      and Beijing Agritech Fertilizer Limited31.1
                                                        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.




28





SIGNATURES





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





CHINA
      AGRITECH, INC.Date:  May
      14, 2009
                  By:
                  /s/
      Yu ChangYu
      ChangChief
      Executive Officer, President, Secretary and ChairmanDate:  May
      14, 2009
                  By:
                  /s/
      Yau-Sing TangYau-Sing
      TangChief
      Financial Officer and Controller (Principal Financial
    Officer)


29





EXHIBIT
INDEX





ExhibitNumber
              
              Description10.1
              
              Employment
      Agreement, dated March 18,, 2009, between Ming Fang Zhu and China
      Agritech, Inc.10.2
              
              Employment
      Agreement, dated May 1, 2009, between Ling Xiao Dai and China Agritech,
      Inc.10.3
              
              Industrial
      Product Purchase Contract, dated December 2, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Beijing Zhongxin Chemical Development
      Company10.4
              
              Industrial
      Product Purchase Contract, dated December 5, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Harbin Hai Heng Chemical Distribution Co.,
      Ltd.10.5
              
              Industrial
      Product Purchase Contract, dated December 8, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Shenzhen Hongchou Technology
    Company10.6
              
              WangZou
      Center Lease Agreement, dated November 21, 2008, between Li Hua and China
      Tailong Holdings Company Limited10.7
              
              Plant
      Lease Agreement, dated June 4, 2007, between ZhongYun Instrument Sales
      Limited, High-Tech Industrial Development Zone, Urumqi and Beijing
      Agritech Fertilizer Limited, Xinjiang Branch10.8
              
              Plant
      Lease Agreement, dated July 13, 2006, between Beijing Xinggu Investing
      Center and Beijing Agritech Fertilizer Limited10.9
              
              Plant
      Lease Agreement, dated May 18, 2006, between Management Committee of
      Bengbu Industrial Park of Anhui Water Resources Development Co., Ltd. and
      Anhui Agritech Agriculture Development Limited10.10
              
              Plant
      Lease Agreement, dated April 1, 2007, between Sanheshiye Development
      Company Juilongpo District Chongqing and Beijing Agritech Fertilizer
      Limited, Chongqing Branch10.11
              
              Plant
      Lease Agreement, dated December 30, 2007, between Xinggu Economic
      Development Zone Administration Committee and Beijing Agritech Fertilizer
      Limited10.12
              
              Office
      Building Lease Agreement, dated February 1, 2007, between Teng Xiao Rong
      and Beijing Agritech Fertilizer Limited31.1
              
              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.





30