UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
    x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
quarterly period ended: September 30, 2010
   ̈
              TRANSITION
      REPORT PUR SUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  Commission
File Number: 000-49608
  CHINA AGRITECH,
INC.
 (Exact
name of small business issuer as specified in its charter)
  Delaware
              
              75-2955368(State
      or other jurisdiction of incorporation or
                organization)
              
              (I.R.S.
      Employer Identification No.)
  Room 3F
No. 11 Building, Zhonghong International Business Garden, Future Business
Center,
 Chaoyang
North Road, Chaoyang District, Beijing, China 100024
 People’s Republic of
China
 (Address
of principal executive offices, Zip Code)
  (86)
10-59621228
 (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 xNo o
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every, Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes oNo 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
                (Do
      not check if a smaller reporting company)
              Smaller
      Reporting Company x
  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 November 8, 2010 is as follows:
  Class
      of Securities
              
              Shares
      OutstandingCommon
      Stock, $0.001 par value
              
              20,768,343
  
 
 
 Contents
              
              Page(s)PART
      I: FINANCIAL INFORMATIONItem
      1 Financial statements
              
              
              1-16Item
      2 Management Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              17-27Item
      3 Quantitative and Qualitative Disclosure about Market
Risk
              
              
              27Item
      4 Controls and Procedures
              
              
              27PART
      II : OTHER INFORMATIONItem
      1 Legal Proceedings
              
              
              28Item
      2 Unregistered Sales of Equity Securities and Use of
    Proceeds
              
              
              28Item
      3 Defaults Upon Senior Securities
              
              
              28Item
      4 Removed and Reserved
              
              
              28Item
      5 Other Information
              
              
              28Item
      6 Exhibits
              
              
              29SIGNATURES
              
              
              30-34
  
  PART
I: FINANCIAL STATEMENTS
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 September
      30,
                2010
              
              
              December
      31,
                2009ASSETS
              
              (Unaudited)Current
      AssetsCash
      and cash equivalents
              
              $
              45,822,439
              
              
              $
              20,313,089Accounts
      receivable, net
              
              
              62,202,350
              
              
              
              39,256,098Inventories
              
              
              10,695,121
              
              
              
              6,606,095Advances
      to suppliers
              
              
              20,596,768
              
              
              
              25,348,687Prepayments
      and other receivables
              
              
              2,124,629
              
              
              
              2,287,220Total
      Current Assets
              
              
              141,441,307
              
              
              
              93,811,189Property,
      plant and equipment, net
              
              
              6,111,960
              
              
              
              5,980,696Construction
      in progress
              
              
              500,466
              
              
              
              424,006Intangible
      assets, net
              
              
              358,361
              
              
              
              397,507Prepayment
      of property, plant and equipments
              
              
              1,640,931
              
              
              
              —Total
      Assets
              
              $
              150,053,025
              
              
              $
              100,613,398LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              2,017,607
              
              
              $
              62,616Accrued
      expenses and other payables
              
              
              2,490,017
              
              
              
              1,394,357Warrant
      liabilities
              
              
              —
              
              
              
              20,157,869Taxes
      payable
              
              
              1,618,034
              
              
              
              1,695,665Total
      Current Liabilities
              
              
              6,125,658
              
              
              
              23,310,507Stockholders’
      EquityPreferred
      stock: $0.001 par value, 10,000,000 shares authorized, none
      issued
              
              
              —
              
              
              
              —Common
      stock: $0.001 par value; 100,000,000 shares authorized, 20,766,243 and
      17,002,542* shares issued and outstanding as of September 30, 2010 and
      December 31, 2009, respectively
              
              
              20,766
              
              
              
              17,003Additional
      paid in capital
              
              
              85,444,351
              
              
              
              34,698,079Statutory
      reserves
              
              
              2,195,818
              
              
              
              2,195,818Accumulated
      other comprehensive income
              
              
              7,974,120
              
              
              
              5,723,265Retained
      earnings
              
              
              48,292,312
              
              
              
              34,668,726Total
      Equity
              
              
              143,927,367
              
              
              
              77,302,891Total
      Liabilities and Stockholders’ Equity
              
              $
              150,053,025
              
              
              $
              100,613,398
  
 *
              Retroactively
      adjusted for the 2-for-1 forward stock split on February 1,
      2010.
  The
accompanying notes are an integral part of these consolidated financial
statements.
  1
 
 CHINA
AGRITECH, INC. AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME
  For
      the Three Months Ended September 30,
              
              
              For
      the Nine Months ended September 30,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      revenue
              
              $
              23,890,139
              
              
              $
              27,043,952
              
              
              $
              78,072,861
              
              
              $
              55,379,939Cost
      of revenue
              
              
              (14,908,509
              )
              
              
              (17,447,653
              )
              
              
              (50,708,186
              )
              
              
              (33,460,130
              )Gross
      profit
              
              
              8,981,630
              
              
              
              9,596,299
              
              
              
              27,364,675
              
              
              
              21,919,809Operating
      expenses:Selling
      expenses
              
              
              (823,816
              )
              
              
              (727,593
              )
              
              
              (2,670,090
              )
              
              
              (1,758,305
              )General
      and administrative expenses
              
              
              (4,086,648
              )
              
              
              (1,694,715
              )
              
              
              (11,656,492
              )
              
              
              (3,550,228
              )Total
      operating expenses
              
              
              (4,910,464
              )
              
              
              (2,422,308
              )
              
              
              (14,326,582
              )
              
              
              (5,308,533
              )Income
      from operations
              
              
              4,071,166
              
              
              
              7,173,991
              
              
              
              13,038,093
              
              
              
              16,611,276Other
      expense/(income)Interest
      expenses
              
              
              (39,625
              )
              
              
              9,065
              
              
              
              (11,184
              )
              
              
              15,089Exchange
      (loss)/ gain
              
              
              (100,635
              )
              
              
              299
              
              
              
              (99,570
              )
              
              
              (2,757
              )Gain
      on extinguishment of warrant classified as derivatives
              
              
              —
              
              
              
              —
              
              
              
              1,629,465
              
              
              
              —Changes
      in fair value of warrants classified as derivatives
              
              
              —
              
              
              
              —
              
              
              
              3,829,985
              
              
              
              —Total
      other expense/(income)
              
              
              (140,260
              )
              
              
              9,364
              
              
              
              5,348,696
              
              
              
              12,332Income
      before income taxes
              
              
              3,930,906
              
              
              
              7,183,355
              
              
              
              18,386,789
              
              
              
              16,623,608Income
      taxes expenses
              
              
              (2,097,616
              )
              
              
              (1,473,260
              )
              
              
              (4,763,204
              )
              
              
              (3,789,496
              )Net
      income
              
              
              1,833,290
              
              
              
              5,710,095
              
              
              
              13,623,585
              
              
              
              12,834,112Net
      income attributable to non-controlling interest in a
      subsidiary
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (481,452
              )Net
      income attributable to China Agritech’s common
stockholders
              
              
              1,833,290
              
              
              
              5,710,095
              
              
              
              13,623,585
              
              
              
              12,352,660Other
      comprehensive income:Foreign
      currency translation adjustment
              
              
              1,571,393
              
              
              
              110,815
              
              
              
              2,250,855
              
              
              
              (13,526
              )Comprehensive
      income
              
              
              3,404,683
              
              
              
              5,820,910
              
              
              
              15,874,440
              
              
              
              12,339,134Comprehensive
      income attributable to non-controlling interest in a
      subsidiary
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,403Comprehensive
      income attributable to China Agritech’s common
stockholders
              
              $
              3,404,683
              
              
              $
              5,820,910
              
              
              $
              15,874,440
              
              
              $
              12,347,537Net
      income per share:-
      Basic
              
              $
              0.09
              
              
              $
              0.41
              *
              
              $
              0.73
              
              
              $
              0.93
              *-
      Diluted
              
              $
              0.09
              
              
              $
              0.41
              *
              
              $
              0.69
              
              
              $
              0.93
              *Weighted
      average number of shares outstanding:-
      Basic
              
              
              20,607,623
              
              
              
              14,096,126
              *
              
              
              18,755,182
              
              
              
              13,239,606
              *-
      Diluted
              
              
              20,632,968
              
              
              
              14,096,126
              *
              
              
              19,662,097
              
              
              
              13,239,606
              *
  
 *
              Retroactively
      adjusted for the 2-for-1 forward stock split on February 1,
      2010.
  The
accompanying notes are an integral part of these consolidated financial
statements.
  2
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 UNAUDITED
CONSOLIDATED STATEMENT OF CASH FLOWS FOR NINE MONTHS ENDED
 SEPTEMBER
30, 2010 AND 2009
 
 For
      the Nine Months Ended September 30,2010
              
              
              2009Cash
      flows from operating activities:Net
      income
              
              $
              13,623,585
              
              
              $
              12,834,112Adjustments
      to reconcile net income to cash provided by operating
      activities:Share
      based compensation
              
              
              5,513,125
              
              
              
              2,703Changes
      in fair value of warrants classified as derivatives
              
              
              (3,829,985
              )
              
              
              —Gain
      on extinguishment of warrant classified as derivatives
              
              
              (1,629,465
              )
              
              
              —Depreciation
      and amortization of property, plant and equipment
              
              
              612,271
              
              
              
              508,312Amortization
      of intangible assets
              
              
              47,996
              
              
              
              —Allowance
      for doubtful debts
              
              
              1,491,820
              
              
              
              452,958Decrease
      / (Increase) in current assets:Accounts
      receivable
              
              
              (23,261,070
              )
              
              
              (12,080,214
              )Inventories
              
              
              (4,089,027
              )
              
              
              (8,731,639
              )Advances
      to suppliers
              
              
              4,751,919
              
              
              
              5,874,503Prepayments
      and other receivable
              
              
              (1,014,409
              )
              
              
              579,412Increase
      in current liabilities:Accounts
      payable
              
              
              1,954,991
              
              
              
              7,950,480Tax
      payables
              
              
              (77,631
              )
              
              
              875,900Accrued
      expenses and other payables
              
              
              1,095,660
              
              
              
              1,880,903Net
      cash (used)/ provided by operating activities
              
              
              (4,810,220
              )
              
              
              10,147,430Cash
      flows from investing activities:Prepayment
      for property, plant and equipment
              
              
              (1,640,931
              )
              
              
              —Acquisition
      of property, plant and equipment
              
              
              (743,535
              )
              
              
              (2,201,642
              )Construction
      in progress
              
              
              (76,460
              )
              
              
              155,780Acquisition
      of 10% interest of Pacific Dragon
              
              
              —
              
              
              
              (1,000,000
              )Net
      cash used in investing activities
              
              
              (2,460,926
              )
              
              
              (3,045,862
              )Cash
      flows from financing activities:Issuance
      of shares for cash in public offering
              
              
              20,828,197
              
              
              
              —Proceeds
      from exercise of warrants
              
              
              10,000,074
              
              
              
              —Net
      cash provided by financing activities
              
              
              30,828,271
              
              
              
              —Net
      increase in cash and cash equivalents
              
              
              23,557,125
              
              
              
              7,101,568Effect
      of exchange rate change on cash and cash equivalents
              
              
              1,952,225
              
              
              
              (39,981
              )Cash
      and cash equivalents, beginning of period
              
              
              20,313,089
              
              
              
              11,952,235Cash
      and cash equivalents, end of period
              
              $
              45,822,439
              
              
              $
              19,013,822Supplement
      disclosure of cash flow information:Cash
      paid for income tax
              
              $
              4,789,023
              
              
              $
              3,013,389Cash
      paid for interest
              
              
              —
              
              
              
              —
  3
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  1.            
ORGANIZATION AND DESCRIPTION OF BUSINESS
  China
Agritech, Inc. (the “Company” or “China Agritech”) is a
holding company whose direct and indirect subsidiaries manufacture and sell
organic liquid compound fertilizers, organic granular compound fertilizers and
related agricultural products. The Company conducts its business operations
primarily through its subsidiaries, including Anhui Agritech Agriculture
Development Limited (“Anhui Agritech”),
Beijing Agritech Fertilizer Ltd. (“Beijing Agritech”),
Xinjiang Agritech Agriculture Resources Co., Ltd (“Xinjiang Agritech”), China
Tailong Holdings Company Limited (“Tailong”) and Pacific
Dragon Fertilizer Co. Ltd. (“Pacific Dragon”). The
Company’s revenues are derived from the sale of fertilizers and related
agricultural products to customers.
  Changes
in Capital Structure
  On
February 1, 2010, the Company effected a 2 for 1 forward split of its common
stock on the basis of two shares for every one outstanding shares, so that every
outstanding share of common stock before the forward stock split was converted
into two shares of common stock after the forward stock split. Except as
otherwise noted, all references to common share and per common share amounts
(including warrant and option shares, shares reserved for issuance and
applicable exercise prices) for all periods presented in these consolidated
financial statements have been retroactively restated to reflect the Company’s
forward split.
  2.            
BASIS OF PRESENTATION
  These
consolidated financial statements include the accounts of China Agritech and all
of its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation.
 
 These
interim consolidated financial statements for the three and nine months periods
ended September 30, 2010 and 2009 are unaudited. In the opinion of management,
all adjustments and disclosures necessary for a fair presentation of these
interim consolidated financial statements have been included.  The
results reported in the consolidated financial statements for any interim
periods are not necessarily indicative of the results that may be reported for
the entire year.  These interim consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and do not include all information and footnotes necessary
for a complete presentation of financial statements in conformity with
accounting principles generally accepted in the United States. These unaudited
interim consolidated financial statements should be read in conjunction with the
Company’s consolidated financial statements for the years ended December 31,
2009 and 2008, and accompanying footnotes included in Company’s annual report on
Form 10-K for the year ended December 31, 2009.
  4
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 3.            
RECENT ACCOUNTING PRONOUCEMENTS
  Effective
January 1, 2010, the Company adopted the provisions in ASU 2009-17,
“Consolidation (ASC Topic 810): Improvements to Financial Reporting by
Enterprises Involved with Variable Interest Entities”, which changes how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
adoption of the provisions in ASU 2009-17 did not have an impact on the
Company’s consolidated financial statements.
  Effective
January 1, 2010, the Company adopted ASU 2010-01, “Equity (ASC Topic 505):
Accounting for Distributions to Shareholders with Components of Stock and Cash”,
which clarifies that the stock portion of a distribution to shareholders that
allow them to elect to receive cash or stock with a potential limitation on the
total amount of cash that all shareholders can elect to receive in the aggregate
is considered a share issuance that is reflected prospectively in earnings per
share and is not considered a stock dividend for purposes of ASC Topic 505 and
ASC Topic 260. The adoption of the provisions in ASU 2010-01 did not have an
impact on the Company’s consolidated financial statements.
  Effective
January 1, 2010, the Company adopted the provisions in ASU 2010-06, “Fair Value
Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair
Value Measurements, which requires new disclosures related to transfers in and
out of levels 1 and 2 and activity in level 3 fair value measurements, as well
as amends existing disclosure requirements on level of disaggregation and inputs
and valuation techniques. The adoption of the provisions in ASU 2010-06 did not
have an impact on the Company’s consolidated financial statements.
  Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.
  4.             EARNINGS
PER SHARE
  Basic
earnings per share is based upon the weighted average number of common shares
outstanding. Diluted earnings per share is based on the assumption that all
dilutive warrant and stock options were converted or exercised. Dilution is
computed by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the period (or at the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the
period.
  On
February 1, 2010, the Company effected a 2-for-1 forward split of its common
stock. The weighted average number of shares for the purposes of calculating the
earnings per share has been retroactively adjusted as forward split had taken
effect as of the beginning of the earliest period presented.
  5
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  4 EARNINGS
PER SHARE (CONTINUED)
  The
following table is a reconciliation of the net income and the weighted average
shares used in the computation of basic and diluted earnings per share for the
periods presented:
  Three
      months ended
                September
      30,
              
              
              Nine
      months ended
                September 30,2010
              
              
              2009
              
              
              2010
              
              
              2009(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Income
      available to common stockholders for calculation of basic and diluted
      EPS
              
              $
              1,833,290
              
              
              $
              5,710,095
              
              
              $
              13,623,585
              
              
              $
              12,352,660Weighted
      average number of shares:-
      Basic
              
              
              20,607,623
              
              
              
              14,096,126
              
              
              
              18,755,182
              
              
              
              13,239,606-
      Effect of dilutive securities – options and warrants
              
              
              25,345
              
              
              
              —
              
              
              
              906,915
              
              
              
              —-
      Diluted
              
              
              20,632,968
              
              
              
              14,096,126
              
              
              
              19,662,097
              
              
              
              13,239,606
  The
dilutive earnings per share computation for both three and nine months ended
September 30, 2010 excluded options to purchase up to 760,000 shares of common
stock, because their effects were anti-dilutive.
  The
dilutive earnings per share computation for both three and nine months ended
September 30, 2009, excluded options and warrants to purchase 271,960 shares of
common stock because their effects were anti-dilutive.
  6
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  5.             FAIR
VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
  ASC Topic
820, Fair Value Measurement
and Disclosures, defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This topic also
establishes a fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. The fair value
hierarchy distinguishes between assumptions based on market data (observable
inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy
consists of three levels:
  Level one
— Quoted market prices in active markets for identical assets or
liabilities;
  Level two
— Inputs other than level one inputs that are either directly or indirectly
observable; and
  Level
three — Unobservable inputs developed using estimates and assumptions, which are
developed by the reporting entity and reflect those assumptions that a market
participant would use.
  Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.
  The
Company had no assets and liabilities measured at fair value on a recurring
basis as of September 30, 2010.
  The
following table presents the Company’s assets and liabilities measured at fair
value on a recurring basis as of December 31, 2009:
  Carrying
              
              
              Using
      InputDecember 31, 2009
              
              value
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Warrant
      Liability
              
              $
              20,157,869
              
              
              $
              —
              
              
              $
              20,157,869
              
              
              $
              —Total
              
              $
              20,157,869
              
              
              $
              —
              
              
              $
              20,157,869
              
              
              $
              —
  There
were no assets or liabilities measured at fair value on a non-recurring basis as
of September 30, 2010 or December 31, 2009.
  The
carrying values of cash and cash equivalents, trade and other receivables, trade
and other payables approximate their fair values due to the short maturities of
these instruments.
  7
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  5.             FAIR
VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS – CONTINUED
 
 Derivative
Instruments – Warrants
 
 As of
December 31, 2009, the Company’s only derivative instruments included warrants,
the exercise price of which are denominated in a currency other than the
Company’s functional currency, as follows:
 
 ▪
              1,857,024
      warrants (“2009 Warrants”) exercisable at approximately $5.385 per share
      at any time during the period from April 19, 2010 through April 2012, that
      were issued in connection with a private placement of the Company’s common
      stock completed in October 2009.
 
 Effective
January 1, 2009, the Company adopted the guidance provided in FASB ASC
815-40-15-5 through 815-40-15-8 (formerly EITF 07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”). ASC
815-40-15-5 through 815-40-15-8 applies to any freestanding financial
instruments or embedded features that have the characteristics of a derivative,
as defined in ASC paragraph 815-10-15-83 (formerly SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,”) and to any freestanding
financial instruments that are potentially settled in an entity’s own common
stock.
 
 The 2009
warrants are not considered indexed to the Company’s own stock and were recorded
at their fair value as derivative liabilities. In addition, they did not qualify
for hedge accounting, and as such, all changes in the fair value of these
warrants were recognized as other income or expenses. These warrants were
reported as liability until such time as they were exercised or
expire.
 
 As of
June 21, 2010, a total of 1,857,024 warrants were exercised at $5.385 per share,
with total consideration of $10,000,074. Carlyle Asia Growth Partners IV, L.P
and CAGP IV Co-Investment, L.P received 1,705,249 common shares and 151,775
common shares respectively as a result of their exercise of the
warrants.
 
 As of
June 21, 2010, the Company estimates the fair value of warrants using the
Black-Scholes option pricing model based on the following
assumptions:
 
 On June
21, 2010, all of the 2009 Warrants were exercised at $5.385 each in cash. The
Company accounted for the exercise of these warrants as extinguishment of debts
in accordance with ASC 815-10-40-1, “Derivatives and Hedges – De-recognition”.
In accordance with ASC 470-50-40, “Debt – Modification and Extinguishments –
De-recognition”, a gain of $1,629,465 in aggregate was recognized as the
difference between the reacquisition price (determined based on the closing
price of the common stock of $13.3 each issued to settle the warrant liabilities
less the exercise price of $5.38 each received) and the fair value of the
warrants of $8.7925 each at the date of exercise. The fair values of the 2009
Warrants on June 21, 2010 and December 31, 2009 were determined using the
Black-Scholes option pricing model based on the following
assumptions:
  June
      21,
                2010
              
              
              December
      31,
                2009(Unaudited)Exercise
      price per share
              
              $
              5.385
              
              
              $
              5.385Remaining
      contractual life (years)
              
              
              1.83
              
              
              
              2.3Dividend
      yield
              
              
              —
              
              
              
              —Expected
      volatility (based on historical volatility)
              
              
              106.65
              %
              
              
              112.21
              %Risk
      free interest rate
              
              
              0.63
              %
              
              
              1.29
              %Estimated
      fair value per share
              
              $
              8.793
              
              
              $
              10.855
 
 The
risk-free rate of return reflected the interest rate for U.S. Treasury Note with
similar time-to-maturity to that of the warrants
  8
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  6.            
ACCOUNTS RECEIVABLE
  Accounts
receivable consist of the following:
 
 September
      30,
                2010
              
              
              December
      31,
                2009(Unaudited)Accounts
      receivable
              
              $
              63,286,133
              
              
              $
              40,025,063Less:
      Allowance for doubtful accounts
              
              
              (1,083,783
              )
              
              
              (768,965
              )$
              62,202,350
              
              
              $
              39,256,098
  7.            
INVENTORIES
  Inventories
consist of the following
 
 September
      30,
                2010
              
              
              December
      31,
                2009(Unaudited)Raw
      Materials
              
              $
              6,189,098
              
              
              $
              4,166,380Work
      in progress
              
              
              571,569
              
              
              
              —Packing
      materials
              
              
              178,543
              
              
              
              85,342Finished
      goods
              
              
              3,755,911
              
              
              
              2,354,373$
              10,695,121
              
              
              $
              6,606,095
  8.            
PROPERTY, PLANT AND EQUIPMENT
  Property,
plant and equipment consist of the following:
 
 September
      30,
                2010
              
              
              December
      31,
                2009(Unaudited)Building
              
              $
              1,081,656
              
              
              $
              1,060,298Manufacturing
      machinery
              
              
              6,163,124
              
              
              
              5,840,901Leasehold
      improvements
              
              
              501,428
              
              
              
              440,092Office
      equipment
              
              
              286,585
              
              
              
              223,298Motor
      vehicles
              
              
              904,918
              
              
              
              629,5878,937,711
              
              
              
              8,194,176Less:
      Accumulated depreciation and amortization
              
              
              (2,825,751
              )
              
              
              (2,213,480
              )Net
      book value
              
              $
              6,111,960
              
              
              $
              5,980,696
  Depreciation
expense for the three months ended September 30, 2010 and 2009 was $249,416 and
$188,203 respectively. Depreciation expense for nine months ended September 30,
2010 and 2009 was $612,271 and $508,312, respectively.
  9
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  9. PREPAYMENT
OF PROPERTY, PLANT AND EQUIPMENT
  The
prepayment of property, plant and equipments mainly comprised a deposit paid to
acquire two unit office lots located in the
Zhonghong International Business Garden, Future Business Centre,
Beijing, China. One of the unit office lots was acquired from a related party,
Ms. Xiaorong Teng (a director of the Company)(Note 16). The Company has fully
settled the acquisition price of $1,490,806 as of September 30, 2010. The
Company has obtained the strata title on November 3, 2010.
  Another
office lot is being acquired from a third party for a total consideration of
$1,449,022. As of September 30, 2010, the Company has paid 10.3% deposit for the
acquisition.
  10. INTANGIBLE
ASSETS
  Intangible
assets consist of the following:
  September
      30,
                2010
              
              
              December
      31,
                2009(Unaudited)License
      for manufacture and sale of fertilizer products
              
              $
              440,100
              
              
              $
              440,100Less:
      Accumulated amortization
              
              
              (89,839
              )
              
              
              (42,593
              )Effect
      of foreign currency exchange difference
              
              
              8,100
              
              
              
              —Net
      book value
              
              $
              358,361
              
              
              $
              397,507
  Amortization
expense for three months ended September 30, 2010 and 2009 was $15,943 and nil
respectively. Amortization expense for nine months ended September 30, 2010 and
2009 was $ 47,996 and nil respectively.
  11.           ACCRUED
EXPENSES AND OTHER PAYABLES
  Accrued
expenses and other payables consist of the following:
  September
      30,
                2010
              
              
              December
      31,
                2009(Unaudited)Accrued
      expenses
              
              $
              761,926
              
              
              $
              439,028Other
      payables
              
              
              1,728,091
              
              
              
              955,329$
              2,490,017
              
              
              $
              1,394,357
  10
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  12.           TAXES
PAYABLE
 
 September
      30,
                2010
              
              
              December
      31,
                2009(Unaudited)Income
      tax payable
              
              $
              1,384,691
              
              
              $
              1,281,775Value
      added tax payable
              
              
              218,884
              
              
              
              397,118Others
              
              
              14,459
              
              
              
              16,772$
              1,618,034
              
              
              $
              1,695,665
  13.           INCOME
TAXES
  The
entities within the Company file separate tax returns in the respective tax
jurisdictions that they operate.
  The
Company’s operating subsidiaries are subject to PRC enterprise income tax
(“EIT”).  Before January 1, 2008, the PRC EIT rate was generally 33%.
In March 2007, the PRC government enacted a new PRC Enterprise Income Tax Law,
or the New EIT Law, and promulgated related regulation, Implementation
Regulations for the PRC Enterprise Income Tax Law. The New EIT Law and
Implementation Regulations became effective from January 1, 2008. The New EIT
Law, among other things, imposes a unified income tax rate of 25% for both
domestic and foreign invested enterprises registered in the PRC. The New EIT Law
provides for a grandfathering and five-year transition period from its effective
date for those enterprises which were established before the promulgation date
of the New EIT Law and which were entitled to a preferential EIT treatment.
Accordingly, Beijing Agritech and Anhui Agritech, as wholly foreign-owned
enterprises, have continued to be entitled to a tax exemption for the two years
ended December 31, 2009 and 2008 and a 50% reduction on its respective EIT rate
for the ensuing three years ended December 31, 2010 through 2012.
 
 The
provision for income taxes for three and nine months ended September 30, 2010
and 2009 consisted of the following:
 
 Three
      months ended
                September
      30
              
              
              Nine
      months ended
                September 302010
              
              
              2009
              
              
              2010
              
              
              2009(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Provision
      for current income tax – China
              
              $
              2,097,616
              
              
              $
              1,473,260
              
              
              $
              4,763,204
              
              
              $
              3,789,496
 
 As of
September 30, 2010 and December 31, 2009, the Company did not have any
significant temporary differences and carry forwards that may result in deferred
tax.
 
 The
following table reconciles the theoretical tax expense calculated at the
statutory tax rate to the Company’s effective tax expense for the three and nine
months ended September 30, 2010 and 2009:
 
 (in
      thousands)
              Three
      months ended
                September
      30
              
              Nine
      months ended
                September 302010
              
              
              2009
              
              2010
              
              
              2009(Unaudited)
              
              
              (Unaudited)
              
              (Unaudited)
              
              
              (Unaudited)Theoretical
      tax expense at PRC statutory tax rate of 25%
              
              $
              983
              
              
              $
              1,796
              
              
              $
              4,597
              
              
              $
              4,156Non-deductible
      expenses
              
              
              1,115
              
              
              
              232
              
              
              
              2,454
              
              
              
              443Non-taxable
      income
              
              
              —
              
              
              
              —
              
              
              
              (1,365
              )
              
              
              —Tax
      holiday
              
              
              —
              
              
              
              (555
              )
              
              
              (923
              )
              
              
              (810
              )Effective
      tax expense
              
              $
              2,098
              
              
              $
              1,473
              
              
              $
              4,763
              
              
              $
              3,789
  11
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  13.           INCOME
TAXES (CONTINUED)
 
 Non-taxable
income for the nine months ended September 30, 2010 consisted of the change in
fair value of warrants of $3,829,985 and gain on extinguishment of warrant
liability of $1,629,465.
 
 Non-deductible
expenses for the three months ended September 30, 2010 primarily consisted of
the share-based compensation of $1,288,743 and other operating expenses incurred
in other tax jurisdiction where no tax benefit would be realized. Non-deductible
expenses for the nine months ended September 30, 2010 primarily consisted of the
share-based compensation of $5,513,125 and other operating expenses incurred in
other tax jurisdiction where no tax benefit would be realized.
  Currently,
the Company has considered share based compensation to be a non-deductible
expense and has treated it as such in the computations of the estimated tax
provisions. The Company intends to pursue the deductibility of this expense
with appropriate government officials and if successful negotiations ensue,
these expenses could at least in part be deductible. Should this occur, future
tax provisions would reflect the change in this treatment and the revised
treatment would be applied to those expenses currently considered
non-deductible.
  12
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  14. COMMON
STOCK AND WARRANTS
  Common
Stock Transactions
 
 On April
28, 2010, the Company entered into an underwriting agreement with Rodman &
Renshaw Capital Group, Inc. (the “Underwriter”), pursuant to which the Company
agreed to issue and sell 1,243,000 shares of our common stock (the “Firm
Shares”), to the Underwriter at a price per share of $16.10. In addition,
the Company granted the Underwriter an option to purchase up to an additional
186,450 shares to cover over-allotments (“Option Shares”), if any, at the same
price as the Firm Shares. The sale of the Firm Shares and Option Shares was
consummated on May 4, 2010. Net proceeds to the Company from the offering, after
deducting underwriting discounts and commissions and estimated offering
expenses, were approximately $21 million.
 
 During
the nine months ended September 30, 2010, the Company issued 150,627 and
1,857,024 shares of common stock for the cashless exercise of 277,000 options
and for the exercise of warrants at $5.385 per share for cash,
respectively.
  Common
Stock Purchase Warrants
  A summary
of the warrants outstanding as of September 30, 2010, and changes during the
nine months ended September 30, 2010 are presented below:
  Number
      of underlying shares
              
              
              Weighted
      Average Exercise Price
              
              
              Average
      Remaining Contractual Life (years)Outstanding
      at December 31, 2009*
              
              
              1,857,024
              
              
              $
              5.385
              
              
              
              2.50Issued
              
              
              —Forfeited
              
              
              —Exercised
              
              
              (1,857,024)
              
              
              $
              5.385Outstanding
      at September 30, 2010
              
              
              —
  
 *
              Retroactively
      adjusted for the 2-for-1 forward stock split on February 1,
      2010.
  13
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  15. STOCK
OPTIONS AND SHARE-BASED COMPENSATION
  A summary
of the stock options, which were granted under the Company’s 2008 Equity
Incentive Plan (the “Plan”), and changes during the nine months ended September
30, 2010 are presented below:
 
 Underlying
                shares
              
              
              Weighted
                Average
                Exercise
      Price
              
              Weighted-
      Average Remaining Contractual
                Term
              
              Aggregate
                Intrinsic
      ValueOutstanding
      at December 31, 2009*
              
              
              517,500
              
              
              $
              11.64
              
              4.80
      yearsGranted
              
              
              781,100
              
              
              $
              14.01Exercised
              
              
              (277,000
              )
              
              $
              11.48Outstanding
      at September 30, 2010
              
              
              1,021,600
              
              
              $
              13.45
              
              4.52
      years
              
              $
              20,500Exercisable
      at September 30, 2010
              
              
              2,500
              
              
              $
              3.36
              
              3.65
      years
              
              $
              16,975
  
 *
              Retroactively
      adjusted for the 2-for-1 forward stock split on February 1,
      2010
  On
January 12, 2010, the Company awarded an aggregate of 326,600 shares (as
adjusted for the 2-for-1 forward stock split on February 1, 2010) common stock
to certain directors and officers in consideration for services rendered to the
Company, with varying vesting periods among different grantees in accordance
with the terms of the agreements entered into by the Company and the
grantees.
 
 The fair
value of the options granted during the nine months ended September 30, 2010 has
been estimated on the date of grant using the Black-Scholes option-pricing model
that uses the weighted-average assumptions noted in the following table.
Expected volatilities are based on historical volatility of the Company’s stock,
and reflect the assumption that the historical volatilities are indicative of
future trends, which may not necessarily be the actual outcome. Expected term of
each option award represents the period of time that options granted are
expected to be outstanding and is estimated based on the historical exercise
behavior of separate groups of employees or officers. The risk-free rate
reflects the interest rate for United States Treasury Note with similar
time-to-maturity to that of the options.
 
 Expected
      term (year)
              
              1Expected
      volatility
              
              
              145.6
              %Expected
      dividend yield
              
              
              0
              %Risk-free
      rate
              
              
              0.36
              %
  As of
September 30, 2010, a total of $6.5 million unrecognized compensation cost
related to non-vested options and restricted shares of common stock under the
Plan is expected to be recognized over a weighted average period of 3 years. The
total fair value of options and common stock vested under the Plan and
recognized as administrative expenses forthe nine
months ended September 30, 2010 and 2009 was $5,513,125 and $2,703 respectively.
The total compensation cost for three-month period ended September 30, 2010 and
2009 was $1,288,743 and nil, respectively.
 
 The
Company has obtained the approval of the stockholders to adopt the China
Agritech, Inc. 2010 Omnibus Securities and Incentive Plan (the “2010 Plan”). The
purpose of the 2010 Plan is to attract and retain qualified individuals for
positions of substantial responsibility with the Company and to provide
incentive to such individuals to promote the success of the Company’s business.
Awards under the Plan, which provide for the issuance of shares of the Company’s
common stock, will be limited to an aggregate of 2,100,000 shares of Common
Stock in any calendar year.
  14
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  15. STOCK OPTIONS AND SHARE-BASED COMPENSATION (CONTINUED)
 
 The 2010
Plan permits the grant of options, stock appreciation rights, restricted stock,
restricted stock units and other share-based awards.  The exercise price
per share with respect to each option and each stock appreciation rights is
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.
  16.           RELATED
PARTY TRANSACTIONS
  On
January 6, 2005, the Company’s subsidiary Pacific Dragon entered into a license
agreement with Mr. Yu Chang, our Chairman, Chief Executive Officer and
President. Under this license agreement, Mr. Chang granted an exclusive license
to Pacific Dragon for the use of certain know-how in manufacturing organic
liquid compound fertilizer on a royalty-free basis. 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. This renewal
license agreement extends the terms of such license agreement and extended until
December 31, 2011.
  On April
28, 2010, the Company’s subsidiary, Beijing Agritech entered into a similar
license agreement with Mr. Yu Chang regarding granted an exclusive license to
Beijing Agritech for the use of certain know-how in manufacturing organic liquid
compound fertilizer on a royalty-free basis for three years period from the date
of agreement. The Company continues to refine the manufacturing know-how of the
product at its expense. In order to improve the production technology and speed
up the step of changing products, the Company has continued to develop the
manufacturing know-how of the product at its expense. The Company considers that
the know-how would have had an insignificant value without the Company’s
development initiatives.
  Pacific
Dragon has entered into a tenancy agreement with a related party, Yinlong
Industrial Co. Ltd. (“Yinlong”), a former minority shareholder previously
holding 10% equity interest in Pacific Dragon which is owned and controlled by
Mr. Yu Chang and Ms. Xiaorong Teng, to lease two factory plants and one
office building with a total floor area of 7,018 square 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 monthly rental amount includes
substantial monthly utilities expenses incurred by two factory plants and one
office building which rented by Pacific Dragon. With the development of Pacific
Dragon and the expanding of the business, the utilities expenses as accounted
for the rate of rent increase year by year. The tenancy agreement was revised by
increasing the annual rent to RMB 3,600,000 (equivalent to $518,940) effective
on July 1, 2005. The monthly rental amount includes substantial monthly
utilities expenses incurred by two factory plants and one office building rented
by Pacific Dragon.
  On July
2, 2007, Beijing Agritech entered into a tenancy agreement with Ms. Xiaorong
Teng (a director of the Company) to lease an office with a total floor area of
780 square meters for a term of 5 years from February 1, 2007 to February 1,
2012 at an annual rent of RMB 492,000 (equivalent to approximately $70,922)
effective on July 2, 2007. Such tenancy agreement was terminated on August 31,
2010.
  On
September 27, 2010, YiNong Agriculture Co. Ltd. (the Company’s newly established
subsidiary) has entered into sales and purchase agreement with Ms. Xiaorong Teng
to acquire an office lot located in the Zhonghong International Business Garden,
Future Business Centre, Beijing, China for a total consideration of RMB9,978,624
(equivalent to $1,490,806). The total floor area for the office lot is 780
square meters. The acquisition price was determined by reference to the
valuation carried out by an international independent firm of professional
appraisers, “Knight Frank Petty Ltd.” using a “direct comparison approach”, with
reference to sales evidence as available on the market and assumed sale of the
property interests with the benefit of vacant possession.
  15
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  17.          RISK
OF CONCENTRATIONS
  Four
customers accounted for 20.1% of the Company’s net revenue for nine months ended
September 30, 2010, each individually accounting for approximately 7.9%, 4.6%,
4.4% and 3.2%, respectively, of the Company’s net revenue. There was no
individual customer that accounted for 10% or more of the Company’s net revenue
for the nine months ended September 30, 2009.
  Four
suppliers provided 50% of the Company’s dollar value of raw materials purchased
for the nine months period ended September 30, 2010, with each individually
accounting for approximately 19.0%, 11.0%, 11.0%, and 9.0%,
respectively.
  18.          SEGMENT
AND ENTITY-WIDE INFORMATION
  The
Company operates in one business segment, manufacturing and sale of organic
fertilizer products. The Company also operates only in one geographical segment
– China, as all of the Company’s products are sold to customers located in China
and the Company’s long-lived assets are located in China.
  The
Company’s major product categories are (i) organic liquid fertilizers, and (ii)
organic granular fertilizers. The sale of granular fertilizers was officially
launched in the second quarter of fiscal year 2009.
  Management
evaluates performance based on several factors, of which net revenue and gross
profit by product are the primary financial measures:
  Three
      months ended
                September
      30,
              
              
              Nine
      months ended
                September 30,2010
              
              
              2009
              
              
              2010
              
              
              2009(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Net
      revenue from unaffiliated customers:Organic
      liquid fertilizers
              
              $
              14,190,212
              
              
              $
              15,554,809
              
              
              $
              43,102,624
              
              
              $
              36,533,864Organic
      granular fertilizers
              
              
              9,699,927
              
              
              
              11,489,143
              
              
              
              34,970,237
              
              
              
              18,846,075Total
              
              $
              23,890,139
              
              
              $
              27,043,952
              
              
              $
              78,072,861
              
              
              $
              55,379,939Gross
      profit:Organic
      liquid fertilizers
              
              $
              6,822,637
              
              
              $
              7,317,629
              
              
              $
              20,251,086
              
              
              $
              18,117,932Organic
      granular fertilizers
              
              
              2,158,993
              
              
              
              2,278,670
              
              
              
              7,113,589
              
              
              
              3,801,877Total
              
              $
              8,981,630
              
              
              $
              9,596,299
              
              
              $
              27,364,675
              
              
              $
              21,919,809
  16




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





Introductory
Note




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




Special
Note Regarding Forward Looking Statements




This
Report contains forward-looking statements and information relating to China
Agritech that are based on the beliefs of our management, as well as assumptions
made by and information currently available to us.  Such statements
should not be unduly relied upon.  When used in this Report,
forward-looking statements include, but are not limited to, the words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar
expressions, as well as statements regarding new and existing products,
technologies and opportunities, statements regarding market and industry segment
growth and demand and acceptance of new and existing products, any projections
of sales, earnings, revenue, margins or other financial items, any statements of
the plans, strategies and objectives of management for future operations, any
statements regarding future economic conditions or performance, uncertainties
related to conducting business in China, any statements of belief or intention,
any of the factors mentioned in the “Risk Factors” section of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009, filed with the
U.S. Securities and Exchange Commission (the “SEC”) on March 23, 2010, and any
statements or assumptions underlying any of the foregoing.  These
statements reflect our current view concerning future events and are subject to
risks, uncertainties and assumptions.  There are important factors
that could cause actual results to vary materially from those described in this
Report as anticipated, estimated or expected, including, but not limited to,
competition in the fertilizer industry and the impact of such competition on
pricing, revenues and margins, volatility in the securities market due to the
general economic downturn; SEC regulations which affect trading in the
securities of “penny stocks,” and other risks and
uncertainties.  Except as required by law, we assume no obligation to
update any forward-looking statements publicly, or to update the reasons actual
results could differ materially from those anticipated in any forward- looking
statements, even if new information becomes available in the
future.  Depending on the market for our stock and other conditional
tests, a specific safe harbor under the Private Securities Litigation Reform Act
of 1995 may be available.  Notwithstanding the above, Section 27A of
the Securities Act of 1933, as amended (the “ Securities Act” ) and
Section 21E of the Securities Exchange Act of 1934, as amended (the “ Exchange Act” )
expressly state that the safe harbor for forward-looking statements does not
apply to companies that issue penny stock.  Because we may from time
to time be considered to be an issuer of penny stock, the safe harbor for
forward-looking statements may not apply to us at certain times.




17




Our
Business





We
manufacture and sell organic liquid compound fertilizers, organic granular
compound fertilizers and related agricultural products in the PRC through our
direct and indirect subsidiaries: Anhui Agritech, Beijing
Agritech  Tailong and Pacific Dragon.





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




Our
products:





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





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





·
            eliminate
      the damage of harmful radicals to
plants;





·
            increase
      protein and vitamin content levels;





·
            accelerate
      the accumulation of photosynthesis materials and cell
      concentration;





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





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





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





The
demand for our products has steadily increased. Our annual production as of
September 30, 2010 was approximately 200,000 metric tons, consisting of 100,000
metric tons in Anhui, 50,000 metric tons in Harbin, and 50,000 tons in
Xinjiang.




We
currently plan to build and operate approximately 10 and 45 branded
large-scale distribution centers in 2010 and 2011, respectively, in central and
eastern provinces of the PRC to sell our organic fertilizers and third party
sourced products, including seeds, pesticides, and other agricultural products
to franchised retail stores. We believe that our planned distribution
centers and franchised retail stores in the PRC could enable us to
introduce farmers, especially individual farmers, to our products, to
educate them about the benefits of organic fertilizer over chemical fertilizer,
and to teach them how to properly use our products in a more cost effective
manner. Our anticipated schedule of building and operating these branded
distribution centers depends upon a variety of factors, many of which
are outside of our control. Accordingly, our current build-out
schedule, may change.





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




18




Results
of Operations





Comparison
of Three Months Ended September 30, 2010 and 2009





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





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





Three
      Months
                Ended
      September 30,
              
              
              Dollar
      ($)
                Increase
              
              
              Percentage
      (%) Increase2010
              
              
              2009
              
              
              (Decrease)
              
              
              (Decrease)Net
      Revenue
              
              $
              23,890
              
              
              $
              27,044
              
              
              $
              (3,154
              )
              
              
              (12
              )%Cost
      of Revenue
              
              
              (14,908
              )
              
              
              (17,448
              )
              
              
              (2,540
              )
              
              
              (15
              )%Gross
      Profit
              
              
              8,982
              
              
              
              9,596
              
              
              
              (614
              )
              
              
              (6
              )%Selling
      Expenses
              
              
              (824
              )
              
              
              (727
              )
              
              
              97
              
              
              
              13
              %General
      and Administrative Expenses
              
              
              (4,087
              )
              
              
              (1,695
              )
              
              
              2,392
              
              
              
              141
              %Income
      From Operations
              
              
              4,071
              
              
              
              7,174
              
              
              
              (3,103
              )
              
              
              (43
              )%Other
      expenses/ (income)Change
      in fair value of warrants classified as derivatives
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Gain
      on extinguishment of warrants classified as derivatives
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Others
              
              
              (140
              )
              
              
              9
              
              
              
              (149
              )
              
              
              (1656
              )%Income
      Tax
              
              
              (2,098
              )
              
              
              (1,473
              )
              
              
              625
              
              
              
              (42
              )%Net
      income
              
              
              1,833
              
              
              
              5,710
              
              
              
              (3,877
              )
              
              
              (68
              )%Net
      income attributable to non-controlling interest in a
      subsidiary
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Net
      income attributable to common stockholders
              
              $
              1,833
              
              
              $
              5,710
              
              
              $
              (3,877
              )
              
              
              (68
              )%Earning
      per Share-
      Basic
              
              
              0.09
              
              
              
              0.41-
      Diluted
              
              
              0.09
              
              
              
              0.41Weighted
      average shares outstanding*-
      Basic
              
              
              20,608
              
              
              
              14,096-
      Diluted
              
              
              20,633
              
              
              
              14,096







*
            Retroactively
      adjusted for the 2-for-1 forward stock split on February 1,
      2010.




19




Net
Revenue.




Our net
revenue of $23.9 million for the three-month period ended September 30, 2010,
represented a slight decrease of $3.2 million, or 12% as compared to $27 million
for the same period in 2009. Sales of organic granular compound fertilizer
equaled $9.7 million, a decrease of $1.8 million or 16% compared to the same
period in 2009.  Sales of organic liquid fertilizer equaled $14.2
million for the three-month period ended September 30, 2010 representing a
decrease of $1.4 million compared to sales of $15.6 million in the same period
in 2009.




Normally the third quarter is a slack
season for organic granular compound fertilizer since it is used as a base
manure before seeding. The decline in sales in third quarter 2010 was due to the
Company tightening its credit policy in order to reduce credit sales and
encourage cash sales. The decrease in granular sales was also a result of the
bad weather in China, which prevented many crops from being planted. As a
result, the demand for fertilizer decreased accordingly.




Cost of
Revenue.




Our
cost of revenue for the three-month period ended September 30, 2010 decreased by
$2.5 million, or 15%, as compared to the same period in 2009. Cost of goods sold
equaled $14.9 million as compared to $17.4 million in the same period in 2009.
Our cost of revenue primarily consists of the cost of our raw materials, direct
labor and manufacturing overhead expenses. Our decrease in cost of revenue is
generally consistent with the decrease in sales.




Gross
Profit.




Our gross
profit for three-month period ended September 30, 2010 equaled $9 million, a
decrease of $0.6 million or 6%, as compared to $9.6 million in the same period
in 2009. Overall gross profit margin for the three-month period ended September
30, 2010 was 38%, as compared to 35% for the same period in 2009. The increase
in overall gross profit margin was mainly due to the decrease of the percentage
that sales of the comparatively lower-margined organic granular product
represented to total sales.




Specifically,
organic granular compound fertilizer products reflected a gross profit margin of
22% for three-month period ended September 30, 2010, higher than the 20% margin
in the same period in 2009. The increase in gross profit margin of organic
granular compound fertilizer products was due to increase in average selling
price from RMB2,377 (equivalent to $349) per ton to RMB 2,500 (equivalent to
$367) per ton. Organic liquid fertilizer had a gross profit margin of 48%
compared with 47% for the same period in 2009.




Selling
Expenses.





Our selling expenses consist primarily
of advertising and promotion expenses, freight charges, salaries and travelling
expenses.  Our selling expenses were $0.8 million for the three-month
period ended September 30, 2010 as compared to $0.7 million for the same period
in 2009, an increase of $0.1 million. The increase in selling expenses was
mainly due to an increase in promotion and advertising expenses of $0.1 million
for a total of $0.25 million, compared to the three-month period ended September
30, 2009.





Selling
expenses as a percentage to net revenue remained at 3% for the three-month
period ended September 30, 2010 and same period in 2009.




20





General and Administrative
Expenses.





Our
general and administrative expenses were $4.1 million for the three-month period
ended September 30, 2010, an increase of $2.4 million, representing a 141%
increase as compared to $1.7 million for the same period in 2009. General and
administrative expenses consist primarily ofstaff costs,
such as salaries and bonus, stock-based compensation expenses for management,
professional fees, audit fees, rental and others. The increase in administrative
expenses was primarily due to non-cash charges of $1.3 million incurred in
connection with options and stock granted to a directors and management. The
additional allowance for doubtful debts of $1.5 million was booked in third
quarter 2010 based on the Company provision for doubtful debts policy and
specific provision for certain receivables.





Other Expenses





Other
expenses mainly comprise foreign exchange loss.





Income
tax.





We
incurred income tax expense of $2.1 million, representing an effective tax rate
of 53.4%, for the three-month period ended September 30, 2010, as compared to
20.6% for the same period in 2009. Please refer to Note 13 for details
explanation of change of effective tax rate.





Net
Income





We recorded a net income of $1.8
million for the three-month period ended September 30, 2010 as compared to a net
income of $5.7 million for the same period in 2009, a decrease of $3.9 million,
or 68%. If we excluded the non-cash charges, share based compensation expenses
of $1.3 million, we would have recorded a net income of $3.1 million, a decrease
of $2.6 million, or 45%, as compared to the same period in 2009.




21




Comparison
of Nine Months Ended September 30, 2010 and 2009





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





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





Nine Months
                Ended
      September 30,
              
              
              Dollar
      ($)
                Increase
              
              
              Percentage
      (%) Increase2010
              
              
              2009
              
              
              (Decrease)
              
              
              (Decrease)Net
      Revenue
              
              
              78,073
              
              
              
              55,379
              
              
              
              22,694
              
              
              
              41
              %Cost
      of Revenue
              
              
              (50,708
              )
              
              
              (33,460
              )
              
              
              17,248
              
              
              
              52
              %Gross
      Profit
              
              
              27,365
              
              
              
              21,919
              
              
              
              5,446
              
              
              
              25
              %Selling
      Expenses
              
              
              (2,670
              )
              
              
              (1,758
              )
              
              
              912
              
              
              
              52
              %General
      and Administrative Expenses
              
              
              (11,656
              )
              
              
              (3,550
              )
              
              
              8,106
              
              
              
              228
              %Income
      From Operations
              
              
              13,039
              
              
              
              16,611
              
              
              
              (3,572
              )
              
              
              (22
              )%Other
      IncomeChange
      in fair value of warrants classified as derivatives
              
              
              3,830
              
              
              -
              
              
              
              3,830
              
              
              
              100
              %Gain
      on extinguishment of warrants classified as derivatives
              
              
              1,629
              
              
              -
              
              
              
              1,629
              
              
              
              100
              %Others
              
              
              (111
              )
              
              
              12
              
              
              
              (123
              )
              
              
              (1025
              )%Income
      Tax
              
              
              (4,763
              )
              
              
              (3,789
              )
              
              
              974
              
              
              
              26
              %Net
      income
              
              
              13,624
              
              
              
              12,834
              
              
              
              790
              
              
              
              6
              %Net
      income attributable to non-controlling interest in a
      subsidiary
              
              -
              
              
              
              (481
              )
              
              
              481
              
              
              
              (100
              )%Net
      income attributable to common stockholders
              
              
              13,624
              
              
              
              12,353
              
              
              
              1,271
              
              
              
              10
              %Earning
      per Share-
      Basic
              
              
              0.73
              
              
              
              0.93-
      Diluted
              
              
              0.69
              
              
              
              0.93Weighted
      average shares outstanding*-
      Basic
              
              
              18,755
              
              
              
              13,240-
      Diluted
              
              
              19,662
              
              
              
              13,240







*
            Retroactively
      adjusted for the 2-for-1 forward stock split on February 1,
      2010.




Net
Revenue.




Our net
revenue rose to $78.1 million for the nine-month period ended September 30,
2010, an increase of approximately $22.7 million, or 41% as compared to $55.4
million for the same period in 2009. The increase in our net revenue was mainly
attributable to the increase in sales of organic granular compound fertilizer
equaling $35.0 million, an increase of $16.1 million, or 86%, as compared with
same period in 2009. Net revenue for our traditional organic liquid fertilizer
product equaled $43.1 million for nine-month period ended September 30, 2010, an
increase of $6.6 million, or 18%, as compared to $36.5 million for the same
period in 2009. The increase in sales was mainly due to the introduction of a
new product, organic granular compound fertilizer in the second quarter of 2009.
The Company received good market response since the product was launched,
especially in the first half of 2010. There is higher market demand for organic
granular compound in first half year since organic granular compound fertilizer
is used as a base manure before crop seeding, compared to organic liquid
fertilizer which is applied during the growth period, in May and beyond. The
introduction of organic granular compound fertilizer solved the seasonal problem
in which the first half of a year is a slack season for traditional products,
especially organic liquid fertilizer. The increase in sales of organic liquid
fertilizer was due to strong demand from the market during the third quarter,
the traditional peak season for this product.




22





Cost of
Revenue.




Our
cost of revenue for the nine-month period ended September 30, 2010 equaled $50.7
million, an increase of $17.2 million, or 52%, as compared to the same period in
2009. Our cost of revenue primarily consists of the cost of our raw materials,
direct labor and manufacturing overhead expenses. The increase in the cost of
revenue is generally consistent with an increase in sales, especially granular
fertilizer, which represents 44.8% of total sales with higher material
costs.




Gross
Profit.




Our gross
profit for the nine-month period ended September 30, 2010 increased by $5.4
million or 25%, in line with the increase in sales. Overall gross profit margin
for the nine-month period ended September 30, 2010 was 35%, as compared to 40%
for the same period in 2009. The slight decrease was due to an increase in sales
of organic granular compound fertilizer which has a lower profit
margin.




Our
organic granular compound fertilizer products had a gross profit margin of 20%
for the nine-month period ended September 30, 2010, as compared to 47.1% for our
traditional organic liquid fertilizer products. Gross profit margin for our
organic granular compound fertilizer products and organic liquid fertilizer
products was 20% and 50%, respectively for the same period 2009. The slight
decline in gross profit margin of organic liquid fertilizer was due to the
changed composition of the organic liquid fertilizer products which lowered the
profit margin.





Selling
Expenses.





Selling expenses consist primarily of
advertising and promotion expenses, freight charges and related
compensation.  Our selling expenses were $2.7 million for the
nine-month period ended September 30, 2010 as compared to $1.8 million for the
same period in 2009 representing an increase of $0.9 million, or 52%. The
increase in selling expenses was mainly due to a $0.4 million increase in
promotion and advertising expenses totaling $0.85 million as compared to the
nine month period ended September, 2009. No significant change in selling
expenses as a percentage to net revenue, which equaled 3% for the nine-month
period ended September 30, 2010 and 2010.





General and Administrative
Expenses.





Our
general and administrative expenses were $11.7 million for the nine-month period
ended September 30, 2010, an increase of $8.1 million, or 228% increase as
compared to $3.6 million for the same period in 2009. General and administrative
expenses consist primarily ofstaff costs,
such as salaries and bonus, stock-based compensation expenses for management,
professional fees, audit fees, rental and allowance for doubtful debts. The
increase in general and administrative expenses was primarily due to an increase
in non-cash compensation charge of $5.5 million for the amortization of stock
granted to our directors and management, and additional allowances for doubtful
debts $1.5 million.





Income from
Operations.





Income
from operations was $13.0 million for the nine-month period ended September 30,
2010, as compared to $16.6 million for the same period in 2009, a decrease of
approximately $3.6 million, or 22%. The decrease in income from operation was
mainly due to increase in administrative expenses primarily comprised
share-based compensation to management of $5.5 million and additional allowance
for doubtful debts of $1.5 million.




23




Other
Income.





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





Income
tax.





We
incurred income tax expense of $4.8 million, representing an effective tax rate
of 25.9%, for the nine-month period ended September 30, 2010, as compared to
22.8% for the same period in 2009. Please refer to Note 13 for a detailed
explanation of the change in the effective tax rate.





Net
Income.





We recorded a net income of $13.6
million for the nine-month period ended September 30, 2010 as compared to net
income of $12.8 million for the same period in 2009. If we excluded the non-cash
charge resulting from the change in fair value of the warrant classified as
derivatives of $3.8 million (nine-month period 2009: nil), gain on
extinguishment of warrant classified as derivatives of $1.6 million (nine-month
period 2009: nil), stock compensation costs $5.5 million (nine-month period
2009: 0.3 million), and allowance for doubtful debts of $1.5 million (nine-month
period 2009: 0.5 million), we would have recorded a net income of $15.2 million,
an effective increase of $1.9 million, or 14% growth, as compared to the same
period in 2009.





Liquidity
and Capital Resources





As of
September 30, 2010, we had cash and cash equivalents of $45.8 million, an
increase of $25.5 million, from $20.3 million as at December 31, 2009, which is
principally attributable to the cash proceeds from a public offering consummated
in May, 2010 and the exercise of warrants in June 2010. Our current assets
totaled $141.4 million as of September 30, 2010, while our current liabilities
totaled $6.1 million, which results in a current ratio of 23 times.





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





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




24




Results
of Operations (continued)




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






Nine
      months ended
                September
      30,(in
      U.S. dollars)
              
              2010
              
              
              2009Net
      cash generated in operating activities
              
              $
              (4,810,220
              )
              
              $
              10,147,430Net
      cash used in investing activities
              
              
              (2,460,926
              )
              
              
              (3,045,862
              )Net
      cash provided by financing activities
              
              
              30,828,271
              
              
              
              -Net
      increase in cash and cash equivalent
              
              
              23,557,125
              
              
              
              7,101,568Effect
      of exchange rate changes on cash and cash equivalents
              
              
              1,952,225
              
              
              
              (39,981
              )Cash
      and cash equivalents at the beginning of the period
              
              
              20,313,089
              
              
              
              11,952,235Cash
      and cash equivalents at the end of the period
              
              $
              45,822,439
              
              
              $
              19,013,822




Operating
Activities





Net cash used in operating activities
was $4.8 million for nine-months ended September 30, 2010 which was decrease of
$15.0 million as compared to $10.1 million net cash generated from operating
activities for the same period in 2009. The decrease was mainly due to a
slowdown in the collection of trade receivables as the Company granted long
credit terms to certain long-term customers ranging from 90 to 270
days.





Investing
Activities





Net cash used in investing activities
was $2.5 million for nine months ended September 30, 2010, which was an decrease
of $0.6 million from the $3 million net cash used in investing activities for
the same period in 2009. The cash
used in investing activities in third quarter 2009 mainly related to the deposit
paid for the acquisition of a 10% interest of Pacific Dragon. No such
transaction occurred during the nine months ended September 30,
2010.





Financing
Activities





Net cash generated from financing
activities increased to of $30.8 million, which is principally attributable to
the cash proceeds from the public offering of 1,243,000 shares of our common
stock and the exercise of the warrants for 186,450 shares with an exercise price
of $16.10 per share for total consideration of $20.1 million and net proceeds
$10 million from the exercise of the 2009 warrants for 1,857,024 shares,
exercise price $5.385 per share. The proceeds were netted against listing
expenses. No cash provided from financing activities in the same period of last
year due to no financing activities incurred.




25




Critical
Accounting Policies




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




·
              Accounts
      Receivable.  Our policy is to maintain reserves for potential
      credit losses on accounts receivable. Management reviews the composition
      of accounts receivable and analyzes historical bad debts, customer
      concentrations, customer credit worthiness, current economic trends and
      changes in customer payment patterns to evaluate the adequacy of these
      reserves.




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




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




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




·
              Revenue
      Recognition.  Sales revenue is recognized at the date of
      shipment from the Company’s facilities to customers when a formal
      arrangement exists, the price is fixed or determinable, the delivery is
      completed, no other significant obligations of our company exist and
      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, being the primary currency of the PRC, the
      economic environment in which their operations are conducted. In general,
      for consolidation purposes, we translate our subsidiaries’ assets and
      liabilities into U.S. dollars using the applicable exchange rates
      prevailing at the balance sheet date, and the statement of income is
      translated at average exchange rates during the reporting period. Gain or
      loss on foreign currency transactions are reflected on the income
      statement. Gain or loss on financial statement translation from foreign
      currency are recorded as a separate component in the equity section of the
      balance sheet, as component of comprehensive income. The functional
      currency of our Company is RMB. Until July 21, 2005, RMB had been pegged
      to the U.S. dollar at the rate of RMB 8.28:$1.00. On July 21, 2005, the
      PRC government reformed the exchange rate system into a managed floating
      exchange rate system based on market supply and demand with reference to a
      basket of currencies. In addition, the exchange rate of RMB to U.S.
      dollars was adjusted to RMB 8.11:$1.00 as of July 21, 2005. The People’s
      Bank of China announces the closing price of a foreign currency such as
      U.S. dollar traded against RMB in the inter-bank foreign exchange market
      after the closing of the market on each working day, which will become the
      unified exchange rate for the trading against RMB on the following working
      day. The daily trading price of U.S. dollars against RMB in the inter-bank
      foreign exchange market is allowed to float within a band of 0.3% around
      the unified exchange rate published by the People’s Bank of China. This
      quotation of exchange rates does not imply free convertibility of RMB to
      other foreign currencies. All foreign exchange transactions continue to
      take place either through the People’s Bank of China or other banks
      authorized to buy and sell foreign currencies at the exchange rates quoted
      by the People’s Bank of China. Approval of foreign currency payments by
      the People’s Bank of China or other institutions require submitting a
      payment application form together with invoices, shipping documents and
      signed contracts.




26




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




ITEM
3 QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 September 30, 2010, of the design and
operation of our disclosure controls and procedures, as such term is defined in
Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our
principal executive officer and principal financial officer have concluded that,
as of September 30, 2010,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
were no changes in our internal control over financial reporting that occurred
during the third fiscal quarter of 2010 covered by this Quarterly Report on
Form 10-Q that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 
However, during the quarter ended June 30, 2010, management identified
several material weaknesses in its disclosure controls and procedures and
internal controls over financial reporting as of March 31, 2010.  The
material weaknesses identified by our management related to the
following two accounting errors: (i) the failure by the Company to account for
326,600 shares of common stock awarded to directors and officers for services
during the quarter ended March 31, 2010 and (ii) incorrectly eliminating
inter-company sales and cost of sales twice for the quarter ended March 31,
2010.  During the third quarter 2010, management enhanced the
supervision and review of the financial reporting process for the preparation of
US GAAP based financial statements.  We believe these remediation
steps correct the material weaknesses discussed above and that no further
training to the Company's finance team was required. We will assess the
effectiveness of our remediation efforts in connection with our management's
tests of internal control over financial reporting in conjunction with our
fiscal year 2010 testing procedures.




27




PART
II  OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




None.




ITEM
1A. RISK FACTORS




Not
applicable to smaller reporting companies




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




None.




ITEM
3. DEFAULT UPON SENIOR SECURITIES




None.




ITEM
4 [REMOVED AND RESERVED]




ITEM
5 OTHER INFORMATION




None.




28




ITEM
6.  EXHIBITS





Exhibit
              No.
            
            Description31.1
            
            Certification
      of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            
            Certification
      of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
            
            Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
            
            Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002




29




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:
      November 9, 2010
              By:
              /s/ Yu
      ChangYu
      ChangChief
      Executive Officer, President,
                Secretary
      and Chairman




Date:
      November 9, 2010
              By:
              /s/ Yau-Sing
      TangYau-Sing
      TangChief
      Financial Officer and Controller
                (Principal
      Financial Officer)




30




EXHIBIT
INDEX





Exhibit
              No.
            
            Description31.1
            
            Certification
      of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            
            Certification
      of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
            
            Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
            
            Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002





31