U.S.
SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
 (MARK
ONE)
 x
              ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the Fiscal Year Ended December 31, 2009
  OR
   ̈
              TRANSITION REPORT PURSUANT TO
      SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the Transition Period from _______________ to _________________
  Commission
file number: 000-49608
  CHINA
AGRITECH, INC.
 (Exact
name of Registrant 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(Address of principal executive offices)
                      
                      (Zip Code)
  Registrant’s
telephone number, including area code:
 (86)
10-59621278
  SECURITIES
REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:   NONE
 SECURITIES
REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
  COMMON
STOCK, PAR VALUE $0.001 PER SHARE
  Name of
each exchange on which registered: NASDAQ Capital Market
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  ̈  Yes  x
  No
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   ̈  Yes  x  No
  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 of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. x
 Yes   ̈
 No
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  x
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large accelerated
                  filer  ̈
                
                Accelerated
                  filer  ̈
                
                Non-accelerated  filer  ̈
                
                Smaller reporting
                  company x(Do not check if a smaller reporting company)
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   ̈  Yes  x  No
  The
aggregate market value of the shares of common stock, par value $0.001 per
share, of the registrant held by non-affiliates on June 30, 2009 was $24,494,770
which was computed upon the basis of the closing price on that
date.
  There
were 19,479,769 shares of common stock of the registrant outstanding as of March
23, 2010.
  
  TABLE
OF CONTENTS
 
 PART
      I
                
                2Item
      1
                Business
                2Item
      2
                Properties
                28Item
      3
                Legal
      Proceedings
                28PART
      II
                
                29Item
      4
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                29Item
      5
                Selected
      Financial Data
                30Item
      6
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                31Item
      7
                Financial
      Statements and Supplementary Financial Data
                36Item
      8
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                36PART
      III
                
                38Item
      9
                Directors,
      Executive Officers of and Corporate Governance
                38Item
      10
                Executive
      Compensation
                42Item
      11
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                46Item
      12
                Certain
      Relationships and Related Transactions and Director
      Independence
                47Item
      13
                Principal
      Accounting Fees and Services
                48PART
      IV
                
                49Item
      14
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                49
  i
  INTRODUCTORY
NOTE
  Except as
otherwise indicated by the context, references in this Annual Report on Form
10-K (this “Form
10-K“) 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 references to Tailong’s 90% owned subsidiary, Pacific
Dragon Fertilizers Co. Ltd., references to “CAI” are to our wholly owned
subsidiary, CAI Investment Inc., references to “Beijing Agritech” are to our
wholly owned indirect subsidiary, Beijing Agritech Fertilizer Co., Ltd.,
references to “Anhui Agritech” are to our wholly owned subsidiary, Anhui
Agritech Development Co. Ltd., and references to “Xinjiang Agritech” are to our
wholly owned indirect subsidiary, Xinjiang Agritech Agriculture Resources Co.,
Ltd. References to “China” or “PRC” are references to the People’s Republic of
China.  References to “RMB” are to Renminbi, the legal currency of
China, and all references to “$” and dollar are to the U.S. 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,
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; Securities and Exchange Commission (the “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.
  1
  PART
I
  Item
      1
              Business
  Our
Business
  We
manufacture and sell organic liquid compound fertilizers, organic granular
compound fertilizers and related agricultural products in the PRC through our
direct and indirect subsidiaries: Anhui Agritech Development Co.
Ltd.  (“Anhui Agritech”), Agritech Fertilizer Limited (“Beijing
Agritech”), China Tailong Holdings Company Limited (“Tailong”), Pacific Dragon
Fertilizer Co. Ltd. (“Pacific Dragon”), and Xinjiang Agritech Agriculture
Resources Co., Ltd (“Xinjiang Agritech”).
  Our main
products include spray, water-flush, dip and granular fertilizer products and
other customized, crop specific fertilizers that are tailored to our customers’
specific requirements. Our liquid fertilizer products can be applied on a
widespread basis via spraying by machine or aircraft.  Our products
have been recognized for their quality and effectiveness by leading industry
associations and have been certified by the PRC government at the national
level, which is an endorsement of the effectiveness of the products in all
regions of the PRC.
  Our
products:
  ·
              promote
      photosynthesis, root system growth and transmission of nutrients to
      seeds;
  ·
              equilibrate
      absorption of nutrients to speed a plant’s
  maturity;
  ·
              eliminate
      the damage of harmful radicals to
plants;
  ·
              increase
      protein and vitamin content levels;
  ·
              accelerate
      the accumulation of photosynthesis materials and cell
      concentration;
  ·
              increase
      plants’ reservation ability to resist drought, resistance and the
      utilization rate of basic fertility;
and
  ·
              foster
      the development of plant life along with neutral or acidic
      pesticides.
  We
believe that our brand reputation and ability to tailor our products to meet the
requirements of various regions of the PRC affords us a competitive advantage.
We purchase the majority of our raw materials from suppliers located in the PRC
and use suppliers that are located in close proximity to our manufacturing
facilities, which helps us to contain our cost of revenue.
  The
demand for our products has steadily increased. Our annual production capacity
as of December 31, 2009 was approximately 13,000 metric tons of organic liquid
compound fertilizers whereas our annual production capacity for granular
fertilizers as of December 31, 2009 was approximately 200,000 metric tons,
consisting of 100,000 metric tons in Anhui, 50,000 metric tons in Harbin, and
50,000 tons in our newly completed plant in Xinjiang.
  We plan
to build and open between 30 and 50 branded large-scale distribution centers in
central and eastern provinces in 2010 to sell our own organic fertilizers and
third party sourced products, including seeds, pesticides, and other
agricultural products throughout the PRC, and hope to expand into southern and
western provinces in 2011. Each distribution center can cover 80 to 100
franchised retail stores under our management. We hope to use these locations
and franchised stores to introduce small individual farmers to our products,
educate them about the benefits of organic fertilizer over chemical fertilizer,
and teach them how to properly use our products. We believe that these
franchised stores will introduce our products to a vast network of farmers who
otherwise operate outside of our existing distribution network and outside of
the reach of traditional advertising media.
  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.
  2
  Our
Industry and Our Principal Markets
  China
  Arable
land, which is defined as land that is capable of being cultivated and
supporting agricultural production has been steadily reduced as a result of
industrialization/urbanization, soil degradation and the availability of water.
While China accounts for approximately 20% of the world’s population; the
country’s total available arable land represents only 7% of global
supply.  This disparity has been exacerbated over the past 20 years as
the population has continued to grow, adding 12–13 million net new inhabitants
on an annual basis while total arable land has shrunk from 133 million hectares
to 121 million hectares today. On a relative basis, China has 40% less per
capita arable land than the global average and nearly 1/8th that of the United
States. These statistics highlight the fact that if China is to become/remain
self sufficient from agricultural basis, farmers will have to largely increase
yields to meet future demand.
  Fertilizers
are used by farmers as a means to supplement naturally occurring soil components
in an effort to aid the growth and yield of agricultural products. These
elements are comprised largely of nutrients such as nitrogen, phosphorus,
potassium, and sulfur, as well as the trace elements such as iron, zinc, and
magnesium.
  China is
the world’s largest fertilizer market, both in production and consumption,
accounting for approximately 1/3 of the total global market. Growing at a
compound annual growth rate of 2.5% over 1998-2007, the country’s total
fertilizer consumption reached 51.1 million metric tons in
2007 compared to 40.8 million metric tons a decade ago, according to
the China Statistical Year Book. Fertilizer demand throughout China has
continued to grow as a result of both increased food volume demands but also low
yield comparison with other producer nations and a decrease in arable
lands.
  Organic versus Chemical
Fertilizers
  Fertilizers
fall into two broad categories, Organic and Inorganic, also known as chemical.
Organic fertilizers are a combination of materials derived from living things:
animal manures, compost, bone meal and blood meal represent typical organic
fertilizers; while chemical fertilizers are manufactured from nonliving
materials; such as rock phosphate which is a common source of phosphorus in
chemical fertilizers.
  Chemical
fertilizers have long been a “fast and dirty” solution as the components are
already in inorganic form and can be immediately absorbed by plants. It is
important to note that there is no nutritional quality differentiation found in
crops using either organic or chemical fertilizers. Potassium provided to a
plant root is no different if it is the result of wood ash found in organic
fertilizer or muriate in the potash component of chemical fertilizer. However,
chemical fertilizers have three main disadvantages relative to organic
fertilizers. First they are subject to leaching, which occurs when the
fertilizers are washed by rain or irrigation water down below the level of the
plant roots. Second, a heavy application of chemical fertilizers can “burn”
seedlings and young plants. This is a result of drying out, or desiccation, due
to the presence of chemical salts within the commercial fertilizers. The third
problem associated with the use of chemical commercial fertilizers is that
overly heavy applications can build up toxic concentrations of salts in the soil
and create chemical imbalances.
  Organic
fertilizers require a digestion period prior to making nutrients available to
plants. Before the plants can use them, they must be broken down by soil
microorganisms into simpler, inorganic molecules and ions. In contrast, the
nutrients in chemical fertilizers are already in inorganic form and so can be
immediately used by the plants. The use of organic fertilizers contributes not
only vital nutrients to plant growth, but also improves the soil structure, or
tilth, and increases its ability to hold both water and nutrients. As
microorganisms in the soil break down the organic material into an inorganic
soluble form, a slow release of nutrients is provided over a longer period of
time. With organic fertilizers a buildup of toxicity in the soil is unlikely, as
long as the amount of organic material incorporated into the soil is fully
decomposed. There are relative disadvantages to the use of organic fertilizers.
As noted above, they are not immediately available to the plants. An example of
this can be the application of manure to a vegetable garden in the spring may
not provide useful nutrients to the plants until it has been broken down into
organic form by soil bacteria, which could take several months. Also there is
less of an ability to measure the exact nutrient components and volume that are
added to the soil. The amount of nutrients and the exact type of elements
available from a given amount of manure, compost or other inorganic fertilizer
is difficult to distinguish and is dependent on such factors as: the age of the
manure or compost; its origin (chicken, cow, horse, sawdust, garden residue,
grass clippings); and weather conditions such as temperature and
rainfall.
  3
  Years of
chemical fertilizer overuse have led to environmental pollution, soil quality
degradation and crop yield impacts. China’s Ministry of Agriculture, therefore,
is actively promoting and creating awareness among farmers about application of
compound fertilizers to help an environment friendly and sustainable future. The
awareness about compound fertilizers has been increasing – especially in areas
like southern and eastern China, where industrial crops are more
dominant.
  Compound
fertilizers help in achieving optimal agricultural yield as these include all
the nutrients needed by different types of soils and crops. However, the 2008
China Statistical Year Book indicates that the use of compound fertilizers
account for less than 30% of the total fertilizer consumption in China, far
below the 50-80% average in developed countries. This is due to the fact that
compound fertilizers are relatively new to the market and Chinese farmers are
accustomed to using more conventional varieties. Nevertheless, demand for
compound fertilizers are estimated to grow at a compound annual growth rate over
7% in the coming years, according to the China National Chemical Information
Centre (CNCIC). In 2008, Chinese farmers reduced their usage of traditional
fertilizers by approximately 30% year over year because of surging prices, thus
impacting the fertility of the farmlands. Factors like these are expected to
increase demand for compound fertilizers in order to boost fertility
rapidly.
  Although
we recently began to distribute our products into several other Asian and
Southeast Asian countries, the PRC is the principal market for our organic
compound fertilizers and related agricultural products.
  The
PRC’s “Green Food” Industry
  Crops
grown with the use of our products are eligible to qualify for the “AA Green
Food” rating administered by the China Green Food Development Center, an agency
under the jurisdiction of the Ministry of Agriculture of the PRC. The green food
rating system consists of an “A” rating and a more stringent “AA” rating. The
“AA” rating indicates that the crops contain minimal chemical residue from
fertilizers (however, our products themselves do not bear the “AA green food”
designation). “Green Food” is food that is deemed safe, free from pollutants and
harmful chemicals, and of good quality.
  In 1990,
the PRC Ministry of Agriculture began to encourage the production of “Green
Food”. In 1992, the PRC Ministry of Agriculture established the China Green Food
Development Center to oversee food quality and the development and management of
Green Food at the national and provincial level in the PRC. In 1993, the
Ministry of Agriculture established regulations on the use of Green Food
labeling. In 1996, an identifying trademark for Green Food was registered in the
PRC and put into use. More information regarding the China Green Food
Development Center, including the green food regulatory and authentication
process, is available at the Center’s website at
http://www.greenfood.org.cn/sites/GREENFOOD. The contents of this website are
not incorporated by reference herein.
  Our
Growth Strategy
  We
believe that our increased capacity to produce organic granular compound
fertilizer products, which have a lower price point and greater market appeal
than our organic liquid compound fertilizer products, makes us well positioned
to expand sales and increase revenues. We have focused on the expansion of our
granular production because the market for organic granular fertilizer is larger
than the current market for organic liquid fertilizer due to the familiarity and
tradition of farmers’ using granular fertilizers. In addition, the per unit
amount of granular fertilizer used for sowing coverage is much higher than the
amount used for liquid fertilizer.
  Our goal
is to further expand our product’s market share throughout the PRC by
establishing branded chain stores which will sell our own branded products
(e.g., organic fertilizers) and international and local sourced products (e.g.,
seeds, pesticides and other agricultural products). Our growth strategy also
includes the following strategies:
  4
  Continue Organic Growth
Initiatives. We believe that the current fertilizer market is fragmented
and represents an excellent opportunity for us to gain additional market share
from our competitors, mainly chemical fertilizer manufacturers. We intend to
establish branded chain stores by converting our current offices into a flagship
store and distribution center and inviting our current distributors to join in
our line as franchisees to operate chain stores under our brand. We also intend
to leverage our strong brand, quality customer services and quality of our
products to gain incremental business in the fertilizer market. Finally, we
strongly believe that as we continue to grow, economies of scale and enforced
brand awareness will bring strong profitability to us.
  Expand the lines of our
products. Beside our current organic fertilizers, we will seek to source,
either internally or locally, other agricultural products, like seeds,
pesticides, agricultural equipments and tools to expand the lines of our
products to meet all the necessities of farmers in the PRC. We expect that all
these products will be sold through our branded chain stores directly to
farmers, who are the end customers.
  Capitalize upon Strong Industry
Dynamics in the PRC.  Continued economic growth in the PRC,
coupled with evolving government policy on preservation of farmlands by
promoting use of organic fertilizers on one hand and improvement of farmer’s
income on another hand, present us with significant future growth
opportunities.  We believe that with continued strong government
commitment, we will continue to benefit from it.
  Execute Strategic
Acquisitions.   We intend to acquire certain domestic targets
that are accretive and synergistic to our growth strategy.
  Competitive
Advantages
  We
believe we are well-positioned to continue to be the largest manufacturer of
organic compound fertilizers in the PRC and to become a leading distributor of
organic compound fertilizers in the PRC and beyond.  We believe we
have several competitive advantages, including the following:
  ·
              Well
      established brand name products;
  ·
              Established
      distribution channel in northern and eastern  provinces of the
      PRC; and
  ·
              Food
      grown with our products may be eligible to receive a AA Green Food
      rating.
  Our
Competitive Strengths
  We
believe that the following competitive strengths enable us to compete
effectively in the fertilizer market in the PRC:
  ·
              Strong
      Market Position. We are a leading manufacturer of
      fertilizer products and, more specifically, organic fertilizer products in
      liquid form, in the PRC.
  ·
              Recognized
      and Certified Product Offerings.  Our Tailong liquid
      brand of fertilizer products was favorably recognized by the China
      Association for Quality Supervision and the China Quality Standard
      Research Center in 2006 for product quality, brand reputation and customer
      loyalty.  Our fertilizer products also have been certified by
      the Ministry of Agriculture.
  ·
              Established
      Distribution Network.   We sell the majority of our
      fertilizer products through an extensive distribution network of regional
      factories, which help us to establish a local presence in each community
      we serve with multi-level sales support and to educate local retailers and
      farmers on the benefits of our fertilizer products.  Since 2007
      we have sold our Green Vitality products to Sinochem Fertilizer Co., Ltd,
      the PRC’s largest integrated agricultural company, which utilizes its own
      distribution network to distribute our
products.
  ·
              Efficient
      Infrastructure.   We have created a flexible and
      responsive infrastructure, which allows us to efficiently manufacture and
      deliver high-quality fertilizer products within a short delivery
      time
  ·
              Broad
      Customer Base.   We developed a diversified customer base
      of farmers and retailers located throughout the PRC and are not dependent
      on, or heavily concentrated in, any single customer or customer
      base.
  5
  Our
Strategy
  We
believe that our strong competitive position, our ability to meet customer
demands and our well-regarded product offerings will enable us to benefit from
the anticipated growth in the PRC fertilizer market.  We are committed
to enhancing our sales, profitability and cash flows through the following
strategies:
  ·
              Capitalize
      on our brand reputation to increase sales of new and existing
      products.   We intend to leverage the favorable
      reputation of our fertilizer products through collaboration with academic
      and governmental institutions which can attest to the quality of our
      current product offerings.  We plan to develop new compounds to
      better meet the changing needs of the PRC’s agricultural communities by
      tailoring our product offerings to meet the local needs of the farmers and
      to create greater reliability of fertilizer products nationwide. Over the
      past year we added an organic granular compound fertilizer to our product
      lines and constructed a granular fertilizer line near each of our existing
      factories, located in Harbin, Beijing and
  Xinjiang.
  ·
              Expand Our
      Domestic Operation.  We intend to build or acquire
      additional organic granular fertilizer factories in strategic locations in
      the PRC to serve new agricultural areas in Hebei and Sichuan provinces.
      When our recently completed Xinjian facility commences commercial
      production in early 2010 our organic granular compound fertilizer
      production capacity will reach 200,000 metric
  tons.
  ·
              Build &
      Operate Franchised Retail Stores in the PRC.  We plan to
      open between 30 and 50 large-scale distribution centers throughout the
      PRC’s central provinces in 2010, and hope to expand into eastern and
      western provinces in 2011.  Each distribution center could cover
      up to approximately 100 franchised retail chain stores.  We hope
      to use the franchised retail chain stores to introduce small provincial
      farmers to our products, educate them about the benefits of organic
      fertilizer over chemical fertilizer, and teach them how to properly use
      our products.   We believe that these chain stores will
      introduce our products to a vast network of farmers who otherwise operate
      outside of our existing distribution network and outside of the reach of
      traditional advertising media.
  ·
              Enhance
      Brand Awareness.   Our core future focus will be to build
      and enhance brand awareness of our “Lvlingbao” and “Tailong” products, as
      well as our “Green Vitality” product line and organic granular compound
      fertilizer by launching an extensive advertising campaign to educate
      retailers and farmers on the benefits of our liquid organic compound
      products.  We expect to combine these marketing efforts with our
      planned retail store expansion into locations that have little or no
      current exposure to our products. We believe that this strategy will allow
      us to expand our distribution and sales outside of our traditional base in
      northeast regions of the PRC and capture a larger market
      share.
  ·
              Increase
      Sales into Select Foreign Markets.   We plan to leverage
      our product offerings and brand reputation to expand our product sales
      into select markets outside of the PRC.  In June 2009 we entered
      into a 6-year marketing and distribution agreement with Odyssey
      International (Trading) Group Ltd., a Hong Kong corporation (“Odyssey”)
      that provides for Odyssey to have the exclusive marketing and distribution
      rights for the Company’s Lvlingbao series of organic liquid compound
      fertilizers in certain target markets, including, but not limited to,
      Central and South America, South Africa, Asian countries and overseas
      markets.
  Purchase
Agreement
 
 On May
15, 2009, Tailong entered into an amendment to the supplemental purchase
agreement among Yinlong, Pacific Dragon, Mr. Yu Chang, the Company’ s Chief
Executive Officer, President, Secretary and Chairman, and Ms. Xiao Rong
Teng, one of the Company’ s directors, pursuant to which Tailong amended the
settlement of the purchase consideration of 10% interest in Pacific Dragon to
cash payment of $1,000,000 and issuance of 1,745,000 new restricted shares of
common stock in the Company for the balance consideration.  On the
same date, Tailong completed the acquisition of 10% interest in Pacific Dragon
from Yinlong. Mr. Chang has an 85% equity interest in Yinlong and Ms. Teng owns
the remaining 15% equity interest.
  6
  Private
Placement
  On
October 19, 2009 we issued (i) an aggregate of 2,785,536 shares of common stock
(the “Investor Shares”) and (ii) warrants to purchase up to an aggregate of
1,857,024 shares of common stock (the “Warrant Shares”) at an initial
exercise price of approximately $5.38 per share, subject to adjustment, to
Carlyle Asia Growth Partners IV, L.P. and CAGP IV Co-Investment, L.P.
(collectively, the “Carlyle Investors”) for a purchase price of $15,000,000. The
exercise price of the warrants has a floor of $1.5329 per share, and in the
event that the warrants are exercised at that price, we would issue an
additional 4,666,663 shares (the “Additional Warrant Shares”) for an aggregate
of 6,523,691 shares issued pursuant to the warrants. The warrants issued to the
Carlyle Investors will become exercisable on April 19, 2010 and expire April 19,
2012.
 
 Additional
Warrant Shares would only occur if we fail to meet a predetermined net income
target of $11.5 million for the fiscal year ending December 31, 2009 where such
net income has been defined to exclude any extraordinary transactions and to be
increased by any non-cash charges incurred as a result of the Private Placement
including changes in fair value of warrants classified as derivatives, and
reasonable expenses incurred in connection with any public offering of the
Company’s securities. Pursuant to the Purchase Agreement, we are also obligated
to issue up to 7,000,000 shares of common stock (the “Make-Good Shares”) to the
Carlyle Investors in the event that the Company fails to meet the net income
target of $11.5 million, where such net income has been defined to exclude any
extraordinary transactions and to be increased by any non-cash charges incurred
as a result of the Private Placement including changes in fair value of warrants
classified as derivatives, and reasonable expenses incurred in connection with
any public offering of the Company’s securities.
    We
granted the Carlyle Investors a one-year right of participation in future
offerings by us of shares of our common stock, debt or equity securities
convertible, exercisable or exchangeable into common stock, or debt securities.
The right of participation was granted individually, on a pro rata basis based
upon each investor’s original subscription amount, and collectively no less than
$5 million and no more than $10 million. In addition, we granted the Carlyle
Investors the right to collectively designate one person to serve as a member of
our board of directors. On December 23, 2009, we appointed Carlyle’s designee,
Zheng “Anne” Wang, to serve as a member of our Board of directors. On January 8,
2010, the board of directors also appointed Charles Law to serve as a member of
our board of directors. The board of directors determined that Mr. Law was an
“independent director” as that term is defined and determined in accordance with
Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ Stock Market, LLC and
Section 10A(m)(3) of the Securities Exchange Act of 1934, as
amended.
  In
connection with the transaction, we entered into a registration rights
agreement, pursuant to which the Company agreed to prepare and file a
registration statement covering the resale of the Investor Shares and Warrant
Shares, and in the event they are issued, the Make-Good Shares and the
Additional Warrant Shares (collectively, the “Registrable Securities”) no later
than January 31, 2010. On February 1, 2010, we agreed with the Carlyle
Investors to extend the deadline for filing such registration statement until
March 15, 2010.  The registration of 2,785,536 of the shares of common
stock was filed on March 12, 2010 which satisfied our registration obligation
under the registration rights agreement.
  Expansion
of Facilities
  During
the third quarter of 2009, we completed the construction of our granular
production facilities in Xinjiang (50,000 metric tons).  As of today,
the Company has an annual production capacity of approximately 200,000 metric
tons for granular fertilizers.  It is expected that the Xinjiang
granular plant will commence its commercial production in the second quarter of
2010.
  Corporate
Structure
  China
Agritech, Inc. is a holding company with no operations.  We are the
parent company to our operating subsidiaries, Pacific Dragon, Anhui Agritech,
Beijing Agritech and Xinjiang Agritech, which are located in the
PRC.
  7
  
  Our
executive offices are located in the PRC at Room 3F No. 11 Building, Zhonghong
International Business Garden, Future Business Center, Chaoyang North Road,
Chaoyang District, Beijing, PRC 100024  and our telephone number is
+86 10-59621278. Our website address is www.chinaagritechinc.com.
  Our
Products
  Our
fertilizer products consist of organic liquid and granular compound fertilizers
which are derived from natural sources.  We believe that our
fertilizer products are capable of increasing crop yield by as much as 50%
depending on the kind of crop.
  Our
fertilizer is produced using proprietary formulas of humic acid and other amino
acids which have proven to have a significant effect on crop yield and quality
without the harmful side effects of chemical fertilizers.  Our
products contain over 30 active ingredients comprised of organic elements,
inorganic elements that are region specific and other active and stimulative
agents.
  Our
products, which are designed to be multi-functional, improve the photosynthesis
function in crops and the root absorption system, enhance the resistance of
crops to harsh environmental conditions and increase plant size and
quality.  Our liquid fertilizer formulas are highly concentrated,
blendable with pesticides or water for easy application and facilitate better
absorption rates due to low sedimentation.  Our products are suitable
for a variety of application methods, ranging from seed soaking, root dipping
and irrigation to application by machine and aircraft.
  Our four
main product lines and their primary uses are as follows:
  ·
              Lvlingbao III.
        Our Lvlingbao III liquid fertilizer product line blends humic
      acid, nitrogen, phosphorus, potassium, microelements, amino acid, active
      and stimulative agents and is specially formulated for fruits and
      vegetables.
  ·
              Lvlingbao IV.
        Our Lvlingbao IV liquid fertilizer line is produced using
      humic acid, nitrogen, phosphorus, potassium, and microelements and is
      formulated for large scale crops of fruits, vegetables and grains and
      suitable for jet spray application.
  ·
              Tailong
      I.  Tailong I, one of our liquid fertilizers products,,
      is our highly customized fertilizer line used for a wide variety of crops
      and plants that can be tailored to local soil
      conditions.  Tailong I has been derived from LvLingBao III, with
      adjustments in the amount of amino acid, active agent and stimulative
      agent for better nutrient
absorption.
  8
  ·
              Green
      Vitality.  Our Green Vitality fertilizer product line
      (either liquid or granular form) is a new, premium line that will be
      marketed in the central and southern regions of China and can be applied
      to enhance yield in a large variety of
crops.
  We are
committed to producing “green” agricultural products which are designed to be
environmentally friendly and intend to expand our product offerings to add
additional organic liquid and granular compound fertilizer
products.
  Raw
Materials and Our Principal Suppliers
  The main
raw materials of our products are humic acid, nitrogen, phosphorus, kalium and
other supplementary material, which are abundant in China. Humic acid is mainly
mined from a soft, brownish-black coal called lignite.  According to
the survey of energy resources published by the World Energy Council, China has
large lignite reserves.
  There are
numerous suppliers and vendors of the raw materials needed for our products in
China.  We have entered into non-binding business arrangement with our
main suppliers: Beijing Zhongxin Chemical Development Company Ltd., Harbin Hai
Heng Chemical Distribution Co., Ltd., Shenzhen Hongchou Technology Company Ltd.
and Langfang Tong Chuang Industrial and Trading Company Ltd.  In
fiscal year 2009, we purchased approximately 18%, 17%, 15% and 13% of our total
annual purchases from Beijing Zhongxin Chemical Development Company, Harbin Hai
Heng Chemical Distribution Co., Ltd., Shenzhen Hongchou Technology Company and
Langfang Tong Chuang Industrial and Trading Company Ltd.
respectively.
  Our
Distributors and Customers
  We sell
most of our products through various regional distributors in
China.  We have established and maintained long-term relationships
with major distributors whom we believe have local business experience and
established regional sales networks.
  For the
year ended December 31, 2009, distribution through our ten largest distributors
accounted for approximately 36.4% of our total annual sales. Our three largest
distributors represented 17.2% in the aggregate of our total annual
sales.
  For the
year ended December 31 2009, our sales of organic granular compound fertilizer
to SINOCHEM amounted to approximately $3,696,000, representing 4.9% of our total
sales.
  We hold
an annual ordering conference for our major distributors to place purchasing
orders through written sales agreements.  In addition, our sales
department holds ordering conferences with our distributors in various
provinces, including Heilongjiang, Jilin, Liaoning, Hebei, Shandong, Jiangsu,
Xinjiang and Sichuan from time to time to promote our products and maintain and
strengthen these relationships.  In addition, we also sell our
products to end users directly. All purchasing orders on our products are served
on a first come, first serve basis.
  We
provide our customers with a variety of customer services, including a technical
support hotline service, conducting seminars and the provision of instructional
DVDs.
  We have
also been marketing and promoting our products through broadcasting on Chinese
local TV channels, such as Heilongjiang Satellite Channel and participating in
activities organized by local governments to promote information about, and use
of, fertilizers.
  Competition
  Our
experience is that the compound fertilizer industry in China is highly
fragmented, consisting of numerous smaller regional manufacturers and larger,
domestic and international competitors.
  9
  Our major
competitors for liquid fertilizer in China include Guangxi Beihai Penshibao Co.,
Ltd, Henan Luo Xiaowang Group, and Shangdong Tianda 2116 whereas our major
competitors for granular fertilizer in China include Xia Men Tong Yong Xing
Chemical Co., Ltd., Liao Ning Pu Tian Tong Le Fertilizer Co., Ltd., Si Chuan
Quan Ming Fertilizer Co., Ltd. and Yan Tai Xin Feng Fertilizer Co., Ltd Our
major global competitors for liquid and/or granular fertilizers include Phosyn
from the UK, Shi Ma (Chinese translation) a part of BASF in Germany, Kemira
GrowHow Oyj in Finland, and Leffingwell in the United States. Due to the Chinese
government’s WTO commitment, China started to allow foreign companies to gain
the right to distribute and make retail sales of fertilizers beginning on
December 11, 2006. Our management believes that this has the potential to
change the competitive landscape in the Chinese fertilizer market in the near
future.  However, because fertilizer products usually need to be
specifically formulated for local plant, soil and climate conditions, we believe
that there are not many foreign competitors in our selected markets that are
capable of producing customized fertilizers that compete with our
products.  Nevertheless, as a result of the opening of the fertilizer
market to foreign producers, we expect that the amount of fertilizer imported to
China will rise significantly and that we will face increasing competition from
non-Chinese fertilizer manufacturers.  Judging by our 2009 financial
performance, management remains optimistic that our company can remain
competitive in its markets notwithstanding the entry of non-Chinese fertilizer
manufacturers into the marketplace, although we can make no assurances of this
belief in light of the anticipated increase in competition.
  Intellectual
Property
  We have
registered with the Trademark Office of the State Administration for Industry
and Commerce of China the trademark for the “Tailong” logo (registration
number:  836192), which is used on our products that are distributed
in China.  The trademark expires in 2016 and the Green Vitality
trademark is in the process of registration. .
  We rely
on trade secrets to protect our proprietary technology and
formulas.  We currently do not own any patents and have not applied
for patents on our proprietary technology and formulas because we do not want to
make available to the public a detailed description of our technology and
formulas as would be required in connection with a patent
application.  We believe that disclosure of our technology and
formulas would be detrimental to our future business.  If information
about our formulas and processes is not tightly controlled, we believe that more
competitors would likely emerge in this market.  Only certain of our
key executives have knowledge of our proprietary technology and
formulas.
  Mr. Yu
Chang, our CEO, President, Secretary and Chairman, has granted us
an exclusive license to use his know-how in manufacturing certain types of
organic liquid compound fertilizer on a royalty-free basis and has granted us a
long-term royalty and free license to use his know-how in manufacturing other
organic liquid compound fertilizers for three years ending December 31,
2011.  We are negotiating with Mr. Chang to extend the license to
use his know-how in manufacturing organic liquid compound fertilizers on a
royalty-free basis for another three-year period after it expires on
December 31, 2011.  Mr. Chang is under contractual obligations
with us to keep the confidentiality of this technology and refrain from
licensing this technology to any third party or using the technology for his own
benefit.
  Employees
  As of
December 31, 2009, we had approximately 305 full-time employees, of which 45
were administrative and managerial staff; 150 were sales staff and 110 were
manufacturing workers.  We also hire temporary manufacturing workers
to supplement our manufacture capabilities at periods of high demand. None of
our employees are under collective bargaining agreements and they all reside in
China.  We believe that we maintain a satisfactory working
relationship with our employees and we have not experienced any significant
labor disputes or any difficulty in recruiting staff for our
operations.
  Research
and Development
  We
conduct on-going research and development activities relating to the improvement
of the organic liquid compound fertilizers we manufacture and the control of
related manufacturing costs.  Our primary research and development
facilities are located in Beijing.  All research and development
expenses are included in our operating and administrative
expenses.
  10
  Government
Regulation
  All
fertilizers produced in China must be registered with the PRC Ministry of
Agriculture.  No fertilizers can be manufactured without such
registration.  There are two kinds of registrations: interim
registration and formal registration.  The interim registration is
valid for one year and applies to fertilizers in the stages of in-the-field
testing and test selling.  All fertilizers that have completed
in-the-field testing and test selling must obtain formal registration that, once
obtained, is valid for five years and, thereafter, may be renewed for five-year
periods.  We have obtained the necessary Formal Fertilizer
Registration Certificate for all of our fertilizer products from the PRC
Ministry of Agriculture. Our formal fertilizer certificate was renewed on May
28, 2008 and is valid for a period of five years starting from May 28,
2008.Additionally, fertilizer’s manufacturers in the PRC must have a
manufacturing license to make fertilizers.  We have a current and active
license permitting us to manufacture our fertilizers.
  As of
December 31, 2009, we believe that we are in material compliance with all
registrations and requirements for the issuance and maintenance of all licenses
required by the governing bodies and that all license fees and filings are
current.
  If we
were to lose any of these licenses, we would only have a limited time to
re-apply for such licenses and would face possible regulatory
fines.  However, such licenses will generally only be revoked under
rare circumstances, such as when illegal activities have occurred.  We
are not subject to any environmental controls or restrictions that require the
outlay of capital or the obtaining of a permit in order to engage in business
operations.
  Item
1A.      Risk Factors
  Risks
Related To Our Business
  If
we fail to effectively expand our current operations and capacity to satisfy
demand for our granular fertilizer products, our results of operations and
business prospects could be impaired.
  We
believe that over the next year demand for our granular fertilizer products will
outgrow our present production capacity of 200,000 metric tons. Our future
success depends on our ability to expand our business to address the growth in
demand for our granular fertilizer products. Because our industry is highly
competitive, if we are unable to increase our production capabilities to meet
increased demand for our products, we may lose existing customers, as well as
potential additional customers, to competitors with greater production
capacities.  If we lose our existing customers our revenues could
decrease and accordingly our overall financial performance could be
significantly impaired.  In addition, we currently rely on
distributors to distribute our products to multiple end users.
  Our
ability to add production capacity and increase output is subject to significant
risks and uncertainties, including:
  ·           the
availability of additional funding to build manufacturing facilities and
purchase raw materials on favorable terms or at all;
  ·           our
management and minimization of delays and cost overruns caused by problems with
our suppliers of raw materials and third-party vendors; and
  ·           our
receipt of any necessary government approvals or permits that may be required to
expand our operations in a timely manner or at all.
  If we
cannot successfully implement additional production capacity increases
efficiently and cost-effectively, we will be unable to satisfy any increased
demand for our granular fertilizers, which could significantly impair our
financial performance.
  11
  We
currently intend to build branded retail chain stores and we do not have any
prior experience in the retail business.
  We
currently plan to build branded chain stores in 2010 to sell our own and third
party products, including fertilizers, seeds, pesticides, and other agricultural
products throughout central provinces of China. We do not have any track record
in the retail business and there can be no assurance that our Company will be
successful in planning, building or operating the retail stores.  The
ability to operate our new stores successfully is subject to various
contingencies, many of which are beyond our control. These contingencies include
our ability to secure suitable locations on a timely basis and on satisfactory
terms, our ability to hire, train and retain qualified personnel and the
successful integration of our stores with our existing marketing and
distribution network. There can be no assurance that suitable locations will be
available or that our proposed retail operations will be successfully
implemented or integrated with our existing operations. The costs associated
with acquiring, assimilating and opening new stores may adversely affect our
profitability. The planned expansion of our sales channel may not produce the
revenues, earnings, or business synergies that we anticipate which could cause
our business and financial condition to be materially and adversely
affected.
  The
successful implementation of this business plan will require the dedication of
significant time and of our senior management, which may cause senior management
to divert their attention from the normal daily operations of our fertilizer
manufacturing business which could adversely impact our overall business
operations.
  If
our projections regarding the future market demand for our products are
inaccurate, our operating results and our overall business may
suffer.
  We have
made significant capital investments in anticipation of rapid growth in the
organic compound fertilizer market in the PRC. The expansion of our internal
manufacturing capabilities has required significant up-front fixed costs. If
market demand for our products does not increase as quickly as we have
anticipated and align with our expanded manufacturing capacity, we may be unable
to offset these costs and to achieve economies of scale, and our operating
results may be adversely affected as a result of high operating expenses,
reduced margins and underutilization of capacity. Our ability to meet such
excess customer demand could also depend on our ability to raise additional
capital and effectively scale our manufacturing operations.
  If
we cannot protect the proprietary formula and manufacturing processes for our
concentrated organic liquid and granular compound fertilizer products it could
increase our competition and cause our operating results to suffer.
  Our
success will depend in part on our ability to protect our proprietary formula
and manufacturing process for organic liquid and granular compound fertilizer
products. We rely on trade secrets to protect our proprietary formulas and
manufacturing processes.  We have not applied for patents for our
technology and formulas because we believe an application for such patents would
result in public knowledge of our proprietary technology and formulas and could
lead competitors to attempt to copy our products, thereby increasing
competition. Only certain of our key employees have knowledge of our proprietary
technology and formulas. This could in turn result in a decrease of our market
share and hurt our operating results.
  Our
subsidiary Pacific Dragon entered into a license agreement with Mr. Yu Chang,
our Chairman, CEO and President, under which Mr. Chang granted us an exclusive
license to use his know-how in manufacturing Tailong organic liquid compound
fertilizer on a royalty-free basis.  The Company continues to develop the
manufacturing know-how of the product at its expense. Under the license
agreement, Mr. Chang has the obligation to maintain the confidentiality of this
technology and is prohibited from licensing this technology to any third party
or using the technology for his own benefit. The license agreement is for a
period of three years expiring
December 31, 2011. We are negotiating with Mr. Chang to extend this exclusive
license for an additional three-year term, but we cannot assure you that such an
agreement will be met.Despite these precautions, the legal regime
protecting intellectual property rights in China is weak. If we are not able to
enforce our licensing agreement with Mr. Chang and fully protect our proprietary
trade secrets, if our employees unintentionally or willfully disclose our
confidential technology or know-how to competitors, or if our competitors
independently develop similar or superior products, our competitors may be able
to more effectively offer products similar to ours and/or produce products with
a cost structure similar to ours, if not better, and we may thereby lose any
competitive advantage that we currently have. If we are forced to take legal
action to protect our proprietary formulas and processes, we will incur
significant expense and further could not guarantee a favorable
outcome.
  12
  In
addition, our competitors may counterfeit our products and use our trademark.
These counterfeit products could damage our reputation and create confusion for
our customers. Our financial results would be negatively impacted by the lost
sales to the fake and/or competitive product or by lost sales from a damaged
reputation.
  Our
proprietary fertilizer formulas may become obsolete which could materially
adversely affect the competitiveness of our future fertilizer
products.
  The
production of our fertilizer products is based on our proprietary fertilizer
formulas. Our future success will depend upon our ability to address the
increasingly sophisticated needs of our customers by supporting existing and
emerging humic acid fertilizer products and by developing and introducing
enhancements to our existing products and new products on a timely basis that
keep pace with evolving industry standards and changing customer requirements.
If our proprietary formula becomes obsolete as our competitors develop better
products than ours, our future business and financial results could be adversely
affected.
  We
may be subject to more stringent governmental regulation on our
products.
  The
manufacture and sale of our agricultural products in the PRC is regulated by the
PRC Ministry of Agriculture and the local government of the Provinces in which
our factories are situated. The legal and regulatory regime governing our
industry is evolving, and we may become subject to different, including more
stringent, requirements than those currently applicable to us. While we believe
a more stringent standard will have more of an adverse impact on those
manufacturers with poor quality products, we cannot assure you any regulatory
change will not adversely affect our business.
  Potential
environmental liability could have a material adverse effect on our operations
and financial condition.
  To our
knowledge, neither the production nor the sale of our products constitutes
activities, or generate materials that create any environmental hazards or
violate the current PRC environmental laws. Although it has not been alleged by
PRC government officials that we have violated any current environmental
regulations, we cannot assure you that the PRC government will not amend the
current PRC environmental protection laws and regulations in a way that could
adversely impact us. Our business and operating results may be materially and
adversely affected if we were to be held liable for violating existing
environmental regulations or if we were to increase expenditures to comply with
environmental regulations affecting our operations.
  If
we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results. As a
result, current and potential investors could lose confidence in our financial
reporting, which could harm our business and have an adverse effect on our stock
price.
  Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to
annually furnish a report by our management on our internal control over
financial reporting. Such report must contain, among other matters, an
assessment by our principal executive officer and our principal financial
officer on the effectiveness of our internal control over financial reporting,
including a statement as to whether or not our internal control over financial
reporting is effective as of the end of our fiscal year. This assessment must
include disclosure of any material weakness in our internal control over
financial reporting identified by management. In addition, under current SEC
rules, we will be required to obtain an attestation from our independent
registered public accounting firm as to our internal control over financial
reporting for our annual report on Form 10-K for our fiscal year ending December
31, 2010. Performing the system and process documentation and evaluation needed
to comply with Section 404 is both costly and challenging. During the course of
our testing we may identify deficiencies which we may not be able to remediate
in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002 for
compliance with the requirements of Section 404. In addition, if we fail to
maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of
2002. Failure to achieve and maintain an effective internal control environment
could also cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on the price of our
common stock.
  13
  As
of December 31, 2009, we had approximately $39.3 million of accounts receivable,
net, or 39.0% of our total assets and we extend credit to our customers for long
periods of time which adversely impact our working capital.
  Our
liquid organic fertilizers account for approximately 62% of our total annual
sales for the year ended December 31, 2009.  We typically extend our
liquid fertilizer’s customers credit for their purchase of our products to allow
them use the proceeds of their harvests to repay us for their purchase of our
products, which typically spans from six to nine months. As of December 31,
2009, we had approximately $29.5 million of accounts receivable from customers
of liquid fertilizers, or 75.1% of our total accounts receivable.  If
customers responsible for a significant amount of accounts receivable were to
become insolvent or otherwise unable to pay for products and services, or to
make payments in a timely manner, our business, results of operations or
financial condition could be materially adversely affected. A natural disaster,
such as a wildfire, flood or drought, or an economic or industry downturn could
materially adversely affect the collection of these accounts receivable, which
could result in longer payment cycles, increased collection costs and defaults
in excess of management's expectations. A significant deterioration in our
ability to collect on accounts receivable could also impact the cost or
availability of financing available to us. Working capital management, including
prompt and diligent billing and collection, is an important factor in our
results of operations and liquidity. We cannot assure you that natural
disasters, system problems, industry trends or other issues will not extend our
collection period, adversely impact our working capital.
  We
depend heavily on Mr. Yu Chang, our CEO, President, Secretary and director, and
without his services our prospects would be severely limited.
  Our
future business and results of operations depend in significant part upon the
continuing contribution of Mr. Yu Chang, our CEO, President, Secretary and
Chairman. Mr. Chang has extensive experience in the organic compound fertilizer
industry and is directly involved in all of our business operations. We
currently have no employment agreement with Mr. Chang and Mr. Chang is not
obligated to devote any specified number of hours to working for
us.  There can be no assurance that we will be able to reach an
agreement with Mr. Chang on terms favorable to us, if at all.  If Mr.
Chang ceases to be employed by us, we may have difficulty finding a suitable
replacement with equal leadership and industry experience, and our business
would suffer because we will not have the leadership needed to capitalize on
market opportunities and to direct our growth, leading to a possible decrease in
revenues and inappropriate capital investments in projects that may not benefit
our long-term growth. Mr. Chang has both sales contacts in the Agricultural
industry and know-how to produce our products, making his expertise both unique
and valuable to us.  We do not maintain key-person insurance on any of
our executive officers.
  We
depend heavily on skilled research and development personnel, and any loss of
such personnel, or the failure to continue to attract such personnel in the
future, could harm our business.
  The
agricultural chemicals business is specialized and requires the employment of
personnel with significant scientific and operational experience in the
industry. Accordingly, we must attract, recruit and retain a sizeable workforce
of technically and scientifically competent employees. Our ability to
effectively implement our business strategy will depend upon, among other
factors, the successful recruitment and retention of additional management and
other key personnel that have the necessary scientific, technical and
operational skills and experience with the fertilizer industry. These
individuals are difficult to find in the PRC and we may not be able to retain
such skilled employees. If we are unable to hire individuals with the requisite
experience we may not be able to produce enough products to optimize profits,
research and development initiatives may be delayed and we may encounter
disruptions in production and research which will negatively impact our
financial condition.
  14
  We
currently rely on a small number of third parties to supply the key raw
materials we use to produce our products.
  Our
business depends upon the availability of key raw materials, including humic
acid, nitrogen, phosphorus, kalium, and other supplementary material. We rely on
only a few external suppliers for these raw materials and we have only
non-binding supply agreements. In fiscal year 2009, we purchased approximately
18%, 17%, 15% and 13% of our total annual purchases from Beijing Zhongxin
Chemical Development Company, Harbin Hai Heng Chemical Distribution Co., Ltd.,
Shenzhen Hongchou Technology Company and Langfang Tong Chuang Industrial and
Trading Company Ltd., respectively.  Our purchases through December
31, 2009 were from similar sources and in similar amounts, and for the 2010
fiscal year we expect that our raw materials suppliers will be substantially
similar to past years and the amount of raw materials will increase commensurate
with the increase in the demand for our fertilizer products. We have entered
into written agreements with all of these suppliers, each under supply
agreements that expire in December 2010. If any of our major suppliers were to
default or become unable to deliver the raw materials in sufficient quantities,
we may be unable to purchase these raw materials from alternative sources on the
same or similar terms, which could result in a significant increase in our
operating costs. When these supply agreements expire in December 2010, we may be
unable to negotiate new agreements with these suppliers on terms favorable to
us, or at all.  In addition, any disruption in the supply of our raw
materials could cause delay in the delivery of our products which would be
harmful to our sales reputation and business. If supply is disrupted the
increased amount we have to pay for raw materials could negatively impact our
margins, cause us to delay deliveries which may cause us to breach contracts or
damage customer relationships or cause us to cease production if an alternate
supplier cannot be found. If we were unable to procure replacement supplies, our
inability to meet the production demands of our customers could cause the loss
of customers and/or market share. Our financial results could be negatively
impacted by the lost sales or decreased margins.
  We
rely on a limited number of products to achieve most of our
revenues.
  We derive
a substantial percentage of our revenues from a limited number of products, and
we expect these products to continue to account for a large percentage of our
revenues in the near term. For example, our liquid organic fertilizer accounted
for 91.0% and 62.0% of our revenue for the years ended December 31, 2008 and
2009, respectively, while granular fertilizer accounted for 9.0% and 38.0% of
our revenue for the year ended December 31, 2008 and 2009,
respectively.  Continued market acceptance of these products is,
therefore, critical to our future success. Our business, operating results,
financial condition, and cash flows could therefore be adversely affected by: a
decline in demand for even a limited number of our products; a failure to
achieve continued market acceptance of our key products; export restrictions or
other regulatory or legislative actions which could limit our ability to sell
those products to key customer or market segments; an improved version of
products being offered by a competitor in the market in which we participate;
increased pressure from competitors that offer broader product lines;
technological change that we are unable to address with our products; or a
failure to release new or enhanced versions of our products on a timely
basis.  This may impact our ability to maintain or expand our business
with certain customers.
  Our
liquid and granular fertilizer sales have seasonal variations and adverse
weather conditions could reduce demand for our products.
  We
experience seasonal variations in our revenues and our operating costs. The peak
selling season for our liquid fertilizer products is from April through
September. Periods of cold weather may delay the application of the liquid
fertilizer, or render it unnecessary, thereby reducing demand for such
fertilizer products. During the fiscal year ended December 31, 2009,
approximately 60.8% of our annual liquid fertilizer sales volume came from the
second and third fiscal quarters, when demand for our liquid fertilizer products
typically peaks during planting season and prior to harvest. We believe that the
peak selling season for our granular fertilizer products is from October through
March the next calendar year.  Since our granular fertilizer was only
commercially launched into the market in the second quarter of 2009, we have not
yet developed an established record of seasonal revenues for these products.
Although we believe that the peak selling seasons for our liquid and granular
fertilizers as referenced above are different and do not overlap, we may still
experience seasonal variations, and we cannot assure you that sales of our
granular fertilizer products will mitigate the seasonal impact of fertilizer
sales.
  If
we are unable to design, manufacture, and market products in a timely and
efficient manner, we may not remain as competitive.
  Some of
our products are characterized by continuing technological advancement, changes
in customer requirements, and evolving product
standards.  Accordingly, we devote a substantial amount of resources
to product development. To compete successfully, we must develop and offer new
and/or improved products that provide increasingly higher levels of performance
and reliability.  New technologies may be untested or unproven. In
some instances, product requirements or specifications may be
modified.  As a result, we may experience technological and other
performance difficulties, which may result in delays, setbacks and cost
overruns.  Product development is highly uncertain and we cannot
assure you that we will successfully develop new products. Our inability to
develop and offer new and/or improved products or to achieve customer acceptance
of these products could limit our ability to compete in the market or to grow
revenues at desired rates of growth.
  15
  Our
ability to attract new customers in the PRC depends on the continued transition
from the use of less expensive chemical fertilizers to organic fertilizers that
we sell.
  We
estimate that approximately 90% of the fertilizer products used in the PRC today
are chemical fertilizers, rather than organic fertilizers.  Farmers in
the PRC have been using chemical fertilizers for decades, and we believe that
our growth depends on our ability to convince these farmers to switch to organic
fertilizers, such as our products, despite the increased cost of such
products.  Many prospective customers are rural farmers that are
isolated and, we believe, lack an understanding of the environmental and health
benefits of our organic fertilizer products.  Even if these potential
customers are aware of the benefits of our products, we believe that the
increased cost of our products as compared to chemical fertilizers may be
prohibitive for some rural farmers.  While we may take steps, though
our distributors, to educate users of chemical fertilizers about the benefits of
our products, we believe that it will be difficult to convince significant
numbers of small farmers, some of who use no fertilizer at all, to purchase our
products.  If we cannot continue to drive the transition to organic
fertilizer products in the provinces that we serve, our sales will stagnate and
our financial results will suffer.
  Our
entry into foreign markets exposes us to changes in foreign regulations and
other risks inherent to international business, any of which could effect our
results of operations.
  In June
2009, we granted exclusive marketing and distribution rights for certain of our
Lvlingbao organic liquid fertilizer products to Odyssey International (Trading)
Group Ltd. (“Odyssey”), which plans to market our products in Central and South
America, South Africa and certain Southeast Asian
countries.  Distributing our products in these markets presents risks
including:
  ·           volatility
in general economic, social and political conditions;
  ·           differing
tax rates, tariffs, exchange controls or other similar
restrictions;
  ·           changes
in currency rates;
  ·           inability
to repatriate income or capital;
  ·           changes
in, and compliance with, domestic and foreign laws and regulations which impose
a range of restriction on operations, trade practices, trade partners and
investment decisions;
  ·           seizure
of our products by foreign governments
  ·           boycotts
and embargoes that may be imposed by the international community on countries in
which we operate;
  ·           labor
unrest; and
  ·           disruptions
due to civil war, election outcomes, shortages of commodities, power
interruptions or inflation; the imposition of unexpected taxes or other payments
on revenues.
  Any of
these risks could limit our ability to operate or have a negative impact on our
profitability.
  16
  We
have granted exclusive rights to market and distribute our Lvlingbao line of
liquid organic compound fertilizers to Odyssey and their efforts to market and
distribute our products are outside of our control.
  In June
2009 we granted Odyssey the exclusive right to market and distribute our
Lvlingbao line of liquid organic compound fertilizers in Guangdong, Guangxi and
Hainan provinces within the PRC, as well as outside of the PRC, such as Central
and South America, South Africa and certain Southeast Asian
countries.  The revenue we earn from the sale of our products under
the agreement depends heavily on Odyssey’s efforts. Odyssey has significant
discretion in determining the efforts and resources it applies to the marketing
and sale of our products, and Odyssey has a significant number of other clients
whose products it distributes. Furthermore, regardless of the effort and
resources they invest, Odyssey may not be effective in distributing or marketing
our products.   A disagreement between us and Odyssey could lead
to lengthy and expensive dispute resolution proceedings as well as to extensive
financial and operational consequences to us, and have a material adverse effect
on our business, results of operations and financial condition. If our
relationship with Odyssey were to terminate, we may not be able to enter into
another distribution and marketing agreement with a company with similar
resources to distribute our products and perform on acceptable terms or at all.
As a result, we could experience delays in our ability to distribute our
products and increased expenses, all of which would have a material adverse
affect on our business, results of operations and financial
condition.
  Our
operating results will suffer if the price of raw materials increases and we
cannot pass the increased cost through to our customers.
  The
primary raw materials included in our products are humic acid, nitrogen,
phosphorus, kalium and other supplementary material. The prices for these raw
materials are subject to market forces largely beyond our control, including
energy costs, organic chemical feedstock, market demand, and freight costs. The
prices for these raw materials may fluctuate significantly based upon changes in
these forces. Our operating results may be seriously harmed if we are unable to
pass any raw material price increases through to our customers due to lower
margins from our sales. If we are forced to increase prices of our products due
to increases in the prices of raw materials, the demand for our products could
decrease, which could materially harm our operations and financial
results.
  Demand
for our products may decrease if the PRC government changes the requirements for
the “Green Food” rating.
  Food
grown using our fertilizer products qualifies to be certified by the PRC
government as Grade AA “Green Food.” Green food certified by the China Green
Food Research Center can be divided into 2 groups: Grade A (allowed to use
certain amount of chemical materials) and Grade AA (containing little or no
chemical materials - also known as organic food). The Green food certification
came about in response to the overuse of fertilizers and pesticides in the PRC,
as well as the use of unsafe fertilizers and pesticides, which led to the sale
of products with dangerous and high concentrations of harmful chemicals and
several publicized incidents of food-caused illness. In addition to creating a
dangerous situation for domestic consumers, it also created problems for the
PRC’s food exporters which, in many cases, were barred from exporting to certain
countries which have minimum acceptable standards for pesticide and chemical
use.  The loss of our “Green Food” certification would have a material
and adverse impact on our revenues and results of operations.
  The
industry in which we do business is highly fragmented and competitive and we
face competition from numerous fertilizer manufacturers in the PRC and
elsewhere.
  We
compete with approximately 300 small-sized, local Chinese fertilizer
manufacturers.  Our most significant competition comes from sellers of
chemical fertilizers who tend to be concentrated in the PRC’s central
provinces.  Chemical fertilizers tend to be less expensive than
organic fertilizers, and we estimate that chemical fertilizers make up about 90%
of the fertilizer market in the PRC.  While we may have greater
resources than our smaller competitors, it is possible that these competitors
have better access in certain local markets to customers and prospects, an
enhanced ability to customize products to a particular region or locality and
established local distribution channels within a small region. Furthermore, we
face competition from large domestic and international fertilizer producers and
traders who import fertilizers into the PRC such as Guangxi Beihai Penshibao
Co., Ltd (www.psb.com.cn), Henan Luo Xiaowang Group (www.luoxiaowang.com), and
Shangdong Tianda 2116 (www.2116.cn). Our major international competitors are
Phosyn from the UK (www.cuikang.com/), Shi Ma (Chinese translation) part of BASF
of Germany, Kemira GrowHow Oyj from Finland, and Leffingwell from the USA. These
imported products range from fertilizers with single chemical elements, such as
urea, phosphate and potash, to standard nitrogen phosphate, potassium compound
fertilizers. The quality of the imported products is generally higher and more
stable than fertilizers produced in the PRC. While our resources may not be as
great as our larger competitors, we believe our product quality, sales network,
brand recognition and sales network are superior. If our competitors are able to
gain greater market share or improve their sales efforts, our sales may
decrease, we may be forced to lower our prices, or our marketing costs may
increase, all of which could negatively impact our financial
results.
  17
  Our major
competitors may be better able than we to successfully endure downturns in our
industrial sector. In periods of reduced demand for our products, we can either
choose to maintain market share by reducing our selling prices to meet
competition or maintain selling prices, which may likely sacrifice market
share.  Sales and overall profitability would be reduced in either
case.
  Historically,
imported fertilizers have been subject to tariffs, duties and quotas imposed by
the PRC government.  In connection with the PRC’s entry into the World
Trade Organization, based on the WTO commitment, the PRC government started to
allow foreign companies to sell and distribute fertilizers beginning in December
2006. As the PRC fertilizer market starts to gain more market participants, we
will face increased competition which may create pricing, supply and demand
constraints and cause our profit margins to suffer.
  We
do not presently maintain business disruption insurance. Any disruption of the
operations in our factories would damage our business and disrupt our production
and have a material adverse effect on our business, financial position on
results of operations.
  Our
business could be materially and adversely affected by power shortages, natural
disasters, terrorist attacks or other events in the PRC. For example, in early
2008, parts of the PRC suffered a wave of strong snow storms that severely
impacted public transportation systems and the power supply in those areas. In
May 2008, Sichuan Province in the PRC suffered a strong earthquake measuring
approximately 8.0 on the Richter scale that caused widespread damage and
casualties. The May 2008 Sichuan earthquake may have a material adverse effect
on the general economic conditions in the areas affected by the earthquake. In
July 2008, explosive devices were detonated on several buses in Kunming, Yunnan
Province of the PRC, which resulted in disruptions to public transportation
systems in Kunming and casualties. Any future natural disasters, terrorist
attacks or other events in the PRC could cause a reduction in usage of, or other
severe disruptions to, public transportation systems and could have a material
adverse effect on our business and results of operations.
  The
demand for our organic fertilizer products fluctuates significantly with weather
conditions, which may delay the application of the fertilizer or render it
unnecessary at all. If any natural disasters, such as flood, drought, hail,
tornado or earthquake, occur, demands for our products will be reduced. In
addition, in some cases, we allow our distributors to purchase our products
partially on credit. The distributors, in turn, may sell the fertilizer to
farmers on credit. If any natural disaster occurs, reduced crop yields may cause
farmers to default on their payments which could harm our cash flow and results
of operations. If we are unable to collect on our sales our cash flows will
decrease and we will have additional expenses from bad debts which will harm our
published financials results.
  While we
have property damage insurance and automobile insurance, we do not carry
business disruption insurance, which is not readily available in the PRC. Any
disruption of the operations in our factories would have a significant negative
impact on our ability to manufacture and deliver products, which would cause a
potential diminution in sales, the cancellation of orders, damage to our
reputation and potential lawsuits.
  The
fertilizer products that we manufacture pose safety risks and could expose us to
product liability claims.
  Defects
in, or unknown harmful effects caused by, organic and inorganic chemical and
elements in our products could subject us to potential product liability claims
that our products cause some harm to the human body or to property. Although we
have adopted safety measures of industry standard in our research, development
and manufacturing processes, accidents may still occur. Any accident, either at
the manufacturing phase or during the use of our products, may subject us to
significant liabilities to persons harmed by these products. We have renewed
product liability insurance to cover claims from personal injuries or property
damage caused by our products for the period from July 11, 2009 to July 10,
2010. Our insurance coverage was limited to approximately $585,000 (RMB
4,000,000) and may not have been sufficient to cover potential
claims.  A successful claim against us that is in excess of our
insurance coverage could significantly harm our business and financial
condition. Public perception that our products are not safe, whether justified
or not, could impair our reputation, involve us in litigation, damage our brand
names and our business. As of the filing of this prospectus, no product
liability claim has ever been brought against us. However, if we are involved in
litigation in the future the potential judgment or settlement along with the
litigation costs could harm our financial performance.
  18
  Risks
Related To Doing Business In the PRC
  Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of the PRC could
materially and adversely affect our business.
  All of
our operations are conducted in the PRC and substantially all of our sales are
made in the PRC. Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political and
legal developments in the PRC. The PRC economy differs from the economies of
most developed countries in many respects, including:
  ·           the
amount of government involvement;
  ·           the
level of development;
  ·           the
growth rate;
  ·           the
control of foreign exchange; and
  ·           the
allocation of resources.
  While the
PRC economy has grown significantly since the late 1970’s, the growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on us. For example, our
financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.
  The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has in recent years implemented measures
emphasizing the utilization of market forces for economic reform, the reduction
of state ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of the productive
assets in the PRC is still owned by the PRC government. The continued control of
these assets and other aspects of the national economy by the PRC government
could materially and adversely affect our business. The PRC government also
exercises significant control over economic growth in the PRC through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Efforts by the PRC government to slow the
pace of growth of the PRC economy could result in decreased capital expenditure
by energy users, which in turn could reduce demand for our
products.
  Any
adverse change in the economic conditions or government policies in the PRC
could have a material adverse effect on the overall economic growth and the
level of energy investments and expenditures in the PRC, which in turn could
lead to a reduction in demand for our products and consequently have a material
adverse effect on our business and prospects.
  The PRC laws and
regulations governing our
current business operations are sometimes vague and uncertain. Any changes
in such PRC laws and regulations may have a material and adverse effect on our
business.
  There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, and the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We and any future subsidiaries are
considered foreign persons or foreign funded enterprises under PRC laws, and as
a result, we are required to comply with PRC laws and regulations. These laws
and regulations are sometimes vague and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our
businesses.
  19
  A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect our customers, demand for our services and our
business.
  All of
our operations are conducted in the PRC and almost all of our revenues are
generated from sales in the PRC. Although the PRC economy has grown
significantly in recent years (Source: National Bureau of Statistics of China
and Xinhuanet.com), we cannot assure you that such growth will continue. The
humic acid based fertilizer industry in the PRC is growing (Source: Ministry of
Agriculture in the PRC), according to the PRC National Bureau of Statistics, the
PRC’s economy expanded 6.8% from a year earlier in the fourth quarter of 2008,
which means that a full-year growth for 2008 was 9.0%. It is the first time
since 2002 that the PRC has expanded by less than 10% annually. A number of
factors have contributed to this slow-down, including appreciation of the RMB,
which has adversely affected the PRC’s exports. In addition, the slow-down has
been exacerbated by the recent global crisis in the financial services and
credit markets, which has resulted in significant volatility and dislocation in
the global capital markets. It is uncertain how long the global crisis in the
financial services and credit markets will continue and how much adverse impact
it will have on the global economy in general or the PRC economy in particular.
We do not know how sensitive we are to a slowdown in economic growth or other
adverse changes in the PRC economy which may affect demand for our products. A
slowdown in overall economic growth, an economic downturn or recession or other
adverse economic developments in the PRC may materially reduce the demand for
our products and materially and adversely affect our business.
  Inflation
in the PRC could negatively affect our profitability and growth.
  While the
PRC economy has experienced rapid growth, it has been uneven among various
sectors of the economy and in different geographical areas of the country. Rapid
economic growth can lead to growth in the money supply and rising inflation. If
prices for our products do not rise at a rate that is sufficient to fully
absorb inflation-driven increases in our costs of supplies, our profitability
can be adversely affected.
  During
the past ten years, the rate of inflation in the PRC has been as high as 20.7%
and as low as -2.2%. These factors have led to the adoption by the Chinese
government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain inflation. In
order to control inflation in the past, the PRC government has imposed controls
on bank credits, limits on loans for fixed assets and restrictions on state bank
lending. The implementation of these and other similar
policies can impede economic growth and thereby harm the market for
our products.
  Substantially
all of our assets are located in the PRC and all of our revenues are derived
from our operations in the PRC.  Accordingly, our results of
operations and prospects are subject, to a significant extent, to the economic,
political and legal developments in the PRC.
  Substantially
all of our assets are located in the PRC and all of our revenues are derived
from our operations in the PRC.  Accordingly, our results of
operations and prospects remain subject, to a significant extent, to the
economic, political and legal developments in the PRC. The PRC economy differs
from the economies of most developed countries in many respects.
  Since
1978, the PRC has been one of the world’s fastest-growing economies in terms of
gross domestic product, or GDP growth. We cannot assure you, however, that such
growth will be sustained in the future. If, in the future, the PRC’s economy
experiences a downturn or grows at a slower rate than expected, there may be
less demand for spending in certain industries.
  Our
ability to implement our business plan is based on the assumption that the
Chinese economy will continue to grow. The PRC’s economic growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on us.
  20
  The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although in recent years the PRC government has implemented measures
emphasizing the use of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in the PRC is still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. It also exercises significant control over PRC
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. We cannot assure
you that changes in the PRC’s economic, political or legal systems will not
detrimentally affect our business, prospects, financial conditions and results
of operations.
  Adverse
changes in political and economic policies of the PRC government could impede
the overall economic growth of the PRC, which could reduce the demand for our
product offerings and adversely affect our business and prospects.
  We
conduct substantially all of our operations and generate all of our revenues in
the PRC. Accordingly, our business, financial condition, results of operations
and prospects will be affected significantly by changes in the PRC’s economic,
political and legal systems in the PRC. The PRC economy differs from the
economies of most developed countries in many respects, including:
  ·           the
higher level of government involvement and regulation;
  ·           the
early stage of development of the market-oriented sector of the
economy;
  ·           the
rapid growth rate;
  ·           the
higher rate of inflation;
  ·           the
stricter control over foreign exchange; and
  ·           government
control over the allocation of many resources.
  As the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.
  Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in the PRC through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
  In the
past 20 years, the PRC has been one of the world’s fastest growing economies
measured in terms of growth in gross domestic product. However, in conjunction
with recent slowdowns in the economies of the United States and European Union,
the growth rate in the PRC has declined in recent quarters. Any further adverse
change in the economic conditions or any adverse change in government policies
in the PRC could have a material adverse effect on the overall economic growth
and the level of consumer spending in the PRC, which in turn could lead to a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects.
  Deterioration
of the PRC’s political relations with the U.S., Europe, or other nations could
make Chinese businesses less attractive to Western investors.
  The
relationship between the U.S. and the PRC is subject to sudden fluctuation and
periodic tension. Changes in political conditions in the PRC and changes in the
state of Sino-foreign relations are difficult to predict and could materially
adversely affect our operations or cause potential target businesses or services
to become less attractive. This could lead to a decline in our profitability.
Any weakening of relations between the U.S., Europe, or other nations and the
PRC could have a material adverse effect on our operations or our ability to
raise additional capital.
  21
  Fluctuations
in exchange rates could result in foreign currency exchange losses.
  Because
substantially all of our revenues and expenditures are denominated in Renminbi
and some cash is denominated in U.S. dollars, fluctuations in the exchange
rate between the U.S. dollar and Renminbi will affect the relative purchasing
power of such amounts and the amount we will spend in purchasing equipment as
well as our balance sheet and earnings per share in U.S. dollars. In addition,
we report our financial results in U.S. dollars, and appreciation or
depreciation in the value of the Renminbi relative to the U.S. dollar would
affect our financial results reported in U.S. dollars terms without giving
effect to any underlying change in our business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of
earnings from and the value of any U.S. dollar-denominated investments we make
in the future, although we have no plans to make such investments as of the date
of this prospectus.
  Since
July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although
currently the Renminbi exchange rate versus the U.S. dollar is restricted to a
rise or fall of no more than 0.5% per day and the People’s Bank of China
regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the Renminbi may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to
long-term. Moreover, it is possible that in the future, PRC authorities may lift
restrictions on fluctuations in the Renminbi exchange rate and lessen
intervention in the foreign exchange market.
  Very
limited hedging transactions are available in the PRC to reduce our exposure to
exchange rate fluctuations. We have not entered into any hedging transactions in
an effort to reduce our exposure to foreign currency exchange risk. While we may
decide to enter into hedging transactions in the future, the availability and
effectiveness of these hedging transactions may be limited and we may not be
able to successfully hedge our subsidiaries’ exposure at all. In addition, our
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currency.
  The
discontinuation of any of the preferential tax treatments currently available to
the PRC entities could materially increase our tax liabilities.
  The rate
of income tax on companies in China may vary depending on the availability of
preferential tax treatment or subsidies based on their industry or location. The
current maximum corporate income tax rate is 33%. The new Enterprise Income Tax
Law (the “EIT Law”) became effective as of January 1, 2008, pursuant to which,
an enterprise income tax of 25% applies to any enterprise. Although we were
approved by the local tax authority to be exempted from the enterprise income
tax for a five-year period commencing in 2007 and ending in 2012, we do not know
whether such new law will change the preferential treatment that was granted to
us. Any loss or substantial reduction of the tax benefits enjoyed by us would
reduce our net profit.
  Restrictions
on currency exchange may limit our ability to utilize our revenues effectively
and the ability of the PRC entities to obtain financing.
  Substantially
all of our revenues and operating expenses are denominated in Renminbi.
Restrictions on currency exchange imposed by the PRC government may limit our
ability to utilize revenues generated in Renminbi to fund our business
activities outside the PRC, if any, or expenditures denominated in foreign
currencies. Under current PRC regulations, Renminbi may be freely converted into
foreign currency for payments relating to “current account transactions,” which
include among other things dividend payments and payments for the import of
goods and services, by complying with certain procedural requirements. The PRC
entities may also retain foreign exchange in their respective current account
bank accounts, subject to a cap set by the State Administration for Foreign
Exchange, or SAFE, or its local counterpart, for use in payment of international
current account transactions. However, conversion of Renminbi into foreign
currencies, and of foreign currencies into Renminbi, for payments relating to
“capital account transactions,” which principally includes investments and
loans, generally requires the approval of SAFE and other relevant PRC
governmental authorities. Restrictions on the convertibility of the Renminbi for
capital account transactions could affect the ability of the PRC entities to
make investments overseas or to obtain foreign exchange through debt or equity
financing, including by means of loans or capital contributions from the parent
entity.
  22
  Any
existing and future restrictions on currency exchange may affect the ability of
the PRC entities or an affiliated entity to obtain foreign currencies, limit our
ability to utilize revenues generated in Renminbi to fund any business
activities outside the PRC that are denominated in foreign currencies, or
otherwise materially and adversely affect our business.
  Because
PRC law governs nearly all of our operating subsidiaries’ material agreements,
we may not be able to enforce our rights within the PRC or elsewhere, which
could result in a significant loss of business, business opportunities or
capital.
  PRC law
governs almost all of the material agreements of Tailing, Anhui Agritech,
Beijing Agritech, Xinjiang Agritech and Pacific Dragon, some of which could be
with Chinese governmental agencies. We cannot assure you that we will be able to
enforce any of our material agreements or that remedies will be available
outside of the PRC. The Chinese legal system is similar to a civil law system
based on written statutes. Unlike common law systems, it is a system in which
decided legal cases have little precedential value.  In 1979, the PRC
government began to promulgate a comprehensive system of laws and regulations
governing economic matters in general. The overall effect of legislation since
then has been to significantly enhance the protections afforded to various forms
of foreign investment in the PRC.  Certain of our subsidiaries are
wholly foreign-owned enterprises, and are subject to laws and regulations
applicable to foreign investment in the PRC in general and laws and regulations
applicable to wholly foreign-owned enterprises in
particular.  Relevant PRC laws, regulations and legal requirements may
change frequently, and their interpretation and enforcement involve
uncertainties. For example, we may have to resort to administrative and court
proceedings to enforce the legal protection that we enjoy either by law or
contract. However, since PRC administrative and court authorities have
significant discretion in interpreting and implementing statutory and
contractual terms, it may be more difficult to evaluate the outcome of
administrative and court proceedings and the level of legal protection we enjoy
than under more developed legal systems. Such uncertainties, including the
inability to enforce our contracts, could materially and adversely affect our
business and operations. In addition, confidentiality protections in the PRC may
not be as effective as in the United States or other countries. Accordingly, we
cannot predict the effect of future developments in the PRC legal system,
particularly with respect to financing sectors, including the promulgation of
new laws, changes to existing laws or the interpretation or enforcement thereof,
or the preemption of local regulations by national laws. These uncertainties
could limit the legal protections available to us and other foreign
investors.
  The
PRC economy had been experiencing unprecedented growth before 2008, which could
be curtailed if the government tries to control inflation by traditional means
of monetary policy or its return to planned-economy policies, any of which would
have an adverse effect on our results of operations.
  The rapid
growth of the Chinese economy before 2008 had led to higher levels of inflation.
In the past, the PRC government has imposed controls on bank credits, limits on
loans for fixed assets and restrictions on state bank lending in order to try to
control inflation.  Similar government attempts to control inflation
may adversely affect the business climate and growth of private enterprise. In
addition, our profitability may be adversely affected if prices for our products
rise at a rate that is insufficient to compensate for the rise in
inflation.
  Government
regulations on environmental matters in the PRC may adversely impact on our
business.
  Our
manufacturing operations are subject to numerous laws, regulations, rules and
specifications relating to human health and safety and the environment. These
laws and regulations address and regulate, among other matters, wastewater
discharge, air quality. In addition, third parties and governmental agencies in
some cases have the power under such laws and regulations to require remediation
of environmental conditions and, in the case of governmental agencies, to impose
fines and penalties. We make capital expenditures from time to time to stay in
compliance with applicable laws and regulations.
  All
potential environmental liabilities may not have been identified or properly
quantified and a prior owner, operator, or tenant may have created an
environmental condition unknown to us. We may be potentially liable for damages
or cleanup, investigation or remediation costs in connection with the ownership
and operation of our properties (including locations to which we may have sent
waste in the past) and the conduct of our business.
  23
  State and
local environmental regulatory requirements change often. Future laws,
ordinances or regulations might impose material environmental liability or the
current environmental condition of the properties could in the future be
affected by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to us. Moreover, it is possible that compliance with a new
regulatory requirement could impose significant compliance costs on us. Such
costs could have a material adverse effect on our business, financial condition
and results of operations.
  The
payment of dividends in the PRC is subject to limitations. We may not be able to
pay dividends to our stockholders.
  We
conduct all of our business through our consolidated subsidiaries incorporated
in the PRC. We rely on dividends paid by these consolidated subsidiaries for our
cash needs, including the funds necessary to pay any dividends and other cash
distributions to our stockholders, to service any debt we may incur and to pay
our operating expenses. The payment of dividends by entities established in the
PRC is subject to limitations. Regulations in the PRC currently permit payment
of dividends only out of accumulated profits as determined in accordance with
accounting standards and regulations in the PRC. Each of our PRC subsidiaries,
including wholly foreign-owned enterprises and joint venture enterprises is also
required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its general reserves or statutory capital
reserve fund until the aggregate amount of such reserves reaches 50% of its
respective registered capital. Our statutory reserves are not distributable as
loans, advances or cash dividends. In addition, if any of our PRC subsidiaries
incurs debt on its own behalf in the future, the instruments governing the debt
may restrict its ability to pay dividends or make other distributions to us. As
of December 31, 2009, our PRC subsidiaries had allocated RMB49.9 million
($6.63 million) to these reserves, consisting of paid-in capital and statutory
reserves. Any limitations on the ability of our PRC subsidiaries to transfer
funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.
  In
addition, under a new PRC tax law that became effective in January 2008 and the
Arrangement between the PRC and the Hong Kong Special Administrative Region on
the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double
Taxation Arrangement, which became effective on January 1, 2007, dividends
from our PRC subsidiaries paid to us through our Hong Kong subsidiary may be
subject to a withholding tax at a rate of 5%. The withholding tax on dividends
may be exempted or reduced by the State Council of the PRC. Furthermore, the
ultimate tax rate will be determined by treaty between the PRC and the tax
residence of the holder of the PRC subsidiary. We are actively monitoring the
proposed withholding tax and are evaluating appropriate organizational changes
to minimize the corresponding tax impact.
  Dividends
we receive from our subsidiaries located in the PRC may be subject to PRC
withholding tax.
  The EIT
Law provides that an income tax rate of 10% may be applicable to dividends
payable to non-PRC investors that are “non-resident enterprises.” Non-resident
enterprises refer to enterprises which do not have an establishment or place of
business in the PRC, or which have such establishment or place of business in
the PRC but the relevant income is not effectively connected with the
establishment or place of business, to the extent such dividends are derived
from sources within the PRC. The income tax for the non-resident enterprises
shall be subject to withholding at income source with the payer acting as the
obligatory withholder under the EIT Law, and therefore, such income tax is
generally called “withholding tax” in practice. It is currently unclear in what
circumstances a source will be considered as located within the PRC. As a U.S.
holding company and substantially all of our income will be derived from
dividends we receive from our PRC operating subsidiaries. Thus, if we are
considered as a “non-resident enterprise” under the EIT Law and the dividends
paid to us by our PRC operating subsidiaries are considered income sourced
within the PRC, such dividends may be subject to a 10% withholding
tax.
  Our
PRC subsidiaries are obligated to withhold and pay PRC individual income tax on
behalf of our employees who are subject to PRC individual income tax. If we fail
to withhold or pay such individual income tax in accordance with applicable PRC
regulations, we may be subject to certain sanctions and other penalties and may
become subject to liability under PRC laws.
  Under PRC
laws, our PRC subsidiaries are obligated to withhold and pay individual income
tax on behalf of our employees who are subject to PRC individual income tax. If
we fail to withhold and/or pay such individual income tax in accordance with PRC
laws, we may be subject to certain sanctions and other penalties and may become
subject to liability under PRC laws.
  24
  In
addition, the State Administration of Taxation has issued several circulars
concerning employee stock options. Under these circulars, our employees working
in the PRC (which could include both PRC employees and expatriate employees
subject to PRC individual income tax) who exercise stock options will be subject
to PRC individual income tax. Our PRC subsidiaries have obligations to file
documents related to employee stock options with relevant tax authorities and
withhold and pay individual income taxes for those employees who exercise their
stock options. While tax authorities may advise us that our policy is compliant,
they may change their policy, and we could be subject to sanctions.
  Governmental
control of currency conversion may affect the value of your
investment.
  The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the PRC. We receive
substantially all of our revenues in RMB, which is currently not a freely
convertible currency. Shortages in the availability of foreign currency may
restrict our ability to remit sufficient foreign currency to pay dividends, or
otherwise satisfy foreign currency dominated obligations. Under existing PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where RMB is to be converted into foreign currency and remitted out of
PRC to pay capital expenses such as the repayment of bank loans denominated in
foreign currencies.
  The PRC
government also may at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain of our expenses as they come
due.
  The
fluctuation of RMB may materially and adversely affect your
investment.
  The value
of the RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in the PRC’s political and economic
conditions. As we rely entirely on revenues earned in the PRC, any significant
revaluation of RMB may materially and adversely affect our cash flows, revenues
and financial condition. For example, to the extent that we need to convert
U.S. dollars we receive from an offering of our securities into RMB for our
operations, appreciation of the RMB against the U.S. dollar could lead the RMB
equivalent of the U.S. dollars be reduced and therefore could have a material
adverse effect on our business, financial condition and results of operations.
Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of
making dividend payments on our common stock or for other business purposes and
the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of the
RMB we convert would be reduced. In addition, the depreciation of significant
U.S. dollar denominated assets could result in a charge to our income statement
and a reduction in the value of these assets.
  Recent
PRC regulations relating to the establishment of offshore special purpose
companies by PRC domestic residents and registration requirements for employee
stock ownership plans or share option plans may subject our PRC resident
beneficial owners or the plan participants to personal liability, limit our
ability to inject capital into our PRC subsidiaries, limit our subsidiaries’
ability to increase their registered capital or distribute profits to us,
or may otherwise adversely affect us.
  SAFE
issued a public notice in October 2005 requiring PRC domestic residents to
register with the local SAFE branch before establishing or controlling any
company outside of the PRC for the purpose of capital financing with assets or
equities of PRC companies, referred to in the notice as an “offshore special
purpose company.” PRC domestic residents who are stockholders of offshore
special purpose companies and have completed round trip investments but did not
make foreign exchange registrations for overseas investments before November 1,
2005 were retroactively required to register with the local SAFE branch before
March 31, 2006. PRC resident stockholders are also required to amend their
registrations with the local SAFE in certain circumstances. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75. After consultation with PRC
counsel, we do not believe that any of our PRC domestic resident stockholders
are subject to the SAFE registration requirement, however, we cannot provide any
assurances that all of our stockholders who are PRC residents will not be
required to make or obtain any applicable registrations or approvals required by
these SAFE regulations in the future. The failure or inability of our PRC
resident stockholders to comply with the registration procedures set forth
therein may subject us to fines and legal sanctions, restrict our cross-border
investment activities, or limit our PRC subsidiaries’ ability to distribute
dividends or obtain foreign-exchange-dominated loans to our
company.
  25
  As it is
uncertain how the SAFE regulations will be interpreted or implemented, we cannot
predict how these regulations will affect our business operations or future
strategy. For example, we may be subject to more stringent review and approval
process with respect to our foreign exchange activities, such as remittance of
dividends and foreign-currency-denominated borrowings, which may adversely
affect our results of operations and financial condition. In addition, if we
decide to acquire a PRC domestic company, we cannot assure you that we or the
owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the
SAFE regulations. This may restrict our ability to implement our acquisition
strategy and could adversely affect our business and prospects.
  Regulations
on Employee Share Options may subject us and/or our PRC employees to regulatory
liability.
  Under the
Implementation Rules of the Administrative Measures for Individual Foreign
Exchange, or the Individual Foreign Exchange Rules, issued on January 5,
2007 by the SAFE (“SAFE #78”), PRC citizens who are granted shares or share
options by an overseas listed company (a company that is listed on a stock
exchange) according to its employee share option or share incentive plan are
required, through the PRC subsidiary of such overseas listed company or any
other qualified PRC agent, to register with the SAFE and complete certain other
procedures related to the share option or other share incentive plan. Foreign
exchange income received from the sale of shares or dividends distributed by the
overseas listed company may be remitted into a foreign currency account of such
PRC citizen or be exchanged into RMB. When our PRC citizen employees are granted
share options, they should be subject to SAFE #78. If we or our PRC citizen
employees fail to comply with these regulations, we or our PRC option holders
may be subject to fines and legal sanctions.
  Failure
to comply with the U.S. Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
  We are
required to comply with the United States Foreign Corrupt Practices Act, which
generally prohibits United States companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. Foreign companies, including some that may compete with us,
are not subject to these prohibitions, and therefore may have a competitive
advantage over us. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices may occur in the PRC. If our competitors engage in these
practices they may receive preferential treatment, giving our competitors an
advantage in securing business, which would put us at a disadvantage. We can
make no assurance that our employees or other agents will not engage in such
conduct for which we might be held responsible. If our employees or other agents
are found to have engaged in such practices, we could suffer severe penalties
and other consequences that may have a material adverse effect on our business,
financial condition and results of operations.
  We
face risks related to health epidemics and outbreak of contagious
disease.
  Our
business could be materially and adversely affected by the effects of H1N1 flu
(swine flu), avian flu, severe acute respiratory syndrome (“SARS”) or other
epidemics or outbreaks. In April 2009, an outbreak of H1N1 flu first occurred in
Mexico and quickly spread to other countries, including the U.S. and the PRC. In
the last decade, the PRC has suffered health epidemics related to the outbreak
of avian influenza and SARS. Any prolonged occurrence or recurrence of H1N1 flu,
avian flu, SARS or other adverse public health developments in the PRC may have
a material adverse effect on our business and operations. These health epidemics
could result in severe travel restrictions and closures that would restrict our
ability to ship our products. Potential outbreaks could also lead to temporary
closure of our manufacturing facilities, our suppliers’ facilities and/or our
end-user customers’ facilities, leading to reduced production, delayed or
cancelled orders, and decrease in demand for our products. Any future health
epidemic or outbreaks that could disrupt our operations and/or restrict our
shipping abilities may have a material adverse effect on our business and
results of operations.
  26
  Risks
Related to Our Stock
  Your
ability to bring an action against us or against our directors and officer, or
to enforce a judgment against us or them, will be limited because we conduct
substantially all of our operations in the PRC and because the majority of our
directors and officers reside outside of the United States.
  We are a
Delaware holding company and most of our assets are located outside of the
United States. Most of our current operations are conducted in the PRC. In
addition, most of our directors and officers are nationals and residents of
countries other than the United States. A substantial portion of the assets of
these persons is located outside the United States. As a result, it may be
difficult for you to effect service of process within the United States upon
these persons. It may also be difficult for you to enforce in U.S. courts
judgments on the civil liability provisions of the U.S. federal securities laws
against us and our officers and directors, most of whom are not residents in the
United States and the substantial majority of whose assets are located outside
of the United States. In addition, there is uncertainty as to whether the courts
of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as
to PRC law, has advised us that the recognition and enforcement of foreign
judgments are provided for under the PRC Civil Procedures Law. Courts in the PRC
may recognize and enforce foreign judgments in accordance with the requirements
of the PRC Civil Procedures Law based on treaties between the PRC and the
country where the judgment is made or on reciprocity between jurisdictions. The
PRC does not have any treaties or other arrangements that provide for the
reciprocal recognition and enforcement of foreign judgments with the United
States. In addition, according to the PRC Civil Procedures Law, courts in the
PRC will not enforce a foreign judgment against us or our directors and officers
if they decide that the judgment violates basic principles of PRC law or
national sovereignty, security or the public interest. So it is uncertain
whether a PRC court would enforce a judgment rendered by a court in the United
States.  Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement against
us or our officers and most of our directors of criminal penalties, under the
United States Federal securities laws or otherwise.
  A
limited number of stockholders currently beneficially own the majority of our
outstanding shares of common stock, and this concentration of ownership could
discourage or prevent a potential takeover of our Company which might otherwise
result in you receiving a premium over the market price for your common
stock.
  A limited
number of our stockholders own a majority of our outstanding common shares. As
of March 23, 2010, 5 stockholders beneficially owned or controlled approximately
10,390,000 shares of our common stock, representing approximately 59.4% of our
outstanding shares of common stock. By virtue of their shareholdings, these
stockholders, if they vote together, are able to elect members of our Board of
Directors, influence our management and affairs and possibly cause or prevent
corporate transactions such as mergers, consolidation or the sale of all or
substantially all of our assets. The interests of our principal stockholders may
differ from that of other stockholders, with the result that our principal
stockholder may cause us to enter into transactions that may not be viewed as
favorable to our other stockholders.
  27
  Item
1B.        Unresolved Staff
Comments
  None.
  Item
      2
                Properties.
  Our
executive office is located at 3rd Floor, No.11 Building, Zhonghong
International Business Garden, Future Business Center, Chaoyang North Road,
Chaoyang District, Beijing, China 100024. The rentable space in this office
consists of approximately 780 square meters (approximately 8,396 square
feet).  The lease agreement has a five-year term which expires on
February 1, 2012.  The monthly rental payment is approximately $5,910
(RMB 41,000).
  We
currently lease 7,018 square meters (approximately 75,541 square feet) in the
aggregate for office space and manufacturing facilities in Harbin, China, where
our subsidiary Pacific Dragon is located.  The lease has a 10-year
term which runs from January 1, 2004 to January 1, 2014.  Our current
rent due under this lease is approximately $518,940 (RMB 3,600,000) per
year.
  In
addition to the Harbin factory, we have four factories located in Anhui,
Beijing, Chongqing and Xinjiang and a research and development center located in
Beijing.The details of facilities and properties and lease terms
are described below.
  Factories
                                        
                                        Address
                                        
                                        Area (m2 )
                                          (Approx. ft2)
                                        
                                        Lease Term
                                        
                                        Monthly RentAnhui
                                        
                                        Changzheng
      East Rd.
                                          Gaoxin
      District, Bangfu City
                                        
                                        3,400
                                          (36,597)
                                        
                                        1/10/2009 – 1/9/2014
                                        
                                        US$32,488
                                          (RMB252,960)Chongqing
                                        
                                        No.
      11-3, Industrial Park,
                                          Geleshandu
      City
                                        
                                        1,074
                                          (11,560)
                                        
                                        4/1/2007 – 3/31/2012
                                        
                                        US$1,372
                                          (RMB9,370)Xinjiang
                                        
                                        No.
      10, Weisi Rd., North Zone Industrial Park, Gaoxin District, Urumqi,
      Xinjiang
                                        
                                        3,110
                                          (33,476)
                                        
                                        6/10/2007 – 6/10/2017
                                        
                                        US$3,662
                                          (RMB25,000)Beijing-liquid
                                        
                                        No.
      8, M2-4 District,
                                          Xinggu
      Industrial Development Zone, Pinggu District
                                        
                                        4,485
                                          (48,274)
                                        
                                        9/15/2006 – 9/15/2011
                                        
                                        US$7,323
                                          (RMB50,000)Beijing
      - research and development center
                                        
                                        No.
      2 of Ping Gu Western Road, Xing Gu Industrial Development
      Zone,  Beijing
                                        
                                        4,931
                                          (53,080)
                                        
                                        1/1/2008 – 1/1/2013
                                        
                                        US$7,934
                                          (RMB54,167)
  Item
      3
              Legal
      Proceedings
  We may be
subject to legal proceedings, investigations and claims incidental to the
conduct of our business from time to time. We are not currently a party to any
litigation or other legal proceedings brought against us. We are also not aware
of any legal proceeding, investigation or claim, or other legal exposure that
has a more than remote possibility of having a material adverse effect on our
business, financial condition or results of operations.
  28
  PART
II
  Item
      4
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
  Market
Price Information for our Common Stock
  Commencing
on September 21, 2009, our common stock was listed on the NASDAQ Global Market
under the symbol “CAGC.”  Prior to such listing, our common stock was
quoted on the OTCBB under the symbol “CTEC.OB.”  The following table
sets forth the high and low closing prices for our common stock from the period
January 1, 2008 to March 23, 2010, as reported by the OTCBB and the high and low
sale prices for our common stock for subsequent periods, as reported by NASDAQ.
The OTCBB quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not represent actual
transactions.
 
 Common Stock (1)Low
                  
                  
                  High2008First
      quarter 2008
                  
                  $
                  3.56
                  
                  
                  $
                  5.80Second
      quarter 2008
                  
                  $
                  4.02
                  
                  
                  $
                  6.36Third
      quarter 2008
                  
                  $
                  1.80
                  
                  
                  $
                  4.60Fourth
      quarter 2008
                  
                  $
                  1.02
                  
                  
                  $
                  2.402009First
      quarter 2009
                  
                  $
                  1.70
                  
                  
                  $
                  2.50Second
      quarter 2009
                  
                  $
                  2.30
                  
                  
                  $
                  4.00Third
      quarter 2009
                  
                  $
                  3.30
                  
                  
                  $
                  7.70Fourth
      quarter 2009
                  
                  $
                  6.71
                  
                  
                  $
                  14.952010First
      quarter 2010-March 23, 2010
                  
                  $
                  13.66
                  
                  
                  $
                  30.45
 
 (1) The
stock prices are adjusted to reflect the reverse stock split of four to one
share effective September 8, 2009 and the forward stock split of one to two
shares effective February 1, 2010.
  On March
23, 2010, the closing price of our common stock on the NASDAQ Global Market was
$25.83.
  Number
of Record Holders of Our Common Stock
  As of
March 27, 2010, we had 17,479,769 shares of our common stock outstanding and 951
holders of record of our common stock.  The number of record holders
was determined from the records of our transfer agent and does not include
beneficial owners of common stock, of which we have over 3,000, whose shares are
held in the names of various security brokers, dealers and registered clearing
agencies.
  29
  Dividend
Policy
  We have
never declared or paid cash dividends on our capital stock and do not anticipate
declaring or paying cash dividends on our common stock in the foreseeable
future. Payments of future dividends on our common stock, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs, plans for expansion and other factors that our board of directors
may deem relevant.
  Securities
Authorized for Issuance Under Equity Compensation Plans
 
 Plan category
                  
                  Number of
                    securities to be
                    issued upon
                    exercise of
                    outstanding
                    options,
                    warrantsand
                    rights/Number
                    ofrestricted
                    stockissued
                  
                  
                  Weighted-average
                    exercise price of
                    outstanding options,
                    warrants and rights
                  
                  
                  Number of
                    securities
                    remaining
                    available for
                    future issuance
                    under equity
                    compensation
                    plans (excluding
                    securities
                    reflected in
                    column (a))(a)
                  
                  
                  (b)
                  
                  
                  (c)Equity
      compensation plans approved by security holders
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Equity
      compensation plans not approved by security holders
                  
                  
                  517,500
                  
                  
                  
                  11.64
                  
                  
                  
                  1,282,500Restricted
      stock issued to executives in January 2010
                  
                  
                  326,000
                  
                  
                  
                  N/A
                  
                  
                  
                  956,500Total
                  
                  
                  843,500
                  
                  
                  
                  11.64
                  
                  
                  
                  956,500
  Under the
China Agritech, Inc. 2008 Equity Incentive Plan (the “Plan”), a maximum of 1.8
million shares of our common stock are available for issuance, subject to
adjustment.  The 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.  The Plan will terminate 10 years following the
earlier of (i) the date it was adopted by our Board of Directors or (ii)
the date it became effective upon approval by our stockholders, unless sooner
terminated by our Board of Directors pursuant to the Plan. The Plan was adopted
by our Board of Directors on October 22, 2008
  Performance
Graph
  Not
applicable to smaller reporting companies.
  Recent
Sales of Unregistered Securities
  Sales of
unregistered securities by the Company have been previously disclosed in our
Form 8-Ks and 10-Qs filed with the SEC.
  Issuer
Purchases of Equity Securities
  None.
  Item
      5
              Selected
      Financial Data
  Not
applicable to smaller reporting companies.
  30
  Item
      6
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
  Overview
  We
manufacture and sell organic liquid compound fertilizers; organic granular
compound fertilizers and related agricultural products in the PRC. Our annual
liquid fertilizer production capacity in 2008 was approximately 13,000 metric
tons of organic liquid compound fertilizers. We commenced sales of our organic
granular compound fertilizers in the third quarter of 2008.  Until
September 2009, our annual production capacity for granular fertilizers was
approximately 150,000 metric tons, consisting of 100,000 metric tons in Anhui
and 50,000 metric tons in Harbin.  In September 2009, we expanded our
annual production capacity for granular fertilizers to approximately 200,000
metric tons by completing another 50,000 granular plant in Xinjiang.. Our
Xinjiang granular plant commenced its commercial production in the second
quarter of 2010..
  Our
revenues are primarily derived from the sale of our organic fertilizer
products.  As of December 31, 2009, approximately 62.0% of our
revenues were derived from the sale of our liquid organic fertilizer products,
while approximately 38.0% of our revenues were derived from the sale of our
granular organic fertilizer products.  Revenue from sales of liquid
fertilizer has a lower cost of revenue than that of granular
fertilizer.  Our cost of revenue primarily consists of the cost of our
raw materials, direct labor and manufacturing overhead expenses.
  We plan
on expanding our operations to build 20 to 30 distribution centers during 2010
and 2011.  We currently anticipate that the fertilizer sales in the
distribution centers will primarily consist of our organic liquid and granular
compound fertilizers.  We plan on using both cash generated from
operations and financing activities to be able to complete the build-out of the
distribution centers.
  Because
we typically extend 6-9 months of credit on the sale of our liquid fertilizer
products, our accounts receivable have represented approximately 39.0% of our
total assets as of December 31, 2009.
  Results
of Operations
  Year
Ended December 31, 2009 Compared with Year Ended December 31, 2008
  All
amounts in the chart below, other than percentages, earnings per share and
weighted average shares outstanding, in thousands of U.S. dollars
 
 December31,
                        
                        
                        Increase
                        
                        
                        % IncreaseItem
                        
                        2009
                        
                        
                        2008
                        
                        
                        (Decrease)
                        
                        
                        (%Decrease)Net
      Revenue
                        
                        
                        76,130
                        
                        
                        
                        45,240
                        
                        
                        
                        30,890
                        
                        
                        
                        68.3Cost
      of Revenue
                        
                        
                        (47,245
                        )
                        
                        
                        (24,889
                        )
                        
                        
                        22,356
                        
                        
                        
                        89.8Gross
      Profit
                        
                        
                        28,885
                        
                        
                        
                        20,351
                        
                        
                        
                        8,534
                        
                        
                        
                        41.9Selling
      Expenses
                        
                        
                        (2,639
                        )
                        
                        
                        (2,370
                        )
                        
                        
                        269
                        
                        
                        
                        11.4Operating
      and Administrative Expenses
                        
                        
                        (5,290
                        )
                        
                        
                        (4,266
                        )
                        
                        
                        1,024
                        
                        
                        
                        24.0Income
      from Operations
                        
                        
                        20,956
                        
                        
                        
                        13,715
                        
                        
                        
                        7,241
                        
                        
                        
                        52.8Other
      income/(expenses)
                        
                        
                        (9,878
                        )
                        
                        
                        267
                        
                        
                        
                        (10,145
                        )
                        
                        
                        (3,799.6
                        )Income
      tax
                        
                        
                        (4,907
                        )
                        
                        
                        (4,151
                        )
                        
                        
                        756
                        
                        
                        
                        18.2Net
      income
                        
                        
                        6,171
                        
                        
                        
                        9,831
                        
                        
                        
                        (3,660
                        )
                        
                        
                        (37.2
                        )Net
      income attributable to non-controlling interest
                        
                        
                        (481
                        )
                        
                        
                        (1,189
                        )
                        
                        
                        (708
                        )
                        
                        
                        (59.5
                        )Net
      Income attributable to China Agritech stockholders
                        
                        
                        5,690
                        
                        
                        
                        8,642
                        
                        
                        
                        (2,952
                        )
                        
                        
                        (34.2
                        )Earnings
      per share attributable to China Agritech common
    stockholders-
      Basic
                        
                        
                        0.41
                        
                        
                        
                        0.70-
      Diluted
                        
                        
                        0.40
                        
                        
                        
                        0.70Weighted
      average shares outstanding-
      Basic
                        
                        
                        14,039,152
                        
                        
                        
                        12,349,808-
      Diluted
                        
                        
                        14,228,943
                        
                        
                        
                        12,349,808
  31
  Net
Revenue
  Our net
revenue increased $30.9 million, or 68.3 %, to $ 76.1 million for fiscal year
2009 from $45.2 million for fiscal year 2008.  Our net revenue is
generated from sales of our two major products: organic liquid fertilizers and
organic granular fertilizers. The increase in our net revenues was mainly
attributable to the successful launch of our new product, organic granular
compound fertilizers in the second quarter of fiscal year 2009. Our new organic
granular compound fertilizers products reported net revenue of $29.0 million for
fiscal year 2009, as compared to $4.1 million generated from a trial sale during
fiscal year 2008. Our traditional organic liquid compound fertilizer products
reported net revenue of $47.2 million for fiscal year 2009, a 14.6% growth from
$41.2 million for fiscal year 2008. The increase in net revenue from our organic
liquid compound fertilizer products is mainly attributable to the expansion of
our customer base to newly established markets in the central and southern
regions of China.
  Cost
of Revenue
  Our cost
of revenue increased $22.4 million, or 89.8%, to $47.2 million for fiscal year
2009 from $24.9 million for fiscal year 2008.  Our cost of revenue
primarily consists of the cost of our raw materials, direct labor and
manufacturing overhead expenses. Our cost of revenue increased as a result of
higher sales. However, the percentages of costs of revenue to net revenue
increased to 62.1% for 2009 from 55.0% for 2008. The higher cost of revenue as a
percentage of sales was primarily due to the introduction of our new product
line – organic granular fertilizers in the second quarter of 2009.
  Gross
Profit
  Our gross
profit increased $8.5 million, or 41.9%, to $28.9 million for fiscal year 2009
from $20.4 million for fiscal year 2008. Overall gross profit margin was 37.9%
for 2009, as compared to 45.0% for 2008.  The decrease in gross profit
margin was due to the launch of our new products, organic granular compound
fertilizers, which generally have lower gross profit margins than our
traditional organic liquid compound fertilizers, for which we have developed an
established whilst steadily growing market.
  Selling
Expenses
  Our
selling expenses include salaries, bonuses, commission, freight charges,
advertising and promotion expenses. Our selling expenses increased by 11.4% to
$2.6 million for fiscal year 2009, as compared to $2.4 million for 2008,
primarily due to increases in sales commission driven by increased
sales.  Notwithstanding the increase in selling expenses, leveraging
on our well established sales network, we have contained our selling expenses
and report a drop in the percentage of selling expense to net revenue from 5.2%
for 2008 to 3.5% for 2009.
  32
  Operating
and Administrative Expenses
  Our
general and administrative expenses were $5.3 million for fiscal year 2009, as
compared to $4.3 million for fiscal 2008, an increase of $1 million or 24.0%.
Operating and administrative expenses include rental expenses, salaries,
stock-based compensation expense for management, professional fees for legal and
accounting services, depreciation and amortization, cost of supplies and
equipment. A major factor to our increased operating and administrative expenses
is the listing of our shares on the Global Market of NASDAQ in September 2009,
which has resulted in higher legal, professional and listing fees. In addition,
we have recorded a non-cash stock compensation charge of approximately $0.6
million as a result of the issuance of stock options to directors and management
under our option plan.
  Income
from operations
  Income
from operations was $21.0 million for fiscal year 2009, an increase of
approximately $ 7.2 million, or approximately 52.8%, from$13.7 million for the
fiscal year 2008. The increase was a result of an increase in our gross profit
of $8.5 million, offset by concurrent increases in selling expenses of $0.3
million and operating and in administrative expenses of $1 million.
  Other
Income (Expenses)
  Other
income (expenses) consisted of other operating expense, interest income,
exchange gain/loss and the change in fair value of warrants classified as
derivatives.  Other expenses for the fiscal year 2009 were $9.9
million, as compared to other income of $0.3 million for the fiscal year
2008.  The significant increase in other expenses by $10.2 million was
attributable to a non-cash charge of $9.9 million resulting from the change in
fair value of warrants classified as derivative instruments.
  Income
taxes
  We
incurred income taxes of $4.91 million for the fiscal year 2009, an increase of
approximately $0.8 million, or 18.2% from $4.2 million for the fiscal year 2008.
Our effective tax rate was 44% for 2009, as compared to 30% for 2008. The
increase in our effective tax rate was primarily attributable to the increase in
non-deductible share-based compensation expense of $0.6 million and change in
fair value of the warrants of $9.9 million, offset by the tax benefit of
approximately $0.9 million due to the tax holiday enjoyed by our subsidiaries,
Beijing Agritech and Anhui Agritech.
  Net
Income
  We
recorded a net income of $5.7 million for the fiscal year 2009, as compared to
$8.6 million for the fiscal year 2008. If excluding the non cash charges
resulting from the change in fair value of the warrants of $9.9 million, our net
income for 2009 would have been $15.6 million, an increase of $7.0 million, or
81.4% from 2008.
  Liquidity
and capital resources
  At
December 31, 2009, we had cash and cash equivalents of $20.3 million, an
increase of $8.4 million, or 70.0%, from $11.9 million at December 31, 2008,
which is principally attributable to the cash raised in the Private Placement
transaction completed in October 2009. Our current assets totaled $93.8 million
at December 31, 2009, representing almost 4 times our current liabilities
of $23.2 million.
  Total
stockholders’ equity at December 31, 2009 was $77.3 million, an increase of
$14.5 million, or 14.5%, from $62.8 million at December 31,
2008.
  We had no
bank loans or other interest bearing borrowings outstanding at December 31,
2009. We believe that our currently available working capital will be sufficient
to maintain our operations at our current level for the next twelve
months.
  33
  The
following table sets forth a summary of our cash flows for the periods
indicated:
  (in
      thousands)
                    
                    2009
                    
                    
                    2008Net
      cash used in operating activities
                    
                    $
                    (3,535
                    )
                    
                    $
                    (893
                    )Net
      cash used in investing activities
                    
                    
                    (2,321
                    )
                    
                    
                    (1,906
                    )Net
      cash provided by financing activities
                    
                    
                    14,216
                    
                    
                    
                    2,000Effect
      of exchange rate changes on cash and cash equivalents
                    
                    
                    1
                    
                    
                    
                    910Net
      increase/(decrease) in cash and cash equivalent
                    
                    
                    8,361
                    
                    
                    
                    111Cash
      and cash equivalents at the beginning of year
                    
                    
                    11,952
                    
                    
                    
                    11,841Cash
      and cash equivalents at the end of year
                    
                    $
                    20,313
                    
                    
                    $
                    11,952
 
 Operating
Activities
  We used
$3.5 million of net cash in operating activities for the fiscal year 2009, an
increase of $2.6 million from $0.9 million for the fiscal year 2008. The
increase in cash expenditure in operating activities was mainly due to the
increased advanced payments to our suppliers to guarantee the sources of our raw
materials.
  Investing
Activities
  We
primarily use cash for investing activities in our growth initiatives, which
include expansion of our production facilities and acquisition of businesses.
During the fiscal year 2009, we acquired the remaining 10% ownership interest in
Pacific Dragon in consideration of $1,000,000 in cash and the issuance of
3,490,000 shares of our common stock.  In addition, we also used $0.4
million for payment to acquire the license for certain fertilizer product
manufacturing and sale in the PRC. On the other hand, cash used in acquisition
of plant and equipment and spent in construction in progress was $0.9 million
for 2009, a decrease of $1 million as compared to $1.9 million for 2008. The
decrease was primarily due to the substantial completion of our new production
plants in Anhui and Beijing during 2008.
  Financing
Activities
  Since we
had no bank loans or other interest-bearing borrowings at December 31, 2009, we
had a zero gearing ratio.
  During
the fiscal year 2009, we raised cash of $14.2 million, which represented the net
proceeds from the private placement of 2,785,536 shares of our common stock and
warrants to purchase up to 1,857,024 common shares we completed in October 2009.
The net proceeds from this private placement transaction are being used for
business expansion and working capital purposes.
  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.
  34
  ·
              Inventories.
       Inventories are valued at the lower of cost (determined on a
      weighted average basis) or net marketvalue. Our management compares the
      cost of inventories with the net realizable value and an allowance is made
      for inventories with the net realizable value and an allowance is made for
      inventories with net realizable value, if lower than the
    cost.
  ·
              Impairment.
       We apply the provisions of ASC 360-10-35, “Impairment or Disposal of
      Long-Lived Assets Subsections” (formerly Statement of Financial Accounting
      Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets’), issued by the Financial Accounting Standards Board
      (“FASB”).  ASC Impairment or Disposal of Long-Lived Assets
      Subsections require that long-lived assets be reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying
      amount of an asset may not be recoverable through the estimated
      undiscounted cash flows expected to result from the use and eventual
      disposition of the assets. Whenever any such impairment exists, an
      impairment loss will be recognized for the amount by which the carrying
      value exceeds the fair value.
 ·
                Fixed Assets. We
      test long-lived assets, including property, plant and equipment and
      intangible assets subject to periodic amortization, for recoverability at
      least annually or more frequently upon the occurrence of an event or when
      circumstances indicate that the net carrying amount is greater than its
      fair value. Assets are grouped and evaluated at the lowest level for their
      identifiable cash flows that are largely independent of the cash flows of
      other groups of assets. We consider historical performance and future
      estimate results in our evaluation of potential impairment and then
      compare the carrying amount of the asset to the future estimated cash
      flows expected to result from the use of the asset. If the carrying amount
      of the asset exceeds estimated expected undiscounted future cash flows, we
      measure the amount of impairment by comparing the carrying amount of the
      asset to its fair value. The estimation of fair value is generally
      measured by discounting expected future cash flows at the rate we utilize
      to evaluate potential investments. We estimate fair value based on the
      information available in making whatever estimates, judgments and
      projections are considered
necessary
  ·
              Revenue
      Recognition.  Sales revenue is recognized at the date of
      shipment from the Company’s facilities to customers when a formal
      arrangement exists, the price is fixed or determinable, the delivery is
      completed, no other significant obligations of our company exist and
      collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as
      unearned revenue. Our revenue consists of invoiced value of goods, net of
      a value-added tax (“VAT”). No product return or sales discount allowance
      is made as products delivered and accepted by customers are normally not
      returnable and sales discounts are normally not granted after products are
      delivered.
  ·
              Foreign
      currency translation. We use U.S. dollars for financial reporting
      purposes. The functional currency of the Company and our PRC
      operating subsidiaries is the RMB. Our PRC operating 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.
  35
  ·
              Stock-based
      Compensation.  The Company accounts for stock-based
      compensation arrangements in accordance with ASC 718-10 (formerly SFAS No.
      123R “Share-Based Payment”) and measures the cost of services received as
      consideration for equity instruments issued or liabilities incurred in
      share-based compensation transactions based on the grant-date fair value
      of the equity instruments issued or the liabilities settled, net of any
      amount that an employee pays for that instrument when it is granted. The
      Company recognizes compensation cost for an award with only service
      conditions that has a graded vesting schedule on a straight-line basis
      over the requisite service period for the entire award, provided that the
      compensation cost recognized for any date must at least equal the portion
      of the grant-date value of the award that is vested at that date. No
      compensation cost is recognized for awards that do not vest (i.e. awards
      for which the requisite service is not rendered). If an award is
      cancelled, any previously unrecognized compensation cost is recognized
      immediately at the cancellation date. However, if the cancellation is
      accompanied by the concurrent grant of a replacement award, an incremental
      compensation cost is recognized and measured as the excess of the fair
      value of the replacement award over the fair value of the cancelled award
      at the cancellation date.
  Off-Balance
Sheet Arrangements
  None.
  Item
6A.       Quantitative and Qualitative
Disclosures About Market Risk
  Not
applicable to smaller reporting companies.
  Item
      7
              Financial
      Statements and Supplementary Financial
Data
  Consolidated
Financial Statements
  The
financial statements required by this item begin on page F-1
hereof.
  Item
      8
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
  Not
Applicable
  Item
8A(T).    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 December 31, 2009, of the design and
operation of our disclosure controls and procedures, as such term is defined in
Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our
principal executive officer and principal financial officer have concluded that,
as of such date, our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
  36
  Internal
Controls Over Financial Reporting
  Management’s
Report on Internal Control over Financial Reporting.
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f).  Internal control over financial
reporting refers to the process designed by, or under the supervision of, our
principal executive officer and principal financial officer, and effected by our
Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles, and includes those policies and procedures
that:
  (1)
              Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of our
      assets;
  (2)
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorization of our management and
      directors; and
  (3)
              Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisitions, use or disposition of our assets that could
      have a material effect on the financial
  statements.
  Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations.
 Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override.  Because
of such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting.  However, these inherent limitations  are known
features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this risk.
Management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company.
  Management
has used the framework set forth in the report entitled Internal
Control—Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission, known as COSO, to evaluate the
effectiveness of our internal control over financial reporting. Based on this
assessment, our Chief Executive Officer and Chief Financial Officer have
concluded that our internal control over financial reporting was effective as of
December 31, 2009.
  This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our
management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only our management’s report in this Annual
Report.  We are not required to include in our Annual Report an attestation
report by our independent auditors under the Public Company Accounting Oversight
Board’s auditing Standard No. 2 until the filing of the Annual Report for the
fiscal year ending December 31, 2010.
  Changes
in Internal Controls over Financial Reporting.
  There has
been no change in our internal control over financial reporting during the
fourth quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  Item
8B.      Other Information
  None.
  37
  PART
III
  Item
      9
              Directors,
      Executive Officers of and Corporate
Governance
  Directors
and Executive Officers
  Set forth
below are the names of our directors, officers and significant employees, their
age, all positions and offices that they hold with us, the period during which
they have served as such, and their business experience during at least the last
five years.  The directors will serve until the next annual meeting of
the stockholders or until their successors are elected or appointed and
qualified. Executive officers will serve at the board’s discretion.
  Name
              Age
              Position
              Held Office SinceYu Chang
              54
              Chief
      Executive Officer, President, Secretary and Chairman of the
      Board
              February
      2005Yau-Sing Tang
              47
              Chief
      Financial Officer and Controller
              October
      2008Ming Fang Zhu
              43
              Chief
      Operating Officer
              March
      2009Xiao Rong Teng
              40
              Director
              June
      2005Gene Michael Bennett
              61
              Director
              October
      2008Lun Zhang Dai
              74
              Director
              October
      2008Hai Lin Zhang
              59
              Director
              October
      2008Charles Law
              50
              Director
              January
      2010Zheng Wang
              33
              Director
              December
      2009
  Yu
Chang.  Mr. Chang has been our Chief Executive Officer,
President, Secretary and Chairman since February 3, 2005. Mr. Chang
has been serving as the Chairman of the Board of Directors of Pacific Dragon and
Tailong, and he has served as the Chairman of Board of Directors of Yinlong
since 1993.  Mr. Chang received a Bachelor of
Economics from the Heilongjiang Forestry Cadre Management Institute in
1983. Mr. Chang is the founder of the Company and has more than 15 years of
experience in running the business operations of the Company. We
believe that Mr. Chang brings essential knowledge of Company’s operations to the
Board of Directors.
  Yau-Sing
Tang.  Mr. Tang has been our Chief Financial Officer and
Controller since October 22, 2008.  Prior to that from April 2008 to
September 2008, Mr. Tang was the director of AGCA CPA Limited, a CPA firm in
Hong Kong.  From August 2006 to March 2008, Mr. Tang
served as financial controller of Carpenter Tan Holdings Ltd., a company listed
on The Stock Exchange of Hong Kong Limited.  Prior to that, he was the
founder and managing director of AGCA CPA, Limited from January 2006 to
July 2006.  From April 2003 to December 2005, he was
executive director and chief financial officer of China Cable &
Communication, Inc., which is quoted on the Pink Sheets under the symbol
CCCI.PK. Mr. Tang received his Bachelor of Social Sciences (Honors) degree
from the University of Hong Kong in 1986. He is a fellow of the Association of
Chartered Certified Accountants in the U.K. and the Hong Kong Institute of
Certified Public Accountants. He is also a member of the Institute of Chartered
Accountants in England and Wales and the Taxation Institute of Hong
Kong.
  38
  Ming Fang
Zhu.  Mr. Zhu has been our Chief Operating Officer since
March 13, 2009.  From April 2007 to March 2009 Mr. Zhu
served as President of Beijing Agritech Fertilizer Co, Ltd., an indirect
subsidiary of the Company.  From January 2006 to April 2007
Mr. Zhu served as Vice President of Strategic Development of Beijing
Agritech Fertilizer Co, Ltd, an indirect subsidiary of the
Company.  Prior to joining the Company, Mr. Zhu was the Chief
Executive Officer and a member of the Board of Directors of Gateguard
Information Security Co, Ltd. from February2002 to
December 2005.  Mr. Zhu earned a bachelor’s degree in
physics from Xuzhou Normal University and a master’s degree in economics from
Henan University.  He earned a law degree through self-study and is a
state-certified economist in the PRC.
  Xiao Rong
Teng.  Ms. Teng has served as a member of our board of
directors since June 2005, and was our Chief Operating Officer from
February 3, 2005 to March 13, 2009.  Ms. Teng has
served as a director of Pacific Dragon since 2000 and as a director of Tailong
since its inception in 2003.  Ms. Teng served as the General
Manager of Yinlong from 1994 to 2000 and as the Vice General Manager of Pacific
Dragon from 2000 to May 2005.  Ms. Teng received a bachelor’s
degree in Chinese from Heilongjiang University in 1992 and a master’s degree in
business administration from Harbin Normal University in 1998. Ms. Teng is the
founder of the Company and has more than 7 years of experience in the business
operations of the Company. We
believe that Ms. Teng brings vital operational experience to the Board of
Directors.
  Gene Michael
Bennett.  Mr. Bennett has been a member of our board of
directors since October 22, 2008.  Mr. Bennett has been appointed as
Senior Advisor, Advisory Board of Swiss Private Client Capital Partners Ltd
since January 2010.  From September 2009 to present, he is the Acting
CFO of China Architectural Engineering Inc. which is listed on American Stock
Exchange (AMEX: CAEI).  From March 2009 to present, he served as the
Chief Executive Officer of American General Business Association in Beijing, a
non-government organization that assists Chinese companies to develop business
in the West. From June 2004 to March 2009, he was the managing partner for
Beijing-based Nexis Investment Consulting
Corporation.  Mr. Bennett currently also serves on the boards of
China Shen Zhou Mining & Resources, Inc. (AMEX: SHZ) and China Pharma
Holding, Inc. (AMEX:CPHI). Mr. Bennett holds a B.A. (1972) and MBA in
Finance (1974) from Michigan State University and is currently pursuing a
doctorate of business administration at City University of Hong Kong in
Corporate Governance. Mr. Bennett has strong financial knowledge and significant
executive level and board experience throughout his career. He has an interest
in and knowledge of Chinese management practices, and we believe that
he bring substantial financial and corporate strategy knowledge,
experience and training, including experience with SEC reporting compliance to
his role as director.
  Lun Zhang
Dai.  Mr. Dai has been a member of our board of directors
since October 22, 2005.  Mr. Dai has served on the Planning
Committee of the North-East Cooperative Bank in the PRC and as its Secretary
General since 2003 and as senior research fellow at the People’s Bank of China
since 2004. Mr. Dai is also a full-time professor for the Academy of
International Economic Relations, a research institution sponsored by the
People’s Bank of China, where he has taught courses in international economics
since 1983, and has been retained as a part-time professor at several Chinese
universities, as well as a visiting professor of international economics in the
graduate programs of Queens College, City University of New York and American
University. Mr. Dai is a fellow at the Institute of Internal Auditors and
received his master’s degree in economics from the University of Moscow in 1960.
Mr.
Dai has more than 50 years of experience in teaching and research in
universities. We believe that his vast knowledge of micro and macro
economics of China bring a unique expertise to the Board of
Directors.
  Hai Lin
Zhang. Mr. Zhang has been a member of our board of directors since
October 22, 2008.  Mr. Zhang has served as Vice Principal of the
Chinese Academy of Agricultural Sciences and Resources since May 2003, and
he has also served as the Division Deputy Director of the Agricultural Research
Institute in the PRC since June 1996. He graduated with a bachelor’s degree
from the Renmin University of China in 1987. We consider to be be our
agricultural industry
expert, bringing to us up-to-date knowledge of new developments in the
agriculture industry in China.
  Charles
Law. Mr. Law has been a member of our board of directors since
January 8, 2010.  Mr. Law has been a partner in the Beijing
office of King & Wood since January 2001 and prior to that he was the
managing partner at Law & Arthur.  He obtained his LLB from
Soochow University School of Law, Taipei, and his LLM from the Law School of
Southern Methodist University. Mr. Law
is a qualified US attorney who has an understanding to SEC compliance
requirements.
  Zheng “Anne”
Wang. Ms. Wang has been a member of our board of directors since
December 2009.  Ms. Wang has been Vice-President of Carlyle Asia
Growth Capital, a subsidiary of The Carlyle Group, a private equity firm, since
December 2007.  From August 2005 through December 2007, Ms. Wang was
Senior Associate at Carlyle Asia Growth Capital and from December 2003 through
August 2005, Ms. Wang was a Senior Associate in the Shanghai office of
A.T. Kearney Co., Ltd.  She graduated from Shanghai Fudan
University with a bachelor degree in 1998 and earned an MBA from the Kellogg
School of Management, Northwestern University, in 2003. Ms. Wang
has extensive capital market, finance and operational knowledge and experience
from her career as fund manager in The Carlyle Group. She can oversee the
Company on corporate governance and transparency between investors and the
Company.
  39
  Voting
Agreement
  In
connection with the purchase agreement for the sale of shares of common stock
and warrants to the Carlyle Investors (i) the Company, (ii) the
Investors, (iii) Yu Chang, our Chief Executive Officer, President and
Secretary, (iv) Xiao Rong Teng, a member of our Board of Directors,
(v) China Tailong Group Limited, which is owned by Mr. Chang, and (vi)
Sammi Holdings Limited, which is owned 85% by Mr. Chang and 15% by
Ms. Teng (China Tailong Group, Limited and Sammi Holdings Limited being the
“Additional Stockholders”), entered into a voting agreement whereby
Mr. Chang, Ms. Teng and the Additional Stockholders agreed to vote
their respective shares of common stock at each annual meeting of the Company’s
stockholders or at any other meeting or pursuant to each written consent of the
Company’s stockholders, in each such case, at which or pursuant to which,
members of the Board are to be elected for one individual designated by the
Investors (jointly) to be appointed as a member of the Board of
Directors.  In the event that the Board determines that the Carlyle
Investors’ designee qualifies an “independent director” as defined and
determined in accordance with Rule 5605(a)(2) of the Nasdaq Marketplace Rules,
the Company, Mr. Chang, Ms. Teng and the Additional Stockholders
agreed to take any and all action necessary so as to cause the Investors’
designee to be appointed to each committee of the Board, including, but not
limited to, the audit and compensation committees of the Board; provided,
however, that for inclusion on the audit committee, such designee must also meet
the requirements for service on the audit committee as set forth in Rule
5605(c)(2)(A) of the Nasdaq Marketplace Rules.  The Carlyle Investors’
right to designate a member of the Board terminates at such time as the
investors, together, do not own at least 5.0% of the shares of common stock of
the Company, calculated on a fully diluted basis.  Carlyle’s designee
to the Board of Directors is Ms. Zheng “Anne” Wang, who the Board of Directors
has determined not to be an “independent director.”
  Meetings
and Committees of the Board of Directors
  During
the year ended December 31, 2009, the board of directors held three meetings,
which was attended by all directors, and took action by written consent on 6
other occasions.  The board of directors has determined that Messrs.
Bennett, Dai and Zhang are “independent directors” as defined in Rule 5605 of
the Nasdaq Marketplace Rules. We do not have a written policy relating to
attendance by members of the board of directors at annual stockholder meetings.
However, all directors are encouraged to attend the annual meeting.
 
 Director
Qualifications
 
 We seek
directors with established strong professional reputations and experience in
areas relevant to the strategy and operations of our businesses.  We
seek directors who possess the qualities of integrity and candor, who have
strong analytical skills and who are willing to engage management and each other
in a constructive and collaborative fashion.  We also seek directors
who have the ability and commitment to devote significant time and energy to
service on the Board and its committees.  We believe that all of our
directors meet the foregoing qualifications.
 
  Board
Leadership Structure
  The Board
of Directors believes that Mr. Chang’s service as both Chairman of the Board and
Chief Executive Officer is in the best interest of the Company and its
stockholders. Mr. Chang possesses detailed and in-depth knowledge of the issues,
opportunities and challenges facing the Company and its business and is thus
best positioned to develop agendas that ensure that the Board’s time and
attention are focused on the most critical matters. His combined role enables
decisive leadership, ensures clear accountability, and enhances the Company’s
ability to communicate its message and strategy clearly and consistently to the
Company’s shareholders, employees, customers and suppliers.
  Committees
of the Board of Directors
  In
October 2008, the board formed an Audit Committee, Compensation Committee and
Nominating and Governance Committee.
  Compensation
Committee.
  The
Compensation Committee is comprised of Messrs. Bennett, Dai and Zhang, each of
whom is independent as defined in Rule 5605 of the Nasdaq Marketplace Rules. Mr.
Dai is the Chairman of the Compensation Committee. The board of directors
adopted a written charter of the Compensation Committee on October 22, 2008. The
charter is available on our website, www.chinagritechinc.com.The charter sets forth
responsibilities, authority and specific duties of the Compensation Committee.
The Compensation Committee reviews and recommends to the board of directors the
compensation for the chief executive officer and other corporate officers, as
well as non-employee directors. It also reviews the general policy relating to
compensation and benefits for all employees. The Compensation Committee has been
designated by the board of directors to administer our 2008 Equity Incentive
Plan.  The compensation committee took action by written consent one
time in 2009.
  40
  No member
of our Compensation Committee has at any time been an officer or employee of
ours or our subsidiaries. No interlocking relationship exists between our Board
of Directors or Compensation Committee and the Board of Directors or
Compensation Committee of any other company, nor has any interlocking
relationship existed in the past.
  Nominating and Governance
Committee.The
Nominating and Governance Committee is comprised of Messrs. Bennett, Dai and
Zhang, each of whom is independent as defined in Rule 5605 of the Nasdaq
Marketplace Rules. Mr. Zhang is the Chairman of the Nominating and Governance
Committee. The board of directors adopted a charter for the Nominating and
Governance Committee on October 22, 2008. The charter is available on our
website, www.chinaagritechinc.com.
  Although
we do not currently have a formal policy or procedure for stockholder
recommendations of director candidates, the board of directors welcomes such
recommendations and will consider candidates recommended by stockholders if
there is a vacancy on the board of directors or if there is a need for
particular expertise on the board of directors. Stockholders can recommend
qualified candidates for the Board of Directors by submitting the candidate’s
name and qualifications to: Hai Lin Zhang, Chairman, Nominating and Governance
Committee, China Agritech, Inc., at 3rd Floor,
No.11 Building, Zhonghong International Business Garden, Future Business Center,
Chaoyang North Road, Chaoyang District, Beijing, China 100024.  There
are no differences in the manner in which the Nominating and Governance
Committee evaluates nominees for director based on whether the nominee was
recommended by a stockholder. Among other things, the Nominating and Governance
Committee takes into account, when acting upon nominees, factors such as
familiarity with the industry in which the Company operates, experience in
working with China-based companies, the relevant expertise of its directors and
director nominees, whether the director or nominee would be considered
independent, the time that the director or nominee will be able to devote to
Company matters, experience with US public companies, language skills and other
factors. The Nominating and Governance Committee believes that it is appropriate
to include representation of senior management on the Board of
Directors.  The Nominating and Governance Committee met two times and
took action by written consent one time during 2009.
  Audit Committee.
  The Audit
Committee is comprised of Messrs. Bennett, Dai and Zhang, and Mr. Bennett is its
Chairman.  The board of directors has determined that each of the
members of the Audit Committee is independent as defined in Rule 5605 of the
Nasdaq Marketplace Rules, and that Mr. Bennett qualifies as an ‘‘audit committee
financial expert,’’ as that term is defined in Item 407(d)(5)(ii) of Regulation
S-K. The Audit Committee recommends to the board of directors the annual
engagement of a firm of independent accountants and reviews with the independent
accountants the scope and results of audits, our internal accounting controls
and audit practices and professional services rendered to us by our independent
accountants. The Audit Committee adopted a written charter on October 22, 2008.
The charter is available on our website, www.chinaagritechinc.com.The charter sets forth the
responsibilities, authority and specific duties of the Audit
Committee.  The Audit Committee took action by written consent three
times in 2009.
  Code
of Ethics
  We
adopted a Code of Ethics on April 12, 2006, to which our Chief Executive
Officer, Chief Financial Officer, Chief Operating Officer, Controller and any
person who may perform similar functions, are subject.  Currently,
Mr. Chang and Mr. Tang are our only officers subject to the Code of
Ethics.  If we retain additional officers in the future to act as our
principal financial officer, principal accounting officer, controller or persons
serving similar functions, they would become subject to our Code of
Ethics.  A copy of our Code of Ethics is available on our website,
www.chinaagritechinc.com.
  41
  Section 16(a)
Beneficial Ownership Reporting Compliance
  Section 16(a)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
requires our executive officers, directors and persons who beneficially own more
than 10% of a registered class of our equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities. These
executive officers, directors, and greater than 10% beneficial owners are
required by SEC regulation to furnish us with copies of all Section 16(a)
forms filed by such reporting persons.
  Based
solely on our review of such forms furnished to us and written representations
from certain reporting persons, we believe that Yu Chang did not timely file
three of such reports, Gene Michael Bennett did not timely file one such report,
Xiao Rong Teng did not timely file two such reports, Yinlong Industrial Co.,
Ltd. did not timely file two such reports, Sammi Holdings Ltd. did not timely
file one such report and Yau-Sing Tang did not timely file one such
report.
  Limitation
of Liability and Indemnification of Officers and Directors
  As
permitted by Delaware law, we have adopted provisions in our amended and
restated certificate of incorporation and bylaws that limit or eliminate the
personal liability of our directors and officers to the fullest extent permitted
by Delaware law, as it now exists or may in the future be amended, and against
all expenses and liabilities reasonably incurred in connection with their
service for or on our behalf.  In addition, our certificate of
incorporation provides that our directors will not be personally liable for
monetary damages to us for breaches of their fiduciary duty as directors, unless
they violated their duty of loyalty to us or our stockholders, acted in bad
faith, knowingly or intentionally violated the law, authorized illegal dividends
or redemptions or derived an improper personal benefit from their action as
directors.
  Item
      10
              Executive
      Compensation
  Summary
Compensation Table
  The
following table reflects information concerning the annual compensation for
services provided to us by our chief executive officer, our chief financial
officer and our one other most highly compensated executive officers during the
last three completed fiscal years and other persons who acted as executive
officers during the fiscal year ended December 31, 2009, but were not employed
by us at year end.
  Name and Principal Position
                                      
                                      Year
                                      
                                      Salary ($)
                                      
                                      
                                      Option
                                        Awards ($)
                                      
                                      
                                      Total ($)Yu
      Chang, Chief Executive Officer and President
                                      
                                      2007
                                      
                                      $
                                      120,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      120,0002008
                                      
                                      $
                                      120,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      120,0002009
                                      
                                      $
                                      93,000
                                      
                                      
                                      $
                                      103,048
                                      (1)
                                      
                                      $
                                      196,048Yau-Sing
      Tang, Chief Financial Officer and Controller
                                      
                                      2007
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —2008
                                      
                                      $
                                      37,500
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      37,5002009
                                      
                                      $
                                      150,000
                                      
                                      
                                      $
                                      343,493
                                      (2)
                                      
                                      $
                                      493,493Ming-Fang
      Zhu, Chief Operating Officer
                                      
                                      2007
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —2008
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —2009
                                      
                                      $
                                      32,861
                                      
                                      
                                      $
                                      51,524
                                      (3)
                                      
                                      $
                                      84,385Xiao
      Rong Teng, Chief Operating Officer and Director
                                      
                                      2007
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —2008
                                      
                                      $
                                      84,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      $
                                      84,0002009
                                      
                                      $
                                      80,000
                                      
                                      
                                      $
                                      51,524
                                      (4)
                                      
                                      $
                                      131,524
 42
 (1)
              On
      December 22, 2009, Mr. Chang was granted 150,000 stock options at an
      exercise price of $11.92 per share.  The options vest and become
      exercisable according to the following schedule: (i) 45,000 on
      December 31, 2009; (ii) 45,000 on December 31, 2010; and
      (iii) 60,000 on December 31,
2011.
  (2)
              Mr.
      Tang was appointed in October 2008.  On December 22, 2009,
      Mr. Tang was granted 150,000 stock options at an exercise price of
      $11.92 per share.  The options fully vest and become exercisable
      on the date of grant.
  (3)
              Effective
      March 13, 2009, Mr. Zhu was appointed as our Chief Operating
      Officer. On December 22, 2009, Mr. Zhu was granted 75,000 stock
      options at an exercise price of $11.92 per share.  The options
      vest and become exercisable according to the following schedule:
      (i) 22,500 on December 31, 2009; (ii) 22,500 on
      December 31, 2010; and (iii) 30,000 on December 31,
      2011.
  (4)
              Effective
      March 11, 2009, Ms. Teng resigned as our Chief Operating
      Officer, but remained as the Director of the Company.  On
      December 22, 2009, Ms. Teng was granted 75,000 stock options at
      an exercise price of $11.92 per share.  The options vest and
      become exercisable according to the following schedule: (i) 22,500 on
      December 31, 2009; (ii) 22,500 on December 31, 2010; and
      (iii) 30,000 on December 31,
2011.
  We
provide our executive officers with a base salary to compensate them for
services rendered during the year.  In addition, we believe that it
will be advantageous to provide our executives discretionary bonuses, equity
incentives, retirement benefits, perquisites, deferred compensation or other
benefits, such as through the 2008 Equity Incentive Plan, to continue to be
successful.
  Base Salary. The base salary
paid to Mr. Chang during 2009 was approximately $93,000.  The base
salary paid to Mr. Tang during 2009 was approximately $150,000.  The
base salary paid to Ms. Teng during 2009 was approximately
$80,000.  The base salary of Mr. Zhu during 2009 was approximately
$32,861.. The base salary paid to all executives during 2009 was paid in
cash.  The value of base salary reflects each executive’s skill set
and the market value of that skill set in the sole discretion of the Board of
Directors.
  On
October 17, 2008, China Agritech, Inc. entered into an employment agreement with
Mr. Tang pursuant to which he was appointed as its Chief Financial Officer. Mr.
Tang will receive a base salary of $150,000 annum (the “Base Salary”), which is
payable in advance on a monthly basis. The term of Mr. Tang’s employment ends
October 16, 2010.  In addition, we issued options to purchase up to
150,000 shares of our common stock at an exercise price of $11.92 per share to
Mr. Tang during his employment period.  The options vest immediately
upon the grant.
  The
Company entered into a three year employment agreement dated March 18, 2009 with
Ming Fang Zhu pursuant to which Mr. Zhu serves as Chief Operating Officer of the
Company. The agreement provides that Mr. Zhu receive an annual salary of $36,000
and is terminable by Mr. Zhu for any reason upon 30 days notice.
  Employee
Benefits Plans
  We do not
sponsor any qualified or non-qualified pension benefit plans or maintain any
non-qualified defined contribution or deferred compensation plans.
  2008 Equity Incentive
Plan
  The 2008
Equity Incentive Plan permits the grant of Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units, and Other Share-Based Awards as the
Compensation Committee may determine to our employees, directors and
consultants. We believe the Plan will promote the success of our business,
advance our interests, and help us to attract and retain the best available
personnel for positions of substantial responsibility.  The exercise
price per share with of awards issued pursuant to the Plan is determined by the
Compensation Committee provided that the exercise price per share cannot be less
than the fair market value of a share on the grant date, and the Plan
administrator establishes the times, installments or conditions upon which the
Option, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, and
other share-based awards will vest and become exercisable.
  As of
December 31, 2009, there were six employees and/or directors who were
awarded stock options of 517,500 shares under the Plan.  In
January 2010, the Company also awarded 326,000 shares of restricted common
stock to five executives and/or directors.
  Shares Available for Awards.After having equitably adjusted our Plan to give effect to the Reverse
Stock Split of four to one shares in September 2009 and the Forward Stock
Split of two for one share in February 2010, we have reserved 1,800,000
shares of common stock for issuance under the Plan.If any award expires,
is cancelled, or terminates unexercised or is forfeited, the number of shares
subject thereto is again available for grant under the Plan. The number of
shares of common stock for which awards may be granted to a participant under
the 2008 Plan in any calendar year cannot exceed 1,800,000 shares.  As
of March 29, 2010, the Company still has 956,500 shares available for
awards under the 2008 Plan.
  43
  Change-in-Control Provisions.
In the event of a change in control, any outstanding awards that are
unexercisable or otherwise unvested will become fully vested and immediately
exercisable unless such award has been assumed by the successor
corporation.
  Amendment and Termination.
The Compensation Committee may adopt, amend and rescind rules relating to the
administration of the Plan, and amend, suspend or terminate the Plan, but no
amendment will be made that adversely affects in a material manner any rights of
the holder of any award without the holder’s consent, other than amendments that
are necessary to permit the granting of awards in compliance with applicable
laws. We have attempted to structure the Plan so that remuneration attributable
to stock options and other awards will not be subject to a deduction limitation
contained in Section 162(m) of the Code.
  Outstanding
Equity Awards at Fiscal Year-End
  As of
December 31, 2009, we had the following outstanding equity awards:
 
 Option awardsName
                            
                            Number of
                              securities
                              underlying
                              unexercised
                              options
                              exercisable
                            
                            
                            Number of
                              securities
                              underlying
                              unexercised
                              options
                              unexercisable
                            
                            
                            Equity
                              incentive
                              plan awards:
                              Number of
                              securities
                              underlying
                              unexercised
                              unearned
                              options
                              (#)
                            
                            
                            Option
                              exercise
                              price
                              ($)
                            
                            Option expiration
                              date(a)
                            
                            (b)
                            
                            
                            (c)
                            
                            
                            (d)
                            
                            
                            (e)
                            
                            (f)Yau-Sing
      Tang
                            
                            
                            150,000
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            11.92
                            
                            October
      17, 2014Yu
      Chang
                            
                            
                            45,000
                            
                            
                            
                            105,000
                            
                            
                            
                            -
                            
                            
                            
                            11.92
                            
                            October
      17, 2014Xiao
      Rong Teng
                            
                            
                            22,500
                            
                            
                            
                            52,500
                            
                            
                            
                            -
                            
                            
                            
                            11.92
                            
                            October
      17, 2014Ming
      Fang Zhu
                            
                            
                            22,500
                            
                            
                            
                            52,500
                            
                            
                            
                            -
                            
                            
                            
                            11.92
                            
                            October
      17, 2014Min
      Zhang
                            
                            
                            12,000
                            
                            
                            
                            14,000
                            
                            
                            
                            -
                            
                            
                            
                            11.92
                            
                            October
      17,
2014
  Director
Compensation
 
 Name
                  
                  Fees
                    earned
                    or
                    paid in
                    cash
                    ($)
                  
                  
                  Stock
                    awards
                    ($)
                  
                  
                  Option
                    awards
                    ($)
                  
                  
                  Non-equity
                    incentive
                    plan
                    compensation
                    ($)
                  
                  
                  Nonqualified
                    deferred
                    compensation
                    earnings
                    ($)
                  
                  
                  All other
                    compensation
                    ($)
                  
                  
                  Total
                    ($)(a)
                  
                  (b)
                  
                  
                  (c)
                  
                  
                  (d)
                  
                  
                  (e)
                  
                  
                  (f)
                  
                  
                  (g)
                  
                  
                  (h)Gene
      Michael Bennett
                  
                  
                  20,000
                  
                  
                  
                  —
                  
                  
                  
                  2,703
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  22,703Lun
      Zhang Dai
                  
                  
                  20,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20,000Hai
      Lin Zhang
                  
                  
                  20,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  20,000
 
  44
  In
September 2008 we entered into an agreement with each of Mr. Lun Zhang Dai, Mr.
Hai Lin Zhang and Mr. Gene Michael Bennett.  Pursuant to each
agreement, the director is entitled to a director’s fee of $20,000 per annum,
payable semi-annually, except in the case of Mr. Bennett, whose fee is payable
quarterly.  Such fee is in addition to any fees to which the director
may be entitled under guidelines and rules established by us from time to time
for compensating non-employee directors for their services and attending
meetings of the board and its committees.  Pursuant to our agreement
with Mr. Bennett, he is entitled to receive an option to purchase 3,000 shares
of our common stock, although no such option has been issued. The directors are
also entitled to reimbursement of pre-approved reasonable business related
expenses in the performance of their duties as directors. Each agreement is
expires upon the respective director’s removal or resignation from the Board of
Directors.  Pursuant to the agreements, Messrs. Dai, Zhang and Bennett
are each obligated not to complete with us or our subsidiaries for a period of
12 months from the date the cease serving as members of our Board of
Directors.  Either the parties to the directors’ agreements may
terminate the respective agreements upon 10 days written
notice.  Additionally, each of Messrs Dai, Zhang and Bennett executed
indemnification agreements with us in September 2008.  Pursuant to
such agreements, we have agreed to indemnify the directors to the fullest extent
permitted by Delaware law against expenses paid in settlement, actually and
reasonably incurred by the director in connection with a proceeding by us or in
pursuit of our rights to procure a judgment in our favor if the director acted
in good faith and in a matter the director indemnitee reasonably believed to be
in our best interests.  We also agreed to indemnify the directors
against expenses actually and reasonably incurred by the director indemnitee in
connection with a proceeding, other than a proceeding by us or in pursuit of our
rights, if the director acted in good faith and in a matter the director
indemnitee reasonably believed to be in our best interests, and, with respect to
any criminal action or proceeding, the director had no reasonable cause to
believe that his conduct was unlawful
  Option
Exercises and Stock Vested
  On
January 12, 2010, the Company awarded the following restricted shares of common
stock to directors and executives for their services rendered to the
Company.
 Name
                
                Number of Shares
      Awarded
                
                
                Value
      Realized
                  on
      VestingYu
      Chang
                
                100,000
                (2)
                
                $
                1,761,000Xiao-Rong
      Teng
                
                50,000
                (2)
                
                $
                880,500Yau-Sing
      Tang
                
                100,000
                (3)
                
                $
                1,761,000Ming-Fang
      Zhu
                
                50,000
                (2)
                
                $
                880,500
 1.
                The value
      is determined with reference to the closing market price of $17.61 per
      share as at January 12, 2010 (the date of
award).
 2.
                The
      shares awarded to Mr. Chang, Ms. Teng and Mr. Zhu vest according to the
      following schedule (i) 30% upon issuance (ii) 30% on December 31, 2010 and
      (iii) 40% on December 31, 2011.
 3.
                  The shares
      awarded to Mr. Tang fully vest upon
issuance.
  On March
2, 2010, the following stock options issued to directors and executives that
already vested were exercised by cashless. As a result, the following
shares were issued upon exercise:
  Name
                    
                    Number
      of Stock
                      Options
      Exercised
                    
                    
                    Number
      of Shares
                      Issued
      by
                      Cashless
      Exercise
                    
                    
                    Value
      Realized
                      on
      Exercise (1)Yu
      Chang
                    
                    
                    45,000
                    
                    
                    
                    24,720
                    
                    
                    $
                    632,832Xiao-Rong
      Teng
                    
                    
                    22,500
                    
                    
                    
                    12,360
                    
                    
                    $
                    316,416Yau-Sing
      Tang
                    
                    
                    150,000
                    
                    
                    
                    82,401
                    
                    
                    $
                    2,109,466Ming-Fang
      Zhu
                    
                    
                    22,500
                    
                    
                    
                    12,360
                    
                    
                    $
                    316,410
 1.
                      The value
      is determined with reference to the closing market price of $25.60 per
      share as at March 2, 2010.
 Employment
Agreements
  Yau-Sing Tang.  We
entered into a two-year employment agreement with Mr. Tang on
October 17, 2008, pursuant to which he was appointed as our Chief Financial
Officer. Mr. Tang receives a base salary of $150,000 per annum. On
December 22, 2009, Mr. Tang was awarded a five-year option to purchase
150,000 shares at an exercise price of $11.92 per share, the fair market value
of our common stock on the date of the grant, which was fully vested on the date
of grant. Also, on January 12, 2010, Mr. Tang was awarded 100,000
shares of our restricted common stock for his service rendered to the
Company.
  45
  Item
      11
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
  Security
Ownership of Certain Beneficial Owners and Management
  The
following table sets forth information regarding beneficial ownership of our
common stock as of March 23, 2010 (i) by each person who is known by us to
beneficially own more than 5% of our common stock; (ii) by each of our
officers and directors; and (iii) by all of our officers and directors as a
group.  Unless otherwise stated, the address of all persons in the
table is c/o China Agritech, Inc., Room 3F, No 11 Building, Zhonghong
International Business Garden, Future Business Center, Chaoyang North Road,
Chaoyang District, Beijing China 100024.
  As of
March 23, 2010, an aggregate of 17,479,769 shares of our common stock were
outstanding.
 
 Name & Address of Beneficial Owner and Office, if any
                    
                    Amount & Nature of
                        Beneficial Ownership (1)
                    
                    
                    Percent of Class(1)Yu
      Chang, Chief Executive Officer, President, Secretary and
      Chairman
                    
                    
                    7,073,638
                    (2)
                    
                    
                    40.23China
      Tailong Group Limited
                    
                    
                    4,322,420
                    (3)
                    
                    
                    24.73Carlyle
      Asia Growth Partners IV, L.P.
                    
                    
                    4,263,123
                    (4)
                    
                    
                    22.22CAGP
      IV Co-Investment, L.P.
                    
                    
                    379,437
                    (4)
                    
                    
                    1.30Sammi
      Holdings Limited
                    
                    
                    1,745,000
                    (5)
                    
                    
                    9.98Xiao
      Rong Teng, Director
                    
                    
                    376,136
                    (6)
                    
                    
                    2.15Yau-Sing
      Tang, Chief Financial Officer and Controller
                    
                    
                    182,401
                    
                    
                    
                    1.04Ming
      Fang Zhu, Chief Operating Officer
                    
                    
                    112,360
                    (7)
                    
                    
                    
                    *Gene
      Michael Bennett, Director
                    
                    
                    0Lun
      Zhang Dai, Director
                    
                    
                    0
                    
                    
                    
                    
                    *Hai
      Lin Zhang, Director
                    
                    
                    0
                    
                    
                    
                    
                    *Charles
      Law, Director
                    
                    
                    0
                    
                    
                    
                    
                    *Zheng
      “Anne” Wang, Director
                    
                    
                    0
                    
                    
                    
                    
                    *All
      officers and directors as a group (9 persons)
                    
                    
                    7,797,035
                    
                    
                    
                    45.26
 
 * Less than
1%.
  1.
              Pursuant
      to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of
      any securities as to which such person, directly or indirectly, through
      any contract, arrangement, undertaking, relationship or otherwise has or
      shares voting power and/or investment power or as to which such person has
      the right to acquire such voting and/or or investment power within 60
      days.  Unless otherwise stated, each beneficial owner has sole
      power to vote and dispose of the
shares.
  2.
              Includes
      4,322,420 shares of our common stock held by China Tailong Group Limited
      and 1,745,000 shares held by Sammi Holdings Limited.  Mr. Chang
      holds 100% of the registered shares of China Tailong Group Limited and 85%
      of the registered shares of Sammi Holdings Limited of which he is the sole
      director. Does not include 105,000 options that do not vest within 60
      days.  In addition, Mr. Chang has sole voting and dispositive
      power over 1,006,218 shares of our common
stock.
  3.
              Yu
      Chang holds 100% of the registered shares of China Tailong Group
      Limited.
  4.
              Includes
      2,557,874 shares of common stock owned outright and 1,705,249 shares of
      common stock issuable upon exercise of a warrant held by Carlyle Asia
      Growth Partners IV, L.P. The warrant is first exercisable on April 19,
      2010 and expires on April 19, 2012. Based on a Schedule 13D/A filed by
      Carlyle Asia Growth Partners IV, L.P. on February 23, 2010, CAGP IV
      General Partner, L.P. is the general partner of Carlyle Asia Growth
      Partners IV, L.P. and CAGP IV Co-Investment, L.P., the record holder of
      113,831 shares of common stock of China Agritech, and may be deemed to
      have voting control and investment discretion over the securities held by
      Carlyle Asia Growth Partners IV, L.P. and CAGP IV Co-Investment,
      L.P.  CAGP IV General Partner, L.P. disclaims beneficial
      ownership of such securities.   The sole general partner of
      CAGP IV General Partner, L.P. is CAGP IV Ltd., a limited company that is
      wholly owned by TC Group Cayman Investment Holdings, L.P. The sole general
      partner of TC Group Cayman Investment Holdings, L.P. is TCG Holdings
      Cayman II, L.P. DBD Cayman, Ltd. is the sole general partner of TCG
      Holdings Cayman II, L.P. Carlyle Offshore Partners II, Limited is the
      Class B member of DBD Cayman, Ltd. Each of CAGP IV Ltd., TC Group Cayman
      Investment Holdings, L.P., TCG Holdings Cayman II, L.P., DBD Cayman, Ltd.,
      and Carlyle Offshore Partners II, Limited may, by virtue of being the
      owner or general partner, as the case may be, of CAGP IV General Partner,
      L.P., CAGP IV Ltd., TC Group Cayman Investment Holdings, L.P., TCG
      Holdings Cayman II, L.P., and DBD Cayman, Ltd., respectively, be deemed to
      have voting control and investment discretion over the securities held by
      Carlyle Asia Growth Partners IV, L.P. and CAGP IV Co-Investment, L.P. CAGP
      IV Ltd., TC Group Cayman Investment Holdings, L.P., TCG Holdings Cayman
      II, L.P., DBD Cayman, Ltd., and Carlyle Offshore Partners II, Limited each
      disclaims beneficial ownership of such securities.  The
      principal business address of each of these persons is c/o The Carlyle
      Group, 1001 Pennsylvania Ave., N.W., Suite 220 South, Washington D.C.,
      20004-2505.  William E. Conway, Jr., Daniel A. D’Aniello, David
      Rubenstein, David Pearson, and Curt Buser are the directors of CAGP IV
      Ltd. and, in such capacity, may be deemed to share beneficial ownership of
      the shares of common stock of the Company beneficially owned by CAGP IV
      Ltd. Such individuals, in their capacities as directors, expressly
      disclaim any such beneficial ownership. Does not include warrants to
      purchase 928,514 shares of commons stock held collectively by Carlyle Asia
      Growth Partners IV, L.P. and CAGP IV Co-Investment, L.P that are not
      exercisable within 60 days.
  46
  5.
              Yu
      Chang and Xiao Rong Teng hold 85% and 15% of the registered shares of
      Sammi Holdings Limited,
respectively.
  6.
              Ms.
      Teng holds 15% of the registered shares of Sammi Holdings Limited, but
      she does not have the power to vote on dispose of any of the shares of the
      Company held by Sammi Holdings Limited. Does not include 52,500 options
      that do not vest within 60 days.
 7.
                Does
      not include 52,500 options that do not vest within 60
      days.
 Securities
Authorized for Issuance Under Equity Compensation Plans
 
 Plan category
                  
                  Number of
                    securities to be
                    issued upon
                    exercise of
                    outstanding
                    options,
                    warrants and
                    rights
                  
                  
                  Weighted-average
                    exercise price of
                    outstanding options,
                    warrants and rights
                  
                  
                  Number of
                    securities
                    remaining
                    available for
                    future issuance
                    under equity
                    compensation
                    plans
                    (excluding
                    securities
                    reflected in
                    column (a))(a)
                  
                  
                  (b)
                  
                  
                  (c)Equity
      compensation plans approved by security holders
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Equity
      compensation plans not approved by security holders
                  
                  
                  517,500
                  
                  
                  
                  11.64
                  
                  
                  
                  1,282,500Restricted
      common stock
                  
                  
                  326,000
                  
                  
                  
                  N/A
                  
                  
                  
                  956,500
  Changes
in Control
  Not
Applicable.
  Item
      12
              Certain
      Relationships and Related Transactions and Director
      Independence
  Related
Parties Transactions
  On
February 12, 2009,  Tailong, our wholly owned subsidiary, entered into
(i) a share purchase agreement between Pacific Dragon and Yinlong, and (ii) a
supplemental purchase agreement among Yinlong, Pacific Dragon, Mr. Chang (our
CEO, President, Secretary and director) and Ms. Xiao Rong Teng, one of our
directors, pursuant to which Tailong has agreed to acquired Yinlong’s remaining
10% interest in Pacific Dragon for an aggregate purchase price of
$7,980,000.  Mr. Chang owns 85% of Yinlong’s outstanding shares and
Ms. Teng owns the remaining 15%.  After the close of this transaction
on May 15, 2009, Pacific Dragon became our indirect wholly owned
subsidiary.
  On
February 12, 2009, in connection with the supplemental purchase agreement
described above, Tailong issued an unsecured, interest-free promissory note in
the principal amount of $6,980,000 to Yinlong as consideration for the purchase
of its 10% interest in Pacific Dragon.  The promissory note had a
maturity date of December 31, 2009 and Tailong was permitted to prepay all of
any portion of the principal of the promissory note without
penalty.
  47
  On May
15, 2009, Tailong entered into an amendment to the supplemental purchase
agreement among Yinlong, Pacific Dragon, Mr. Yu Chang and Ms. Xiao Rong Teng
pursuant to which Tailong amended the settlement of the purchase consideration
to provide for a cash payment of $1,000,000 and issuance of 1,745,000 restricted
shares of our common stock for the balance consideration. On the same date,
Tailong completed the acquisition of all of the capital stock in Pacific
Dragon.  In July 2009, Yinlong sold all 1,745,000 shares of our common
stock to SammiHoldings Limited, a British Virgin Islands company in which Mr.
Chang has an 85% equity interest and Ms. Teng owns the remaining 15% equity
interest.
  Director
Independence
  Four of
our directors, Messrs. Dai, Bennett, Zhang and Law, have been determined to be
independent as defined by Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ
Stock Market, LLC and Section 10A(m)(3) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”).
  No
transactions, relationships or arrangements were considered by the board of
directors in determining that these directors were independent.
  Item
      13
              Principal
      Accounting Fees and Services.
  Effective
April 18, 2008, we formally engaged Grobstein, Horwath & Company LLP as our
principal independent registered public accounting firm to examine our
consolidated financial statements for the fiscal year ended December 31,
2008.  Effective December 8, 2008, Grobstein, Horwath & Company
LLP merged with and into Crowe Horwath LLP.  As a result of the
merger, Grobstein Horwath & Company LLP resigned on January 7, 2009 as our
independent registered public accounting firm and Crowe Horwath LLP was formally
engaged on January 19, 2009 as our new independent public accounting
firm.
  Fees
for the fiscal years ended December 31, 2009 and 2008
  Audit Fees. Crowe
Horwath LLP was paid aggregate fees of approximately $160,000 and $150,000 for
the audit of our annual financial statements for the fiscal year ended
December 31, 2009 and 2008 respectively  Crowe Horwath LLP was
paid aggregate fees of approximately $45,000 for the review of the financial
statements included in our Quarterly Reports on Form 10-Q for the periods ended
March 31, 2009, June 30, 2009, and September 30,
2009.  Grobstein, Horwath & Company LLP was paid aggregate fees of
approximately $50,000 for the review of the financial statements included in our
Quarterly Reports on Form 10-Q for the periods ended March 31, 2008,
June 30, 2008, and September 30, 2008.
  Audit-Related
Fees.  None
  Tax
Fees.          None.
  All Other Fees.
  The aggregate fees billed in the fiscal years ended December 31,
2009 and 2008 for products and services provided by the principal accountant for
the relevant fiscal year, other than services reported above under other
captions of this Item 14 are $5,000 and $5,500, respectively.
  As
provided for in our Audit Committee charter, the Audit Committee pre-approves
all audit and non-audit services by the independent auditors as required by
applicable law and the rules of any securities exchange upon which our
securities may be listed.
  48
  PART
IV
  Item
      14
                EXHIBITS
      AND FINANCIAL STATEMENT
SCHEDULES
 
 Exhibit
                  No.
                
                Description2.1
                
                Agreement
      and Plan of Merger, dated July 1, 2004 by and between Basic Empire
      Corporation, a Nevada Corporation and Basic Empire Corporation, a Delaware
      corporation (incorporated by reference to Exhibit 10.2 in the our annual
      report on Form 10-KSB filed on April 15, 2005).2.2
                
                Agreement
      and Plan of Reorganization, dated as of December 25, 2004, as amended, by
      and among the us, China Tailong Holdings Company Limited and its
      stockholders (incorporated by reference to Exhibit 2.1 in the our current
      report on Form 8-K filed on February 3, 2005, as
  amended).3.1
                
                Amended
      and Restated Certificates of Incorporation as filed with the Secretary of
      the State of Delaware (incorporated by reference to Exhibit 3.1 in the our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).3.2
                
                Articles
      of Association of China Tailong Holdings Company Limited (incorporated by
      reference to Exhibit 4.2 in our current report on Form 8-K filed on
      February 3, 2005, as amended).3.3
                
                Articles
      of Association of Pacific Dragon Fertilizers Co. Ltd. (incorporated by
      reference to Exhibit 4.3 in our current report on Form 8-K filed on
      February 3, 2005, as amended).3.4
                
                Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 in our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).3.5*
                
                Certificate
      of Amendment of to our Amended and Restated Certificate of Incorporation
      (incorporated by reference to Appendix C of our Information Statement on
      Schedule 14C filed on November 11, 2009).3.6
                
                Certificate
      Of Amendment to our Amended and Restated Certificate of Incorporation
      (incorporated by reference to Appendix C of our Information Statement on
      Schedule 14C filed on January 8, 2010).4.1
                
                Form
      of Registration Right Agreement, dated June 29, 2007, by and among us,
      Securities Transfer Corporation and the Investors (incorporated by
      reference to Exhibit 4 in registration statement on our Form S-1/A filed
      on October 19, 2007).4.2
                
                Common
      Stock Purchase Warrant, dated July 5, 2007, issued to Roth Capital
      Partner, LLC. (incorporated by reference to Exhibit 4.1 in our
      registration statement on Form S-1 filed on August 20,
    2007).10.1
                
                Lease
      Agreement, dated December 30, 2003, by and between Pacific Dragon
      Fertilizers Co. Ltd. and Yinlong Industrial Co. Ltd.
(1)10.2
                
                Amendment
      to the Lease Agreement, dated June 28, 2005, by and between Pacific Dragon
      Fertilizers Co., Ltd. and Yinglong Industrial Co.,
      Ltd.  (1)10.3
                
                License
      Agreement, dated January 6, 2005, by and between Yu Chang and Pacific
      Dragon Fertilizers Co. Ltd. (1)10.4
                
                License
      Agreement, dated July 5, 2007, by and between Yu Chang and Pacific Dragon
      Fertilizers Co., Ltd. (4)10.5
                
                Supplier
      contracts dated October 14, 2008, by and between China Agritech, Inc. and
      Sinochem Fertilizer Co., Ltd. (6)10.6
                
                Employment
      Agreement, dated October 17, 2008, by and between China Agritech, Inc. and
      Mr. Yau-Sing
Tang  (7)
  49
 
 Exhibit
                    No.
                  
                  Description10.7
                  
                  Independent
      Director’s Contract, dated September 24, 2008, by and  between
      China Agritech, Inc. and Mr. Lun Zhang Dai (7)10.8
                  
                  Independent
      Director’s Contract, dated September 24, 2008, by and between China
      Agritech, Inc. and Mr. Hai Lin Zhang (7)10.9
                  
                  Independent
      Director’s Contract, dated September 24, 2008, by and between China
      Agritech, Inc. and Mr. Gene Michael Bennett (7)10.10
                  
                  Form
      of Share Purchase Agreement, dated February 12, 2009, among Yinlong
      Industrial Co. Ltd., Tailong Holdings Company Limited and Pacific Dragon
      Fertilizer Co. Ltd. (8)10.11
                  
                  Form
      of Supplemental Share Purchase Agreement, dated February 12, 2009, among
      Yinlong Industrial Co. Ltd., Tailong Holdings Company Limited, Pacific
      Dragon Fertilizer Co. Ltd., Yu Chang and Xiao Rong
      Teng  (8)10.12
                  
                  Amendment
      to Supplemental Share Purchase Agreement, dated May 15, 2009, by and among
      Yinlong, Tailong, Pacific Dragon and the Company (9).10.13
                  
                  China
      Agritech Inc. 2008 Equity Incentive Plan (10)10.14
                  
                  Employment
      Agreement, dated March 18, 2009, between Ming Fang Zhu and China Agritech,
      Inc.  (11)10.15
                  
                  Employment
      Agreement, dated May 1, 2009, between Ling Xiao Dai and China Agritech,
      Inc. (11)10.16
                  
                  Industrial
      Product Purchase Contract, dated December 2, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Beijing Zhongxin Chemical Development Company
      (11)10.17
                  
                  Industrial
      Product Purchase Contract, dated December 5, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Harbin Hai Heng Chemical Distribution Co., Ltd.
      (11)10.18
                  
                  Industrial
      Product Purchase Contract, dated December 8, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Shenzhen Hongchou Technology Company
      (11)10.19
                  
                  WangZou
      Center Lease Agreement, dated November 21, 2008, between Li Hua and China
      Tailong Holdings Company Limited (11)10.20
                  
                  Plant
      Lease Agreement, dated June 4, 2007, between ZhongYun Instrument Sales
      Limited, High-Tech Industrial Development Zone, Urumqi and Beijing
      Agritech Fertilizer Limited, Xinjiang Branch (11)10.21
                  
                  Plant
      Lease Agreement, dated July 13, 2006, between Beijing Xinggu Investing
      Center and Beijing Agritech Fertilizer Limited (11)10.22
                  
                  Plant
      Lease Agreement, dated May 18, 2006, between Management Committee of
      Bengbu Industrial Park of Anhui Water Resources Development Co., Ltd. and
      Anhui Agritech Agriculture Development Limited (11)10.23
                  
                  Plant
      Lease Agreement, dated April 1, 2007, between Sanheshiye Development
      Company Juilongpo District Chongqing and Beijing Agritech Fertilizer
      Limited, Chongqing Branch (11)10.24
                  
                  Plant
      Lease Agreement, dated December 30, 2007, between Xinggu Economic
      Development Zone Administration Committee and Beijing Agritech Fertilizer
      Limited  (11)10.25
                  
                  Office
      Building Lease Agreement, dated February 1, 2007, between Xiao Rong Teng
      and Beijing Agritech Fertilizer Limited (11)10.26
                  
                  Registration
      Rights Agreement dated as of October 19, 2009 between China Agritech, Inc.
      and Investors, Carlyle Asia Growth Partners IV, L.P. and CAGP IV
      Co-Investment, L.P. (12)10.27
                  
                  Securities
      Purchase Agreement dated as of October 19, 2009 between China Agritech,
      Inc. and Investors, Carlyle Asia Growth Partners IV, L.P. and CAGP IV
      Co-Investment, L.P. (12)10.28
                  
                  Voting
      Agreement dated as of October 19, 2009 among China Agritech, Inc. and
      Investors, Carlyle Asia Growth Partners IV, L.P. and CAGP IV
      Co-Investment, L. And certain stockholders of China Agritech, Inc.
      (12)10.29
                  
                  Non-Executive
      Director's Contract, dated December 30, 2009, between China Agritech, Inc.
      and Ms. Anne Wang (13)10.30
                  
                  Independent
      Director's Contract, dated January 8, 2010, between China Agritech, Inc.
      and Mr. Charles Law (14)14
                  
                  Code
      of ethics (incorporated by reference to Exhibit 14 in our annual report on
      Form 10-KSB filed on April 14, 2006)16.1
                  
                  Letter
      from  Grobstein, Horwath & Company LLP regarding change in
      certifying accountant, dated February 13, 2009  (incorporated by
      reference to Exhibit 16.1 in our current report on Form 8-K/A filed on
      February 18, 2009).16.2
                  
                  Letter
      from  Grobstein, Horwath & Company
      LLP regarding agreement with the disclosures made in the Current
      Report  on Form 8-K/A, dated March 10, 2009 (incorporated by
      reference to Exhibit 16.2 in our current report on Form 8-K/A filed on
      March 10, 2009).21*
                  
                  Subsidiaries
      of the Registrant23.1*
                  
                  Consent
      of Crowe Horwath LLP, independent registered public accounting
      firm31.1*
                  
                  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 2002
  50
  Exhibit
                    No.
                  
                  Description32.1*
                  
                  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 2002
  *32.2*
                  
                  Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *
 
  * Filed
herewith
 (1)
              Incorporated by reference to our
      registration statement on Form SB-2/A (No. 333-126802) filed on April 28,
      2006.
 (2)
              Incorporated by reference to our
      Annual Report on Form 10-K filed on March 31,
  2009.
 (3)
              Incorporated by reference our
      Annual Report on Form 10-KSB filed on April 14,
    2006.
 (4)
              Incorporated by reference our
      registration statement on Form S-1 (No. 333-145562) filed on August 20,
      2007.
 (5)
              Incorporated by reference to our
      Current Report on Form 8-K filed on October 10,
    2007.
 (6)
              Incorporated by reference to our
      Current Report on Form 8-K filed on October 14,
    2008.
 (7)
              Incorporated by reference to our
      Current Report on Form 8-K filed on October 24,
  2008
 (8)
              Incorporated by reference to our
      Current Report on Form 8-K filed on February 18,
    2008.
 (9)
              Incorporated by reference to our
      Current Report on Form 8-K filed on May 21,
  2009
 (10)
              Incorporated by reference to our
      registration statement on Form S-8 (No. 33-156407) filed on December 22,
      2008
 (11)
              Incorporated by reference to our
      Quarterly Report on Form 10-Q filed May 14, 2009(12)
              Incorporated
      by reference to our Current Report on Form 8-K filed on October 20,
      2009.(13)
              Incorporated
      by reference to our Current Report on Form 8-K filed on December 30,
      2009.(14)
              Incorporated
      by reference to our Current Report on Form 8-K filed on January 8,
      2010.
  51
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) 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.March 31, 2010
                    By:
                    /s/ Yu
      Chang(Date
      Signed)
                    
                    Yu
      Chang, Chief Executive Officer, President, and Secretary
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
 
 Signature
                                        
                                        Capacity
                                        
                                        Date/s/
      Yu Chang
                                        
                                        Chief
      Executive Officer, President, Secretary and Chairman
                                        
                                        March
      31, 2010Yu
      Chang/s/
      Yau Sing Tang
                                        
                                        Chief
      Financial Officer and Controller
                                        
                                        March
      31, 2010Yau-Sing
      Tangs/
      Xiao Rong Teng
                                        
                                        Director
                                        
                                        March
      31, 2010Xiao
      Rong Teng/s/
      Gene Michael Bennett
                                        
                                        Director
                                        
                                        March
      31, 2010Gene
      Michael Bennett/s/
      Lun Zhang Dai
                                        
                                        Director
                                        
                                        March
      31, 2010Lun
      Zhang Dai/s/
      Hai Lin Zhang
                                        
                                        Director
                                        
                                        March
      31, 2010Hai
      Lin Zhang/s/
      Charles Law
                                        
                                        Director
                                        
                                        March
      31, 2010Charles
      Law/s/
      Zheng Wang
                                        
                                        Director
                                        
                                        March
      31, 2010Zheng
      Wang
  52




Exhibit
Index




Exhibit
                                      No.
                                    
                                    Description2.1
                                    
                                    Agreement
      and Plan of Merger, dated July 1, 2004 by and between Basic Empire
      Corporation, a Nevada Corporation and Basic Empire Corporation, a Delaware
      corporation (incorporated by reference to Exhibit 10.2 in the our annual
      report on Form 10-KSB filed on April 15, 2005).2.2
                                    
                                    Agreement
      and Plan of Reorganization, dated as of December 25, 2004, as amended, by
      and among the us, China Tailong Holdings Company Limited and its
      stockholders (incorporated by reference to Exhibit 2.1 in the our current
      report on Form 8-K filed on February 3, 2005, as
  amended).3.1
                                    
                                    Amended
      and Restated Certificates of Incorporation as filed with the Secretary of
      the State of Delaware (incorporated by reference to Exhibit 3.1 in the our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).3.2
                                    
                                    Articles
      of Association of China Tailong Holdings Company Limited (incorporated by
      reference to Exhibit 4.2 in our current report on Form 8-K filed on
      February 3, 2005, as amended).3.3
                                    
                                    Articles
      of Association of Pacific Dragon Fertilizers Co. Ltd. (incorporated by
      reference to Exhibit 4.3 in our current report on Form 8-K filed on
      February 3, 2005, as amended).3.4
                                    
                                    Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 in our
      registration statement on Form SB-2 filed on July 22, 2005, as
      amended).3.5*
                                    
                                    Certificate
      of Amendment of to our Amended and Restated Certificate of Incorporation
      (incorporated by reference to Appendix C of our Information Statement on
      Schedule 14C filed on November 11, 2009).3.6
                                    
                                    Certificate
      Of Amendment to our Amended and Restated Certificate of Incorporation
      (incorporated by reference to Appendix C of our Information Statement on
      Schedule 14C filed on January 8, 2010).4.1
                                    
                                    Form
      of Registration Right Agreement, dated June 29, 2007, by and among us,
      Securities Transfer Corporation and the Investors (incorporated by
      reference to Exhibit 4 in registration statement on our Form S-1/A filed
      on October 19, 2007).4.2
                                    
                                    Common
      Stock Purchase Warrant, dated July 5, 2007, issued to Roth Capital
      Partner, LLC. (incorporated by reference to Exhibit 4.1 in our
      registration statement on Form S-1 filed on August 20,
    2007).10.1
                                    
                                    Lease
      Agreement, dated December 30, 2003, by and between Pacific Dragon
      Fertilizers Co. Ltd. and Yinlong Industrial Co. Ltd.
(1)10.2
                                    
                                    Amendment
      to the Lease Agreement, dated June 28, 2005, by and between Pacific Dragon
      Fertilizers Co., Ltd. and Yinglong Industrial Co.,
      Ltd.  (1)10.3
                                    
                                    License
      Agreement, dated January 6, 2005, by and between Yu Chang and Pacific
      Dragon Fertilizers Co. Ltd. (1)10.4
                                    
                                    License
      Agreement, dated July 5, 2007, by and between Yu Chang and Pacific Dragon
      Fertilizers Co., Ltd. (4)10.5
                                    
                                    Supplier
      contracts dated October 14, 2008, by and between China Agritech, Inc. and
      Sinochem Fertilizer Co., Ltd. (6)10.6
                                    
                                    Employment
      Agreement, dated October 17, 2008, by and between China Agritech, Inc. and
      Mr. Yau-Sing
Tang  (7)


53





Exhibit
                No.
              
              Description10.7
              
              Independent
      Director’s Contract, dated September 24, 2008, by and  between
      China Agritech, Inc. and Mr. Lun Zhang Dai (7)10.8
              
              Independent
      Director’s Contract, dated September 24, 2008, by and between China
      Agritech, Inc. and Mr. Hai Lin Zhang (7)10.9
              
              Independent
      Director’s Contract, dated September 24, 2008, by and between China
      Agritech, Inc. and Mr. Gene Michael Bennett (7)10.10
              
              Form
      of Share Purchase Agreement, dated February 12, 2009, among Yinlong
      Industrial Co. Ltd., Tailong Holdings Company Limited and Pacific Dragon
      Fertilizer Co. Ltd. (8)10.11
              
              Form
      of Supplemental Share Purchase Agreement, dated February 12, 2009, among
      Yinlong Industrial Co. Ltd., Tailong Holdings Company Limited, Pacific
      Dragon Fertilizer Co. Ltd., Yu Chang and Xiao Rong
      Teng  (8)10.12
              
              Amendment
      to Supplemental Share Purchase Agreement, dated May 15, 2009, by and among
      Yinlong, Tailong, Pacific Dragon and the Company (9).10.13
              
              China
      Agritech Inc. 2008 Equity Incentive Plan (10)10.14
              
              Employment
      Agreement, dated March 18, 2009, between Ming Fang Zhu and China Agritech,
      Inc.  (11)10.15
              
              Employment
      Agreement, dated May 1, 2009, between Ling Xiao Dai and China Agritech,
      Inc. (11)10.16
              
              Industrial
      Product Purchase Contract, dated December 2, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Beijing Zhongxin Chemical Development Company
      (11)10.17
              
              Industrial
      Product Purchase Contract, dated December 5, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Harbin Hai Heng Chemical Distribution Co., Ltd.
      (11)10.18
              
              Industrial
      Product Purchase Contract, dated December 8, 2008, between Pacific Dragon
      Fertilizer Co., Ltd. and Shenzhen Hongchou Technology Company
      (11)10.19
              
              WangZou
      Center Lease Agreement, dated November 21, 2008, between Li Hua and China
      Tailong Holdings Company Limited (11)10.20
              
              Plant
      Lease Agreement, dated June 4, 2007, between ZhongYun Instrument Sales
      Limited, High-Tech Industrial Development Zone, Urumqi and Beijing
      Agritech Fertilizer Limited, Xinjiang Branch (11)10.21
              
              Plant
      Lease Agreement, dated July 13, 2006, between Beijing Xinggu Investing
      Center and Beijing Agritech Fertilizer Limited (11)10.22
              
              Plant
      Lease Agreement, dated May 18, 2006, between Management Committee of
      Bengbu Industrial Park of Anhui Water Resources Development Co., Ltd. and
      Anhui Agritech Agriculture Development Limited (11)10.23
              
              Plant
      Lease Agreement, dated April 1, 2007, between Sanheshiye Development
      Company Juilongpo District Chongqing and Beijing Agritech Fertilizer
      Limited, Chongqing Branch (11)10.24
              
              Plant
      Lease Agreement, dated December 30, 2007, between Xinggu Economic
      Development Zone Administration Committee and Beijing Agritech Fertilizer
      Limited  (11)10.25
              
              Office
      Building Lease Agreement, dated February 1, 2007, between Xiao Rong Teng
      and Beijing Agritech Fertilizer Limited (11)14
              
              Code
      of ethics (incorporated by reference to Exhibit 14 in our annual report on
      Form 10-KSB filed on April 14, 2006)16.1
              
              Letter
      from Grobstein, Horwath & Company LLP regarding change in
      certifying accountant, dated February 13, 2009 (incorporated by
      reference to Exhibit 16.1 in our current report on Form 8-K/A filed on
      February 18, 2009).16.2
              
              Letter
      from Grobstein, Horwath & Company LLP regarding agreement
      with the disclosures made in the Current Report  on Form 8-K/A, dated
      March 10, 2009 (incorporated by reference to Exhibit 16.2 in our current
      report on Form 8-K/A filed on March 10, 2009).21*
              
              Subsidiaries
      of the Registrant23.1*
              
              Consent
      of Crowe Horwath LLP, independent registered public accounting
      firm31.1*
              
              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 2002


54





Exhibit
                No.
              
              Description32.1*
              
              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 2002
  *32.2*
              
              Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  *





* Filed
herewith


(1)
            Incorporated by reference to our
      registration statement on Form SB-2/A (No. 333-126802) filed on April 28,
      2006.


(2)
            Incorporated by reference to our
      Annual Report on Form 10-K filed on March 31,
  2009.


(3)
            Incorporated by reference our
      Annual Report on Form 10-KSB filed on April 14,
    2006.


(4)
            Incorporated by reference our
      registration statement on Form S-1 (No. 333-145562) filed on August 20,
      2007.


(5)
            Incorporated by reference to our
      Current Report on Form 8-K filed on October 10,
    2007.


(6)
            Incorporated by reference to our
      Current Report on Form 8-K filed on October 14,
    2008.


(7)
            Incorporated by reference to our
      Current Report on Form 8-K filed on October 24,
  2008


(8)
            Incorporated by reference to our
      Current Report on Form 8-K filed on February 18,
    2008.


(9)
            Incorporated by reference to our
      Current Report on Form 8-K filed on May 21,
  2009


(10)
            Incorporated by reference to our
      registration statement on Form S-8 (No. 33-156407) filed on December 22,
      2008


(11)
            Incorporated
      by reference to our Quarterly Report on Form 10-Q filed May 14,
      2009


55




CHINA
AGRITECH, INC.


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008





Contents
                              
                              Page(s)Report
      of Independent Registered Public Accounting Firm
                              
                              F-1Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                              
                              F-2Consolidated
      Statements of Income for the years ended December 31, 2009 and
      2008
                              
                              F-3Consolidated
      Statements of Stockholders’ Equity and Comprehensive Income for the years
      ended December 31, 2009 and 2008
                              
                              F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008
                              
                              F-5Notes
      to the Consolidated Financial Statements
                              
                              F-6


56




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Report of
Independent Registered Public Accounting Firm
 
 To the
Stockholders and Board of Directors of China Agritech, Inc. and
Subsidiaries
 
 We have
audited the accompanying consolidated balance sheets of China Agritech, Inc. and
Subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of income, stockholders' equity and other comprehensive income, and
cash flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for the years then ended, in conformity with U.S. generally accepted accounting
principles.
 
 As
discussed in Note 2 to the consolidated financial statements, in 2009 the
Company changed the manner in which it accounts for noncontrolling interests in
subsidiaries.  This change was made retrospectively to the 2008
financial statements.
  As
discussed in Note 3 to the consolidated financial statements, in 2009 the
Company adopted guidance relating to determining
whether an instrument (or embedded feature) is indexed to an entity’s own
stock.
   
 
 
 /s/ Crowe
Horwath LLP
 Crowe
Horwath LLP
 Sherman
Oaks, California
 March 31,
2010




F-1




CHINA
AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008





2009
                        
                        
                        2008ASSETSCurrent
      AssetsCash
      and cash equivalents
                        
                        $
                        20,313,089
                        
                        
                        $
                        11,952,235Accounts
      receivable, net
                        
                        
                        39,256,098
                        
                        
                        
                        34,773,115Inventories
                        
                        
                        6,606,095
                        
                        
                        
                        6,452,618Advances
      to suppliers
                        
                        
                        25,348,687
                        
                        
                        
                        10,795,357Prepayments
      and other receivables
                        
                        
                        2,287,220
                        
                        
                        
                        2,484,346Total
      Current Assets
                        
                        
                        93,811,189
                        
                        
                        
                        66,457,671Property,
      plant and equipment, net
                        
                        
                        5,980,696
                        
                        
                        
                        4,496,045Construction
      in progress
                        
                        
                        424,006
                        
                        
                        
                        961,551Deposit
      for equipment
                        
                        
                        —
                        
                        
                        
                        749,799Intangible
      assets, net
                        
                        
                        397,507
                        
                        
                        
                        —Total
      Assets
                        
                        $
                        100,613,398
                        
                        
                        $
                        72,665,066


LIABILITIES
      AND STOCKHOLDERS’S EQUITYCurrent
      LiabilitiesAccounts
      payable
                          
                          $
                          62,616
                          
                          
                          $
                          3,327,281Accrued
      expenses and other payables
                          
                          
                          1,394,357
                          
                          
                          
                          221,954Taxes
      payable
                          
                          
                          1,695,665
                          
                          
                          
                          1,388,897Warrant
      liabilities
                          
                          
                          20,157,869
                          
                          
                          
                          —Total
      Current Liabilities
                          
                          
                          23,310,507
                          
                          
                          
                          4,938,132Commitments
      and Contingencies (Note 22)Stockholders’
      EquityPreferred
      stock: $0.001 par value, 10,000,000 shares authorized, none
      issued
                          
                          
                          —
                          
                          
                          
                          —Common
      stock: $0.001 par value; 100,000,000 shares authorized, 17,002,542* and
      12,351,126* shares issued and outstanding as of December 31, 2009 and
      2008
                          
                          
                          17,003
                          
                          
                          
                          12,351Additional
      paid in capital
                          
                          
                          34,698,079
                          
                          
                          
                          26,161,228Statutory
      reserves
                          
                          
                          2,195,818
                          
                          
                          
                          5,425,407Accumulated
      other comprehensive income
                          
                          
                          5,723,265
                          
                          
                          
                          5,837,917Retained
      earnings
                          
                          
                          34,668,726
                          
                          
                          
                          25,361,597Total
      China Agritech stockholders’ equity
                          
                          
                          77,302,891
                          
                          
                          
                          62,798,500Noncontrolling
      Interest
                          
                          
                          —
                          
                          
                          
                          4,928,434Total
      Equity
                          
                          
                          77,302,891
                          
                          
                          
                          67,726,934Total
      Liabilities and Stockholders’ Equity
                          
                          $
                          100,613,398
                          
                          
                          $
                          72,665,066




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




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


F-2




CHINA
AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008





2009
              
              
              2008Net
      revenue
              
              $
              76,129,839
              
              
              $
              45,240,212Cost
      of revenue
              
              
              (47,244,887
              )
              
              
              (24,889,387
              )Gross
      profit
              
              
              28,884,952
              
              
              
              20,350,825Operating
      expenses:Selling
      expenses
              
              
              (2,638,800
              )
              
              
              (2,369,763
              )Operating
      and administrative expenses
              
              
              (5,289,845
              )
              
              
              (4,265,655
              )Total
      operating expenses
              
              
              (7,928,645
              )
              
              
              (6,635,418
              )Income
      from operations
              
              
              20,956,307
              
              
              
              13,715,407Other
      income/(expenses):Other
      income/(expense), net
              
              
              (7,225
              )
              
              
              (56,165
              )Interest
      income
              
              
              27,688
              
              
              
              91,984Exchange
      (loss)/gain, net
              
              
              (3,788
              )
              
              
              231,326Unrealized
      loss on derivatives
              
              
              (9,894,409
              )
              
              
              −Total
      other income/(expense), net
              
              
              (9,877,734
              )
              
              
              267,145Income
      before income taxes
              
              
              11,078,573
              
              
              
              13,982,552Provision
      for income taxes
              
              
              (4,907,474
              )
              
              
              (4,151,782
              )Net
      income
              
              
              6,171,099
              
              
              
              9,830,770Net
      income attributable to noncontrolling interest
              
              
              (481,452
              )
              
              
              (1,189,029
              )Net
      income attributable to China Agritech stockholders
              
              $
              5,689,647
              
              
              $
              8,641,741Earnings
      per share attributable to China Agritech common
    stockholders*:-
      Basic
              
              $
              0.41
              
              
              $
              0.70-
      Diluted
              
              $
              0.40
              
              
              $
              0.70Weighted
      average shares outstanding*:-
      Basic
              
              
              14,039,152
              
              
              
              12,349,808-
      Diluted
              
              
              14,228,943
              
              
              
              12,349,808




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




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


F-3




CHINA
AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




Attributable
      to China Agritech shareholdersCommon
      stockNumber
      of
                  Shares
                
                
                Amount
                
                
                Additional
                  paid-in-
                  capital
                
                
                Statutory
                  reserves
                
                
                Accumulated
                  Other
                  Comprehensive
                  Income
                
                
                Retained
                  earnings
                
                
                Noncontrolling
                  interest
                
                
                TotalBalance, January
      1, 2008
                
                
                12,351,138
                
                
                $
                12,351
                
                
                $
                26,148,263
                
                
                $
                4,299,653
                
                
                $
                2,578,107
                
                
                $
                17,845,610
                
                
                $
                3,465,724
                
                
                $
                54,349,708Stock-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                12,965
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                12,965Comprehensive
      income:Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                8,641,741
                
                
                
                1,189,029
                
                
                
                9,830,770Foreign
      currency translation adjustment
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,259,810
                
                
                
                —
                
                
                
                273,681
                
                
                
                3,533,491Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                13,364,261Transfer
      to statutory reserves
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,125,754
                
                
                
                —
                
                
                
                (1,125,754
                )
                
                
                —
                
                
                
                —Balance, December
      31, 2008
                
                
                12,351,138
                
                
                
                12,351
                
                
                
                26,161,228
                
                
                
                5,425,407
                
                
                
                5,837,917
                
                
                
                25,361,597
                
                
                
                4,928,434
                
                
                
                67,726,934Cumulative
      effect of change of accounting principle (Note 3)
                
                
                −
                
                
                
                −
                
                
                
                (598,581
                )
                
                
                −
                
                
                
                −
                
                
                
                387,893
                
                
                
                −
                
                
                
                (210,688
                )Balance,
      January 1, 2009 as adjusted
                
                
                12,351,138
                
                
                
                12,351
                
                
                
                25,562,647
                
                
                
                5,425,407
                
                
                
                5,837,917
                
                
                
                25,749,490
                
                
                
                4,928,434
                
                
                
                67,516,246Comprehensive
      income:Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                5,689,647
                
                
                
                481,452
                
                
                
                6,171,099Foreign
      currency translation adjustment
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (114,652
                )
                
                
                —
                
                
                
                435
                
                
                
                (114,217
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,056,882Transfer
      from statutory reserves
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (3,229,589
                )
                
                
                —
                
                
                
                3,229,589
                
                
                
                —
                
                
                
                —Acquisition
      of noncontrolling interest
                
                
                1,745,000
                
                
                
                1,745
                
                
                
                4,408,576
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (5,410,321
                )
                
                
                (1,000,000
                )Share-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                566,807
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                566,807Stock
      issued for cash
                
                
                2,785,536
                
                
                
                2,786
                
                
                
                2,407,310
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,410,096Cashless
      exercise of warrants (Note 3)
                
                
                120,868
                
                
                
                121
                
                
                
                1,752,739
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,752,860Balance, December
      31, 2009
                
                
                17,002,542
                
                
                $
                17,003
                
                
                $
                34,698,079
                
                
                $
                2,195,818
                
                
                $
                5,723,265
                
                
                $
                34,668,726
                
                
                $
                —
                
                
                $
                77,302,891




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


F-4




CHINA
AGRITECH, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CASH FLOWS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008





2009
              
              
              2008Cash
      flows from operating activities:Net
      income
              
              $
              6,171,099
              
              
              $
              9,830,770Adjustments
      to reconcile net income to net cash used in operating
      activities:Share-based
      compensation
              
              
              566,807
              
              
              
              12,965Depreciation
      and amortization of property, plant and equipment
              
              
              695,703
              
              
              
              549,341Amortization
      of intangible assets
              
              
              41,826
              
              
              
              —Bad
      debts expense
              
              
              320,960
              
              
              
              195,616Changes
      in fair value of warrants classified as derivatives
              
              
              9,894,409
              
              
              
              —Decrease
      / (Increase) in current assets:Accounts
      receivable
              
              
              (4,858,975
              )
              
              
              (11,306,241
              )Inventories
              
              
              (164,082
              )
              
              
              (2,638,273
              )Advances
      to suppliers
              
              
              (14,566,555
              )
              
              
              1,668,798Prepayments
      and other receivable
              
              
              185,291
              
              
              
              (1,503,874
              )(Decrease)
      / Increase in current liabilities:Accounts
      payable
              
              
              (3,258,407
              )
              
              
              3,226,288Tax
      payables
              
              
              308,913
              
              
              
              (375,076
              )Accrued
      expenses and other payables
              
              
              1,127,753
              
              
              
              (553,730
              )Net
      cash used in operating activities
              
              
              (3,535,258
              )
              
              
              (893,416
              )Cash
      flows from investing activities:Acquisition
      of property, plant and equipment
              
              
              (881,685
              )
              
              
              (951,588
              )Acquisition
      of intangible assets
              
              
              (439,170
              )
              
              
              —Payment
      for construction in progress
              
              
              —
              
              
              
              (966,168
              )Acquisition
      of noncontrolling interest
              
              
              (1,000,000
              )
              
              
              —Restricted
      cash
              
              
              —
              
              
              
              11,415Net
      cash used in investing activities
              
              
              (2,320,855
              )
              
              
              (1,906,341
              )Cash
      flows from financing activities:Amount
      held in escrow account
              
              
              —
              
              
              
              2,000,000Issuance
      of common stock for cash
              
              
              2,410,096Issuance
      of warrants for cash
              
              
              11,805,632
              
              
              
              —Net
      cash provided by financing activities
              
              
              14,215,728
              
              
              
              2,000,000Effect
      of exchange rate change on cash and cash equivalents
              
              
              1,239
              
              
              
              910,771Net
      increase in cash and cash equivalents
              
              
              8,360,854
              
              
              
              111,014Cash
      and cash equivalents, beginning of year
              
              
              11,952,235
              
              
              
              11,841,221Cash
      and cash equivalents, end of year
              
              $
              20,313,089
              
              
              $
              11,952,235Supplement
      disclosure of cash flow information:Cash
      paid for interest
              
              $
              —
              
              
              $
              —Cash
      paid for income tax
              
              $
              4,481,792
              
              
              $
              4,437,384Noncash
      Investment and Financing ActivityAcquisition
      of noncontrolling interest funded by issuance of stock
              
              $
              4,410,321
              
              
              $
              —Reclassification
      of warrant liabilities to equity upon cashless exercise of the
      warrants
              
              $
              1,752,860
              
              
              $
              —Options
      issued to directors and officers for services
              
              $
              566,807
              
              
              $
              12,965Offset
      of amounts due to/from stockholders
              
              $
              —
              
              
              $
              320,666




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


F-5




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




1.           ORGANIZATION
AND DESCRIPTION OF BUSINESS




China
Agritech Inc. (the “Company” or “China Agritech”) is a
holding company whose direct and indirect subsidiaries manufacture and sell
organic liquid compound fertilizers, organic granular compound fertilizers and
related agricultural products. The Company conducts its business operations
primarily through its subsidiaries including Anhui Agritech Agriculture
Development Limited (“Anhui Agritech”),
Beijing Agritech Fertilizer Ltd. (“Beijing Agritech”),
China Tailong Holdings Company Limited (“Tailong”) and Pacific
Dragon Fertilizers Co. Ltd. (“Pacific Dragon”). The
Company’s revenues are derived from the sale of fertilizers and related
agricultural products to customers.




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




On
December 25, 2004, the Company, Tailong, and the stockholders of Tailong (the
“Tailong
Stockholders”) entered into the Agreement and Plan of Reorganization
(“Reorganization
Agreement”), as amended and such reorganization became effective on
February 3, 2005.  The Reorganization Agreement provided for the
acquisition by the Company from the Tailong Stockholders of all of the issued
and outstanding Tailong shares in exchange for 10,606,158 shares of newly issued
restricted common stock of the Company, whereby the Tailong Stockholders
obtained control of the Company and as a result, Tailong became a wholly-owned
subsidiary of the Company.




As a
result of the acquisition of Tailong, the Company took on the business of our
operating subsidiaries and became a fertilizer manufacturer and conducted its
operations in the People’s Republic of China (the “PRC”) through its
wholly-owned subsidiary, Tailong and Tailong’s 90% owned subsidiary, Pacific
Dragon.




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




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




On
November 1, 2006, the Company and the stockholders of CAI Investment, Inc (the
“CAI
stockholders”) entered into an equity transfer agreement whereby the CAI
stockholders transferred 100% equity interest in CAI Investment, Inc. (“CAI”) to the Company
in exchange for $1,000. CAI holds 100% equity interest in Beijing
Agritech.




On
December 23, 2008, the Company formed Xinjiang Agritech, a PRC entity. Beijing
Agritech and Anhui Agritech hold 75% and 25% of the equity interests,
respectively, in Xinjiang Agritech, which engages in the manufacturing and
marketing of a series of organic liquid compound fertilizers.




On May
15, 2009, Tailong acquired the remaining 10% of Pacific Dragon in consideration
for the cash payment of $1,000,000 and the issuance of 3,490,000 shares of the
Company’s common stock. As a result, Pacific Dragon became a wholly
foreign-owned enterprise in the PRC and a wholly-owned subsidiary of the
Company.




Changes
in Capital Structure
  On
September 8, 2009, the Company effected a reverse split of its common stock on
the basis of one share for every four outstanding shares, so that every four
outstanding shares of common stock before the reverse stock split was converted
into one common stock after the reverse stock split. On February 1, 2010, the
Company effected a 2 for 1 forward split of its common stock on the basis of two
shares for every one outstanding shares, so that every outstanding share of
common stock before the forward stock split was converted into two shares of
common stock after the forward stock split. Except as otherwise noted, all
references to common share and per common share amounts (including warrant and
option shares, shares reserved for issuance and applicable exercise prices) for
all periods presented in these consolidated financial statements have been
retroactively restated to reflect these reverse and forward splits.


F-6




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




2.           SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES




a)           Principles
of consolidation




The
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.




b)        
  Use of estimates




The
preparation of these consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of these consolidated financial statements and the
amount of revenues and expenses during the reporting periods. Management makes
these estimates using the best information available at the time the estimates
are made. However, actual results could differ materially from those estimates,
Key sources of the Company’s estimation uncertainty at the balance sheet date,
that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next fiscal year, include allowance
for doubtful debts, assessment for any inventory writedown, impairment of
long-lived assets which are further discussed below.




c)           Basis
of presentation




These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America.




d)           Cash
and cash equivalents




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




e)           Accounts
receivable and concentration of credit risk




Accounts
receivable potentially exposes the Company to concentration of credit risk. The
Company provides credit in the normal course of business and performs ongoing
credit evaluations on its customers’ financial condition, but generally does not
require collateral to support such receivables. The Company’s policy is to
maintain reserves for potential credit losses on accounts receivable. Management
reviews the composition of accounts receivable and analyzes historical bad
debts, customer concentrations, customer creditworthiness, current economic
trends and changes in customer payment patterns to evaluate the adequacy of
these reserves. Credit losses have not been significant
historically.




f)           Inventories




Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. Management compares the cost of inventories with market value and an
allowance is provided to reduce the value of inventories to their net market
value. Costs of inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Market value is
determined by reference to selling prices after the balance sheet date or with
reference to management’s estimates based on prevailing market conditions. The
management will write down inventories to market value if it is below cost. The
management also regularly evaluates the composition of its inventories to
identify slow-moving and obsolete inventories to determine if valuation
allowance is required. Any inventory writedown calculation requires management
to make assumptions to estimate the amount of slow-moving items, which is
dependent upon factors such as historical trends, inventory aging, forecasted
sales and the general market environment.


F-7




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




g)          Advances
to suppliers




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




h)          Construction
in progress




Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. Interest incurred
during the period of construction, if material, is capitalized. No depreciation
is provided for construction in progress until such time as the relevant assets
are completed and are ready for their intended use. No interest was capitalized
during the years ended December 31, 2009 and 2008.




i)           Property,
plant and equipment
  Property,
plant and equipment are recorded at cost. Gains or losses on disposals are
reflected as gain or loss in the year of disposal. The cost of improvements that
extend the life of property, plant and equipment are capitalized. These
capitalized costs may include structural improvements, equipment and fixtures.
All ordinary repair and maintenance costs are expensed as incurred.
  Depreciation
and amortization for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets: 15 to 20
years for buildings, 5 to 15 years for machinery; 3 to 5 years or shorter of the
lease period for leasehold improvement, 5 to 10 years for office equipment; and
5 to 8 years for motor vehicles.
  j)           Intangible
assets
  The
Company’s intangible assets represent the cost incurred to acquire the license
for manufacture and sale of certain fertilizer products in the PRC. The Company
accounts for intangible assets pursuant to ASC Subtopic 350-30, “General
Intangibles Other Than Goodwill”. Under ASC 350-30-35, intangibles with definite
lives are amortized on a straight-line basis over the lesser of their estimated
useful lives or contractual terms. Accordingly, the Company amortizes the
license for fertilizer products using the straight-line method over 7
years.


F-8




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




k)           Impairment




The
Company applies 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.




The
Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to 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. The Company
considers historical performance and future estimated results in its evaluation
of potential impairment and then compares the carrying amount of the asset to
the future estimated cash flows expected to result from the use of the asset. If
the carrying amount of the asset exceeds estimated expected undiscounted future
cash flows, the Company measures the amount of impairment by comparing the
carrying amount of the asset to its fair value. The estimation of fair value is
generally measured by discounting expected future cash flows as the rate the
Company utilizes to evaluate potential investments. The Company estimates fair
value based on the information available in making whatever estimates, judgments
and projections are considered necessary. Based on the Company’s assessment,
there were no events or changes in circumstances that would indicate any
impairment of long-lived assets for the years ended December 31, 2009 and
2008.




l)           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, ownership has passed, no other significant
obligations of the Company exist and collectibility is reasonably
assured.
  The
Company’s revenue consists of the invoiced value of goods, net of value-added
tax (“VAT”).
  m)          Advertising
costs
  The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the year ended
December 31, 2009 and 2008 were $673,267 and $646,242,
respectively.




F-9




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




n)           Shipping
and handling




The
Company classifies shipping cost under selling expenses. Shipping costs for the
year ended December 31, 2009 and 2008 were $1,037,499 and $720,401,
respectively




o)          Income
taxes




The
Company accounts for income taxes in accordance with ASC 740-10 (formerly SFAS
No. 109, “Accounting for Income Taxes”) which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred income taxes are recognized for tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized.




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




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




The
Company evaluates its uncertain tax positions following the provisions of ASC
740-10 (formerly FIN 48, “Accounting for Uncertainty in Income Taxes”), and
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken (or expected to be taken) in a tax
return. ASC 740-10 also provides guidance on derecognition of income tax assets
and liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods and income tax
disclosures.




p)          Foreign
currency translation




The
Company uses the United States dollar for financial reporting purposes. The
functional currency of the Company and its PRC operating subsidiaries is
the Renminbi (“RMB”). The Company’s PRC operating subsidiaries maintain
their books and records in RMB, which is their functional currency, being the
primary currency of the economic environment in which their operations are
conducted. Such financial statements were translated into U.S. dollars in
accordance with ASC 830-10 (formerly SFAS No. 52, “Foreign Currency
Translation.”) According to ASC 830-10, all assets and liabilities are
translated at the current exchange rate, stockholders’ equity is translated at
the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with ASC 220-10 (formerly SFAS
No. 130, “Reporting Comprehensive Income,”) as a component of stockholders’
equity.


F-10




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
  2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




q)          Fair
values of financial instruments




ASC
825-10 (formerly SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments,”) requires that the Company disclose estimated fair values of
financial instruments. The Company’s financial instruments primarily consist of
cash and cash equivalents, accounts receivable, other receivables, advances to
suppliers, accounts payable, other payables, taxes payable, and related party
advances and borrowings.




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




r)           Earning
per share (EPS)
  Earnings
per share is calculated in accordance with ASC 260-10 (formerly SFAS No. 128,
“Earnings per share.”) Basic earnings per share is based upon the weighted
average number of common shares outstanding. Diluted earnings per share is based
on the assumption that all dilutive warrant and stock options were converted or
exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
  On
September 8, 2009, the Company effected a 1-for-4 reverse split of its common
stock.  On February 1, 2010, the Company effected a 2-for-1 forward split
of its common stock. The weighted average number of shares for the purposes of
calculating the earnings per share has been retroactively adjusted as if the
reverse split and the forward split had taken effect as of the beginning of the
earliest period presented.
  The
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:
  Year ended December 31,2009
                
                
                2008Income
      available to common stockholders for calculation of basic and diluted
      EPS
                
                $
                5,689,647
                
                
                $
                8,641,741Weighted
      average number of shares:-
      Basic
                
                
                14,039,152
                
                
                
                12,349,808-
      Effect of dilutive securities – options and warrants
                
                
                189,791
                
                
                
                –-
      Diluted
                
                
                14,228,943
                
                
                
                12,349,808
  The
dilutive earnings per share computation for 2009 and 2008 excludes options and
warrants to purchase up to 25,000 shares and 269,460 shares of common stock,
respectively because their effects were anti-dilutive.




F-11




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




s)           Segment
reporting




The
Company follows FASB ASC 280-10, Segment Reporting, which
requires that companies disclose segment data based on how management makes
decision about allocating resources to segments and evaluating their
performance. During the years ended December 31, 2009 and 2008, the Company
operated and managed its business in one operating business
segment.




t)           Statement
of cash flows




In
accordance with ASC 230-10 (formerly SFAS No. 95, “Statement of Cash Flows,”),
cash flows from the Company’s operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities reported on
the statement of cash flows may not necessarily agree with changes in the
corresponding balances on the balance sheets.




u)          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.


F-12




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




v)          Recent
Accounting Pronouncements




In June
2009, the FASB established the FASB Accounting Standards CodificationTM (ASC)
as the single source of authoritative U.S generally accepted accounting
principles (GAAP) recognized by the FASB to be applied to nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The ASC superseded all previously
existing non-SEC accounting and reporting standards, and any prior sources of
U.S. GAAP not included in the ASC or grandfathered are not authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by the
FASB through Accounting Standards Updates (ASUs). The ASC did no change current
U.S. GAAP but changes the approach by referencing authoritative literature by
topic (each a “Topic”) rather than by type of standard. The ASC has been
effective for the Company effective July 1, 2009. Adoption of the ASC did not
have a material impact on the Company’s Consolidated Financial Statements, but
references in the Company’s Notes to Consolidated Financial Statements to former
FASB positions, statements, interpretations, opinions, bulletins or other
pronouncements are now presented as references to the corresponding Topic in the
ASC.




Effective
January 1, 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly
FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”), which
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” The
Company will apply ASC 350-30 and ASC 275-10-50 prospectively to intangible
assets acquired subsequent to the adoption date.  The adoption of
these revised provisions had no impact on the Company’s Consolidated Financial
Statements.




Effective
January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161,
“Disclosures about Derivative Instruments and Hedging Activities”), which amends
and expands previously existing guidance on derivative instruments to require
tabular disclosure of the fair value of derivative instruments and their gains
and losses., This ASC also requires disclosure regarding the credit-risk related
contingent features in derivative agreements, counterparty credit risk, and
strategies and objectives for using derivative instruments. The adoption of this
ASC did not have a material impact on the Company’s Consolidated Financial
Statements.




During
2008, the Company adopted FASB ASC 820-10 (formerly FSP
FAS 157-2, ”Effective Date of FASB Statement 157”), which deferred the
provisions of previously issued fair value guidance for nonfinancial assets and
liabilities to the first fiscal period beginning after November 15, 2008.
Deferred nonfinancial assets and liabilities include items such as goodwill and
other nonamortizable intangibles. Effective January 1, 2009, the Company adopted
the fair value guidance for nonfinancial assets and liabilities. The adoption of
FASB ASC 820-10 did not have a material impact on the Company’s Consolidated
Financial Statements.




Effective
January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160,
“Noncontrolling Interests in Consolidated Financial Statements — an amendment of
ARB No. 51”), which amends previously issued guidance to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest
in a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity.
Among other requirements, this Statement requires that the consolidated net
income attributable to the parent and the noncontrolling interest be clearly
identified and presented on the face of the consolidated income statement. 
The presentation and disclosure requirements of the ASC Topics have
been applied retrospectively for all periods presented in the accompanying
consolidated balance sheets, statements of operations and statements of cash
flows. The adoption of this pronouncement resulted in a change in the
description and presentation of “minority interest” to “non-controlling
interest,”. However there was no impact on the Company’s financial condition or
net income (loss) attributable to stockholders for any periods
presented.


F-13




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




v)          Recent Accounting Pronouncements –
continued




Effective
January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R,
“Business Combinations”), which establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in an
acquiree and the goodwill acquired.  In addition, the provisions in this
ASC require that any additional reversal of deferred tax asset valuation
allowance established in connection with our fresh start reporting on
January 7, 1998 be recorded as a component of income tax expense rather
than as a reduction to the goodwill established in connection with the
fresh start reporting. The Company will apply ASC 805-10 to any business
combinations subsequent to adoption.




Effective
January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies”), which amends ASC 805-10 to require
that an acquirer recognize at fair value, at the acquisition date, an asset
acquired or a liability assumed in a business combination that arises from a
contingency if the acquisition-date fair value of that asset or liability can be
determined during the measurement period. If the acquisition-date fair value of
such an asset acquired or liability assumed cannot be determined, the acquirer
should apply the provisions of ASC Topic 450, Contingences, to determine whether
the contingency should be recognized at the acquisition date or after such date.
The
Company will apply ASC 805-20 to
any business combination subsequent to adoption.




Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FASB Staff
Position (“FSP”) No. FAS 107-1 and Accounting Principles Board 28-1, “Interim
Disclosures about Fair Value of Financial Instruments”), which amends previous
guidance to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements. The adoption of FASB ASC 825-10-65 did not have a material
impact on the Company’s Consolidated Financial Statements.




Effective
July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and
FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”).
Under ASC 320-10-65, an other-than-temporary impairment must be recognized if
the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, ASC 320-10-65 requires impairments related to
credit loss, which is the difference between the present value of the cash flows
expected to be collected and the amortized cost basis for each security, to be
recognized in earnings while impairments related to all other factors to be
recognized in other comprehensive income. The adoption of ASC 320-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.




Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”), which provides guidance on how to determine the fair value of assets
and liabilities when the volume and level of activity for the asset or liability
has significantly decreased when compared with normal market activity for the
asset or liability as well as guidance on identifying circumstances that
indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.




In
December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits
(formerly FASB FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement
Benefit Plan Assets”), which expands the disclosure requirements about plan
assets for defined benefit pension plans and postretirement plans. The Company
adopted these disclosure requirements in the fourth quarter of 2009. The
adoption of these disclosure requirements did not have a material impact on the
Company’s Consolidated Financial Statements.




In August
2009, the FASB issued ASC Update No. 2009-05 (“Update 2009-05”) to provide
guidance on measuring the fair value of liabilities under FASB ASC 820 (formerly
SFAS 157, “Fair Value Measurements”).  The Company adopted Update
2009-05 in the fourth quarter of 2009.  The adoption of this Update
did not have a material impact on the Company’s Consolidated Financial
Statements.




F-14




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




w)          New
Accounting Pronouncement to be Adopted




In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140,” (not yet reflected in
FASB ASC). SFAS No. 166 limits the circumstances in which a financial asset
should be derecognized when the transferor has not transferred the entire
financial asset by taking into consideration the transferor’s continuing
involvement. The standard requires that a transferor recognize and initially
measure at fair value all assets obtained (including a transferor’s beneficial
interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. The concept of a qualifying special-purpose entity is
removed from SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” along with the exception
from applying FIN 46(R), “Consolidation of Variable Interest Entities.” The
standard is effective for the first annual reporting period that begins after
November 15, 2009 (i.e., the Company’s fiscal year beginning January 1,
2010), for interim periods within the first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. It is expected the adoption of this Statement will not have a
material impact on the Company’s Consolidated Financial Statements




In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (not yet reflected in FASB ASC). The standard amends FIN
No. 46(R) to require a company to analyze whether its interest in a
variable interest entity (“VIE”) gives it a controlling financial interest. A
company must assess whether it has an implicit financial responsibility to
ensure that the VIE operates as designed when determining whether it has the
power to direct the activities of the VIE that significantly impact its economic
performance. Ongoing reassessments of whether a company is the primary
beneficiary are also required by the standard. SFAS No. 167 amends the
criteria to qualify as a primary beneficiary as well as how to determine the
existence of a VIE. The standard also eliminates certain exceptions that were
available under FIN No. 46(R). This Statement will be effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009  (i.e., the Company’s fiscal year
beginning January 1, 2010), for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter.
Earlier application is prohibited. Comparative disclosures will be required for
periods after the effective date. As such, the Company will adopt this Statement
for interim and annual periods ending after January 1, 2010.  It
is expected the adoption of this Statement will not have a material impact on
the Company’s Consolidated Financial Statements.




In
October 2009, the FASB concurrently issued the following ASC
Updates:




·          
 ASU No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements That
Include Software Elements (formerly EITF Issue No. 09-3). This standard removes
tangible products from the scope of software revenue recognition guidance and
also provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product, such as embedded software, are
within the scope of the software revenue guidance.




·         
  ASU No. 2009-13 - Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No.
08-1).  This standard modifies the revenue recognition guidance for
arrangements that involve the delivery of multiple elements, such as product,
software, services or support, to a customer at different times as part of a
single revenue generating transaction.  This standard provides
principles and application guidance to determine whether multiple deliverables
exist, how the individual deliverables should be separated and how to allocate
the revenue in the arrangement among those separate deliverables. The standard
also expands the disclosure requirements for multiple deliverable revenue
arrangements.


F-15




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
  2.          SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED




w) New
Accounting Pronouncement to be Adopted–
continued




ASU No.
2009-13 and 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application
permitted.  Alternatively, an entity can elect to adopt these
standards on a retrospective basis, but both these standards must be adopted in
the same period using the same transition method.  The Company expects
to apply this standard on a prospective basis for revenue arrangements entered
into or materially modified beginning January 1, 2011.  It is expected
the adoption of these ASC Updates will not have a material impact on the
Company’s Consolidated Financial Statements.




In
October 2009, the FASB also issued ASU No. 2009-15—Accounting for Own-Share
Lending Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15 amends ASC 470-20, Debt with Conversion and Other
Options, to provide accounting and reporting guidance for own-share lending
arrangements issued in contemplation of convertible debt issuance. ASU 2009-15
is effective for fiscal years beginning on or after December 15, 2009 (i.e. the
Company’s fiscal 2010) with retrospective application required. It is expected
the adoption of this ASC Update will have no material impact on the Company’s
consolidated financial statements.




In
January 2010, the FASB issued the following ASC Updates:
  ·           
ASU No. 2010-01—Equity (Topic
505): Accounting for Distributions to Shareholders with Components of Stock and
Cash. This Update clarifies that the stock portion of a distribution to
shareholders that allows 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 in EPS
prospectively and is not a stock dividend for purposes of applying Topics 505
and 260 (Equity and Earnings Per Share). The amendments in this Update are
effective for interim and annual periods ending on or after December 15, 2009
with retrospective application.
  ·           
ASU No. 2010-02—Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary. This Update amends Subtopic 810-10 and related guidance to
clarify that the scope of the decrease in ownership provisions of the Subtopic
and related guidance applies to (i) a subsidiary or group of assets that is a
business or nonprofit activity; (ii) a subsidiary that is a business or
nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a noncontrolling interest in an entity, but does not
apply to: (i) sales of in substance real estate; and (ii) conveyances of oil and
gas mineral rights. The amendments in this Update are effective beginning in the
period that an entity adopts FAS 160 (now included in Subtopic
810-10).
  ·           
ASU No. 2010-06—Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements.  This Update amends Subtopic 820-10 that require
new disclosures about transfers in and out of Levels 1 and 2 and activity in
Level 3 fair value measurements. This Update also amends Subtopic 820-10 to
clarify certain existing disclosures. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements, which are effective for fiscal years beginning after
December 15, 2010.
  The
Company expects that the adoption of the above Updates issued in January 2010
will not have any significant impact on its financial position and results of
operations.
  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.




F-16




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




3.           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.




’




December
      31,
                                  
                                  
                                  Using
      InputsDescription
                                  
                                  2009
                                  
                                  
                                  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
during the years ended December 31, 2009 and 2008.




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.


F-17




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




3. FAIR VALUE MEASUREMENTS AND FINANCIAL
INSTRUMENTS –
CONTINUED




Derivative
Instruments – Warrants
  The
Company’s only derivative instruments are warrants, the exercise price of which
are denominated in a currency other than the Company’s functional currency, as
follows:
 
 ▪
              194,460
      warrants (“2007 Warrants”) exercisable at $5.40 per share, that were
      issued in 2007 and fully exercised during the year ended December 31,
      2009;
 ▪
              1,857,024
      warrants (“2009 Warrants”) exercisable at approximately $5.38 per share
      (see also Note 16) at any time during the period from April 19, 2010
      through April 19, 2012, that were issued 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.
 
 As a
result of adopting ASC 815-40-15 through 815-40-15-8, the 2007 Warrants
outstanding at January 1, 2009 previously treated as equity pursuant to the
scope exception in ASC 815-10-15-74 (formerly paragraph 11(a) of SFAS No. 133)
were no longer afforded equity treatment. As such, as of January 1, 2009, the
Company reclassified the fair value of these 194,460 warrants from equity to
liability as if these warrants had been treated as a derivative liability since
their date of issue. On January 1, 2009, the Company recognized a
cumulative-effect adjustment of $210,688, whereby $387,893 was reclassified to
beginning retained earnings and $598,581 from additional paid-in capital, to
recognize the fair value of the 2007 Warrants as warrant liability on such
date.
 
 Both 2007
Warrants and 2009 Warrants are not considered indexed to the Company’s own stock
and have been recorded at their fair value as derivative liabilities. In
addition, they do not qualify for hedge accounting, and as such, all changes in
the fair value of these warrants have been recognized as other income or
expenses. These warrants will continue to be reported as liability until such
time as they are exercised or expire.
 
 The
Company estimates the fair value of the 2007 Warrants and the 2009 Warrants
using the Black-Scholes option pricing model based on the following
assumptions:




2009
      Warrants
              
              
              2007
      WarrantsDecember
      31, 2009
              
              
              October
      19, 2009
                (date
      of issuance)
              
              
              December
      22, 2009
                (date
      of exercise)
              
              
              January
      1, 2009
              
              
              July
      5, 2007
                (date
      of issuance)Exercise
      price (per share):
              
              $
              5.38
              
              
              $
              5.38
              
              
              $
              5.40
              
              
              $
              5.40
              
              
              $
              5.40Remaining
      contractual life (years):
              
              
              2.3
              
              
              
              2.5
              
              
              
              2.53
              
              
              
              3.51
              
              
              
              5Dividend
      yield:
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −Expected
      volatility (based on historical volatility):
              
              
              112.21
              %
              
              
              107.29
              %
              
              
              110.12
              %
              
              
              97.93
              %
              
              
              41.80
              %Risk-free
      interest rate:
              
              
              1.29
              %
              
              
              1.22
              %
              
              
              1.20
              %
              
              
              1.11
              %
              
              
              4.92
              %Estimated
      fair value (per share):
              
              $
              10.855
              
              
              $
              6.357
              
              
              $
              9.014
              
              
              $
              1.083
              
              
              $
              3.078




The
risk-free interest rate reflects the interest rate for U.S. Treasury Note with
similar time-to-maturity to those of the warrants.


On
December 22, 2009, the 2007 Warrants were fully exercised by cashless exercise.
Accordingly, the Company reclassified the 2007 Warrants at their aggregate fair
value of $1,752,860 at the date of exercise to equity.


F-18
  CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
  4.
              ACCOUNTS
      RECEIVABLE
  Accounts
receivable consist of the following:
 
 As of December 31,2009
                  
                  
                  2008Accounts
      receivable
                  
                  $
                  40,025,063
                  
                  
                  $
                  35,221,721Less:
      Allowance for doubtful accounts
                  
                  
                  (768,965
                  )
                  
                  
                  (448,606
                  )$
                  39,256,098
                  
                  
                  $
                  34,773,115
  The
activity in the Company’s allowance for doubtful accounts is summarized as
follows:




Year Ended December 31,2009
                
                
                2008Balance
      at the beginning of the year
                
                $
                448,606
                
                
                
                227,981Provision
      during the year
                
                
                320,359
                
                
                
                220,625Balance
      at the end of the year
                
                $
                768,965
                
                
                $
                448,606




5.
            INVENTORIES




Inventories
consist of the following:





As of December, 312009
                
                
                2008Raw
      Materials
                
                $
                4,166,380
                
                
                $
                4,941,787Packing
      Materials
                
                $
                85,342
                
                
                
                107,053Finished
      goods
                
                
                2,354,373
                
                
                
                1,403,778$
                6,606,095
                
                
                $
                6,452,618




6.
            PREPAYMENTS
      AND OTHER RECEIVABLES




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





F-19




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




7.
            PROPERTY,
      PLANT AND EQUIPMENT




Property,
plant and equipment consist of the following:





As of December 31,2009
                
                
                2008Building
                
                $
                1,060,298
                
                
                $
                −Manufacturing
      machinery
                
                
                5,840,901
                
                
                
                4,735,761Leasehold
      improvements
                
                
                440,092
                
                
                
                439,341Office
      equipment
                
                
                223,298
                
                
                
                220,031Motor
      vehicles
                
                
                629,587
                
                
                
                619,1498,194,176
                
                
                
                6,014,282Less:  Accumulated
      depreciation and amortization
                
                
                (2,213,480
                )
                
                
                (1,518,237
                )Net
      book value
                
                $
                5,980,696
                
                
                $
                4,496,045




Depreciation
and amortization expense for the years ended December 31, 2009 and 2008 was
$695,703 and $548,571, respectively.




8.
            CONSTRUCTION
      IN PROGRESS




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




9.
            DEPOSIT
      FOR EQUIPMENT




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




10.
            INTANGIBLE
      ASSETS




Intangible
assets consist of the following:


As of December 31,2009
                
                
                2008License
      for manufacture and sale of fertilizer products
                
                $
                440,100
                
                
                $
                –Less:
      Accumulated amortization
                
                
                (42,593
                )
                
                
                –Net
      book balue
                
                $
                397,507
                
                
                $
                –




Amortization
expense for the year ended December 31, 2009 was $41,826 . The annual estimated
amortization expense for the above intangible assets for each of the next five
years from December 31, 2009 is $62,764.




F-20




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




11.
            ACCRUED
      EXPENSES AND OTHER PAYABLES




Accrued
expenses and other payables consist of the following:


As of December, 312009
                
                
                2008License
      for manufacture and sale of fertilizer products
                
                $
                439,028
                
                
                $
                105,924Less:
      Accumulated amortization
                
                
                955,329
                
                
                
                116,030$
                1,394,357
                
                
                $
                221,954




12.
            TAXES
      PAYABLE




Taxes
payable consist of the following:


As of December 31,2009
                    
                    
                    2008Income
      tax payable
                    
                    $
                    1,281,775
                    
                    
                    $
                    857,324Value
      added tax payable
                    
                    
                    397,118
                    
                    
                    
                    529,313Others
                    
                    
                    16,772
                    
                    
                    
                    2,260$
                    1,695,665
                    
                    
                    $
                    1,388,897





F-21





CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




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 tax exemption for the two years
ended December 31, 2008 and 2008 and a 50% reduction on its EIT rate for the
ensuing three years ended December 31, 2010 through 2012.




The
provision for income taxes for the year ended December 31, 2009 and 2008
consisted of the following:


2009
                
                
                2008Provision
      for current income tax – China
                
                $
                4,907,474
                
                
                $
                4,151,782




The
following table reconciles the statutory rates to the Company’s effective tax
rate for the years ended December 31, 2009 and 2008 respectively:


2009
                
                
                2008Tax
      at PRC statutory rate
                
                
                25
                %
                
                
                25
                %Non-deductible
      expenses
                
                
                26
                %
                
                
                5
                %Tax
      holiday
                
                
                (7
                )%
                
                
                –Effective
      tax rate
                
                
                44
                %
                
                
                30
                %




Non-deductible
expenses for the year ended December 31, 2009 primarily consist of the change in
fair value of warrants classified as derivative of $9,894,409, share-based
compensation expense of $566,807 and others.




The
effect of the tax holiday of Beijing Agritech and Anhui Agritech amounted to
$871,259 and $nil for the years ended December 31, 2009 and 2008, equivalent to
basic earnings per share of $0.06 and $nil, respectively, and diluted earnings
per share amount of $0.06 and $nil, respectively.




As of
December 31, 2009 and 2008, the Company did not have any significant temporary
differences and carryforwards that may result in deferred tax.





F-22




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




13.
              INCOME
      TAXES–
      CONTINUED




The
Company has analyzed the tax positions taken or expected to be taken in its tax
filings and has concluded it has no material liability related to uncertain tax
positions or unrecognized tax benefits as of December 31, 2009 and 2008. The
Company classifies interest and/or penalties related to income tax matters in
income tax expense. As of December 31, 2009 and 2008, there was no interest and
penalties related to uncertain tax positions. The Company does not anticipate
any significant increases or decreases to its liability for unrecognized tax
benefits within the next 12 months.




The New
EIT Law also imposes a withholding tax of 10% unless reduced by a tax treaty,
for dividends distributed by a PRC-resident enterprise to its immediate holding
company outside the PRC for earnings accumulated beginning on January 1, 2008
and undistributed earnings generated prior to January 1, 2008 are exempt from
such withholding tax. The Company has not provided for income taxes on
accumulated earnings of its PRC subsidiaries as of December 31, 2009 or 2008
since these earnings, which amounted to approximately $54.6 million as of
December 31, 2009,  are intended to be reinvested indefinitely in the
overseas jurisdictions. If
undistributed earnings relating to operations domiciled in the PRC were to be
remitted to the Company, additional taxes, including the withholding tax
discussed above, might result. It is not practicable to estimate the
amount of additional taxes that might be payable on such undistributed
earnings.




According
to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational or other errors
made by the taxpayer or the withholding agent.  The statute of
limitations extends to five years under special circumstances. In the case of
transfer pricing issues, the statute of limitations is ten years. There is no
statute of limitations in the case of tax evasion. Accordingly, the income tax
returns of the Company’s PRC operating subsidiaries for the years ended December
31, 2007 through 2009 are open to examination by the PRC state and local tax
authorities.





F-23





CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




14.
            RETIREMENT
      PLAN




As
stipulated by the regulations of the PRC government, companies operating in the
PRC have defined contribution retirement plans for their employees. The PRC
government is responsible for the pension liability to these retired employees.
Commencing January 1, 2002, the Company was required to make specified
contributions to the state-sponsored retirement plan at 20% of the basic salary
cost of their staff. Each of the employees of the PRC subsidiaries is
required to contribute 8% of his/her basic salary. For the years ended December
31, 2009 and 2008, contributions made by the Company were approximately
$34,789 and $43,871, respectively.




15.
            NONCONTROLLING
      INTEREST




Noncontrolling
interest as of December 31, 2008 represented 10% ownership interest held by a
noncontrolling shareholder, Yinlong Industrial Co., Ltd., a related party of the
Company, in Pacific Dragon.




On
February 12, 2009, Tailong entered into a share purchase agreement with Pacific
Dragon and Yinlong and a supplemental purchase agreement among Yinlong, Pacific
Dragon, Mr. Yu Chang and Ms. Xiao Rong Teng pursuant to which Tailong agreed to
acquire Yinlong’s 10% interest in Pacific Dragon for a cash payment of
$1,000,000 and issuance of 1,745,000 shares (as retroactively adjusted the
1-for-4 reverse split on September 8, 2009 and the 2-for-1 forward split on
February 1, 2010) of the Company’s common stock in the Company.  On
the same date, Tailong completed the acquisition and Pacific Dragon has since
become a wholly-owned subsidiary of the Company.




According
to the requirements in ASC 810-45-23 (formerly paragraphs 32 to 34 of
SFAS 160, “Non-controlling Interests in Consolidated Financial Statements –
an amendment of ARB No. 51”), the Company’s change in the ownership
interest in Pacific Dragon was accounted for as equity
transactions.  The noncontrolling interest in Pacific Dragon had a
carrying amount of $5,410,321 at the date of acquisition. Accordingly, the
difference of $4,408,576, between the carrying amount of the noncontrolling
interest and the aggregate value consisting of $1,000,000 in cash and 1,745,000
shares of common stock of $0.001 par each, was credited to additional paid-in
capital.





F-24




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




16.
            COMMON
      STOCK AND WARRANTS




Private
Placement




Pursuant
to a securities purchase agreement dated October 19, 2009 (the “Securities
Purchase Agreement”), the Company issued (i) an aggregate of 2,785,536 (as
retroactively adjusted for the 2-for-1 forward split on February 1, 2010) shares
of common stock (the “Investor Shares”) and (ii) warrants (the “2009
Warrant”) to purchase up to an aggregate of 1,857,024 shares of common stock
(the “Warrant Shares”) retroactively adjusted for the 2 for 1 forward split on
February 1, 2010) at an initial exercise price of approximately $5.38 per share
(as retroactively adjusted for the 2-for-1 forward split on February 1, 2010),
subject to adjustment, to Carlyle Asia Growth Partners IV, L.P. and CAGP IV
Co-Investment, L.P. (collectively, the “Carlyle Investors”) for a purchase price
of $15,000,000 (the “Private Placement”). Under the Securities Purchase
Agreement, the Company was obligated to issue up to 7,000,000 shares of common
stock (the “Make-Good Shares”) to the Carlyle Investors in the event that the
Company would fail to meet a predetermined net income target of $11.5 million
for the fiscal year 2009, where such net income has been defined to exclude any
extraordinary transactions and to be increased by any non-cash charges incurred
as a result of the Private Placement including changes in fair value of warrants
classified as derivatives, and reasonable expenses incurred in connection with
any public offering of the Company’s securities




In
connection with the Private Placement, the Company granted the Carlyle Investors
a one-year right of participation in future offerings by the Company of shares
of its common stock, debt or equity securities convertible, exercisable or
exchangeable into common stock, or debt securities. The right of participation
was granted individually, on a pro rata basis based upon each investor’s
original subscription amount, and collectively no less than $5 million and no
more than $10 million. In addition, we granted the Carlyle Investors the right
to collectively designate one person to serve as a member of the Company’s board
of directors. On December 23, 2009, the Company appointed Carlyle’s designee,
Zheng “Anne” Wang, to serve as a member of its Board of directors.




Common
Stock Purchase Warrants




The 2009
Warrants are exercisable at any time from April 19, 2010 through April 19, 2012
at an exercise price equal to (i) $15,000,000 divided by the sum of (A)
2,785,536 plus (B) the aggregate number of additional shares (“Additional
Shares”) that the Company would be obligated to issue to the Carlyle Investors
if the Company failed to meet a predetermined net income target of $11.5 million
for the fiscal year 2009, where such net income has been defined to exclude any
extraordinary transactions and to be increased by any non-cash charges incurred
as a result of the Private Placement including changes in fair value of warrants
classified as derivatives, and reasonable expenses incurred in connection with
any public offering of the Company’s securities. The Company has met the net
income target for 2009 and hence, the exercise price of the 2009 Warrants has
fixed at approximately $5.38 per share, subject to customary adjustment
provisions for stock dividends and split, merger or consolidation or similar
corporate events.




In
connection with a private placement which occurred on July 5, 2007, the Company
granted the private placement consultant with warrants to purchase up to 194,460
(as retroactively adjusted for the 1-for-4 reverse split on September 8, 2009
and the 2-for-1 forward split on February 1, 2010) shares of its common stock.
These warrants vested immediately and have an exercise price of $5.40 per share
(as retroactively adjusted for the 1-for-4 reverse split on September 8, 2009
and the 2-for-1 forward split on February 1, 2010). These warrants were fully
exercised during the year ended December 31, 2009.




’




F-25




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




16.
                COMMON
      STOCK AND WARRANTS–
      CONTINUED




A summary
of the warrants activity as of December 31, 2009, and changes during the year
then ended is presented below:


Warrants Outstanding
                  
                  
                  Warrants ExercisableNumber of
                    underlying
                    shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Average
                    Remaining
                    Contractual
                    Life (years)
                  
                  
                  Number of
                    underlying
                    shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Average
                    Remaining
                    Contractual
                    Life (years)Outstanding
      at December 31, 2008*
                  
                  
                  194,460
                  
                  
                  $
                  5.40
                  
                  
                  
                  3.50
                  
                  
                  
                  194,460
                  
                  
                  $
                  5.40
                  
                  
                  
                  3.50Issued*
                  
                  
                  1,857,024
                  
                  
                  
                  5.38
                  
                  
                  
                  2.50
                  
                  
                  
                  1,857,024
                  
                  
                  $
                  5.38
                  
                  
                  
                  2.50Forfeited
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −Exercised
      by cashless exercise
                  
                  
                  (194,460
                  )
                  
                  
                  5.40
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −
                  
                  
                  
                  −Outstanding
      at December 31, 2009
                  
                  
                  1,857,024
                  
                  
                  $
                  5.38
                  
                  
                  
                  2.50
                  
                  
                  
                  1,857,024
                  
                  
                  $
                  5.38
                  
                  
                  
                  2.50




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





F-26




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




17.
              STOCK
      OPTIONS




The
Company has adopted the 2008 Equity Incentive Plan (the “Plan”), which is
shareholder-approved, permits the grant of options, stock appreciation rights,
restricted stock, restricted stock units, and other share-based awards as the
administrator of the Plan (“Administrator”) may
determine to the Company’s employees, directors and consultants. Up to one
million eight hundred thousand (1,800,000) shares (as retroactively adjusted the
1-for-4 reverse split on September 8, 2009 and the 2-for-1 forward split on
February 1, 2010) of the Company’s stock are available for issuance under the
Plan. The Company believes the Plan will promote the success of the Company’s
business, advance the interests of the Company, and attract and retain the best
available personnel for positions of substantial responsibility. The exercise
price per share with respect to the Plan will be determined by the Administrator
provided that the exercise price per share cannot be less than the fair market
value of a share on the grant date and the Administrator shall establish and set
forth in the Award Agreement the times, installments or conditions upon which
the option, stock appreciation rights, restricted stock, restricted stock units,
and other share-based awards shall vest and become exercisable, which may
include, among other things, the achievement of the Company-wide, business unit,
and individual goals (including, but not limited to continued employment or
services).




Option
awards are generally granted with an exercise price equal to the market price of
the Company’s stock at the date of grant. The options may have varying vesting
periods among different grantees and vest in accordance with the terms of the
agreements entered into by the Company and the option grantees. Options granted
by the Company generally have 5-year contractual terms.




The
compensation cost that has been charged against income resulting from the
options granted under the Plan was $566,807 and $12,965 for the years ended
December 31, 2009 and 2008, respectively.




The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model that uses the 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.





2009
                
                
                2008Expected
      term (year)
                
                
                0.33
                
                
                
                1Expected
      volatility
                
                
                116
                %
                
                
                99
                %Weighted-average
      volatility
                
                
                116
                %
                
                
                99
                %Expected
      dividend yield
                
                
                0
                %
                
                
                0
                %Risk-free
      rate
                
                
                0.08
                %
                
                
                1.34
                %





F-27




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
  17.
                  STOCK
      OPTIONS–
      CONTINUED




Underlying
                                    shares
                                  
                                  
                                  Weighted
                                    Average
                                    Exercise
                                    Price
                                  
                                  Weighted-
                                    Average
                                    Remaining
                                    Contractual
                                    Term
                                  
                                  Weighted-
                                    Average
                                    Grant-Date
                                    Fair Value
                                    (per share)
                                  
                                  
                                  Aggregate
                                    Intrinsic
                                    ValueOutstanding
      at January 1, 2008*
                                  
                                  
                                  25,000
                                  
                                  
                                  $
                                  7.00Granted*
                                  
                                  
                                  50,000
                                  
                                  
                                  $
                                  4.00
                                  
                                  
                                  
                                  $
                                  0.26Exercised
                                  
                                  
                                  —Outstanding
      at December 31, 2008*
                                  
                                  
                                  75,000
                                  
                                  
                                  $
                                  5.00
                                  
                                  3.99 yearsGranted*
                                  
                                  
                                  492,500
                                  
                                  
                                  $
                                  11.88
                                  
                                  
                                  
                                  $
                                  1.177Cancelled*
                                  
                                  
                                  (50,000
                                  )
                                  
                                  $
                                  4.00Exercised
                                  
                                  
                                  —Outstanding
      at December 31, 2009*
                                  
                                  
                                  517,500
                                  
                                  
                                  $
                                  11.64
                                  
                                  4.80 years
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1,207,863Exercisable
      at December 31, 2009*
                                  
                                  
                                  279,500
                                  
                                  
                                  $
                                  11.40
                                  
                                  4.65 years
                                  
                                  
                                  
                                  
                                  
                                  $
                                  718,773




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




As of
December 31, 2009, there was $545,009 of total unrecognized compensation cost
related to non-vested options under the Plan. That cost is expected to be
recognized over a weighted average period of 2 years. That total fair value of
options vested during the years ended December 31, 2009 and 2008 was $566,807
and $12,965, respectively.





F-28




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




18.
            STATUTORY
      RESERVES




The
Company’s subsidiaries incorporated in the PRC is required on an annual basis to
make appropriations of retained earnings set at certain percentage of after-tax
profit determined in accordance with PRC accounting standards and regulations
(“PRC GAAP”).
Accordingly, the Company must make appropriations to (i) general reserve
and (ii) enterprise expansion fund in accordance with the Law of the PRC on
Enterprises Operated Exclusively with Foreign Capital.




The
general reserve fund requires annual appropriations of 10% of after-tax profit
(as determined under PRC GAAP at each year-end and after setting off against any
accumulated losses from prior years) until such fund has reached 50% of the
registered capital whereas enterprise expansion fund appropriation is at its
discretion. Appropriation to the general reserve must be made before
distribution of dividends to stockholders. The general reserve fund and
statutory reserve fund can only be used for specific purposes, such as setting
off the accumulated losses, enterprise expansion or increasing the registered
capital. The enterprise expansion fund was mainly used to expand the production
and operation; it also may be used for increasing the registered
capital.




Appropriations
to these funds are classified in the consolidated balance sheets as statutory
reserves. During the year ended December 31, 2008, the Company made total
appropriations of $1,125,754 from retained earnings to these statutory reserves.
During the year ended December 31, 2009, the Company transferred $3,229,589 from
statutory reserves to retained earnings, which represented the appropriations in
excess of 50% of the registered capital of the Company’s PRC
subsidiaries.




There are
no legal requirements in the PRC to fund these reserves by transfer of cash to
restricted accounts, and the Company has not done so.




19.
            RELATED
      PARTY TRANSACTIONS




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




Pacific
Dragon has entered into a tenancy agreement with a related party, Yinlong
Industrial Co. Ltd. (“Yinlong”), the former minority shareholder previously
holding 10% equity interest in Pacific Dragon, to lease two factory plants and
one office building with a total floor area of 7,018 sq. meters for a term of 10
years from January 1, 2004 to January 1, 2014 at an annual rent of RMB 1,200,000
(equivalent to $144,578). The tenancy agreement was revised by increasing the
annual rent to RMB 3,600,000 (equivalent to $518,940) effective from July 1,
2005. Yinlong is owned and controlled by Mr. Yu Chang and Ms. Xiaorong Teng, who
are both directors of the Company.




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





F-29




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




20.
            RISK
      ARISING FROM OPERATIONS IN FOREIGN
COUNTRIES




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




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


21.
              RISK
      OF CONCENTRATIONS
  There
were no individual customers which accounted for 10% or more of the Company’s
net revenue for the year ended December 31, 2009 or 2008.
  Four
suppliers provided approximately 63% of the Company’s dollar value of raw
materials for the year ended December 31, 2009, with each individually
accounting for approximately 18%, 17%, 15% and 13%, respectively. Four suppliers
provided approximately 68% of the Company’s raw materials for the year ended
December 31, 2008, with each individually accounting for approximately 33%, 12%,
12% and 11%, respectively.




F-30




CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




22.
            COMMITMENTS
      AND CONTINGENCIES




Operating
lease commitments




The
Company incurred rent expense of $1,134,047 and $888,460 related to the leases
with related parties disclosed in Note 19 for the years ended December 31, 2009
and 2008, respectively. The Company’s commitments for minimum lease payment
under these operating leases for the next five years after December 31, 2009 are
as follows:





Year
      ending December 31,-
      2010
                  
                  $
                  897,781-
      2011
                  
                  
                  846,486-
      2012
                  
                  
                  698,583-
      2013
                  
                  
                  593,313-
      2014
                  
                  
                  30,307-
      Thereafter
                  
                  
                  72,585$
                  3,139,055




Registration
rights arrangement




In
connection with the Private Placement transaction completed in October 2009 (see
Note 16), the Company entered into a registration rights agreement, pursuant to
which the Company agreed to prepare and file a registration statement covering
the resale of the Investor Shares and Warrant Shares, and in the event they are
issued, the Make-Good Shares and the Additional Shares (collectively, the “Registrable
Securities”) no later than January 31, 2010. On February 1, 2010, the
Company agreed with the Carlyle Investors to extend the deadline for filing such
registration statement until March 15, 2010, thereby extending the deadline for
the effectiveness of such registration statement until 120 days from March 15,
2010.




Any
liquidated damage under the registration rights agreement is calculated as 1.5%
of the aggregate purchase price paid by the holders of the Registrable
Securities pursuant to the Securities Purchase Agreement for any unregistered
Registrable Securities then held by such holders.




On March
12, 2010, the Company filed a registration statement covering 2,785,536 shares
of common stock, which satisfies certain of the Company’s obligations under the
registration rights agreement. The Company considers that it is not probable the
Company would be required to pay any liquidated damage under the registration
rights agreement and has not made any provision as of December 31,
2009.





F-31





CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008




23.
            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:





Year ended December 31,2009
                
                
                2008Net
      revenue from unaffiliated customers:Organic
      liquid fertilizers
                
                $
                47,166,707
                
                
                $
                41,157,884Organic
      granular fertilizers
                
                
                28,963,132
                
                
                
                4,082,328Total
                
                $
                76,129,839
                
                
                $
                45,240,212Gross
      profit:Organic
      liquid fertilizers
                
                $
                23,239,303
                
                
                $
                19,424,805Organic
      granular fertilizers
                
                
                5,645,649
                
                
                
                926,020Total
                
                $
                28,884,952
                
                
                $
                20,350,825




24.
            RESTRICTED
      NET ASSETS




The
Company’s operations are primarily conducted through its PRC subsidiaries, which
may only pay dividend out of their retained earnings determined in accordance
with the accounting standards and regulations in the PRC and after it has met
the PRC requirements for appropriation to statutory reserves (see Note
18).




In
addition, the Company’s businesses and assets are primarily denominated in RMB,
which is not freely convertible into foreign currencies. All foreign exchange
transactions 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 regulatory institutions requires submitting a
payment application form together with suppliers’ invoices, shipping documents
and signed contracts. These currency exchange control procedures imposed by the
PRC government authorities may restrict the ability of the Company’s PRC
subsidiaries to transfer their net assets to the Company through loans, advances
or cash dividends, which consisted of paid-up capital, retained earnings and
statutory reserves and which aggregate amount of approximately $84 million as of
December 31, 2009 exceeded 25% of the Company’s consolidated net assets.
Accordingly, condensed parent company financial statements have been prepared in
accordance with Rule 5-04 and Rule 12-04 of SEC Regulation S-X, and are as
follows.





F-32





CHINA
AGRITECH, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2009




PARENT
COMPANY FINANCIAL INFORMATION OF CHINA AGRITECH




Condensed
Balance Sheet




As of December 31,2009
                
                
                2008ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                8,087,056
                
                
                $
                3,158,513Other
      current assets
                
                
                4,667
                
                
                
                −Total
      current assets
                
                
                8,091,723
                
                
                
                3,158,513Investments
      in subsidiaries
                
                
                89,749,370
                
                
                
                60,064,117Total
      assets
                
                $
                97,841,093
                
                
                $
                63,222,630LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accrued
      expenses and other payables
                
                $
                380,333
                
                
                $
                424,130Warrant
      liabilities
                
                
                20,157,869
                
                
                
                –Total
      liabilities
                
                
                20,538,202
                
                
                
                424,130Stockholders’
      equityPreferred
      stock: $0.001 par value, 10,000,000 shares authorized; non
      issued
                
                
                –
                
                
                
                –Common
      stock, $0.001 par value, 100,000,000 shares authorized;17,002,542*
      and 12,351,126* shares issued and outstanding
                
                
                17,003
                
                
                
                12,351Additional
      paid-in capital
                
                
                34,698,079
                
                
                
                26,161,228Retained
      earnings
                
                
                36,864,544
                
                
                
                30,787,004Accumulated
      other comprehensive income
                
                
                5,723,265
                
                
                
                5,837,917Total
      shareholders’ equity
                
                
                77,302,891
                
                
                
                62,798,500Total
      liabilities and stockholders’ equity
                
                $
                97,841,093
                
                
                $
                63,222,630




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





F-33




CHINA
AGRITECH, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2009
  PARENT COMPANY
FINANCIAL INFORMATION OF CHINA AGRITECH – CONTINUED


Condensed
Statement of Income




Year ended December 31,2009
                
                
                2008Administrative
      expenses
                
                $
                (2,086,959
                )
                
                $
                (1,086,374
                )Other
      income (expenses):Changes
      in fair value of warrants
                
                
                (9,894,409
                )
                
                
                −Other
                
                
                88
                
                
                
                61,952Income
      tax
                
                
                –
                
                
                
                –Equity
      in income of subsidiaries
                
                
                17,670,927
                
                
                
                9,666,163Net
      income
                
                $
                5,689,647
                
                
                $
                8,641,741




Condensed
Statement of Cash Flows




Year ended December 31,2009
                
                
                2008Net
      cash used in operating activities
                
                $
                (1,568,528
                )
                
                $
                (939,321
                )Net
      cash used in investing activities
                
                
                (7,718,657
                )
                
                
                (3,989,128
                )Net
      cash provided by financing activities
                
                
                14,215,728
                
                
                
                2,000,000Cash
      and cash equivalents, beginning of year
                
                
                3,158,513
                
                
                
                6,086,962Cash
      and cash equivalents, end of year
                
                $
                8,087,056
                
                
                $
                3,158,513


Note
to Condensed Parent Company Financial Information:
  The
Company records its investment in subsidiaries under the equity method of
accounting as prescribed in ASC Topic 323, “Investments – Equity Method and
Joint Ventures”. Such investment and long-term loans to subsidiaries are
presented on the balance sheet as “Investments in subsidiaries” and the income
of the subsidiaries is presented as “Equity in income of subsidiaries” on the
statement of income.
  These
supplemental condensed parent company financial statements should be read in
conjunction with the notes to the Company’s Consolidated Financial Statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. GAAP have been condensed or
omitted.
  As of
December 31, 2009 and 2008, there were no material contingencies, significant
provisions for long-term obligations, or guarantees of the Company, except as
separately disclosed in the Consolidated Financial Statements, if
any.





F-34