UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


x
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGEACT
      OF 1934





For the
quarterly period ended March 31, 2010





or





 ̈
            TRANSITION REPORT PURSUANT TO SECTION 13 OR
      15(d) OF THESECURITIES
      EXCHANGEACT
      OF 1934





For
      the transition period from
              To





Commission
      File Number :
              001-33593





Zhongpin
      Inc.(Exact
      name of registrant as specified in its
charter)





Delaware
                
                54-2100419(State
      or other jurisdiction of incorporation or organization)
                
                (I.R.S.
      Employer Identification
No.)





21
      Changshe Road, Changge City, Henan Province, People’s Republic of
      China
                  
                  461500(Address
      of principal executive offices)
                  
                  (Zip
      Code)





011
      86 10-8286 1788(Registrant’s
      telephone number, including area
code)





Not
      Applicable(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities 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 ninety (90)
days.  YES x NO o





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation


S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such
files).    YES o NO o





Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company.  See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.  (Check One):





Large
accelerated filer o    Accelerated
filer x     
Non-accelerated filer o(Do not check if a
smaller reporting company)  Smaller reporting company o




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  YESo NO x





As of May 4, 2010, 34,725,104 shares
of the registrant’s common stock were outstanding.





ZHONGPIN
INC.





FORM
10-Q





INDEX





PagePart
    I
                                                          
                                                          Financial Information
                                                          1Item
      1.
                                                          
                                                          Unaudited
      Financial Statements:
                                                          1Consolidated
      Balance Sheets as of March 31, 2010 (unaudited) and December 31,
      2009
                                                          2Consolidated
      Statements of Operations and ComprehensiveIncome
      (unaudited) for the three-month periods ended March 31, 2010 and
      2009
                                                          3Consolidated
      Statements of Cash Flows (unaudited) for the three- month
      periods ended March 31, 2010 and 2009
                                                          4Notes
      to Consolidated Financial Statements (unaudited)
                                                          5Item
      2.
                                                          
                                                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                          19Item
      3.
                                                          
                                                          Quantitative
      and Qualitative Disclosures About Market Risk
                                                          32Item
      4.
                                                          
                                                          Controls
      and Procedures
                                                          32PartII
                                                          
                                                          OtherInformation
                                                          33Item
      1.
                                                          
                                                          Legal
      Proceedings
                                                          33Item 1A.
                                                          
                                                          Risk
      Factors
                                                          33Item
      2.
                                                          
                                                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                          33Item
      3.
                                                          
                                                          Defaults
      Upon Senior Securities
                                                          33Item
      4.
                                                          
                                                          (Removed
      and Reserved)
                                                          33Item
      5.
                                                          
                                                          Other
      Information
                                                          33Item
      6.
                                                          
                                                          Exhibits
                                                          33Signatures
                                                          
                                                          
                                                          34





ZHONGPIN
INC.





Part
I - Financial Information





Item
1. Financial Statements





The accompanying unaudited consolidated
balance sheets, statements of operations and comprehensive income, and of cash
flows and related notes thereto, have been prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”) for
interim financial information and in conjunction with the rules and regulations
of the Securities and Exchange Commission (“SEC”). Accordingly, they do not
include all of the disclosures required by GAAP for complete financial
statements. The financial statements reflect all adjustments, consisting only of
normal, recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation for the interim periods.





The accompanying financial statements
should be read in conjunction with the notes to the aforementioned financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto included in
our Annual Report on Form 10-K for the year ended December 31,
2009.





The results of operations for the three
month period ended March 31, 2010 are not necessarily indicative of the results
to be expected for the entire fiscal year or any other period.


1


ZHONGPIN
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
in U.S. dollars)




March 31, 2010
                
                
                December 31, 2009ASSETS
                
                (Unaudited)Current
      assetsCash
      and cash equivalents
                
                $
                56,363,756
                
                
                $
                68,982,259Restricted
      cash
                
                
                10,539,784
                
                
                
                14,490,575Bank
      notes receivable
                
                
                9,127,624
                
                
                
                7,997,172Accounts
      receivable, net of allowance fordoubtful
      accounts of $1,628,947 and $1,132,038
                
                
                29,860,755
                
                
                
                20,419,797Other
      receivables, net of allowance for doubtfulaccounts of $168,041 and $290,436
                
                
                508,705
                
                
                
                652,523Purchase
      deposits
                
                
                4,081,140
                
                
                
                5,653,192Inventories
                
                
                35,893,367
                
                
                
                33,859,420Prepaid
      expenses
                
                
                296,477
                
                
                
                186,030VAT
      recoverable
                
                
                16,261,364
                
                
                
                14,064,185Allowance
      receivables
                
                
                4,413,770
                
                
                
                -Deferred
      tax assets
                
                
                256,222
                
                
                
                256,151Other
      current assets
                
                
                155,992
                
                
                
                120,709Total
      current assets
                
                
                167,758,956
                
                
                
                166,682,013Property,
      plant and equipment (net)
                
                
                211,294,506
                
                
                
                189,588,904Deposits
      for purchase of land use rights
                
                
                8,721,167
                
                
                
                8,718,740Construction
      in progress
                
                
                66,833,282
                
                
                
                70,192,150Land
      use rights
                
                
                61,295,934
                
                
                
                61,128,431Deferred
      charges
                
                
                28,512
                
                
                
                39,855Other
      non-current assets
                
                
                1,762,199
                
                
                
                1,761,709Total
      assets
                
                $
                517,694,556
                
                
                $
                498,111,802LIABILITIES
      AND EQUITYCurrent
      liabilitiesShort-term
      loans
                
                $
                68,015,962
                
                
                $
                84,661,697Bank
      notes payable
                
                
                5,874,339
                
                
                
                9,560,353Long-term
      loans - current portion
                
                
                1,317,609
                
                
                
                4,539,215Capital
      lease obligation - current portion
                
                
                6,760,143
                
                
                
                7,480,098Accounts
      payable
                
                
                12,544,468
                
                
                
                9,260,750Other
      payables
                
                
                13,420,394
                
                
                
                12,882,316Accrued
      liabilities
                
                
                10,462,477
                
                
                
                7,377,850Deposits
      from customers
                
                
                4,982,010
                
                
                
                5,335,907Tax
      payable
                
                
                1,940,455
                
                
                
                1,918,057Total
      current liabilities
                
                
                125,317,857
                
                
                
                143,016,243Deferred
      tax liabilities
                
                
                248,014
                
                
                
                247,945Deposits
      from customers
                
                
                2,192,942
                
                
                
                1,987,579Capital
      lease obligation
                
                
                10,192,985
                
                
                
                11,104,435Long-term
      loans
                
                
                68,876,352
                
                
                
                44,912,744Total
      liabilities
                
                
                206,828,150
                
                
                
                201,268,946EquityCommon
      stock: par value $0.001; 100,000,000authorized; 34,725,104 and 34,662,314 shares issuedand outstanding
                
                
                34,725
                
                
                
                34,662Additional
      paid-in capital
                
                
                166,856,661
                
                
                
                166,169,902Retained
      earnings
                
                
                124,949,838
                
                
                
                111,699,375Accumulated
      other comprehensive income
                
                
                19,025,182
                
                
                
                18,938,917Total
      equity
                
                
                310,866,406
                
                
                
                296,842,856Total
      liabilities and equity
                
                $
                517,694,556
                
                
                $
                498,111,802




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


2


ZHONGPIN
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


(Amount
in U.S. dollars) (Unaudited)





Three Months Ended
                    March 31,2010
                  
                  
                  2009RevenuesSales
      Revenues
                  
                  $
                  204,284,915
                  
                  
                  $
                  153,849,448Cost
      of sales
                  
                  
                  (179,366,565
                  )
                  
                  
                  (134,705,646
                  )Gross
      Profit
                  
                  
                  24,918,350
                  
                  
                  
                  19,143,802Operating
      expensesGeneral
      and administrative expenses
                  
                  
                  (6,058,141
                  )
                  
                  
                  (4,608,286
                  )Selling
      expenses
                  
                  
                  (4,336,828
                  )
                  
                  
                  (2,793,278
                  )Research
      and development expenses
                  
                  
                  (40,852
                  )
                  
                  
                  (30,578
                  )Amortization
      of loss from sale-leaseback
                  
                  
                  —
                  
                  
                  
                  (16,657
                  )Total
      operating expenses
                  
                  
                  (10,435,821
                  )
                  
                  
                  (7,448,799
                  )Income
      from operations
                  
                  
                  14,482,529
                  
                  
                  
                  11,695,003Other
      income (expense)Interest
      expense
                  
                  
                  (1,435,461
                  )
                  
                  
                  (1,499,520
                  )Other
      income
                  
                  
                  565,063
                  
                  
                  
                  168,073Exchange
      gain (loss)
                  
                  
                  (304
                  )
                  
                  
                  1,333Government
      subsidies
                  
                  
                  625,156
                  
                  
                  
                  94,955Total
      other income (expense)
                  
                  
                  (245,546
                  )
                  
                  
                  (1,235,159
                  )Net
      income before taxes
                  
                  
                  14,236,983
                  
                  
                  
                  10,459,844Provision
      for income taxes
                  
                  
                  (986,520
                  )
                  
                  
                  (718,545
                  )Net
      income after tax
                  
                  $
                  13,250,463
                  
                  
                  $
                  9,741,299Foreign
      currency translation adjustment
                  
                  
                  86,265
                  
                  
                  
                  (378,972
                  )Comprehensive
      income
                  
                  $
                  13,336,728
                  
                  
                  $
                  9,362,327Basic
      earnings per common share
                  
                  $
                  0.38
                  
                  
                  $
                  0.33Diluted
      earnings per common share
                  
                  $
                  0.38
                  
                  
                  $
                  0.33Basic
      weighted average shares outstanding
                  
                  
                  34,715,466
                  
                  
                  
                  29,486,642Diluted
      weighted average shares outstanding
                  
                  
                  35,222,810
                  
                  
                  
                  29,569,452




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


3


ZHONGPIN
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amount
in U.S. dollars) (Unaudited)





Three Months Ended March
31,2010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                13,250,463
                
                
                $
                9,741,299Adjustments
      to reconcile net income to net cash provided by (used in)
      operations:Depreciation
                
                
                2,729,974
                
                
                
                1,801,235Amortization
                
                
                327,390
                
                
                
                187,858Provision
      for allowance for bad debt
                
                
                374,030
                
                
                
                (102,628
                )Stock-based
      compensation expense
                
                
                473,472
                
                
                
                289,917Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (9,929,541
                )
                
                
                (7,783,530
                )Other
      receivables
                
                
                266,413
                
                
                
                1,378,559Purchase
      deposits
                
                
                1,573,258
                
                
                
                (16,221,596
                )Prepaid
      expense
                
                
                (110,379
                )
                
                
                61,962Inventories
                
                
                (2,024,048
                )
                
                
                (8,640,944
                )Tax
      refunds receivable
                
                
                (2,192,751
                )
                
                
                (2,154,544
                )Other
      current assets
                
                
                (35,240
                )
                
                
                (31,519
                )Deferred
      charges
                
                
                11,351
                
                
                
                11,632Accounts
      payable
                
                
                3,280,371
                
                
                
                2,189,263Other
      payables
                
                
                534,534
                
                
                
                1,131,977Allowance
      receivable
                
                
                (4,412,736
                )
                
                
                —Accrued
      liabilities
                
                
                3,082,041
                
                
                
                544,581Taxes
      payable
                
                
                21,859
                
                
                
                (71,681
                )Deposits
      from clients
                
                
                (355,299
                )
                
                
                (1,258,162
                )Deposits
      from clients – Long term portion
                
                
                204,761
                
                
                
                11,277Net
      cash provided by (used in) operating activities
                
                
                7,069,923
                
                
                
                (18,915,044
                )Cash
      flows from investing activities:Construction
      in progress
                
                
                (19,057,251
                )
                
                
                (2,749,323
                )Additions
      to property and equipment
                
                
                (1,942,869
                )
                
                
                (3,441,307
                )Additions
      to land use rights
                
                
                (477,844
                )
                
                
                —Increase
      in restricted cash
                
                
                3,953,897
                
                
                
                2,096,882Net
      cash used in investing activities
                
                
                (17,524,067
                )
                
                
                (4,093,748
                )Cash
      flows from financing activities:Proceeds
      from (repayment of) bank notes, net
                
                
                (4,815,772
                )
                
                
                2,054,947Proceeds
      from (repayment of) short-term bank loans, net
                
                
                (19,887,508
                )
                
                
                27,502,670Proceeds
      from long-term loans
                
                
                23,945,495
                
                
                
                —Proceeds
      from (repayment of) capital lease obligation
                
                
                (1,636,194
                )
                
                
                (359,875
                )Proceeds
      from warrants exercise
                
                
                213,350
                
                
                
                —Net
      cash provided by (used in) financing activities
                
                
                (2,180,629
                )
                
                
                29,197,742Effects
      of rate changes on cash
                
                
                16,269
                
                
                
                (82,166
                )(Decrease)
      increase in cash and cash equivalents
                
                
                (12,618,504
                )
                
                
                6,106,784Cash
      and cash equivalents, beginning of period
                
                
                68,982,259
                
                
                
                41,857,166Cash
      and cash equivalents, end of period
                
                $
                56,363,755
                
                
                $
                47,963,950Supplemental
      disclosures of cash flow information:Cash
      paid for interest
                
                
                1,926,252
                
                
                
                1,527,258Cash
      paid for income taxes
                
                
                964,583
                
                
                
                753,430




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




4




ZHONGPIN
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


1.
            ORGANIZATION
      AND NATURE OF OPERATIONS




Zhongpin
Inc. (the “Company”) was established under the laws of the State of Delaware on
February 4, 2003.  The Company is a public holding company holding an
equity interest in its subsidiaries outside the U.S.  Its operating
subsidiaries are located in the People’s Republic of China (the “PRC”) and focus
on two business divisions: pork and pork products, and vegetables and
fruits.The pork
and pork products division is involved primarily in the processing of live hogs
into fresh, frozen and processed pork products which are sold domestically to
branded stores, food retailers, food service distributors, restaurants, hotel
chains and non-commercial food service establishments, such as schools,
governments, healthcare facilities, the military and other food processors, as
well as to certain international markets in a limited scope.  The
vegetables and fruits segment is involved primarily in the processing of frozen
vegetables and fruits that are sold to the Company’s branded stores and
food retailers.





The
Company holds a 100% interest in Falcon Link Investment Limited, a company
organized under the laws of the British Virgin Islands (“Falcon”), through which
the Company holds a 100% interest in its China-based subsidiaries, each of which
was organized under the laws of the PRC.  The Company’s China-based
subsidiaries include the following:





Date of
                                                          
                                                          Registered
                                                          
                                                          PercentageName
                                                          
                                                          Incorporation
                                                          
                                                          Capital
                                                          
                                                          ofOwnershipHenan Zhongpin Food
      Company Limited
                                                          
                                                          May
      20, 2005
                                                          
                                                          $137,300,000
                                                          
                                                          100%Henan
      Zhongpin Food Share Company
                                                          
                                                          Jan.
      20, 2000
                                                          
                                                          1,000,000,000
      RMB
                                                          
                                                          100%(1)Limited
      (“Henan Zhongpin”)
                                                          
                                                          
                                                          
                                                          ($146,492,243)Henan
      Zhongpin Import and Export
                                                          
                                                          Aug.
      11, 2004
                                                          
                                                          5,060,000
      RMB
                                                          
                                                          100%Trading
      Company
                                                          
                                                          
                                                          
                                                          ($611,111)Zhumadian
      Zhongpin Food Company Limited
                                                          
                                                          June
      7, 2006
                                                          
                                                          60,000,000
      RMB
                                                          
                                                          100%($8,585,399)Anyang Zhongpin Food
      Company Limited
                                                          
                                                          Aug.
      21, 2006
                                                          
                                                          34,800,000
      RMB
                                                          
                                                          100%($5,094,422)Henan
      Zhongpin Fresh Food Logistics
                                                          
                                                          Sept.
      14, 2006
                                                          
                                                          1,500,000
      RMB
                                                          
                                                          100%Company
      Limited
                                                          
                                                          
                                                          
                                                          ($189,665)Deyang Zhongpin Food
      Company Limited
                                                          
                                                          Sept.
      25, 2006
                                                          
                                                          15,000,000
      RMB
                                                          
                                                          100%($1,893,652)Henan
      Zhongpin Business Development
                                                          
                                                          Sept.
      27, 2006
                                                          
                                                          5,000,000
      RMB
                                                          
                                                          100%Company
      Limited
                                                          
                                                          
                                                          
                                                          ($632,215)Heilongjiang
      Zhongpin Food Company Limited
                                                          
                                                          Oct.
      17, 2006
                                                          
                                                          1,000,000
      RMB
                                                          
                                                          100%(2)($126,406)Luoyang
      Zhongpin Food Company
                                                          
                                                          Jan.
      18, 2007
                                                          
                                                          60,000,000
      RMB
                                                          
                                                          100%Limited
      (“Luoyang Zhongpin”)
                                                          
                                                          
                                                          
                                                          ($8,783,487)Yongcheng Zhongpin
      Food Company Limited
                                                          
                                                          Mar.
      1, 2007
                                                          
                                                          60,000,000
      RMB
                                                          
                                                          100%($8,783,487)


5


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Date of
                                      
                                      Registered
                                      
                                      PercentageName
                                      
                                      Incorporation
                                      
                                      Capital
                                      
                                      ofOwnershipTianjin Zhongpin
      Food Company Limited
                                      
                                      Sept.
      14, 2007
                                      
                                      100,000,000
      RMB
                                      
                                      100%(
      $14,639,145 )Hengshui Zhongpin
      Food Company Limited
                                      
                                      Nov.
      17, 2008
                                      
                                      1,000,000
      RMB
                                      
                                      100%($146,428)Jilin
      Zhongpin Food Company Limited
                                      
                                      Dec.
      11, 2008
                                      
                                      1,000,000
      RMB
                                      
                                      100%($145,688)Henan
      Zhongpin Agriculture and
                                      
                                      Dec.
      26, 2008
                                      
                                      10,000,000
      RMB
                                      
                                      100%Animal
      Husbandry Industry
                                      
                                      
                                      
                                      ($1,461,796)Development
      Company Limited


(1)           Includes
a 1.7% ownership interest of another six stockholders with respect to which
Henan Zhongpin Food Company Limited is entitled to all economic benefits and the
right to vote pursuant to the terms of a trust agreement with such
stockholders.


(2)           Includes
a 10% ownership interest of another stockholder with respect to which Henan
Zhongpin is entitled to all economic benefits and the right to vote pursuant to
the terms of a trust agreement with such stockholder.





2.
              SUMMARYOF
      SIGNIFICANT ACCOUNTING
POLICIES




Consolidation
and Basis of Presentation





The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated during
the process of consolidation. The consolidated financial statements were
prepared in accordance with GAAP.





Foreign
Currency Translations and Transactions





RMB, the national currency of the PRC,
is the primary currency of the economic environment in which the
Company’s China-based subsidiaries are operating. The United States dollar
(“U.S. dollar”) is the functional currency used by the Company and Falcon to
record all of their activities. The Company uses the U.S. dollar for financial
reporting purposes.





The Company translates assets and
liabilities into U.S. dollars using the middle rate published by
the People’s Bank of China as of the balance sheet date. The consolidated
statement of income is translated at average rates during the reporting period.
Adjustments resulting from the translation of financial statements from RMB into
U.S. dollars are recorded in stockholders' equity as part of accumulated
comprehensive loss translation adjustments. Gains or losses resulting from
transactions in currencies other than RMB are reflected in income for the
reporting period.





Revenue
Recognition





Revenues generated from the sales of
various meat products and vegetables and fruits are recognized when these
products are delivered to customers in accordance with previously agreed upon
pricing and delivery arrangements, and the collectability of these sales is
reasonably assured. Since the products sold by the Company are primarily
perishable and frozen food products, the right of return is only for a few days
and has been determined to be
insignificant by the management of the Company. Accordingly, no provision has
been made for returnable goods. Revenues presented on the consolidated
statements of operations and comprehensive income are net of sales
taxes.


6


ZHONGPIN
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
  Cash
and Cash Equivalents





The Company considers all highly-liquid
investments with maturity of three months or less to be cash equivalents. The
Company maintains its cash accounts at credit-worthy financial institutions and
closely monitors the movements of its cash positions.





Restricted
Cash and Bank Notes Payable





Under the terms of the credit
agreements with certain of its lenders, Henan Zhongpin has agreed to maintain
with such lenders in a deposit account an amount of cash that will serve as
collateral for its delivery of bank promissory notes of such lenders as payment
instruments for its procurement purposes. The amount of bank promissory notes of
such lenders that can be delivered by Henan Zhongpin can be up to twice the
amount of such deposits. As such deposits may not be withdrawn by Henan Zhongpin
without restriction, such cash deposits are presented as “restricted cash” on
the consolidated balance sheets.





Bank
Notes Receivable





The Company only accepts notes issued
by banks in the normal course of business as payment for products sold by the
Company. These bank notes receivable have maturity dates of up to 180 days and
bear no interest. The Company can hold the bank notes until the maturity date
and collect the amount from the issuing banks, or the Company can use these bank
notes as a means for payment for goods or services received. The Company accrues
no provision for these bank notes because such bank notes have little risk of
default in the PRC.





Accounts
Receivable





During the normal course of business,
the Company's policy is to ask larger customers to make deposits in reasonable
and meaningful amounts on a case-by-case basis. For certain newly-developed
customers, the Company may extend unsecured credit.





The Company regularly evaluates and
monitors the creditworthiness of each of its customers in accordance with the
prevailing practice in the meat industry and based on general economic
conditions in the PRC. The Company maintains a general policy of providing 100%
allowance for doubtful accounts in an amount equal to the aggregate amount of
those accounts that are not collected within one year plus an amount
equal to 5% of the aggregate amount of accounts receivable less than one
year old. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance. The Company also examines the credit terms
of significant customers regularly and asks for more cash deposits if these
customers appear to have any indicators of delaying their payments to the
Company.  Such deposits are usually applied for the collection of the
outstanding accounts receivable during the year.  With such a practice
in place, the Company did not have any specific allowance for doubtful accounts
provided against specific customers at March 31, 2010 and 2009,
respectively.




The
following table presents allowance activities in accounts
receivable.





March31,2010
                  
                  
                  December31,2009Beginning
      balance
                  
                  $
                  1,132,038
                  
                  
                  $
                  1,215,901Additions
      charged to (reduction in ) expense
                  
                  
                  496,909
                  
                  
                  
                  (83,863
                  )Ending
      balance
                  
                  $
                  1,628,947
                  
                  
                  $
                  1,132,038


7


ZHONGPIN
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


2.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(continued)


Inventories





Inventories are stated at the lower of
cost or the market based on the weighted average method. Production cost
components include the purchase cost of live hogs, direct labor, depreciation,
packaging material, utility expense and other manufacturing overhead. By using a
systematic costing system, the production cost is allocated to various products
at the stage of work-in-progress and finished goods, respectively. Net
realizable value is the estimated selling price, in the ordinary course of
business, less estimated costs to complete and dispose. The Company regularly
inspects the shelf life of prepared foods and, if necessary, writes down their
carrying value based on their salability and expiration dates into cost of goods
sold.





Plant,
Property and Equipment





Plant, properties and equipment are
recorded at cost and are stated net of accumulated depreciation. Depreciation
expense is determined using the straight-line method over the estimated useful
lives of the assets as follows:





Estimated
      Useful
                                      Economic
      LifePlants
      and buildings
                                    5-30
      yearsMachinery
      and equipment
                                    5-20
      yearsOffice
      furniture and equipment
                                    3-5
      yearsVehicles
                                    5
      years





Maintenance and repairs are charged
directly to expense as incurred, whereas improvement and renewals are generally
capitalized in their respective property accounts. When an item is retired or
otherwise disposed of, the cost and applicable accumulated depreciation are
removed and the resulting gain or loss is recognized and reflected as a line
item before operating income (loss).





Land
Use Rights





The Chinese government owns all of the
parcels of land on which the Company's plants are built. In the PRC, land use
rights for commercial purposes are granted by the PRC government typically for a
term of 40-50 years. The Company is required to pay a lump sum of money to the
State Land and Resource Ministry of the applicable locality to acquire such
rights. In accordance with the provision of Statement of Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification 350, Intangibles –Goodwill and Other, the
Company capitalizes the lump sum of money paid and amortizes these land use
rights by using the straight line method over the term of the land use license
granted by the applicable governmental authority.




Construction
in Progress and Interest Capitalization





Construction in progress is stated at
cost. The cost accumulation process starts from time the construction project is
set-up and ends at the time the project has been put into service and all
regulatory permits and approvals have been received. The Company borrows bank
loans from time to time for these construction projects. The interest costs
incurred for these loans have been capitalized during the construction
process.





Impairment
of Long-Lived Assets





The
Company reviews long-lived assets 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 that asset.  Whenever any
such impairment exists, an impairment loss will be recognized for the amount by
which the carrying value exceeds the fair value.


8




ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Fair
Value of Financial Instruments





The
carrying amount of cash and cash equivalents, accounts receivable, other
receivables, advance to vendor, accounts payable and accrued liabilities,
capital lease obligations and short term and long term loans are reasonable
estimates of their fair value because of the short maturity of these items. The
fair value of amounts due from/to related parties and stockholders are
reasonable estimate of their fair value as the amounts will be collected and
paid off in a period less than one year.  The carrying amounts of capital
lease obligations approximate their fair value based on the Company’s current
incremental borrowing rates for similar types of arrangements.  Long term
debt approximates fair value since the bank term loans are fixed rate
instruments and bear interests at the rate dictated and published by the
People's Bank of China.





Shipping
and Handling Cost





All shipping and handling fees are
included in selling expenses.





Value
Added Tax





All China-based enterprises are subject
to a value added tax (“VAT”) imposed by the PRC government on their domestic
product sales. The output VAT is charged to customers who purchase goods from
the Company and the input VAT is paid when the Company purchases goods from its
vendors. Input VAT rates are 13% for most of purchasing activities conducted by
the Company. Output VAT rate is 13% for chilled pork products, frozen pork
products and vegetable and fruit products, and 17% for prepared meat
products. The input VAT can be offset against the output VAT. The VAT payable or
recoverable balance presented on the consolidated balance sheets represents
either the input VAT less than or larger than the output VAT. The debit balance
represents a credit against future collection of output VAT instead of a
receivable.





Share-Based
Payment





The
Company receives employee and certain non-employee services in exchange for (a)
equity instruments of the Company or (b) liabilities that are based on the fair
value of the Company’s equity instruments or that may be settled by the issuance
of such equity instruments.  The Company accounts for stock options
granted using a fair-value-based method.





Earnings
Per Share





Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully-diluted earnings
per share. All of such securities are included in the computation of diluted
earnings per share. The number of shares of common stock underlying the
outstanding stock warrants and options at March 31, 2010 and 2009 were 1,439,490
and 1,775,827, respectively, which were all included in the computation of
diluted earnings per share.




Government
Subsidies





The Company's subsidiaries in the PRC
receive government subsidies from local Chinese government agencies in
accordance with relevant Chinese government policies. In general, the Company
presents the government subsidies received as part of other income unless the
subsidies received are earmarked to compensate a specific expense, which have
been accounted for by offsetting the specific expense, such as research and
development expense or interest expenses. The information relating to government
subsidies received and recognized is presented in Note 11.


9


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Research
and Development Expenses





Research and development costs are
expensed as incurred. Gross research and development expenses for new product
development and improvements of existing products by the Company incurred for
the three-month periods ended March 31, 2010 and 2009 were
$40,852 and 30,578, respectively. There is no offsetting of research and
development expenses from government subsidies during the quarters ended March
31, 2010 and 2009.





Comprehensive
Income (Loss)





The Company adopted FASB Accounting
Standards Codification 220, Comprehensive Income, which
establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of general-purpose financial statements.
The Company has chosen to report comprehensive income (loss) in the statements
of income and comprehensive income. Comprehensive income (loss) is comprised of
net income and all changes to stockholders' equity except those due to
investments by owners and distributions to owners.





Recently
Adopted Accounting Pronouncements




Adoption
of FASB ASU 2010-13





In April
2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-13,
"Compensation—Stock Compensation (Topic 718): Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades," which addresses the classification
of a share-based payment award with an exercise price denominated in the
currency of a market in which the underlying equity security trades. Topic 718
is amended to clarify that a share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entity’s equity securities trades shall not be considered to contain a market,
performance, or service condition. Therefore, such an award is not to be
classified as a liability if it otherwise qualifies as equity classification.
The amendments in this Update should be applied by recording a cumulative-effect
adjustment to the opening balance of retained earnings. The cumulative-effect
adjustment should be calculated for all awards outstanding as of the beginning
of the fiscal year in which the amendments are initially applied, as if the
amendments had been applied consistently since the inception of the award. ASU
2010-13 is effective for interim and annual periods beginning on or after
December 15, 2010 and is not expected to have a material impact on the Company’s
consolidated financial position or results of operations.





3.
            INVENTORIES




Inventories
at March 31, 2010 and December 31, 2009 consisted of the
following:




March
      31, 2010
                  
                  
                  December
      31, 2009(Unaudited)Raw
      materials
                  
                  $
                  3,886,797
                  
                  
                  $
                  4,941,774Low
      value consumables and packing materials
                  
                  
                  999,011
                  
                  
                  
                  961,009Work
      in progress
                  
                  
                  4,012,703
                  
                  
                  
                  3,020,589Finished
      goods
                  
                  
                  26,994,856
                  
                  
                  
                  24,936,048Total
                  
                  $
                  35,893,367
                  
                  
                  $
                  33,859,420




10


ZHONGPIN
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




4.
            PROPERTY,
      PLANT AND EQUIPMENT




A summary
of property, plant and equipment at cost at March 31, 2010 and December 31,
2009 is as follows:





March 31,2010
                  
                  
                  December 31,2009(Unaudited)Plants
      and buildings
                  
                  $
                  148,519,929
                  
                  
                  $
                  130,399,711Machinery
      and equipment
                  
                  
                  73,630,161
                  
                  
                  
                  68,060,172Office
      furniture and equipment
                  
                  
                  2,891,370
                  
                  
                  
                  2,658,598Vehicles
                  
                  
                  3,223,446
                  
                  
                  
                  3,144,368Accumulated
      depreciation
                  
                  
                  (16,970,400
                  )
                  
                  
                  (14,673,945
                  )Total
                  
                  $
                  211,294,506
                  
                  
                  $
                  189,588,904




The
depreciation and amortization expenses for the three months ended March 31,
2010 and 2009 were $2,729,974 and $1,801,235,
respectively.





In 2009
and 2008, the Company entered into various sale-leaseback arrangements. Under
the arrangements, the Company sold property and equipment and leased them back
for a period of 3 years. The leasebacks have been accounted for as capital
leases. The difference between the carrying value of the sale-leaseback
equipment and the appraised fair value was recognized to the income statement as
loss from sale-leaseback transactions. Further, the difference between the
appraised fair value and the sales price was capitalized as deferred loss, which
was included in the property and equipment above.





Of the
above information, property, plant and equipment under the sale-leaseback
agreement at March 31, 2010 and December 31, 2009 are as
follows:





March 31,2010
                    
                    
                    December 31,2009(Unaudited)Plants
      and buildings
                    
                    $
                    699,393
                    
                    
                    $
                    707,433Machinery
      and equipment
                    
                    
                    25,891,443
                    
                    
                    
                    26,239,328Office
      furniture and equipment
                    
                    
                    30,114
                    
                    
                    
                    28,937Vehicles
                    
                    
                    3,957
                    
                    
                    
                    3,939Accumulated
      depreciation
                    
                    
                    (988,634
                    )
                    
                    
                    (631,251
                    )Total
                    
                    $
                    25,636,273
                    
                    
                    $
                    26,348,386





The
deferred losses included in the property and equipment balance were
$3,788,330 and $4,149,415 at March 31, 2010 and December 31, 2009, respectively,
and would be amortized over the lease term. Of the depreciation expenses,
$362,155 and $357,158 were amortization of deferred loss and
depreciation expense from assets under capital lease for the first quarter ended
March 31, 2010; $16,657 and $90,634 were amortization of deferred loss and
depreciation expense from assets under capital lease for the quarter ended March
31, 2009





5.
            LAND
      USE RIGHTS




The
Company’s land use rights at March 31, 2010 and December 31, 2009 are as
follows:





March 31, 2010
                    
                    
                    December 31, 2009(Unaudited)Land
      use rights
                    
                    $
                    63,908,042
                    
                    
                    $
                    63,412,436Accumulated
      amortization
                    
                    
                    (2,612,108
                    )
                    
                    
                    (2,284,005
                    )Total
                    
                    $
                    61,295,934
                    
                    
                    $
                    61,128,431




The
amortization expenses for the three months ended March 31, 2010 and 2009 were
$327,390 and $187,858, respectively.


11




ZHONGPIN
INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






6.
            CONSTRUCTION
      IN PROGRESS




Construction
in progress at March 31, 2010 and December 31, 2009 consisted of the
following:




Construction Project
                              
                              Date
      or
                                Estimated
      Date
                                Put in Service(1)
                              
                              March 31, 2010
                              
                              
                              December31, 2009Production
      line for prepared pork in Changge industrial park
                              
                              January 2010
                              
                              $
                              —
                              
                              
                              $
                              75,203Zhengzhou
      office
                              
                              May
      2010
                              
                              
                              27,043
                              
                              
                              
                              12,390Water
      solution Station in Changge industrial park
                              
                              April
      2010
                              
                              
                              —
                              
                              
                              
                              64,439Replacement
      and maintenance in Changge industrial park
                              
                              April
      2010
                              
                              
                              184,500
                              
                              
                              
                              121,187Production
      facility for prepared pork products in Changge industrial
      park
                              
                              March
      2010
                              
                              
                              —
                              
                              
                              
                              17,145,694Dormitories
      and other infrastructure in Changge industrial park
                              
                              April
      2010
                              
                              
                              3,544,897
                              
                              
                              
                              2,844,349Production
      facility for food oil in Changge industrial park
                              
                              April
      2010
                              
                              
                              6,477,669
                              
                              
                              
                              4,515,099Production
      facility for chilled and frozen pork in Tianjin
                              
                              April
      2010
                              
                              
                              40,598,539
                              
                              
                              
                              38,100,295Distribution
      center in Zhumadian
                              
                              April
      2010
                              
                              
                              5,009,650
                              
                              
                              
                              3,611,201Distribution
      center in Anyang
                              
                              June
      2010
                              
                              
                              6,907,870
                              
                              
                              
                              2,958,320Distribution
      center in Luoyang
                              
                              September
      2010
                              
                              
                              4,033,753
                              
                              
                              
                              743,973Distribution
      center in Changge
                              
                              April
      2011
                              
                              
                              49,361
                              
                              
                              
                              —Total
                              
                              
                              
                              $
                              66,833,282
                              
                              
                              $
                              70,192,150





Estimated
cost to complete current construction in process is $10.9
million.





(1)
            Represents
      date all regulatory permits and approvals are received and project is
      placed in service. In certain cases, construction of a project may be
      substantially completed and the project may be operational during a
      testing period prior to such date.




7.
            SHORT-TERM
      BANK LOANS




Short-term
bank loans are due within one year. Of the $68.0 million aggregate principal
amount of short-term bank loans at March 31, 2010, loans in the principal amount
of $13.5 million were secured by the Company’s plants located primarily in Henan
province, loans in the aggregate principal amount of $11.7 million were
guaranteed by the Company’s subsidiaries, and loans in the aggregate principal
amount of $14.6 million were guaranteed by Huanghe Group Co., Ltd., an
unaffiliated third party (“Huanghe Group”). These loans bear interest at
prevailing lending rates in the PRC ranging from 5.04 % to 5.31% per
annum.


12


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




8.
            LONG-TERM
      BANK LOANS




Amounts
outstanding under the Company’s long-term debt arrangements at March 31, 2010
and December 31, 2009 were as follows:




Bank
                  
                  March 31, 2010
                  
                  
                  December 31, 2009(Unaudited)Canadian
      Government Transfer Loan
                  
                  $
                  1,489,099
                  
                  
                  $
                  1,489,099Rabobank
      Nederland Shanghai
                  
                  
                  11,719,379
                  
                  
                  
                  11,716,118China
      CITIC Bank
                  
                  
                  —
                  
                  
                  
                  4,393,544China
      Construction Bank
                  
                  
                  7,324,612
                  
                  
                  
                  7,322,574Agriculture
      Bank of China
                  
                  
                  28,419,496
                  
                  
                  
                  10,251,605China
      Minsheng Bank
                  
                  
                  7,324,612
                  
                  
                  
                  7,322,574China
      Merchants Bank
                  
                  
                  13,916,763
                  
                  
                  
                  6,956,44570,193,961
                  
                  
                  
                  49,451,959Less:
      Current portion
                  
                  
                  (1,317,609
                  )
                  
                  
                  (4,539,215
                  )Total
      long-term portion
                  
                  $
                  68,876,352
                  
                  
                  $
                  44,912,744




In
February 2010, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 71 million
($10.4 million). All amounts borrowed under the loan agreement bear interest at
a floating rate that is based on the prime rate published by the People’s Bank
of China for loans with the same or similar terms on the drawdown date (5.4% per
annum on March 31, 2010) and are payable on February 3,
2013.  Borrowings under the loan agreement are guaranteed by the land
use right, property and plant of Luoyang Zhongpin.





In March
2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of
China pursuant to which Henan Zhongpin borrowed RMB 53 million ($7.8 million).
All amounts borrowed under the loan agreement bear interest at a floating rate
that is based on the prime rate published by the People’s Bank of China for
loans with the same or similar terms on the drawdown date (5.76% per annum on
March 31, 2010) and are payable on December 27, 2014.  Borrowings
under the loan agreement are guaranteed by the land use right, property and
plant of Luoyang Zhongpin.





In March
2010, Henan Zhongpin entered into a loan agreement with China Merchants Bank
pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.0 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.76% per annum on March
31, 2010) and are payable on November 26, 2014.  Borrowings under the
loan agreement are guaranteed by Luoyang Zhongpin.





In
December 2009, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million ($10.3
million). All amounts borrowed under the loan agreement bear interest at a
floating rate that is based on the prime rate published by the People’s Bank of
China for loans with the same or similar terms on the drawdown date (5.76% per
annum on March 31, 2010) and are payable on December 27,
2014.  Borrowings under the loan agreement are guaranteed by the land
use right, property and plant of Luoyang Zhongpin.


13


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





In
November 2009, Henan Zhongpin entered into a loan agreement with China Merchants
Bank pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.0 million).
All amounts borrowed under the loan agreement bear interest at a floating rate
that is based on the prime rate published by the People’s Bank of China for
loans with the same or similar terms on the drawdown date (5.76% per annum on
March 31, 2010) and are payable on November 26, 2014.  Borrowings
under the loan agreement are guaranteed by Luoyang Zhongpin.





In June
2009, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.3 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.4% per annum on March 31,
2010) and are payable on June 10, 2011.  Borrowings under the loan
agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.





In May
2009, Henan Zhongpin entered into a loan agreement with China Minsheng Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.3 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.4% per annum on March 31,
2010) and are payable on May 6, 2011. Borrowings under the loan agreement are
guaranteed by the Company’s wholly-owned subsidiary, Yongcheng Zhongpin Food
Company Limited.





In May
2008, Henan Zhongpin entered into a credit agreement with Rabobank Nederland
Shanghai Branch that provided for a three-year term loan of up to RMB 80 million
($11.7 million).  On June 10, 2008, the first 50% of the long-term
loan was funded by the bank.  The remaining 50% of the long-term loan
was drawn down by Henan Zhongpin on July 10, 2008.  Amounts currently
outstanding under the long-term loan bear interest at the rate published by the
People’s Bank of China for loans with the same or similar terms. The accrued
interest on this loan is payable on a quarterly basis. Of the outstanding
principal under the long-term loan, 25% is payable 24 months after the first
drawdown date (June 10, 2008), 37.5% is payable 30 months after the first
drawdown date and the balance is payable 36 months after the first drawdown
date.





Borrowings
under the term loan agreement are guaranteed by the Company’s subsidiaries,
Anyang Zhongpin Food Co., Ltd. and Zhumadian Zhongpin Food Co., Ltd., are
secured by mortgages on the Company’s prepared pork production facilities
located in Changge City, Henan province and are subject to various financial and
non-financial covenants, including a debt-to-net-worth ratio, a debt-to-EBIDTA
ratio, an interest coverage ratio, a required minimum tangible net worth,
restrictions on investments in fixed assets and financial assets, on
inter-company indebtedness and on consolidated contingent liabilities and a
requirement that a minimum percentage of Henan Zhongpin’s consolidated EBITDA be
generated by Henan Zhongpin and the guarantors.  Henan Zhongpin also
is prohibited from paying dividends in an amount in excess of 50% of its
retained earnings during the term of the credit facility.





In May
2002, Henan Zhongpin entered into a loan agreement with Bank of Communications,
Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the
amount of $2,504,969 from the Canadian government.  Under the terms of
the loan agreement, 58% of the principal amount ($1,452,882) of this loan bears
interest at the fixed rate of 6.02% per annum and remaining principal amount of
this loan is interest free.  The loan is repayable in a fixed amount
of $145,671, which includes principal and interest, that is payable on a
semi-annual basis through May 15, 2042.  Borrowings under the loan
agreement are guaranteed by the Financing Department, Henan
province.


14


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


9.
              EQUITY
      TRANSACTIONS




During
the three months ended March 31, 2010, warrants to purchase an aggregate of
14,950 units were exercised on a cash basis. Each unit is comprised of two
shares of the Company’s Series A preferred stock and a five-year warrant to
purchase one share of the Company’s common stock with the exercise price of
$4.00 per share. At the time of exercise of the unit warrants, the holders also
exercised the underlying warrants to purchase shares of common stock. In
connection with these transactions, the Company issued an aggregate of 44,850
shares of common stock and received $194,350 cash proceeds from such issuances.
For cash flow purposes, these transactions were cash transactions.




During
the three months ended March 31, 2010, warrants to purchase an aggregate of
50,000 units of common stock were exercised on a cashless basis. In
connection with these transactions, the Company issued an aggregate of 15,565
shares of common stock. For cash flow purposes, these transactions were non-cash
transactions.




During
the three months ended March 31, 2010, warrants to purchase an aggregate of
2,375 common shares were exercised on a cash basis. In connection with
these transactions, the Company issued an aggregate of 2,375 shares of common
stock and received $19,000 cash proceeds from such issuances. For cash flow
purposes, these transactions were cash transactions.




On March
31, 2009, the Company granted stock options to its Chief Financial
Officer to purchase an aggregate of 100,000 shares of the Company’s common
stock, exercisable in accordance with the following schedule:  33,000
options vesting on March 31, 2010 with an exercise price of $8.88 per share,
equal to the closing price of the Company’s common stock on March 31, 2009,
33,000 options vesting on March 31, 2011 with an exercise price of $12.70 per
share, equal to the closing price of the Company’s common stock on March 31,
2010, and 34,000 options vesting on March 31, 2012 with an exercise price equal
to the closing price of the Company’s common stock on March 31,
2011.  Each tranche of options expires on the fourth anniversary of
its respective vesting dates.





The
Company adopted the fair value recognition to measure and recognize of
compensation expense for all stock-based payment awards made to the Company’s
employees and directors, including stock options and employee stock
purchases.  Stock-based compensation expense for stock options was
based on the grant-date fair value.  During the process of
estimating the fair value of the stock options granted and recognizing
share-based compensation, the following assumptions were adopted.





The fair
value for these awards was estimated using the Black-Scholes option pricing
model with the following weighted average assumptions, assuming no expected
dividends:





Three
      Months Ended March 31,2010
                    
                    
                    2009Expected
      life (years)
                    
                    3-5
                    
                    
                    3-5Expected
      volatility
                    
                    33.22%
                    
                    
                    40.33%Risk-free
      interest rate
                    
                    1.60%
                    
                    
                    1.15%Dividend
      yield
                    
                    —%
                    
                    
                    —%





The
expected volatilities are based on the historical volatility of the Company’s
common stock.  The observation is made on a weekly
basis.  The observation period covered is consistent with the expected
life of the options.  The risk-free rate is consistent with the
expected terms of the stock options and is based on the United States Treasury
yield curve in effect at the time of grant. In estimating expected lives of
the options, the Company considered the contractual and vesting terms of awards,
along with historical experience; however, due to insufficient historical data
from which to reliably estimate expected lives, the Company used estimates based
on the “simplified method” set forth by the SEC in Staff Accounting Bulletins
No. 107, where expected life is estimated by summing the award’s vesting term
and contractual term and dividing that result by two. Insufficient historical
data from which to reliably estimate expected lives is expected to exist for the
foreseeable future due to different terms associated with awards granted in
recent years, along with other factors.





For the
three months ended March 31, 2010 and 2009, the stock-based compensation
expenses were $473,472 and $289,917, respectively.


15


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




10.
            EARNINGS
      PER SHARE




The
following table sets forth the computation of basic and diluted net earnings per
share for the periods indicated:




Three
      Months Ended
                    March
      31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Numerator:Net
      income attributable to common shares
                  
                  $
                  13,250,463
                  
                  
                  $
                  9,741,299Denominator:Weighted
      average number of common shares outstanding – basic
                  
                  
                  34,715,466
                  
                  
                  
                  29,486,642Dilutive
      effect of stock options
                  
                  
                  507,344
                  
                  
                  
                  122,386Weighted
      average number of common shares outstanding – diluted
                  
                  
                  35,222,810
                  
                  
                  
                  29,609,028Basic
      earnings per share
                  
                  $
                  0.38
                  
                  
                  $
                  0.33Diluted
      earnings per share
                  
                  $
                  0.38
                  
                  
                  $
                  0.33




11.
            GOVERNMENT
      SUBSIDIES




The
central and local government in Changge City, Henan province provided Henan
Zhongpin with various subsidies to encourage its research and development
activities, building new facilities and its establishment of a fresh fruit and
vegetable production facility in Changge City, and for other contributions to
the local community, such as increasing employment opportunities. The government
subsidies are generally classified as earmarked (such as research and
development activities) or non-earmarked. The interest subsidies were earmarked
to offset the Company’s interest expenses incurred in relation to the
construction of its fruit and vegetable production facility. All subsidies were
accounted for based on evidence that cash has been received and the earmarked
activities have taken place. In accordance with internationally prevailing
practice, subsidies earmarked for research and development activities were first
offset against relevant research and development expenses incurred, and interest
subsidies were offset against the relevant interest expense incurred.
Non-earmarked subsidies are generally recognized as other
income.


16




ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Government
subsidies received by the Company during the three months ended March 31, 2010
and 2009 were as follows:




Three
      Months Ended
                      March
      31,2010
                    
                    
                    2009Deferred
      subsidies opening balance:Interest
      subsidies
                    
                    $
                    —
                    
                    
                    $
                    —Earmarked
      subsidies
                    
                    
                    —
                    
                    
                    
                    —Non-earmarked
      subsidies
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    $
                    —
                    
                    
                    $
                    —Subsidies
      received:Interest
      subsidies
                    
                    $
                    306,947
                    
                    
                    $
                    —Earmarked
      subsidies
                    
                    
                    —
                    
                    
                    
                    —Non-earmarked
      subsidies
                    
                    
                    625,156
                    
                    
                    
                    94,955Total
                    
                    $
                    932,103
                    
                    
                    $
                    94,955Subsidies
      recognized:Interest
      subsidies
                    
                    $
                    306,947
                    
                    
                    $
                    —Earmarked
      subsidies
                    
                    
                    —
                    
                    
                    
                    —Non-earmarked
      subsidies
                    
                    
                    625,156
                    
                    
                    
                    94,955Total
                    
                    $
                    932,103
                    
                    
                    $
                    94,955Deferred
      subsidies year ending balance:Interest
      subsidies
                    
                    $
                    —
                    
                    
                    $
                    —Earmarked
      subsidies
                    
                    
                    —
                    
                    
                    
                    —Non-earmarked
      subsidies
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    $
                    —
                    
                    
                    $
                    —





Subsidies
received and other income recognized are translated at the average exchange
rate. The beginning and ending balances are translated at the period-end
exchange rates.





12.
            SEGMENT
      REPORTING




The
Company operates in only one segment: meat production. The Company’s
vegetables and fruits operations, both financially and operationally, do not
represent a significant enough portion of its business to constitute a separate
segment. However, the Company’s product lines are divided into two divisions:
pork and pork products, and vegetables and fruits.




The pork
and pork products division is involved primarily in the processing of live hogs
into fresh, frozen and processed pork products. The pork and pork products
division markets its products domestically to branded stores and to food
retailers, foodservice distributors, restaurant operators and noncommercial
foodservice establishments, such as schools, hotel chains, healthcare
facilities, the military and other food processors, as well as in certain
international markets on a limited basis.




The
vegetables and fruits division is involved primarily in the processing of fresh
vegetables and fruits. The Company contracts with more than 100 farms in Henan
province and nearby areas to produce high-quality vegetable varieties and fruits
suitable for export purposes. The proximity of the contracted farms to
operations ensures freshness from harvest to processing. The Company contracts
with those farms to grow more than 34 categories of vegetables and fruits,
including asparagus, sweet corn, broccoli, mushrooms, lima beans and
strawberries.


17


ZHONGPIN
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Sales
      by Division
                    (U.S.
      dollars in millions)Three
      Months Ended
                    March
      31,2010
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Pork
      and Pork Products:Chilled
      pork
                  
                  $
                  114.7
                  
                  
                  $
                  86.3Frozen
      pork
                  
                  
                  50.4
                  
                  
                  
                  44.0Prepared
      pork products
                  
                  
                  36.3
                  
                  
                  
                  22.0Vegetables
      and Fruits
                  
                  
                  2.9
                  
                  
                  
                  1.5Total
                  
                  $
                  204.3
                  
                  
                  $
                  153.8Cost
      of SalesPork
      products
                  
                  $
                  177.0
                  
                  
                  $
                  133.5Vegetables
      and fruits
                  
                  
                  2.4
                  
                  
                  
                  1.2Gross
      Profit Margin:Pork
      products
                  
                  
                  12.1
                  %
                  
                  
                  12.3
                  %Vegetables
      and fruits
                  
                  
                  17.2
                  %
                  
                  
                  20.0
                  %


18


Item
2.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations




Disclosure
Regarding Forward-Looking Statements




The
statements contained in this Report with respect to our financial condition,
results of operations and business that are not historical facts are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). We intend such forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements
contained in Section 21E of the Exchange Act. Forward-looking statements can be
identified by the use of forward-looking terminology, such as “estimates,”
“projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the
negative thereof or other variations thereon, or by discussions of strategy that
involve risks and uncertainties. Management wishes to caution the reader of the
forward-looking statements that any such statements that are contained in
this Report reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors, including, but
not limited to, economic, competitive, regulatory, technological, key employee,
and general business factors affecting our operations, markets, growth,
services, products, licenses and other factors discussed in our other filings
with the Securities and Exchange Commission, and that these statements are only
estimates or predictions. No assurances can be given regarding the achievement
of future results, as actual results may differ materially as a result of risks
facing our company, and actual events may differ from the assumptions underlying
the statements that have been made regarding anticipated events.




These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties that may cause our actual results to be materially different from
any future results expressed or implied by us in those statements. Some of these
risks are described in “Risk Factors” in Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2009.




These
risk factors should be considered in connection with any subsequent written or
oral forward-looking statements that we or persons acting on our behalf may
issue. All written and oral forward looking statements made in connection with
this Report that are attributable to our company or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements. Given
these uncertainties, we caution investors not to unduly rely on our
forward-looking statements. We do not undertake any obligation to review or
confirm analysts’ expectations or estimates or to release publicly any revisions
to any forward-looking statements to reflect events or circumstances after the
date of this Report or to reflect the occurrence of unanticipated events.
Further, the information about our intentions contained in this Report is a
statement of our intention as of the date of this Report and is based upon,
among other things, the existing regulatory environment, industry conditions,
market conditions and prices, the economy in general and our assumptions as of
such date. We may change our intentions, at any time and without notice, based
upon any changes in such factors, in our assumptions or otherwise.





Overview




We are
principally engaged in the meat and food processing and distribution business in
the PRC. Currently, we have 13 processing plants located in Henan, Jilin
and Sichuan provinces and in Tianjin in the PRC. Our total production capacity
for chilled pork and frozen pork is approximately 1,504.9 metric tons per day,
based on an eight-hour working day, or approximately 541,760 metric tons on an
annual basis. We also have production capacity for prepared meats of
approximately 250 metric tons per eight-hour day, or approximately 90,000 metric
tons on an annual basis, and for fruits and vegetables of approximately 83.3
metric tons per eight-hour day, or approximately 30,000 metric tons on an annual
basis. We utilize state-of-the-art equipment in all of our slaughterhouses and
processing facilities.




We are investing approximately $61.0
million, not including the cost of land use rights, to build a production
facility, warehouse and distribution center, and research and development center
in Tianjin.  This facility will have a production capacity of
approximately 100,000 metric tons for chilled and frozen pork, of which 70% will
be for chilled pork and 30% for frozen pork, and 36,000 metric tons for prepared
foods. We put the new facility for chilled and frozen pork into use ahead of
schedule in January 2010.  After chilled and frozen pork production at
this new facility commenced, we terminated the lease for our existing production
facilities in Tianjin without material lease termination costs.We
expect to put the facility for prepared foods into operation in the fourth
quarter of 2010.


19




We have invested approximately $5.6
million to build an additional production facility in Changge City, Henan
province.  This facility is being designed with a production capacity
of 20,000 metric tons for food oil (pork oil).  We put this facility
into operation in April 2010.




We are
also investing approximately $6.3 million to further improve our facility in
Anyang, Henan province. We plan to improve the facility’s pre-cooling room and
equipment so as to increase its annual capacity from 63,000 metric tons
currently to 85,000 metric tons. After the expansion, chilled pork will account
for about 70% of the facility’s capacity, up from the current 60%. This
improvement project is scheduled to be completed in July 2010 and there is no
impact on our operations in Anyang.




Our
products are sold under the “Zhongpin” brand name. At March 31, 2010, our
customers included 29 international or domestic fast food companies in the PRC,
51 processing factories and 1,687 school cafeterias, factory canteens, army
posts and national departments. At such date, we also sold directly to 3,220
retail outlets, including supermarkets, within the PRC.




We have
established distribution networks in 20 provinces and four cities with special
legal status in the North, East, South and South Midland regions of the
PRC, and also have formed strategic business alliances with leading supermarket
chains and the catering industry in the PRC. In addition, we export products to
Europe, Russia, Hong Kong and other selected countries in Asia and South
Africa.




As of
March 31, 2010, we had 6,778 employees, of whom 5,111 were operating personnel,
1,203 were sales personnel, 109 were research and development personnel and 355
were administrative personnel.




Critical
Accounting Policies




Unless
otherwise noted, all translations from RMB to U.S. dollars were made at the
middle rate published by the People’s Bank of China, or the middle rate, as of
March 31, 2010, which was RMB6.8263 to $1.00. We make no representation that the
RMB amounts referred to in this Quarterly Report on Form 10-Q could have been or
could be converted into U.S. dollars at any particular rate or at all. On May 4,
2010, the middle rate was RMB6.8265 to $1.00.




Our
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles.  The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses.  We evaluate, on an on-going basis, our estimates for
reasonableness as changes occur in our business environment.  We base
our estimates on experience, the use of independent third-party specialists, and
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates under
different assumptions or conditions.




Critical
accounting policies are defined as those that are reflective of significant
judgments, estimates and uncertainties, and potentially result in materially
different results under different assumptions and conditions.  We
believe the following are our critical accounting policies:




Revenue
Recognition.  Revenues generated from the sale of various meat
products and vegetables and fruits are recognized when these products are
delivered to customers in accordance with previously-agreed-upon pricing and
delivery arrangements, and the collectability of these sales is reasonably
assured.  Since the products sold by us are primarily perishable and
frozen food products, the right of return is only for a few days and has been
determined to be insignificant by our management.  Accordingly, no
provision has been made for returnable goods.  Revenues presented on
our consolidated income statements are net of sales taxes.




20




AccountsReceivable. During the normal course of business, our policy is to
ask larger customers to make deposits in reasonable and meaningful amounts on a
case-by-case basis.  For certain newly-developed customers, we may
extend unsecured credit.




We
regularly evaluate and monitor the creditworthiness of each of our customers in
accordance with the prevailing practice in the meat industry and based on
general economic conditions in the PRC.  If any particular customer appears
to be delaying or deferring payments for our products, we generally request a
deposit from, or an increase in the deposits of, such customer.  Such
deposits are typically applied against the outstanding accounts receivable of
the applicable customer during the year.  As a result, we did not have
a bad debt allowance provided against any specific customer at March 31,
2010.




We
maintain a general policy of providing 100% allowance for doubtful accounts in
an amount equal to the aggregate amount of those accounts that are not collected
within one year plus an amount equal to 5% of the aggregate amount of accounts
receivable less than one year old.  After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance.




Inventories.  Inventories
are stated at the lower of cost, determined on a weighted average basis, and net
realizable value.  Work-in-progress and finished goods are composed of
direct material, direct labor and an attributable portion of manufacturing
overhead.  Net realizable value is the estimated selling price, in the
ordinary course of business, less estimated costs to complete and
dispose.




Plant, Property
and Equipment.  Plant, properties and equipment are recorded at
cost and are stated net of accumulated depreciation.  Depreciation
expense is determined using the straight-line method over the estimated useful
lives of the assets as follows:




Estimated LifePlants
      and buildings
                
                5-30
      yearsMachinery
      and equipment
                
                5-20
      yearsOffice
      furniture and equipment
                
                3-5
      yearsVehicles
                
                5
      years




Maintenance
and repairs are charged directly to expense as incurred, whereas improvements
and renewals are generally capitalized in their respective property
accounts.  When an asset is retired or otherwise disposed of, the cost
and applicable accumulated depreciation are removed and the resulting gain or
loss is recognized and reflected as a line item before operating
income.




Results
of Operations




In 2010,
we intend to continue to focus on the implementation of our strategic plan to
sustain the growth we have experienced since becoming a U.S. public company
in 2006 through the reverse acquisition of Falcon, a holding company for our
China-based subsidiaries. Over the next 12 months, we expect to continue to
expand our distribution channel and develop new markets. Through our aggressive
marketing campaign, we also expect to increase our brand awareness and customer
loyalty. We also intend to further streamline our supply chain management to
further advance and extend our unified, safe and efficient cold-chain logistics
system.  In March, 2010, our scientific laboratory for food quality
and processing, established in collaboration with Henan Agricultural University,
was designated by the Science & Technology Department of Henan Province as a
Key Laboratory, which is an important achievement for our quality assurance
system. The laboratory is equipped with modern scientific instruments and
integrated systems from North America and Asia and uses stringent testing and
measurement processes. We expect the designation as a Key Laboratory to
encourage outstanding scientists and engineers to join us, enhance our research
and development capabilities, accelerate our product and process improvements
and new product innovations, and serve as an exchange platform for technical
cooperation with universities, technical institutes, and food processors in
China and around the world. We also have invested in employee training and
development to help sustain our rapid and healthy growth while maintaining a
satisfactory profit margin.




21




Hog and
pork prices decreased approximately 10% in the first quarter of 2010 primarily
because the supply of hogs was higher than the market demand. The imbalance
between supply and demand was due to a limited outbreak of foot and mouth
disease in south China that affected the hog breeding industry. Zhongpin does
not source hogs from south China. As of the end of the first quarter, we are not
aware of any reports of new infections, so we believe the disease has been
controlled and the outbreak is over. We expect hog and pork prices to recover in
the near future.




Comparison
of Three Months Ended March 31, 2010 and 2009




Revenue. Total revenue
increased from $153.8 million for the three months ended March 31, 2009 to
$204.3 million for the three months ended March 31, 2010, which represented
an increase of $50.5 million, or approximately 33%. The increase in
revenues during the first quarter of 2010 was primarily due to increased
sales volume in our meat and meat products divisions resulting from the
effects of the continuing increases in the number of our retail channels,
geographic expansion and increased sales to chain restaurants, food service
providers and wholesalers and distributors in the PRC.  The following
table presents information regarding our sales by product division for the three
months ended March 31, 2010 and 2009.




Sales by Division
                      (unaudited)Three Months Ended
                      March 31, 2010
                    
                    
                    Three Months Ended
                      March 31, 2009Metric
                      Tons
                    
                    
                    Sales
                      Revenues
                      (in millions)
                    
                    
                    Average
                      Price/
                      Metric
                      Ton
                    
                    
                    Metric
                      Tons
                    
                    
                    Sales
                      Revenues
                      (in millions)
                    
                    
                    Average
                      Price/
                      Metric
                      TonPork
      and Pork ProductsChilled
      pork
                    
                    
                    64,418
                    
                    
                    $
                    114.7
                    
                    
                    $
                    1,781
                    
                    
                    
                    43,499
                    
                    
                    $
                    86.3
                    
                    
                    $
                    1,984Frozen
      pork
                    
                    
                    32,845
                    
                    
                    
                    50.4
                    
                    
                    
                    1,534
                    
                    
                    
                    24,077
                    
                    
                    
                    44.0
                    
                    
                    
                    1,827Prepared
      pork products
                    
                    
                    16,047
                    
                    
                    
                    36.3
                    
                    
                    
                    2,262
                    
                    
                    
                    9,530
                    
                    
                    
                    22.0
                    
                    
                    
                    2,308Vegetables
      and Fruits
                    
                    
                    3,952
                    
                    
                    
                    2.9
                    
                    
                    
                    734
                    
                    
                    
                    2,645
                    
                    
                    
                    1.5
                    
                    
                    
                    567Total
                    
                    
                    117,262
                    
                    
                    $
                    204.3
                    
                    
                    $
                    1,742
                    
                    
                    
                    79,751
                    
                    
                    $
                    153.8
                    
                    
                    $
                    1,929





The pork
market in the PRC is highly fragmented and in the markets where we sell our
products, no single supplier has a significant effect on the market price of
pork or related pork products. We have been pricing our products based on the
value of our brand, the quality of our products, hog prices in the applicable
period and pricing trends for similar products in the regions in which we
operate.  In the first quarter of 2010, we increased our sales of
chilled pork products by approximately $28.4 million over the amount of our
sales of such products in the first quarter of 2009. As shown in the table
above, our average price during the first quarter of 2010 was approximately
$1,781 per metric ton for chilled pork, compared to $1,984 during the first
quarter of 2009, a decrease of 10%.  The number of metric tons of
chilled pork sold during the first quarter of 2010 increased by 20,919, or 48%
from the first quarter of 2009.  Despite the decrease in average price
in the first quarter of 2010 as a result of market fluctuations, our total
revenue still increased due to successful capacity expansion, increased sales to
existing customers, and significantly increased volume of sales of our products
as we entered new geographic markets, expanded our points of sales and acquired
new customers.





In the
first quarter of 2010, we increased our sales of frozen pork products by
approximately $6.4 million over the amount of our sales of such products in the
first quarter of 2009. Our average price during the first quarter of 2010 was
approximately $1,534 per metric ton for frozen pork compared to $1,827 during
the first quarter of 2009, a decrease of 16%.  The number of metric
tons of frozen pork sold during the first quarter of 2010 increased by 8,768, or
36% from the first quarter of 2009.  Despite the decrease in average
price in the first quarter of 2010 as a result of market fluctuations, our total
revenue still increased due to successful capacity expansion, increased sales to
existing customers, and significantly increased volume of sales of our products
as we entered new geographic markets, expanded our points of sales and acquired
new customers.


22





In the
first quarter of 2010, we increased our sales of prepared pork products by
approximately $14.3 million over the amount of our sales of such products in the
first quarter of 2009. Our average price during the first quarter of 2010 was
approximately $2,262 per metric ton for prepared pork products compared to
$2,308 during the first quarter of 2009, a decrease of 2%. The number of metric
tons of prepared pork products sold during the first quarter of 2010 increased
by 6,517, or 68% from the first quarter of 2009.  This product
division is becoming more important to our business as customers increasingly
demand prepared pork products and are willing to pay higher average prices for
the convenience of such products. The average selling price of this product
division dropped only 2% compared to a 10% decrease from chilled pork division
and a 16% decrease from frozen pork division. We plan to gradually increase
sales from prepared pork products by building up our brand recognition and
expanding our capacities for this division.





The sales
of meat and vegetable products are closely related to the particular regional
markets in which our distribution channels are located. Therefore, the increase
in metric tons sold for the first quarter of 2010 was partly attributable to our
success in expanding our distribution channels. The following table shows the
changes in our distribution channels:




Numbers
      of Stores and Cities Generating Sales Volume
                          (unaudited)March
      31,
                        
                        
                        Net
                        
                        
                        Percentage2010
                        
                        
                        2009
                        
                        
                        Change
                        
                        
                        of ChangeShowcase
      stores
                        
                        
                        148
                        
                        
                        
                        135
                        
                        
                        
                        13
                        
                        
                        
                        10
                        %Branded
      stores
                        
                        
                        1,017
                        
                        
                        
                        970
                        
                        
                        
                        47
                        
                        
                        
                        5
                        %Supermarket
      counters
                        
                        
                        2,055
                        
                        
                        
                        1,992
                        
                        
                        
                        63
                        
                        
                        
                        3
                        %Total
                        
                        
                        3,220
                        
                        
                        
                        3,097
                        
                        
                        
                        123
                        
                        
                        
                        4.0
                        %First-tier
      cities
                        
                        
                        29
                        
                        
                        
                        29
                        
                        
                        
                        0
                        
                        
                        
                        0
                        %Second-tier
      cities
                        
                        
                        125
                        
                        
                        
                        111
                        
                        
                        
                        14
                        
                        
                        
                        13
                        %Third-tier
      cities
                        
                        
                        393
                        
                        
                        
                        337
                        
                        
                        
                        56
                        
                        
                        
                        17
                        %Total
      cities
                        
                        
                        547
                        
                        
                        
                        477
                        
                        
                        
                        70
                        
                        
                        
                        14.7
                        %




The
expansion in our distribution channels and geographical coverage has been a
significant factor in the increase in our sales volume. The following table
shows our revenues by distribution channel for the first quarter of
2010 and 2009, respectively.




Sales
      by Distribution Channel
                  (unaudited)March
      31,
                
                
                Net
                
                
                Percentage2010
                
                
                2009
                
                
                Change
                
                
                of ChangeRetail
      channels
                
                
                84.6
                
                
                $
                68.3
                
                
                $
                16.3
                
                
                
                24
                %Wholesalers
      and distributors
                
                
                62.2
                
                
                
                45.5
                
                
                
                16.7
                
                
                
                37
                %Restaurants
      and food services
                
                
                56.2
                
                
                
                39.5
                
                
                
                16.7
                
                
                
                42
                %Export
                
                
                1.3
                
                
                
                0.5
                
                
                
                0.8
                
                
                
                160
                %Total
                
                
                204.3
                
                
                $
                153.8
                
                
                $
                50.5
                
                
                
                33
                %




The
increase in sales to different distribution channels was mainly due to the
following factors:




·
            our
      production capacity has increased since we put new facilities into
      operation in 2009 and increased our utilization rate for all
      facilities;





·
            we
      have built up our brand image and brand recognition through general
      advertising display promotions and sales
  campaigns;


23





·
            we
      have increased the number of stores and other channels through which we
      sell our products; and





·
            we
      believe consumers are placing increased importance on food safety and are
      willing to pay higher prices for safe food
  products.




During
the three months ended March 31, 2010, revenues from export sales increased to
$1.3 million, which represented an increase of $0.8 million, or approximately
160%, as compared to the three months ended March 31, 2009.




Cost of Sales. Our cost of
sales primarily include our costs of raw materials, labor costs and overhead. Of
our total cost of sales, our cost of raw materials typically accounts for
approximately 96%, our overhead typically accounts for 2.5% and our labor costs
typically accounts for 1.5%, with slight variations from period to period. All
of our meat products are derived from the same raw materials, which are live
hogs. Our vegetable and fruit products are purchased from farmers located close
to our processing facility in Changge City, Henan province. As a result,
the purchasing costs of live hogs and vegetables and fruits represent
substantially all of our costs of raw materials. The increase in our cost of
sales was consistent with our increase in sales revenue.




Cost of Sales by Division
                      (unaudited)Three Months Ended
                      March 31, 2010
                    
                    
                    Three Months Ended
                      March 31, 2009Metric
                      Tons
                    
                    
                    Cost of Sales
                      (in millions)
                    
                    
                    Average
                      Price/
                      Metric
                      Ton
                    
                    
                    Metric
                      Tons
                    
                    
                    Cost ofSales
                      (in millions)
                    
                    
                    Average
                      Price/
                      Metric
                      TonPork
      and Pork ProductsChilled
      pork
                    
                    
                    64,418
                    
                    
                    $
                    102.1
                    
                    
                    $
                    1,585
                    
                    
                    
                    43,499
                    
                    
                    $
                    76.7
                    
                    
                    $
                    1,763Frozen
      pork
                    
                    
                    32,845
                    
                    
                    
                    46.3
                    
                    
                    
                    1,410
                    
                    
                    
                    24,077
                    
                    
                    
                    39.9
                    
                    
                    
                    1,657Prepared
      pork products
                    
                    
                    16,047
                    
                    
                    
                    28.6
                    
                    
                    
                    1,782
                    
                    
                    
                    9,530
                    
                    
                    
                    16.9
                    
                    
                    
                    1,773Vegetables
      and Fruits
                    
                    
                    3,952
                    
                    
                    
                    2.4
                    
                    
                    
                    607
                    
                    
                    
                    2,645
                    
                    
                    
                    1.2
                    
                    
                    
                    454Total
                    
                    
                    117,262
                    
                    
                    $
                    179.4
                    
                    
                    $
                    1,530
                    
                    
                    
                    79,751
                    
                    
                    $
                    134.7
                    
                    
                    $
                    1,689




Our gross
profit margin (gross profit divided by sales revenue) decreased from 12.4% for
the three months ended March 31, 2009 to 12.2% for the three months ended March
31, 2010. The slight decrease in our gross margin during the first quarter of
2010 was primarily due to (i) the increase in labor costs, (ii) the
increase in our depreciation expense resulting from the newly-built production
facilities that were put into service over the past year, and (iii) our
strategic decision to take steps to increase market share and utilization
rateof our
production capacity at a time when our production capacity increased due to the
opening of new production facilities.  As a result, our gross profit
margin was lower than the level we would expect to achieve once we fully
integrate our new production facilities and expand into new regional markets for
our products.  We intend to adjust our production levels and product
mix and the percentages of our sales through our different sales channels in the
coming quarters to increase our gross profit margin.




General and Administrative
Expenses. General and administrative expenses increased from
$4.6 million for the three months ended March 31, 2009 to
$6.1 million for the three months ended March 31, 2010, which represented
an increase of $1.5 million, or approximately 33%. As a percentage of
revenues, general and administrative expenses remained at 3.0% for the
three months ended March 31, 2009 and 2010.




24




The
increase in general and administrative expenses during the three months ended
March 31, 2010 was primarily the result of a $0.5 million increase in bad
debt provision due to the increase in accounts receivables, a $0.4 million
increase in depreciation due to the increase in fixed assets and a $0.4 million
increase in consulting fee.




Selling
Expenses. Selling expenses increased from $2.8 million for the
three months ended March 31, 2009 to $4.3 million for the three months
ended March 31, 2010, which represented an increase of $1.5 million, or
approximately 54%. The increase in selling expenses was primarily the
result of our increased sales of pork and pork products and was primarily due to
a $0.9 million increase in advertising and a $0.3 million
increase in transportation. As a percentage of revenue, selling expenses
increased from 1.8% for the three months ended March 31, 2009 to 2.1%
for the three months ended March 31, 2010.




InterestExpense(net of interest income). Interest expense net of
interest income decreased from $1.5 million for the three months ended March 31,
2009 to $1.4 million for the three months ended March 31, 2010, which
represented a decrease of $0.1 million, or approximately 7%. The decrease
in interest expense net of interest income was primarily due to lower interest
rates on loans and higher interest income from higher average cash
balances.




Other Income, Exchange Gainand Government Subsidies.
Other income, exchange gain and government subsidies increased from
$0.3 million for the three months ended March 31, 2009 to
$1.2 million for the three months ended March 31, 2010,which represented an
increase of $0.9 million, or approximately 300%. This increase was primarily due
to a new budget received from the PRC Ministry of Finance in the first quarter
of 2010 to a few selected enterprises in the locality, the objective of which is
to promote further growth and development of enterprises in the key
industries.




Income Taxes. The effective
tax rate in the PRC on income generated from the sale of prepared pork products
is 25% and there is no income tax on income generated from the sale of other
products, including chilled and frozen pork, and fruits and vegetable products.
The increase of $0.3 million in the provision for income taxes for the
three months ended March 31, 2010 over the three months ended March 31,
2009 resulted from the increase in revenue from prepared meat
products.




Segment
Information




Under
generally accepted accounting principles in the United States, we operate in
only one segment: meat production.  Our fruits and vegetables
operations, both financially and operationally, do not represent a significant
enough portion of our business to constitute a separate
segment.  However, our product lines have been divided into two
divisions: pork and pork products, and vegetables and fruits.




Our pork
and pork products division is involved primarily in the processing of live hogs
into fresh, frozen and processed pork products. Our pork and pork products
division markets its products domestically to our branded stores, food
retailers, foodservice distributors, restaurant operators and noncommercial
foodservice establishments, such as schools, hotel chains, healthcare
facilities, the military and other food processors, as well as to international
markets.




Our
vegetables and fruits division is involved primarily in the processing of fresh
vegetables and fruits. We contract with more than 100 farms in Henan province
and nearby areas to produce high-quality vegetable varieties and fruits suitable
for export. The proximity of the contracted farms to our operations ensures
freshness from harvest to processing. We contract to grow more than 20
categories of vegetables and fruits, including asparagus, sweet corn, broccoli,
mushrooms, lima beans, strawberries and capsicum.




25




The
following tables show our sales volume and the production volume in metric tons
by product division for the three months ended March 31, 2010 and 2009
and the percentage increases for each division between the periods.




Sales
      by Division
                  (in
      metric tons)Three
      Months Ended
                  March
      31,Net
      Change
                
                
                %
      Change2010
                
                
                2009
                
                
                2010/2009
                
                
                
                2010/2009(Unaudited)
                
                
                (Unaudited)Pork
      and Pork ProductsChilled
      pork
                
                
                64,418
                
                
                
                43,499
                
                
                
                20,919
                
                
                
                48
                %Frozen
      pork
                
                
                32,845
                
                
                
                24,077
                
                
                
                8,768
                
                
                
                36
                %Prepared
      pork products
                
                
                16,047
                
                
                
                9,530
                
                
                
                6,517
                
                
                
                68
                %Vegetables
      and Fruits
                
                
                3,952
                
                
                
                2,645
                
                
                
                1,307
                
                
                
                49
                %Total
                
                
                117,262
                
                
                
                79,751
                
                
                
                37,511
                
                
                
                47
                %




Production
      by Division
                  (in
      metric tons)Three
      Months Ended
                  March
      31,Net
      Change
                
                
                %
      Change2010
                
                
                2009
                
                
                2010/2009
                
                
                
                2010/2009(Unaudited)
                
                
                (Unaudited)Pork
      and Pork ProductsChilled
      pork
                
                
                64,385
                
                
                
                43,330
                
                
                
                21,055
                
                
                
                49
                %Frozen
      pork
                
                
                40,478
                
                
                
                29,449
                
                
                
                11,029
                
                
                
                37
                %Prepared
      pork products
                
                
                15,874
                
                
                
                10,725
                
                
                
                5,149
                
                
                
                48
                %Vegetables
      and Fruits
                
                
                3,899
                
                
                
                2,396
                
                
                
                1,503
                
                
                
                63
                %Total
                
                
                124,636
                
                
                
                85,900
                
                
                
                38,736
                
                
                
                45
                %




Additional
Operating Data




In
assessing our existing operations and planning our future growth and the
development of our business, management considers, among other factors, our
revenue growth and growth in sales volume by market segment, as well as our
sales by distribution channel and geographic market coverage.




The following table sets forth
information with respect to the number of products we offered, the number of
stores in our retail network and the number of provinces and cities in the PRC
in which we offered and sold our products at March 31, 2010 and
December 31, 2009, 2008 and 2007.




December
      31,March 31, 2010
                
                
                2009
                
                
                2008
                
                
                2007Number
      of products
                
                
                397
                
                
                
                392
                
                
                
                314
                
                
                
                270Number
      of retail stores
                
                
                3,220
                
                
                
                3,205
                
                
                
                3,061
                
                
                
                2,939Expansion
      of Market CoverageNumber
      of Provinces
                
                
                24
                
                
                
                24
                
                
                
                24
                
                
                
                24Number
      of first-tier cities
                
                
                29
                
                
                
                29
                
                
                
                29
                
                
                
                29Number
      of second-tier cities
                
                
                125
                
                
                
                120
                
                
                
                106
                
                
                
                93Number
      of third-tier cities
                
                
                393
                
                
                
                383
                
                
                
                324
                
                
                
                287




26




Liquidity
and Capital Resources




At March
31, 2010 and December 31, 2009, we had cash and cash equivalents of $56.4
million and $69.0 million, respectively. At March 31, 2010, our working capital
was approximately $42.4 million.




We have
established and implemented corporate policies to manage our cash flows
generated by our operating activities.  We have established strict
credit policies to manage the credit we give to our customers, and we give
different credit terms to different types of customers in different sales
channels.  For supermarket customers, the credit terms are generally
two to four weeks.  For showcase stores and branded stores, the credit
terms are generally cash sales within one week.  For food
distributors, the credit terms are generally two weeks.  For
restaurants and non-commercial customers, the credit terms are from one week to
one month.  These credit terms are subject to negotiation if requested
by our customers, but any adjustment must be approved by designated
management.  In general, we ask for credit terms from our
suppliers.  We generally pay for the hogs we purchase within one week
after the hogs pass our health and quality examinations.




For the
three months ended March 31, 2010, net cash provided by operating activities was
$7.1 million, which represented an increase of $26.0 million
as compared to the net cash used by operating activities of
$18.9 million for the same period of 2009. Of the $26.0 million
increase, net income accounted for $3.5 million, non-cash items accounted
for $1.7 million and changes in operating assets and liabilities accounted for
$20.7 million. Of the non-cash items, depreciation and amortization
accounted for $1.1 million of change due to the fact that more plants, equipment
and machinery were put into use.




Cash flow
from changes in operating assets and liabilities increased approximately
$20.7 million, as compared to the negative cash flow of $30.8 million from
changes in operating assets and liabilities for the same period of the prior
year. Of the $20.7 million increase, $6.7 million was attributable to the
change of cash flow from inventories due to the fact that we intentionally built
up our inventories in the first quarter of 2010 to take advantage of lower
hog prices during that period. The price of hogs dropped approximately 10% in
the first quarter and we expect such price to increase by the middle of
2010.  As a result, we increased our lower-cost inventories to
potentially benefit the operating results of our future quarters.  Of
the remaining increase, $17.8 million was attributable to the change of cash
flow from purchase deposits due to the fact that we paid more purchase deposits
in the first quarter of 2009 to purchase land use rights to support our
expansion. We had paid all purchase consideration and recorded the land use
rights on the balance sheet.




Net cash
used in investing activities was $17.5 million for the three months ended March
31, 2010, which represented an increase of $13.4 million as compared
to the net cash of $4.1 million used by investing activities for the same period
of the prior year. We spent $16.3 million more on the costs of
construction for new production facilities during the current period and $1.5
million less on equipment and machinery.




Net cash
used by financing activities was $2.2 million during the three months ended
March 31, 2010, a decrease of $31.4 million compared to the net cash
provided by financing activities of $29.2 million for the same period of the
prior year. We received $23.9 million more in net proceeds from long-term bank
loans. We repaid $19.9 million short-term bank loans and $4.8 million
of bank notes during the current period. Through these financing
activities, we optimized our debt structure with more long-term bank loans and
less short-term bank loans.




At March
31, 2010, Henan Zhongpin had short-term bank in the aggregate amount of $68.0
million with interest rates ranging from 5.04 % to 5.31% per annum, as
follows.




27




Bank
                              
                              Maximum
                                Credit
                                Availability
                              
                              
                              Amount
                                Borrowed
                              
                              
                              InterestRate
                              
                              MaturityDateShort-term
      LoansIndustrial
      and Commercial Bank of China
                              
                              $
                              21,973,836
                              
                              
                              $
                              —China
      Everbright Bank
                              
                              
                              7,324,612
                              
                              
                              
                              —Bank
      of Luoyang
                              
                              
                              4,394,767
                              
                              
                              
                              4,394,767
                              
                              
                              
                              5.31
                              %
                              01/17/2011Bank
      of Communications
                              
                              
                              5,859,690
                              
                              
                              
                              —China
      Construction Bank
                              
                              
                              29,298,449
                              
                              
                              
                              4,394,767
                              
                              
                              
                              5.31
                              %
                              06/10/2010China
      CITIC Bank
                              
                              
                              36,623,061
                              
                              
                              
                              4,394,767
                              
                              
                              
                              5.31
                              %
                              01/19/2011Agriculture
      Development Bank of China
                              
                              
                              102,544,570
                              
                              
                              
                              6,166,937
                              
                              
                              
                              5.31
                              %
                              06/27/20109,082,519
                              
                              
                              
                              5.31
                              %
                              12/30/2010Shanghai
      Pudong development Bank of China
                              
                              
                              17,579,069
                              
                              
                              
                              —Bank
      of China
                              
                              
                              14,649,224
                              
                              
                              
                              —China
      Merchants Bank
                              
                              
                              27,101,065
                              
                              
                              
                              5,859,690
                              
                              
                              
                              5.31
                              %
                              06/04/20102,929,845
                              
                              
                              
                              5.31
                              %
                              06/22/20104,394,767
                              
                              
                              
                              5.31
                              %
                              02/01/2011Guangdong
      Development Bank
                              
                              
                              10,254,457
                              
                              
                              
                              5,859,690
                              
                              
                              
                              5.31
                              %
                              09/28/2010Xuchang
      Commercial Bank
                              
                              
                              4,394,767
                              
                              
                              
                              —China
      Minsheng Bank
                              
                              
                              7,324,612
                              
                              
                              
                              —Rabobank
      Nederland
                              
                              
                              14,649,224
                              
                              
                              
                              2,929,845
                              
                              
                              
                              5.31
                              %
                              05/28/2010Zhongyuan
      Trust Co., Ltd.
                              
                              
                              
                              
                              
                              
                              17,579,069
                              
                              
                              
                              5.04
                              %
                              03/31/2011City
      Finance –short-term
                              
                              
                              
                              
                              
                              
                              29,299
                              
                              
                              
                              0.00
                              %
                              ExtendableTotal
                              
                              
                              
                              
                              
                              $
                              68,015,962Long-term
      Loan-Current portionCanadian
      Government Transfer Loan
                              
                              
                              
                              
                              
                              
                              145,671
                              
                              
                              
                              6.02
                              %
                              05/15/2010Agriculture
      Bank of China
                              
                              
                              73,246,122
                              
                              
                              
                              1,171,938
                              
                              
                              
                              5.76
                              %
                              03/18/2011Total
                              
                              
                              
                              
                              
                              $
                              1,317,609Long-term
      LoansChina
      Construction Bank
                              
                              
                              29,298,449
                              
                              
                              
                              7,324,612
                              
                              
                              
                              5.40
                              %
                              06/10/2011Agriculture
      Bank of China
                              
                              
                              73,246,122
                              
                              
                              
                              16,846,609
                              
                              
                              
                              5.76
                              %
                              12/27/201410,400,949
                              
                              
                              
                              5.40
                              %
                              02/03/2013China
      Minsheng Bank
                              
                              
                              7,324,612
                              
                              
                              
                              7,324,612
                              
                              
                              
                              5.40
                              %
                              05/06/2011China
      Merchants Bank
                              
                              
                              22,706,298
                              
                              
                              
                              13,916,764
                              
                              
                              
                              5.76
                              %
                              11/26/2014Rabobank
      Nederland
                              
                              
                              14,649,224
                              
                              
                              
                              5,859,689
                              
                              
                              
                              5.40
                              %
                              06/15/20115,859,689
                              
                              
                              
                              5.40
                              %
                              07/09/2011Canadian
      Government Transfer Loan
                              
                              
                              
                              
                              
                              
                              1,343,428
                              
                              
                              
                              *
                              
                              05/15/2042Total
                              
                              
                              
                              
                              
                              $
                              68,876,352







* 58% of
the principal amount of this loan bears interest at the rate of 6.02% per annum
and the remaining principal amount of this loan is interest free.  All
repayments are applied first to the interest-bearing portion of this
loan.


28





Of our
outstanding short-term loans at March 31, 2010, $13.5 million
aggregate principal amount of loans was secured by our land and plants located
in the PRC and $14.6 million aggregate principal amount of loans was guaranteed
by Huanghe Enterprises Group Co., Ltd., a group corporation based in Henan
province that is not affiliated with our company or with any of our subsidiaries
(“Huanghe Group”).





In
February 2010, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 71 million
($10.4 million). All amounts borrowed under the loan agreement bear interest at
a floating rate that is based on the prime rate published by the People’s Bank
of China for loans with the same or similar terms on the drawdown date (5.4% per
annum on March 31, 2010) and are payable on February 3,
2013.  Borrowings under the loan agreement are guaranteed by the land
use right, property and plant of Luoyang Zhongpin.





In March
2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of
China pursuant to which Henan Zhongpin borrowed RMB 53 million ($7.8 million).
All amounts borrowed under the loan agreement bear interest at a floating rate
that is based on the prime rate published by the People’s Bank of China for
loans with the same or similar terms on the drawdown date (5.76% per annum on
March 31, 2010) and are payable on December 27, 2014.  Borrowings
under the loan agreement are guaranteed by the land use right, property and
plant of Luoyang Zhongpin.





In March
2010, Henan Zhongpin entered into a loan agreement with China Merchants Bank
pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.0 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.76% per annum on March
31, 2010) and are payable on November 26, 2014.  Borrowings under the
loan agreement are guaranteed by Luoyang Zhongpin.





In
December 2009, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million
($10.3 million). All amounts borrowed under the loan agreement bear
interest at a floating rate that is based on the prime rate published by the
People’s Bank of China for loans with the same or similar terms on the drawdown
date (5.76% per annum on March 31, 2010) and are payable on December 27,
2014.  Borrowings under the loan agreement are guaranteed by the land
use right, property and plant of Luoyang Zhongpin.




29


In
November 2009, Henan Zhongpin entered into a loan agreement with China Merchants
Bank pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.0 million).
All amounts borrowed under the loan agreement bear interest at a floating rate
that is based on the prime rate published by the People’s Bank of China for
loans with the same or similar terms on the drawdown date (5.76% per annum on
March 31, 2010) and are payable on November 26, 2014.  Borrowings
under the loan agreement are guaranteed by Luoyang Zhongpin.





In
November 2009, Henan Zhongpin entered into a sale-leaseback agreement with CMB
Financial Leasing Co., Ltd. (“CMB Leasing”) pursuant to which we sold to CMB
Leasing equipment with a book net value of $8.3 million for $5.9 million and
leased such equipment back. The lease payments for this equipment are paid
on a monthly basis over a three-year period and consist of a fixed payment based
upon a 36-month amortization of the purchase price plus an interest component
that is based upon the rate announced from time to time by the People’s Bank of
China for three-year loans.  At March 31, 2010, the monthly rental fee
under the agreement was $528,049, which included an interest component
calculated at the rate of 4.91% per annum. Henan Zhongpin has the right at the
end of the lease term to repurchase all of the equipment for a nominal purchase
price.





In
November 2009, our subsidiary Luoyang Zhongpin Food Co., Ltd. entered into a
sale-leaseback agreement with CMB Leasing pursuant to which we sold to CMB
Leasing equipment with a book net value of $6.8 million for $4.4 million and
leased such equipment back. The lease payments for this equipment are paid on a
monthly basis over a three-year period and consist of a fixed payment based upon
a 36-month amortization of the purchase price plus an interest component that is
based upon the rate announced from time to time by the People’s Bank of China
for three-year loans.  At March 31, 2010, the monthly rental fee under
the agreement was $396,037, which included an interest component calculated at
the rate of 4.91% per annum. Henan Zhongpin has the right at the end of the
lease term to repurchase all of the equipment for a nominal purchase
price.





In
November 2009, our subsidiary Zhumadian Zhongpin Food Co., Ltd. entered into a
sale-leaseback agreement with De Lage Landen (China) Co., Ltd. (“De Lage
Landen”) pursuant to which we sold to De Lage Landen equipment with a book net
value of $5.9 million for $6.0 million and leased such equipment back. The lease
payments for this equipment are paid on a monthly basis over a three-year period
and consist of a fixed payment based upon a 36-month amortization of the
purchase price plus an interest component that is based upon the rate announced
from time to time by the People’s Bank of China for three-year
loans.  At March 31, 2010, the monthly rental fee under the agreement
was $176,482, which included an interest component calculated at the rate of
5.31% per annum. Henan Zhongpin has the right at the end of the lease term to
repurchase all of the equipment for a nominal purchase price.





In June
2009, Henan Zhongpin entered into a mutual guarantee agreement with Huanghe
Group. Under the agreement, Henan Zhongpin agreed to guarantee bank loans of
Huanghe Group in an amount up to $8.8 million and Huanghe Group agreed to
guarantee Henan Zhongpin’s bank loans in an amount up to $8.8 million. The
agreement expires in June 2010. In September 2009, Henan Zhongpin entered into a
mutual guarantee agreement with Huanghe Group. Under the agreement, Henan
Zhongpin agreed to guarantee bank loans of Huanghe Group in an amount up to $5.9
million and Huanghe Group agreed to guarantee Henan Zhongpin’s bank loans in an
amount up to $5.9 million. The agreement expires in September
2010.  At the expiration of the agreements, each party will remain
obligated under its guarantee for any loans of the other party that are
outstanding on the date of expiration of the agreements.  At March 31,
2010, Henan Zhongpin had outstanding guarantees for $14.6 million of Huanghe
Group’s bank loans under the agreements.  All of the bank loans of
Huanghe Group guaranteed by Henan Zhongpin will mature within the next 6
months.





In June
2009, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.3 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.4% per annum on March 31,
2010) and are payable on June 10, 2011.  Borrowings under the loan
agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.





In May
2009, Henan Zhongpin entered into a loan agreement with China Minsheng Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.3 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.4% per annum on March 31,
2010) and are payable on May 6, 2011. Borrowings under the loan agreement are
guaranteed by our wholly-owned subsidiary, Yongcheng Zhongpin Food Co.,
Ltd.


30





On
November 5, 2008, Henan Zhongpin entered into a sale-leaseback agreement with
CMB Leasing pursuant to which we sold to CMB Leasing equipment with a book net
value of $6.6 million for $4.6 million and leased such equipment back. The lease
payments for this equipment are paid on a monthly basis over a three-year period
and consist of a fixed payment based upon a 36-month amortization of the
purchase price plus an interest component that is based upon the rate announced
from time to time by the People’s Bank of China for three-year
loans.  At March 31, 2010, the monthly rental fee under the agreement
was $138,859, which included an interest component calculated at the rate of
5.4% per annum. Henan Zhongpin has the right at the end of the lease term to
repurchase all of the equipment for a nominal purchase price.





In May
2008, Henan Zhongpin entered into a credit agreement with Rabobank Nederland
Shanghai Branch that provided for a three-year term loan of up to RMB 80 million
($11.7 million). On June 10, 2008, the first 50% of the long-term loan was
funded by the bank. The remaining 50% of the long-term loan was drawn down by
Henan Zhongpin on July 10, 2008. Amounts currently outstanding under the
long-term loan bear interest at the rate published by the People’s Bank of China
for loans with the same or similar terms. The accrued interest on this loan is
payable on a quarterly basis. Of the outstanding principal under the long-term
loan, 25% is payable 24 months after the first drawdown date (June 10, 2008),
37.5% is payable 30 months after the first drawdown date and the balance is
payable 36 months after the first drawdown date.





Borrowings
under the term loan agreement are guaranteed by our subsidiaries, Anyang
Zhongpin Food Co., Ltd. and Zhumadian Zhongpin Food Co., Ltd., are secured by
mortgages on our prepared pork production facilities located in Changge City,
Henan province and are subject to various financial and non-financial covenants,
including a debt-to-net-worth ratio, a debt-to-EBITDA ratio, an interest
coverage ratio, a required minimum tangible net worth, restrictions on
investments in fixed assets and financial assets, on inter-company indebtedness
and on consolidated contingent liabilities and a requirement that a minimum
percentage of Henan Zhongpin’s consolidated EBITDA be generated by Henan
Zhongpin and the guarantors. Henan Zhongpin also is prohibited from paying
dividends in an amount in excess of 50% of its retained earnings during the term
of the credit facility.





In May
2002, Henan Zhongpin entered into a loan agreement with Bank of Communications,
Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the
amount of $2,504,969 from the Canadian government. Under the terms of the loan
agreement, 58% of the principal amount ($1,452,882) of this loan bears interest
at the fixed rate of 6.02% per annum and remaining principal amount of this loan
is interest free. The loan is repayable in a fixed amount of $145,671, which
includes both principal and interest, that is payable on a semi-annual basis
through May 15, 2042. Borrowings under the loan agreement are guaranteed by
the Financing Department, Henan province.





We
believe our existing cash and cash equivalents, together with our available
lines of credit ($234.6 million at March 31, 2010), will be sufficient to
finance our investment in new facilities, operating requirements and anticipated
capital expenditures of approximately $74.2 million over the next 12
months. We intend to use such funds over the next 12 months to fund our capacity
expansion and the construction of supporting facilities and to supplement our
working capital requirements to enable us to strengthen our market position and
accelerate our growth. We intend to satisfy our short-term debt obligations
that mature over the next 12 months through additional short-term bank loans, in
most cases by rolling the maturing loans into new short-term loans with the same
lenders as we have done in the past. We also we intend to optimize our loan
structure by replacing certain of our short-term indebtedness with additional
long-term debt.





Contractual
Obligations





For
information on our contractual obligations, please refer to Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Contractual Commitments.” as
presented in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009.




31


Off-Balance
Sheet Arrangements





We do not
have off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.




Inflation
and Seasonality




While
demand for our products in general is relatively high before the Chinese New
Year in January or February each year and lower thereafter, we do not believe
our operations have been materially affected by inflation or
seasonality.




Item
3.    Quantitative and Qualitative Disclosures About Market
Risk




Disclosures About Market
Risk. We may be exposed to changes in financial market conditions in the
normal course of business. Market risk generally represents the risk that losses
may occur as a result of movements in interest rates and equity prices. We
currently do not use financial instruments in the normal course of business that
are subject to changes in financial market conditions.




Currency Fluctuations and Foreign
Currency Risk. Substantially all of our operations are conducted in the
PRC, with the exception of our export business and limited overseas purchases of
raw materials.  Most of our sales and purchases are conducted within
the PRC in RMB, which is the official currency of the PRC.  As a
result, the effect of the fluctuations of exchange rates is considered minimal
to our business operations.




Substantially
all of our revenues and expenses are denominated in RMB. However, we use the
U.S. dollar for financial reporting purposes. Conversion of RMB into foreign
currencies is regulated by the People’s Bank of China through a unified floating
exchange rate system. Although the PRC government has stated its intention to
support the value of RMB, there can be no assurance that such exchange rate will
not again become volatile or that RMB will not devalue significantly against the
U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S.
dollar terms, of our net assets and income derived from our operations in the
PRC.




Interest Rate Risk. We do not
have significant interest rate risk as the interest we pay on substantially all
of our debt obligations is calculated at a fixed rate in accordance with the
terms of such indebtedness.




Credit Risk. We have not
experienced significant credit risk, as most of our customers are long-term
customers with superior payment records. Our receivables are monitored regularly
by our credit managers.




Item
4.    Controls and Procedures




Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the
period covered by this report.  Based on such evaluation, our chief
executive officer and chief financial officer concluded that, as of the end of
such period, our disclosure controls and procedures were effective to ensure
that information that we are required to disclose in reports that we file or
submit under the Exchange Act was recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure.




There
were no changes in our internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.


32





Part
II – Other Information





Item
1.     Legal Proceedings





None.





Item
1A.  Risk Factors





During
the three months ended March 31, 2010, there were no material changes to the
risk factors previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2009.





Item
2.    Unregistered Sales of Equity Securities and Use of
Proceeds





(a)           None.





(b)           Not
Applicable.





(c)           None.





Item
3.    Defaults Upon Senior Securities





Not Applicable.





Item
4.   (Removed and Reserved)





Item
5.   Other Information





(a)           None.





(b)           None.





Item
6.   Exhibits





The
      exhibits required by this item are set forth on the Exhibit Index attached
      hereto.


33





Signatures





Pursuant
to the requirements of the Securities Exchange Act of 1934, we have duly caused
this report to be signed on our behalf by the undersigned thereunto duly
authorized.





Zhongpin
      Inc.(Company)Date:  May
      10, 2010By:
            /s/ Xianfu ZhuXianfu
      ZhuChief
      Executive OfficerBy:
            /s/ Feng WangFeng
      WangChief
      Financial Officer


34


Exhibit
Index





Exhibit
              Number
            
            Exhibit Title31.1*
            
            Certification
      of our Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2*
            
            Certification
      of our Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1*
            
            Certification
      of our Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2*
            
            Certification
      of our Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.








*
            Filed
      herewith





35