Edgar Filing: China Agri-Business, Inc.

China Agri-Business, Inc.

Consolidated Balance Sheets

		March 31,		December 31,
		2008		2007
		(Unaudited)		(Audited)
Assets
Current Assets
Cash and cash equivalents	$	6,376,366	$	5,984,448
Accounts receivable, net of allowance for doubtful
accounts of $8,557 and $23,991, respectively		33,656		65,118
Inventory		77,616		60,582
Other receivables		7,131		6,855
Prepaid expenses		2,401		5,735
Total Current Assets		6,497,170		6,122,738
Property, plant and equipment, net		273,961		276,000
Investment in Tienwe Technology		855,660		822,540
Intangible assets, net		71,733		73,554
Total Assets	$	7,698,524	$	7,294,832

Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued liabilities	$	160,999	$	166,200
Total Current Liabilities		160,999		166,200

Stockholders' Equity
Undesignated preferred stock, par value $.001 per share; authorized
4,900,000 shares; none issued		-		-
Common stock par value $.001 per share; authorized 100,000,000 shares,
issued and outstanding 12,958,574 and 12,958,574 shares, respectively (Includes 300,000 shares being issued pursuant to the automatic conversion of series A preferred stock in October 2007. See Note 7).		12,959		12,959
Additional paid-in capital		4,150,636		4,150,636
Retained earnings		2,425,201		2,308,873
Accumulated other comprehensive income		948,729		656,164
Total stockholders' equity		7,537,525		7,128,632
Total Liabilities and Stockholders' Equity	$	7,698,524	$	7,294,832

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

F-1

China Agri -Business, Inc.

Consolidated Statements of Operations

	Three Months Ended
	March 31,
		2008		2007
		(Unaudited)		(Unaudited)
Sales of products	$	339,444	$	564,430
Cost of goods sold		103,591		179,656
Gross profit		235,853		384,774

Selling, general and administrative expenses		124,434		183,309
Income from operations		111,419		201,465
Interest income		4,909		1,037
Income before income taxes		116,328		202,502
Income taxes		-		-
Net income	$	116,328	$	202,502

Earnings per common share:
Basic	$	0.01	$	0.02
Diluted	$	0.01	$	0.02

Weighted average number of common shares
used to compute earnings per common share:
Basic		12,958,574		12,278,774
Diluted		12,958,574		12,578,774

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

F-2

China Agri -Business, Inc.

Consolidated Statements of Stockholders' Equity

												Accumulated
						Additional			Retained			Other
	Common Stock					Paid-in			Earnings			Comprehensive
		Shares		Amount		Capital			(Deficit)			Income		Total

Balance, December 31, 2006		12,278,774	$	12,279	$	3,629,709		$	1,449,991		$	232,272	$	5,324,251
Sales of Units in public offering		379,800		380		379,420			-			-		379,800
Costs relating to the public offering		-		-		(158,193	)		-			-		(158,193	)
Conversion of Series A preferred stock		300,000		300		99,700			-			-		100,000
Deemed dividend relating to beneficial conversion feature
of Series A preferred stock		-		-		200,000			(200,000	)		-		-
Net income for the year ended December 31, 2007		-		-		-			1,058,882			-		1,058,882
Foreign currency translation adjustment		-		-		-			-			423,892		423,892
Balance, December 31, 2007		12,958,574		12,959		4,150,636			2,308,873			656,164		7,128,632
Unaudited:
Net income for the three months ended March 31, 2008		-		-		-			116,328			-		116,328
Foreign currency translation adjustment		-		-		-			-			292,565		292,565
Balance, March 31, 2008		12,958,574	$	12,959	$	4,150,636		$	2,425,201		$	948,729	$	7,537,525

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

F-3

China Agri-Business, Inc.

Consolidated Statements of Cash Flows

	Three Months Ended
	March 31,
		2008			2007
		(Unaudited)			(Unaudited)

Operating activities
Net income	$	116,328		$	202,502
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment		12,881			10,108
Amortization of intangible assets		4,684			359
Changes in operating assets and liabilities:
Accounts receivable, net		31,462			(19,890	)
Other receivables		(276	)		4,736
Inventory		(17,034	)		(10,333	)
Prepaid expenses		3,334			20,453
Accounts payable and accrued liabilities		(5,201	)		(3,776	)
Net cash provided by operating activities		146,178			204,159
Investing activities
Loans receivable collections		-			296,773
Property, plant and equipment additions		-			(10,457	)
Net cash provided by investing activities		-			286,316

Effect of exchange rate changes on cash and cash equivalents		245,740			44,666

Increase in cash and cash equivalents		391,918			535,141

Cash and cash equivalents, beginning of period		5,984,448			3,785,535


Cash and cash equivalents, end of period	$	6,376,366		$	4,320,676

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

F-4

CHINA AGRI-BUSINESS, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS

China Agri-Business, Inc. (“China Agri”) was incorporated in the State of Maryland on December 7, 2005. On October 31, 2006, China Agri effectuated a 2.032 to 1 forward stock split. All share and per share amounts have been retroactively adjusted to reflect the stock split.

On March 16, 2006, China Agri executed a Corporate Finance Advisory Services Agreement (the “China Agri Advisory Agreement”) with Friedland Corporate Investor Services LLC (“Friedland”). The China Agri Advisory Agreement provided that Friedland would assist China Agri in forming a Wholly-Owned Foreign Enterprise (“Meixin”) under the laws of the People’s Republic of China (the “PRC”), in acquiring control of a PRC business enterprise, and in becoming publicly traded in the United States. As consideration for these services, China Agri issued 1,327,877 shares of China Agri common stock to 7 Friedland designees (including 10,000 shares to the then sole director of China Agri) and paid Friedland 750,000 PRC Renminbi (“RMB”) (or $98,610 translated at the year 2007 average exchange rate) upon the establishment of a trading market in the United States for China Agri’s shares of common stock.

On March 24, 2006, China Agri formed Mei Xin Agri Technology (Shaanxi) Co., Ltd. (“Meixin”). Meixin is a wholly-owned subsidiary of China Agri and a limited liability company organized under the laws of PRC. Pursuant to measures passed by the stockholders of Shaanxi Xin Sheng Centennial Agriculture and Technology Co., Ltd. (“Xinsheng”), a corporation formed under the laws of the PRC on April 22, 2002, on April 10, 2006, a Management Entrustment Agreement dated April 18, 2006 between Meixin and Xinsheng, and a Stock Purchase Agreement dated April 22, 2006 between China Agri and Xinsheng (collectively, the “Transaction”), Meixin acquired management control of Xinsheng, in the same manner as if it were a wholly owned subsidiary under PRC law, and China Agri issued 10,950,897 shares of China Agri common stock, representing approximately 89% of the 12,278,774 shares of China Agri common stock outstanding after the Transaction, to a trustee of a trust for the benefit of the Xinsheng stockholders. The Transaction has been accounted for as a “reverse merger”, since the stockholders of Xinsheng owned a majority of China Agri’s common stock immediately following the Transaction. Xinsheng is deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that are reflected in the financial statements prior to the Transaction are those of Xinsheng and are recorded at the historical cost basis of Xinsheng, and the consolidated financial statements after completion of the Transaction include the assets and liabilities of China Agri, Meixin, and Xinsheng (collectively, the “Company”), historical operations of Xinsheng, and operations of China Agri and Meixin from the date of the Transaction.

Xinsheng’s primary activities are the manufacture, marketing and sale of organic and environmentally friendly “Green” agricultural enhancement products in China.

F-5

NOTE 2 - INTERIM FINANCIAL STATEMENTS

The unaudited financial statements as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10 - Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of March 31, 2008 and the results of operations and cash flows for the periods ended March, 2008 and 2007. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three month period ended March 31, 2008 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2008. The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2007 included in our Form 10 -KSB filed on March 28, 2008.

NOTE 3 - INVENTORY

Inventory consists of:		March 31,		December 31,
		2008		2007
		(Unaudited)
Raw materials	$	69,146	$	52,953
Finished goods		5,111		5,342
Other		3,359		2,287

Total inventory	$	77,616	$	60,582

F-6

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consist of:

		March 31,			December 31,
		2008			2007
		(Unaudited)
Building	$	19,167		$	18,425
Transportation equipment		281,996			271,081
Manufacturing equipment and machinery		128,782			123,798
Office and computer equipment		17,111			16,448
		447,056			429,752
Less accumulated depreciation		(173,095	)		(153,752	)
Property, plant and equipment, net	$	273,961		$	276,000

Depreciation expense was $12,881 and $10,108 for the three months ended March 31, 2008 and 2007, respectively.

NOTE 5 - INVESTMENT IN TIENWE TECHNOLOGY INC.

On July 29, 2005, Xinsheng acquired a 13.95% equity interest in Tienwe Technology Inc. (“Tienwe”), a PRC company, for 6,000,000 RMB ($855,600 and $822,540 translated at the March 31, 2008 and December 31, 2007 exchange rate, respectively). The investment is carried at cost. Tienwe shares are not quoted or traded on any securities exchange or in any recognized over-the-counter market; accordingly, it is not practicable to estimate the fair value of the investment. Tienwe sells aerospace products to military industry customers.

NOTE 6 - INTANGIBLE ASSETS, NET

Intangible assets, net consist of:

		March 31,		December 31,
		2008		2007
		(Unaudited)
Product rights	$	87,705	$	84,310
Patent		14,261		13,709
Trademark		1,617		1,555
Total		103,583		99,574

Less accumulated amortization		31,850		26,020

Intangible assets, net	$	71,733	$	73,554

F-7

NOTE 6 - INTANGIBLE ASSETS, NET (Continued)

The product rights were acquired by Xinsheng in December 2006 from an unrelated third party and relate to six registered fertilizer products.

The patent was acquired by Xinsheng in 2002 from three related parties (one of the parties was an officer, director and significant stockholder of the Company at the time of the exchange) in exchange for a total of 16.67% of the issued and outstanding shares of Xinsheng common stock. The patent (and contributed capital) at the date of the exchange on April 22, 2002 has been reflected at the transferors’ cost. The patent is for Zero-tillage Fertilizing Equipment (PRC Patent Number 330398), which is a type of seeding machine, the use of which reduces soil erosion.

Estimated amortization expense for each of the Company’s succeeding years ending March 31, 2009, 2010, 2011 and 2012 is $19,129, $19,129, $19,129 and $14,346, respectively.

NOTE 7 - REDEEMABLE SERIES A PREFERRED STOCK

On May 31, 2006, China Agri sold 10,000 Units of securities to an investor at a price of $10.00 per Unit, or $100,000 total. Each Unit was comprised of one share of Series A preferred stock and one warrant to purchase one share of common stock at $1.50 per share exercisable through May 31, 2009. Each share of Series A preferred stock was not entitled to any voting rights, except that the consent of the holders of at least 51% of the outstanding shares of Series A preferred stock were necessary to permit the authorization or issuance or any increase in the authorized or issued amount of any class or series of capital stock ranking equal to or senior to the Series A preferred stock.

The Series A preferred stock (the “Series A Stock”) was not entitled to any dividends. In the event of a voluntary or involuntary liquidation of the Company, the holders of Series A Stock were entitled to be paid out of the assets of the Company available for distribution an amount in cash equal to $10.00 per share before any payment was made to the holders of common stock or other capital stock of the Company, the terms of which do not specifically provide that such securities rank senior to or on a parity with the Series A Stock as to rights on liquidation. The holders of Series A Stock were not entitled to receive liquidation payments until liquidation payments were made in full to the holders of capital stock ranking senior to the Series A Stock as to rights on liquidation. The holders of Series A Stock were to share ratably in liquidation payments with the holders of shares of the Company’s capital stock ranking on a parity with the Series A Stock as to rights on liquidation.

Each share of Series A Stock was automatically convertible into shares of the Company’s common stock at a conversion price of one-third of the price per share of the common stock paid for by the purchasers of common stock in a Public Offering pursuant to a registration statement under the Securities Act of 1933, as amended (the “Act”). The number of shares of common stock issuable upon one share of Series A Stock in such event was the quotient obtained by dividing $10 by the conversion price.

F-8

NOTE 7 - REDEEMABLE SERIES A PREFERRED STOCK (Continued)

Upon completion of the sale of common stock for $1.00 per share pursuant to the public offering which closed on October 11, 2007 (see note 8), each outstanding share of Series A Stock automatically converted into 30 shares of common stock (300,000 shares of common stock total). The Company recorded as a dividend and as an increase in additional paid-in capital, the intrinsic value of the beneficial conversion feature (the “BCF”). The intrinsic value of the BCF was the difference between the $300,000 fair value of the common stock issued upon conversion and the $100,000 proceeds received, or $200,000.

NOTE 8 - PUBLIC OFFERING

In 2006, China Agri entered into an Underwriting Agreement with Spencer Edwards, Inc. (the “Underwriter”), a NASD-registered broker-dealer, in connection with the Company’s public offering (the “Public Offering”) of up to 1,000,000 Units of China Agri securities at $1.00 per Unit, or $1,000,000 total. Each Unit consisted of one share of common stock, one warrant to purchase one share of common stock at $1.50 per share exercisable for three years from the date of issuance, and one warrant to purchase one share of common stock at $2.00 per share exercisable for three years from the date of issuance only if the $1.50 Unit Warrant was exercised. The Underwriter made no commitment to purchase (or take down) all or any part of the Units, but agreed to use its best efforts on an “all or none” basis to sell 300,000 Units within a period of 90 days (which may have been extended for up to an additional 60 days upon the mutual consent of China Agri and the Underwriter) following the effective date of the related Form SB-2 registration statement, which effective date was July 13, 2007. Until 300,000 Units were sold, all funds received by the Underwriter from subscribers were placed in an escrow account. In the event that 300,000 Units were not sold within the 90 day period (150 day period, if extended), the funds deposited with the escrow agent were to be returned in full to subscribers.

On October 11, 2007, China Agri completed its public offering. 379,800 units of the Company’s securities were sold at a price of $1.00 per unit for gross proceeds of $379,800. Net proceeds to the Company, after deducting offering costs of $158,193, were $221,607.

Pursuant to the Underwriting Agreement, the underwriter was paid $30,384 (8%) commissions and a $11,394 (3%) non-accountable expense allowance. Additionally, China Agri issued the Underwriter 37,980 warrants, each exercisable into one share of common stock at a price of $1.00 per share from January 8, 2008 to July 13, 2012.

F-9

NOTE 9 - WARRANTS

The Company has issued warrants (exercisable into shares of common stock) to investors and the Underwriter as part of its sale of Series A preferred stock and as part of its public offering. Changes in the warrants outstanding are as follows:

	Three Months Ended March 31, 2008	Year Ended December 31, 2007
	(Unaudited)

Outstanding at beginning of period	807,580	10,000
Warrants issued	-	797,580
Warrants exercised	-	-
Warrants expired	-	-
Outstanding at end of period	807,580	807,580

Exercisable at end of period	807,580	807,580

Warrants outstanding at March 31, 2008 consist of:

Date Issued	Expiration Date	Number of Warrants		Weighted Average Exercise Price
May 31, 2006	May 31, 2009	10,000	$	1.50
October 11, 2007	October 10, 2010	379,800		1.50
October 11, 2007	October 10, 2010	379,800		2.00
October 11, 2007	October 10, 2010	37,980		1.00
Total		807,580	$	1.71

NOTE 10 - RESTRICTED NET ASSETS

Relevant PRC statutory laws and regulations permit payments of dividends by Xinsheng only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, PRC laws and regulations require that annual appropriations of 10% of after-tax income should be set aside prior to payments of dividends as a reserve fund. As a result of these PRC laws and regulations Xinsheng is restricted in its ability to transfer a portion of its net assets in the form of dividends, loans or advances, which restricted portion amounted to approximately $4,120,000 and $4,105,000 at March 31, 2008 and December 31, 2007, respectively.

F-10

NOTE 11 - INCOME TAXES

Xinsheng is subject to a PRC 25% standard enterprise income tax. However, due to its agricultural industry status, the National Tax Bureau in Xi’an High-Tech Development Zone granted Xinsheng three annual exemptions from this tax. The first exemption was granted for the year ended August 31, 2006, the second exemption was granted and adjusted to the year ended December 31, 2007, and the third exemption was granted for the year ending December 31, 2008.

At March 31, 2008 and December 31, 2007, the Company had an unrecognized deferred United States income tax liability relating to undistributed earnings of Xinsheng. These earnings are considered to be permanently invested in operations outside the United States. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. Determination of the amount of the unrecognized deferred United States income tax liability with respect to such earnings is not practicable.

The Company did not have any significant temporary differences relating to deferred tax liabilities as of March 31, 2008 and December 31, 2007.

The provision for income taxes differs from the amount computed by applying the statutory United States federal income tax rate to income (loss) before income taxes. Reconciliations follow:

	Three Months Ended
		March 31,			March 31,
		2008			2007
Expected tax at 35%	$	40,715		$	70,876
Tax effect of unutilized losses of China Agri and Meixin		13,341			-
Effect of PRC income tax exemption granted to Xinsheng		(38,611	)		(66,826	)
Permanent difference relating to Xinsheng's earnings
to be permanently invested in operations outside the United States		(15,445	)		(4,050	)
Actual provision for income taxes	$	-		$	-

NOTE 12 - SEGMENT INFORMATION

The Company operates in one industry segment - the manufacturing and sale of agricultural enhancement products. Substantially all of the Company’s identifiable assets at March 31, 2008 and December 31, 2007 were located in the PRC. Net sales for the periods presented were all derived from PRC customers.

F-11

NOTE 13 - CORPORATE FINANCE ADVISORY SERVICES AGREEMENTS

On September 3, 2005, Xinsheng executed a Corporate Finance Advisory Services Agreement (the “Xinsheng Advisory Agreement”) with Friedland. The agreement provided that Friedland would provide certain corporate finance advisory services to Xinsheng designed to result in Xinsheng’s shares (or a successor entity’s shares) becoming publicly-traded in the United States. As consideration for these services, Xinsheng paid Friedland a total of $211,678 ($86,772 in 2005 and $124,906 in 2007)

On March 16, 2006, as described in Note 1, China Agri also executed a Corporate Finance Advisory Services Agreement (the “China Agri Advisory Agreement”) with Friedland. Under this agreement, China Agri paid Friedland $98,610 in 2007 which was due upon the establishment of a trading market in the United States for China Agri’s shares of common stock (which occurred October 17, 2007). In addition, China Agri issued 1,327,877 shares of China Agri common stock to 7 Friedland designees (including 10,000 shares to the then sole director of China Agri).

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Lease Agreements

Xinsheng leases its office space (approximately 7300 square feet) at an annual rent of 366,390 RMB ($52,250 translated at the March 31, 2008 exchange rate) under a lease with a three year term expiring March 31, 2011.

Xinsheng leases its operating space (approximately 2600 square feet) at an annual rent of 38,500 RMB ($5,490 translated at the March 31, 2008 exchange rate) under a lease expiring March 31, 2010.

China Agri utilizes office space provided by one of its directors at no cost.

For the three months ended March 31, 2008 and 2007, rental expenses for all operating leases amounted to $15,896 and $17,007, respectively.

At March 31, 2008, future minimum rental commitments under all non-cancelable operating leases are:

Year ending March 31,

2009	$	57,740
2010		57,740
2011		52,250
Total	$	167,730

F-12

NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)

PRC Risks

Substantially all of the Company’s business operations are conducted in the PRC and governed by PRC laws and regulations. Meixin and Xinsheng are generally subject to laws and regulations applicable to foreign investments and foreign-owned enterprises. Because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The Company receives substantially all of its revenues in RMB, which is currently not a freely convertible currency. Under existing PRC foreign exchange regulations, payment of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.

F-13

Item 1A. Risk Factors.

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

	For the quarterly period ended March 31, 2008

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

	For the transition period from __________ to __________

Maryland		20-3912942
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

	·	Innovations or new products by our competitors;
	·	Severe weather or other natural catastrophes in the PRC;
	·	Regulatory developments in the PRC or actions taken by PRC regulatory agencies with respect to our products, manufacturing process or sales and marketing activities;
	·	Regulatory developments in the United States with respect to securities of companies with business activities in the PRC;
	·	The success of our research and development efforts;
	·	Any intellectual property infringement action, or any other litigation, involving us;
	·	Actual or anticipated fluctuations in our operating results;
	·	Our ability to remain quoted on the OTCBB;
	·	Sales of large blocks of our common stock;
	·	Sales of our common stock by our executive officers, directors and significant stockholders; and
	·	The loss of any of our key personnel.

	EXHIBIT INDEX
Exhibit No.	Description
31.1	Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302.
31.2	Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302.
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

		March 31, 2008			March 31, 2007
Sales	$	339,444		$	564,430
Less: Cost of Goods Sold		103,591			179,656
Gross Profit	$	235,853		$	384,774
Gross Profit Margin		69.48	%		68.17	%
Net Income	$	116,328		$	202,502


	CHINA AGRI-BUSINESS, INC.

	/s/ Liping Deng
	Liping Deng
	President, Chief Executive Officer, Director (Principal Executive Officer)

	/s/ Xiaolong Zhou
	Xiaolong Zhou
	Chief Financial Officer (Principal Accounting and Financial Officer)