Unassociated Document
As filed with the Securities and Exchange Commission on June 16, 2009
Registration No. 333-157346

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
(Amendment No. 2)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

China Agri-Business, Inc.
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of incorporation or organization)

2870
20-3912942
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer Identification Number)

In the People’s Republic of China:
Finance Plaza, 9 th Floor, Hi-Tech Road No. 42, Hi-Tech Industrial Development Zone, Xi-An, China 710068
(86) 29-88222938

In the United States:
11 East 86th Street, New York, New York 10028
(212) 348-5600
 
 
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Michael Segal
11 East 86th Street, New York, New York 10028
(212) 348-5600
 
 
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
Jeffrey Rinde, Esq.
Blank Rome LLP
The Chrysler Building, 405 Lexington Avenue
New York, NY 10174-0208 U.S.A.
Tel: (212) 885-5000

As soon as practicable after the effective date of this Registration Statement
(Approximate date of commencement of proposed sale to the public)

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company:

Large accelerated filer o
   
Accelerated filer o
Non-accelerated filer o
   
Smaller reporting company x
 
Title of each class of securities to be registered
  
 
Amount to be
registered 
   
Proposed
maximum
offering
price per
share (5)
      
Proposed
maximum
aggregate offering
price
      
Amount of
registration fee
  
Common stock underlying convertible notes, par value $0.001 per share (1)
  
1,000,000 shares
  
$
0.14
    
$
140,000
    
$
5.50
  
Common stock underlying investor warrants, par value $0.001 per share (2)
  
500,000 shares
  
$
0.14
    
$
70,000
    
$
2.75
  
Common stock underlying placement agent warrants, par value $0.001 per share (3)
  
80,000 shares
    
0.14
    
$
11,200
    
$
0.44
  
Common stock underlying underwriter warrants, par value $0.001 per share (4)
  
37,980 shares
  
$
0.14
    
$
5,317.20
    
$
0.21
  
                             
Total
  
1,617,980 shares
  
$
0.14
    
$
226,517.20
    
$
8.90
  
 
(1) Represents shares of common stock underlying convertible promissory notes.

(2) Represents shares of common stock underlying investor warrants.

(3) Represents shares of common stock underlying placement agent warrants.

(4) Represents shares of common stock underlying underwriter warrants.

(5) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the closing price as reported on the OTC Bulletin Board on February 6, 2009.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.


SUBJECT TO COMPLETION, dated June 16, 2009

PROSPECTUS

China Agri-Business, Inc.

Up to 1,617,980 Shares of Common Stock

This Prospectus relates to the sale by the selling security holders listed herein of up to 1,617,980 shares of common stock of China Agri-Business, Inc. (“China Agri” or the “Company”). The common stock is issuable upon conversion of the notes and exercise of the investor warrants which were purchased by the selling security holders in a private placement (the “Private Placement”). For a complete description of the Private Placement please see the section entitled “Description of Private Placement of Convertible Notes and Warrants”, below). The Common Stock being registered also includes shares underlying warrants issued to placement agents in connection with the Private Placement and with our initial public offering completed in 2007 (the “Public Offering”).

The shares being registered include the following shares of common stock: (i) 500,000 shares (the “Investor Warrant Shares”) underlying Series C warrants issued to investors that are exercisable at $1.50 per share, subject to adjustment (the “Investor Warrants”), (ii) 1,000,000 shares (the “Conversion Shares”) underlying convertible notes issued to investors convertible at $0.50 per share, subject to adjustment (the “Notes”), (iii) 80,000 shares (the “Placement Agent Warrant Shares”) underlying warrants issued to the placement agent (the “Placement Agent Warrants”) in connection with the Private Placement, and (iv) (iii) 37,980 shares (the “Underwriter Warrant Shares”) underlying warrants issued to the underwriter in connection with the Public Offering (the “Underwriter Warrants”).

For purposes of consistency throughout this prospectus, the Investor Warrants, Underwriter Warrants and Placement Agent Warrants may collectively be referred to as the “Warrants”, and the shares issuable upon exercise of the Warrants may collectively be referred to as the “Warrant Shares”.
 
The Conversion Shares and Warrant Shares may be offered by the selling security holders at fixed prices, at the then prevailing market prices at the time of sale, at varying prices, or in negotiated transactions.  See “Plan of Distribution”.
 
China Agri will not receive any proceeds from the sale of the shares of common stock offered by the selling security holders to the public. However, China Agri will receive proceeds from the exercise of the investor warrants, as well as from the exercise of the placement agent and underwriter warrants. China Agri has agreed to pay all of the costs of this offering, excluding commissions and discounts regarding the sale of the common stock by the selling security holders.

Brokers or dealers effecting transactions in the shares should confirm the registration of these securities under the securities laws of the states in which such transactions occur or the existence of an exemption from such registration.

Certain selling security holders and any participating broker-dealers may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), and any commissions or discounts given to any such broker-dealer may be regarded as underwriting commissions or discounts under the Securities Act. See “Selling Security holders” and “Plan of Distribution”.

Investing in the common stock of China Agri involves a high degree of risk. You should invest in the common stock only if you can afford to lose your entire investment. See “Risk Factors” beginning on page 4.

The information in this prospectus is incomplete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this Prospectus is ______________, 2009.


TABLE OF CONTENTS
Prospectus Summary
3
The Offering
3
Risk Factors
4
Forward Looking Statements
2
Business
 
Management's Discussion and Analysis of Financial Condition or Plan of Operations
14
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Dividend Policy
22
Selling Security Holders
23
Management
 
Certain Relationships and Related Transactions
 
Plan of Distribution
33
Description of Capital Stock
34
Legal Matters
34
Experts
35
Where You Can Find Additional Information
35
Consolidated Financial Statements
F-1
 
1

ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with any information or to make any representations about us, the selling security holders, the securities or any matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us or any selling stockholder.

The selling stockholders are offering to sell shares of our common stock, including shares they may acquire upon conversion of their notes or exercise of their warrants, only in jurisdictions where offers and sales are permitted. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy the securities in any circumstances under which the offer or solicitation is unlawful.

The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Neither the delivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus. The prospectus will be updated and updated prospectuses made available for delivery to the extent required by the federal securities laws.

Currency, exchange rate, “China” and other references

Unless otherwise noted, all currency figures in this prospectus are in U.S. dollars. References to "yuan" or "RMB" are to the Chinese yuan, which is also known as the renminbi. According to the currency exchange website www.xe.com, on January 16, 2009, $1.00 was equivalent to approximately 6.84 yuan.

References in this prospectus to the “PRC” or “China” are to the People’s Republic of China.

In this prospectus, unless otherwise specified, the words “Company,” “China Agri”, “we,” “us,” and “our,” refer collectively to China Agri-Business, Inc., Mei Xin Agri Technology (Shaanxi) Co., Ltd., and Shaanxi Xin Sheng Centennial Agricultural and Technology Co., Ltd., our operating company in the People’s Republic of China (the “PRC” or “China”).

FORWARD-LOOKING STATEMENTS

This Prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may", "expect", "plans", "intends", "anticipate", "believe", "estimate" and "continue" or similar words and are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. You should read statements that contain these words carefully because they discuss our future expectations contain projections of our future results of operations or of our financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed above in the section captioned "Risk Factors", as well as any cautionary language in this Prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described as risk factors and elsewhere in this Prospectus could have a material adverse effect on our business, operating results and financial condition.

2

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus.

Our Business

China Agri-Business, Inc., through its operating company in China, manufactures and sells non-toxic fertilizer, bactericide and fungicide products used for farming in the People’s Republic of China (the “PRC”). Crops grown with the use of our products are eligible to qualify for the “AA Green Food” rating administered by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC. The green food rating system consists of an “A” rating and a more stringent “AA” rating. The “AA” rating indicates that the crops contain minimal chemical residue from fertilizers (However, our products themselves do not bear the “AA green food” designation).

Our executive offices in the PRC are located at Finance Plaza, 9 th Floor, Hi-Tech Road No. 42, Hi-Tech Industrial Development Zone, Xi-An, China 710068. Our executive offices in the United States are located at 11 East 86th Street, New York, New York 10028. Our web site address is http://www.chinaagri-business.com. Information contained on our web site is not a part of this Prospectus.

Corporate Structure

China Agri-Business, Inc. is a holding company with no operations other than acting as a holding company for its wholly owned subsidiary, Mei Xin Agri Technology (Shaanxi) Co., Ltd. (“Meixin”), a limited liability company and a wholly-owned foreign enterprise (“WOFE”) organized under the laws of the PRC. Meixin acts as a management company for our operating business in the PRC, Shaanxi Xin Sheng Centennial Agricultural and Technology Co., Ltd. (“Xinsheng”), in accordance with the terms of a management entrustment agreement between Meixin and Xinsheng. Meixin controls Xinsheng's business and management, is entitled to the proceeds of Xinsheng's business and is obligated to fund Xinsheng’s operations, including any losses. China Agri and Meixin do not own any equity rights in Xinsheng.  See Item 1. Business for a more detailed description of our corporate structure and corporate history.

Financial Summary

Sales for the year ended December 31, 2008 totaled $2,922,385, a decrease of $115,029, or 3.8% as compared to sales of $3,037,414 for the year ended December 31, 2007.

Gross profit for the year ended December 31, 2008 was $2,104,913, an increase of $32,460, or 1.6%, as compared to gross profit of $2,072,453 for the year ended December 31, 2007.

Net income for the year ended December 31, 2008 was $1,345,339, an increase of 27.1%, or $286,457, as compared to net income of $1,058,882 for the year ended December 31, 2007.

As of December 31, 2008, 85% of the Company’s assets consist of cash and cash equivalents, as compared to 82% as of December 31, 2007. As of December 31, 2008, our cash and cash equivalents amounted to $8,312,636, an increase of $2,328,188 as compared to $5,984,448 as of December 31, 2007.

The foregoing financial summary should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and accompanying notes included in this prospectus.

The Offering
    
     
Shares of common stock offered by the selling security holders
  
Up to 1,617,980 shares of common stock, including (i) 500,000 Investor Warrant Shares (ii) 80,000 Placement Agent Warrant Shares, (iii) 37,980 Underwriter Warrant Shares and (iv) 1,000,000 Conversion Shares. Assuming the full conversion of all of the Notes, and the full exercise of the Investor Warrants and the Placement Agent Warrants, the shares being registered would represent approximately 11% of our outstanding common stock. (1)
     
Common stock to be outstanding after the offering
  
Up to 14,576,554 shares, assuming the conversion of all of the Notes, and the exercise of all of the Warrants. (1)
     
Use of proceeds
  
China Agri will not receive any proceeds from the sale of the shares of common stock offered by the selling security holders to the public. However, China Agri will receive proceeds from any cash exercise of the Warrants by selling security holders. Any such proceeds will be used to support the Company's expansion plans and for working capital.
 
3
 
OTCBB Ticker Symbol
  
CHBU

(1) The above information regarding common stock to be outstanding after the offering is based on 12,958,574 shares of common stock outstanding as of  March 31 , 2009 and assumes the subsequent exercise of all of the Notes and Warrants by the selling security holders.

Description of  Private Placement of Convertible Notes and Warrants
 
On January 8, 2009, we completed a private placement with two accredited investors consisting of 3% unsecured convertible notes in an aggregate principal amount of $500,000 and series C warrants to purchase an aggregate of 500,000 shares of the Company’s common stock. We received net proceeds of approximately $431,500, which the Company plans to use to pursue the expansion of its manufacturing and distribution operations and for general working capital and business purposes.

The notes mature two years from the date of issuance, on September 29, 2010, and bear interest at the rate of 3% per annum, payable annually in cash or in shares common stock, subject to approval of the holder. Any interest which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum. Any principal which is not paid when due shall bear interest at the rate of eight percent (8%) per annum. The notes are convertible at the option of the holder into common at a conversion price of $0.50 per share. The conversion price is subject to adjustment upon the occurrence of stock splits, combinations, dividends, and subsequent offerings, as set forth in the notes.

Subject to effectiveness of the registration statement, the Company shall have the right to prepay the notes at 110% of the outstanding principal amount any time prior to the maturity date, and upon thirty (30) days prior written notice to the holders.

The series C warrants have a term of three years, expiring on September 29, 2011, and an exercise price of $1.50 per share. The Series C warrants are exercisable into shares of common stock on a one to one basis at an exercise price of $1.50 per share. In addition to receiving shares of common stock, upon exercise of a series C warrant, each holder shall also be issued a series D warrant entitling its holder to purchase additional shares of common stock in an amount equal to the number of Series C warrants exercised. The series D warrants, if issued, shall have a term of three years and an exercise price of $2.00 per share. The shares that would be issuable upon exercise of any series D warrants are not covered by this registration statement. The exercise price of the Warrants is subject to adjustment upon the occurrence of stock splits, combinations, dividends, and subsequent offerings, as set forth in the Warrants. Upon termination of any unexercised Series C warrants, the warrant holders would not receive any Series D warrants, any shares underlying the Series C or Series D warrants, or any other securities.

The Company may call for the termination of any unexercised portion of the series C warrants upon consummation of a subsequent offering by the Company of not less than $7.5 million in gross proceeds, and upon thirty (30) days written notice to the holders.

In connection with the Private Placement we entered into registration rights agreements with the investors pursuant to which we have agreed to prepare and file a registration statement with the Securities and Exchange Commission not later than 60 calendar days after the final closing. The registration statement shall seek to register for resale, in the amounts set forth in the Registration Rights Agreement: (i) the Warrant Shares issuable upon exercise of the Warrants, and (ii) the Conversion Shares issuable upon conversion of the Notes.

If we fail to file such registration statement within the 60 calendar day deadline, or if the registration statement is not declared effective within 120 days from the filing date, we are subject to liquidated damages payments in an amount equal to two percent (2%) of the initial principal amount of the Notes per month, subject to a maximum of twenty four percent (24%).

In connection with the Private Placement, the placement agent received a cash commission of $40,000 and an expense allowance of $25,000. In addition, the placement agent received warrants to purchase 80,000 shares of common stock at an exercise price of $1.00 per share for a term of three years.

The Company believes that this private placement is exempt from registration under the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder.

RISK FACTORS
 
An investment in our common stock involves significant risks. Before deciding to invest in shares of our common stock, investors should carefully consider and all other information set forth herein, including  the following risks, which represent all  known material risks. If any of the events or developments described below occurs, our business, financial condition and results of operations may suffer. In that case, the value of our common stock may decline and investors could lose all or part of their investment.

Our business operations are conducted entirely in the PRC. Because China’s economy and its laws, regulations and policies are different from those typically found in the west and are continually changing, we face certain risks, as summarized below.
 
4

RISKS RELATED TO OUR BUSINESS:

We Have A Limited Operating History And We Operate In A Highly-Competitive Industry And Our Failure To Compete Effectively May Adversely Affect Our Ability To Generate Revenue.

Xinsheng, our operating company in the PRC, commenced operations in 2004. Accordingly, we are subject to the risks and challenges inherent in the establishment of a new business enterprise. Unanticipated problems, expenses, and delays are frequently encountered in establishing a new business and marketing and developing products. These include, but are not limited to, competition, the need to develop customers and market expertise, market conditions, sales, marketing and governmental regulation.

We are principally engaged in the manufacture and marketing of organic biochemical agricultural application products and we face competition from numerous other companies. Many of our competitors have greater financial resources, a longer operating history, and a larger customer base, than we do. We may be unsuccessful in our attempts to compete, which would have a material adverse impact on our business and financial condition.

We Rely On A Contractual Arrangement With Xinsheng For Our Operations In China, Which May Not Be As Effective In Providing Control Over Xinsheng As Direct Ownership.

China Agri-Business, Inc. is a holding company with no operations other than acting as a holding company for Meixin and Xinsheng, and raising capital for their operations. China Agri and Meixin do not own any equity rights in Xinsheng. At present, neither China Agri-Business nor Meixin have any existing or planned business activities other than acting as a holding company and management company, respectively, for Xinsheng.

We operate our business in China through a contractual agreement called a Management Entrustment Agreement between Xinsheng and our subsidiary in China, Meixin. All of our business in China is conducted through, and all of our revenues are generated by, Xinsheng. We have no equity control over Xinsheng.

The Management Entrustment Agreement terminates upon the earlier of: (i) the termination date of Xinsheng’s business, (ii) mutual agreement by Xinsheng and Meixin to terminate the Agreement, or (iii) Meixin acquiring a greater than 51% equity interest in Xinsheng’s shares.

If the Management Entrustment Agreement is terminated, our ability to conduct our business would be compromised. In addition, if Xinsheng fails to perform under the Management Entrustment Agreement, we may have to rely on legal remedies under Chinese law, which we cannot be sure would be available.

Due to uncertainties regarding the interpretation of PRC laws, we cannot be sure that, in the future, the PRC government will view the contractualarrangement with Xinsheng to be in compliance with PRC law.   If we are determined not to be in compliance, the PRC government could levy fines, revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our business, corporate structure or operations, or impose additional conditions or requirements, or take other regulatory or enforcement actions against us that could be harmful to our business.

We May Not Be Able To Effectively Control And Manage Our Planned Growth.

We have limited operational, administrative and financial resources, which may be inadequate to sustain the growth we want to achieve. If our business and markets grow and develop, it will be necessary for us to finance and manage expansion accordingly. In addition, we may face challenges in managing our expanding product offerings and in integrating any businesses we acquire with our own. Such growth would place increased demands on our existing management, employees and facilities. Our failure to meet these demands could interrupt or adversely affect our operations and cause production backlogs, longer product development time frames and administrative inefficiencies.

Our Business Is Dependent Upon Our Brand Recognition And Trademarks.

Our trademarked brands have gained recognition in the PRC. However, the protection of intellectual property rights in the PRC may not be as effective as those in the U.S. or other countries. The unauthorized use of our brands could harm our business and competitive position. We cannot guarantee that counterfeiting or imitation of our products will not occur in the future or that we will be able to detect it and resolve it effectively. Any related litigation could be time consuming, costly, and unsuccessful.

We May Be Subject to Intellectual Property Infringement Claims.

We also cannot guarantee that our products will not infringe patents, copyrights or other intellectual property rights held by third parties. Third parties may initiate litigation against us alleging infringement of their proprietary rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing products or license the infringed or similar technology on a timely basis, our business could be harmed. In addition, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.

The potential consequences for intellectual property infringement under Chinese law include the following: the Company may become the subject of a court order or decree publicly denouncing the infringing activity; the Company may be required to indemnify the infringed party for losses caused by the infringing activity; confiscation/seizure of the Company’s assets and income derived from the infringing activity, and; potential criminal liability.

5

We Do Not Own Any Patents Related To Our Products.

The patent application process in China requires patent applicants to disclose substantial information regarding the subject matter of the patent application. In addition, patent applications in China are published and become part of the public record.  Accordingly, we do not own any patents related to our products because applying for patent protection would reveal our proprietary methods and techniques and subject us to increased risk of infringement.However, we may nevertheless face severe pricing pressure from copycat products if our competitors are able to copy and implement our proprietary methods and techniques.
We May Not Be Able To Hire And Retain Qualified Personnel.

Competition for senior management and other key employees is intense, and the pool of qualified candidates is limited. We may not be able to retain the services of our senior executives or key employees, which could materially and adversely affect our future growth.
 
We Do Not Presently Maintain Fire, Theft, Product Liability Or Any Other Property Insurance, Which Leaves Us With Exposure In The Event Of Loss Or Damage To Our Properties Or Claims Filed Against Us.

We do not maintain fire, theft, product liability or other insurance of any kind. We bear the economic risk with respect to loss of or damage or destruction to our property and to the interruption of our business as well as liability to third parties for damage or destruction to them or their property that may be caused by our personnel or products. Such liability could be substantial and the occurrence of such loss or liability may have a material adverse effect on our business, financial condition and prospects. While product liability lawsuits in the PRC are rare, and we have never experienced significant failure of our products, there can be no assurance that we would not face liability in the event of the failure of any of our products.

RISK RELATED TO DOING BUSINESS IN THE PRC:

Our Success Depends Upon The Development Of The PRC's Agricultural Industry.

The PRC is currently the world's most populous country and one of the largest producers and consumers of agricultural products. Despite the Chinese government's emphasis on agricultural self-sufficiency, inadequate port facilities and lack of warehousing and cold storage facilities may impede the growth of the domestic agricultural trade. We rely on local farmers in the PRC to purchase our products, which are generally purchased under a cash-on-delivery basis or on credit. Accordingly, any difficulties farmers in the PRC experience in selling their produce could reduce the demand for our products and hinder the ability of the farmers to pay us on a timely basis.

Changes In The Policies Of The PRC Government Could Have An Adverse Effect On Our Business.

Policies of the PRC government can have significant effects on the economic conditions of the PRC. Although the PRC government has been pursuing economic reform policies and transitioning to a market-oriented economy, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic and social conditions. Our business could be adversely affected by changes in PRC government policies, including but not limited to changes in policies relating to taxation, currency conversion, imports and exports, and ownership of private enterprises.

PRC Laws And Regulations Governing Our Current Business Operations Are Sometimes Vague And Subject to Interpretation, And Any Changes In PRC Laws And Regulations May Have A Material And Adverse Effect On Our Business.

There are substantial uncertainties regarding the interpretation, application and enforcement of PRC laws and regulations, including but not limited to the laws and regulations governing our business. These laws and regulations are sometimes vague and are subject to future changes, and their official interpretation and enforcement by the various branches of the PRC government may involve substantial uncertainty. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict with certainty what effect existing or new PRC laws or regulations may have on our business. The PRC legal system does not have the same level of transparency as in the United States. In addition, there is less published guidance regarding PRC laws as compared to laws in the United States. Accordingly, prior rulings and interpretations of PRC laws may not necessarily carry the same precedential value as in the United States.

Demand For Our Products May Decrease If The PRC Government Changes The Requirements For The “Green Food” Rating.

Crops that are grown using our products may be considered as “all-natural,” “organic,” or “green”, and accordingly may qualify for the “AA Green Food” rating, which is administered by the Green Food Development Center of the PRC Ministry of Agriculture. Should the PRC government change the current Green Food rating standards, crops grown with our products may not qualify for the Green Food rating, which would adversely affect our business.

6

We Are Required To Obtain Fertilizer Registration Certificates For Our Products From The PRC Government That Are Subject To Annual Renewal.

In the PRC, manufacturers of fertilizers and related products must obtain a government approval known as a fertilizer registration certificate. Since 2004, we have obtained temporary registration certificates from the PRC’s Ministry of Agriculture for each of our primary products which authorize us to manufacture and distribute our agricultural application products throughout the PRC. Each temporary certificate is reviewed by the PRC’s Ministry of Agriculture on an annual basis, until such time as we are eligible to receive permanent certificates. There is no assurance that the temporary certificates will be renewed or that we will become eligible for permanent certificates.

Xinsheng’s Tax Exemption in the PRC is Subject to Annual Renewal And May Not Be Granted In The Future.

Xinsheng is subject to a 25% standard enterprise income tax in the PRC. However, due to Xinsheng’s agricultural related activities, the National Tax Bureau in Xi’an High-Tech Development Zone has granted Xinsheng annual exemptions from this tax for the years ending December 31, 2007 and 2008. We have applied for a tax exemption for 2009 and we expect that this application will be approved.

However, there is no assurance that we will continue to receive the tax exemption in future years. Without the tax exemption, our financial results would be materially and adversely affected. For purposes of comparison, had we been subject to the 25% tax, our operating cash flow and net income for the years ended December 31, 2008 and 2007 would each have been reduced by approximately $387,600 and $349,400, respectively.

Our Business Is Subject To Severe Weather Conditions, Disease, And Other Natural Catastrophes In China.

Our products are used for agricultural purposes, and accordingly our business is exposed to the risk of severe weather conditions, disease, and other natural catastrophes in the PRC. Natural catastrophes may include hail storms, floods, droughts, windstorms, earthquakes, fires, insect infestations, disease and other events, each of which tends to be unpredictable.

Cold weather and other unusual weather conditions, particularly during or prior to the spring plowing season, can significantly affect the purchasing decisions of the Company’s customers, and can have a material adverse effect on our financial results, as we experienced during 2008.

The Recent Economic Downturn May Materially And Adversely Affect Our Business.

The Chinese economy has experienced a slowing growth rate due to a number of factors, including but not limited to instability in the global financial markets, the appreciation of the RMB as an inflationary factor, and economic and monetary policies adopted by the Chinese government aimed at preventing overheating of the Chinese economy and inflation.

We cannot predict how long the downturn will last, the timing of any subsequent recovery, or how much of an impact the downturn will have on our business and demand for our products. To the extent that the downturn reduces spending on produce with the “Green Food” designation, which tends to more expensive than products without the designation, demand for our products could be affected.

The economic downturn and financial market instability have generally made the business climate more volatile and more costly. One result of the deterioration in the global equity and credit markets is that obtaining any additional debt or equity financing has become more difficult, more costly, and more potentially dilutive to our existing investors. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy and require us to delay or abandon our expansion plans. 

Inflation In The PRC Could Negatively Affect Our Profitability And Growth.

A resumption of the rapid economic growth experienced in the PRC prior to the global economic downturn can lead to growth in the money supply and rising inflation. In reaction to inflationary pressures, the PRC government has imposed controls in the past on bank credits, limits on loans for fixed assets, restrictions on state bank lending, and restrictions on funds flowing into the PRC. Such policies can potentially lead to a slowing of economic growth. In addition, in October 2004, the People's Bank of China, the PRC's central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the domestic economy. Future rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products.

PRC Governmental Control Of Currency Conversion May Affect Our Business And Financial Results.

The PRC government imposes controls on the convertibility of Renminbi (RMB) into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in RMB, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and certain expenditures can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange (SAFE) 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 expenses, and for return of capital. The procedure followed by the Company for remitting currency out of the PRC is as follows: the Company submits a fund remittance application to SAFE for approval. Upon receipt of the approval document from SAFE, the Company submits the SAFE approval document to the bank at which the Company maintains a foreign exchange account. The bank then processes the transfer. In the event that the Company is not permitted to remit funds out of the PRC due to SAFE restrictions, the Company’s ability to meet its payment obligations to its service providers and creditors may be affected.

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The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain expenses as they come due.

The Fluctuation Of The RMB Against The U.S. Dollar May Affect Our Operating Results And Financial Condition.

The value of the RMB against the U.S. Dollar and other currencies fluctuates and is affected by, among other things, changes in the PRC's political and economic conditions. As we rely entirely on revenues earned in the PRC, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. Dollars we receive from an offering of our securities into RMB, appreciation of the RMB against the U.S. Dollar would reduce the amount of RMB we receive upon conversion. Conversely, if we need to convert RMB into U.S. Dollars and the U.S. Dollar appreciates against the RMB, the U.S. Dollar equivalent of the RMB we convert would be reduced. In addition, the depreciation of significant U.S. Dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

In July, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. Dollar. Under the new policy, the RMB is permitted to fluctuate against a basket of certain foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant fluctuation of the value of the RMB against the U.S. Dollar.

Because Our Principal Assets Are Located Outside Of The U.S. And Most Of Our Directors And Officers Reside Outside Of The U.S., It May Be Difficult To Pursue Legal Action Against The Company And Its Directors And Officers.

Our operating subsidiary is located in the PRC and substantially all of its assets are located in the PRC. In addition, most of our directors and officers reside in the PRC. It may therefore be difficult for investors in the U.S. to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the U.S. and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties under U.S. laws or otherwise.

Lack Of Bank Deposit Insurance In The PRC Puts Our Cash Reserves At Risk Of Loss.  

We maintain bank accounts in China whose balances are not insured and are not protected by FDIC insurance or other insurance. As of December 31, 2008, we held the equivalent of approximately $8,311,182 in US dollars in bank accounts in China. If a Chinese bank holding our funds were to experience insolvency or closure, it may not permit us to withdraw our funds which would result in a loss of such funds and a reduction of our net assets.

RISKS RELATED TO OUR COMMON STOCK:

The Trading Market For Our Common Stock is Relatively Illiquid And The Market Price Of Our Common Stock Has Been And Will Likely Continue To Be Volatile.

There is relatively low trading volume in our common stock, and the price of our common stock has and is likely to continue to fluctuate significantly. These circumstances may make it difficult for shareholders to sell shares of our common stock when desired or at attractive prices. During 2008, the trading price of our common stock as quoted on the OTC Bulletin Board ranged from a low of $0.10 per share to a high of $1.50 per share. Thus far during 2009, the trading price of our common stock ranged from a low of $0.10 per share to a high of $0.25 per share.

The price for our common stock may fluctuate in response to a number of events and factors, including but not limited to: quarterly variations in our operating results; announcements of technological innovations or new products by us or our competitors; the operating and stock price performance of other companies that investors may deem comparable to us, including companies with business activities in the PRC; news reports relating to trends in our markets or general economic conditions. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees.

In addition, there is no guarantee that our common stock will remain quoted on the OTC Bulletin Board. If our common stock does not remain quoted on the OTC Bulletin Board, it would become even more difficult to sell when desired or at attractive prices.

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The Number Of Shares Of Common Stock Available For Resale And Issuable Upon Conversion Or Exercise Of Our Notes And Warrants May Adversely Affect The Price Of Our Common Stock.

On April 22, 2006, we issued 5,389,221 shares of our common stock (approximately 10,950,897 shares after giving effect to our forward stock split on October 31, 2006) as consideration for the Management Agreement with Xinsheng. Of this amount, 9,099,749 shares are presently held in a trust and can be released from the trust and are eligible for resale pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended.
 
As indicated in Note 11 to the Consolidated Financial Statements included herein, we have 1,887,580 common stock purchase warrants outstanding with exercise prices ranging from $1.00 to $2.00. The shares of our common stock issuable upon exercise of the warrants may be sold under Rule 144 beginning six months after exercise. In addition, we have convertible notes outstanding in an aggregate principal amount of $500,000, which are convertible into up to 1,000,000 shares of common stock at a conversion price of $0.50 per share. The shares of our common stock issuable upon conversion of the notes may be sold under Rule 144 upon conversion.

The exercise of the warrants by the warrant holders and the conversion of the notes by the note holders would have a dilutive effect on our existing shareholders. In addition, the number of shares of common stock available for resale by the Xinsheng shareholders, as well as the number of shares issuable upon conversion of our outstanding notes or exercise of our outstanding warrants may adversely affect the price of our common stock and may make it more difficult for us to raise additional capital on favorable terms.

Our Common Stock Falls Within The Definition Of Penny Stock.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock falls within the definition of penny stock and accordingly is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities.

Before a broker-dealer can sell a penny stock, SEC rules require the firm to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The firm must furnish the customer a document describing the risks of investing in penny stocks. The firm must tell the customer the current market quotation, if any, for the penny stock and the compensation the firm and its broker will receive for the trade. Finally, the firm must send monthly account statements showing the market value of each penny stock held in the customer’s account.

Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell their common stock in the secondary market.

We Are Authorized To Issue 4,900,000 Shares Of An "Undesignated" Class Of Stock Which May Adversely Affect The Voting Power Or Other Rights Of The Holders Of Common Stock.

Our certificate of incorporation authorizes our board of directors to designate and issue one or more series of preferred stock, having rights and preferences as the board may determine in accordance with Maryland law. Our board of directors is empowered, without stockholder approval, to issue such preferred stock with rights that could adversely affect the voting power or other rights of the holders of our common stock. In addition, the undesignated stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. As of this date, no shares of the undesignated stock are outstanding and no designation has been made as to any characteristics these shares may have in the future.

We Are Not Likely To Pay Cash Dividends In The Foreseeable Future.

We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a U.S. based holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiary. In addition, our operating subsidiary is subject to restrictions under PRC law on its ability to make distributions to us, including restrictions on the conversion of local currency into U.S. Dollars or other hard currency and other regulatory restrictions.

DESCRIPTION OF BUSINESS

Company History

China Agri-Business, Inc. was incorporated in the State of Maryland on December 7, 2005. On March 24, 2006, China Agri formed Mei Xin Agri Technology (Shaanxi) Co., Ltd. (“Meixin”) in Xi'an city, the PRC. Meixin is a wholly-owned subsidiary of China Agri and a limited liability company organized under the laws of the PRC. Meixin acts as a management company for our operating business in the PRC, Shaanxi Xin Sheng Centennial Agricultural and Technology Co., Ltd. (“Xinsheng”), in accordance with the management entrustment agreement described below. Meixin controls all aspects of Xinsheng's business and management, and is entitled to all proceeds of Xinsheng's business and obligated to fund its operations. China Agri-Business, Inc. is a holding company with no operations other than acting as a holding company for Meixin and Xinsheng, and raising capital for their operations. China Agri and Meixin do not own any equity rights in Xinsheng.

Xinsheng was founded on April 22, 2002 as a joint stock limited liability company formed under the laws of the PRC. Meixin’s control over Xinsheng was established in the following manner, and in accordance with PRC laws:

On April 18, 2006, Meixin entered into a management entrustment agreement (the “Management Agreement”) with Xinsheng. Under the Management Agreement, Xinsheng and its shareholders entrusted to Meixin its management rights, the rights and powers of its shareholders and board of directors, and the right to receive all of Xinsheng's profits in exchange for Meixin’s assumption of the obligation to fund all operating losses of Xinsheng.

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On April 22, 2006, following a Xinsheng shareholder meeting at which an attorney-in-fact was appointed to represent the Xinsheng shareholders, China Agri entered into a stock purchase agreement with the attorney-in-fact (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, China Agri issued an aggregate of 5,389,221 shares (10,950,897 shares after a 2.032-for-1 forward split in October 2006) of common stock to the Xinsheng shareholders in consideration of the execution of the Management Agreement between Xinsheng and Meixin. Pursuant to the Stock Purchase Agreement and a voting trust and escrow agreement (the “Voting Trust and Escrow Agreement”) entered into by the parties in connection with the Stock Purchase Agreement, these shares were issued in the name of the trustees for the Xinsheng shareholders, which trustees also act as the escrow and selling agent for the Xinsheng shareholders for the sale of the shares. The trustees are entitled to exercise all rights and powers to vote the shares on behalf of the Xinsheng shareholders. Each shareholder can request the release of his or her shares from the trust. Alternatively, each shareholder can request that the trustees sell the shares on behalf of such shareholder and remit the proceeds to such shareholder. The entry into the Management Agreement, the Stock Purchase Agreement and the Voting Trust and Escrow Agreement, and the appointment of the attorney-in-fact, were approved by the Xinsheng shareholders at a meeting held on April 10, 2006, in accordance with PRC Company Law.
 
The following diagram sets forth the current corporate structure of the Company:

China Agri-Business, Inc.
    
|
|
100% ownership
|
|
    
Mei Xin Agri
Technology
(Shaanxi) Co., Ltd.
—————————————————
Contractual Relationship
(Management Entrustment
Agreement)
Shaanxi Xin Sheng Centennial
Agricultural and Technology Co., Ltd.

At present, neither China Agri-Business nor Meixin have any existing or planned business activities other than acting as a holding company and management company, respectively, for Xinsheng. However, these plans are subject to change in the future.

Overview of Business

Xinsheng began producing agricultural application products in 2004. Our business is concentrated in the growing “Green Food” market in the PRC. Xinsheng manufactures and sells non-toxic fertilizer, bactericide and fungicide products used for farming in the PRC. Crops grown with our products are eligible to qualify for the “AA Green Food” rating administered by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC (However, our products themselves do not bear the “AA green food” designation).

The executive offices of China Agri-Business in the United States are located at 11 East 86th Street, New York, New York 10028. China Agri’s telephone number in the United States is (212) 348-5600. Xinsheng is located outside of the city of Xi-an in the Shaanxi Province of the PRC. Xinsheng’s address is Finance Plaza, 9th Floor, Hi-Tech Road No. 42, Hi-Tech Industrial Development Zone, Xi-An, China 710068. Xinsheng’s telephone number is 011-86-29-88222938.

Our Organic Biochemical Agricultural Application Products

We manufacture and market the following organic biochemical agricultural application products. Our products are designed to be environmentally friendly, as explained in further detail below. Within the following five product categories, we produce more than 50 different agricultural application products.

Product Brand Name
  
Description and Functionality
  
Plant Suitability
   
Price*
Xinsheng Luyuan
   
A line of fertilizer product whose primary function is to increase agricultural production.
  
Wheat, Rice, Maize, Tobacco,  Cotton, Melons and various other fruits and vegetables.
  
$          61.56/Box
Xinsheng Lufeng
  
A line of organic soil amendment products whose primary function is as a bactericide.
  
Tomatoes and Apples.
  
$          38.69/Box
Xinsheng Huang-jin-gai
  
A line of amino acid fertilizer products designed to help crops absorb calcium and to improve their overall quality.
  
Tomatoes and Apples.
  
$          32.25/Box
Xinsheng Jia-tian-xia
  
A line of humic acid fertilizer products designed improve the overall quality of crops
  
Maize, Cotton, Apples, Tomatos, Watermelon, and various other fruits and melons.
  
$          32.25/Box
Xinsheng Bai-le
  
A line of amino acid fertilizer products designed to provide supplementary micro-nutrients to crops and to help crops grow with balanced nutrition.
  
Maize, Cotton,  Apples, Tomatos, Watermelon, and various other fruits & melons.
  
$          26.38/Box

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* Based on the currency exchange rate in effect as of December 31, 2008. A standard box contains various bottles and bags of the product. The price per box may vary depending on the contents of the box.

Our agricultural application products are made of a chemical polymer combined with active potassium, organic nitrogen and 20 other ingredients, including chitosan. The key raw material for our products is chitosan, which consists primarily of polysaccharides extracted from the shells of crustaceans, such as crabs and shrimp, and mixed with active calcium. Because each of our products are designed to minimize harm to the environment, use of our products contributes to the production of healthy and environmentally friendly crops.

Studies performed by our research and development personnel indicate that nitrogen, phosphorus, potassium and other potentially environmentally harmful nutrients in traditional chemical fertilizers tend to become soluble in the presence of water, which can lead to potentially harmful runoff when it rains. Our products, which contain chitosan, are designed to release nutrients into the soil at a slower rate, making them less likely to be leached from the soil by rainwater. The retention of these nutrients improves the effects of both naturally-occurring and applied nutrients and fertilizers. Our chitosan based products are also designed to build soil structure, which allows more air to reach plant roots and increases the soil's ability to retain water, resulting in healthier crops. Our products also use chitosan to provide nutrients used by soil microorganisms, which in turn make mineral nutrients available to plants.

Our agricultural application products are produced and sold in two types of packaging: (i) polyethylene bottles that are 12 centimeters in height and 5.8 centimeters in diameter and have a net weight of 200 grams and (ii) bags that are 11 centimeters in length and 8.4 centimeters in width and have a net weight of 20 grams.

The raw materials used in the production of our products are generally available from local suppliers and accordingly we do not have any long term supply contracts.

The principal advantages of our agricultural application products include their quality and their potential to reduce famers’ costs. In addition, our proprietary blending methods allow our products to mix readily with water so that they can be sprayed onto crops. This permits our products to be applied consistently over large areas. Higher yields mean that farmers can plant less and therefore decrease their costs. We believe our products can ultimately increase plant growth by up to 20%. These estimates are based on our own testing and on field trial reports issued by the following three independent land and fertilizer working stations in China, for the years of 2005 and 2004 (collectively the “Field Trial Reports”): Shaanxi Chunhua County Land and Fertilizer Working Station, Shaanxi Province Land and Fertilizer Working Station and Shaanxi Province Yangling Zone Land and Fertilizer Working Station.

In addition, we offer agricultural application products that contain, in addition to growth-promoting compounds, both bactericides and pesticides. These products are cost effective because they eliminate the need to purchase  separate pesticides and bactericides.

Manufacturing Capacity

As of December 31, 2008, Xinsheng’s manufacturing capacity is approximately 540 tons per year. Xinsheng has the ability to increase its manufacturing capacity to approximately 700 tons per year through the use of the facilities of third party contract manufacturers. Xinsheng’s manufacturing output is primarily order driven. Accordingly, Xinsheng uses the facilities contract manufacturers on an as needed basis, when orders exceed capacity. Xinsheng’s employees are present to oversee the manufacturing process when facilities of contract manufacturers are used.

The PRC’s “Green Food” Industry

By the late 1980s, in an effort to produce more food, the PRC had reached a point where its farmers were relying heavily on the use of fertilizers and pesticides. This reliance on fertilizers and pesticides, including the use of environmentally harmful fertilizers and pesticides, led to the sale of products with dangerous and high concentrations of harmful chemicals. In addition to creating a dangerous situation for domestic consumers, it also created problems for the PRC's food exporters which, in many cases, were barred from exporting to countries with minimum acceptable standards for pesticide and chemical use.

In 1990, the PRC Ministry of Agriculture began to encourage the production of “Green Food”, which is food that is deemed safe, free from pollutants and harmful chemicals, and of good quality. In 1992, the PRC Ministry of Agriculture established the China Green Food Development Center to oversee food quality and the development and management of Green Food at the national and provincial level in the PRC. In 1993, the Ministry of Agriculture established regulations on the use of Green Food labeling. In 1996, an identifying trademark for Green Food was registered in the PRC and put into use. More information regarding the China Green Food Development Center, including the green food regulatory and authentication process, is available at the Center’s website at http://www.greenfood.org.cn/sites/GREENFOOD/. The contents of this website are not otherwise incorporated by reference herein.

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According to the China Green Food Development Center website, China’s Green Food industry experienced a rapid growth period from 1997 to 2007. For example, from 2002 to 2007, certified Green Food products and Green Food production enterprises increased at a rate of 21.8% and 30.8% per year, respectively. By the end of October 2008, there were 17,647 Green Food products and 6,160 Green Food production enterprises in China. Approximately 9.4 million hectares, or 7.2% of the total farm land in China, is used in the production of Green Food.

Seasonality

Our business is seasonal and order driven. Accordingly we experience seasonal fluctuations in our revenues and our operating costs.

Generally, our sales peak occurs at the beginning of the planting season, which generally occurs during the period from March though June. Our sales are typically the lowest in the period from December through January and are relatively stable for the rest of the year.

Adverse weather conditions and other natural disasters may affect our customers’ planting activities and therefor reduce demand for our products. For example, our business was negatively impacted during 2008 by the following events: (i) severe winter weather conditions that existed in China during the end of January and early February, (ii) the major earth quake on May 12, 2008 whose epicenter was located in Sichuan province, and (iii) widespread flooding in the central and southern parts of China in May and June, including the Hunan and Hubei provinces.

Employees

Xinsheng has approximately 120 employees, including 60 who are engaged in sales and marketing activities. Approximately half of our employees are full-time employees and the remaining half are part-time or seasonal employees.

Sales and Marketing

We have traditionally sold our products through wholesale and retail distributors. In order to market our products, we advertise in newspapers, including national publications. We have also utilized a limited amount of television advertising, and distributed brochures, company profiles and promotional videos to farmers. We also offer free field trials to potential customers for the purpose of comparing plantings that have applied our products to plantings that have not. We believe that potential customers are more inclined to purchase our products after seeing the comparison results. We have a marketing team comprised of approximately 60 people who demonstrate to our dealers and our direct customers the correct methods of using our products, and who help address issues that arise for our dealers and customers in using our products and collect feedback from them.

As of December 31, 2008, we have established relationships with approximately 98 wholesale distributors. Our products are sold in approximately 400 stores located in 12 provinces in the PRC.

During 2008 we launched a new sales and marketing initiative “New Agriculture-Generator” designed to expand our distribution network directly in the rural areas of China.  The purpose of the campaign is to establish a closer relationship with farmers through agricultural cooperatives located throughout the rural areas of China. One component of this initiative is called the “Super Chain Sales Partner Program”, whereby the Company agrees to provide a $3,000 advance payment to participating retailers in exchange for their commitment to purchase and sell approximately $14,000 worth of the Company’s products per year. Each participating retailer must also agree not to sell any competing products.

Another component of this initiative is to establish, in conjunction with participating retailers, a membership system that would enable the Company to measure and monitor the use of its products by farmers and to improve the Company’s efforts to provide training and other support services to farmers.

As of January 31, 2009, approximately 41 retailers in Shaanxi province and approximately 28 retailers in Hunan province have participated in the “Super Chain Sales Partner Program”. However, there is no assurance that the “New Agriculture-Generator” campaign or “Super Chain Sales Partner Program” will be successful.

Government Regulation

Fertilizer Registration Certificates

In the PRC, producers of fertilizer and related products must obtain a government approval known as a fertilizer registration certificate. Accordingly, we have obtained temporary registration certificates from the PRC’s Ministry of Agriculture for each of our primary products. The certificates authorize us to manufacture and distribute our agricultural application products in the PRC. The term of a fertilizer registration certificate is one (1) year, subject to annual renewal. There is no assurance that the certificates will be renewed.

The Company’s prior application for a permanent fertilizer registration certificate was not accepted because the PRC government had not yet established standards for the Company’s products. The PRC government has since established standards for the following three of the Company’s five product categories: Xinsheng Huang-jin-gai, Xinsheng Bai-le, and Xinsheng Jia-tian-xia. The temporary certificates for these products are automatically convertible into permanent certificates after three years. The Company will seek to obtain permanent certificates for these products as soon as the Company is eligible. In the meantime, the Company will continue to apply for temporary certificates. Other than the term of the certificate, there is no difference in the restrictions applied to temporary certificate holders and permanent certificate holders.
 
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Registration
No.
  
Trademark/Product Name
  
Expiration
 Date
No. (2004) 1485
  
Xinsheng Luyuan
  
September 2009
No. (2004) 1542
  
Xinsheng Lufeng
  
October 2009
No. (2007) 2968
  
Xinsheng Huang-jin-gai
  
December 2009
No. (2007) 2969
  
Xinsheng Bai-le
  
December 2009
No. (2007) 2970
  
Xinsheng Jia-tian-xia
  
December 2009

China Green Food Development Center “Green Food” Certification

Crops grown with the use of our products may qualify for the “AA green food” designation in the PRC (However, our products themselves do not bear the “AA green food” designation). The green food rating system, which consist of an “A” rating and a more stringent “AA” rating, is overseen by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC. The “AA” rating indicates that the crops contain minimal chemical residue from fertilizers. However, our products themselves do not bear the “AA green food” designation.

While we believe that we maintain all requisite licenses and permits and are in compliance with all applicable regulations, we may not be able to maintain all requisite licenses and permits and remain in compliance with all applicable regulations. Any failure to satisfy those and other regulatory requirements could have a material adverse effect on our financial condition and results of operations.

Competition

The industry in which we operate is highly competitive. We compete largely on the basis of the quality of our products, which we make by processing and combining raw materials using proprietary methods. Each of our five product categories has a different blending process and combination of ingredients Our proprietary blending methods allow us to include a higher chitosan content in our products relative to our competitors. Our products contain approximately 5% chitosan. The Company believes competing products contain between 0.5% and 3% chitosan. Higher chitosan content translates into increased cost of production and quality, and accordingly our products are priced approximately 10% to 15% higher than those of our competitors.

We consider the following companies to be among our primary competitors:

Company Name
  
Location within PRC
Weifang Xinde Bio-tech Co., Ltd.
  
Shandong Province
Shaanxi Haide'er Bio-tech Co., Ltd.
  
Shaanxi Province
Weifang Hengsheng Bio-tech Co., Ltd.
  
Shandong Province
Zhejiang Lanhai Bio-engineering Co., Ltd.
  
Zhejiang Province
Aiwo Beijing Agricultural Technology Co., Ltd.
  
Beijing City
China Green Agriculture, Inc.
  
Shaanxi Province
Shandong Dongyan Kefeng Bio-tech Co., Ltd.
  
Shangdong Province
Shandong Tianda Bio-tech Co., Ltd.
  
Shangdong Province
Guangxi Beihai Guofa Bio-tech Co., Ltd.
  
Guangxi Province

Intellectual Property

Trademarks

We own the rights to the following registered trademarks in the PRC, which we use in our business and which appear on our product packaging. We do not own the rights to any registered trademarks in the United States.

Trademark
  
Registration Number
  
Expiration Date
Xinsheng Shi ji
  
3412688
  
July 2014
Xinsheng Luyuan
  
4734942
  
September 2015
Xinsheng Lufeng
  
4734940
  
September 2015
Xinsheng Huang-jin-gai
  
6213163
  
August 2022
Xinsheng Bai-le
  
6212924
  
August 2022
Xinsheng Jia-tian-xia
  
6213164
  
August 2022
New Agriculture - Generator
  
6952690
  
September 2023
 
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Patents

We own the rights to one patent  in the PRC for "Zero-tillage Fertilizing Equipment" (PRC Patent Number: 330398), which is a type of seeding machine, the use of which prevents soil erosion. We do not currently use this patent or the Zero-tillage Fertilizing Equipment in our business. We have not yet determined whether and when this patent may be utilized in our business. We do not own the rights to any patents in the United States.

Research and Development

We have a research and development team consisting of six full time employees and five consultants. This team is responsible for formulating our organic biochemical agricultural application products and developing new products.

We have spent approximately $8,947 and $6,393 on research and development for the years ended December 31, 2007 and 2008, respectively.

DESCRIPTION OF PROPERTY

There is no private land ownership in PRC. Land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants or allocates landholders a “land use right,” which is sometimes referred to informally as land ownership. Land use rights are granted for specific purposes and for limited periods. Each period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. Generally speaking, there are four primary ways of obtaining land use rights in the PRC:

• Grant of the right to use land;
• Assignment of the right to use land;
• Lease of the right to use land; and
• Allocated land use rights.

Xinsheng does not own any land use rights.

Xinsheng owns its manufacturing machinery and office equipment, valued at approximately RMB 1,154,680 (approximately $169,241 based on the exchange rate in effect as of December 31, 2008) and vehicles, valued at cost at RMB 1,522,087 (approximately $223,092).

Xinsheng leases its office space (approximately 7,300 square feet) at the Finance Plaza 9th Floor, Hi-tech Road No. 42, Hi-tech Industrial Development Zone in Xi'an, Shaan Xi Province, for an annual rent of RMB 366,390 (approximately $53,7000) from Shaanxi Heng Xing Property Management Co., Ltd. The term of the lease is three years and expires on March 31, 2011.

Xinsheng leases its operating and testing space (approximately 2,600 square feet), located at the Xi'an Vegetable Research Institute, 2 Ouyan Road, Xian, Shaanxi, China, for an annual rent of RMB 38,500 (approximately $5,640). The lease expires on March 31, 2010.

Xinsheng leases its manufacturing space (approximately 22,600 square feet), located at Sanyuan Cotton Company, 16 Shihua Road, Chemistry District, Sanyuan County, Shaanxi Province, for an annual rent of RMB 90,000 (approximately $13,190). The lease expires on December 21, 2010.

China Agri’s executive offices in the United States are located at 11 East 86th Street, New York, New York 10028. Michael Segal, one of our directors, allows us to use the space rent free.

We believe that our facilities are suitable for our current operations. However, our expansion plans contemplate the need for additional space as we increase production.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto included herein. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to the Company’s fiscal years ended in December and the associated quarters of those fiscal years. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

14

Results of Operations

Quarter Ended March 31, 2009 as compared to Quarter Ended March 31, 2008

Comparison of Gross Profit for the Quarter Ended March 31, 2009 and 2008
   
Three Months Ended March 31,
 
   
2009
   
2008
 
Sales
 
$
469,572
   
$
339,444
 
Cost of Goods Sold
   
146,242
     
103,591
 
Gross Profit
 
$
323,330
   
$
235,853
 
Gross Profit Margin
   
68.86
%
   
69.48
%
 
Sales

Sales for the first quarter of 2009 totaled $469,572, an increase of $130,128, or 38.3% as compared to sales of $339,444 for the same quarter ended March 31, 2008. The year over year increase in sales is attributable to lower than expected sales during the first quarter of 2008 due to severe winter weather conditions in China during the first quarter of 2008.

In addition to the severe winter weather conditions during the first quarter of 2008, China also experienced the following natural and weather related disasters in 2008: (i) the major earth quake on May 12, 2008 whose epicenter was located in Sichuan province, and (ii) widespread flooding in the central and southern regions in May and June, including the Hunan and Hubei provinces. Our sales in the affected areas declined significantly, and in some instance were non existent. Agricultural production in the affected areas has not yet fully recovered, and we expect that our sales in these areas will continue to be negatively impacted continue at least through the second quarter of 2009, and possibly beyond.

During 2008 we launched a new sales and marketing initiative “New Agriculture-Generator” designed to expand our distribution network directly in the rural areas of China.  The purpose of the campaign is to establish a closer relationship with farmers through agricultural cooperatives located throughout the rural areas of China. One component of this initiative is called the “Super Chain Sales Partner Program”, whereby the Company agrees to provide a $3,000 advance payment to participating retailers in exchange for their commitment to purchase and sell approximately $14,000 worth of the Company’s products per year. Each participating retailer must also agree not to sell any competing products.

As of March 31, 2009, approximately 61 retailers in Shaanxi province and approximately 39 retailers in Hunan province have participated in the “Super Chain Sales Partner Program”. Total sales to these Super Chain Stores were approximately $26,000 during the first quarter 2009. However, there is no assurance that our “New Agriculture-Generator” campaign will be successful.

Cost of Goods Sold,  Gross Profit and Gross Profit Margin

Cost of goods sold for the first quarter of 2009 totaled $146,242, an increase of $42,651, or  41% as compared to cost of goods sold of $103,591 for the same quarter ended March 31, 2008. The increase in cost of goods sold is in line with  the increase in sales.

Gross profit for the first quarter of 2009 was $323,330, an increase of $87,477, or 37%, as compared to gross profit of $235,853 for the same quarter of 2008. The increase in gross profit is also attributable to the increase in sales.

15
 
Gross profit margin, which is measured as the ratio of gross profit to sales, was 68.86% for the first quarter of 2009, a decrease of 0.62 percentage points as compared to 69.48% for the quarter ended March 31, 2008.

Comparison of Net Income for the Quarter Ended March 31, 2009 and 2008

   
Three Months Ended March 31,
 
   
2009
   
2008
 
             
Gross Profit
 
$
323,330
   
$
235,853
 
                 
Selling and marketing
   
56,400
     
44,213
 
Professional fees
   
29,000
     
29,000
 
Depreciation and amortization expenses
   
11,843
     
16,170
 
Other general and administrative
   
67,108
     
35,051
 
Total selling, general and administrative
   
164,351
     
124,434
 
                 
Income from operations
   
158,979
     
111,419
 
Interest expense
   
(56,582
)
   
-
 
Interest income
   
4,519
     
4,909
 
Net Income
 
$
106,916
   
$
116,328
 

Selling and Marketing Expenses

Selling and marketing expenses were $56,400 for the quarter ended March 31, 2009, an increase of $12,187, or 28%, as compared to $44,213 for the quarter ended March 31, 2008. The increase in selling and marketing expenses is primarily attributable to the implementation of our “Super Chain Sales Partner Program” sales and marketing initiative.

Other General and Administrative Expense

Other general and administrative expense generally consists of: wages and related benefits, rent and utility expenses, office expenses, bad debt expense, director fees, and travel and miscellaneous expenses. Other general and administrative expense was $67,108 for the quarter ended March 31, 2009, an increase of $32,057, or 91%, as compared to $35,051 for the quarter ended March 31, 2008. Higher other general and administrative expenses in the first quarter of 2009 were primarily attributable to a $16,000 adjustment in connection with the allowance for doubtful accounts.

Interest expense

Interest expense increased by $56,582, which represents amortization of deferred financing costs of $27,374, amortization of fair value of warrants of $19,118, amortization of beneficial conversion feature of $6,340 and accrued loan interest of $3,750. These expenses relate to the convertible notes issued in September 2008.

Net income

Net income for the quarter ended March 31, 2009 was $106,916, a decrease of 8%, or $9,412, as compared to net income of $116,328 for the quarter ended March 31, 2008. The decrease in net income is primarily attributable to the increase in non cash interest expense, as explained above.

16
 
Year Ended December 31, 2008 as compared to Year Ended December 31, 2007

Comparison of Gross Profit for the Years Ended December 31, 2008 and 2007

   
2008
    
2007
  
Sales
  
$
2,922,385
    
$
3,037,414
  
Cost of Goods Sold
    
817,472
      
964,961
  
Gross Profit
  
$
2,104,913
    
$
2,072,453
  
Gross Profit Margin
    
72.03
%
    
68.23
%

Sales

Sales for the year ended December 31, 2008 totaled $2,922,385, a decrease of $115,029, or 3.8% as compared to sales of $3,037,414 for the year ended December 31, 2007. Our sales in 2008 were adversely affected by the following natural and weather related disasters that occurred in China in 2008: (i) severe winter weather conditions during the end of January and early February, (ii) the major earth quake on May 12, 2008 whose epicenter was located in Sichuan province, and (iii) widespread flooding in the central and southern regions in May and June, including the Hunan and Hubei provinces. Our sales in the affected areas declined significantly, and in some instance were non existent. We expect lower sales in the disaster areas to continue at least through the first quarter of 2009, and possibly beyond.

In 2008, approximately 45% of our sales were in Shaanxi province, 10% of our sales were in Hunan province, and 8% of our sales were in Hebei province. Our products are also sold in the following provinces in the PRC: Sichuan, Anhui, Jiangsu, Henan, Shanxi, Jiangxi and Shandong.

During the fourth quarter of 2008, we launched sales and marketing initiative called “New Agriculture-Generator”, which is designed to expand our distribution network in the PRC (a description of this initiative is set forth in Item 1. Business, above)

In addition, we continue to seek opportunities to produce fertilizer products for third parties in order to fully utilize our manufacturing facilities and as a means of generating additional revenue. However, we have not  yet produced any products for third parties.

Gross Profit and Gross Profit Margin

Gross profit for the year ended December 31, 2008 was $2,104,913, an increase of $32,460, or 1.6%, as compared to gross profit of $2,072,453 for the year ended December 31, 2007.

Gross profit margin rate for the year ended December 31, 2008 was 72.03%, an increase of 3.80 percentage points as compared to the 68.23% for the year ended December 31, 2007.  The improvement in gross margin is primarily attributable to a 5-10% increase in the prices of our products implemented during the second quarter of 2008.

Comparison of Net Income for the Years Ended December 31, 2008 and 2007

   
2008
    
2007
  
             
Gross Profit
  
$
2,104,913
    
$
2,072,453
  
                 
Selling and marketing
    
316,272
      
146,178
  
Professional fees
    
174,869
      
473,809
  
Depreciation and amortization expenses
    
60,947
      
61,793
  
Other general and administrative
    
177,190
      
347,450
  
Total general and administrative
    
729,278
      
1,029,230
  
                 
Income from operations
    
1,375,635
      
1,043,223
  
Interest expense
    
(58,403
)
    
-
  
Interest income
    
28,107
      
15,659
  
Net Income
  
$
1,345,339
    
$
1,058,882
  

Selling and Marketing Expenses

Selling and marketing expenses were $316,272 for the year ended December 31, 2008, an increase of $170,094, or 116%, as compared to $146,178 for the year ended December 31, 2007. The increase in selling and marketing expenses is primarily attributable to the launch of our “New Agriculture-Generator” sales and marketing initiative “Super Chain Sales Partner Program” during the fourth quarter of 2008 (A description of this initiative is set forth in Item 1. Business, above). Approximately $190,000 in expenses were incurred in connection with this initiative during the fourth quarter.

17

Professional Fees

Professional fees totaled $174,869 for the year ended December 31, 2008, a decrease of $298,940, or 63%, as compared to professional fees of $473,809 for the year ended December 31, 2007. The disparity in professional fees in 2007 as compared to 2008 is attributable to fees incurred in connection with our initial public offering in October 2007.

Other General and Administrative Expense

Other general and administrative expense generally consists of wages and related benefits, rent and utility expenses, office expenses, travel and miscellaneous expenses. The other general and administrative expense was $177,190 for the year ended December 31, 2008, a decrease of $170,260, or 49%, as compared to $347,450 for the year ended December 31, 2007.  Higher other general and administrative expenses in 2007 were primarily attributable to the Company’s initial public offering in October 2007. The disparity in other general and administrative expense in 2007 as compared to 2008 is also attributable to expenses incurred in connection with our initial public offering in October 2007.

Interest expense

Interest expense increased by $58,403, which represents amortization of deferred financing costs of $28,403, amortization of fair value of warrants of $19,713, amortization of beneficial conversion feature of $6,537 and accrued loan interest of $3,750. These expenses relate to the convertible notes issued in September 2008.

Net income

Net income for the year ended December 31, 2008 was $1,345,339, an increase of 27.1%, or $286,457, as compared to net income of $1,058,882 for the year ended December 31, 2007. Consequently, net income as a percentage of sales increase to 46% for the year ended December 31, 2008 from 34.9% for the year ended December 31, 2007. The increase in net income is primarily attributable to higher gross profits, lower professional fees, and lower general and administrative expenses in 2008 relative to 2007.

Liquidity and Capital Resources

As of March 31, 2009, 87% of the Company’s assets consist of cash and cash equivalents, as compared to 85% as of December 31, 2008. As of March 31, 2009, our cash and cash equivalents amounted to $8,570,966, an increase of $258,330 as compared to $8,312,636 as of December 31, 2008.

Net cash provided by operating activities was $136,842 and $146,178 for the quarters ended March 31, 2009 and 2008, respectively.

18
 
Net cash provided by investing activities was $131,152 and $0 for the quarters ended March 31, 2009 and 2008, respectively. The Company disposed of unused equipment and product rights in the first quarter of 2009 for total proceeds of $131,760.

Foreign currency translation

Xinsheng’s functional currency is the Chinese Yuan, or Renminbi (“RMB”). The appreciation of the RMB against the U.S. dollar will have a positive effect on our cash position, and vice versa. For the three months ended March 31, 2009, the exchange rate had a negative impact of $9,664 on our cash flows.  By comparison, for the period ended March 31, 2008, the exchange rate had a positive impact of $245,740 on our cash flows.

Tax-exempt status in the PRC

Xinsheng is subject to a 25% standard enterprise income tax in the PRC. However, due to Xinsheng’s agricultural activities, the National Tax Bureau in Xi’an High-Tech Development Zone has granted Xinsheng annual exemptions from this tax for the years ending December 31, 2007 and 2008. We have applied for a tax exemption for 2009 and we expect that this application will be approved.

For purposes of comparison, had we been subject to the 25% tax, our operating cash flow and net income for the quarter ended March 31, 2009 and 2008 would each have been reduced by approximately $54,949 and $38,611, respectively.

Private Placement of Convertible Notes and Warrants

During the third quarter, we completed the sale of 3% unsecured convertible notes in an aggregate principal amount of $500,000 and series C warrants to purchase an aggregate of 500,000 shares of common stock to two accredited investors. We received net proceeds of $431,500, which the Company plans to use to pursue the expansion of its manufacturing and distribution operations and for general working capital purposes.

The notes mature two years from the date of issuance, on September 29, 2010, and bear interest at the rate of 3% per annum. The interest is payable annually in cash or, subject to approval of the holder, in shares of common stock. Any interest which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum. Any principal which is not paid when due shall bear interest at the rate of eight percent (8%) per annum. The notes are convertible at the option of the holder into common stock at a conversion price of $0.50 per share. Accordingly, any conversions of the notes by the note holders would reduce the outstanding principal amount of the notes, which in turn would reduce interest payable on the notes. However, the likelihood of conversion by the note holders is affected by the Company’s stock price relative to the conversion price. The likelihood of conversion is greater if our stock price is at or above the conversion price. The conversion price is subject to adjustment upon the occurrence of stock splits, combinations, dividends, and subsequent offerings, as set forth in the notes.

Subject to effectiveness of the registration statement, the Company shall have the right to prepay the notes at 110% of the outstanding principal amount any time prior to the maturity date, and upon thirty (30) days prior written notice to the holders.

The series C warrants have a term of three years, expiring on September 29, 2011, and an exercise price of $1.00 per share. In addition, upon exercise of a series C warrant, each holder shall be issued a series D warrant. The series D Warrants shall have a term of three years and an exercise price of $2.00 per share. The exercise price of the warrants is subject to adjustment upon the occurrence of stock splits, combinations, dividends, and subsequent offerings, as set forth in the Warrants. China Agri would receive cash proceeds from the exercise of the Series C warrants, as well as from the exercise of the warrants issued to the placement agent. However, as with the notes, the likelihood of exercise by the warrant holders depends upon the Company’s stock price relative to the exercise price. The likelihood of exercise is greater if the stock price is at or above the exercise price. Upon termination of any unexercised Series C warrants, the warrant holders would not receive any Series D warrants, any shares underlying the Series C or D warrants, or any other securities.

19
 
The Company may call for the termination of any unexercised portion of the series C warrants upon consummation of a subsequent offering by the Company of not less than $7.5 million in gross proceeds, and upon thirty (30) days written notice to the holders.

In connection with the private placement we entered into registration rights agreements with the investors pursuant to which we have agreed to prepare and file a registration statement with the Securities and Exchange Commission not later than 60 calendar days after the final closing. The registration statement shall seek to register for resale, in the amounts set forth in the Registration Rights Agreement: (i) the warrant shares issuable upon exercise of the Warrants, and (ii) the conversion shares issuable upon conversion of the Notes.

In the event that our obligations under the registration rights agreements are not met, we are subject to liquidated damages payments in an amount equal to two percent (2%) of the initial principal amount of the notes per month, subject to a maximum of twenty four percent (24%). If we are required to pay liquidated damages, our net income would be reduced by the amount of the liquidated damages.

In connection with the private placement, the placement agent received a cash commission of $40,000 and an expense allowance of $25,000. In addition, the placement agent received warrants to purchase 80,000 shares of common stock at an exercise price of $1.00 per share for a term of three years.

The Company believes that this private placement was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder.

Sources of Liquidity

We presently do not have any available credit, bank financing or other external sources of liquidity. We believe that our existing cash resources will be sufficient to meet our existing operating requirements for the foreseeable future. However, we are seeking opportunities to expand our manufacturing and distribution capabilities in the PRC that may require an investment beyond our existing cash resources. Accordingly, we are seeking additional funding through additional equity and/or debt financings. However, there can be no assurance that that any additional financing will become available to us, and if available, on terms acceptable to us.

The conversion of our outstanding notes and exercise of our outstanding warrants into shares of common stock would have a dilutive effect on our common stock, which would in turn reduce our ability to raise additional funds on favorable terms. In addition, the subsequent sale on the open market of any shares of common stock issued upon conversion of our outstanding notes and exercise of our outstanding warrants could impact our stock price which would in turn reduce our ability to raise additional funds on favorable terms.

20

Any financing, if available, may involve restrictive covenants that may impact our ability to conduct our business or raise additional funds on acceptable terms. If we are unable to raise additional capital when required or on acceptable terms, we may have to delay, scale back or discontinue our expansion plans.

Critical Accounting Policies and Estimates

Financial Reporting Release No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies , published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a relatively greater degree of judgment and estimates. Actual results may differ from those estimates.

We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

General

The Company’s Consolidated Financial Statements are prepared in accordance with U.S. Generally Accepted Accounting Principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes 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. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB No. 104”), which superseded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements . SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.

Allowance for Doubtful Accounts

The Company’s receivables primarily consist of accounts receivable from its customers. Accounts receivable are recorded at invoiced amount and generally do not bear interest. The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables.  The credit risk is controlled through credit approvals, limits and monitoring procedures.  The Company establishes an allowance for doubtful accounts based upon historical experience, management’s evaluation of the outstanding accounts, age of receivables and other factors. As of December 31, 2008, 48% of the Company’s trade receivables were current, and the remaining 52% of trade receivables were aged between 31 to 60 days. By comparison, as of December 31, 2007, 25% of the Company’s trade receivables were current, 35% of trade receivables were aged between 31 to 90 days, and the remaining 40% of trade receivables were aged between 91 to 360 days.

Long-Lived Assets

The Company has adopted Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). SFAS No. 144 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted discounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. SFAS No. 144 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

21

MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
 
Our common stock began quoting on the OTC Bulletin Board (“OTCBB”) on October 17, 2007 under the symbol CHBU.OB. The price range per share of common stock presented below represents the highest and lowest intra-day prices for the Company's common stock as quoted on the OTCBB. Such over-the-counter market quotations may reflect inter-dealer prices, without markup, markdown or commissions and may not necessarily represent actual transactions. Our common stock is traded relatively infrequently and accordingly the market for our common stock may not be indicative of a liquid trading market. The closing price of our common stock as quoted on the OTCBB on May 14, 2009 was $0.32.

   
High Sales
Price
   
Low Sales
Price
 
             
Year Ended December 31, 2009:
           
2 nd Quarter (through May 14, 2009)
 
$
0.40
     
0.11
 
1 st Quarter
 
$
0.25
   
$
0.10
 
                 
Year Ended December 31, 2008:
               
4 th Quarter
 
$
0.55
   
$
0.10
 
3 rd Quarter
 
$
0.51
   
$
0.25
 
2 nd Quarter
 
$
1.50
   
$
0.42
 
1 st Quarter
 
$
1.00
   
$
0.40
 
                 
Year Ended December 31, 2007:
               
4 th Quarter (from October 17, 2007 to December 31, 2007)
 
$
2.00
   
$
0.62
 

Number of Shareholders

As of May 14, 2009, there were 12,958,574 shares of our common stock issued and outstanding and 7 active holders of record of our common stock. The number of active record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of the Xinsheng trustees, security brokers, dealers, and registered clearing agencies.

The Xinsheng trustees act as trustees on behalf of approximately 2,317 shareholders in the PRC, but are considered by our transfer agent to be one shareholder of record.   In addition,   all of our common shares held by brokerage firms, banks and other financial institutions in the United States and Canada as nominees for beneficial owners are considered to be held of record by Cede & Co. in respect of brokerage firms, banks and other financial institutions in the United States. Cede & Co. is also considered to be one shareholder of record.

The Company's transfer agent is Securities Transfer Corporation, 2591 Dallas Parkway, Suite 102, Frisco, TX 75034, telephone number: (469) 633-0101.

Dividends

We have not declared or paid any cash dividends on our common stock. We currently intend to retain all earnings, if any, for use in our business operations and we do not anticipate declaring any dividends in the foreseeable future.

The payment of dividends is contingent on the ability of our PRC based operating subsidiary to obtain approval to send monies out of the PRC. The PRC's national currency, called the Yuan or Renminbi, is not a freely convertible currency. The PRC government imposes controls on the convertibility of renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC.

Equity Compensation Plan Information

We do not have any stock option, bonus, profit sharing, pension or similar plan. However, we may adopt such a plan in the future to attract and retain members of management, directors or key employees.
22

SELLING SECURITY HOLDERS

The selling security holders listed herein include the investors who participated in our Private Placement, upon whose behalf we have agreed to register the Conversion Shares underlying the 3% notes and the Warrant Shares underlying the series C warrants (See “Description of January Private Placement of Common Stock and Warrants”).

The selling security holders listed herein also included the placement agent for our Private Placement and the placement agent for our Public Offering, upon whose behalf we are registering the shares underlying warrants issued to them as compensation for their services.

As of the date of this filing, the notes have not yet been converted and the Warrants have not yet been exercised by the selling security holders.

Except for Legend Merchant Group, Inc. and Spencer Edwards, Inc., none of the selling stockholders is a broker dealer or an affiliate of a broker dealer.

The shares offered by this prospectus may be offered from time to time by the selling security holders listed in the following table. Each selling security holder will determine the number of shares to be sold and the timing of the sales. Our registration of the shares does not necessarily mean that the selling security holders will sell all or any of the shares. Because the selling security holders may offer all, some or none of their shares, no definitive estimate as to the number of shares thereof that will be held by the selling security holders after such offering can be provided, and the following table has been prepared on the assumption that all shares of common stock offered under this prospectus will ultimately be sold.

            Name
  
Total Shares
Issuable Upon
Conversion of
Notes
Plus shares
Issuable Upon
Exercise of
Warrants (1)
  
Total
Percentage
of Common
Stock,
Assuming
Full
Exercise (1)
     
Shares of
Common Stock
Included in
Prospectus
(2)
  
Beneficial
Ownership
Before the
Offering (3)
     
Percentage of
Common Stock
Owned Before
Offering (3)
     
Beneficial
Ownership
After the
Offering
(4)
     
Percentage
of Common
Stock Owned
After
Offering
(4)
  
JAG Multi Investments, LLC (5)
   
  750,000
 
5.1
%
 
750,000
   
750,000
     
5.1
%
   
—
     
—
 
Keith Guenther (6)
   
750,000
 
5.1
%
 
750,000
   
750,000
     
5.1
%
   
—
     
—
 
 Legend Merchant Group, Inc. (7)
   
  80,000
     
* 
 
80,000
   
80,000
     
*
     
—
     
—
 
Spencer Edwards, Inc. (8)
   
  37,980
     
* 
 
37,980
   
37,980
     
*
     
—
     
—
 
                                                   
TOTALS
   
  1,617,980
         
1,617,980
   
1,617,980
                         

* Less than 1%.

(1) For purposes of this column only, we have included all shares of common stock owned or beneficially owned by that selling security holder, and the number of shares of common stock issuable upon exercise of all warrants owned or beneficially owned by such selling security holder. Each selling security holder’s ownership percentage is based on 14,576,554 shares, which is the number of shares that would be outstanding if all of the Notes were converted and all of the Warrants were exercised.

23

(2) Represents an aggregate of: (i) 1,000,000 shares issuable upon conversion of the Notes issued to investors with a conversion price of $0.50 per share, (ii) 500,000 shares issuable upon exercise of the series C Investor Warrants issued to investors with an exercise price of $1.50 per share, subject to adjustment (iii) 80,000 shares of common stock issuable upon the exercise of the Placement Agent Warrants with an exercise price of $1.00 per share, and (iv) 37,980 shares of common stock issuable upon the exercise of the Underwriter Warrants with an exercise price of $1.00 per share.

(3) The percentages set forth in this column are based on 14,576,554 shares, which is the number of shares that would be outstanding if all of the Notes were converted and all of the Warrants were exercised. The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the selling security holder has sole or shared voting power or investment power and also any shares, which the selling security holder has the right to acquire within 60 days. However, the selling stockholders have contractually agreed to restrict their ability to exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such exercise does not exceed 9.99% of the then issued and outstanding shares of common stock as determined in accordance with Section 13(d) of the Exchange Act. Accordingly, this column represents the aggregate maximum number and percentage of shares that the selling security holder can own at one time (and therefore, offer for resale at any one time) due to their 9.99% limitation.

(4) Assumes that all securities registered will be sold.

(5) Includes 500,000 shares of common stock underlying Notes and 250,000 shares of common stock underlying series C Investor Warrants. In accordance with rule 13d-3 under the Securities Exchange Act of 1934, Alexander M. Goren and James Goren share voting and dispositive control of the shares owned by this selling security holder.

(6) Includes 500,000 shares of common stock underlying Notes and 250,000 shares of common stock underlying series C Investor Warrants.

(7) Includes 80,000 shares of common stock underlying the Placement Agent Warrants. In accordance with rule 13d-3 under the Securities Exchange Act of 1934, David W. Unsworth has sole voting and dispositive control of the shares owned by this selling security holder. Legend Merchant Group, Inc. is a FINRA member broker-dealer. We do not have any arrangement with Legend Merchant Group, Inc. for it to act as a broker-dealer for the sale of the shares included herein for the selling stockholders. This selling security holder may be deemed an underwriter with respect to sales of shares to be offered by it in this prospectus.

(8) Includes 37,980 shares of common stock underlying the Underwriter Warrants. In accordance with rule 13d-3 under the Securities Exchange Act of 1934, Gordon Dihle has sole voting and dispositive control of the shares owned by this selling security holder. Spencer Edwards, Inc. is a FINRA member broker-dealer. We do not have any arrangement with Spencer Edwards, Inc. for it to act as a broker-dealer for the sale of the shares included herein for the selling stockholders. This selling security holder may be deemed an underwriter with respect to sales of shares to be offered by it in this prospectus.

Additional Disclosures
 
Total Dollar Value of Securities Underlying the Notes and Warrants
 
The total dollar value of the securities underlying the Notes and Warrants being registered for resale (using the number of underlying securities that we have registered for resale and the market price per share for those securities on the date of issuance) are as follows:

Title of Security
 
Number of Underlying
Shares  of Common Stock
   
Market Price at Issuance
   
Dollar Value of Underlying
Securities
 
3% Convertible Notes
    1,000,000     $ 0.40 (1)   $ 400,000  
Investor Warrants
    500,000     $ 0.40 (1)   $ 200,000  
Placement Agent Warrants
    80,000     $ 0.40 (1)   $ 32,000  
Underwriter Warrants
    37,980     $ 1.50 (2)   $ 56,970  
                         
TOTALS
    1,617,980             $ 688,970  
 
(1) Fair market value based on the average of the high and low prices reported on the OTC Bulletin Board on September 29, 2008.
 
(2) Fair market value based on the average of the high and low prices reported on the OTC Bulletin Board on October 17, 2007, which is the first day that the Company’s shares were quoted on the OTC Bulletin Board. The issuance date of the Underwriter Warrants is October 11, 2007.
 
Payments in Connection with the Private Placement of Notes and Investor Warrants
 
The following schedule of interest payments is based on the initial principal amount of the Notes and assumes: (i) that the interest payments are paid in cash and (ii) the Noteholders will not convert any portion of the principal amount into Common Stock:
 
Name
 
Payment
Reference
 
Date
 
Amount
 
JAG Multi Investment, LLC
             
   
Interest Payment
 
September 29, 2009
  $ 7,500  
   
Interest Payment
 
September 29, 2010
  $ 7,500  
JAG Multi Investment, LLC Total:
          $ 15,000  
                 
Keith Guenther
               
   
Interest Payment
 
September 29, 2009
  $ 7,500  
   
Interest Payment
 
September 29, 2010
  $ 7,500  
Keith Guenther Total:
          $ 15,000  
 
Placement agent and other fees:
   
Payment
 Reference
 
Date
 
Amount
 
               
Legend Merchant Group, Inc.
 
Placement Agent Fee
 
September 29, 2008
  $ 40,000  
   
Expense Allowance
 
September 29, 2008
  $ 25,000  
                 
Signature Bank
 
Escrow Agent Fee
 
September 29, 2008
  $ 3,500  
                 
Net Proceeds from Sale of Notes and Investor Warants:
               
            $ 431,500  
                 
Total payments that have been or may be required to be made in connection with the Private Placement of Notes and Investor Warrants during the first year, following the sale of Notes and Investor Warrants (excluding principal repayments, and assuming that (i) the interest payments are paid in cash and (ii) the Noteholders will not convert any portion of the principal amount into Common Stock):
                 
Interest payments during the first year:
               
            $    
 JAG Multi Investment, LLC
 
Interest Payment
 
September 29, 2009
  $ 7,500  
 Keith Guenther
 
Interest Payment
 
September 29, 2009
  $ 7,500  
                 
Total interest payments during the first year:
           $ 15,000   
 
24
 
Liquidated Damages:
 
Pursuant to the Registration Rights Agreement, if the registration statement is not declared effective within 120 days from the filing date, we are required to pay liquidated damages to the selling shareholders in an amount equal to 2% of the principal amount of notes per month. To date, we have not incurred any such liquidated damages. The maximum possible aggregate amount of liquidated damages that we may be required to pay to the selling shareholders is 24% of the aggregate principal amount of the notes, or $120,000.
 
Potential Profits of Selling Securityholders from Conversion of the Convertible Notes
 
 
Selling Securityholder
 
 
Date of Issuance
 
Shares 
underlying
Notes
   
Market 
Price of
Common
Stock on
Date of
Issuance
   
Exercise
Price of
Notes
   
Combined 
Market
Price of
Shares
underlying
Notes
   
Combined
Exercise
Price of
Shares
underlying
Notes
   
Total
Possible
Discount  
  (Premium)
to Market
Price
 
JAG Multi Investment, LLC
 
9/28/08
    500,000     $ 0.40     $ 0.50     $ 200,000     $ 250,000     $ (50,000 )
Keith Guenther
 
9/28/08
    500,000     $ 0.40     $ 0.50     $ 200,000     $ 250,000     $ (50,000 )
Total
        1,000,000     $ —     $ —     $ 400,000     $ 500,000     $ (100,000 )
 
Potential Profits of Selling Securityholders from Exercise of Warrants

Selling
Securityholder
 
 
 
 
Date of Issuance
 
Shares 
underlying
Warrants
or Options
   
Market 
Price of
Common
Stock on
Date of
Issuance
   
Exercise
Price of
Warrants
or Options
   
Combined 
Market
Price of
Shares
underlying
Warrants or
Options
   
Combined
Exercise
Price of
Shares
underlying
Warrants or
Options
   
Total
Possible
Discount  
  (Premium)
to Market
Price
 
JAG Multi Investment, LLC
 
9/29/08
    250,000     $ 0.40     $ 1.50     $ 100,000     $ 375,000     $ (275,000 )
Keith Guenther
 
9/29/08
    250,000     $ 0.40     $ 1.50     $ 100,000     $ 375,000     $ (275,000 )
Legend Merchant Group, Inc.
 
9/29/08
    80,000     $ 0.40       1.00       32,000       80,000       (48,000 )
Spencer Edwards, LLC
 
10/11/07
    37,980     $ 1.50       1.00       56,970       37,980       (18,990 )
Total
        617,980     $ —     $ —     $ 288,970     $ 867,980     $ (566,990 )
 
Comparison of Company Proceeds from Sale of Notes and Investor Warrants to Potential Investor Profit
 
Set forth below is a table that shows the gross proceeds paid or payable to us, all payments that have been made or may be required to be paid by us, the net proceeds to us and the combined total possible profit to the selling shareholders:

Gross Proceeds to Company from Notes and Investor Warrants
 
Transaction Fees
and Interest
Payments (1)
 
Net Proceeds
 
Combined total Possible Profit to
Selling Securityholders from
Conversion of Notes and Exercise
of Investor Warrants
 
               
$500,000
    $ 98,500     $ 401,500     $ -0-  
 
(1) Assumes interest will be paid in cash.
 
25
 
The following information presents the sum of all possible payments and the total possible discounts to the market price of the shares as well as the amount of that resulting percentage averaged over the term of the convertible notes:

Total payments
 
$
98,500
 
Proceeds to the Company
 
$
401,500
 
Percentage of the total amount of all possible payments divided by the net proceeds to the issuer from the sale of the Notes
   
24.5
%
Percentage of the above averaged over the term of the convertible notes
   
12.25
%
The total possible discount to the market price of the shares underlying the Notes divided by the net proceeds to the issuer from the sale of the convertible notes
   
-0-
%
Percentage of the above averaged over the term of the convertible notes 
   
-0-
%
 
Comparison of Registered Shares to Outstanding Shares
 
The following table sets forth:
 
 
·
the number of shares outstanding prior to the Private Placement of Convertible Notes and Warrants that are held by persons other than the selling shareholders, affiliates of the company, and affiliates of the selling shareholders;
 
 
·
the number of shares registered for resale by the selling shareholders or affiliates of the selling shareholders in prior registration statements;
 
 
·
the number of shares registered for resale by the selling shareholders or affiliates of the selling shareholders that continue to be held by the selling shareholders or affiliates of the selling shareholders;
 
 
·
the number of shares that have been sold in registered resale transactions by the selling shareholders or affiliates of the selling shareholders; and
 
 
·
the number of shares registered for resale on behalf of the selling shareholders or affiliates of the selling shareholders in. the current transaction.
 
In this analysis, the calculation of the number of outstanding shares does not include any securities underlying any outstanding convertible securities, options, or warrants.

Selling
Stockholder
 
Number of
Shares of
Common Stock
Outstanding
prior to the
Private Placement of
Convertible Notes and
Warrants
(excluding Selling
 Shareholders,
Affiliates and
Affiliates of Selling
Securityholders)
   
Number of
Shares of
Common Stock
Registered
for Resale
by Selling
Securityholder
in Prior
Registration
Statements
   
Number of
Shares of
Common Stock
Registered
for Resale
by Selling
Stockholder
in Prior
Registration
Statements
Still held by
the Selling
Securityholder
   
Number of
Shares of
Common Stock
Sold in
Registered Resale
Transactions
by the Selling
Securityholder
   
Number of
Shares of
Common Stock
Registered
for Resale
by Selling 
Securityholder
in Current
Transaction
 
JAG Multi Investment, LLC
    12,958,574       -0-       -0-       -0-       750,000  
Keith Guenther
    12,958,574       -0-       -0-       -0-       750,000  
Legend Merchant Group, Inc.
    12,958,574       -0-       -0-       -0-       80,000  
Spencer Edwards, LLC
    12,958,574       -0-       -0-       -0-       37,980  
 
26
 
Company's Financial Ability to Satisfy its Obligations to the Selling Shareholders
 
The Company has the intention, and a reasonable basis to believe that it will have the financial ability to make payments on the overlying securities.
 
Existing Short Positions by Selling Shareholders
 
Based upon information provided by the selling shareholders, to the best of management's knowledge, the Company is not aware of any of the selling shareholders having an existing short position in the Company's common stock.
 
Relationships/Arrangements Between the Company and Selling Shareholders During the Past Three Years

In 2006, China Agri entered into an Underwriting Agreement with Spencer Edwards, Inc. in connection with the Public Offering that took place in 2007. Pursuant to the Underwriting Agreement, China Agri paid Spencer Edwards an 8% commission in the amount of $30,384, and a 3% non-accountable expense allowance in the amount of $11,394. Additionally, China Agri issued to Spencer Edwards 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.
 
In 2008, China Agri entered into a Placement Agent Agreement with Legend Merchant Group, Inc. in connection with the Private Placement. Pursuant to the Placement Agent Agreement, China Agri paid Legend Merchant Group an 8% commission in the amount of $40,000, and an  expense allowance in the amount of $25,000. Additionally, China Agri issued to Legend Merchant Group 80,000 warrants, each exercisable into one share of common stock at a price of $1.00 per share from September 29, 2008, 2008 until September 29, 2008, 2011.
 
In 2008, China Agri entered into a Business Advisory Agreement with Legend Merchant Group, Inc. setting forth fees payable to Legend for business advisory services rendered in connection with any equity and/or debt investment, merger, acquisition, partnership, joint venture, investment, strategic alliance or any other business combination entered into by the Company with a business entity and/or individual introduced to the Company by Legend. Pursuant to the Business Advisory Agreement, the Company agreed to pay to Legend the following fees in connection with a transaction consummated pursuant to the Advisory Agreement: eight percent for a transaction with gross aggregate consideration less than $5 million; plus six percent of the gross aggregate consideration over $5 million to $10 million; plus four percent of the gross aggregate consideration over $10 million to $20 million; plus two percent of the gross aggregate consideration over $20 million. In addition, the Company agreed to issue to Legend Merchant Group warrants to purchase 100,000 shares of common stock.

DIRECTORS AND EXECUTIVE OFFICERS

The following are the officers and directors of China Agri-Business, Inc., Mei Xin Agri Technology (Shaanxi) Co., Ltd., and Shaanxi Xin Sheng Centennial Agricultural and Technology Co., Ltd. as of the date hereof. Some of our officers and directors are residents of the PRC and, therefore, it may be difficult for investors to effect service of process within the U.S. upon them or to enforce judgments against them obtained from the U.S. courts.

Directors and Executive Officers of China Agri:
 
NAME
  
POSITION
  
AGE
Liping Deng
  
Director, Chief Executive Officer and President
  
37
Limin Deng
  
Chairman of Board of Directors
  
46
Xiaolong Zhou
  
Chief Financial Officer
  
56
Michael Segal
  
Director
  
66

Directors and Executive Officers of Meixin:
 
NAME
  
POSITION
  
AGE
Liping Deng
  
Chairman of Board of Directors
  
37
Limin Deng
  
Vice-Chairman of Board of Directors
  
46
Zhengfeng Guo
  
Director
  
39

27

Directors and Executive Officers of Xinsheng:
 
NAME
  
POSITION
  
AGE
Liping Deng
  
Director, and President
  
37
Limin Deng
  
Chairman of Board of Directors
  
46
Hong Cai
  
Director and Finance Manager
  
42
Yi Fu
  
Director and Vice President
  
36
Mengzhou Li
  
Director
  
45
 
Mr. Liping Deng was appointed as our Director, President and Chief Executive Officer on June 26, 2006. He has been a Director and President of Xinsheng since 2002 and Chairman of Board of Directors of Meixin since March 2006. Prior to joining us, Mr. Deng served as a senior manager at Xianyang Tong Lida Electronic Communication Co., Ltd. from 1996 to 1998. Prior to that, Mr. Deng served as President of the Worker's Union in Xianyang Pottery Factory from 1991 to 1995. Mr.Deng obtained a technical secondary school degree from Xi'an Construction Company Pottery Technology School. Mr. Liping Deng is the brother of Mr. Limin Deng.

Mr. Limin Deng was appointed as our Director on June 26, 2006. He founded Xinsheng in 2002 and served as Chairman of Xinsheng since that time. Mr. Deng is the Vice Chairman of the Board of Directors of Meixin. Prior to joining us, he served as a security manager in the Xi'An Electronic Technology University for six years. He founded Shaanxi Xinsheng Weiye Technology Development Co., Ltd. in 2001, which has been liquidated. He obtained a junior college degree in Economic Management from the Continuous Education College of Xi'an Electronic Technology University. Mr. Limin Deng is the brother of Mr. Liping Deng.

Mr. Xiaolong Zhou was appointed as our Chief Financial Officer in April 1, 2007. He had been a senior accountant in Liss Okou Goldstein Okun and Tancer CPA'S P.C. in Great Neck, New York for the prior nine years. He is a certified public accountant, registered in the state of New York, a member of American Institute of Certified Public Accountants, and a member of New York State Society of Certified Public Accountants. Mr. Zhou obtained an M.B.A. in accountancy degree from Baruch College of CUNY and an M.A. in economics degree from City College of CUNY. He obtained a B.A. in economics degree from Fudan University, Shanghai, China.

28
 
Mr. Michael Segal was appointed as our Director on June 8, 2006. Since 2001, Mr. Segal has been President of Segal Cirone Services Inc., a financial consulting company that advises institutions, banks and high net worth individuals. He currently is a Principal, Options Compliance Principal and Branch Office Manager of Whitaker Securities LLC, a member of the Financial Industry Regulatory Authority (FINRA) since October 23, 2006. Prior to that, Mr. Segal served in the following capacities: President of Alexander Westcott & Co., Inc., a licensed broker-dealer, and Secretary of the board of directors of its parent company, the Financial Commerce Network Inc., a publicly held company; President of Lamborn Securities Inc. a licensed broker-dealer. He is also individually registered as an Introducing Broker with the Commodity Futures Trading Commission, a member of the National Futures Association, and a founding member of the Managed Funds Association. Mr. Segal received a B.B.A. in marketing and economics from the University of Miami, (Coral Gables) Florida. Mr. Segal sits on the board of directors of the following privately held companies: China Power Equipment Company Inc.; Jiali Pharmaceuticals Inc.; Asia Nutracueticals Consulting Co. Ltd.; China America Holdings LLC; Kerry Pharmaceuticals Inc.; Asia Carbon Black, Inc. Mr. Segal also sits on the board of directors of the following publicly held company: BioStar Pharmaceuticals, Inc.

Mr. Zhengfeng Guo was appointed as a director of Meixin in November 2007. Prior to that, he was industry supervisor of Shaanxi Xinsheng Centennial Agriculture & Technology Co., Ltd. in the PRC from 2001 to 2007. He obtained his bachelor degree in marketing management from Shaanxi Finance & Economics college in the PRC.

Mr. Yi Fu was appointed as a Director and Vice President of Xinsheng in 2008. Prior that, he served as sales manager of Xinsheng. Mr. Fu graduated from Shaanxi Mechanical and Electrical Industry College in 1995.

Mr. Mengzhou Li was appointed as a Director of Xinsheng in 2009. Prior that, he was a Vice-Manager of Jiahui Group. He obtained his dealer certificate of Shanghai Stock Exchanges in 2001.

According to our By-laws, the term of our directors is from the date of their appointment or election until the next annual meeting of shareholders or until his or her successor shall have been elected and qualified. The terms for our principal executive officers are one year, and they serve at the discretion of our board of directors.
Family Relationships

Mr. Limin Deng and Mr. Liping Deng are brothers.
 
29

CORPORATE GOVERNANCE

Audit Committee

We have not yet appointed an audit committee. At the present time, our board of directors is collectively responsible for analyzing and evaluating our financial statements and our internal controls and procedures for financial reporting.

Compensation Committee

We do not presently have a compensation committee. Our board of directors currently acts as our compensation committee.

Nominating Committee

We do not presently have a nominating committee. Our board of directors currently acts as our nominating committee.

Director Independence

Michael Segal is an independent director as that term is defined in the applicable rules and regulations of the Nasdaq Stock Market.

Our Board of Directors does not presently have a majority of independent directors. In the absence of a majority of independent directors, our executive officer, who is also a principal stockholder and director, could establish policies and enter into transactions without independent review and approval thereof. This could present the potential for a conflict of interest between the Company and its stockholders generally and the controlling officers, stockholders or directors.

Code of Ethics

We have not yet adopted a Code of Business Conduct and Ethics that applies to our directors and officers.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of our common stock as of the date of this filing by:

 
·
each person known by us to be the beneficial owner of more than 5% of our outstanding shares of   common stock;
 
·
each of our officers and directors; and
 
·
all our officers and directors as a group.
 
Based on information available to us, all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them, unless otherwise indicated. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our common stock subject to options or warrants currently exercisable or exercisable within 60 days after the date of this prospectus are deemed outstanding, but are not deemed outstanding for the purpose of computing the percentage of ownership of any other person. Applicable percentage ownership is based upon 14,576,554 shares of common stock, which assumes full conversion or exercise, as the case may be, of all of the convertible securities held by the beneficial owners set forth in the table below.

Unless otherwise indicated, the address of each individual named below is c/o China Agri-Business, Inc., Finance Plaza, 9th Floor, Hi-tech Road No. 42, Hi-tech Industrial Development Zone Xi'an, Shaanxi, CHINA 710068.

Name of Beneficial Owner
 
Amount and
Nature of
Beneficial
Ownership (1)
   
Per cent of
Class
 
             
Michael Segal  
11 East 86th Street
New York, New York 10028
   
63,074
     
0.4
%
Liping Deng
   
1,851,148
     
12.6
 
Liming Deng
   
—
     
—
 
Xiaolong Zhou
   
—
     
—
 
All Directors and Executive Officers as a group (4 persons)
   
1,914,222
     
13.1
 
Trustees for Xinsheng Shareholders (2)
   
9,099,749
     
62.4
 
JAG Multi Investment (3)
   
750,000
     
5.1
 
Keith Guenther (3)
   
750,000
     
5.1
 

30

Footnotes:

(1) Reflects the ownership of our equity securities after a 2.032-for-1 forward split of our common stock during the fourth quarter of 2006.

(2) The trustees for the trust holding these shares are: Zhihong Yang, Xiaoying Lin, Dongdong Ding, Fei Zhao and Junsheng Meng. The trustees are individuals and are not affiliated with any bank or trust company.

(3) Includes 500,000 shares of common stock underlying Notes and 250,000 shares of common stock underlying the series C Investor Warrants.

EXECUTIVE COMPENSATION
 
Summary Compensation Table

The following table sets forth all compensation awarded to, or earned by, our Principal Executive Officer, and our two other most highly compensated executive officers   for the years indicated.

Name and Principal
Position
(a)
  
Year
(b)
   
Salary
($)
(c)
   
Bonus
($)
(d)
   
Stock
Awards
($)
(e)
   
Option
Awards
($)
(f)
   
Non-Equity
Incentive
Plan
Compensation
($)
(g)
   
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
(h)
   
All Other
Compensation
($)
(i)
   
Total
($)
(j)
Liping Deng
Chief Executive
Officer (1)
  
2008
    
6,260
  
—
    
—
  
—
    
—
  
—
    
—
  
6,260
   
2007
    
5,260
  
—
    
—
  
—
    
—
  
—
    
—
  
5,260
Xiaolong Zhou
Chief Financial Officer (2)
  
2008
    
45,000
  
—
    
—
  
—
    
—
  
—
    
—
  
45,000
   
2007
    
33,750
  
—
    
—
  
—
    
—
  
—
    
—
  
33,750

Compensation Discussion and Analysis

The goal of our board of directors in determining compensation levels is to adequately reward the efforts and achievements of our executive officers for the management of the Company. The board believes that the compensation paid to its executive officers is comparable to peer companies of comparable size in similar locations.

31
 
We entered into a preliminary employment agreement with Mr. Zhou on April 1, 2007, which provides for annual compensation of $45,000. Mr. Zhou continues to be compensated at this annual rate.

We do not have written employment agreements with our other executive officers. Under PRC employment laws, if an employer and employee do not enter into a written employment agreement within one year, they are deemed to have entered into a de facto employment contract with an open (indefinite) term. In the absence of an employment contract, an employer remains obligated to participate in the PRC’s social insurance programs on behalf of the employee, including pension, medical, unemployment, occupational accident/disability, and maternity insurance.
 
Generally speaking, employment contracts governed by PRC law are required to include the following information: identity and domicile of the employer and employee, term of employment, job description and place of work, work hours, vacation policy, compensation, social insurance information, safety measures and working conditions.

China Agri-Business does not currently have a pension plan, stock option plan, non-equity incentive plan or deferred compensation arrangement. We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including but not limited to non-cash and other equity-based compensation such as stock options.

Director Compensation

The compensation of our directors is determined on a case by case basis. The factors considered by the Company for the purpose of determining director compensation include, but are not limited to: the director’s relevant work experience; the number of years the director has served as a director of the Company, and; the director’s overall contributions to the Company, including the amount of time devoted to the Company by the director. The Company has not established a maximum fee for its directors.

Effective January 1, 2008, Michael Segal is paid cash compensation at the rate of $1,500 per month, or $18,000 annually, for his services as director.

Our Chief Executive Officer, Liping Deng, does not receive any additional compensation for his services as director above and beyond his salary as an officer.

32

The following table sets forth compensation paid to each named director during the year end December 31, 2008.

DIRECTOR COMPENSATION

Name
(a)
  
Fees
Earned or
Paid in
Cash
($)
(b)
    
Stock
Awards
($)
(c)
    
Option
Awards
($)
(d)
    
Non-Equity
Incentive
Plan
Compensation
($)
(e)
    
Non-Qualified
Deferred
Compensation
Earnings
($)
(f)
    
All
Other
Compensation
($)
(g)
  
Total
($)
(j)
Limin Deng
    
6,332
      
—
      
—
      
—
      
—
      
—
  
6,332
Michael Segal
    
18,000
      
—
      
—
      
—
      
—
      
—
  
18,000

PLAN OF DISTRIBUTION
 
Each selling security holder and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of the shares of common stock offered by this prospectus on any stock exchange or automated interdealer quotation system on which the common stock is listed or quoted at the time of sale, in the over-the-counter market, in privately negotiated transactions or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at prices otherwise negotiated. A selling security holder may use any one or more of the following methods when selling shares:
 
 
•
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
 
•
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
•
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
•
an exchange distribution in accordance with the rules of the applicable exchange;
 
•
privately negotiated transactions;
 
•
settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
 
•
broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share;
 
•
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
 
•
a combination of any such methods of sale; or
 
•
any other method permitted pursuant to applicable law.

The selling security holders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
 
Broker-dealers engaged by the selling security holders may arrange for other broker dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated.  The selling security holders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.

A selling security holder may from time to time pledge or grant a security interest in some or all of the shares or common stock owned by him and, if the selling security holder defaults in the performance of the secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling security holders to include the pledgee, transferee or other successors in interest as selling security holders under this prospectus.

 In connection with the sale of our common stock or interests therein, the selling security holders may enter into hedging transactions with broker-dealers or other financial institutions which may in turn engage in short sales of our common stock in the course of hedging the positions they assume.  The selling security holders may, after the date of this prospectus, also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge their common stock to broker-dealers that in turn may sell these securities. The selling security holders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The selling security holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

33

Because the selling security holders may be deemed to be "underwriters" within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. Federal securities laws, including Regulation M, may restrict the timing of purchases and sales of our common stock by the selling security holders and any other persons who are involved in the distribution of the shares of common stock pursuant to this prospectus. 

There is no underwriter or coordinating broker acting in connection with the proposed sale of the shares by the selling security holders.

The shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

DESCRIPTION OF SECURITIES
 
We have an authorized capital of 100,000,000 shares of common stock, par value $0.001 per share, 100,000 shares of Series A preferred stock, and 4,900,000 shares of undesignated preferred stock, par value $0.001 per share. As of April 1, 2009, 12,958,574 shares of common stock were outstanding, and no shares of preferred stock were outstanding.
 
Common Stock
 
The holders of common stock are entitled to one vote per share on all matters voted on by stockholders, including the election of directors. Except as otherwise required by law, the holders of common stock exclusively possess all voting power. The holders of common stock are entitled to dividends as may be declared from time to time by the Board from funds available for distribution to holders. No holder of common stock has any preemptive right to subscribe to any securities of ours of any kind or class or any cumulative voting rights.

3% Unsecured Convertible Notes

The notes mature two years from the date of issuance, on September 29, 2010, and bear interest at the rate of 3% per annum, payable annually in cash or in shares common stock, subject to approval of the holder. Any interest which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum. Any principal which is not paid when due shall bear interest at the rate of eight percent (8%) per annum. The notes are convertible at the option of the holder into common at a conversion price of $0.50 per share. The conversion price is subject to adjustment upon the occurrence of stock splits, combinations, dividends, and subsequent offerings, as set forth in the notes.

Subject to effectiveness of the registration statement, the Company shall have the right to prepay the notes at 110% of the outstanding principal amount any time prior to the maturity date, and upon thirty (30) days prior written notice to the holders.

Series C Warrants

The series C warrants have a term of three years and an exercise price of $1.50 per share. In addition, upon exercise of a series C warrant, each  holder shall be issued a series D warrant. The series D warrants shall have a term of three years and an exercise price of $2.00 per share. The shares issuable upon exercise of the series D warrants are not covered by this registration statement. The exercise price of the warrants is subject to adjustment upon the occurrence of stock splits, combinations, dividends, and subsequent offerings, as set forth in the Warrants.

The Company may call for the termination of any unexercised portion of the series C warrants upon consummation of a subsequent offering by the Company of not less than $7.5 million in gross proceeds, and upon thirty (30) days written notice to the holders.

LEGAL PROCEEDINGS
 
There are no material pending legal proceedings to which we are a party or to which any of our property is subject and to the best of our knowledge, no such actions against us are contemplated or threatened.
 
34

EXPERTS

The consolidated financial statements of China Agri-Business, Inc. as of and for the years ended December 31, 2008 and 2007, have been audited by Michael T. Studer, CPA, P.C., independent registered public accountants, as indicated in their reports with respect thereto, and are in reliance upon the authority of said firm as experts in accounting and auditing.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers or persons controlling our Company pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file reports and other information with the Securities and Exchange Commission. We have also filed a registration statement on Form S-1, including exhibits, with the SEC with respect to the shares being offered in this offering. This prospectus is part of the registration statement, but it does not contain all of the information included in the registration statement or exhibits. For further information with respect to us and our common stock, we refer you to the registration statement and to the exhibits and schedules to the registration statement. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference. You may inspect a copy of the registration statement without charge at the SEC's principal office in Washington, D.C., and copies of all or any part of the registration statement may be obtained from the Public Reference Section of the SEC, 100 F. St. NE, Washington, D.C. 20549, upon payment of fees prescribed by the SEC. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the Web site is http://www.sec.gov. The SEC's toll free investor information service can be reached at 1-800-SEC-0330.

FINANCIAL STATEMENTS

CHINA AGRI-BUSINESS, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS
   
Page
     
Condensed Consolidated Balance Sheets
as of March 31, 2009 (Unaudited) and December 31, 2008
 
F-1
     
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2009 and 2008 (Unaudited)
 
F-2
     
Condensed Consolidated Statements of Stockholders’ Equity
for the three months ended March 31, 2009 (Unaudited) and
the year ended December 31, 2008
 
F-3
     
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2009 and 2008 (Unaudited)
 
F-4
     
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
F-5 - F-13

   
Page
     
Report of Independent Registered Public Accounting Firm
  
F-1
     
Consolidated Balance Sheets as of December 31, 2008 and 2007
  
F-2
     
Consolidated Statements of Operations for the Years ended December 31, 2008 and 2007
  
F-3
     
Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2008 and 2007
  
F-4
     
Consolidated Statements of Cash Flows for the Years ended December 31, 2008 and 2007
  
F-5
     
Notes to Consolidated Financial Statements
  
F-5 - F-17
 
35
 
China Agri-Business, Inc.
Condensed Consolidated Balance Sheets

   
March 31,
2009
   
December 31,
2008
 
   
(Unaudited)
       
Assets
 
Current Assets
           
Cash and cash equivalents
  $ 8,570,966     $ 8,312,636  
Accounts receivable, net of allowance for doubtful accounts of $6,587 and  $6,524, respectively
    37,881       45,165  
Inventory
    65,217       47,113  
Other receivables
    7,320       7,329  
Prepaid expenses
    29,441       22,345  
Total Current Assets
    8,710,825       8,434,588  
Property, plant and equipment, net
    126,922       231,278  
Investment in Tienwe Technology
    878,400       879,420  
Deferred financing costs, net of accumulated amortization of $55,777 and $28,403, respectively
    151,505       178,879  
Intangible assets, net
    19,044       59,495  
Total Assets   
  $ 9,886,696     $ 9,783,660  
                 
Liabilities and Stockholders' Equity
 
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 215,701     $ 234,007  
Total Current Liabilities  
    215,701       234,007  
                 
Long Term Liabilities
               
Convertible notes, net  
    352,478       327,020  
                 
Total Liabilities  
    568,179       561,027  
                 
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, respectively
    12,959       12,959  
Additional paid-in capital
    4,369,786       4,369,786  
Retained earnings
    3,761,128       3,654,212  
Accumulated other comprehensive income
    1,174,644       1,185,676  
Total stockholders' equity  
    9,318,517       9,222,633  
Total Liabilities and Stockholders' Equity  
  $ 9,886,696     $ 9,783,660  

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

 
F-1
 

China Agri -Business, Inc.
Condensed Consolidated Statements of Operations

   
Three Months Ended
 
   
March 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
             
Sales of products
  $ 469,572     $ 339,444  
Cost of goods sold
    146,242       103,591  
Gross profit
    323,330       235,853  
                 
Selling, general and administrative expenses
    164,351       124,434  
Income from operations
    158,979       111,419  
Interest and other income
    4,519       4,909  
Interest expense
    (56,582 )     -  
Income before income taxes
    106,916       116,328  
Income taxes
    -       -  
Net income
  $ 106,916     $ 116,328  
                 
Earnings per common share:
               
Basic
  $ 0.01     $ 0.01  
Diluted
  $ 0.01     $ 0.01  
                 
                 
Weighted average number of common shares used to compute earnings per common share:
               
Basic
    12,958,574       12,958,574  
Diluted
    13,958,574       12,958,574  

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

 
F-2
 

China Agri -Business, Inc.
Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2009 (Unaudited) and the Year Ended December 31, 2008

   
Common Stock
Shares
   
Common Stock
Amount
   
Additional
Paid-in Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Total
 
Balance, December 31, 2007
    12,958,574     $ 12,959     $ 4,150,636       2,308,873     $ 656,164     $ 7,128,632  
Relative fair value of warrants and beneficial conversion feature included in sale of convertible notes
    -       -       199,230       -       -       199,230  
Fair value of Placement Agent warrants
    -       -       19,920       -       -       19,920  
Net income for the year ended December 31, 2008
    -       -       -       1,345,339       -       1,345,339  
Foreign currency translation adjustment
    -       -       -       -       529,512       529,512  
Balance, December 31, 2008
    12,958,574       12,959       4,369,786       3,654,212       1,185,676       9,222,633  
Net income for the three months ended March 31, 2009 (Unaudited)
    -       -       -       106,916       -       106,916  
Foreign currency translation adjustment (Unaudited)
    -       -       -       -       (11,032 )     (11,032 )
Balance, March 31, 2009 (Unaudited)
    12,958,574     $ 12,959     $ 4,369,786     $ 3,761,128     $ 1,174,644     $ 9,318,517  

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

 
F-3
 

China Agri -Business, Inc.
Condensed Consolidated Statements of Cash Flows

   
Three Months Ended
 
   
March 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
Operating activities
           
Net income
  $ 106,916     $ 116,328  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Bad debt expense
    70       -  
Depreciation of property, plant and equipment
    10,262       12,881  
Amortization of intangible assets and deferred financing costs
    30,421       4,684  
Amortization of debt discount and fair value of warrants
    25,458       -  
Changes in operating assets and liabilities:
               
Decrease in accounts receivable
    7,221       31,462  
Increase in other receivable
    -       (276 )
Increase in inventory
    (18,104 )     (17,034 )
(Increase)/decrease in prepaid expenses
    (7,096 )     3,334  
Decrease in accounts payable and accrued liabilities
    (18,306 )     (5,201 )
Net cash provided by operating activities
    136,842       146,178  
                 
Investing activities
               
Proceeds from disposal of fixed assets and intangible assets
    131,760       -  
Property, plant and equipment additions
    (608 )     -  
Net cash provided by investing activities
    131,152       -  
                 
Financing activities
               
Net cash provided by financing activities
    -       -  
                 
Effect of exchange rate changes on cash and cash equivalents
    (9,664 )     245,740  
Increase in cash and cash equivalents
    258,330       391,918  
Cash and cash equivalents, beginning of period
    8,312,636       5,984,448  
Cash and cash equivalents, end of period
  $ 8,570,966     $ 6,376,366  

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

 
F-4
 
 
CHINA AGRI-BUSINESS, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Organization

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.

China Agri is a holding company with no operations other than acting as a holding company for its wholly owned subsidiary, Mei Xin Agri Technology (Shaanxi) Co., Ltd. (“Meixin”), a limited liability company and a wholly-owned foreign enterprise (“WOFE”) organized under the laws of the PRC on March 24, 2006. Meixin acts as a management company for our operating business in the PRC, Shaanxi Xin Sheng Centennial Agricultural and Technology Co., Ltd. (“Xinsheng”), a corporation formed under the laws of the PRC on April 22, 2002, in accordance with the terms of a management entrustment agreement between Meixin and Xinsheng. Meixin controls Xinsheng's business and management, and is entitled to the proceeds of Xinsheng's business and is obligated to fund Xinsheng’s operations, including any losses. China Agri and Meixin do not own any equity rights in Xinsheng.

Pursuant to 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”), 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 was 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 was 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.

China Agri-Business, Inc., through its operating company in China, manufactures and sells non-toxic fertilizer, bactericide and fungicide products used for farming in the People’s Republic of China (the “PRC”). Crops grown with our products are eligible to qualify for the “AA Green Food” rating administered by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC.

Basis of presentation

The condensed consolidated financial statements (unaudited) have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).

 
F-5
 

Principles of Consolidation

The condensed consolidated financial statements (unaudited) include the accounts of China Agri, Meixin and Xinsheng. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 – INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements as of March 31, 2009 and for the three months then ended 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 condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of March 31, 2009 and the results of operations and cash flows for the three months ended March 31, 2009 and 2008. 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, 2009 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2009. The balance sheet at December 31, 2008 has been derived from the audited consolidated 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 condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2008 included in our Form 10 –K filed March 31, 2009.

NOTE 3 – INVENTORY

Inventory consists of:
 
March 31,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Raw materials
  $ 50,156     $ 39,125  
Finished goods
    11,613       4,536  
Other
    3,448       3,452  
                 
Total inventory
  $ 65,217     $ 47,113  
 
 
F-6
 


NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consist of:
   
March 31,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Building
  $ 19,676     $ 19,699  
Transportation equipment
    222,833       223,092  
Manufacturing equipment and machinery
    37,048       146,034  
Office equipment
    18,502       3,508  
      298,059       392,333  
                 
Less accumulated depreciation
    171,137       161,055  
Property, plant and equipment, net
  $ 126,922     $ 231,278  
 
Depreciation expense was $10,262 and $47,374 for the three months ended March 31, 2009 and the year ended December 31, 2008, respectively. In the first quarter of 2009, the Company returned certain unused manufacturing equipment to the original vendor for $94,428, an amount equal to the net book value of the equipment.

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 ($878,400 and $879,420 translated at the March 31, 2009 and December 31, 2008 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 – DEFERRED FINANCING COSTS

Deferred financing costs, which are being amortized as interest expense over the two year term of the convertible notes payable due September 29, 2010, consist of:

   
March 31,
2009
   
December 31,
2008
 
   
(Unaudited)
       
Placement Agent commissions
  $ 40,000     $ 40,000  
Placement Agent expense allowance
    25,000       25,000  
Fair value of Placement Agent warrants
    19,920       19,920  
Legal and other fees
    122,362       122,362  
Total
    207,282       207,282  
Less: accumulated amortization
   
(55,777
)     (28,403 )
                 
Deferred Financing Costs, end of period
  $ 151,505     $ 178,879  
 
 
F-7
 

NOTE 7 – INTANGIBLE ASSETS, NET

Intangible assets, net, consist of:
   
March 31,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
Product rights
  $ 52,704     $ 90,141  
Patent
    14,640       14,657  
Trademark
    2,187       2,190  
Total
    69,531       106,988  
Less accumulated amortization
    50,487       47,493  
                 
Intangible assets, net
  $ 19,044     $ 59,495  

The product rights were acquired by Xinsheng in December 2006 from an unrelated third party and relate to six registered fertilizer products.  In the first quarter of 2009, the Company returned three of these products rights to the original vendor for $37,332, an amount equal to the net book value of the respective assets.

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, 2010, 2011, 2012, 2013 and 2014 is $12,224, $5,196, $1,275, $53 and $53, respectively.

NOTE 8 – CONVERTIBLE NOTES PAYABLE, NET

Convertible notes payable, net, consist of:
   
March 31,
2,009
   
December 31,
2008
 
   
(Unaudited)
       
Convertible notes - face amount
  $ 500,000     $ 500,000  
Less:
               
Debt discount attributable to the relative fair value of warrants
    (149,615 )     (149,615 )
Debt discount attributable to the intrinsic value of the beneficial conversion feature
    (49,615 )     (49,615 )
Less accumulated amortization of debt discounts
    51,708       26,250  
                 
Convertible notes payable, net
  $ 352,478     $ 327,020  

On September 29, 2008, the Company completed the sale of 3% unsecured convertible notes in an aggregate principal amount of $500,000, and Series C warrants to purchase 500,000 shares of common stock, to two accredited investors. The Company received net proceeds of $431,500 after the deduction of Placement Agent commissions of $40,000, Placement Agent expense allowance of $25,000, and an escrow agent fee of $3,500.

 
F-8
 

NOTE 8 – CONVERTIBLE NOTES PAYABLE, NET (Continued)

The Notes mature two years from the date of issuance and bear interest at the rate of 3% per annum, payable annually in cash or in shares of common stock, subject to approval of the holder. Overdue interest shall bear interest at the rate of 15% per annum. Overdue principal shall bear interest at the rate of 8% per annum. The Notes are convertible at the option of the holder into the common stock of the Company at an initial conversion price of $0.50 per share. The conversion price is subject to adjustment upon the occurrence of stock splits, combinations, dividends and subsequent offerings.

The Series C warrants have a term of three years and are exercisable into shares of common stock on a one to one basis at an an exercise price of $1.50 per share. Upon exercise of a Series C warrant, in addition to receiving shares of common stock, each Series C warrant holder shall be issued  a Series D warrant to purchase additional shares of common stock in an amount equal to the number of Series C warrants exercised. The Series D warrants, if issued shall have a term of three years and an exercise price of $2.00 per share. The exercise price of the Warrants is subject to adjustment upon the occurrence of stock splits, combinations, dividends and subsequent offerings, as set forth in the warrants. No Series D warrants have been issued as of the date of this filing.

Subject to effectiveness of the registration statement, the Company shall have the right to prepay the Notes at 110% of the outstanding principal amount any time prior to the maturity date and upon 30 days prior written notice to the holders. The Company may call for the termination of any unexercised portion of the C warrants upon consummation of a subsequent offering by the Company of not less than $7,500,000 in gross proceeds and upon 30 days written notice to the holders. Upon termination of any unexercised Series C warrants, the warrant holders would not receive any Series D warrants, any shares underlying the Series C or Series D warrants, or any other securities.

In connection with the transaction, the Company agreed to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) within 60 days following the final closing date. In addition, if the registration statement is not declared effective within 120 days from the filing date, the Company is subject to monthly cash liquidated damages payments equal to 2% of the purchase price paid by each investor, subject to a maximum of 24%. On February 13, 2009, the Company filed a registration Statement on Form S-1 to register the shares underlying the convertible notes and warrants.

In accordance with the Accounting Principal Board (“APB”) Opinion No.14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” and the Emerging Issues Task Force (“EITF”) Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”, the Company recorded the $149,615 relative fair value of the warrants ($78,136 for the Series C warrants; $71,479 for the Series D warrants) and the $49,615 intrinsic value of the beneficial conversion feature as additional paid in capital. No Series D warrants have been issued as of the date of this filing.

The $149,615 fair value of the Series C and Series D warrants was calculated using a Black-Scholes option pricing model and the following assumptions: risk-free interest rate of 2.26%; expected stock price volatility of 130.69%; stock price of $0.40 per share; exercise price of $1.50 per share for the C warrants and $2.00 per share for the D warrants; and term of 3 years.
 
 
F-9
 

NOTE 8 – CONVERTIBLE NOTES PAYABLE, NET (Continued)

In connection with the private placement, the placement agent received warrants to purchase 80,000 shares of the Company’s common stock at an exercise price of $1.00 per share for a term of three years. The $19,920 fair value of these warrants (calculated using the same assumptions described above except for the exercise price) was charged to deferred financing costs and added to additional paid in capital.

NOTE 9 – COMMON STOCK

On October 11, 2007, upon the completion of the public offering, China Agri sold 379,800 units at a price of $1.00 per unit to the public investors. 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.

NOTE 10 - WARRANTS

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

   
March 31,
2009
   
Year Ended
December 31, 2008
 
   
(Unaudited)
       
Outstanding at beginning of period
    1,387,580       807,580  
Warrants issued
    -       580,000  
Warrants exercised
    -       -  
Warrants expired
    -       -  
Outstanding at end of period
    1,387,580       1,387,580  
                 
Exercisable at end of period
    1,387,580       1,387,580  

Warrants outstanding at March 31, 2009 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, 2012
      37,980       1.00  
September 29, 2008
 
September 29, 2011
      80,000       1.00  
September 29, 2008
 
September 29, 2011
      500,000       1.50  
Total
            1,387,580     $ 1.59  

 
F-10
 

NOTE 11 – RESTRICTED NET ASSETS

Relevant PRC statutory laws and regulations permit payments of dividends by Meixin and 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, the Company 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 $5,115,000 and $5,104,000 at March 31, 2009 and December 31, 2008, respectively.

NOTE 12 – 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 has granted Xinsheng exemptions from this tax since 2006. The Company has to apply for exemption status on an annual basis.

At March 31, 2009 and December 31, 2008, 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, 2009 and December 31, 2008.

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

   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
Expected tax at 35%
  $ 37,421     $ 40,715  
                 
Tax effect of unutilized losses of China Agri and Meixin
    39,507       13,341  
                 
Effect of PRC income tax exemption granted to Xinsheng
    (54,949 )     (38,611 )
                 
Permanent difference relating to Xinsheng's earnings to be  permanently invested in operations outside the United States
    (21,979 )     (15,445 )
Actual provision for income taxes
  $ -     $ -  
 
 
F-11
 

NOTE 13 – 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, 2009 and December 31, 2008 were located in the PRC.  Net sales for the periods presented were all derived from PRC customers.

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Lease Agreements

Xinsheng leases its office space (approximately 7300 square feet) at an annual rent of 366,390 RMB ($53,640 translated at the March 31, 2009 exchange rate) under a lease with a three year term expiring March 31, 2011.

Xinsheng leases its operating and testing space (approximately 2600 square feet) at an annual rent of 38,500 RMB ($5,636 translated at the March 31, 2009 exchange rate) under a lease expiring March 31, 2010.

Xinsheng leases its manufacturing space (approximately 22,600 square feet at an annual rent of 90,000 RMB ($13,176 translated at March 31, 2009 exchange rate) under a lease expiring December 21, 2010.

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

For the three months ended March 31, 2009 and 2008, rental and related expenses for all operating leases amounted to $11,409 and $15,896, respectively.

At March 31, 2009, future minimum rental commitments under all non-cancellable operating leases are:
Year ending
March 31,
 
Minimum
Rent
 
2010
  $ 69,158  
2011
    53,640  
Total
  $ 122,798  

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.

 
F-12
 

PRC Risks (Continued)

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.

NOTE 15 – CONCENTRATION OF CREDIT RISK

The Company maintains cash balances in seven banks in China. Currently, no deposit insurance system has been set up in China. Therefore, the Company will bear a risk if any of these banks become insolvent. As of March 31, 2009 and December 31, 2008, the Company’s uninsured cash balances were approximately $8,563,000 and $8,300,000, respectively.

 
F-13
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
China Agri-Business, Inc.
 
I have audited the accompanying consolidated balance sheets of China Agri-Business, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these financial statements based on my audits.
 
I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
 
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Agri-Business, Inc. and subsidiaries as of December 31, 2008 and 2007 and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
 
         
     
/s/ Michael T. Studer, CPA, P.C.
  
     
Michael T. Studer, CPA, P.C.
  
         
 
Freeport, New York
March 31, 2009
 
F-1
 
China Agri-Business, Inc.
Consolidated Balance Sheets
As of December 31,

   
2008
    
2007
  
Assets
            
Current Assets
            
Cash and cash equivalents
  
$
8,312,636
    
$
5,984,448
  
Accounts receivable, net of allowance for doubtful accounts of $6,524 and  $23,991, respectively
    
45,165
      
65,118
  
Inventory
    
47,113
      
60,582
  
Other receivables
    
7,329
      
6,855
  
Prepaid expenses
    
22,345
      
5,735
  
Total Current Assets
    
8,434,588
      
6,122,738
  
Property, plant and equipment, net
    
231,278
      
276,000
  
Investment in Tienwe Technology
    
879,420
      
822,540
  
Deferred financing costs, net of accumulated amortization of $28,403 and $0, respectively
    
178,879
      
-
  
Intangible assets, net
    
59,495
      
73,554
  
Total Assets   
  
$
9,783,660
    
$
7,294,832
  
                 
Liabilities and Stockholders' Equity
                
Current Liabilities
                
Accounts payable and accrued liabilities
  
$
234,007
    
$
166,200
  
Total Current Liabilities  
    
234,007
      
166,200
  
                 
Long Term Liabilities
                
Convertible notes, net  
    
327,020
      
-
  
                 
Total Liabilities  
    
561,027
      
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
    
12,959
      
12,959
  
Additional paid-in capital
    
4,369,786
      
4,150,636
  
Retained earnings
    
3,654,212
      
2,308,873
  
Accumulated other comprehensive income
    
1,185,676
      
656,164
  
Total stockholders' equity  
    
9,222,633
      
7,128,632
  
Total Liabilities and Stockholders' Equity  
  
$
9,783,660
    
$
7,294,832
  

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

F-2
 
China Agri -Business, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2008 and 2007

   
2008
    
2007
  
             
Sales of products
  
$
2,922,385
    
$
3,037,414
  
Cost of goods sold
    
817,472
      
964,961
  
Gross profit
    
2,104,913
      
2,072,453
  
                 
Selling, general and administrative expenses
    
729,278
      
1,029,230
  
Income from operations
    
1,375,635
      
1,043,223
  
Interest and other income
    
28,107
      
15,659
  
Interest expense
    
(58,403
)
    
-
  
Income before income taxes
    
1,345,339
      
1,058,882
  
Income taxes
    
-
      
-
  
Net income
    
1,345,339
      
1,058,882
  
Deemed dividend relating to beneficial conversion feature of Series A preferred stock
    
-
      
(200,000
)
Net income attributable to common stockholders
  
$
1,345,339
    
$
858,882
  
                 
Earnings per common share:
                
Basic
  
$
0.10
    
$
0.07
  
Diluted
  
$
0.10
    
$
0.07
  
 
               
Weighted average number of common shares used to compute earnings per common share:
                
Basic
    
12,958,574
      
12,431,496
  
Diluted
    
13,216,108
      
12,664,099
  

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

F-3

China Agri -Business, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2008 and 2007

    
Common Stock
Shares
      
Common Stock
Amount
      
Additional Paid-in
Capital
      
Retained
Earnings
      
Accumulated
Other
Comprehensive
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
  
Relative fair value of warrants and beneficial conversion feature included in sale of convertible notes
    
-
      
-
      
199,230
      
-
      
-
      
199,230
  
Fair value of Placement Agent warrants
    
-
      
-
      
19,920
      
-
      
-
      
19,920
  
Net income for the year ended December 31, 2008
    
-
      
-
      
-
      
1,345,339
      
-
      
1,345,339
  
Foreign currency translation adjustment  
    
-
      
-
      
-
      
-
      
529,512
      
529,512
  
Balance, December 31, 2008  
    
12,958,574
    
$
12,959
    
$
4,369,786
      
3,654,212
    
$
1,185,676
    
$
9,222,633
  

The accompanying notes are an integral part of these financial statements.
 
F-4

China Agri -Business, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2008 and 2007

   
2008
    
2007
  
Operating activities
            
Net income
  
$
1,345,339
    
$
1,058,882
  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                
Bad debt expense
    
(18,785
)
    
-
  
Depreciation of property, plant and equipment
    
47,374
      
44,157
  
Amortization of intangible assets and deferred financing costs
    
47,726
      
17,636
  
Amortization of debt discount and fair value of warrants
    
26,250
      
-
  
 Changes in operating assets and liabilities:
                
Decrease in accounts receivable
    
37,420
      
38,726
  
(Increase)/decrease in other receivable
    
(474
)
    
11,621
  
Decrease in inventory
    
13,469
      
31,671
  
(Increase)/decrease in prepaid expenses
    
(16,610
)
    
16,402
  
Increase in accounts payable and accrued liabilities
    
67,807
      
114,924
  
Net cash provided by operating activities
    
1,549,516
      
1,334,019
  
Investing activities
                
Loans receivable collections
    
-
      
301,447
  
Property, plant and equipment additions
    
(5,300
)
    
(32,902
)
Net cash (ussed in) provided by investing activities          
    
(5,300
)
    
268,545
  
Financing activities
                
Proceeds from public offering
    
-
      
379,800
  
Costs relating to public offering
    
-
      
(158,193
)
Proceeds from convertible notes
    
500,000
      
-
  
Costs relating to sale of convertible notes
    
(187,362
)
    
-
  
Net cash provided by financing activities          
    
312,638
      
221,607
  
                 
Effect of exchange rate changes on cash and cash equivalents      
    
471,334
      
374,742
  
Increase in cash and cash equivalents
    
2,328,188
      
2,198,913
  
Cash and cash equivalents, beginning of period          
    
5,984,448
      
3,785,535
  
Cash and cash equivalents, end of period          
  
$
8,312,636
    
$
5,984,448
  
                 
Supplemental Disclosures of Cash Flow Informtion:
                
Non Cash Financing Activities:
                
Relative fair value of warrants and beneficial conversion feature recorded as debt discount and additional paid in capital
  
$
199,230
    
$
-
  
Fair value of Placement Agent warrants recorded as deferred financing costs and additional paid in capital      
  
$
19,920
    
$
-
  

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

F-5
 
CHINA AGRI-BUSINESS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.
 
China Agri is a holding company with no operations other than acting as a holding company for its wholly owned subsidiary, Mei Xin Agri Technology (Shaanxi) Co., Ltd. (“Meixin”), a limited liability company and a wholly-owned foreign enterprise (“WOFE”) organized under the laws of the PRC on March 24, 2006. Meixin acts as a management company for our operating business in the PRC, Shaanxi Xin Sheng Centennial Agricultural and Technology Co., Ltd. (“Xinsheng”), a corporation formed under the laws of the PRC on April 22, 2002, in accordance with the terms of a management entrustment agreement between Meixin and Xinsheng. Meixin controls Xinsheng's business and management, and is entitled to the proceeds of Xinsheng's business and is obligated to fund Xinsheng’s operations, including any losses. China Agri and Meixin do not own any equity rights in Xinsheng.

Pursuant to 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”), 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 was 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 was 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.
 
China Agri-Business, Inc., through its operating company in China, manufactures and sells non-toxic fertilizer, bactericide and fungicide products used for farming in the People’s Republic of China (the “PRC”). Crops grown with our products are eligible to qualify for the “AA Green Food” rating administered by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation
 
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
 
Principles of Consolidation

The consolidated financial statements of 2008 and 2007 include the financial statements of China Agri, Meixin and Xinsheng.  All intercompany balances and transactions have been eliminated in consolidation.

F-6

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Use of Estimates
 
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
 
Fair Value of Financial Instruments
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, net, other receivables, accounts payable and accrued liabilities, and convertible notes, net. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments or by comparison to other instruments with similar terms.
 
Foreign Currency Translation
 
The functional currency of China Agri is the United States dollar. The functional currency of Xinsheng and Meixin is the RMB. The reporting currency of the Company is the United States dollar.
 
The assets and liabilities of Xinsheng and Meixin are translated into United States dollars at period-end exchange rates ($0.14657 and $0.13709 at December 31, 2008 and 2007, respectively). The revenues and expenses are translated into United States dollars at average exchange rates for the period ($0.14396 and $0.13148 for the years ended December 31, 2008 and 2007, respectively). Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.
 
F-7

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign Currency Translation (Continued)

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.  There is no material foreign currency transaction gain or loss for the years ended December 31, 2008 and 2007.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, cash on deposit with banks, and highly liquid debt investments with a maturity of three months or less when purchased.

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or market.

Property, Plant and Equipment, Net

Property, plant and equipment is stated at cost less accumulated depreciation.  Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets.

Intangible and Other Long-Lived Assets, Net

Intangible and other long-lived assets are stated at cost, less accumulated amortization and impairments.  The intangible assets are being amortized over their expected useful economic lives ranging from 5 to 10 years.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.  When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition.  If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.

Revenue Recognition
 
Sales of products are recorded when title passes to the customer, which is generally at time of shipment. The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables. The credit risk is controlled through credit approvals, limits and monitoring procedures. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors. Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted. The Company does not routinely permit customers to return product.
 
Freight and other transportation costs are included in cost of goods sold.

F-8

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation
 
Stock-based compensation is accounted for at fair value in accordance with SFAS No. 123(R) “Accounting for Stock-Based Compensation”. No stock options have been granted and none are outstanding.
 
Advertising

Advertising costs are expensed as incurred. For the years ended December 31, 2008 and 2007, advertising expenses were $11,946 and $21,236, respectively.

Income Taxes

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net of operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not more likely than not that some portion or all of the deferred tax assets will be realized.  Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

Earnings (Loss) Per Common Share

Basic earnings (loss) per common share are computed on the basis of the weighted average number of common shares outstanding during the period.

Diluted earnings (loss) per share are computed on the basis of the weighted average number of common shares and dilutive securities (such as convertible preferred stock and convertible notes) outstanding.  Dilutive securities having an anti-dilutive effect on diluted earnings (loss) per share are excluded from the calculation.

A reconciliation of the weighted average number of common shares used to compute basic and diluted earnings per share for the years ended December 31, 2008 and 2007 follows:
 
   
2008
    
2007
  
Weighted average number of common shares outstanding (used to compute basic EPS)
    
12,958,574
      
12,431,496
  
Assumed conversion of redeemable Series A preferred stock - See Note 9
    
-
      
232,603
  
Convertible notes - See Note 8
    
257,534
      
-
  
Weighted average number of common shares and dilutive common stock equivalents outstanding (used to compute diluted EPS)
    
13,216,108
      
12,664,099
  
 
F-9
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements
 
Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.
 
Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 3 – INVENTORY

Inventory consists of:
  
December 31,
    
December 31,
  
   
2008
    
2007
  
Raw materials
  
$
39,125
    
$
52,953
  
Finished goods
    
4,536
      
5,342
  
Other
    
3,452
      
2,287
  
                 
Total inventory
  
$
47,113
    
$
60,582
  
 
F-10

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consist of:
 
   
December 31,
    
December 31,
  
   
2008
    
2007
  
Building
  
$
19,699
    
$
18,425
  
Transportation equipment
    
223,092
      
271,081
  
Manufacturing equipment and machinery
    
146,034
      
123,798
  
Office and computer equipment
    
3,508
      
16,448
  
     
392,333
      
429,752
  
Less accumulated depreciation
    
161,055
      
153,752
  
                 
Property, plant and equipment, net
  
$
231,278
    
$
276,000
  

Depreciation expense was $47,374 and $44,157 for the year ended December 30, 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 ($879,420 and $822,540 translated at the December 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 – DEFERRED FINANCING COSTS

Deferred financing costs, which are being amortized as interest expense over the two year term of the convertible notes payable due September 29, 2010, consist of:

   
December 31,
    
December 31,
  
   
2008
    
2007
  
                 
Placement Agent commissions
  
$
40,000
    
$
-
  
Placement Agent expense allowance
    
25,000
      
-
  
Fair value of Placement Agent warrants
    
19,920
      
-
  
Legal and other fees
    
122,362
      
-
  
Total
    
207,282
      
-
  
Less: accumulated amortization
    
(28,403
)
    
-
  
                 
Balance at December 31, 2008
  
$
178,879
    
$
-
  
 
F-11

NOTE 7 – INTANGIBLE ASSETS, NET

Intangible assets, net, consist of:
 
   
December 31,
    
December 31,
  
   
2008
    
2007
  
Product rights
  
$
90,141
    
$
84,310
  
Patent
    
14,657
      
13,709
  
Trademark
    
2,190
      
1,555
  
Total
    
106,988
      
99,574
  
                 
Less accumulated amortization
    
47,493
      
26,020
  
                 
Intangible assets, net
  
$
59,495
    
$
73,554
  
 
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 December 31, 2009, 2010, 2011, 2012 and 2013 is $19,713, $19,713, $19,713, $53 and $53, respectively.
 
NOTE 8 – CONVERTIBLE NOTES PAYABLE, NET

Convertible notes payable, net, consist of:
 
   
December 31,
2008
    
December 31,
2007
  
Convertible notes - face amount
  
$
500,000
    
$
-
  
Less:
                
Debt discount attributable to the relative fair value of warrants
    
(149,615
)
    
-
  
Debt discount attributable to the intrinsic value of the beneficial conversion feature
    
(49,615
)
    
-
  
Less accumulated amortization of debt discounts
    
26,250
      
-
  
Convertible notes payable, net
  
$
327,020
    
$
-
  
 
On September 29, 2008, the Company completed the first closing of a private placement consisting of 3% unsecured convertible notes with a conversion price of $0.50 and Series C warrants with an exercise price of $1.50. In connection with the closing, the Company entered into subscription agreements with two accredited investors for the sale of Notes in an aggregate principal amount of $500,000 and Series C warrants to purchase an aggregate of 500,000 shares of the Company’s common stock. The Company received net proceeds of $431,500 after the deduction of Placement Agent commissions of $40,000, Placement Agent expense allowance of $25,000 and an escrow agent fee of $3,500.
 
F-12

NOTE 8 – CONVERTIBLE NOTES PAYABLE, NET (Continued)
 
The Notes mature two years from the date of issuance and bear interest at the rate of 3% per annum, payable annually in cash or in shares of common stock, subject to approval of the holder. Overdue interest shall bear interest at the rate of 15% per annum. Overdue principal shall bear interest at the rate of 8% per annum. The Notes are convertible at the option of the holder into the common stock of the Company at an initial conversion price of $0.50 per share. The conversion price is subject to adjustment upon the occurrence of stock splits, combinations, dividends and subsequent offerings.
 
The Series C warrants have a term of three years and an exercise price of $1.50 per share. In addition, upon exercise of the Series C warrant, each Series C warrant holder shall be issued a Series D warrant. The Series D warrants shall have a term of three years and an exercise price of $2.00 per share. The exercise price of the Warrants is subject to adjustment upon the occurrence of stock splits, combinations, dividends and subsequent offerings.
 
Subject to effectiveness of the registration statement, the Company shall have the right to prepay the Notes at 110% of the outstanding principal amount any time prior to the maturity date and upon 30 days prior written notice to the holders. The Company may call for the termination of any unexercised portion of the C warrants upon consummation of a subsequent offering by the Company of not less than $7,500,000 in gross proceeds and upon 30 days written notice to the holders.
 
In connection with the transaction, the Company agreed to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) within 60 days following the final closing date (which was January 8, 2009). If the Company fails to file such registration statement within 60 days, or if the registration statement is not declared effective within 91 (or 120) days from the filing date, the Company is to pay monthly liquidated damages in cash equal to 2% of the purchase price, subject to a maximum of 24%. On February 13, 2009, the Company filed a registration Statement on Form S-1 to register the shares underlying the convertible notes and warrants. On March 12, 2009, the SEC sent a comment letter to the Company.
 
In accordance with the Accounting Principal Board (“APB”) Opinion No.14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” and the Emerging Issues Task Force (“EITF”) Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”, the Company recorded the $149,615 relative fair value of the warrants ($78,136 for the Series C warrants; $71,479 for the Series D warrants) and the $49,615 intrinsic value of the beneficial conversion feature as additional paid in capital.
 
The $149,615 fair value of the Series C and Series D warrants was calculated using a Black-Scholes option pricing model and the following assumptions: risk-free interest rate of 2.26%; expected stock price volatility of 130.69%; stock price of $0.40 per share; exercise price of $1.50 per share for the C warrants and $2.00 per share for the D warrants; and term of 3 years.
 
In connection with the first closing, the placement agent received warrants to purchase 80,000 shares of the Company’s common stock at an exercise price of $1.00 per share for a term of three years. The $19,920 fair value of these warrants (calculated using the same assumptions described above except for the exercise price) was charged to deferred financing costs and added to additional paid in capital.
 
F-13

NOTE 9 – 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.
 
Each share of Series A Stock was automatically convertible into shares of 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”). Upon completion of the sale of Common Stock for $1.00 per share pursuant to the public offering which closed October 11, 2007, 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 10 – COMMON STOCK
 
On October 11, 2007, upon the completion of the public offering, China Agri sold 379,800 units at a price of $1.00 per unit to the public investors. 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.
 
NOTE 11 - WARRANTS

The Company has issued warrants (exercisable into shares of common stock) to investors, the Underwriter, and the Placement Agent as part of its sale of Series A preferred stock, its public offering, and its private placement of convertible notes. Changes in the warrants outstanding are as follows:
 
 
Year Ended
December 31, 2008
    
Year Ended
December 31, 2007
  
             
Outstanding at beginning of period
    
807,580
      
10,000
  
Warrants issued
    
1,080,000
      
797,580
  
Warrants exercised
    
-
      
-
  
Warrants expired
    
-
      
-
  
Outstanding at end of period
    
1,887,580
      
807,580
  
                 
Exercisable at end of period
    
1,887,580
      
807,580
  
 

F-14

NOTE 11 – WARRANTS (Continued)

Warrants outstanding at December 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, 2012
   
37,980
     
1.00
 
September 29, 2008
 
September 29, 2011
   
80,000
     
1.00
 
September 29, 2008
 
September 29, 2011
   
500,000
     
1.50
 
Total
       
1,387,580
   
$
1.59
 
 
NOTE 12 – RESTRICTED NET ASSETS
 
Relevant PRC statutory laws and regulations permit payments of dividends by Meixin and 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, the Company 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 $5,104,000 and $4,105,000 at December 31, 2008 and December 31, 2007, respectively.
 
NOTE 13 – 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 has granted Xinsheng exemptions from this tax since 2006. The Company has to apply for exemption status on an annual basis. The tax authority has approved the Company’s application for the exemption from income tax for the year 2008.
 
At December 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.
 
F-15

NOTE 13 – INCOME TAXES (Continued)

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

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

   
Years Ended December 31,
  
   
2008
    
2007
  
Expected tax at 35%
  
$
470,869
    
$
383,724
  
                 
Tax effect of unutilized losses of China Agri and Meixin
    
71,807
      
135,664
  
                 
Effect of PRC income tax exemption granted to Xinsheng
    
(387,626
)
    
(349,431
)
                 
Permanent difference relating to Xinsheng's earnings to be permanently invested in operations outside the United States
    
(155,050
)
    
(169,957
)
                 
Actual provision for income taxes
  
$
-
    
$
-
  
 
NOTE 14 – 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 December 31, 2008 and 2007 were located in the PRC. Net sales for the periods presented were all derived from PRC customers.
 
NOTE 15 – COMMITMENTS AND CONTINGENCIES
 
Lease Agreements
 
Xinsheng leases its office space (approximately 7300 square feet) at an annual rent of 366,390 RMB ($53,700 translated at the December 31, 2008 exchange rate) under a lease with a three year term expiring March 31, 2011.
 
Xinsheng leases its operating and testing space (approximately 2600 square feet) at an annual rent of 38,500 RMB ($5,640 translated at the December 31, 2008 exchange rate) under a lease expiring March 31, 2010.
 
Xinsheng leases its manufacturing space (approximately 22,600 square feet at an annual rent of 90,000 RMB ($13,190 translated at December 31, 2008 exchange rate) under a lease expiring December 21, 2010.
 
China Agri utilizes office space provided by one of its directors at no cost.
 
F-16

NOTE 15 – COMMITMENTS AND CONTINGENCIES (Continued)

Lease Agreements (Continued)

For the year ended December 31, 2008 and 2007, rental and related expenses for all operating leases amounted to $68,091 and $65,382, respectively.

At December 31, 2008, future minimum rental commitments under all non-cancellable operating leases are:
 
Year ending
December 31,
  
Minimum
Rent
  
2009
  
$
72,530
  
2010
    
68,300
  
2011
    
13,425
  
Total
  
$
154,255
  
 
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.
 
NOTE 16 - Concentration of Credit Risk
 
The Company maintains cash balances in various banks in China. Currently, no deposit insurance system has been set up in China. Therefore, the Company will bear a risk if any of these banks become insolvent. As of December 31, 2008, the Company’s uninsured cash balances were approximately $8,300,000.
 
F-17
 
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS, OR OF ANY SALE OF OUR COMMON STOCK.

China Agri-Business, Inc.

1,617,980 Shares of Common Stock

PROSPECTUS

__________________, 2009

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
  
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses to be paid by the Registrant are as follows. All amounts, other than the SEC registration fee, are estimates.
  
   
Amount to
  
   
Be Paid
  
SEC registration fee
  
$
8.90
  
Legal fees and expenses
  
$
25,000
  
Accounting fees and expenses
  
$
5,000
  
Miscellaneous
  
$
2000
  
         
Total
  
$
32,008.90
  

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
Our articles of incorporation provide that none of our directors will be personally liable to the Company or any of our shareholders for monetary damages arising from the director's breach of fiduciary duty as a director, with certain limited exceptions.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
The following issuance of shares were exempt from registration under section 4(2) of the Securities Act, Regulation D and/or Regulation S promulgated thereunder:
 
2006 Preferred Stock and Warrant Purchase Agreement

On May 31, 2006, we entered into a Preferred Stock and Warrant Purchase Agreement with William J. Ritger whereby we sold and issued to Mr. Ritger for $100,000, 10,000 Units for $10.00 per Unit. Each Unit comprises one share of our Series A Preferred Stock and a warrant to purchase one share of our common stock. The issuance of shares of our Series A Preferred Stock was exempt from registration under Section 4(2) of the Securities Act. The Series A Preferred Stock has since been converted into 300,00 shares of our common stock.

2007 Public Offering

On October 11, 2007, we completed an underwriter initial public offering of 379,800 units for $1.00 per unit, for gross proceeds of $379,800. Each unit consists of (i) one share of common stock, par value $0.001 per share, (ii) one warrant to purchase one share of the Company's common stock at $1.50 per share and (iii) one warrant to purchase one share of the Company's common stock at $2.00 per share.

36

Private Placement of Convertible Notes and Warrants
 
On January 8, 2009, we completed a private placement with two accredited investors consisting of 3% unsecured convertible notes in an aggregate principal amount of $500,000 and series C warrants to purchase an aggregate of 500,000 shares of the Company’s common stock. We received net proceeds of approximately $431,500, which the Company plans to use to pursue the expansion of its manufacturing and distribution operations and for general working capital and business purposes.

The notes mature two years from the date of issuance and bear interest at the rate of 3% per annum, payable annually in cash or in shares common stock, subject to approval of the holder. Any interest which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum. Any principal which is not paid when due shall bear interest at the rate of eight percent (8%) per annum. The notes are convertible at the option of the holder into common at a conversion price of $0.50 per share. The conversion price is subject to adjustment upon the occurrence of stock splits, combinations, dividends, and subsequent offerings, as set forth in the notes.

Subject to effectiveness of the registration statement, the Company shall have the right to prepay the notes at 110% of the outstanding principal amount any time prior to the maturity date, and upon thirty (30) days prior written notice to the holders.

The series C warrants have a term of three years and an exercise price of $1.50 per share. In addition, upon exercise of a series C warrant, each  holder shall be issued a series D warrant. The series D warrants shall have a term of three years and an exercise price of $2.00 per share. The shares issuable upon exercise of the series D warrants are not covered by this registration statement. The exercise price of the warrants is subject to adjustment upon the occurrence of stock splits, combinations, dividends, and subsequent offerings, as set forth in the Warrants.

The Company may call for the termination of any unexercised portion of the series C warrants upon consummation of a subsequent offering by the Company of not less than $7.5 million in gross proceeds, and upon thirty (30) days written notice to the holders.

In connection with the Private Placement we entered into registration rights agreements with the investors pursuant to which we have agreed to prepare and file a registration statement with the Securities and Exchange Commission not later than 60 calendar days after the final closing. The registration statement shall seek to register for resale, in the amounts set forth in the Registration Rights Agreement: (i) the Warrant Shares issuable upon exercise of the Warrants, and (ii) the Conversion Shares issuable upon conversion of the Notes.

If we fail to file such registration statement within the 60 calendar day deadline, or if the registration statement is not declared effective within 120 days from the filing date, we are subject to liquidated damages payments in an amount equal to two percent (2%) of the initial principal amount of the Notes per month, subject to a maximum of twenty four percent (24%).

In connection with the Private Placement, the placement agent received a cash commission of $40,000 and an expense allowance of $25,000. In addition, the placement agent is entitled to receive warrants to purchase 80,000 shares of common stock at an exercise price of $1.00 per share for a term of three years.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  

3.1.1
  
Articles of incorporation (1)
3.2
  
By-Laws (1)
3.3
  
Articles of Incorporation, as amended (1)
4.1
  
Form of 3% Convertible Note (2)
4.2
  
Form of Series C Warrant (2)
4.3
  
Form of Series D Warrant (2)
4.4
  
Form of Underwriter Warrant (3)
4.5
  
Form of Placement Agent Warrant (3)
5.1
  
Legal Opinion (To be filed by amendment)
9.1
  
Stock Purchase Agreement between Company and Xinsheng Shareholders dated April 22, 2006. (1)
9.2
  
Management Agreement between Xinsheng and Meixin dated April 18,2006. (1)
9.3
  
Voting Trust and Escrow Agreement with Xinsheng Shareholders and their trustee dated April 22 2006. (1)
10.1
  
Form of Subscription Agreement (2)
10.2
  
Form of Registration Rights Agreement (2)
10.3
 
Placement Agent Agreement *
10.4
 
Business Advisory Agreement *
21.1
  
Subsidiaries of the small business issuer (1)
23.1
  
Consent of Michael Studer CPA PC *
23.2
  
Legal Opinion (see Exhibit 5.1)
23.3
 
Consent of China Shaanxi Chunhua County Land and Fertilizer Working Station dated March 24, 2009 (4)
23.4
 
Consent of China Shaanxi Province Land and Fertilizer Working Station dated March 24, 2009 (4)
23.5
 
Consent of China Shaanxi Province Yangling Zong Land and Fertilizer Working Station dated March 24, 2009 (4)

(1) Incorporated by reference to the Form SB-2 (File No. 333-140118) filed on July 19, 2007.

37

(2) Incorporated by reference to the Form 8-K filed on October 3, 2008.

(3) Incorporated by reference to the Form S-1 filed on February 13, 2009.

(4) Incorporated by reference to the Form S-1 (Amendment No. 1) filed on April 13, 2009.

* Filed herewith.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide certificates in such denominations and registered in such names as required by the purchasers to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes:
 
(a) (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
 
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(4) Not applicable.

(5) That for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
 
(ii) Each prospectus filed pursuant to Rule 424(b) as part of this registration statement, shall be deemed to be part of and included in this registration statement as of the date it is first used after effectiveness; provided, however, that no statement made in this registration statement or prospectus that is part of this registration statement or made in a document incorporated or deemed incorporated by reference into this registration statement or prospectus that is part of this registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in this registration statement or prospectus that was part of this registration statement or made in any such document immediately prior to such date of first use.
 
(6) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

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The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
 
(i) Any preliminary prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
 
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

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SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned on June 16, 2009.
 
 
CHINA AGRI-BUSINESS, INC.
     
 
By:  
/s/ Liping Deng
   
Name: Liping Deng
Title: Chief Executive Officer and President (Principal Executive
Officer)

 
By:
/s/ Xiaolong Zhou
   
Name: Xiaolong Zhou
Title: Chief Financial Officer, (Principal Accounting and Financial
Officer)

In accordance with the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 was signed by the following persons in the capacities and on the dates indicated.

By :
/s/ Liping Deng
 
    June 16, 2009
Name: Liping Deng
Title: Chief Executive Officer and President (Principal Executive Officer)
 
     
 
By:
/s/ Xiaolong Zhou
 
    June 16, 2009
Name: Xiaolong Zhou
Title: Chief Financial Officer (Principal Accounting and Financial Officer)
 
     
 
By:
/s/ Michael Segal
 
    June 16, 2009
Name: Michael Segal
Title: Director
 
   

By:
 /s/ Limin Deng
 
    June 16, 2009
Name: Limin Deng
Title: Director
 
   
 
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