Deyu Agriculture (DEYU) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2013

or

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

For the transition period from ______to______.

DEYU AGRICULTURE CORP.

(Exact name of registrant as
specified in its

charter)

Nevada	333-160476	80-0329825
(State or other jurisdiction of incorporation or organization)	(Commission File No.)	(I.R.S. Employer Identification No.)

 Headquarters in China

Unit 1010, Block B, Huizhi Building,

No.9 Xueqing Road,

Haidian District, Beijing, PRC

Zip Code: 100085

Office in the United States

Columbus Circle 5

1790 Broadway, 8th Floor

New York, New York 10019, USA

(Address, including zip code, of principal executive offices)

In China:86-10-8273-2870

In the United States:(646) 499-5475

 (Issuer Telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x

As of November 8, 2013, there were 10,618,266 shares outstanding of the registrant’s common stock.

DEYU AGRICULTURE CORP.

FORM 10-Q

SEPTEMBER 30, 2013

INDEX

PART I
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4.	CONTROLS AND PROCEDURES	41
PART II
ITEM 1.	LEGAL PROCEEDINGS	42
ITEM 1A.	RISK FACTORS	42
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	42
ITEM 4.	MINE SAFETY DISCLOSURES	43
ITEM 5.	OTHER INFORMATION	43
ITEM 6.	EXHIBITS	43
SIGNATURES		46

- 2 -

Item 1. Financial Statements

DEYU AGRICULTURE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2013		December 31, 2012
	(Unaudited)		(Audited)
Assets
Current Assets
Cash and cash equivalents	$	3,733,395	$	4,937,279
Restricted cash		16,340		815,348
Accounts receivable, net		27,103,487		33,991,288
Due from related parties		43,959		397,214
Inventory		21,497,307		30,322,191
Advance to supplier		5,469,003		6,145,840
Prepaid expenses		1,243,073		1,453,184
Other current assets		618,951		340,456
Total Current Assets		59,725,515		78,402,800
Property, plant, and equipment, net		19,644,652		19,442,599
Construction-in-progress		66,993		2,614,491
Long-term Investment		59,477		58,426
Intangible assets, net		8,598,408		13,389,075
Total Assets	$	88,095,045	$	113,907,391
Liabilities and Equity
Current Liabilities
Short-term loan	$	7,383,987	$	8,323,623
Accounts payable		4,138,736		5,179,729
Advance from customers		1,974,413		2,249,282
Accrued expenses		1,661,792		1,506,776
Tax payable		114,578		305,712
Preferred stock dividends payable		122,818		229,171
Due to related parties		563,351		8,668,552
Other current liabilities		343,469		986,153
Total Current Liabilities		16,303,144		27,448,998
Equity
Series A convertible preferred stock, $.001 par value, 10,000,000 shares
authorized, 2,182,628 and 2,039,970 shares outstanding, respectively		2,183		2,040
Common stock, $.001 par value; 75,000,000 shares authorized,
10,618,266 and 10,658,266 shares outstanding, respectively		10,618		10,658
Additional paid-in capital		21,224,421		20,781,439
Other comprehensive income		7,222,682		5,737,793
Retained earnings		43,299,658		59,500,134
Total Stockholders' Equity		71,759,562		86,032,064
Noncontrolling Interests		32,339		426,329
Total Equity		71,791,901		86,458,393
Total Liabilities and Equity	$	88,095,045	$	113,907,391

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

- 3 -

 

DEYU AGRICULTURE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

	For The Three Months Ended				For The Nine Months Ended
	September 30,				September 30,
		2013		2012		2013		2012
Net revenue	$	68,339,368	$	56,472,324	$	209,117,183	$	175,048,803
Cost of goods sold		(64,342,240)		(46,256,954)		(190,705,629)		(141,911,226)
Gross Profit		3,997,128		10,215,370		18,411,554		33,137,577
Selling expenses		(6,207,310)		(3,795,367)		(14,340,936)		(11,926,786)
General and administrative expenses		(4,980,266)		(2,311,508)		(9,884,504)		(6,276,679)
Loss on impairment of assets		(6,586,425)		-		(6,586,425)		-
Total Operating Expenses		(17,774,001)		(6,106,875)		(30,811,865)		(18,203,465)
Operating income (loss)		(13,776,873)		4,108,495		(12,400,311)		14,934,112
Interest income		19,476		7,242		33,148		24,918
Interest expense		(190,183)		(330,771)		(593,464)		(1,260,810)
Non-operating income (loss)		(1,107,683)		(7,063)		(2,307,679)		569,587
Total Other Expenses		(1,278,390)		(330,592)		(2,867,995)		(666,305)
Income (loss) before income taxes		(15,055,263)		3,777,903		(15,268,306)		14,267,807
Income taxes		(54,501)		(184,485)		(580,054)		(1,475,181)
Net income (loss)		(15,109,764)		3,593,418		(15,848,360)		12,792,626
Net loss attributable to noncontrolling interests:		194		3,826		3,998		44,695
Net income (loss) attributable to Deyu Agriculture Corp.		(15,109,570)		3,597,244		(15,844,362)		12,837,321
Preferred stock dividends		(122,691)		(112,035)		(356,114)		(332,087)
Net income (loss) available to common stockholders		(15,232,261)		3,485,209		(16,200,476)		12,505,234
Foreign currency translation gain (loss)		141,382		822,431		1,475,116		187,472
Comprehensive income (loss)		(15,090,879)		4,307,640		(14,725,360)		12,692,706
Other comprehensive income (loss) attributable to noncontrolling interests		(92)		(4,157)		9,773		(306)
Comprehensive income (loss) attributable to Deyu Agriculture Corp.	$	(15,090,971)	$	4,303,483	$	(14,715,587)	$	12,692,400
Net income (loss) attributable to common stockholders per share - basic:	$	(1.43)	$	0.33	$	(1.52)	$	1.18
Net income (loss) attributable to common stockholders per share - diluted:		(1.43)		0.28		(1.52)		1.02
Weighted average number of common shares outstanding - basic		10,618,266		10,604,081		10,627,497		10,578,570
Weighted average number of common shares outstanding - diluted		10,618,266		12,632,585		10,627,497		12,585,860

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

- 4 -

DEYU AGRICULTURE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For The Nine Months Ended
	September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) available to common stockholders	$	(16,200,476)	$	12,505,234
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation & amortization		1,766,231		1,801,515
Loss of impairment of assets		6,586,425		-
Allowance for doubtful accounts		1,330,398		16,314
Share-based compensation		43,187		250,290
Preferred stock dividends accrued		356,114		332,087
Common stocks issued for services		(57,200)		114,400
Grain on bargain purchase		-		(499,079)
Deferred income tax expense		-		875,706
Noncontrolling interests		(3,998)		(44,695)
Decrease (increase) in current assets:
Accounts receivable		6,894,009		8,616,800
Related-parties trade receivable		357,671		466,980
Inventories		9,326,772		(5,060,976)
Advance to suppliers		781,438		2,988,738
Prepaid expense and other current assets		(724,623)		907,358
Increase (decrease) in liabilities:
Accounts payable		(1,136,732)		8,987
Advance from customers		(312,946)		(6,415,884)
Accrued expense and other liabilities		(864,448)		517,019
Net cash provided by operating activities		8,141,822		17,380,794
CASH FLOWS FROM INVESTING ACTIVITIES
Construction and remodeling of factory and warehouses		(100,169)		(5,166,095)
Purchase of machinery and equipment		(532,353)		(312,588)
Consideration paid for acquisition		-		(47,829)
Advances to related parties		-		(78,604)
Cash held by the Taizihu Group at acquisition date		-		20,272
Net cash used in investing activities		(632,522)		(5,584,844)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayment) from short-term loans from bank and others		(1,021,616)		1,104,382
Net repayment of short-term loans from related parties		(8,480,651)		(9,690,871)
Cash released from restriction (restricted) for credit line of bank loans		807,515		(1,579,604)
Net repayments of short-term bank acceptance notes		-		1,812,544
Payment of preferred dividends		-		(266,795)
Net cash provided by (used in) financing activities		(8,694,752)		(8,620,344)
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS		(18,432)		45,899
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS		(1,203,884)		3,221,505
CASH & CASH EQUIVALENTS, BEGINNING BALANCE		4,937,279		8,741,703
CASH & CASH EQUIVALENTS, ENDING BALANCE	$	3,733,395	$	11,963,208
SUPPLEMENTAL DISCLOSURES:
Income tax paid	$	775,198	$	180,705
Interest paid	$	605,843	$	765,725
NONCASH INVESTING AND FINANCING ACTIVITIES:
Construction completed and transferred to property, plant, and equipment	$	767,494	$	-
Construction transferred to land use rights	$	1,045,640	$	-

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

- 5 -

DEYU AGRICULTURE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PREPARATION

Deyu Agriculture Corp. (the “Company”), formerly known as Eco Building International, Inc., was incorporated under the laws of the State of Nevada on December 23, 2008. We completed the acquisition of City Zone Holdings Limited (“City Zone”), an agricultural products distributor in the Shanxi Province of the People’s Republic of China (the “PRC”) engaged in procuring, processing, marketing, and distributing various grain and corn products, by means of a share exchange effective April 27, 2010. As a result of the share exchange, City Zone became our wholly-owned subsidiary. We currently conduct our business primarily through operating PRC subsidiaries, including JinzhongDeyu Agriculture Trading Co., Ltd. (“JinzhongDeyu”), JinzhongYuliang Agriculture Trading Co., Ltd. (“JinzhongYuliang”), Shanxi Taizihu Food Co., Ltd. (“Taizihu”), Shanxi Huichun Bean Products Co., Ltd. (“Huichun” and together with Taizihu, the “Taizihu Group”) and Detian Yu Biotechnology (Beijing) Co., Ltd. (“Detian Yu”) and Detian Yu’s subsidiaries.

On May 11, 2010, our Board of Directors adopted a resolution to change our name to "Deyu Agriculture Corp." and FINRA declared the name change effective on June 2, 2010.

Reverse Acquisition

On April 27, 2010, we entered into a Share Exchange Agreement (“Share Exchange”) pursuant to which we issued 8,736,932 shares of our common stock, par value $0.001 per share, to Expert Venture Limited (“Expert Venture”), a company organized under the laws of the British Virgin Islands, and the other shareholders of City Zone (the “City Zone Shareholders”). As a result of the Share Exchange, City Zone became our wholly-owned subsidiary and City Zone Shareholders acquired a majority of our issued and outstanding shares of common stock.

As a result, the Share Exchange has been accounted for as a reverse acquisition using the purchase method of accounting, whereby City Zone is deemed to be the accounting acquirer (the legal acquiree) and we are to be the accounting acquiree (legal acquirer). The financial statements before the date of the Share Exchange are those of City Zone with our results being consolidated from the date of the Share Exchange. The equity section and earnings per share have been retroactively restated to reflect the reverse acquisition and no goodwill has been recorded.

City Zone was incorporated in the British Virgin Islands (“BVI”) on July 27, 2009 under the BVI Business Companies Act of 2004. In November 2009, pursuant to the restructuring plan set out below, City Zone became the holding company of a group of companies comprising Most Smart International Limited ("Most Smart"), Redsun Technology (Shenzhen) Co. Limited (“Shenzhen Redsun”), Shenzhen JiRuHai Technology Co., Ltd. ("Shenzhen JiRuHai"), Detian Yu, JinzhongDeyu, JinzhongYongcheng and JinzhongYuliang.

Restructuring

In November 2009, pursuant to a restructuring plan intended to ensure compliance with PRC rules and regulations, City Zone, through a series of acquisitions and wholly-owned subsidiaries, acquired 100% of the equity interests in JinzhongDeyu, JinzhongYuliang, and JinzhongYongcheng. The former shareholders and key management of JinzhongDeyu, JinzhongYongcheng, and JinzhongYuliang became the ultimate controlling parties and key management of City Zone. This restructuring has been accounted for as a recapitalization of JinzhongDeyu, JinzhongYongcheng and JinzhongYuliang with no adjustment to the historical basis of the assets and liabilities of these companies, while the historical financial positions and results of operations are consolidated as if the restructuring occurred as of the beginning of the earliest period presented in our accompanying consolidated financial statements. For the purpose of a consistent and comparable presentation, the consolidated financial statements have been prepared as if City Zone had been in existence since the beginning of the earliest and throughout the whole periods covered by these consolidated financial statements.

- 6 -

The Acquisition of the Taizihu Group

On February 2, 2012, Shenzhen Redsun, a company organized under the laws of PRC and a wholly-owned subsidiary of the Company, entered into a Stock Equity Transfer Agreement (the “Agreement”) whereby Shenzhen Redsun acquired 100% of the issued and outstanding registered share capital of the Taizihu Group. In consideration for the acquisition of Taizihu Group, Shenzhen Redsun paid $2,342,168 (RMB 14,773,222) in cash to Mr. Hao He, an individual, for 50% of Taizihu, $1,522,409 (RMB 9,602,594) in cash to Mr. Qinghe Xu, an individual, for 32.5% of Taizihu and $819,759 (RMB5,170,628) in cash to Mr. Jinqing Xie, an individual, for the remaining 17.5% of Taizihu. Immediately prior to the execution of the Agreement, Taizihu owned 85% of the issued and outstanding registered share capital of Huichun, and pursuant to the terms of the Agreement, Shenzhen Redsun acquired the remaining 15% of the share capital of Huichun from Beijing Kanggang Food Development Co., Ltd. for $817,845 (RMB 5,158,556). The total amount of the consideration paid for the acquisition of the Taizihu Group was $5,502,181 (RMB 34,705,000), and such consideration was determined pursuant to arm’s length negotiations between the parties. As a result of the acquisition, the Company currently owns and controls 100% of the Taizihu Group.

Consolidation Scope:

Details of our subsidiaries subject to consolidation are as follows:

	Domicile and			Percentage
	Date of	Registered		of
Name of Subsidiary	Incorporation	Capital		Ownership		Principal Activities
City Zone Holdings Limited ("City Zone")	British Virgin Islands, July 27, 2009	$	20,283,581	100	%	Holding company of Most Smart
Most Smart International Limited ("Most Smart")	Hong Kong, March 11, 2009	$	1	100	%	Holding company of Shenzhen Redsun
Redsun Technology (Shenzhen) Co., Ltd. ("Shenzhen Redsun")	The PRC, August 20, 2009	$	30,000	100	%	Holding company of Shenzhen JiRuHai, Taizihu and Huichun
Shenzhen JiRuHai Technology Co., Ltd.("Shenzhen JiRuHai")	The PRC, August 20, 2009	$	14,638	100	%	Holding company of Beijing Detian Yu
Detian Yu Biotechnology (Beijing) Co., Ltd. ("Detian Yu")	The PRC, November 30, 2006	$	7,637,723	100	%	Wholesale distribution of simple-processed and deep-processed packaged food products and staple food. Holding company of the following first five entities.
JinzhongDeyu Agriculture Trading Co., Ltd. ("JinzhongDeyu")	The PRC, April 22, 2004	$	1,492,622	100	%	Organic grains preliminary processing and wholesale distribution.
JinzhongYongcheng Agriculture Trading Co., Ltd. ("JinzhongYongcheng")	The PRC, May 30, 2006	$	1,025,787	100	%	Corns preliminary processing and wholesale
JinzhongYuliang Agriculture Trading Co., Ltd. ("JinzhongYuliang")	The PRC, March 17, 2008	$	13,963,243	100	%	Corns preliminary processing and wholesale distribution.
Tianjin Guandu Food Co., Ltd. ("Tianjin Guandu")	The PRC, June 21, 2011	$	1,544,497	100	%	Wholesale distribution of simple-processed and deep-processed packaged food products and staple food.
HebeiYugu Grain Co., Ltd. ("HebeiYugu")	The PRC, July 25, 2011	$	1,563,824	70	%	Wholesale distribution of grain products and operating or acting as an agent of import & export business for grain products.
Shanxi Taizihu Food Co., Ltd. (“Taizihu”) (1)	The PRC, July 27, 2003	$	1,208,233	100	%	Producing and selling fruit beverages and soybean products.
Shanxi HuiChun Bean Products Co., Ltd. (“Huichun”) (1)	The PRC, September 2, 2007	$	2,636,192	100	%	Producing and selling fruit beverages and soybean products.
Jilin Jinglong Agriculture Development Limited (“Jinglong”)	The PRC, October 10, 2012	$	3,152,138	99	%	Procurement, storage and sales of corn and grain.

(1)Taizihu and Huichun became the wholly-owned subsidiaries of the Company on February 2, 2012 through a business acquisition. They have been within the scope of consolidation since February 2, 2012.

- 7 -

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The unaudited consolidated financial statements include the financial statements of Deyu Agriculture Corp. and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in consolidation. Results of operations of companies purchased are included from the dates of acquisition.

These accompanying consolidated financial statements have been prepared in accordance with US GAAP. The Company’s functional currency is the Chinese Yuan, or Renminbi (“RMB”); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD”).

On April 27, 2010, as a result of the consummation of the Share Exchange, we changed our fiscal year end from May 31 to December 31 to conform to the fiscal year end of City Zone.

Use of estimates

The preparation of the consolidated 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its estimates based on historical experience and various other assumptions and information that are available and believed to be reasonable at the time the estimates are made. Therefore, actual results could differ from those estimates under different assumptions and conditions.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, cash in banks and all highly liquid investments with original maturities of three months or less.

As of September 30, 2013, the balance of restricted cash of $16,340 represents a pledge for a bank loan of $14,706 (RMB90,000) obtained from Bank of Communications Gongzhufen Sub-branch obtained on December 12, 2012.

Accounts receivable

Accounts receivable are recorded at net realizable value consisting of the carrying amount less allowance for doubtful accounts, as needed. We assess the collectability of accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends, and changes in customer payment patterns to evaluate the adequacy of these reserves. While management uses the best information available upon which to base estimates, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used for the purposes of analysis. As of September 30, 2013, the balance of allowance for doubtful accounts was $557,660. As of December 31, 2012, the balance of allowance for doubtful accounts was not material.

- 8 -

Inventories

The Company's inventories are stated at lower of cost or market. Cost is determined on a moving-average basis. Costs of inventories include purchase and related costs incurred in delivering products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. Management periodically evaluates the composition of its inventories at least quarterly to identify slow-moving and obsolete inventories to determine if a valuation allowance is required. As of September 30, 2013 and December 31, 2012, slow moving or obsolete inventories identified by management were not material.

Property, plant, and equipment

Property, plant, and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred; in additions, renewals and betterments are capitalized. When property, plant, and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

	Useful Life (in years)
Automobiles	5
Buildings	10-30
Office equipment	5
Machinery and equipment	5-10
Furniture & fixtures	5

Construction-in-progress

Construction-in-progress consists of amounts expended for the construction of a new factory park, and the cost of the portion of the land use right that the new factory park occupied. Construction-in-progress is not depreciated until such time as the assets are completed and put into service. Once factory park construction is completed, the cost accumulated in construction-in-progress will be transferred to property, plant, and equipment.

Long-lived assets

The Company applies the provisions of FASB ASC Topic 360 (ASC 360), "Property, Plant, and Equipment" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360, at least on an annual basis. ASC 360 requires the impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. As of September 30, 2013, the Company recorded $771,502 of impairment of construction-in-progress. As of December 31, 2012, there was no impairment of long-lived assets.

Intangible assets

For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. As of September 30, 2013, the Company recorded $5,814,923 of impairment loss of the land use rights of the farmlands. As of December 31, 2012, there was no impairment of intangible assets.

- 9 -

Fair value measurements

FASB ASC 820, “Fair Value Measurements” (formerly SFAS No. 157) defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It requires that an entity measure its financial instruments to base fair value on exit price, maximize the use of observable units and minimize the use of unobservable inputs to determine the exit price. It establishes a hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows:

⋅ Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available.

⋅ Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

⋅ Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data. The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability.

This guidance applies to other accounting pronouncements that require or permit fair value measurements. On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (ASC 820). This Staff Position delays the effective date of SFAS No. 157 (ASC 820) for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 (ASC 820) had no effect on the Company's financial position or results of operations for the nine months ended September 30, 2013.

We also analyze all financial instruments with features of both liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”) and ASC 815-40 (formerly EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”). We have determined ASC 480-10 (formerly SFAS 150) and ASC 815-40 (formerly EITF 00-19) had no material effect on our financial position or results of operations for the nine months ended September 30, 2013.

Revenue recognition

The Company’s revenue recognition policies are in compliance with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”). The Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. The Company recognizes revenue for product sales upon transfer of title to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered. The Company assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

- 10 -

The Company’s revenue is recognized net of value-added tax (VAT), reductions to revenue for estimated product returns, and sales discounts based on volume achieved in the same period that the related revenue is recorded. The estimates are based on historical sales returns, analysis of credit memo data and other factors known at the time. The sales discounts were not material for the nine months ended September 30, 2013 and $669,831 for the nine months ended September 30, 2012.

We offer a right of exchange on our grain products sold through our relationships with grocery store networks. The consumer who purchases the product may exchange it for the same kind and quantity of product originally purchased. In accordance with FASB ASC 605-15-25-1 and 605-15-15-2, these are not considered returns for revenue recognition purposes. The returns of our products for the nine months ended September 30, 2013 were $819,972 and the returns of our products were not material was not material.

Advertising costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the nine months ended September 30, 2013 and 2012 were $219,415 and $1,279,682 respectively.

Research and development

The Company expenses its research and development costs as incurred. Research and development expenses for the nine months ended September 30, 2013 and 2012 were not material.

Stock-based compensation

In December 2004, the Financial Accounting Standard Board, or the FASB, issued the Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment”, which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) is now included in the FASB’s ASC Topic 718, “Compensation – Stock Compensation.” Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees or independent contractors are required to provide services. Share-based compensation arrangements include stock options and warrants, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods. On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS No. 123(R). Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under SFAS No. 123.

The Company has fully adopted the provisions of FASB ASC 718 and related interpretations as provided by SAB 107. As such, compensation cost is measured on the date of grant as the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.

Income taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

- 11 -

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no material effect on the Company’s consolidated financial statements for the nine months ended September 30, 2013.

Foreign currency translation and comprehensive income

U.S. GAAP requires that recognized revenue, expenses, gains, and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company is RMB. The unit of RMB is in Yuan. Translation gains are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.

Statement of cash flows

In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Recent pronouncements

In July 2012, FASB issued an amendment (ASU No. 2012-02) to Intangibles–Goodwill and Other (ASC Topic 350). In accordance with the amendments in this update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance had no material impact on our consolidated financial position or results of operations for the nine months ended September 30, 2013.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

- 12 -

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2014. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

NOTE 3. BUSINESS COMBINATION

On February 2, 2012, Shenzhen Redsun, a wholly-owned subsidiary of the Company, acquired 100% of the equity interests of the Taizihu Group for cash consideration of $5,502,181 (RMB 34,705,000).  The acquisition was accounted for as a business combination under the purchase method of accounting. The Taizihu Group’s results of operations were included in Deyu’s results beginning February 2, 2012.  The purchase price has been allocated to the assets acquired and the liabilities assumed based on their fair value at the acquisition date as summarized in the following:

Purchase price	$	5,502,181
Allocation of the purchase price:
Cash and cash equivalents		28,867
Restricted cash		240,474
Accounts receivable, net		133,863
Inventory		1,373,222
Advance to supplier		840,849
Prepaid expenses		5,412
Other current assets		445,287
Property, plant, and equipment, net		5,891,772
Construction-in-progress		1,673,997
Long-term Investment		57,705
Other assets		59,448
Intangible assets, net		2,823,087
Short-term loan		(6,499,683)
Accounts payable		(319,077)
Advance from customers		(225,819)
Accrued expenses		(167,453)
Tax Payable		(65,192)
Due to related parties		(80,551)
Other current liabilities		(214,948)
Fair value of net assets acquired		6,001,260
Gain on bargain purchase	$	(499,079)

- 13 -

 

NOTE 4. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

	September 30,		December 31,
	2013		2012
Accounts receivable	$	27,661,147	$	33,996,165
Less: Allowance for doubtful accounts		(557,660)		(4,877)
Accounts receivable, net	$	27,103,487	$	33,991,288

NOTE 5. INVENTORY

Inventory consisted of the following:

	September 30,		December 31,
	2013		2012
Raw materials	$	2,269,462	$	7,730,831
Work in process		170,944		73,131
Finished goods		18,397,271		21,761,558
Supplies		659,630		756,671
Total Inventory	$	21,497,307	$	30,322,191

NOTE 6. PREPAID EXPENSES

Prepaid expenses consisted of the following:

	September 30,		December 31,
	2013		2012
Deductible value-added taxes (VAT)	$	432,058	$	1,003,871
Prepaid rent		278,758		155,883
Prepaid expenses for investor relations		-		163,443
Prepaid other expenses		532,257		129,987
Total	$	1,243,073	$	1,453,184

NOTE 7. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:

	September 30,		December 31,
	2013		2012
Automobiles	$	1,035,531	$	1,010,594
Buildings		17,254,967		16,534,542
Office equipment		1,081,450		467,739
Machinery and equipment		8,347,692		7,435,413
Furniture and fixtures		124,680		611,907
Total cost		27,844,320		26,060,195
Less: Accumulated depreciation		(8,199,668)		(6,617,596)
Property, plant, and equipment, net	$	19,644,652	$	19,442,599

The buildings owned by the Company located in Jinzhong and Quwo in Shanxi Province, China are used for production, warehousing and offices for our corn and grains business.

As of September 30, 2013, $5.7 million (RMB 35.2 million) of buildings, machinery and equipment owned by the Taizihu Group were pledged as collateral for short-term bank loans.

Depreciation expense for the nine months ended September 30, 2013 and 2012 were $1,474,093 and $1,457,975, respectively.

NOTE 8. CONSTRUCTION-IN-PROGRESS

As of September 30, 2013, the Company determined to terminate the construction of the factory facility Huichun due to the technical innovation and assessed the fair value of the uncompleted building is zero. The Company recorded an impairment loss of $ 771,502. The carrying amount of the construction of the building was $ 771,502 and was written to zero. The Company used unobservable inputs based on its experience and knowledge of the market, as such; the Company classifies the fair value of this asset within Level 3. The carrying amount of the land use right of the industrial land allocated to the construction of the factory was $1,045,640 and was reclassified to intangible assets.

Construction-in-progress amounted to $66,993 as of September 30, 2013 mainly represents payment on the renovation of the staff canteen in Huichun.

NOTE 9. INTANGIBLE ASSETS

Intangible assets consisted of the following:

	September 30,		December 31,
	2013		2012
Land use rights		8,680,382	$	13,158,508
Software-ERP System and B2C platform		1,078,056		1,059,004
Less: Accumulated amortization		(1,160,030)		(828,437)
Total	$	8,598,408	$	13,389,075

According to government regulations of the PRC, the PRC Government owns all lands. The Company owns the land use rights of farmlands and industrial lands.

Jinzhong Deyu owns the land use rights of 17,000 acres of farmlands. Based on the change of the economy, environment and current operating plan, the Company assessed that fair value of the land use rights of the farmlands in Jinzhong owned by Jingzhong Deyu was less than the carrying value of the land use rights of the farmlands, and recorded an impairment loss in the amount of $5,814,923 for the nine months ended September 30, 2013. The carrying value of the land use rights of the farmlands was $7,203,107 and was written down to $1,388,184. The Company used unobservable inputs based on its experience and knowledge of the market, as such; the Company classifies the fair value of this asset within Level 3.

The Company leases and has obtained a certificate of right of use on 11,667 square meters with the PRC Government in Jinzhong, Shanxi Province where JinzhongDeyu's buildings and production facility are located. The term of the right is four to five years and is automatically renewed upon expiration. The right was fully amortized as of December 31, 2010 using the straight-line method. On June 18, 2012, the Company received the extended land use right certificate and the term of the right has been extended to March 14, 2037.

- 14 -

As of September 30, 2013, $3,921,569 (RMB 24 million) of the land use right owned by Taizihu Group was pledged as collateral for short-term bank loans.

Amortization expense of the intangible assets for the nine months ended September 30, 2013 and 2012 were $292,138 and $343,540, respectively. 

NOTE 10. SHORT-TERM LOANS

Short-term loans consisted of the following:

	September 30,		December 31,
	2013		2012
Bank loan payable to Agriculture Development Bank of China, bearing interest at the prime rate based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of September 30, 2013 and December 31, 2012 were 6.00%. The term of the loan started from August 14, 2012 with maturity date on August 13, 2013. The loan was obtained by Taizihu and pledged by its buildings and land use right. On July 31, 2013 the loan was repaid for $65,359 (or RMB400,000). As of September 30, 2013, the loan balance was $2,385,621 (or RMB14,600,000). As of the date of this filing, the Company has been in negotiation with the lender on renewal of the loan. The Company is not currently able to predict the probability of the success on the renewal and will repay the loan immediately if the loan cannot be renewed.	$	2,385,621	$	2,407,666
Bank loan payable to Agriculture Development Bank of China, bearing interest at the prime rate, based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of September 30, 2013 and December 31, 2012 were 6.0%. The term of the loan started from September 18, 2012 with maturity date on September 17, 2013. The loan was obtained by Taizihu and pledged by its buildings and land use right. As of the date of this filing, the Company has been in negotiation with the lender on renewal of the loan. The Company is not currently able to predict the probability of the success on the renewal and will repay the loan immediately if the loan cannot be renewed.		1,470,588		1,444,599
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd., bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rate as of September 30, 2013 was 15.084%. The term of the loan started from September 6, 2013 with maturity date on August 22, 2014. The loan was obtained by Jinzhong Yongcheng and guaranteed by Yuci Jinmao Food Processing Factory, a related party, for a period of two years starting from August 23, 2014.		1,388,889		-
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd., bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rate as of September 30, 2013 was 15.084%. The term of the loan started from September 6, 2013 with maturity date on August 22, 2014. The loan was obtained by Jinzhong Yuliang and guaranteed by Yuci Jinmao Food Processing Factory, a related party, for a period of two years starting from August 23, 2014.		1,388,889		-
Bank loan payable to Agriculture Development Bank of China, bearing interest at the prime rate, based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rate as of September 30, 2013 was 6.0%. The term of the loan started from January 4, 2013 with maturity date on January 3, 2014. The loan was obtained by Taizihu and pledged by its buildings and land use right.		735,294		-
Bank loan payable to Bank of Communications Gongzhufen subbranch, bearing interest at a fix rate of prime rate, of which prime rate was based on one-year loan interest rate released by The People's Bank of China. The actual interest rate as of September 30, 2013 and December 31, 2012 were 6.310%. The term of the loan started from December 12, 2012 with maturity date on December 12, 2013. The loan was obtained by Detian Yu.		14,706		14,446
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd., bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of December 31, 2012 were 15.084%. The term of the loan started from August 31, 2012 with maturity date on August 29, 2013. The loan was obtained by Jinzhong Yongcheng and guaranteed by Yuci Jinmao Food Processing Factory, a related party, for a period of two years starting from August 30, 2013. The loan was paid of on September 5, 2013.		-		1,364,344
Bank loan payable to Jinzhong City Yuci District Rural Credit Union Co., Ltd., bearing interest at a fixed rate of prime rate plus 130% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of December 31, 2012 were 15.084%. The term of the loan started from August 31, 2012 with maturity date on August 29, 2013. The loan was obtained by Jinzhong Yuliang and guaranteed by Yuci Jinmao Food Processing Factory, a related party, for a period of two years starting from August 30, 2013. The loan was paid off on September 5, 2013.		-		1,364,344
Bank loan payable to Dah Sing Bank (China) Co., Ltd, bearing interest at a fixed rate of prime rate plus 20% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rates as of December 31, 2012 were 7.2%. The term of the loan started from July 18, 2012 with maturity date on July 17, 2013. The loan was obtained by Detian Yu and guaranteed by Mr Tian Wenjun for a period of one year starting from July 18, 2013. The loan was paid off on July 17, 2013.		-		1,284,088
The bank loan of $162,935 (or RMB1,000,000) payable to Bank of Beijing Haidian Branch, bearing interest at a fixed rate of prime rate plus 50% of prime rate, of which prime rate was based on six-month to one-year loan interest rate released by The People's Bank of China. The actual interest rate as of December 31, 2012 was 9%. The term of the loan started from September 28, 2012 with maturity date on September 27, 2013. The loan was obtained by Detian Yu and guaranteed by Mr. Tian Wenjun for a period of one year. On December 21, 2012, March 21, 2013, June 21, 2013 and September 27, 2013 the loan was paid off.		-		120,383
Loan payable to Hangzhou TianCi Investment Management Co., Ltd., an unrelated party. The loan was unsecured, bearing no interest and no due date were specified. The loan was obtained by Jiruhai. As of September 30, 2013, the balance of loan was transferred to other income.		-		58,910
Bank loan payable to China Merchants Bank Beijing Dongzhimen subbranch, bearing interest at a floating rate of prime rate plus 20% of prime rate, of which prime rate was based on one-year loan interest rate released by The People's Bank of China. The actual interest rates as of December 31, 2012 were 7.20%. The term of the loan started from January 11, 2012 with maturity date on January 10, 2013. The loan was obtained by Detain Yu and guaranteed by Beijing Agriculture Guarantee Ltd. for a period of one year starting from November 30, 2011. The loan was paid off on January 10, 2013.		-		264,843
Total	$	7,383,987	$	8,323,623

NOTE 11. ACCRUED EXPENSES

Accrued expenses consisted of the following:

	September 30,		December 31,
	2013		2012
Accrued VAT and other taxes	$	395,923	$	428,552
Accrued payroll		201,935		288,584
Others		1,063,934		789,640
Total	$	1,661,792	$	1,506,776

NOTE 12. INCOME TAXES

United States

Deyu Agriculture Corp. is incorporated in the State of Nevada in the United States of America and is subject to the U.S. federal and state taxation. No provision for income taxes have been made as the Company has no taxable income in the U.S. The applicable income tax rate for the Company for the nine months ended September 30, 2013 and 2012 was 34%. No tax benefit has been realized since a 100% valuation allowance has offset deferred tax asset resulting from the net operating losses.

British Virgin Islands

City Zone, a wholly-owned subsidiary of the Company, is incorporated in the BVI and, under the current laws of the BVI, is not subject to income taxes.

Hong Kong

Most Smart, a wholly-owned subsidiary of the Company, is incorporated in Hong Kong. Most Smart is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No provision for income taxes have been made as Most Smart has no taxable income in Hong Kong.

People’s Republic of China

Under the Enterprise Income Tax (“EIT”) Law of the PRC, the standard EIT rate is 25%. The PRC subsidiaries of the Company are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. According to the Tax Pronouncement [2008] No. 149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled to EIT exemption starting January 1, 2008. Three of the Company’s wholly-owned subsidiaries located in the Shanxi Province, China, including JinzhongDeyu, JinzhongYongcheng and JinzhongYuliang, are subject to the EIT exemption. All other subsidiaries and consolidated variable interest entities are subject to the 25% EIT rate.

- 15 -

The provision for income taxes on income consists of the following for the nine months ended September 30, 2013 and 2012:

	For the Nine Months Ended
	September 30,
	2013		2012
Current income tax expense (benefit)
U.S.	$	-	$	-
PRC		580,054		686,282
Total current expense (benefit)	$	580,054	$	686,282
Deferred income tax expense (benefit)
U.S.	$	-	$	-
PRC		-		788,899
Income tax expense (benefit)	$	580,054	$	1,475,181

The following is a reconciliation of the statutory tax rate to the effective tax rate for the nine months ended September 30, 2013 and 2012:

	For the Nine Months Ended
	September 30,
	2013		2012
Expected U.S. income tax expense	34.0	%	34.0	%
Increase (decrease) in taxes resulting from:
Tax-exempt income	-27.8	%	-32.9	%
Foreign tax differential	-2.2	%	-0.3	%
Change in valuation allowance	-11.2	%	10.2	%
Intercompany elimination	3.4	%	-1.2	%
Other	0.0	%	0.5	%
Income tax expense	-3.8	%	10.3	%

Significant components of the Company’s net deferred tax assets as of September 30, 2013 and December 31, 2012 are presented in the following table:

	September 30,		December 31,
	2013		2012
Deferred tax assets
Net operating loss carryforwards (NOL)	$	4,530,189	$	3,430,118
Share-based compensation		435,118		391,339
Others		435,821		88,208
Total		5,401,128		3,909,665
Less: Valuation allowance		(5,401,128)		(3,909,665)
Total deferred tax assets, net	$	-	$	-

As of September 30, 2013, the Company accrued a 100% valuation allowance on its deferred tax assets based on the assessment on the probability of future reversion.

NOTE 13. NET INCOME (LOSS) PER SHARE

Reconciliation of the basic and diluted net income (loss) per share was as follows:

	Amounts		Shares	Per Share
	(Numerator)		(Denominator)	Amount
For the Nine Months ended September 30, 2013:
Net income (loss) attributable to common stockholders - basic	$	(16,200,476)	10,627,497	$	(1.52)
Preferred dividends applicable to convertible preferred stocks		-	-
Net income (loss) attributable to common stockholders - diluted	$	(16,200,476)	10,627,497	$	(1.52)
For the Nine Months ended September 30, 2012:
Net income attributable to common stockholders - basic	$	12,505,234	10,578,570	$	1.18
Preferred dividends applicable to convertible preferred stocks		332,087	2,007,290
Net income attributable to common stockholders - diluted	$	12,837,321	12,585,860	$	1.02

NOTE 14. SHAREHOLDERS’ EQUITY

Reverse Acquisition and Private Placement

On April 27, 2010, we completed the acquisition of City Zone by means of a Share Exchange with (i) City Zone, (ii) the City Zone Shareholders and (iii) our principal shareholders (see NOTE 1). Pursuant to the terms of the Share Exchange, Expert Venture and the other City Zone Shareholders transferred to us all of the shares of City Zone in exchange for the issuance of 8,736,932 shares of our common stock so that Expert Venture and the other minority shareholders of City Zone shall own at least a majority of our outstanding shares.

Our directors approved the Share Exchange and the transactions contemplated thereby. The directors of City Zone also approved the Share Exchange and the transactions contemplated thereby.

As a result of the Share Exchange, we acquired 100% of the equity interests of City Zone, the business and operations of which now constitute our primary business and operations through its wholly-owned PRC subsidiaries. Specifically, as a result of the Share Exchange:

• We issued 8,736,932 shares of our common stock to the City Zone Shareholders;

• The ownership position of our shareholders who were holders of common stock immediately prior to the Share Exchange changed from 100% to 9.5% (fully diluted) of our outstanding shares; and

• City Zone Shareholders were issued our common stock constituting approximately 65.71% of our fully diluted outstanding shares.

Immediately after the Share Exchange, we entered into a securities purchase agreement (the “Purchase Agreement”) with certain accredited investors (the “Investors”) for the issuance and sale in a private placement of 1,866,174 Units at $4.40 per Unit, with each Unit consisting of one share of Series A convertible preferred stock, par value $0.001 per share (the “Investor Shares”) and a warrant to purchase 0.4 shares of our common stock with an exercise price of $5.06 per share (the “Warrants”). We initially received gross proceeds from the sale of the 1,866,174 Investor Shares and Warrants to purchase up to 746,479 shares of our common stock of $8,211,166 (the “Private Placement”).

 

- 16 -

In connection with the Private Placement, we also entered into a registration rights agreement (the “Registration Rights Agreement”) with the Investors, in which we agreed to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to register for resale the Investor Shares, within 60 calendar days of April 27, 2010, and use our best efforts to have the Registration Statement declared effective within 180 calendar days of April 27, 2010. We agreed to pay monthly liquidated damages in cash to each Investor equal to 0.5% of the dollar amount of the purchase price of the Investor Shares, on a pro rata basis, for each 30 day period the Registration Statement is not declared effective, up to a maximum of 8% of the purchase price, however on October 21, 2010, the SEC declared the Registration Statement effective and no liquidated damages were incurred.

In connection with the Private Placement, Maxim Group, LLC acted as our financial advisor and placement agent (the “Placement Agent” or “Maxim”). The Placement Agent received a cash fee equal to 7% of the gross proceeds of the Private Placement. Maxim also received warrants to purchase 171,911 shares of our common stock at a price per share of $4.84 (the “Placement Agent Warrants”). Pursuant to the original placement agreement entered into by and between Detian Yu and the Placement Agent on January 27, 2010 (the “Original Placement Agreement”), we engaged the Placement Agent to act as the exclusive agent to sell the Units in this offering on a “commercially reasonable efforts basis.” The Placement Agent also received a cash corporate finance fee equally to 1% of our gross proceeds raised in the offering, payable at the time of each closing; five (5) year warrants to purchase that number of shares of Series A convertible preferred stock equal to 5% of the aggregate number of shares of Series A convertible preferred stock underlying the Units issued pursuant to the offering; and a non-refundable cash retainer of $25,000 payable upon the execution of the retainer agreement. We also agreed to pay for all of the reasonable expenses the Placement Agent incurred in connection with the offering.

On May 10, 2010, we closed on the second and final round of the private placement offering for the issuance and sale of 589,689 Units, consisting of 589,689 shares of Series A convertible preferred stock and 235,883 five-year Series A Warrants with an exercise price of $5.06 per share, to certain Investors for total gross proceeds of $2,594,607.

We raised an aggregate amount of $10,805,750 in the offering in two closing events. As of the final closing, we had 9,999,999 shares of common stock issued and outstanding. In connection with the offering, we issued a total of 2,455,863 shares of Series A convertible preferred shares and 982,362 Series A Warrants to the investors. Additionally, the Placement Agent received 171,911 warrants.

Common Stock

As of the final closing of the Private Placement, we had 9,999,999 shares of common stock issued and outstanding. Between the final closing of the Private Placement and September 30, 2013, an aggregate of 538,267 shares of Series A convertible preferred stock were converted into 538,267 shares of common stock and an aggregate of 80,000 shares of common stock were issued. As of September 30, 2013, the total number of shares of common stock issued and outstanding was 10,618,266 shares.

Series A Convertible Preferred Stock

Holders of Series A convertible preferred stock (“Series A Preferred”) are entitled to receive cumulative dividends in preference to the holders of our common stock at an annual rate of 5% of the applicable per Series A Preferred original purchase price (the “Dividend Preference” and the “Dividends”). If, after the Dividend Preference has been fully paid or declared and set apart, the Company shall make any additional distributions, then the holders of Series A Preferred shall participate with the holders of common stock on an as-converted basis with respect to such distributions. Dividends are payable in cash or shares of Series A Preferred, at the Company’s option.

- 17 -

Upon any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred will be entitled to receive, out of the assets of the Company available for distribution to its shareholders, an amount equal to $4.40 per share (the “Liquidation Preference Amount”), before any payment shall be made or any assets distributed to the holders of the common stock (the “Liquidation Preference”).

Each holder of Series A Preferred will have the right, at the option of the holder at any time on or after the issuance of the Series A Preferred, without the payment of additional consideration, to convert the Series A Preferred into a number of fully paid and nonassessable shares of common stock equal to: (i) the Liquidation Preference Amount of such share divided by (ii) the Conversion Price in effect as of the date of the conversion in accordance with the Certificate of Designations of the Series A Preferred.

For a period of two (2) years following the issuance of the Series A Preferred, the conversion price of Series A Preferred was subject to adjustment for issuances of common stock (or securities convertible or exchangeable into shares of common stock) at a purchase price less than the conversion price of the Series A Preferred. The Series A Preferred Stock does not contain any repurchase or redemption rights.

Current accounting standards require that we evaluate the terms and conditions of convertible preferred stock to determine (i) if the nature of the hybrid financial instrument, based upon its economic risks, is more akin to an equity contract or a debt contract for purposes of establishing classification of the embedded conversion feature and (ii) the classification of the host or hybrid financial instrument. Based upon a review of the terms and conditions of the Series A Preferred, the Company has concluded that the financial instrument is more akin to an equity financial instrument. The major consideration underlying this conclusion is that the Series A Preferred is a perpetual financial instrument with no stated maturity or redemption date, or other redemption that is not within the Company’s control. Other considerations in support of the equity conclusion included the voting rights and conversion feature into common shares. While the cumulative dividend feature may, in some instances, be likened to a debt-type coupon, the absence of a stated maturity date was determined to establish the cumulative dividend as a residual return, which does not obviate the equity nature of the financial instrument. Further, there are no cash redemption features that are not within the control of our management. As a result, classification in shareholders’ equity is appropriate for the Series A Preferred.

As of September 30, 2013, an aggregate of 538,267 shares of Series A Preferred were converted into 538,267 shares of common stock and an aggregate of 265,032 shares of Series A Preferred were issued as dividends to the shareholders of Series A Preferred. As of September 30, 2013, the total number of shares of Series A Preferred issued and outstanding was 2,182,628 shares.

For the nine months ended September 30, 2013 and 2012, the Company recorded $356,114 and $332,087 preferred dividend expenses, respectively.

Series A Warrants

We issued Series A Warrants to the Investors and the Placement Agent having strike prices of $5.06 and $4.84, respectively, and they expire five (5) years from the original date of issuance. The strike prices are subject to adjustment only for changes in our capital structure, but allow for cashless exercise under a formula that limits the aggregate issuable common shares. There are no redemption features embodied in the warrants and they have met the conditions provided in current accounting standards for equity classification.

There were 982,362 Series A Warrants sold together with the Series A Preferred to the Investors, each of which:

(a)	entitles the holder to purchase one (1) share of common stock;
(b)	are exercisable at any time after consummation of the transactions contemplated by the Purchase Agreement and shall expire on the date that is five years following the original issuance date of the Series A Warrants;
(c)	are exercisable, in whole or in part, at an exercise price of $5.06 per share of common stock; and
(d)	are exercisable only for cash (except that there will be a cashless exercise option if, after twelve months from the Issue Date, (i) the Per Share Market Value of one share of common stock is greater than the Warrant Price (at the date of calculation) and (ii) a registration statement under the Securities Act providing for the resale of the common stock issuable upon exercise of Warrant Shares is not in effect, in lieu of exercising the Series A Warrant by payment of cash).

- 18 -

Aggregate gross proceeds from the two (2) closing events amounted to $10,805,750. Direct financing costs totaled $1,742,993, of which $1,555,627 was paid in cash and the balance of $187,366 represents the fair value of warrants linked to 171,911 shares of our common stock that were issued to Maxim. The proceeds and the related direct financing costs were allocated to the Series A Preferred and the Series A Warrants (classified in paid-in capital) based upon their relative fair values. The following table summarizes the components of the allocation:

			Paid-in
	Series A		Capital
	Preferred		Warrants		Total
Fair values of financial instruments	$	10,248,092	$	1,039,978	$	11,288,070
Gross proceeds	$	9,810,227	$	995,523	$	10,805,750
Direct financing costs		(1,581,550)		(161,443)		(1,742,993)
Fair value of placement agent warrants		-		187,366		187,366
	$	8,228,677	$	1,021,446	$	9,250,123

Fair value considerations:

Our accounting for the sale of Series A Preferred and Series A Warrants, and the issuance of the Series A Warrants to Maxim required the estimation of fair values of the financial instruments on the financing inception date. The development of fair values of financial instruments requires the selection of appropriate methodologies and the estimation of often subjective assumptions. We selected the valuation techniques based upon consideration of the types of assumptions that market participants would likely consider in exchanging the financial instruments in market transactions. The Series A Preferred was valued based upon a common stock equivalent method, enhanced by the cumulative dividend feature. The dividend feature was valued as the estimated cash flows of the dividends discounted to present value using an estimated weighted average cost of capital. The warrants were valued using a Black-Scholes-Merton Valuation Technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments.

These fair values were necessary to develop relative fair value calculation for allocations of certain elements of the financing arrangement, principally proceeds and the related direct financing costs. The following tables reflect assumptions used to determine the fair value of the Series A Preferred:

		Series A			Series A
	Fair Value	Preferred			Preferred
	Hierarchy	April 27,			May 10,
	Level	2010			2010
Indexed common shares			1,866,174			589,689
Components of fair value:
Common stock equivalent value		$	6,631,403		$	2,083,094
Dividend feature			659,821			209,439
		$	7,291,224		$	2,292,533
Significant assumptions:
Common stock price	3		3.55			3.53
Horizon for dividend cash flow projection	3		2.00			2.00
Weighted average cost of capital ("WACC")	3		15.91	%		15.55	%

- 19 -

Fair value hierarchy of the above assumptions can be categorized as follows:

(1)	Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from. There were no level 1 inputs.
(2)	Level 2 inputs are significant other observable inputs. There were no level 2 inputs.
(3)	Level 3 inputs are unobservable inputs. Inputs for which any parts are level 3 inputs are classified as level 3 in their entirety.

· Stock price- Given that management did not believe our trading market price was indicative of the fair value of our common stock at the measurement date, the common stock price value was derived implicitly from an iterative process based upon the assumption that the consideration of the Private Placement was the result of an arm’s length transaction. The Private Placement was composed of shares of Series A Preferred and Series A Warrants which were both indexed to our common stock; accordingly, we used an iterative process to determine the value of our common stock in order for the fair value of the Series A Preferred and Series A Warrants to equal the amount of consideration received in the Private Placement.

· Dividend horizon- We estimated the horizon for dividend payment at 2 years.

· WACC- The rates utilized to discount the cumulative dividend cash flows to their present values were based on a weighted average cost of capital of 18.94% and 18.60%, as of April 27, 2010 and May 10, 2010, respectively. This discount rate was determined after consideration of the rate of return on debt capital and equity that typical investors would require in an investment in companies similar in size and operating in similar markets as Deyu Agriculture Corp. The cost of equity was determined using a build-up method which begins with a risk free rate and adds expected risk premiums designed to reflect the additional risk of the investment. Additional premiums or discounts related specifically to us and the industry are also added or subtracted to arrive at the final cost of equity rate. The cost of debt was determined based upon available financing terms.

· Significant inputs and assumptions underlying the model calculations related to the warrant valuations are as follows:

The following tables reflect assumptions used to determine the fair value of the Series A Warrants:

		April 27, 2010				May 10, 2010
	Fair Value
	Hierarchy	Investor		Agent		Investor		Agent
	Level	warrants		warrants		warrants		Warrants
Indexed shares		746,479		130,632		235,883		41,279
Exercise price		5.06		4.84		5.06		4.84
Significant assumptions:
Stock price	3	3.55		3.55		3.53		3.53
Remaining term	3	5 years		5 years		5 years		5 years
Risk free rate	2	2.39	%	2.39	%	2.24	%	2.24	%
Expected volatility	2	45.25	%	45.25	%	45.47	%	45.47	%

Fair value hierarchy of the above assumptions can be categorized as follows:

(1) There were no Level 1 inputs.

(2) Level 2 inputs include:

- 20 -

• Risk-free rate- This rate is based on publicly-available yields on zero-coupon U.S. Treasury securities with remaining terms to maturity consistent with the remaining contractual term of the Series A Warrants.

• Expected volatility- We did not have a historical trading history sufficient to develop an internal volatility rate for use in the model. As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility. In developing this model, no one company was weighted more heavily.

(3) Level 3 inputs include:

• Stock price- Given that management did not believe our trading market price was indicative of the fair value of our common stock at the measurement date, the stock price was determined implicitly from an iterative process based upon the assumption that the consideration of the Private Placement was the result of an arm’s length transaction.

• Remaining term- We do not have a history to develop the expected term for our warrants. Accordingly, we have used the contractual remaining term in our calculations.

The following is a summary of the status and activity of warrants outstanding as of September 30, 2013:

Outstanding Warrants
Exercise Price		Number of Warrants	Average Remaining Contractual Life
$	5.06	982,362	1.57 years
$	4.84	171,911	1.57 years
	Total	1,154,273

	Number of Warrants
Outstanding as of January 1, 2013	1,154,273
Granted	-
Forfeited	-
Exercised	-
Outstanding as of September 30, 2013	1,154,273

NOTE 15. SHARE-BASED COMPENSATION

As of September 30, 2013, the Company had one share-based compensation plan as described below. The compensation cost that had been charged against income for the plan was $43,779 and $250,290 for the nine months ended September 30, 2013 and 2012, respectively. The related income tax benefit recognized was $14,885 and $85,099 for the nine months ended September 30, 2013 and 2012, respectively. A 100% valuation allowance was assessed against the deferred tax assets derived from such tax benefit as of September 30, 2013 and 2012.

On November 4, 2010, the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan. On November 8, 2010, a total of 931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock shares were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share, of which shall vest as follows:

33 1/3% of the option grants vested one (1) month after the date of grant;

33 1/3% of the option grants vested twelve (12) months after the date of grant; and

33 1/3% of the option grants vested twenty-four (24) months after the date of grant.

On March 8, 2012, the Company’s Board of Directors increased the number of shares allocated to and authorized for use under the Plan from 1,000,000 shares to the maximum number of shares allowable pursuant to the terms of the Plan (1,245,586) and granted 420,000 options under the Plan to independent directors, officers and key employees of the Company, of which included some new options and those re-granted after such options were forfeited by other former employees as a result of their resignations from the Company in accordance with the terms of their option agreements. All of the granted options vest as follows:

50% of the options granted vested six (6) months after the date of the grant; and

50% of the options granted vested twelve (12) months after the date of the grant.

On November 23, 2012, our Board of Directors allocated to and authorized to re-grant 150,000 options to a director of the Company after such options were forfeited by other former employees as a result of their resignations from the Company in accordance with the terms of their option agreements. All of the granted options vest as follows:

33 1/3% of the option grants vested one (1) month after the date of grant;

33 1/3% of the option grants will vest twelve (12) months after the date of grant; and

33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.

- 21 -

The fair value of each option award was estimated on the date of grant using a Black-Scholes option pricing model that uses the assumptions noted in the following table. The model is based on the assumption that it is possible to set up a perfectly hedged position consisting of owning the shares of stock and selling a call option on the stock. Any movement in the price of the underlying stock will be offset by an opposite movement in the options value, resulting in no risk to the investor. This perfect hedge is riskless and, therefore, should yield the riskless rate of return. As the Black-Scholes option pricing model applies to stocks that do not pay dividends, we made an adjustment developed by Robert Merton to approximate the option value of a dividend-paying stock. Under this adjustment method, it is assumed that the Company’s stock will generate a constant dividend yield during the remaining life of the options.

The following tables reflect assumptions used to determine the fair value of the option award:

Options granted on November 8, 2010:

Exercisable Period	12/8/2010 - 11/8/2020	11/8/2011 - 11/8/2020	11/8/2012 - 11/8/2020
Risk-free Rate (%)	1.12	1.27	1.46
Expected Lives (years)	5.04	5.50	6.00
Expected Volatility (%)	46.10	44.49	43.04
Expected forfeitures per year (%)	0.00-55.00	0.00-55.00	0.00-55.00
Dividend Yield (%)	0.00	0.00	0.00

- 22 -

Options granted on December 15, 2010:

Exercisable Period	1/15/2011 - 12/15/2020	12/15/2011 - 12/15/2020	12/15/2012 - 12/15/2020
Risk-free Rate (%)	2.15	2.32	2.50
Expected Lives (years)	5.04	5.50	6.00
Expected Volatility (%)	46.15	44.52	43.09
Expected forfeitures per year (%)	0.00	0.00	0.00
Dividend Yield (%)	0.00	0.00	0.00

Options granted on March 8, 2012:

Exercisable Period	09/08/2012 - 03/08/2020	03/08/2013 - 03/08/2020
Risk-free Rate (%)	0.94	1.00
Expected Lives (years)	5.25	5.49
Expected Volatility (%)	45.91	45.22
Expected forfeitures per year (%)	0.00	0.00
Dividend Yield (%)	0.00	0.00

Options granted on November 23, 2012:

Exercisable Period	12/23/2012 - 11/8/2020	11/23/2013 - 11/8/2020	11/23/2014 - 11/8/2020
Risk-free Rate (%)	0.53	0.60	0.68
Expected Lives (years)	4.02	4.48	4.98
Expected Volatility (%)	37.43	46.48	46.45
Expected forfeitures per year (%)	0.00	0.00	0.00
Dividend Yield (%)	0.00	0.00	0.00

Fair value hierarchy of the above assumptions can be categorized as follows:

(1)	There were no Level 1 inputs.
(2)	Level 2 inputs include:

· Risk-free rate- This rate is based on continuous compounding of publicly-available yields on U.S. Treasury securities with remaining terms to maturity consistent with the expected term of the options at the dates of grant.

- 23 -

· Expected volatility- We did not have a historical trading history sufficient to develop an internal volatility rate for use in the model. As a result, we have used a peer approach wherein the historical trading volatilities of certain companies with similar characteristics as ours and who had a sufficient trading history were used as an estimate of our volatility. In developing this model, no one company was weighted more heavily.

(3) Level 3 inputs include:

· Expected lives- The expected lives of options granted were derived from the output of the option valuation model and represented the period of time that options granted are expected to be outstanding.

· Expected forfeitures per year- The expected forfeitures are estimated at the dates of grant and will be revised in subsequent periods pursuant to actual forfeitures, if significantly different from the previous estimates.

The estimates of fair value from the model are theoretical values of stock options and changes in the assumptions used in the model could result in materially different fair value estimates. The actual value of the stock options will depend on the market value of the Company’s common stock when the stock options are exercised.

A summary of option activity under the Plan as of September 30, 2013, and changes during the nine months ended September 30, 2013 is presented below:

				Weighted-
		Weighted-		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
Options	Shares	Price		Term	Value
Outstanding as of January 1, 2013	1,124,000	$	3.30
Granted	-	$	-
Exercised	-	$	-
Forfeited	(119,000)	$	4.40
Outstanding as of September 30, 2013	1,005,000	$	3.17	3.87 years	$	1,019,617
Exercisable as of September 30, 2013	905,000	$	3.03	3.86 years	$	1,013,181
Vested and expected to vest (1)	1,005,000	$	3.17	3.87 years

(1) Includes vested shares and unvested shares after a forfeiture rate is applied.

A summary of the status of the Company’s unvested shares as of September 30, 2013, and changes during the nine months ended September 30, 2013 is presented below:

		Weighted-
		Average
		Grant-
		Date Fair
Unvested Shares	Shares	Value
Unvested as of January 1, 2012	310,000	$	131,974
Granted	-		-
Vested	(210,000)		(125,538)
Forfeited	-		-
Unvested as of September 30, 2013	100,000	$	6,436

NOTE 16. RELATED PARTY TRANSACTIONS

Transactions

	For The Nine Months Ended
	September 30,
	2013		2012
Sales to Beijing Doukounianhua Biotechnology Co., Ltd.	$	-	$	2,906,361

Jianbin Zhou, the former Chief Operating Officer of the Company, is the legal representative of Beijing Doukounianhua Biotechnology Co., Ltd. The prices in the transactions with related parties were determined according to the market price sold to or purchased from third parties.

Due from related parties

	September 30,		December 31,
	2013		2012
Due from Beijing Doukounianhua Biotechnology Co., Ltd.	$	43,959	$	43,182
Due from Hao He		-		34,330
Due form Jinshang International Finance Leasing Co., Ltd.		-		4,333
Due from Feng Liu		-		315,369
Total	$	43,959	$	397,214

Mr. Hao He is the former shareholder of Huichun and Taizihu. Mr. Wenjun Tian, the former President and Director of the Company is the Executive Director of Jinshang International Finance Leasing Co., Ltd. Mr. Feng Liu is the legal representative and the non-controlling shareholder of Jilin Jinglong.

Due to related parties

	September 30,		December 31,
	2013		2012
Due to Dongsheng International Investment Co., Ltd.		537,841	$	6,007,929
Due to Hao He		25,510		-
Due to Mr. Wenjun Tian		-		2,660,623
Total	$	563,351	$	8,668,552

Mr. WenjunTian, the former President and Director of the Company, is the President and Executive Director of Dongsheng International Investment Co., Ltd. Those loans as of September 30, 2013 and December 31, 2012 are unsecured, bear no interest and no due date is specified. Mr. Hao He is the former shareholder of Huichun and Taizihu.

- 24 -

Guarantees

As of September 30, 2013, YuciJinmao Food Processing Factory, of which the legal representative is JunlianZheng, the wife of Junde Zhang, the Vice President of the Company, provided guarantees on short-term loans obtained by JinzhongYongcheng and JinzhongYuliang.

NOTE 17. SEGMENT REPORTING

The Company defined reportable segments according to ASC Topic 280. The segments, including corn division, grain division and bulk trading division, are identified primarily based on the structure of allocating resources and assessing performance of the group.

The corn division is in the business of purchasing corn from farmers, simple processing and distributing to agricultural product trading companies through wholesale. The business of the grain division is conducted by processing and distributing grains and other products. The business of the bulk trading division is conducted by bulk purchasing and the sale of raw grain.

For the Nine months ended	Corn		Grain		Bulk Trading
September 30, 2013	Division		Division		Division		Others		Total
Revenues from external customers	$	118,737,234	$	32,675,928	$	57,704,021		-	$	209,117,183
Intersegment revenues		-		-		-		-		-
Interest revenue		7,397		2,640		6,490		16,621		33,148
Interest expense		(319,356)		(226,329)		(47,779)		-		(593,464)
Net interest (expense) income		(311,959)		(223,689)		(41,289)		16,621		(560,316)
Depreciation and amortization		(363,886)		(1,238,322)		(3,025)		(160,998)		(1,766,231)
Noncontrolling interest		-		-		-		3,998		3,998
Segment net profit (loss)		(4,324,670)		(1,285,227)		376,918		(10,615,381)		(15,848,360)

For the three months ended	Corn		Grain		Bulk Trading
September 30, 2013	Division		Division		Division		Others		Total
Revenues from external customers	$	47,613,504	$	9,936,614	$	10,789,250	$	-	$	68,339,368
Intersegment revenues		-		-		-		-		-
Interest revenue		1,398		552		1,189		16,337		19,476
Interest expense		(109,853)		(83,772)		3,442		-		(190,183)
Net interest (expense) income		(108,455)		(83,220)		4,631		16,337		(170,707)
Depreciation and amortization		(104,800)		(407,962)		(1,169)		(56,578)		(570,509)
Noncontrolling interest		-		-		-		194		194
Segment net profit (loss)		(4,863,957)		(3,033,318)		(230,797)		(6,981,692)		(15,109,764)

For the Nine months ended	Corn		Grain		Bulk Trading
September 30, 2012	Division		Division		Division		Others		Total
Revenues from external customers	$	115,453,950	$	46,693,753	$	12,901,100		-	$	175,048,803
Intersegment revenues		61,507		-		-		-		61,507
Interest revenue		9,481		8,170		7,253		14		24,918
Interest expense		(500,230)		(530,011)		(230,569)		-		(1,260,810)
Net interest (expense) income		(490,749)		(521,841)		(223,316)		14		(1,235,892)
Depreciation and amortization		(415,792)		(1,379,376)		(269)		(6,078)		(1,801,515)
Noncontrolling interest		-		-		-		44,695		44,695
Segment net profit (loss)		8,231,945		7,011,965		(353,537)		(2,097,747)		12,792,626

- 25 -

For the three months ended	Corn		Grain		Bulk Trading
September 30, 2012	Division		Division		Division		Others		Total
Revenues from external customers	$	34,889,078	$	17,424,132	$	4,159,114	$	-	$	56,472,324
Intersegment revenues		61,507		-		-		-		61,507
Interest revenue		2,831		3,171		1,225		15		7,242
Interest expense		(95,222)		(147,617)		(87,932)		-		(330,771)
Net interest (expense) income		(92,391)		144,446		(86,707)		15		(34,637)
Depreciation and amortization		(140,991)		(500,737)		(89)		11		(641,806)
Noncontrolling interest		-		-		-		3,826		3,826
Segment net profit (loss)		2,144,346		2,005,020		32,807		(588,755)		3,593,418

All of our revenues were generated from customers in China. Sales to exporting agencies were denominated in RMB, the Company’s functional currency and were accounted for as domestic sales. All long-lived assets are located in China. The following tables set forth our three major customers in each segment:

	For the Nine Months Ended
	September 30,
Corn Division :	2013			2012
Sichuan Xinnong Scientific and Technical Feed Co., Ltd.		4.3	%		2.8	%
Meishan Uni-president Enterprise Co., Ltd.		3.7	%		2.5	%
Chengdu Zhengda Co., Ltd.		3.7	%		4.4	%
Top Three Customers as % of Total Gross Sales:		11.7	%		9.7	%
Grain Division :
Deyufarm Innovation Food (Beijing) Co., Ltd.		51.4	%		22.8	%
Tianjin Zhengyangchun Food Co., Ltd.		2.0	%		0.9	%
Tianjin Tianhuajingyu Trading Co., Ltd.		2.0	%		1.8	%
Top Three Customers as % of Total Gross Sales		55.4	%		25.5	%
Bulk Trading Division :
Shanxi Helifahua Trading Co., Ltd.		12.5	%		0.0	%
Jinzhong Kangshuaijianmin Food Trading Co., Ltd.		11.1	%		0.0	%
Shandong Runpeng Trading Co., Ltd.		8.4	%		0.0	%
Top Three Customers as % of Total Gross Sales:		32.0	%		0.0	%

NOTE 18. CONCENTRATION OF CREDIT RISK

As of September 30, 2013 and December 31, 2012, all of the Company’s cash balances in banks were maintained within the PRC where no rule or regulation currently in place to provide obligatory insurance for bank deposits in the event of bank failure. However, the Company has not experienced any losses in such accounts and believes it is not exposed to such risks on its cash balances in banks.

For the nine months ended September 30, 2013 and 2012, all of the Company’s sales were generated in the PRC. In addition, all accounts receivable as of September 30, 2013 and December 31, 2012 were due from customers located in the PRC.

No single customer accounted for greater than 10% of the Company’s consolidated gross revenue for the nine months ended September 30, 2013 and 2012, or consolidated accounts receivable as of September 30, 2013 and December 31, 2012.

- 26 -

 

NOTE 19. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases railroad lines, warehouses and offices under operating leases. Future minimum lease payments under operating leases with initial or remaining terms of one year or more are as follows:

As of September 30,	Operating Leases
2013	$	309,784
2014		274,052
2015		173,529
2016		171,895
2017		171,895
Thereafter		1,251,661
	$	2,352,816

NOTE 20. SUBSEQUENT EVENTS

The Company has evaluated events after the balance sheet date of these consolidated financial statements through the date these consolidated financial statements were issued. There were no material subsequent events as of that date.

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

Forward-Looking Statements

In this Quarterly Report on Form 10-Q, unless otherwise indicated, the words “we”, “us”, “our”, “Deyu” or the “Company”) refer to Deyu Agriculture Corp. and all entities owned or controlled by Deyu Agriculture Corp., except where it is made clear that the term only means the parent or a subsidiary company. References in this report to the “PRC” or “China” are to the People’s Republic of China.

This report contains forward-looking statements. The words “anticipated”, “believe”, “expect”, “plan”, “intend”, “seek”, “estimate”, “project,”, “could”, “may” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, the current economic downturn adversely affecting demand for the our products; our reliance on our major customers for a large portion of our net sales; our ability to develop and market new products; our ability to raise additional capital to fund our operations; our ability to accurately forecast amounts of supplies needed to meet customer demand; market acceptance of our products; exposure to product liability and defect claims; fluctuations in the availability of raw materials and components needed for our products; protection of our intellectual property rights; changes in the laws of the PRC that affect our operations; inflation and fluctuations in foreign currency rates and various other matters, many of which are beyond our control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.

Summary of our Business

We are a vertically integrated producer, processor, marketer and distributor of organic and other agricultural products made from corn and grains operating in Shanxi Province in the People's Republic of China. We have access to over 109,000 acres of farmland in Shanxi Province for breeding, cultivating, processing, warehousing and distributing corn and grain products. We have a nationwide sales network covering manufacturers, grain traders, wholesalers, distributors and retail stores. Our facilities include modern warehouses with storage capacity of over 100,000 tons and sophisticated production lines with annual production capacity of over 105,000 and 700,000 tons for grain products and corn, respectively.

- 27 -

A brief description of our products is set forth below, by division:

· Corn Division – This division acquires unprocessed corn for value-added processing such as cleaning and drying packaging. The main consumers for this division range from livestock feed companies to corn oil/corn starch manufacturing companies as well as governmental procurement agencies in China.

· Grain Division –This division acquires unprocessed grains including millet, green bean, soy bean, black rice and many other varieties of grains traditionally grown and consumed in China for value-added processing such as peeling, cleaning, grinding and packaging. The Grain Division also produces and distributes deep processed grain products, such as bean based products, fruit vinegars and juices, noodles and other grain products. We sell our processed grain products to wholesalers, distributors, institutional clients and directly to consumers in retail stores.

· Bulk Trading Division –This division conducts bulk trading through procuring and wholesales of rice, flour, wheat, kidney beans, green beans and other agricultural products. The majority of our customers of this division include food manufacturers, grain trading companies, wholesalers and governmental procurement agencies in China.

- 28 -

We have adopted the operation mode of “Company + Farmers + Cultivation Base”. We have a cultivation base of 109,000 acres in Jinzhong in Shanxi Province for the supply of corn and grain after obtaining land use rights to 17,000 acres of farmlands with an average remaining useful life of 36 years and after signing agricultural co-operative agreements with the governments of counties and villages for the development of 92,000 acres for 18 years. We have established long term strategic partnerships with over 60,000 farmers to grow crops on farmland. We provide extensive agricultural services to the farmers to plan and harvest crops. Services include technical know-how and support, such as cultivation methods, seeding and logistics.

We are equipped with fully automatic and advanced production lines for grain processing with a total production capacity of over 105,000 tons. The advanced production lines and production technologies help produce grain products with high quality by maintaining the nutritional components of the products. We operate six self-owned warehouses, one rental warehouse and some temporary warehouses with total storage capacity of over 100,000 tons of food products and an annual turnover of 700,000 tons. This capacity helps us to reach economies of scale with low cost of processing and storage. Our production bases are located in Jinzhong and Quwo in Shanxi Province with convenient transportation. We have exclusive lease agreements with three railway lines for freight transportation in Jinzhong: (a) Shanxi Cereal & Oil Group, Mingli Reservation Depot; (b) Shanxi Yuci Cereal Reservation Depot; and (c) Yuci Dongzhao Railway Freight Station, which ensure speedy delivery of our products at a low cost.

We have cultivated a national network for corn and bulk trading with customers including various livestock feed companies, food manufacturers, corn oil/corn starch manufacturing companies, grain trading companies, wholesalers and governmental procurement agencies. Meanwhile, we sell our processed grain products to wholesalers, distributors, institutional clients and retail stores.

Operating revenue for the nine months ended September 30, 2013 was $209,117,183, representing a 19.5% increase from $175,048,803 for the nine months ended September 30, 2012. Our net loss available to common stockholders for the nine months ended September 30, 2013 was $16,200,476, representing a 229.5% decrease from $12,505,234 of net income for the nine months ended September 30, 2012.

Recent Developments

Under the changes in the economic environment and market conditions, as well as the negative impacts from some unexpected extreme weather conditions, our business has faced great challenges in 2013.

The corn market experienced a booming growth of demand exceeding supply in the past several years before 2013. Our selling price had an annual average increase of 15.0% and 7.4% in 2011 and 2012, respectively. However, since the beginning of 2013, the corn market has been seeing a weakening demand with an oversupply and the selling price of corn has been declining. The selling price of corn (including value added tax) in our Corn Division reduced over 7.1% from $421/ton (RMB 2,611/ton) in January of 2013 to $391/ton (RMB 2,427/ton) in September of 2013. In contrast, with the rising labor cost and inflation in China, the lowest price for purchasing corn from famers, which is guided by the government due to the protective farming policies in favor of farmers, continues to rise. The lowest guide price (including value added tax) again increased by $10/ton (RMB 60/ton) to $365 (RMB 2,260) in July 2013. As a result, the gross margin of our corn trading business decreased from 15.8% for the nine months ended September 30, 2012 to 8.9% for the nine months ended September 30, 2013.

Corn is mainly used as raw material for livestock feeds and deep processed products such as corn starch and ethanol. The demand for corn from the two downstream industries declined dramatically in 2013. First, livestock farming has been going through a very difficult time in 2013. After a period of expansion, the pork market turned to be oversupplied. Pork prices decreased significantly after the Spring Festival of 2013. Many farmers or companies in the industry started to reduce the livestock raising scale. Second, with the economy slowing down, demand for the deep processed corn products was also very weak. The price of ethanol decreased to its lowest level in the past three years. A lot of corn deep processing companies have been running under production capacity and have not been profitable. However, corn production had a good harvest in 2012. According to National Bureau of Statistics of China, the output of corn increased 15 million tons, or 8% to 208 million tons in 2012 compared to 2011. Increased supply over the demand caused the selling price of corn to decrease. In the same period, there was an influx of low cost corns imported into the market in the south of China. The market is now anticipating another good harvest of corn in 2013, and the continuous increase of corn imports in the coming year. Based on these observations we anticipate the market price will continue to be low.

For the business of our Grain Division, the deteriorating efficiency of existing retail distribution channels curtailed our retail grain package sales amidst the increasing competitiveness in the market. Consequently, we allocated more grain resources to bulk trading activity, yet the slowdown in consumer market growth and competition in the market segment have had negative impacts on the grain bulk trading business.

In the past three quarters, we met some unexpected and extreme weather, which caused serious damage to our inventories and affected our operations. In late April, an unexpected heavy snow storm collapsed the warehouses located in Taiyuan, Shanxi Province which were leased by the Company’s Grain Division and caused about $1.3 million in damage to our grain goods stored in those warehouses. Beginning in May 2013, Shanxi had unusually frequent heavy rainfall which caused extreme humidity. As a result, we needed to reinforce and waterproof the warehouses and to take measures to prevent inventories from mildewing such as transferring inventories from one warehouse to the other, or drying the inventories by machines frequently.These measures reduced the efficiency of our operations and increased operational expenses. 

Considering the change of the economy environment, management is working on a more sustainable strategy with a new operation model with a digital platform. We assessed the fair value of the land use rights of the farmlands we own in Yuci, Shanxi Province based on our current operation plan. We realized the discounted cash flow generated from the farmlands couldn’t recover their net book value and recorded an impairment loss of $5.8 million as of September 30, 2013. In the meantime, we decided to terminate the construction of the factory facility in the subsidiary of Huichun due to the technical innovation and recorded an impairment loss of $0.8 million on the uncompleted building as of September 30, 2013.

 

- 29 -

Plan of Operation

We believe that the evolving market conditions in China present not only challenges, but opportunities. We are developing a new operation model supported by digital infrastructures, to achieve resourcing integration, execution efficiency, and ability to reduce the exposure to the market volatility by hedging features, at the same time form strategic partnerships with our suppliers and clients via more brand and service driven approach for trading activities. The introduction of this new operating structure could also have a positive impact on the Company's internal controls. We expect that the platform will offer extended services to farmers in the co-ops and to clients alike, build strategic partnerships and serve Deyu's brand building strive.

In the meantime, in order to adapt to the changing market for grain products sold to consumers, we are streamlining our operational structure, developing new product lines, exploring new venues and utilizing a brand-driven approach to go beyond the traditional distribution channels. Our new initiatives still continue to cultivate the whole value chain concept, by offering agricultural services to secure strategic production resources, to offer efficient commercial orders and other value-added services.

Strengthening the Company’s internal and financial controls will remain one of the top priorities for our management. Management will conduct a cost-saving and efficiency assessment review of all subsidiaries and their divisions, with particular focus on reducing administrative costs, and will allocate resources towards business development activities including new product lines and digital infrastructure. We recently reviewed the Company's overall corporate governance, internal control and financial controls and some weaknesses on operations of some subsidiaries were noticed.Measures are being taken to strengthen the Company’s, including subsidiaries, resources sharing, strategic planning and management of funds.

Our new initiatives continue to cultivate the entire value chain concept, by offering agricultural services to secure strategic production resources and by offering efficient commercial orders and other value-added services. With the implementation of new business strategies and resource consolidation/sharing, we believe that we can compete effectively in the industry under the new emerging market conditions.

Results of Operations for the Three Months Ended September 30, 2013 as Compared to the Three Months Ended September 30, 2012

		For The Three Months Ended
		September 30,
	2013		2012		Change		%
Net revenue	$	68,339,368	$	56,472,324	$	11,867,044	21.0	%
Cost of goods sold		(64,342,240)		(46,256,954)		(18,085,286)	39.1	%
Gross Profit		3,997,128		10,215,370		(6,218,242)	-60.9	%
Selling expenses		(6,207,310)		(3,795,367)		(2,411,943)	63.5	%
General and administrative expenses		(4,980,266)		(2,311,508)		(2,668,758)	115.5	%
Loss on impairment of assets		(6,586,425)		-		(6,586,425)
Total Operating Expense		(17,774,001)		(6,106,875)		(11,667,126)	191.0	%
Operating income (loss)		(13,776,873)		4,108,495		(17,885,368)	-435.3	%
Interest income		19,476		7,242		12,234	168.9	%
Interest expense		(190,183)		(330,771)		140,588	-42.5	%
Non-operating income (loss)		(1,107,683)		(7,063)		(1,100,620)	15582.9	%
Total Other Expense		(1,278,390)		(330,592)		(947,798)	286.7	%
Income (loss) before income taxes		(15,055,263)		3,777,903		(18,833,166)	-498.5	%
Income taxes		(54,501)		(184,485)		129,984	-70.5	%
Net income (loss)		(15,109,764)		3,593,418		(18,703,182)	-520.5	%
Net Income (loss) attributable to noncontrolling interests		194		3,826		(3,632)	-94.9	%
Net income (loss) attributable to Deyu Agriculture Corp.		(15,109,570)		3,597,244		(18,706,814)	-520.0	%
Preferred stock dividends		(122,691)		(112,035)		(10,656)	9.5	%
Net income (loss) available to common stockholders	$	(15,232,261)	$	3,485,209	$	(18,717,470)	-537.1	%

Net Revenue

Our net revenue for the three months ended September 30, 2013 was $68.3 million compared with $56.5 million for the three months ended September 30, 2012, an increase of $11.9 million, or 21.0%. This was the combined result of an increase of $12.7 million in corn sales and an increase of $6.6 million in bulk trading sales offset by a decrease of $7.5 million in grain sales. Sales derived from our Corn Division, Grain Division and Bulk Trading Division for the three months ended September 30, 2013 were $47.6 million, $9.9 million and $10.8 million respectively, accounting for 69.7%, 14.5% and 15.8% of total net revenue, respectively.

The following table breaks down the distribution of our sales volume and amount by division and as a percentage of gross sales:

	For The Three Months  Ended  September 30,
	2013					2012
	Volume (ton)		Net Revenue	% of total sales		Volume (ton)		Net Revenue	% of total sales			Changes	%
Corn Division	135,000	$	47,613,504	69.7	%	94,069	$	34,889,078	61.8	%	$	12,724,426	36.5	%
Grain Division	4,391		9,936,614	14.5	%	11,041		17,424,132	30.9	%		(7,487,518)	-43.0	%
Bulk Trading Division	10,530		10,789,250	15.8	%	14,320		4,159,114	7.4	%		6,630,136	159.4	%
Total	149,921	$	68,339,368	100	%	119,430	$	56,472,324	100	%	$	11,867,044	21.0	%

Net revenue from our Corn Division for the three months ended September 30, 2013 was approximately $47.6 million, an increase of $12.7 million, or approximately 36.5%, as compared to $34.9 million for the three months ended September 30, 2012. The increase was mainly the combined result of an increase of 43.5% in sales volume offset by a decrease of 4.9% of corn’s selling price. The increase in sales volume was attributable to the strategy of accelerating the sale of our corn inventory with the management’s anticipation of continuous decline of corn’s selling price. The decline in corn’s selling price was mainly due to the oversupply in the corn market.

Net revenue from our Grain Division for the three months ended September 30, 2013 was $9.9 million, a decrease of $7.5 million, or 43.0%, as compared to $17.4 million for the three months ended September 30, 2012. The decrease was mainly attributable to the decline of retail sales in supermarkets and convenience stores, which was caused by the deteriorating efficiency of traditional retail sales and our strategic shift from grain retail sales to wholesale or bulk trading.

Net revenue from our Bulk Trading Division for the three months ended September 30, 2013 was $10.8 million, an increase of $6.6 million, or 159.4% as compared to $4.2 million for the three months ended September 30, 2012. This increase was mainly attributable to our strategic shift from grain retail sales to wholesale or bulk trading.

- 30 -

Cost of Goods Sold

Cost of goods sold mainly consisted of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and packaging costs. Our cost of goods sold increased by $18.1 million, or 39.1%, from $46.3 million for the three months ended September 30, 2012 to $64.3 million for the three months ended September 30, 2013. This increase was primarily attributable to the increase in sales volume of our corn business and bulk trading business and the increase of the cost of some raw materials for grain products.

Gross Profit

The following table breaks down the gross profit and gross margin by Division:

	For The Three Months  Ended  September 30,
	2013						2012
	Gross Profit		% of total Gross Profit		Margin		Gross Profit		% of total Gross Profit		Margin
Corn Division	$	2,448,738	61.3	%	5.1	%	$	5,365,120	52.5	%	15.4	%
Grain Division		1,365,285	34.2	%	13.7	%		4,602,730	45.1	%	26.4	%
Bulk Trading Division		183,105	4.6	%	1.7	%		247,520	2.4	%	6.0	%
Total	$	3,997,128	100	%	5.8	%	$	10,215,370	100	%	18.1	%

Our gross profit decreased by $6.2 million, or 60.9%, from $10.2 million for the three months ended September 30, 2012 to $4.0 million for the three months ended September 30, 2013. The decrease was a combined result of a decrease in gross profits of $2.9 million in the Corn Division, a decrease of $3.2 million in the Grain Division and a decrease of $0.1 million in the Bulk Trading Division. Our gross margin decreased from 18.1% for the three months ended September 30, 2012 to 5.8% for the three months ended September 30, 2013. The decrease in gross margin was mainly the combined result of the simultaneous decline of gross margin in each division and the increased sales percentage of the bulk trading business, which had a relatively lower gross margin.

Gross profit in the Corn Division was $2.4 million, contributing to 61.3% of total gross profit for the three months ended September 30, 2013. Gross margin for our Corn Division was 5.1% for the three months ended September 30, 2013, down by 1023 basis points from 15.4% for the three months ended September 30, 2012. The decrease in gross margin was mainly attributable to the weakening demand in the corn industry with an oversupply of corn after a good harvest in 2012. The corn demand from livestock feeds factories weakened due to the decrease of pork prices and the spread of bird flu H7N9 in 2013. The average market sales prices of corn decreased 8.3% while the average purchase price of raw corn increased 2.1% due to the government's protective farming policies in favor of farmers.

Gross profit in the Grain Division was $1.4 million, contributing to 34.2% of total gross profit for the three months ended September 30, 2013. Gross margin for the Grain Division was 13.7% for the three months ended September 30, 2013, which decreased by 1270 basis points from 26.4% for the three months ended September 30, 2012. This decrease in gross margin was primarily due to the increasing cost of raw materials in addition to the strategic shift from grain retail sales to wholesales, which has relatively lower gross margins but with fewer distribution expenses.

Gross profit in the Bulk Trading Division was $0.2 million, contributing to 4.6% of total gross profit for the three months ended September 30, 2013. Gross margin in the Bulk Trading Division was relatively lower compared to our other Divisions as a result of its high turnover rate and relatively lower cost maintenance. Gross margin for the Bulk Trading Division was 1.7% for the three months ended September 30, 2013, a decrease of 425 basis points from 6.0% for the three months ended September 30, 2012. This decrease was mainly attributable to market fluctuations in 2013 during the current economic slowdown.

Selling Expenses

Selling expenses included expenses of freight, warehousing, handling, distribution, advertising, farmer subsidies, payroll and other expenses. Selling expenses increased by $2.4 million, or 63.5%, to $6.2 million for the three months ended September 30, 2013 as compared to $3.8 million for the three months ended September 30, 2012. This increase was primarily the combined result of (a) an increase of $1.4 million of handling costs caused by the extreme humid weather conditions in the third quarter of 2013 and (b) an increase of $1.1 million of freight cost due to an increase of 43.5% of sales volume of corn and an average increase of 13% of railway delivery prices which was announced by the Ministry of Railways of China in February 2013. 

- 31 -

General and Administrative Expenses

General and administrative expenses included payroll, professional services, rental, travels, depreciation and amortization. General and administrative expenses for the three months ended September 30, 2013 was $5.0 million, an increase of 2.7 million, or 115.5% compared to $2.3 million for the three months ended September 30, 2012. This increase was primarily due to (a) an increase of $1.3 million of allowance for bad debts of account receivables and other receivables; (b) an increase of $0.7 million in taxes related to inter-subsidiary fixed assets transfers; and (c) an increase of $0.4 million in expenses caused by obsolete inventories.

Loss on Impairment of Assets

 Loss on impairment of assets was $6.6 million for the three months ended September 30, 2013, which represented a $5.8 million impairment loss of the land use rights of farmlands located in Yuci, Shanxi Province and a $0.8 million loss resulted from the termination of the construction of an uncompleted building in the subsidiary Huichun, due to a change in our plan of operation.

Interest Expense

Interest expense for the three months ended September 30, 2013 was $0.2 million compared to $0.3 million for the three months ended September 30, 2012, a decrease of $0.1 million, or 42.5%. This decrease was mainly due to the decrease in the balances on loans. We had a decrease in the average loan balance from $11.0 million for the three months ended September 30, 2012 to $7.2 million for the three months ended September 30, 2013.

Non-operating Income (Loss)

Non-operating loss for the three months ended September 30, 2013 was $1.1 million, and mainly represented donations to the local community and the deposal of unqualified inventories. Non-operating loss for the three months ended September 30, 2012 was immaterial.

Provision for Income Taxes

Under the Enterprise Income Tax (“EIT”) Law of the PRC, the standard EIT rate is 25%. Our PRC subsidiaries are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. According to the Tax Pronouncement [2008] No. 149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled to EIT exemption starting January 1, 2008. Three of the Company’s wholly-owned subsidiaries located in Shanxi Province, namely Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang, are subject to the EIT exemption. All of our other subsidiaries are subject to the 25% EIT rate.

Income tax expenses decreased from $184,485 for the three months ended September 30, 2012 to $54,501 for the three months ended September 30, 2013, which represented the current income tax expenses derived from Taizihu Group. The decrease was mainly attributable to the decline of taxable income in the Tazihu Group.

Net Income

As a result of the above, we had net loss available to common stockholders of $15.2 million for the three months ended September 30, 2013 compared to a net income of $3.5 million for the three months ended September 30, 2012, and decrease of $18.7 million, or 537.1%.

Results of Operations for the Nine Months Ended September 30, 2013 as Compared to the Nine Months Ended September 30, 2012

	For The Nine Months Ended
	September 30,
	2013		2012		Change		%
Net revenue	$	209,117,183	$	175,048,803	$	34,068,380	19.5	%
Cost of goods sold		(190,705,629)		(141,911,226)		(48,794,403)	34.4	%
Gross Profit		18,411,554		33,137,577		(14,726,023)	-44.4	%
Selling expenses		(14,340,936)		(11,926,786)		(2,414,150)	20.2	%
General and administrative expenses		(9,884,504)		(6,276,679)		(3,607,825)	57.5	%
Loss of impairment of assets		(6,586,425)		-		(6,586,425)
Total Operating Expense		(30,811,865)		(18,203,465)		(12,608,400)	69.3	%
Operating income		(12,400,311)		14,934,112		(27,334,423)	-183.0	%
Interest income		33,148		24,918		8,230	33.0	%
Interest expense		(593,464)		(1,260,810)		667,346	-52.9	%
Non-operating income (loss)		(2,307,679)		569,587		(2,877,266)	-505.1	%
Total Other Expense		(2,867,995)		(666,305)		(2,201,690)	330.	%
Income (loss) before income taxes		(15,268,306)		14,267,807		(29,536,113)	-207.0	%
Income taxes		(580,054)		(1,475,181)		895,127	-60.7	%
Net income (loss)		(15,848,360)		12,792,626		(28,640,986)	-223.9	%
Net Income (loss) attributable to noncontrolling interests		3,998		44,695		(40,697)	-91.1	%
Net income (loss) attributable to Deyu Agriculture Corp.		(15,844,362)		12,837,321		(28,681,683)	-223.4	%
Preferred stock dividends		(356,114)		(332,087)		(24,027)	7.2	%
Net income (loss) available to common stockholders	$	(16,200,476)	$	12,505,234	$	(28,705,710)	-229.5	%

Net Revenue

Our net revenue for the nine months ended September 30, 2013 was $209.1 million compared with $175.0 million for the nine months ended September 30, 2012, an increase of $34.1 million, or 19.5%.This increase was the combined result of an increase of $44.8 million in bulk trading sales and an increase of $3.3 million in corn sales off-set by a decrease of $14.0 million in grain sales. Sales derived from our Corn Division, Grain Division and Bulk Trading Division for the nine months ended September 30, 2013 were $118.7 million, $32.7 million and $57.7 million, respectively, accounting for 56.8%, 15.6% and 27.6% of total net revenue, respectively.

- 32 -

 

The following table breaks down the distribution of our sales volume and amount by division and as a percentage of gross sales:

	For The Nine Months  Ended  September 30,
	2013					2012
	Volume (ton)	Net Revenue		% of  total sales		Volume (ton)	Net Revenue		% of total sales		Changes		%
Corn Division	331,620	$	118,737,234	56.8	%	315,506	$	115,453,950	66.0	%	$	3,283,284	2.8	%
Grain Division	19,243		32,675,928	15.6	%	29,589		46,693,753	26.7	%		(14,017,825)	-30.0	%
Bulk Trading Division	87,728		57,704,021	27.6	%	37,995		12,901,100	7.4	%		44,802,921	347.3	%
Total	438,591	$	209,117,183	100.0	%	383,090	$	175,048,803	100.0	%	$	34,068,380	19.5	%

 

Net revenue from our Corn Division for the nine months ended September 30, 2013 was approximately $118.7 million, an increase of $3.3 million, or approximately 2.8%, as compared to $115.5 million for the nine months ended September 30, 2012. The increase was mainly the combined result of an increase of 5.1% in sales volume offset by a decrease of 4.7% in the selling price of corn. The increase in sales volume was attributable to the strategy to accelerate the sale of our corn inventory with the management’s anticipation of continuous decline of corn’s selling price in the third quarter in 2013. The decline of corn’s selling price was mainly due to the oversupply in the corn market.

Net revenue from our Grain Division for the nine months ended September 30, 2013 was $32.7 million, a decrease of $14.0 million, or 30.0%, as compared to $46.7 million for the nine months ended September 30, 2012. The decrease was mainly attributable to the decline in retail sales in supermarket and convenience stores, which was caused by the deteriorating efficiency of traditional retail sales and our strategic shift from grain retail sales to wholesale or bulk trading.

Net revenue from our Bulk Trading Division for the nine months ended September 30, 2013 was $57.7 million, an increase of $44.8 million, or 347.3% as compared to $12.9 million for the nine months ended September 30, 2012. This increase was mainly attributable to our strategic shift from grain retail sales to wholesale or bulk trading.

Cost of Goods Sold

Cost of goods sold mainly consisted of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and packaging costs. Our cost of goods sold increased by $48.9 million, or 34.4%, from $141.9 million for the nine months ended September 30, 2012 to $190.7 million for the nine months ended September 30, 2013. This increase was primarily attributable to the increase in sales volume of our bulk trading business and the increase of cost of some raw materials for grain products.

Gross Profit

The following table breaks down the gross profit and gross margin by division:

	For The Nine Months  Ended  September 30,
	2013						2012
	Gross Profit		% of total Gross Profit		Margin			Gross Profit	% of total Gross Profit		Margin
Corn Division	$	10,593,137	57.5	%	8.9	%	$	18,291,142	55.2	%	15.8	%
Grain Division		5,756,671	31.3	%	17.6	%		13,722,398	41.4	%	29.4	%
Bulk Trading Division		2,061,746	11.2	%	3.6	%		1,124,037	3.4	%	8.7	%
Total	$	18,411,554	100	%	8.8	%	$	33,137,577	100	%	18.9	%

Our gross profit decreased by $14.7 million, or 44.4%, from $33.1 million for the nine months ended September 30, 2012 to $18.4 million for the nine months ended September 30, 2013. The decrease was a combined result of a decrease in gross profits of $7.7 million in the Corn Division and a decrease of $8.0 million in the Grain Division, offset by an increase of $0.9 million in the Bulk Trading Division. Our gross margin decreased from 18.9% for the nine months ended September 30, 2012 to 8.8% for the nine months ended September 30, 2013. The decrease in gross margin was mainly the combined result of the simultaneous decline of gross margin in each division and the increased sales percentage of our bulk trading business, which had a relatively lower gross margin.

Gross profit in the Corn Division was $10.6 million, contributing to 57.5% of total gross profit for the nine months ended September 30, 2013. Gross margin for our Corn Division was 8.9% for the nine months ended September 30, 2013, down by 690 basis points from 15.8% for the nine months ended September 30, 2012. The decrease in gross margin was mainly attributable to the weakening demand in the corn industry with an oversupply of corn after a good harvest in 2012. The corn demand from livestock feeds factories weakened due to the decrease of pork prices and the spread of bird flu H7N9 during 2013. The average market sales price of corn decreased 4.7% during the reporting period while the average purchase price of raw corn increased 7.9% due to the government's protective farming policies in favor of farmers.

Gross profit in the Grain Division was $5.8 million, contributing to 31.3% of total gross profit for the nine months ended September 30, 2013. Gross margin for the Grain Division was 17.6% for the nine months ended September 30, 2013, which decreased by 1180 basis points from 29.4% for the nine months ended September 30, 2012. This decrease in gross margin was primarily due to the increasing cost of raw materials in addition to the strategic shift from grain retail sales to wholesales, which has relatively lower gross margins but with fewer distribution expenses.

- 33 -

Gross profit in the Bulk Trading Division was $2.1 million, contributing to 11.2% of total gross profit for the nine months ended September 30, 2013. Gross margin in the Bulk Trading Division was relatively lower compared to our other Divisions as a result of its high turnover rate and relatively lower cost maintenance. Gross margin for the Bulk Trading Division was 3.6% for the nine months ended September 30, 2013, a decrease of 510 basis points from 8.7% for the nine months ended September 30, 2012. This decrease was mainly attributable to market fluctuations in 2013 during the current economic slowdown.

Selling Expenses

Selling expenses included expenses of freight, warehousing, handling, distribution, advertising, farmer subsidies, payroll and other expenses. Selling expenses for the nine months ended September 30, 2013 were $14.3 million, increased for $2.4 million, or 20.2% from the $11.9 million for the nine months ended September 30, 2012. The material fluctuations between the two periods included: (a) an increase of $2.0 million of handling costs caused by the extreme humid weather conditions from June 2013 to September 2013; (b) an increase of $1.2 million of freight cost due to an average increase of 13% in railway delivery prices which was announced by the Ministry of Railways of China in February 2013; and (c) a decrease of $1.4 million in advertisement and distribution expenses incurred as a result of the reduction of retail sales.

General and Administrative Expenses

General and administrative expenses included payroll, professional services, rental, travel, depreciation and amortization. General and administrative expenses for the nine months ended September 30, 2013 was $9.9 million, an increase of $3.6 million compared to the nine months ended September 30, 2012. This increase was primarily the combined result of (a) an increase of $1.3 million of allowance for bad debts of account receivables and other receivables; (b) an increase of $1.0 million for professional fees, management team enhancement, as well as business developments at the corporate level; (c) an increase of $0.7 million in taxes related to inter-subsidiary fixed assets transfers; and (d) an increase of $0.4 million of expenses caused by obsolete inventories;

Loss on Impairment of Assets

Loss on impairment of assets was $6.6 million for the nine months ended September 30, 2013, which represented a $5.8 million impairment loss of the land use rights of farmlands located in Yuci, Shanxi Province and a $0.8 million loss resulted from the termination of the construction of an uncompleted building in the subsidiary Huichun, due to a change in our plan of operation.

Interest Expense

Interest expense for the nine months ended September 30, 2013 was $0.6 million compared to $1.3 million for the nine months ended September 30, 2012, a decrease of $0.7 million, or 52.9%. This decrease was mainly due to the decrease in the balances on loans. We had a decrease in the average loan balance from $16.3 million for the nine months ended September 30, 2012 to $8.1 million for the nine months ended September 30, 2013.

Non-operating Income (Loss)

Non-operating loss for the nine months ended September 30, 2013 was $2.3 million, mainly including: (a) $ 1.2 million in inventory loss due to the collapse of our warehouses under a heavy snow storm in April 2013; (b) $0.7 million the deposal of unqualified inventories; and (c) $0.4 million in donations to the local community. Non-operating income for the nine months ended September 30, 2012 mainly represented a gain on the bargain purchase prices in connection with the acquisitions of Taizihu and Huichun.

Provision for Income Taxes

Under the Enterprise Income Tax (“EIT”) Law of the PRC, the standard EIT rate is 25%. Our PRC subsidiaries are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. According to the Tax Pronouncement [2008] No. 149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled to EIT exemption starting January 1, 2008. Three of the Company’s wholly-owned subsidiaries located in Shanxi Province, namely Jinzhong Deyu, Jinzhong Yongcheng and Jinzhong Yuliang, are subject to the EIT exemption. All of our other subsidiaries are subject to the 25% EIT rate.

- 34 -

Income tax expenses were $580,054 for the nine months ended September 30, 2013, mainly representing the current income tax expenses derived from Taizihu and Huichun, both of which were subject to the 25% EIT rate. Income tax expenses were $1,475,181 for the nine months ended September 30, 2012, which consisted of $ 686,282 in current income tax expenses derived from Taizihu Group and $788,899 in deferred income tax expenses derived from Detian Yu for valuation allowance for deferred tax assets generated in previous years due to its uncertainty of realization of net operating losses carryover. The decrease in income taxes was mainly due to the decline of deferred tax expenses.

Net Income

As a result of the above, we had net loss available to common stockholders of $16.2 million for the nine months ended September 30, 2013 compared to a net income of $12.5 million for the nine months ended September 30, 2012, an decrease of $28.7 million, or 229.5%.

Liquidity and Capital Resources

The following summarizes the key components of our cash flows for the nine months ended September 30, 2013 and 2012:

	For the Nine Months Ended September 30,
	2013		2012
Net cash provided by operating activities	$	8,141,822	$	17,380,794
Net cash used in investing activities		(632,522)		(5,584,844)
Net cash provided by (used in) financing activities		(8,694,752)		(8,620,344)
Effect of exchange rate change on cash and cash equivalents		(18,432)		45,899
Net (decrease) increase in cash and cash equivalents	$	(1,203,884)	$	3,221,505

Net cash provided by operating activities totaled approximately $8.1 million for the nine months ended September 30, 2013 and $17.4 million for the nine months ended September 30, 2012, a decrease of $9.2 million. This decrease was primarily attributable to the decrease in net income. We incurred $15.0 million of net loss available to common stockholders for the nine months ended September 30, 2013, while we earned $12.5 million of net income available to common stockholders for the nine months ended September 30, 2012. We collected $14.3 million of cash from the reduction of working capital for the nine months ended September 30, 2013, compared to a collection of $2.0 million for the nine months ended September 30, 2012.

Net cash used in investing activities was approximately $0.6 million for the nine months ended September 30, 2013, mainly for the construction of factories and the purchase of equipment. Net cash used in investing activities was $5.6 million for the nine months ended September 30, 2012, which was mainly consisted of $5.2 million of the payment for the acquisition of the Taizihu Group and $0.4 million of payment for the construction of factories and the purchase of equipment.

Net cash used in financing activities was approximately $8.7 million for the nine months ended September 30, 2013 as compared to net cash used of $8.6 million for the nine months ended September 30, 2012. We repaid $8.5 million of short-term loans from related parties, repaid $1.0 million of short-term bank loans and received $0.8 million of cash released from restriction on a credit line of bank loans for the nine months ended September 30, 2013. We repaid $9.7 million of short-term loans from related parties, received $1.1 million of net proceeds of short-term bank loans for the nine months ended September 30, 2012.

We believe that our current levels of cash, cash flows from operations, and bank, related party and unrelated party borrowings will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need additional cash resources in the future if we experience changed business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If we ever determine that our cash requirements exceed our amounts of cash and cash equivalents on hand, we may seek to issue debt or equity securities or obtain a credit facility. Any future issuance of equity securities could cause dilution to our shareholders. Any incurrence of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating and financial covenants. It is possible that, when we need additional cash resources, financing will only be available to us in amounts or on terms that would not be acceptable to us, if at all.

- 35 -

Contractual Obligations

The following table presents the Company’s material contractual obligations as of September 30, 2013:

			Less than						More than
Contractual Obligations	Total		1 year		1-3 years		3-5 years		5 years
Bank Loans	$	7,383,987	$	7,383,987	$	-	$	-	$	-
Operating Lease Obligations		2,352,816		309,784		447,581		343,790		1,251,661
	$	9,736,803	$	7,693,771	$	447,581	$	343,790	$	1,251,661

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”.

Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of operations has been prepared by management based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates our critical accounting policies and estimates, including those related to revenue recognition, valuation of accounts receivable, property and equipment, long-lived assets, intangible assets, derivative liabilities and contingencies. Estimates are based on historical experience and on various assumptions believed 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. These judgments and estimates affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting periods. We consider the following accounting policies important in understanding our operating results and financial condition:

Use of estimates

 The preparation of the consolidated 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its estimates based on historical experience and various other assumptions and information that are available and believed to be reasonable at the time the estimates are made. Therefore, actual results could differ from those estimates under different assumptions and conditions.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, cash in banks and all highly liquid investments with original maturities of three months or less.

As of September 30, 2013, the balance of restricted cash of $16,340 represents a pledge for a bank loan of $14,706 (RMB90,000) obtained from Bank of Communications Gongzhufen Sub-branch obtained on December 12, 2012.

Accounts receivable

Accounts receivable are recorded at net realizable value consisting of the carrying amount less allowance for doubtful accounts, as needed. We assess the collectability of accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends, and changes in customer payment patterns to evaluate the adequacy of these reserves. While management uses the best information available upon which to base estimates, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used for the purposes of analysis. As of September 30, 2013, the balance of allowance for doubtful accounts was $557,660. As of December 31, 2012, the balance of allowance for doubtful accounts was not material.

- 36 -

Inventories

The Company's inventories are stated at lower of cost or market. Cost is determined on a moving-average basis. Costs of inventories include purchase and related costs incurred in delivering products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. Management periodically evaluates the composition of its inventories at least quarterly to identify slow-moving and obsolete inventories to determine if a valuation allowance is required. As of September 30, 2013 and December 31, 2012, slow moving or obsolete inventories identified by management were not material.

Property, plant, and equipment

Property, plant, and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred; in additions, renewals and betterments are capitalized. When property, plant, and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

	Useful
	Life
	(in years)
Automobiles	5
Buildings	10-30
Office equipment	5
Machinery and equipment	5-10
Furniture & fixtures	5

Construction-in-progress

Construction-in-progress consists of amounts expended for the construction of a new factory park, and the cost of the portion of the land use right that the new factory park occupied. Construction-in-progress is not depreciated until such time as the assets are completed and put into service. Once factory park construction is completed, the cost accumulated in construction-in-progress will be transferred to property, plant, and equipment.

Long-lived assets

The Company applies the provisions of FASB ASC Topic 360 (ASC 360), "Property, Plant, and Equipment" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360, at least on an annual basis. ASC 360 requires the impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

As of September 30, 2013, the Company recorded $771,502 of impairment loss of construction-in-progress. As of December 31, 2012, there was no impairment of long-lived assets.

- 37 -

 

Intangible assets

For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. As of September 30, 2013, the Company recorded $5,814,923 of impairment loss of the land use rights of the farmlands. As of December 31, 2012, there was no impairment of intangible assets.

Fair value measurements

FASB ASC 820, “Fair Value Measurements” (formerly SFAS No. 157) defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It requires that an entity measure its financial instruments to base fair value on exit price, maximize the use of observable units and minimize the use of unobservable inputs to determine the exit price. It establishes a hierarchy which prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows:

· Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available.

· Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data. The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability.

This guidance applies to other accounting pronouncements that require or permit fair value measurements. On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (ASC 820). This Staff Position delays the effective date of SFAS No. 157 (ASC 820) for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of SFAS No. 157 (ASC 820) had no effect on the Company's financial position or results of operations for the nine months ended September 30, 2013.

We also analyze all financial instruments with features of both liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”) and ASC 815-40 (formerly EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”). We have determined ASC 480-10 (formerly SFAS 150) and ASC 815-40 (formerly EITF 00-19) had no material effect on our financial position or results of operations for the nine months ended September 30, 2013.

- 38 -

Revenue recognition

The Company’s revenue recognition policies are in compliance with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”). The Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. The Company recognizes revenue for product sales upon transfer of title to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered. The Company assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

The Company’s revenue is recognized net of value-added tax (VAT), reductions to revenue for estimated product returns, and sales discounts based on volume achieved in the same period that the related revenue is recorded. The estimates are based on historical sales returns, analysis of credit memo data and other factors known at the time. The sales discounts were not material for the nine months ended September 30, 2013 and $669,831 for the nine months ended September 30, 2012.

We offer a right of exchange on our grain products sold through our relationships with grocery store networks. The consumer who purchases the product may exchange it for the same kind and quantity of product originally purchased. In accordance with FASB ASC 605-15-25-1 and 605-15-15-2, these are not considered returns for revenue recognition purposes. For the nine months ended September 30, 2013 and 2012, returns of our products were not material.

Advertising costs

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the nine months ended September 30, 2013 and 2012 were $219,415 and $1,279,682 respectively.

Research and development

The Company expenses its research and development costs as incurred. Research and development expenses for the nine months ended September 30, 2013 and 2012 were not material.

Stock-based compensation

In December 2004, the Financial Accounting Standard Board, or the FASB, issued the Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment”, which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) is now included in the FASB’s ASC Topic 718, “Compensation – Stock Compensation.” Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees or independent contractors are required to provide services. Share-based compensation arrangements include stock options and warrants, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods. On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS No. 123(R). Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under SFAS No. 123.

The Company has fully adopted the provisions of FASB ASC 718 and related interpretations as provided by SAB 107. As such, compensation cost is measured on the date of grant as the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.

- 39 -

Income taxes

The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no material effect on the Company’s consolidated financial statements for the nine months ended September 30, 2013.

Foreign currency translation and comprehensive income

U.S. GAAP requires that recognized revenue, expenses, gains, and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of the Company is RMB. The unit of RMB is in Yuan. Translation gains are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.

Statement of cash flows

In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Recent pronouncements

In July 2012, FASB issued an amendment (ASU No. 2012-02) to Intangibles–Goodwill and Other (ASC Topic 350). In accordance with the amendments in this update, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance had no material impact on our consolidated financial position or results of operations for the nine months ended September 30, 2013.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” This ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

- 40 -

In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. For public entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2013. For nonpublic entities, the guidance is effective prospectively for reporting periods beginning after December 15, 2014. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”)

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Smaller reporting companies are not required to provide this information.

Item 4. Controls and Procedures

(a)           Evaluation of disclosure controls and procedures. At the conclusion of the period ended September 30, 2013, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2013, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, in a manner that allowed for timely decisions regarding required disclosure.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

- 41 -

(b)         Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We recently reviewed the Company's overall corporate governance, internal control and financial controls and some weaknesses on operations of some subsidiaries were noticed.Measures are being taken to strengthen the Group’s, including subsidiaries, resources sharing, strategic planning and management of funds.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

On February 12, 2012, the Company’s former Chief Financial Officer alleged that the Company may have violated certain state and federal laws and regulations and upon receipt of such allegations, the Company's Audit Committee retained counsel to conduct an inquiry into such allegations. On March 27, 2012, the Company received a letter asserting a claim of wrongful termination in violation of public policy wherein the former Chief Financial Officer claims that he was terminated in retaliation for reporting and/or refusing to participate in such alleged violations. He also claims breach of employment contract and seeks payment of $250,000 plus the issuance of 60,000 shares of common stock in settlement for the claimed damages therein. On July 23, 2012, the Company was provided a copy of a complaint filed in the Superior Court of California, County of Orange, repeating the same allegations contained in the March 27, 2012 letter and also asserting claims for intentional and negligent infliction of emotional distress and failure to pay wages due at the time of termination. The Company subsequently filed demurrers to the Complaint that resulted in the plaintiff filing a First Amended Complaint on September 28, 2012 and a Second Amended Complaint on January 7, 2013, alleging essentially the same claims. The Company's answer to the Second Amended Complaint, along with the Company's Cross-Complaint against the former Chief Financial Officer, seeking the return of Company property, was filed on March 25, 2013 following the most recent demurrer hearing that was held on March 14, 2013. The answer to the Cross-Complaint was filed on April 5, 2013.

The plaintiff's deposition had been set for July 24, 2013. However, in order to avoid the time and expense of further litigation, the parties agreed to settle the action prior to taking plaintiff’s deposition. On September 26, 2013, the court entered the dismissal, with prejudice, of the entire action, including the Company’s cross-complaint against the plaintiff.  

Except as set forth above, to our knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting us, our common stock, any of our subsidiaries or any of our companies or our companies’ subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A. Risk Factors.

Smaller reporting companies are not required to provide this information.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

- 42 -

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

2.1	Share Exchange Agreement Dated April 27, 2010 (1)
3.1	Articles of Incorporation of Deyu Agriculture Corp. (2)
3.2	Certificate of Amendment of Articles of Incorporation of Deyu Agriculture Corp. (3)
3.3	Bylaws of Deyu Agriculture Corp. (2)
4.1	Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock (1)
4.2	Form of Series A Warrant (1)
10.1	Securities Purchase Agreement Dated April 27, 2010 (1)
10.2	Registration Rights Agreement Dated April 27, 2010 (1)
10.3	Form of Lock-Up Agreement Dated April 27, 2010 (1)
10.4	Securities Escrow Agreement Dated April 27, 2010 (1)
10.5	Placement Agent Agreement between the Company and Maxim Group, LLC dated January 27, 2010(6)
10.6	Share Transfer Agreement between Hong Wang and Yam Sheung Kwok dated April 26, 2010 (6)
10.7	Share Transfer Agreement between Jianming Hao and Yam Sheung Kwok dated April 26, 2010 (6)
10.8	Share Transfer Agreement between Wenjun Tian and Yam Sheung Kwok dated April 26, 2010 (6)
10.9	Share Transfer Agreement between Yongqing Ren and Yam Sheung Kwok dated April 26, 2010 (6)
10.10	Share Transfer Agreement between Junde Zhang and Yam Sheung Kwok dated April 26, 2010 (6)
10.11	Employment Agreement between David Lethem, as Chief Financial Officer, and the Company dated June 18, 2010 (4)
10.12	Certificate from China Organic Food Certification Center dated December 21, 2009 (6)
10.13	Corn Purchase Letter of Intent between Shanghai Yihai Trading Co., Ltd., Shanxi Office and Jinzhong Yuliang Agricultural Trading Co., Limited dated December 20, 2009 (6)
10.14	Warehouse Lease Agreement between Shanxi 661 Warehouse and Jinzhong Yongcheng Agricultural Trading Co., Limited dated December 21, 2006 (6)
10.15	Warehouse Lease Agreement between Shanxi Means of Production Company, Yuci Warehouse (formerly, the 671 Warehouse) and Jinzhong Yongcheng Agricultural Trading Co., Limited dated December 28, 2008 (6)

- 43 -

10.16	Railway Lease Agreement between Shanxi Cereal & Oil Group, Mingli Reservation Depot and Jinzhong Yongcheng Agriculture Trading Co., Limited dated December 21, 2006 (6)
10.17	Railway Lease Agreement between Shanxi Yuci Cereal Reservation Depot and Jinzhong Yongcheng Agriculture Trading Co., Limited dated November 15, 2007 (6)
10.18	Railway Lease Agreement between Yuci Dongzhao Railway Freight Station and Jinzhong Yongcheng Agriculture Trading Co., Limited dated December 21, 2006 (6)
10.19	Agricultural Technology Cooperation Agreement between Jinzhong Deyu Agriculture Trading Co., Ltd. and Millet Research Institute, Shanxi Academy of Agricultural Science dated October 2007 (6)
10.20	Agricultural Technology Cooperation Agreement between Sorghum Institute, Shanxi Academy of Agricultural Sciences and Jinzhong Deyu Agriculture Trading Co., Ltd. dated August 24, 2008 (6)
10.21	Certificate of Forest Rights for the Yuci Forest Right Certificate (2005) No. 01518 dated August 11, 2006 (6)
10.22	Farmland Transfer Agreement between Detian Yu Biotechnology (Beijing) Co. Ltd. and Shanxi Jinbei Plant Technology Co, Ltd. dated September 30, 2010 (6)
10.23	Land Use Rights Acquisition Contract Dated September 30, 2010 (5)
10.24	Deyu Agriculture Corp. 2010 Share Incentive Plan (7)
10.25	Exclusive Management and Consulting Service Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Beijing Jundaqianyuan Investment Management Co., Ltd. (English translated version) (8)
10.26	Exclusive Management and Consulting Service Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Jinzhong Longyue Investment Consulting Co., Ltd. (English translated version) (8)
10.27	Business Cooperation Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Beijing Jundaqianyuan Investment Management Co., Ltd. (English Translated Version) (8)
10.28	Business Operation Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited, Beijing Jundaqianyuan Investment Management Co., Ltd. and each of the shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd. (English translated version) (8)
10.29	Business Operation Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited, Jinzhong Longyue Investment Consulting Co., Ltd. and both of the shareholders of Jinzhong Longyue Investment Consulting Co., Ltd. (English translated version) (8)
10.30	Share Pledge Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd.: Tian Wenjun, Hao Jianming, Yang Jianhui, Zhou Jianbin, Ren Li, Ren Yongqing, Zhang Junde and Wang Tao (English translated version) (8)
10.31	Share Pledge Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Jinzhong Longyue Investment Consulting Co., Ltd.: Zhao Jing and Zhao Peilin (English translated version) (8)

- 44 -

10.32	Form of Power of Attorney (English translated version) (8)
10.33	Equity Acquisition Option Agreement, dated November 16, 2010,  by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd.: Tian Wenjun, Hao Jianming, Yang Jianhui, Zhou Jianbin, Ren Li, Ren Yongqing, Zhang Junde and Wang Tao (English translated version) (8)
10.34	Equity Acquisition Option Agreement, dated November 16, 2010,  by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Jinzhong Longyue Investment Consulting Co., Ltd.: Zhao Jing and Zhao Peilin (English translated version) (8)
10.35	Business Cooperation Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Jinzhong Longyue Investment Consulting Co., Ltd. (English Translated Version) (8)
10.36	Village Collective Farmland Transfer Agreement, dated December 20, 2010, by and between Detian Yu Biotechnology (Beijing) Co., Ltd. and Shanxi Jinbei Plant Technology Development Co., Ltd. (English Translated and Mandarin Versions) (9)
10.37	Contract of Agreement, effective as of January 10, 2011,  by and between Deyu Agriculture Corp. and Charlie Lin (10)
14.1	Code of Conduct (6)
16.1	Letter from Auditor (11)
21	List of Subsidiaries (12)
31.1	Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002**
32.2	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002**
99.1	Audit Committee Charter adopted August 19, 2010 (6)
101. INS	XBRL Instance Document*
101. CAL	XBRL Taxonomy Extension Calculation Link base Document*
101. DEF	XBRL Taxonomy Extension Definition Link base Document*
101. LAB	XBRL Taxonomy Label Link base Document*
101. PRE	XBRL Extension Presentation Link base Document*
101. SCH	XBRL Taxonomy Extension Scheme Document*

(1)	Incorporated by reference to our Form 8-K filed on May 3, 2010.
(2)	Incorporated by reference to our Registration Statement on Form S-1 filed on July 8, 2009.
(3)	Incorporated by reference to our Form 8-K filed on June 4, 2010.
(4)	Incorporated by reference to our Form 8-K filed on June 18, 2010.
(5)	Incorporated by reference to our Form 8-K filed on October 6, 2010.
(6)	Incorporated by reference to our Form S-1/A filed on October 21, 2010.
(7)	Incorporated by reference to our Form S-8 filed on November 5, 2010.
(8)	Incorporated by reference to our Form 8-K filed on November 17, 2010.
(9)	Incorporated by reference to our Form 8-K filed on December 21, 2010.
(10)	Incorporated by reference to our Form 8-K filed on January 10, 2011.
(11)	Incorporated by reference to our Form 8-K filed on May 3, 2010.
(12)	Incorporated by reference to our Form 10-K filed on March 27, 2013.

 *   Filed herewith.

** Furnished, not filed herewith.

- 45 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

DEYU AGRICULTURE CORP.

Signature	Title	Date
/s/ Greg Chen	Chief Executive Officer, Principal Executive	November 14, 2013
Greg Chen	Officer
/s/ Amy He	Chief Financial Officer, Principal Financial	November 14, 2013
Amy He	and Accounting Officer

- 46 -