Deyu Agriculture (DEYU) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

_______________

FORM 10-Q

_______________

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

For the quarterly period ended: September 30, 2010

or

oTRANSITION 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.)

Tower A, Century Centre, Room 808, 8 North Star Road, Beijing, PRC

(Address of principal executive offices)

 86-13828824414

(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o No o

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

Large Accelerated Filer   o         Accelerated Filer   o         Non-Accelerated Filer   o         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 o No x

As of November 15, 2010, there were 10,328,069shares outstanding of the registrant’s common stock.

DEYU AGRICULTURE CORP.

FORM 10-Q

September 30, 2010

INDEX

PART I
ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS	21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
ITEM 4.	CONTROLS AND PROCEDURES	34
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	35
ITEM 1A.	RISK FACTORS	35
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	35
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	35
ITEM 4.	(REMOVED AND RESERVED)	35
ITEM 5.	OTHER INFORMATION	35
ITEM 6.	EXHIBITS	36

i

FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q contains “forward-looking statements” relating to Deyu Agriculture Corp., a Nevada corporation (“we,” “us,” “our,” or the “Company”) within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections.  These “forward looking statements” represent our current expectations or beliefs including, but not limited to, statements concerning our operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements o f historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” or the negative or other comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, competition and our ability to continue our growth strategy, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ii

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

DEYU AGRICULTURE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
Assets	September 30, 2010		December 31, 2009
	(Unaudited)		(Audited)
Current Assets
Cash and cash equivalents	$	10,740,312	$	2,562,501
Restricted cash		204,881		-
Accounts receivable, net		8,170,985		4,200,749
Inventory, net		8,683,377		8,233,760
Other receivable		366,535		28,998
Advance to suppliers		1,693,813		-
Prepaid expenses		686,162		1,104,072
Total Current Assets		30,546,065		16,130,080
Property, plant, and equipment, net		4,578,258		2,939,475
Construction-in-progress		4,907,551		3,254,696
Other assets		1,537,398		1,506,902
Intangible assets, net		2,901,876		-
Total Assets	$	44,471,148	$	23,831,153
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	432,226	$	-
Short-term loans		3,193,633		1,801,960
Advance from customers		1,054,505		-
Accrued expenses		210,248		116,968
Preferred stock dividends payable		231,123		-
Due to related parties		-		145,650
Construction payable		6,594		-
Other current liabilities		133,732		68,339
Total Current Liabilities		5,262,060		2,132,917
Stockholders' Equity
Series A Preferred Stock, $.001 par value, 10,000,000 shares authorized, 2,455,863 and 0 shares outstanding, respectively		2,456		-
Common stock, $.001 par value; 75,000,000 shares authorized, 9,999,999 and 4,930,000 shares issued and outstanding, respectively		10,000		4,930
Additional paid-in capital		17,708,720		8,978,527
Other comprehensive income		2,130,250		909,311
Retained earnings		19,357,662		11,805,468
Total Stockholders' Equity		39,209,088		21,698,236
Total Liabilities and Stockholders' Equity	$	44,471,148	$	23,831,153

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

1

DEYU AGRICULTURE CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
	For The Three Months						For The Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
Net revenue	$	20,980,077		$	11,717,993		$	53,895,929		$	26,319,671
Cost of goods sold		(16,102,399	)		(8,634,826	)		(40,760,575	)		(19,480,999	)
Gross Profit		4,877,678			3,083,167			13,135,354			6,838,672
Selling expenses		(1,485,481	)		(533,600	)		(3,083,142	)		(1,186,303	)
General and administrative expenses		(1,077,210	)		(81,407	)		(2,048,409	)		(251,834	)
Total Operating Expense		(2,562,691	)		(615,007	)		(5,131,551	)		(1,438,137	)
Operating income		2,314,987			2,468,160			8,003,803			5,400,535
Interest income		1,600			3,981			5,065			6,251
Interest expense		(90,208	)		(28,404	)		(242,799	)		(66,935	)
Non-operating income		14,693			-			14,693			-
Total Other Expense		(73,915	)		(24,422	)		(223,041	)		(60,685	)
Income before income taxes		2,241,072			2,443,738			7,780,762			5,339,850
Provision for income taxes		-			-			-			-
Net income		2,241,072			2,443,738			7,780,762			5,339,850
Preferred stock dividends		(135,072	)		-			(231,123	)		-
Net income available to common stockholders	$	2,106,000		$	2,443,738		$	7,549,639		$	5,339,850
Net income per common share - basic	$	0.21		$	0.50		$	0.96		$	1.08
Net income per common share - diluted	$	0.18		$	0.50		$	0.85		$	1.08
Weighted average number of common shares outstanding - basic		9,999,999			4,930,000			7,854,714			4,930,000
Weighted average number of common shares outstanding - diluted		12,278,700			4,930,000			9,132,073			4,930,000

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

2

DEYU AGRICULTURE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
	For The Nine Months
	Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income available to common stockholders	$	7,549,638		$	5,339,850
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation & amortization		346,410			233,682
Reserve for sales discount		391,419			635,775
Reserve for inventory valuation		56,766			-
Preferred stock dividends declared		231,123			-
Decrease (increase) in current assets:
Accounts receivable		(4,210,709	)		(4,618,497	)
Advance to suppliers		(1,642,297	)		-
Inventories		(334,486	)		(3,855,480	)
Prepaid expense and other current assets		78,780			(353,772	)
Increase (decrease) in liabilities:
Accounts payable		424,891			-
Advance from customers		1,033,756			-
Accrued expense and other liabilities		40,581			25,889
Net cash provided by (used in) operating activities		3,965,872			(2,592,553	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of machinery and equipment		(1,898,904	)		(484,716	)
Acquisition of land use rights		(2,852,630	)		-
Construction of warehouse		(1,560,055	)		-
Net cash used in investing activities		(6,311,589	)		(484,716	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term loans from bank		2,012,930			980,694
Net (repayments of) proceeds from short-term loans from related parties		(146,076	)		7,254,653
Net (repayments of) proceeds from short-term loans from others		(559,674	)		-
Proceeds from capital contributions		-			263,470
Release of restricted cash related to private placement		218,119			-
Proceeds from private placement, net of restricted cash held in escrow		8,805,457			-
Net cash provided by financing activities		10,330,756			8,498,816
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS		192,772			4,343
NET INCREASE IN CASH & CASH EQUIVALENTS		8,177,811			5,425,891
CASH & CASH EQUIVALENTS, BEGINNING BALANCE		2,562,501			332,409
CASH & CASH EQUIVALENTS, ENDING BALANCE	$	10,740,312		$	5,758,300
SUPPLEMENTAL DISCLOSURES:
Income tax paid	$	-		$	-
Interest paid	$	236,616		$	65,737

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

3

DEYU AGRICULTURE CORP. AND SUBSIDIARIES

(formerly known as Eco Building International, Inc.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Eco Building International, Inc. (“we,” “us,” “our,” or the “Company”) 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 Peoples 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 three operating PRC subsidiaries, including Jinzhong Deyu Agriculture Trading Co., Ltd. (“Jinzhong Deyu”), Jinzhon g Yuliang Agriculture Trading Co., Ltd. (“Jinzhong Yuliang”), and Jinzhong Yongcheng Agriculture Trading Co., Ltd. (“Jinzhong Yongcheng”).

On May 19, 2010, we filed with the Secretary of State for the State of Nevada a Certificate of Amendment to our Articles of Incorporation changing our name from “Eco Building International, Inc.” to “Deyu Agriculture Corp.” FINRA declared the name change effective on June 2, 2010.

Details of our subsidiaries are as follows:

Name of Subsidiary	Domicile and Date of Incorporation	Registered Capital		Percentage of 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
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 packaged food products.  Holding company of the following three entities.
Jinzhong Deyu Agriculture Trading Co., Ltd. (“Jinzhong Deyu”)	The PRC, April 22, 2004	$	1,492,622		100%	Organic and non-organic grains preliminary processing and wholesale distribution.
Jinzhong Yongcheng Agriculture Trading Co., Ltd. (“Jinzhong Yongcheng”)	The PRC, May 30, 2006	$	288,334		100%	Organic and non-organic corns preliminary processing and wholesale distribution.
Jinzhong Yuliang Agriculture Trading Co., Ltd. (“Jinzhong Yuliang”)	The PRC, March 17, 2008	$	281,650		100%	Organic and non-organic corns preliminary processing and wholesale distribution.

4

DEYU AGRICULTURE CORP. AND SUBSIDIARIES

(formerly known as Eco Building International, Inc.)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Reverse Acquisition and Private Placement

On April 27, 2010, we completed the acquisition of City Zone by means of a share exchange.  Simultaneously with the acquisition, we completed a private placement for gross proceeds of $8,211,166 from the sale of our securities to accredited investors at $4.40 per unit, with each “Unit” consisting of one share of Series A Convertible Preferred Stock, and a warrant to purchase 0.4 shares of common stock with an exercise price of $5.06 per share.

On April 27, 2010, the (the “Closing Date”), we entered into a Share Exchange Agreement (“Exchange Agreement”) by and among (i) City Zone, (ii) City Zone’s shareholders, (iii) us, and (iv) our principal stockholders.  Pursuant to the terms of the Exchange Agreement, Expert Venture Limited, a company organized under the laws of the British Virgin Islands (“Expert Venture”) and the other City Zone shareholders will transfer to us all of the shares of City Zone in exchange for the issuance of 8,736,932 shares of our common stock as set forth in the Exchange Agreement, so that Expert Venture and other minority shareholders of City Zone shall own at least a majority of our outstanding shares (the “Share Exchange”).  As a result of the Share Exchange, City Zone be came our wholly-owned subsidiary.

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

As a result of the Exchange Agreement, we acquired 100% of the processing and production operations of City Zone, the business and operations of which now constitutes our primary business and operations.  Specifically, as a result of the Exchange Agreement on April 27, 2010:

● We acquired and now own 100% of the issued and outstanding shares of capital stock of City Zone, the British Virgin Islands holding company which owns and controls the Deyu agricultural business, making City Zone our wholly-owned subsidiary;

● 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 Exchange Agreement 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,” in such form as attached hereto as Exhibit 10.1) with certain accredited investors (the “Investors”) for the issuance and sale in a private placement of Units, consisting of, 1,866,174 shares of our Series A Convertible Preferred Stock, par value $0.001 per share (the “Investor Shares”) and Series A warrants to purchase up to 746,470 shares of our Common Stock (the “Warrants”), for aggregate gross proceeds of $8,211,166 (the “Private Placement”).  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 the Closing Date of the Private Placement, and use our best efforts to have the Registration Statement declared effective within 180 calendar days of the Closing Date of the Private Placement.  We will pay monthly liquidated damages in cash to each Investor of 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, no liquidated damages shall be paid with respect to any shares that we are not permitted to include in the Registration Statement due to the SEC’s application of Rule 415.  On October 21, 2010, the SEC declared our Form S-1 effective.

In connection with the Private Placement, Maxim Group, LLC acted as our financial advisor and placement agent (the “Placement Agent”).  Maxim 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 $5.06 (the “Placement Agent Warrants”).  Pursuant to the Original Placement Agreement entered into by Detian Yu on January 27, 2010 with the Placement Agent (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 received cash fees equal to 7% of our gross proceeds received in connecti on with an equity financing and 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 Series A Preferred Shares and Shares equal to 5% of the aggregate number of Series A Preferred Shares and Shares underlying the Units issued pursuant to this Offering; and a non-refundable cash retainer (or restricted shares) 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.

5

On May 10, 2010, we closed on the second and final round (the “Final Closing”) of the private placement offering (the “Offering”) previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2010 (the “May 3rd 8-K”).  Through the sale of 589,689 Units comprised of (i) 589,689 shares of our Series A Convertible Preferred Stock (the “Series A Preferred Shares”) and (ii) 235,882 five year warrants (the “Series A Warrants”) with an exercise price of $5.06 per share, to certain accredited investors (the “Investors”) for total gross proceeds of $2,594,607.

We raised an aggregate amount of $10,805,750 in the Offering.  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 warrants to the investors.  Additionally, the Placement Agent received 171,911 warrants.

Series A Convertible Preferred Stock

The holders of the Series A Convertible Preferred Shares will receive cumulative dividends in preference to the holders of Common Stock at an annual rate of 5% of the applicable per Series A Preferred Share original purchase price.  Upon any liquidation, dissolution or winding up, the holders of Series A Convertible Preferred Shares will be entitled to receive, out of our assets available for distribution to its stockholders, an amount equal to $4.40 per share (the amount, 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 Shares will have the right, at the option of the holder at any time on or after the issuance of the Series A Preferred Shares, without the payment of additional consideration, to convert the Series A Preferred Shares into a number of fully paid and nonassessable shares of Common Stock equal to: (i) the Liquidation Preference Amount of such shares divided by (ii) the conversion price in effect as of the date of the conversion.  For a period of two (2) years following the issuance of the Series A Preferred Shares, the conversion price of Series A Preferred Shares will be 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 Shares. 

Series A Warrants

The Series A Warrants: 

(a) entitle the holder to purchase 0.4 shares of Common Stock;

(b) are exercisable any time after the Closing Date and 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 (the “Warrant Price”); and

(d) are exercisable only for cash (except that there will be a cashless exercise option if (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 this Warrant by payment of cash).

Make Good Escrow Agreement

We also entered into a make good escrow agreement with the Investors (the “Securities Escrow Agreement”), pursuant to which the City Zone Shareholders placed a number of shares of Common Stock equal to 100% of the number of shares of Common Stock underlying the Investor Shares, which are initially convertible into 1,866,174 shares of Common Stock (the “Escrow Shares”) in an escrow account.  The Escrow Shares are being held as security in the event we do not achieve $11 million in audited net income for the fiscal year 2010 (the “2010 Performance Threshold”) and $15 million in audited net income for the fiscal year 2011 (the “2011 Performance Threshold”).  If we achieve the 2010 Performance Threshold and the 2011 Performance Threshold, the Escrow Shares will be rel eased back to the City Zone Shareholders.  If either the 2010 Performance Threshold or 2011 Performance Threshold is not achieved, an aggregate number of Escrow Shares (such number to be determined by the formula set forth in the Securities Escrow Agreement) will be distributed to the Investors, based upon the number of Investor Shares (on an as-converted basis) purchased in the Private Placement and still beneficially owned by such Investor, or such successor, assign or transferee, at such time.  If any Investor transfers Investor Shares purchased pursuant to the Purchase Agreement, the rights to the Escrow Shares shall similarly transfer to such transferee, with no further action required by the Investor, the transferee or us.

Lock-Up Agreement

We also entered into a lock-up agreement with the Investors (the “Lock-Up Agreement”), pursuant to which the Common Stock owned by the management of City Zone will be locked-up until six (6) months after the Registration Statement is declared effective.

6

Restructuring

In November 2009, pursuant to a restructuring plan (“Restructuring”) intended to ensure compliance with the PRC rules and regulations, City Zone, through a series of acquisitions and wholly-owned subsidiaries, acquired 100% equity interests in Jinzhong Deyu, Jinzheng Yuliang, and Jinzhong Yongcheng.  The former shareholders and key management of Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang became the ultimate controlling parties and key management of City Zone.  This restructuring exercise has been accounted for as a recapitalization of Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang 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 occu rred as of the beginning of the earliest period presented in the accompanying consolidated financial statements.  For the purpose of 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.

We mainly operate in the Shanxi Province, China in the business of bulk purchasing, preliminary processing, product preservation, distribution, and wholesale of organic grains and corns.  Corns are mainly wholesale distributed to agricultural product trading companies.  Grains are distributed through wholesale and through the network of supermarkets with our own brand names, including “De Yu” and “Shi-Tie” for certified organic grain products.  We have established a complete chain of cultivation, seed breeding, research and development, production, marketing, and a nationwide distribution network in China.  We currently control approximately 367 million square meters (or 550,000 mu) of farmland, with 120,000-ton storage capacity, and 3 exclusive railway lines. &# 160;In addition, on September 30, 2010, we purchased land use rights to 35.3 million square meters (or 53,000 mu) of farmland in the Shanxi Province.

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

Our unaudited consolidated financial statements and our wholly-owned subsidiaries have been prepared in accordance with the U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.  However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations.  Results shown for interim periods are not necessarily i ndicative of the results to be obtained for a full year.  The consolidated balance sheet information as of December 31, 2009 was derived from the audited consolidated financial statements included in our Form 8-K filed on May 3, 2010.  These interim consolidated financial statements should be read in conjunction with that report.  Certain comparative amounts have been reclassified to conform to the current period's presentation.

The accompanying consolidated financial statements include the financial statements of Deyu Agriculture Corp. and its wholly-owned subsidiaries.  All material intercompany balances and transactions have been eliminated.

Our 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 generally accepted accounting principles 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 bank and all highly liquid investments with original maturities of three months or less.

As a result of the financings associated with the reverse merger, we had, as of September 30, 2010, $204,881 in two escrow accounts held at Wachovia Bank (Wells Fargo Bank, NA).  The use of these funds requires the written approval of our placement agent and us.  The funds in these escrow accounts are designated for certain expenses, such as investor relations, accounting/consulting fees, SEC fees, and stock transfer agent fees.  This amount is designated as restricted cash under current assets on our balance sheet, as we expect to utilize these funds within the current fiscal year.

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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.  As of September 30, 2010 and December 31, 2009, there were no customers with accounts receivable greater than six months past due.

Inventories

Our inventories are stated at lower of cost or market.  Cost is determined on moving-average basis.  Costs of inventories include purchase and related costs incurred in delivering the 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 valuation allowance is required.  As of September 30, 2010 and December 31, 2010, management had identified no slow moving or obsolete inventory.

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; 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		30
Office equipment		5
Machinery and equipment		10

Construction-in-Progress

Construction-in-progress consists of amounts expended for warehouse construction.  Construction-in-progress is not depreciated until such time as the assets are completed and put into service.  Once warehouse construction is completed, the cost accumulated in construction-in-progress is transferred to property, plant, and equipment.

Long-lived assets

We apply 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.  We periodically evaluate 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 m anner, except that fair market values are reduced for the cost of disposal.

Financial assets and liabilities measured at fair value

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.  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 th e financial statements on a recurring basis (at least annually).  The adoption of SFAS No. 157 (ASC 820) had no effect on our financial position or results of operations.

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) will not have a material effect on our financial position or results of operations.

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Revenue recognition

Our revenue recognition policies are in compliance with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”).  We recognize 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.  We recognize 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.  We assess whether a p rice is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

Our revenue is recognized net of value-added tax (VAT) and sales discounts based on volume achieved in the same period that the related revenue is recorded.  The estimates are based on historical sales discounts, analysis of credit memo data, and other factors known at the time.  For the nine months ended September 30, 2010 and 2009, sales discounts were $391,419 and $635,775, respectively.  

We offer a right of exchange on our deep end processed grain products sold through our relationship with grocery store networks.  The consumer who purchases the product may exchange it for the same kind and quantity of product originally purchased.  Per FASB ASC 605-15-25-1 and 605-15-15-2, these are not considered returns for revenue recognition purposes.

Income taxes

We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes ASC 740.”  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 of ASC 740 had no effect on our consolidated financial statements.

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.  Our functional currency is Renminbi (“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.

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Net income for common shares

We compute net income per share in accordance with Financial Accounting Standards Statement No. 128 “Earnings per Share” (“SFAS 128”) and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 98 (“SAB 98”).  Under the provisions of SFAS 128 and SAB 98, basic net income per share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding, using the treasury stock method for warrants and the “as-converted” method for the convertible preferred stock, during the period.  Equivale nt shares consist of certain warrants issued to investors and providers of financing that are in-the-money based on the average closing share price for the period.  Under the treasury stock method, the number of in-the-money shares that are considered outstanding for this calculation is reduced by the number of common shares that theoretically could have been re-purchased by us with the aggregate exercise proceeds of such warrant exercises if such shares were re-purchased at the average market price for the period.  Under the “as-converted” method, the number of dilutive shares is calculated assuming the conversion occurred on the issue date of the preferred stock.

Statement of cash flows

In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from our 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 2009, the FASB’s ASC became the single, official source of authoritative, non-governmental GAAP in the United States.  The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the SEC.  This guidance is effective for interim and annual periods ending after September 15, 2009.  We adopted the provisions of this guidance for the year ended December 31, 2009.  Our accounting policies were not affected by the conversion to the ASC.  However, references to specific accounting standards have been changed to refer to the appropriate section of the ASC. 

In December 2007, the FASB issued guidance now incorporated in ASC Topic 810 “Consolidation” (formerly SFAS No. 160).  The guidance clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of stockholders’ equity.  We do not believe this pronouncement will impact our consolidated financial statements.

In March 2008, the FASB issued guidance now incorporated in ASC Topic 815 “Derivatives and Hedging” (formerly SFAS No. 161).  The guidance is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand how and why an entity uses derivative instruments and the instruments’ effects on an entity’s financial position, financial performance and cash flows.  The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged.  This pronouncement is related to disclosure and did not have a material impact on our consolidated financial statements.

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In December 2008, the FASB issued guidance now incorporated in ASC Topic 860 “Transfers and Servicing” (formerly FASB Staff Position (“FSP”) SFAS 140-4 and FASB Interpretation (“FIN”) 46R).  The guidance increases disclosure requirements for public companies and is effective for reporting periods (interim and annual) that end after December 15, 2008.  The guidance requires public entities to provide additional disclosures about transferors’ continuing involvements with transferred financial assets.  It also requires public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities.  This pronouncement is related to disclosure only an d did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued guidance now incorporated in ASC Topic 825 “Financial Instruments” (formerly FSP SFAS 107-1).  The guidance requires that the fair value disclosures required for financial instruments be included in interim financial statements.  In addition, the guidance requires public companies to disclose the method and significant assumptions used to estimate the fair value of those financial instruments and to discuss any changes of method or assumptions, if any, during the reporting period.  The guidance was effective for our year ended December 31, 2009.  This pronouncement is related to disclosure only and did not have a material impact on our consolidated financial statements.

In May 2009, the FASB issued guidance now incorporated in ASC Topic 855 “Subsequent Events” (formerly SFAS No. 165).  This guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued.  Among other items, the guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  It is effective for interim and annual periods ending after June 15, 2009.  There was no material impact upon the adoption of this standard on our consolidated financial statements.

In June 2009, the FASB issued guidance now incorporated in ASC Topic 810 “Consolidation” (formerly SFAS No. 167) amending the consolidation guidance applicable to variable interest entities and the definition of a variable interest entity, and requiring enhanced disclosures to provide more information about our involvement in a variable interest entity.  This guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. We do not believe this pronouncement will impact our consolidated financial statements. 

In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. We do not expect that this pronouncement will impact our consolidated financial statements.

In October 2009, the FASB issued an amendment to the accounting standards related to certain revenue arrangements that include software elements. This standard clarifies the existing accounting guidance such that tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality, shall be excluded from the scope of the software revenue recognition accounting standards. Accordingly, sales of these products may fall within the scope of other revenue recognition accounting standards or may now be within the scope of this standard and may require an allocation of the arrangement consideration for each element of the arrangement. This standard will become effective for us on January 1, 2011.  We do not expect that the adoption of these new disclosu res will have a material impact on our consolidated financial statements.

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables.  Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation.   The adoption of this guidance had no impact on our consolidated financial statements.

In January 2010, the FASB issued an amendment to the accounting standards related to the disclosures about an entity’s use of fair value measurements.  Among these amendments, entities will be required to provide enhanced disclosures about transfers into and out of the Level 1 (fair value determined based on quoted prices in active markets for identical assets and liabilities) and Level 2 (fair value determined based on significant other observable inputs) classifications, provide separate disclosures about purchases, sales, issuances and settlements relating to the tabular reconciliation of beginning and ending balances of the Level 3 (fair value determined based on significant unobservable inputs) classification and provide greater disaggregation for each class of assets and liabilities that use fair value measurements. Except for the detailed Level 3 roll-forward disclosur es, the new standard was effective for us for interim and annual reporting periods beginning after December 31, 2009. The adoption of this accounting standards amendment did not have a material impact on our consolidated financial statements. The requirement to provide detailed disclosures about the purchases, sales, issuances and settlements in the roll-forward activity for Level 3 fair value measurements is effective for us for interim and annual reporting periods beginning after December 31, 2010. We do not expect that the adoption of these new disclosure requirements will have a material impact on our consolidated financial statements.

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In February 2010, the FASB issued an amendment to the accounting standards related to the accounting for, and disclosure of, subsequent events in an entity’s consolidated financial statements. This standard amends the authoritative guidance for subsequent events that was previously issued and among other things exempts Securities and Exchange Commission registrants from the requirement to disclose the date through which it has evaluated subsequent events for either original or restated financial statements. This standard does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provides different guidance on the accounting treatment for subsequent events.

NOTE 3.   ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

	September 30, 2010		December 31, 2009
Accounts receivable	$	8,170,985	$	4,200,749
Less:  Allowance for doubtful accounts		-		-
Accounts receivable, net	$	8,170,985	$	4,200,749

NOTE 4.   INVENTORY

Inventory consisted of the following:

	September 30, 2010		December 31, 2009
Raw materials – grains	$	579,720	$	1,323,848
Raw materials – corns		310,658		-
Work in process – grains		338,857		-
Finished goods – grains		1,749,465		412,995
Finished goods – corns		5,762,423		6,496,917
Total Inventory		8,741,123		8,233,760
Less: Reserve for inventory valuation		(57,746)		-
Total	$	8,683,377	$	8,233,760

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NOTE 5.   PREPAID EXPENSES

Prepaid expenses consisted of the following:

	September 30, 2010		December 31, 2009
Prepayment for equipment		551,292		600,653
Deductible value-added taxes (VAT)		81,596		442,646
Prepaid rent		41,103		60,773
Prepaid government provident fund		12,171		-
Total	$	686,162	$	1,104,072

NOTE 6.   PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:

	September 30, 2010		December 31, 2009
Automobiles	$	1,029,078	$	495,282
Buildings		1,611,607		1,529,035
Office equipment		610,382		163,177
Machinery and equipment		2,594,496		1,648,748
Total cost		5,845,563		3,836,242
Less:  Accumulated depreciation		(1,267,305)		(896,767)
Property, plant, and equipment, net	$	4,578,258	$	2,939,475

The buildings owned by us located in Jinzhong, Shanxi Province, China are used for production, warehouse, and offices for the grains business.  The building structure is mainly constructed of light steels and bricks.  For the year ended December, 31 2009, we observed a significant decrease in the construction cost of such property structure during our annual impairment testing of long-lived assets.  While future estimated operating results and cash flows are considered, we eventually employed the quoted replacement cost of the buildings as comparable market data.  As a result of this analysis, we concluded that the carrying amount of the buildings exceeded their appraised fair value, and recorded an impairment of $556,312 as operating expense for the year ended December 31, 2009.    ;As of September 30, 2010, management has determined that additional impairments were not needed, and we will continue to periodically review the carrying value.

Depreciation expense for the nine months ended September 30, 2010 and September 30, 2009 was $347,548 and $233,682, respectively.  As of September 30, 2010 and December 31, 2009, $0 and $631,419 of machinery and equipment were pledged as collateral for short-term bank loans, respectively (see Note 9).

NOTE 7.   INTANGIBLE ASSETS

Intangible assets consisted of the following:

	September 30, 2010		December 31, 2009
Right to use land	$	2,901,876	$	74,715
Less:  Accumulated depreciation		-		(74,715	)
Intangible assets, net	$	2,901,876	$	-

According to government regulations of the PRC, the PRC Government owns all land.  We lease and obtain the certificate of right to use the industrial land of 11,667 square meters with the PRC Government in Jinzhong, Shanxi Province where Jinzhong Deyu’s buildings and production facility are located at.  The term of the right is four to five years and renewed upon expiration.  The right was fully amortized as of September 30, 2010 and December 31, 2009, using the straight-line method.  The current term of the right is for the period from March 14, 2007 to March 14, 2011.  Amortization expense recorded for the nine months ended September 30, 2010 and 2009 was $0.

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On September 30, 2010, we acquired the land use rights to approximately 53,000 mu (8,731 acres) of ecological farmland from Shanxi Jinbei Plant Technology Development Co. Ltd. for RMB19,415,000 (or $2,900,000).  The land use rights cover a period of 42 to 43 years, and will be amortized using the straight-line method.  There has been no amortization expense recorded for the nine months ended September 30, 2010

As of September 30, 2010, the rights to use land were not pledged as collateral.  As of December 31, 2009, the right to use land was pledged as collateral for short-term bank loans (see Note 9).

NOTE 8.   OTHER ASSETS

Other assets consisted of timber, timberland, and farmland in the amount of $1,537,398 and $1,506,902 as of September 30, 2010 and December 31, 2009, respectively.  According to government regulations of the PRC, the PRC Government owns timberland and farmland.  We lease and obtain the certificate of right to use farmland of approximately 1,605 acres (or 10,032 mu) for the period from August 2005 to December 2031.  For the same farmland, we obtain the certificate of the right to timber and 896 acres (or 5,600 mu) of timberland for the period from August 2006 to August 2028.  Timber mainly includes pine trees and poplar trees.

These timber, timberland, and farmland were not for operating use or intended for sale.  Based on management’s assessment, there was no impairment for the nine months ended September 30, 2010 and September 30, 2009.

NOTE 9.   SHORT-TERM LOANS

Short-term loans consisted of the following:

	September 30, 2010		December 31, 2009
Bank loan payable to Jinzhong Economic Development District Rural Credit Union, bearing interest at 12.204% per annum and due March 8, 2011.  The use of proceeds from the loan is restricted for purchase of raw materials.  Jinzhong Deyu provided guarantees on the loan.	$	1,270,458	$	-
Bank loan payable to Shanxi Province Rural Credit Union, bearing interest at 10.98% per annum and due January 13, 2011.  The use of proceeds from the loan is restricted for purchase of corns.  Jinzhong Deyu and Jinzhong Yuliang provided guarantees on the loan for a period of two years starting from January 13, 2011.		1,270,458		-
Loan payable to Hangzhou TianCi Investment Management Co., Ltd., an unrelated party.  The loan was unsecured, bearing no interest and no due date was specified.		54,854		732,504
Bank loan payable to Shanxi Province Rural Credit Union , bearing interest at 11.592% per annum and due December 8, 2010.  The use of proceeds from the loan is restricted for purchase of corns.  Jinzhong Deyu and Jinzhong Yongcheng provided guarantees on the loan for a period of two years starting from December 8, 2010.		597,863		-
Bank loan payable to Agricultural Development Bank of China, bearing interest at 5.31% per annum and due June 22, 2010.  The loan was collateralized by buildings, machinery and equipment, and right to use land.  The use of proceeds from the loan was restricted for purchase of grains.  This loan was paid in full on May 7, 2010.				175,801
Bank loan payable to Shanxi Province Rural Credit Union, bearing interest at 9.756% per annum and due February 15, 2010.  The loan was obtained by Jinzhong Yongcheng and guaranteed by Jinzhong Yuliang, and the use of proceeds from the loan was restricted for purchase of corns.  The loan was paid in full in February 2010.				673,904
Bank loan payable to Agricultural Development Bank of China, bearing interest at 5.31% per annum and due March 26, 2010.  The loan was collateralized by buildings, machinery and equipment, and right to use land.  The use of proceeds from the loan was restricted for purchase of grains.  This loan was paid in full on March 29, 2010.				219,751
Total	$	3,193,633	$	1,801,960

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NOTE 10.   ACCRUED EXPENSES

Accrued expenses consisted of the following:

	September 30, 2010		December 31, 2009
Accrued payroll	$	57,259	$	45,278
Accrued office lease		29,233		-
Accrued interest		6,290		-
Accrued VAT and other taxes		117,466		71,690
Total	$	210,248	$	116,968

NOTE 11.   INCOME TAXES

People’s Republic of China (PRC)

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.  Our three primary operating entities, including Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang are subject to the EIT exemption.

The provision for income taxes from continuing operations on income consists of the following for the nine months ended September 30, 2010 and 2009:

	September 30, 2010		September 30, 2009
Income tax expense – current	$	-	$	-
Income tax benefit – deferred		-		-
Total income tax expense	$	-	$	-

The following is a reconciliation of the statutory tax rate to the effective tax rate for the nine months ended September 30, 2010 and 2009:

	September 30, 2010		September 30, 2009
U.S. statutory corporate income tax rate		34%		34%
PRC tax rate difference		(9%)		(9%)
Effect of tax exemption		(25%)		(25%)
Effective tax rate		-		-

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NOTE 12.   RELATED PARTY TRANSACTIONS

Due to related parties:

	September 30, 2010		December 31, 2009
Advances from -
Mr. Junde Zhang	$	0	$	61,530
Mr. Jianming Hao		0		84,120
Total	$	0	$	145,650

Mr. Jianming Hao is our Chief Executive Officer and Managing Director.  Mr. Junde Zhang is a Vice President and Director.  The advances as of December 31, 2009 were unsecured, bearing no interest, and no due date was specified.

NOTE 13.   CONCENTRATION OF CREDIT RISK

As of September 30, 2010, $204,881 of restricted cash, as a result of the private placement and financings, was maintained in two accounts at Wachovia Bank (now Wells Fargo Bank N.A) in the United States.  Wells Fargo Bank NA is currently rated 3 ½ (out of 4) by Bauer Financial, and management believes the risk to the uninsured amount is minimal.  All remaining cash balances as of September 30, 2010, and all of our cash balances in bank as of December 31, 2009, were maintained within the PRC where no rule or regulation is currently in place to provide obligatory insurance for bank deposits in the event of bank failure.  However, we have not experienced any losses in such accounts and we believe we are not exposed to such risks on our cash balances in the bank.

For the nine month period ended September 30, 2010 and for the year ended December 31, 2009, all of our sales were generated in the PRC.  In addition, all accounts receivable as of September 30, 2010 and December 31, 2009 were due from customers located in the PRC.

For the nine month period ended September 30, 2010 and for the year ended December 31, 2009, one customer accounted for 33% and 42% of our gross revenue, respectively, and no other single customer accounted for greater than 10%.  As of September 30, 2010 and December 31, 2009, the same customer accounted for 6.9% and 35% of our accounts receivable, respectively.

NOTE 14.   COMMITMENTS AND CONTINGENCIES

Leases:

We lease 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:

	Operating Leases
As of September 30,
2011	$	239,043
2012		218,000
2013		170,669
2014		170,669
2015		170,669
Thereafter		1,454,176
	$	2,423,226

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NOTE 15.   Series A Convertible Preferred Stock

On April 27, 2010, we designated 3,000,000 of our authorized preferred shares as $0.001 par value Series A Convertible Preferred Stock (“Series A Preferred”). The Series A Preferred is an equity instrument that does not embody a term or cash redemption requirement for matters other than those that are within the control of management. The Series A Preferred provides voting rights on an “as-converted” basis and for a preference to common shareholders amounting to $4.40 in the event of our liquidation. It also provides for cumulative dividends at an annual percentage of 5.0% that are payable semi-annually. The Series A Preferred is convertible into our common stock at a fixed conversion price of $4.40 that is subject to adjustment for changes in our capital structure and for sales of common stock or common stock l inked securities below the conversion price, if any. The Series A Preferred provides for a contingent cash redemption of 130% of the liquidation value in the event that the common shares are not delivered upon notice of conversion. Because we have sufficient authorized and unissued common shares to settle the Series A Preferred conversion requirements, the conversion and, therefore the contingent redemption, are within our management’s control.

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, our management 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 our management’s control. Other consideration s 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 stockholders’ equity is appropriate for the Series A Preferred.

On April 27, 2010, we entered into a Securities Purchase Agreement that resulted in the sale of 2,455,863 shares of Series A Preferred and warrants to purchase 982,346 shares of our common stock on two closing dates of April 27, 2010 and May 7, 2010. Aggregate gross proceeds from the two 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 that were issued to the Placement Agent associated with underlying 171,911 shares of our common stock. The proceeds and the related direct financing costs were allocated to the Series A Preferred and the warrants (classified in paid-in capital) based upon their relative fair values. The following table summarizes the components of the allocation:

	Series A Preferred			Paid-in Capital Warrants			Total
Fair values of financial instruments	$	10,248,092		$	1,239,254		$	11,487,346
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

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The warrants issued to the Investors and Placement Agent have strike prices of $5.06 and $4.84, respectively, and expire in five years. 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.

In connection with the sales of the Series A Preferred and warrants, we also entered into a Registration Rights Agreement with the Investors, in which we agreed to file a registration statement with the Securities and Exchange Commission to register for resale the Investor Shares, within 60 calendar days of the Closing Date and use our best efforts to have the registration statement declared effective within 150 calendar days of the Closing Date of the Private Placement. The Registration Rights Agreement provided that if we failed to file or achieve effectiveness we will be required to pay monthly liquidated damages in cash to each Investor of 0.5% of the dollar amount of the pur chase 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. No liquidated damages were required to be paid with respect to any shares that we are not permitted to include in the Registration Statement due to the SEC’s application of Rule 415. We account for liquidating damages, if any, when they are both probable of payment and estimable in amount. As of September 30, 2010, we have not recorded any amounts related to liquidated damages.  On June 15, 2010 we filed a Registration Statement on Form S-1 with the United States Securities and Exchange Commission (the “SEC”), and on October 21, 2010, the SEC declared our Form S-1 effective.

Fair value considerations:

Our accounting for the sale of Series A Preferred and warrants, and the issuance of warrants to the Placement Agent 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 stock:

	Fair Value		Series A Preferred			Series A Preferred
	Hierarchy Level		April 27, 2010			May 10, 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
			$	7,791,224		$	2,292,533
Significant assumptions:
Common stock price		3		3.55			3.53
Horizon for dividend cash flow projection		3		2.0			2.0
Weighted average cost of capital (“WACC”)		3		15.91	%		15.55	%

Fair value hierarchy:

(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.

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● Stock price- Given that management does not believe our current trading market price is indicative of the fair value of our common stock, 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 Series A Preferred Stock 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 Corporation. 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 upo n available financing terms.

● Significant inputs and assumptions underlying the BSM calculations related to the warrant valuations are as follows:

		April 27, 2010				May 10, 2010
	Fair Value Hierarchy Level	Investor warrants		Agent warrants		Investor warrants		Agent 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%

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

● Risk-free rate- This rate is based on publicly-available yields on zero-coupon Treasury securities with remaining terms to maturity consistent with the remaining contractual term of the warrants

● Expected volatility- We did not have a historical trading history sufficient to develop an internal volatility rate for use in BSM. 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 does not believe our current trading market price is indicative of the fair value of our common stock, 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.

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NOTE 16.   SUBSEQUENT EVENTS

On November 4, 2010, the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan (the “Plan”).  Under the Plan, 1,000,000 shares of the Company’s common stock shall be allocated to and authorized for use pursuant to the terms of the Plan.  On November 8, 2010, a total of 926,000 non-qualified stock options (the “Options”) were approved and granted under the Plan to executives and key employees at an exercise price of $4.40 per share, of which shall vest as follows:

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

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

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

As of the date of this filing, the Company has been in the process of determining the fair value of the Options granted and proper accounting treatment.  Such process is expected to be completed during the fourth quarter of 2010.

NOTE 17.   SEGMENT REPORTING

As defined in ASC Topic 280, “Segment Reporting”, the Company has two reportable segments, the grain division and the corn division.  The two segments were identified primarily based on the difference in products.  The grain division is comprised of Jinzhong Deyu and Detian Yu in the business of bulk purchasing grains from farmers and distributing to wholesalers and supermarkets with our own brand names, which are “De Yu” and “Shi-Tie” for certified organic grain products.  The corn division is comprised of Jinzhong Yongcheng and Jinzhong Yuliang which are in the business of bulk purchasing corns from farmers and distributing to agricultural product trading companies through wholesale.  ; Other entities consolidated under the Company are mainly for holding purposes and do not plan to earn revenues, and may only incur incidental activities.

Information about the two reportable segments is presented in the following tables:

Nine Months Ended September 30, 2010	Grain Division			Corn Division			Others			Total
Revenues from external customers	$	9,104,535		$	44,791,393		$			$	53,895,929
Intersegment revenues		-			-						-
Interest revenue		2,464			2,599			2			5,065
Interest expense		(6,651	)		(236,148	)					(242,799	)
Net interest (expense) income		(4,187	)		(233,549	)		2			(237,734	)
Depreciation and amortization		(212,668	)		(125,260	)		(9,620	)		(347,548	)
Segment net profit (loss)		1,669,492			6,529,428			(649,282	)		7,549,639
Nine Months Ended September 30, 2009	Grain Division			Corn Division			Others			Total
Revenues from external customers	$	6,269,988		$	20,049,684		$			$	26,319,671
Intersegment revenues		-			-						-
Interest revenue		3,280			2,971						6,251
Interest expense		(8,096	)		(58,839	)					(66,935	)
Net interest expense		(4,817	)		(55,868	)					(60,685	)
Depreciation and amortization		(113,916	)		(119,767	)					(233,682	)
Segment net profit		3,072,765			2,267,086						5,339,850
Three Months Ended September 30, 2010	Grain Division			Corn Division			Others			Total
Revenues from external customers	$	3,150,196		$	17,829,881		$			$	20,980,077
Intersegment revenues		-			-						0
Interest revenue		1,048			555			(3	)		1,600
Interest expense		(28	)		(90,180	)					(90,208	)
Net interest (expense) income		1,019.60			(89,625	)		(3	)		(88,608	)
Depreciation and amortization		(108,785	)		(42,007	)		(5,670	)		(156,462	)
Segment net profit (loss)		35,972			2,503,219			(433,192	)		2,106,000
Three Months Ended September 30, 2009	Grain Division			Corn Division			Others			Total
Revenues from external customers	$	2,298,575		$	9,419,418		$			$	11,717,993
Intersegment revenues		-			-						-
Interest revenue		2,331			1,651						3,981
Interest expense		(5,313	)		(23,090	)		(1	)		(28,404	)
Net interest expense		(2,983	)		(21,439	)					(24,422	)
Depreciation and amortization		(44,582	)		(42,921	)					(87,502	)
Segment net profit		1,143,559			1,300,179						2,443,737

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

You should read the following discussion and analysis of our financial condition and plan of operations together with our financial statements and related notes appearing elsewhere in this Prospectus.  Various statements have been made in this Prospectus that may constitute “forward-looking statements”. Forward-looking statements may also be made in Deyu Agriculture Corp.’s Quarterly and Annual Reports filed with or furnished to the United States Securities and Exchange Commission (the “SEC”) and in other documents. In addition, from time to time, Deyu Agriculture Corp. through its management may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Deyu Agriculture Corp. undertakes no obligation to update or revise any forward-looking statements. References to “we,” “our,” “ours” and “us” refer to Deyu Agriculture Corp. and its wholly owned subsidiary City Zone, unless otherwise indicated. References to the “PRC” or “China” are to the People’s Republic of China

Overview

On April 27, 2010, we completed the acquisition of City Zone Holdings Limited, an emerging organic and non-organic agricultural products distributor in the Shanxi Province of The People’s Republic of China engaged in procuring, processing, marketing and distributing various grain and corn products (“City Zone”), by means of a share exchange (the “Share Exchange”).  As a result of the Share Exchange, City Zone became a wholly-owned subsidiary of ECBI and ECBI is a holding company. Simultaneously with the acquisition, we completed a private placement offering in the gross amount of $8,211,166 of the sale of securities to accredited investors at $4.40 per unit, with each “Unit” consisting of one share of Series A Convertible Preferred Stock, and a warrant to purchase 0.4 shares of common stock with an exercise price of $5.06 per share.

On May 10, 2010, we closed on the second and final round of the private placement offering as disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2010 through the sale of 589,689 Units comprised of 589,689 shares of our Series A Convertible Preferred Stock and 235,882 five year warrants with an exercise price of $5.06 per share, to certain accredited investors for total gross proceeds of $2,594,606.40. We raised an aggregate amount of $10,805,750 in the two rounds of offerings.

In connection with the financing transaction, we entered into (i) a Registration Rights Agreement, (ii) a Lock-Up Agreement, and (iii) a Securities Escrow Agreement for a make good arrangement with our management (together with the Securities Purchase Agreement, these agreements shall be referred to as the “Financing Documents”).

The private placement closed simultaneously with the signing of the Financing Documents and our issuing of 2,455,863 shares of Series A Convertible Preferred Stock and warrants exercisable into 982,361 shares of common stock to certain investors (collectively, the “Investors”).  Pursuant to its terms, the Series A Convertible Preferred Stock receive cumulative dividends at a rate of 5% per annum and can be converted into common stock on a 1:1 basis, subject to applicable adjustments.  Pursuant to its terms, the warrants can be converted into 982,361 shares of common stock at an exercise price of $5.06 per share (the "Warrants").  The Warrants will expire on April 27, 2015.  

In connection with the Private Placement and as part of the Financing Documents, we also entered into a Registration Rights Agreement, whereby, we agreed to file a registration statement on Form S-1 (or other applicable Form) within 60 days of the close of such financing.  If the registration statement was not timely filed or was not declared effective within 180 days from the closing, we could have been liable for damages in the amount of 0.5% of the purchase price per month until the default is cured. We filed a Registration Statement on Form S-1 with the United States Securities and Exchange Commission (the “SEC”) on June 15, 2010, and on October 21, 2010, the SEC declared the Form S-1 effective.

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We also entered into a Lock-Up Agreement with the Investors, pursuant to which the common stock owned by the management of City Zone will be locked-up until six (6) months after the Registration Statement is declared effective.

Lastly, our majority shareholder entered into a Securities Escrow Agreement whereby our majority shareholder has pledged 2,455,863 shares of his common stock of the Company as security that we reach certain earnings thresholds for fiscal years ended 2010 and 2011 (the “Make Good Shares”).  One half (or 1,227,932 shares) of the Make Good Shares shall be allocated to the 2010 earnings requirement and the other half (1,227,931 shares) of the Make Good Shares shall be allocated to the 2011 earnings requirements.  If we meet these thresholds, the Make Good Shares will be released from escrow and returned to our majority shareholder.  Alternatively, if we fail to meet the earnings requirements, the Make Good Shares will be released to the Investors in accordance with the terms of the Securities Escrow Agreement.  For the fiscal year 2010, pursuant to the Make Good Agreement, we have to report net income of $11,000,000.   For fiscal year 2011, pursuant to the Make Good Agreement, we have to report net income of $15,000,000.  We will not be issuing any additional shares if the earnings threshold is not met.  The Make Good Shares are already issued to our majority shareholder and he will be transferring his shares to the Investors if the earnings threshold is not met.  Therefore, this will not dilute any shareholders.

The Make Good Shares shall be released from escrow based on the following terms and conditions:

For Fiscal Year ended 2010, the 1,227,932 shares being held in escrow for fiscal year 2010 shall be disbursed as follows:

–   If we achieve net income of at least 95% of $11,000,000, then 1,227,932 shares shall be returned to the majority shareholder.

–   If we achieve net income of less than 50% of $11,000,000 (or $5,500,000), then 1,227,932 shares shall be released to the investors on a pro rata basis (based on the amount of each Investors investment).

–   If we achieve net income of between 50% and less than 95% of $11,000,000, then a portion of the 1,227,932 shares held in escrow shall be disbursed to the Investors (the remaining shares will be returned to the majority shareholder.  The number of shares released to the Investors shall be determined by doubling the percentage missed between the actual net income as compared to the make good target and then multiplying that by the 1,227,932 escrow shares.

Additionally, as a result of the Share Exchange, we changed our fiscal year end to December 31.

On May 19, 2010, we filed with the Secretary of State for the State of Nevada a Certificate of Amendment to our Articles of Incorporation changing our name from “Eco Building International, Inc.” to “Deyu Agriculture Corp.” FINRA declared the name change effective on June 2, 2010.

Description of Our Business

Operating through our wholly-owned subsidiaries, Jinzhong Deyu Agriculture Trading Co. Limited (“Deyu Agriculture”), Jinzhong Yongcheng Agriculture Trading Co. Limited (“Yongcheng”), and Jinzhong Yuliang Agriculture Trading Co. Limited (“Yuliang ”), we are an organic and non-organic agricultural products distributor in the Shanxi province of the People’s Republic of China engaged in procuring, processing, marketing and distributing various grain and corn products. Deyu Agriculture focuses on processing and distributing grain products. Yongcheng and Yuliang focus on distributing corn and corn byproducts.

● Grain Products –Deyu Agriculture procures and distributes grain products including millet, green beans, soy beans, black rice, and whole wheat flour. Deyu Agriculture acquires unprocessed grains and performs preliminary value-added processes to the grains such as peeling, cleaning, grinding and packaging. The majority of our finished products are then sold directly to supermarkets and grain wholesalers. We believe Deyu Agriculture is the only company in the Shanxi province to have a portion of its products certified as “Organic” by the China Organic Food Certification Center. The certification is effective from December 31, 2009 to December 20, 2010.

● Corn –Yongcheng and Yuliang process and distribute corn and corn byproducts. Yongcheng and Yuliang acquire unprocessed corn and perform preliminary value-added processes such as cleaning, drying, and packaging.

Our principal office is located at Tower A, Century Centre, Room 808, 8 North Star Road, Beijing, PRC. Our telephone number is (86)-13828824414. Our fax number is (86)-10-62668413. Our common stock is quoted on the OTC Bulletin Board under the trading symbol “DEYU.”

As is evidenced below in our “Results of Operations”, we have experienced increased growth in revenues and net income.  Our future growth depends on our ability to meet the increasing demand for our current products and our expanding product line.  Management has taken certain actions in order to meet the anticipated demands.  Such actions include working with farmers to increase current yields, focus on our ability to enter into new cooperative agreements, sign contracts with new farmer agents, and expand geographically in Shanxi Province.

Our deep processed grain products are higher margin products than our rough processed corn.  As such, we have increased our efforts to enter into supermarkets in Tier 1 and Tier 2 cities in China.  Beijing, Shanghai and Guangzhou are considered Tier 1 cities in China because they were the first to be opened up to competitive economic development and are the most populous, affluent and competitive.  Tier 2 cities, such as Tianjin, Suzhou, Dalian, Qingdao and Hangzhou, have a smaller population and are not as developed as Tier 1 cities.  Additionally, based upon our perceived and historical growing demand for our deep processed grain products, the changing dietary demands, and the increase in health and nutrition cons ciousness of the Chinese people, we believe we have a unique opportunity to substantially increase our revenues, net income and gross margins.  Management has also begun an initial evaluation of the viability of exporting our deep processed grain products to other countries, such as Japan and the United States.  We believe significant factors that could affect our operating results are the (i) cost of raw materials, (ii) prices and margins of our products to our retailers and their markup to the end users, (iii) consumer acceptance of our deep processed grain products, (iv) general economic conditions in China, and (v) the changing dietary habits of the people of China towards our quality organic food.

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Results of Operations

Three months ended September 30, 2010 compared to three months ended September 30, 2009

Net Revenue: Our sales for the three months ended September 30, 2010 were $21.0 million compared to sales of $11.7 million for the three months ended September 30, 2009, an increase of approximately $9.26 million, or 79%.  

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, 2010												For the three months ended September 30, 2009
	Sales Volume (ton)		Gross Sales		Less Sales Discount		Net Sales		% of total sales			Sales Volume (ton)			Gross Sales		Less Sales Discount		Net Sales		% of total sales
Grains Division		1,539		3,150,196		-		3,150,196		15	%			1,822		2,495,503		(196,928)		2,298,575		20	%
Corn Division		62,760		17,829,881		-		17,829,881		85	%			37,140		9,419,418		-		9,419,418		80	%
Total		64,299		20,980,077		-		20,980,077		100	%			38,962		11,914,921		(196,928)		11,717,993		100	%

Grain related sales totaled $3.2 million for the three months ended September 30, 2010, as compared to $2.3 million for the three months ended September 30, 2009.  This represents an increase of $0.9 million or 37%.  Corn sales totaled $17.8 million for the three months ended September 30, 2010 and totaled $9.4 million for the three months ended September 30, 2009.  This represents an increase of $8.4 million between the two periods, or 89%.  The increase in grain sales is mostly attributable to our growth strategy of selling our product in grocery stores and other retail outlets, which increased to approximately 4,000 supermarkets and 500 stores as of September 30, 2010.  The increase in corn sales i s primarily attributable to increasing sales to existing customers and adding new smaller customers.

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The following tables set forth our three major customers in each division for the three months ended September 30, 2010 and 2009, respectively:

Grains Division:

	% of Gross Sales for the three months ended September 30,
Top Three Customers	2010		2009
Customer O		4.7%		-
Customer P		4.1%		-
Customer Q		3.9%		-
Top Three Customers as % of Total Gross Sales		12.7%		-

Corn Division:

	% of Gross Sales for the three months ended September 30,
Top Three Customers	2010		2009
Shanghai Yihai Trading Co. Ltd., Shanxi Office		25.0%		47.6%
Customer R		3.1%		2.1%
Customer K		3.0%		-
Top Three Customers as % of Total Gross Sales:		31.1%		49.7%

During the three months ended September 30, 2010, our three major customers of the grains division accounted for 12.7% of total gross sales, increased from 0.0% for the three months ended September 30, 2009, primarily due to the Company’s growth of sales into retail markets in Tier 1 and Tier 2 cities in China in 2010.

During the three months ended September 30, 2010, our three major customers of the corn division accounted for 31.1% of total gross sales, a decrease from 49.7 % for the three months ended September 30, 2009, primarily due to the increased number of customers in 2010 that diversified the concentration of sales from our top customers as a percentage of total gross sales.

As of September 30, 2010, the accounts receivable due from the three major customers of the grains division as identified for the three-month period represented 12.4% of total accounts receivable of the division comparing to 0.0% as of September 30, 2009, or 3.5% of our consolidated accounts receivable as of September 30, 2010 comparing to 0.0% as of September 30, 2009.  Such variance was mainly a result of our increased sales efforts in the grain division in 2010.  All of our accounts receivable balances were aging within six months as of September 30, 2010 and 2009.

As of September 30, 2010, the accounts receivable due from the three major customers of the corn division as identified for the three-month period represented 15.2% of total accounts receivable of the division comparing to 44.7% as of September 30, 2009, or 10.8% of our consolidated accounts receivable as of September 30, 2010 comparing to 33.4% as of September 30, 2009.  Such variance was mainly a result of the different timing of collections from the customers.  All of our accounts receivable balances were aging within six months as of September 30, 2010 and 2009.

Cost of Goods Sold: Cost of goods sold was $16.1 million for the three months ended September 30, 2010, compared to cost of goods sold of $8.6 million for the three months ended September 30, 2009, an increase of $7.5 million or 86.5%.  This increase in cost of goods sold is primarily due to the 79% increase in net revenues for this period.  We did experience an increase in grain costs for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009, due to temporary grain shortages in other parts of China, caused by drought and floods.  As a percentage of net revenue, however, cost of goods sold increased 3.2% for the three months ended September 30, 2010 compared to the three months ended September 30, 2009, wh ich stood at 76.8% and 73.6%, respectively.

Gross Profit: As a result of the increases in net revenues and cost of goods sold, gross profits for the three months ended September 30, 2010 was $4.9 million, compared to gross profits of $3.1 million for the three months ended September 30, 2009.  This represents an increase of $1.8 million, or 58.2%.  Gross profit margin for grain sales decreased 10.1%, to 41.6% for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009 of 51.7%.  This was primarily due to the increase in grain prices in the third quarter. The gross profit margin for corn sales remained constant at 20% for the three months ended September 30, 2010, and 20.1% for the three months ended September 30, 2009.  Overall, the total gr oss profit margin decreased 3.1%, from 26.3% for the three months ended September 30, 2009 as compared to 23.2% for the three months ended September 30, 2010.

	For the three months ended September 30, 2010
	Grain			Corn			Total
Net Revenue	$	3,150,196		$	17,829,881		$	20,980,077
COGS		(1,840,526	)		(14,261,873	)		(16,102,399	)
Gross Profit	$	1,309,670		$	3,568,008		$	4,877,678
Margin %		41.6	%		20.0	%		23.2	%

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	For the three months ended September 30, 2009
	Grain			Corn			Total
Net Revenue	$	2,298,575		$	9,419,418		$	11,717,993
COGS		(1,109,911	)		(7,524,915	)		(8,634,826	)
Gross Profit	$	1,118,663		$	1,894,504		$	3,083,167
Margin %		51.7	%		20.1	%		26.3	%

Selling Expenses:  Primarily due to transportation costs related to increasing corn and grain revenues, and an increase in our up front costs in expanding our retail distribution network for our grain products, selling expenses increased $952,000, or 178.4% for the three months ended September 30, 2010 when compared to the three months ended September 30, 2009.  Expenses increased to $1.5 million for the three months ended September 30, 2010 from $534,000 for the three months ended September 30, 2009.  As a percent of net revenue, selling expenses were 7.1% of net revenue for the three months ended September 30, 2010, an increase of 2.5% from 4.6% of net revenue for the three months ended September 30, 2009.

General and Administrative Expenses: For the three months ended September 30, 2010, general and administrative expenses totaled $1.1million.  For the three months ended September 30, 2009, they totaled $82,000.  This represents an increase between the two periods of $986,000 or 1,209%.  The increase was mainly resulted from the growth of our business and higher administrative expenses after completing the reverse merger and Private Placement, along with an increase in costs for personnel and conducting an investor outreach. As a percentage of net revenues, general and administrative expenses were 5.1% and 0.7% for the three months ended September 30, 2010 and September 30, 2009, respectively.  This represents an increase of 4.4%.

Interest Expense: Interest expense for the three months ended September 30, 2010 was $90,000, compared to interest expense of $28,000 for the comparable period in 2009, an increase of $62,000, or 217.6%.  This was primarily due to an increase in short term borrowings to $3.2 million on September 30, 2010 from $1.1 million on September 30, 2009.  The borrowing was primarily due to increase inventory in advance of anticipated price increases and other short term funding needs.

Net Income: Net Income, prior to the adjustment for the preferred stock dividend, for the three months ended September 30, 2010 was $2.1 million compared to $2.4 million for the three months ended September 30, 2009, a decrease of $0.3 million or 13.8%.

There was no significant impact on our operations as a result of inflation for the three months ended September 30, 2010.

Nine months ended September 30, 2010 compared to nine months ended September 30, 2009

Net Revenue: Our net revenues for the nine months ended September 30, 2010 were $53.9 million, compared to sales of $26.3 million for the nine months ended September 30, 2009, an increase of $27.6 million or 104.8%.

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, 2010													For the nine months ended September 30, 2009
	Sales Volume (ton)		Gross Sales		Less Sales Discount			Net Sales		% of total sales			Sales Volume (ton)			Gross Sales		Less Sales Discount		Net Sales		% of total sales
Grains Division		6,376		9,495,954		(391,419	)		9,104,535		17	%			5,226		6,905,763		(635,775)		6,269,988		24	%
Corn Division		161,355		44,791,393		-			44,791,393		83	%			86,280		20,049,683		-		20,049,683		76	%
Total		167,731		54,287,347		(391,419	)		53,895,929		100	%			91,506		26,955,446		(635,775)		26,319,671		100	%

Net revenue for grain sales was $9.1 million for the nine months ended September 30, 2010, compared to $6.3 million for the nine months ended September 30, 2009.  This represents an increase of $2.8 million or 45.2%, which is primarily attributable to the expansion of our grain sales through supermarkets and other outlets, which totals more than 4,000 supermarkets and 500 stores as of September 30, 2010.  Net revenue for corn sales for the nine months ended September 30, 2010 was $44.8 million, an increase of $24.7 million or 123.4% over the nine month ended September 30, 2009 net revenue of $20 million.  The increase in corn sales is attributable to increasing sales with our existing customers and the addition of some smaller customers.

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The following tables set forth our three major customers in each division for the nine months ended September 30 2010 and 2009, respectively:

Grains Division:

	% of Gross Sales for the nine months ended September 30,
Top Three Customers	2010		2009
Customer B		5.9%		10.9%
Customer M		5.4%		5.8%
Customer N		4.4%		10.7%
Top Three Customers as % of Total Gross Sales		15.7%		27.4%

Corn Division:

	% of Gross Sales for the nine months ended September 30,
Top Three Customers	2010		2009
Shanghai Yihai Trading co., Ltd., Shanxi Office		32.8%		49.3%
Customer L		3.1%		2.0%
Customer K		2.8%		-
Top Three Customers as % of Total Gross Sales:		38.7%		51.3%

During the nine months ended September 30, 2010, our three major customers of the grains division accounted for 15.7% of total gross sales, a decrease of 11.7% from the nine months ended September 30, 2009 of 27.4%, primarily due to the Company’s increasing its number of retail markets in 2010.

During the nine months ended September 30, 2010, our three major customers of the corn division accounted for 38.7% of total gross sales, a decrease of 12.6% from 51.3 % for the nine months ended September 30, 2009, primarily due to the increased number of customers in 2010 that diversified the concentration of sales from our top customers as a percentage of total gross sales.

As of September 30, 2010, the accounts receivable due from the three major customers of the grains division as identified for the nine month period represented 6.4% of total accounts receivable of the division comparing to 29.6% as of September 30, 2009, or 1.8% of our consolidated accounts receivable as of September 30, 2010 comparing to7.5% as of September 30, 2009.  Such variance was mainly a result of our increased sales efforts in the grain division in 2010.  All of our accounts receivable balances were aging within six months as of September 30, 2010 and 2009.

As of September 30, 2010, the accounts receivable due from the three major customers of the corn division as identified for the three-month period represented 14.3% of total accounts receivable of the division comparing to 44.4% as of September 30, 2009, or 10.2% of our consolidated accounts receivable as of September 30, 2010 comparing to 33.2% as of September 30, 2009.  Such variance was mainly a result of the different timing of collections from the customers.  All of our accounts receivable balances were aging within six months as of September 30, 2010 and 2009.

Cost of Goods Sold: Cost of goods sold was $40.8 million for the nine months ended September 30, 2010, compared to cost of goods sold of $19.5 million for the nine months ended September 30, 2009, an increase of $21.3 million or 109.2%.  Cost of goods sold for grains was $5.2 million for the nine months ended September 30, 2010, compared to $3.1 million for the nine months ended September 30, 2009.  This represents an increase of $2.1 million or 70.3%.  Cost of goods sold for corn for the nine months ended September 30, 2010 was $35.5 million, an increase of $19 million or 116.5% over the cost of goods sold for corn for the nine month ended September 30, 2009 of $16.4 million.  These increases are due primarily to the increase in net revenues, as well as an increase in our grain costs.  Additionally, during the Chinese New Year (January and February 2010) we temporarily reduced prices to stimulate sales of grain products.  As a percentage of net revenue, total cost of goods sold for the nine months ended September 30, 2010 was 75.6%, an increase of only 1.6% compared to the nine month ended September 30, 2009 of 74%.

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Gross Profit: Gross profits for the nine months ended September 30, 2010 was $13.1 million compared to gross profits of $6.8 million for the comparable period in 2009, an increase of $6.3 million or 92.1%.  Gross profit for grain sales for the nine months ended September 30, 2010 was $3.9 million, compared to gross profit of $3.2 million for the nine months ended September 30, 2009, an increase of $700,000 or 21.3%.  Gross profit was negatively impacted by an increase in grain costs, and the accrual of $390,000 sales discounts associated with gaining entry into new supermarkets, and a temporary price reduction during the Chinese New Year (January and February 2010), for the nine months ended September 30, 2010.   Gross profit margin for grain sa les was 42.7% for the nine months ended September 30, 2010 compared to 51.2% for the nine months ended September 30, 2009, a decrease of 8.5%.  Gross profit margin for corn sales increased 2.5% for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.  Gross profit margin for corn sales for the nine months ended September 30, 2010 was 20.6% compared to the gross profit margin of 18.1% for the nine months ended September 30, 2009.  Total sales margin decreased 1.6% for the nine months ended September 30, 2010 to 24.4% compared to the nine months ended September 30, 2009 of 26%.

	For the Nine Months Ended September 30, 2010
	Grain			Corn			Total
Net Revenue	$	9,104,535		$	44,791,393		$	53,895,929
COGS		(5,215,299)			(35,545,275)			(40,760,575)
Gross Profit	$	3,889,236		$	9,246,118		$	13,135,354
Margin %		42.7	%		20.6	%		24.4	%
	For the Nine Months Ended September 30, 2009
	Grain			Corn			Total
Net Revenue	$	6,269,988		$	20,049,684		$	26,319,671
COGS		(3,062,557)			(16,418,442)			(19,480,999)
Gross Profit	$	3,207,431		$	3,631,242		$	6,838,672
Margin %		51.2	%		18.1	%		26.0	%

Selling Expenses:  Selling expenses for the nine months ended September 30, 2010 were $3.1 million, compared to $1.2 million for the nine months ended September 30, 2009.  This represents an increase of $1.9 million or 160%.  Most of this increase is due to packaging costs, which rise incrementally with the increases in products sold, and the upfront costs to establish our retail distribution market. As a percentage of net revenue, selling expenses were 5.7% of net revenue for the nine months ended September 30, 2010 and 4.5% of net revenue for the nine months ended September 30, 2009, an increase of 1.2%.

General and Administrative Expenses:  For the nine months ended September 30, 2010, general and administrative expenses totaled $2.0 million, as compared to $252,000 for the nine months ended September 30, 2009.  This represents an increase of $1.8 million, or 701.8%.  The increase was mainly resulted from the growth of our business and higher administrative expenses after completing the reverse merger and private placement.  As a percentage of net revenue, for the nine months ended September 30, 2010 and September 30, 2009, general and administrative costs were 3.8% and 1.0%, respectively.

Interest Expense: Interest expense for the nine months ended September 30, 2010 was $243,000 compared to interest expense of $67,000 for the comparable period in 2009, an increase of $176,000 or 262.7%.  This increase is attributable to the increase in short term borrowings, which totaled $3.2 million as of September 30, 2010, compared to $1.1 million as of September 30, 2009. The borrowing was primarily due to increase inventory in advance of anticipated price increases and other short term funding needs.

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Net Income: Net income, prior to the income adjustment for our preferred stock dividend, for the nine months ended September 30, 2010 was $7.8 million compared to $5,3 million for the nine months ended September 30, 2009, an increase of $2.4 million, or 45.7%.

Liquidity and Capital Resources

During the nine month period ended September 30, 2010, we had a net increase in cash of $8,177,811 as compared to a net increase of $5,425,891 for the nine months ended September 30, 2009.  Our principal sources and uses of funds were as follows:

–   Cash provided by/ used in operating activities.  We generated $3,965,872 in cash from operating activities for the nine months ended September 30, 2010, as compared to using $2,592,553 in the nine months ended September 30, 2009.  The decrease in cash used for operating activities is primarily attributed to a decrease in cash used for inventory and increases in accounts payable and advances from customers, while net income increased from $5,339,850 for the nine months ended September 30, 2009 to $7,549,638 for the nine months ended September 30, 2010.

–   Cash used in investing activities.  We used $6,311,589 in cash for investing activities for the nine months ended September 30, 2010, as compared to $484,716 in the nine months ended September 30, 2009.  The increase in cash used for investing activities is primarily attributed to the land use rights acquisition,, and an increase in the purchase of machinery and equipment and the construction of our new warehouse facilities.

–   Cash provided by financing activities.  We generated $10,330,756 from financing activities for the nine months ended September 30, 2010, as compared to $8,498,816 for the nine months ended September 30, 2009.  The primary increase in cash provided by financing activities was a result of the net proceeds from the financing related to our reverse merger and private placements on April 27 and May 10, 2010, and from short-term borrowings from banks and related parties.

There was no significant impact on our operations as a result of inflation for the nine months ended September 30, 2010.

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” (SPEs).

Critical Accounting Policies

Use of estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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. 

Long-lived assets

We apply 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.  We periodically evaluate 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 m anner, except that fair market values are reduced for the cost of disposal.

Fair value considerations

On April 27, 2010, we designated 3,000,000 of our authorized preferred shares as $0.001 par value Series A Convertible Preferred Stock (“Series A Preferred”). The Series A Preferred is an equity instrument that does not embody a term or cash redemption requirement for matters other than those that are within the control of management. The Series A Preferred provides voting rights on an as-converted basis and for a preference to common shareholders amounting to $4.40 in the event of our liquidation. It also provides for cumulative dividends at an annual percentage of 5.0% that are payable quarterly. The Series A Preferred is convertible into our common stock at a fixed conversion price of $4.40 that is subject to adjustment for changes in our capital structure and for sales of common stock or common stock linked securities b elow the conversion price, if any. The Series A Preferred provides for contingent cash redemption of 130% of the liquidation value in the event that the common shares are not delivered upon notice of conversion. Because we have sufficient authorized and unissued common shares to settle the Series A Preferred conversion requirements, the conversion and, therefore the contingent redemption, are within our management’s control.

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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, our management 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 our management’s control. Other consider ations 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 stockholders’ equity is appropriate for the Series A Preferred.

On April 27, 2010, we entered into a Securities Purchase Agreement that resulted in the sale of 2,455,863 shares of Series A Preferred and warrants to purchase 982,346 shares of our common stock on two closing dates of April 27, 2010 and May 7, 2010. Aggregate gross proceeds from the two closing events amounted to $10,805,750. Direct financing costs totaled $1,303,942 of which $1,084,446 was paid in cash and the balance of $219,496 represents the fair value of warrants linked to 171,911 shares of our common stock that were issued to a placement agent. The proceeds and the related direct financing costs were allocated to the Series A Preferred and the warrants (classified in paid-in capital) based upon their relative fair values. The following table summarizes the components of the allocation:

	Series A Preferred			Paid-in Capital Warrants			Total
Fair values of financial instruments	$	10,248,092		$	1,239,254		$	11,487,346
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

The warrants issued to the Investors and Placement Agent have strike prices of $5.06 and $4.84, respectively, and expire in five years. 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.

In connection with the sales of Series A Preferred and warrants, we also entered into a Registration Rights Agreement with the Investors, in which we agreed to file a registration statement with the Securities and Exchange Commission to register for resale the Investor Shares, within 60 calendar days of the Closing Date and use our best efforts to have the registration statement declared effective within 150 calendar days of the Closing Date of the Private Placement. The Registration Rights Agreement provided that if we failed to file or achieve effectiveness we would have been required to pay monthly liquidated damages in cash to each Investor of 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. No liquidated damages were required to be paid with respect to any shares that we are not permitted to include in the Registration Statement due to the SEC’s application of Rule 415. We account for liquidating damages, if any, when they are both probable of payment and estimable in amount. As of September 30, 2010, we have not recorded any amounts related to liquidated damages. On June 15, 2010 we filed a Registration Statement on Form S-1 with the United States Securities and Exchange Commission (the “SEC”), and on October 21, 2010, the SEC declared our Form S-1effective.

Fair value considerations:

Our accounting for the sale of Series A Preferred and warrants, and the issuance of warrants to the Placement Agent 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.

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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 stock:

	Fair Value		Series A Preferred			Series A Preferred
	Hierarchy Level		April 27,  2010			May 7, 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		2.0			2.0
Weighted average cost of capital (“WACC”)		3		15.91	%		15.55	%

Fair value hierarchy:

(4)   Level 1 inputs are quoted prices in active markets for identical assets and liabilities, or derived there from. There were no level 1 inputs.

(5)   Level 2 inputs are significant other observable inputs. There were no level 2 inputs.

(6)   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 does not believe our current trading market price is indicative of the fair value of our common stock, 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 Series A Preferred Stock 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 7, 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 Corporation. 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 BSM calculations related to the warrant valuations are as follows:

		April 27, 2010		May 7, 2010
	Fair Value Hierarchy Level	Investor warrants	Agent warrants	Investor warrants	Agent 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%

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(1)   There were no Level 1 inputs.

(2)   Level 2 inputs include:

●   Risk-free rate- This rate is based on publicly-available yields on zero-coupon Treasury securities with remaining terms to maturity consistent with the remaining contractual term of the warrants

●   Expected volatility- We did not have a historical trading history sufficient to develop an internal volatility rate for use in BSM. 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 does not believe our current trading market price is indicative of the fair value of our common stock, 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.

Revenue recognition

Our revenue recognition policies are in compliance with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”).  We recognize 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.  We recognize 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.  We assess whethe r 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.

Our revenue is recognized net of value-added tax (VAT) and sales discounts based on volume achieved in the same period that the related revenue is recorded.  The estimates are based on historical sales discounts, analysis of credit memo data, and other factors known at the time.  For the nine months ended September 30, 2010 and 2009, sales discounts were $398,176 and $636,306, respectively.  

We offer a right of exchange on our deep end processed grain products sold through our relationship with grocery store networks.  The consumer who purchases the product may exchange it for the same kind and quantity of product originally purchased.  Per 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, 2010 and September 30, 2009, we had $36,212 and $0 returns of our product, respectively. 

Income taxes

We account 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.

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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 effect on our consolidated financial statements.

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.  Our functional currency is Renminbi (“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.

Recent Accounting Pronouncements

In July 2009, the FASB’s ASC became the single, official source of authoritative, non-governmental GAAP in the United States.  The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission (the “SEC”).  This guidance is effective for interim and annual periods ending after September 15, 2009.  We adopted the provisions of this guidance for the year ended December 31, 2009.  Our accounting policies were not affected by the conversion to the ASC.  However, references to specific accounting standards have been changed to refer to the appropriate section of the ASC. 

In December 2007, the FASB issued guidance now incorporated in ASC Topic 810 “Consolidation” (formerly SFAS No. 160).  The guidance clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of stockholders’ equity.  We do not believe this pronouncement will impact our consolidated financial statements.

In March 2008, the FASB issued guidance now incorporated in ASC Topic 815 “Derivatives and Hedging” (formerly SFAS No. 161).  The guidance is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand how and why an entity uses derivative instruments and the instruments’ effects on an entity’s financial position, financial performance and cash flows.  The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged.  This pronouncement is related to disclosure and did not have a material impact on our consolidated financial statements.

In December 2008, the FASB issued guidance now incorporated in ASC Topic 860 “Transfers and Servicing” (formerly FASB Staff Position (“FSP”) SFAS 140-4 and FASB Interpretation (“FIN”) 46R).  The guidance increases disclosure requirements for public companies and is effective for reporting periods (interim and annual) that end after December 15, 2008.  The guidance requires public entities to provide additional disclosures about transferors’ continuing involvements with transferred financial assets.  It also requires public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities.  This pronouncement is related to disclosure on ly and did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued guidance now incorporated in ASC Topic 825 “Financial Instruments” (formerly FSP SFAS 107-1).  The guidance requires that the fair value disclosures required for financial instruments be included in interim financial statements.  In addition, the guidance requires public companies to disclose the method and significant assumptions used to estimate the fair value of those financial instruments and to discuss any changes of method or assumptions, if any, during the reporting period.  The guidance was effective for our year ended December 31, 2009.  This pronouncement is related to disclosure only and did not have a material impact on our consolidated financial statements.

In May 2009, the FASB issued guidance now incorporated in ASC Topic 855 “Subsequent Events” (formerly SFAS No. 165).  This guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued.  Among other items, the guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  It is effective for interim and annual periods ending after June 15, 2009.  There was no material impact upon the adoption of this standard on our consolidated financial statements.

In June 2009, the FASB issued guidance now incorporated in ASC Topic 810 “Consolidation” (formerly SFAS No. 167) amending the consolidation guidance applicable to variable interest entities and the definition of a variable interest entity, and requiring enhanced disclosures to provide more information about our involvement in a variable interest entity.  This guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. We do not believe this pronouncement will impact our consolidated financial statements. 

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In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards will be effective for us in the first quarter of 2011. Early adoption is permitted. We are currently evaluating the impact that the adoption of this standard may have on our consolidated financial statements.

In October 2009, the FASB issued an amendment to the accounting standards related to certain revenue arrangements that include software elements. This standard clarifies the existing accounting guidance such that tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality, shall be excluded from the scope of the software revenue recognition accounting standards. Accordingly, sales of these products may fall within the scope of other revenue recognition accounting standards or may now be within the scope of this standard and may require an allocation of the arrangement consideration for each element of the arrangement. This standard will become effective for us on January 1, 2011.  We do not expect that the adoption of these new dis closures will have a material impact on our consolidated financial statements.

In October 2009, the FASB issued a new accounting standard which provides guidance for arrangements with multiple deliverables.  Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation.   The adoption of this guidance had no impact on our consolidated financial statements.

In January 2010, the FASB issued an amendment to the accounting standards related to the disclosures about an entity’s use of fair value measurements.  Among these amendments, entities will be required to provide enhanced disclosures about transfers into and out of the Level 1 (fair value determined based on quoted prices in active markets for identical assets and liabilities) and Level 2 (fair value determined based on significant other observable inputs) classifications, provide separate disclosures about purchases, sales, issuances and settlements relating to the tabular reconciliation of beginning and ending balances of the Level 3 (fair value determined based on significant unobservable inputs) classification and provide greater disaggregation for each class of assets and liabilities that use fair value measur ements. Except for the detailed Level 3 roll-forward disclosures, the new standard was effective for us for interim and annual reporting periods beginning after December 31, 2009. The adoption of this accounting standards amendment did not have a material impact on our consolidated financial statements. The requirement to provide detailed disclosures about the purchases, sales, issuances and settlements in the roll-forward activity for Level 3 fair value measurements is effective for us for interim and annual reporting periods beginning after December 31, 2010. We do not expect that the adoption of these new disclosure requirements will have a material impact on our consolidated financial statements.

In February 2010, the FASB issued an amendment to the accounting standards related to the accounting for, and disclosure of, subsequent events in an entity’s consolidated financial statements. This standard amends the authoritative guidance for subsequent events that was previously issued and among other things exempts Securities and Exchange Commission registrants from the requirement to disclose the date through which it has evaluated subsequent events for either original or restated financial statements. This standard does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provides different guidance on the accounting treatment for subsequent

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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, 2010 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, 2010, our disclosure c ontrols 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. 

(b)       Changes in internal controls. During the period ended September 30, 2010, management determined that a material weakness in internal controls over financial reporting existed. Specifically, there was a lack of proper accounting controls over the recording of cash disbursements used in paying for supermarket listing and barcoding fees. Management has already begun the implementation of internal controls to address this issue. The material weakness did not result in a misstatement of our financial statements.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. 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.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit No.	Description
10.1	Land Use Rights Acquisition Contract Dated September 30, 2010 (i)
31.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002
31.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002
32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant t0 Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

    (1)     Referred to and incorporated herein by reference to that Current Report on Form 8-K dated October 6, 2010.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DEYU AGRICULTURE CORP.

Signature	Title	Date
/s/Jianming Hao	Chief Executive Officer	November 15, 2010
Jianming Hao
/s/David Lethem	Chief Financial Officer	November 15,  2010
David Lethem

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