Migao Corporation
TSX : MGO

Migao Corporation

December 04, 2007 07:00 ET

Migao Announces Fiscal 2007 Year End Financial Results

74% revenue growth

TORONTO, ONTARIO--(Marketwire - Dec. 4, 2007) - Migao Corporation (TSX:MGO), a China-based leading specialty potash fertilizer producer, is pleased to report sales of $101.8 million for the year ended September 30, 2007 compared to $58.3 million for the prior year. EBITDA for fiscal 2007 was $14.1 million, or 14% of revenue. Net income was $11.2 million for the year compared to $8.6 million in 2006. Basic earnings per share were $0.33 for fiscal 2007 compared to $0.37 for fiscal 2006.

As at September 30, 2007, Migao reported cash and cash equivalents of $17.5 million and working capital of $36.7 million. Long-term debt was nil and current bank debt was $4.6 million.

"Our successful financial performance is the result of a dedicated team focused on delivering the highest quality of products to an underserved and growing market. China's demand for high-value crops is directly related to increases in income for China's working class population," said Mr. Liu Guocai, Migao's President and CEO. "Migao is rapidly building a reputation as a trusted reliable source of specialty fertilizer products for high-value crop customers in China."



Summary Financial Results
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For the years
ended September 30

(In thousands of $CDN except
per share data) 2007 2006 change
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Sales $101,804 58,349 74%
Gross profit 21,540 13,750 57%
Net income 11,206 8,598 30%
EBITDA 14,081 10,040 40%
Basic EPS 0.33 0.37
Diluted EPS 0.32 0.37

Weighted average number of
shares (in millions of shares)
Basic 33.5 23.5 42%
Fully Diluted 35.1 23.6 49%
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Balance Sheet Highlights For the year ended September 30
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(In thousand of $CDN except
for ratios) 2007 2006
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Current ratio 3.03:1 2.89:1
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Cash 17,453 16,316
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Working capital 36,669 19,362
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Total assets 100,027 57,087
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Total debt 18,031 10,228
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Total equity 81,995 46,859
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Debt / Equity 22% 22%
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Gross margin as a percentage of sales was 21% for the year ended September 30, 2007, a decrease over the previous year, but in line with management expectations. A fourth quarter adjustment relating to non-refundable Value Added Tax (VAT) on certain inputs previously VAT refunded, and retroactive to February 1, 2007 negatively impacted gross margin by $1.2 million. Further impacting gross margin in the fourth quarter was a dramatic rise in the price of sulphuric acid. The price of sulphuric acid increased globally by as much as 100% due to substantial tightening of supply and demand. Subsequent to the end of the period, Migao successfully increased its selling price of potassium sulphate to reflect the increased raw material prices as the company has historically done with other raw material price increases, ensuring continued stable gross margin.

During the year, Migao aggressively expanded production capacity including the recent expansion of 20,000 tonnes of potassium nitrate at the Sichuan Migao facility and 40,000 tonnes of potassium sulphate capacity at Changchun Migao. The Changchun facility will be fully operational as of December 21, 2007.

The Company's strategy is to continue building capacity in China to primarily serve the Chinese market. Beyond China-based customers, Migao has begun exporting small quantities of its specialty fertilizer in an effort to build international commercial relationships. As the Company's production capacity expands, export markets will be more aggressively pursued.

Expansion activity currently in progress includes three 40,000 tonne potassium sulphate facilities at three wholly owned subsidiaries; Shanghai Migao, Zunyi Migao, and Tianjin Migao. With the completion of these expansion projects, annual combined production capacity of potassium nitrate and potassium sulphate will be in excess of 380,000 tonnes by the end of 2008. Current production capacity is 260,000 tonnes.

Conference Call

Migao will be hosting a conference call to discuss the first quarter results at 9:00am Eastern Time on Tuesday December 4, 2007. The details are as follows:

Dial in number: 416-641-6122 or 1-866-542-4241

Taped replay (until December 11, 2007): 416-695-5800 or 1-800-408-3053

Taped replay access code: 3244733#

Migao Corporation, through its wholly owned subsidiaries, owns and operates fertilizer production plants in various strategic locations across China for the production and sales of specialty potash fertilizer (potassium nitrate and potassium sulphate) to the Chinese agricultural market. Please visit www.migaocorp.com.

This press release contains statements that may constitute forward-looking statements, which may include financial and other projections, as well as statements regarding future plans, objectives or economic performance. Forward-looking information involves significant risks, assumptions, uncertainties and other factors that may cause actual future results or anticipated events to differ materially from those expressed or implied and accordingly, investors should not place undue reliance on any such forward-looking statements. Factors that could cause results to vary include those expressed in the Company's filings with Canadian securities regulatory authorities. All information presented herein should be read in conjunction with such filings.



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Migao Corporation
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Consolidated Balance Sheets
September 30, 2007 and 2006
(in Canadian dollars)
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2007 2006
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Assets
Current assets
Cash and cash equivalents $ 17,452,952 $ 16,315,835
Accounts receivable 6,372,852 4,435,769
Prepayments, deposits and other
receivables (note 3) 10,613,761 4,891,382
Inventory (note 4) 19,101,408 3,947,193
Income taxes receivable (note 6) 1,159,283 -
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54,700,256 29,590,179
Plant and equipment (note 6) 20,517,788 13,464,499
Construction in progress 5,971,902 6,203,587
Land use rights (note 7) 18,366,905 7,828,983
Future income tax assets, net (note 12) 470,000 -
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$ 100,026,851 $ 57,087,248
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Liabilities
Current liabilities
Bank indebtedness (note 8) $ 4,578,150 $ 1,410,000
Accounts payable and accrued liabilities
(note 7) 9,957,740 5,213,106
Customer deposits 3,450,214 2,965,101
Due to related party (note 5) 45,387 530,672
Income taxes payable - 109,308
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18,031,491 10,228,187
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Shareholders' equity
Share capital (note 9) 54,013,269 28,729,591
Contributed surplus (note 9) 8,550,992 2,955,592
Retained earnings (note 10) 26,527,076 15,320,755
Accumulated other comprehensive income (loss)
(note 11) (7,095,977) (146,877)
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81,995,360 46,859,061

Commitments (note 15)
Subsequent event (note 18)
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$ 100,026,851 $ 57,087,248
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The accompanying notes are an integral part of these consolidated financial
statements.



Migao Corporation
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Consolidated Statements of Operations and Retained Earnings
For the years ended September 30, 2007 and 2006
(in Canadian dollars)
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Revenues $ 101,803,592 $ 58,349,473
Cost of goods sold (note 6) 80,263,341 44,599,078
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Gross profit 21,540,251 13,750,395
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Operating expenses
Selling 4,030,261 2,019,132
General and administrative (note 6 and 7) 3,312,954 1,883,841
Professional and consulting 972,028 499,651
Stock-based compensation 908,258 370,305
Pre-operating costs 367,804 -
Finance costs 287,577 -
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9,878,882 4,772,929
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Income from operations 11,661,369 8,977,466
Other income 202,229 50,246
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Income before income taxes 11,863,598 9,027,712
Provision for income taxes (note 12) 657,277 430,150
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Net income for the period 11,206,321 8,597,562
Retained earnings, beginning of period 15,320,755 6,723,193
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Retained earnings, end of period $ 26,527,076 $ 15,320,755
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Income per share: (note 13)
Basic $ 0.33 $ 0.37
Diluted $ 0.32 $ 0.37
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Weighted average number of common shares
outstanding: (note 13)
Basic 33,479,987 23,539,842
Diluted 35,074,923 23,555,094
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The accompanying notes are an integral part of these consolidated financial
statements.



Migao Corporation
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Consolidated Statements of Comprehensive Income
For the years ended September 30, 2007 and 2006
(in Canadian dollars)
--------------------------------------------------------------------------
2007 2006
--------------------------------------------------------------------------
Net income $ 11,206,321 $ 8,597,562
Other comprehensive income (loss), net of tax:
Unrealized losses on translating
financial statements of self-sustaining
foreign operations (6,949,100) (4,489)
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Comprehensive income $ 4,257,221 $ 8,593,073
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The accompanying notes are an integral part of these consolidated financial
statements.



Migao Corporation
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Consolidated Statements of Cash Flows
For the years ended September 30, 2007 and 2006
(in Canadian dollars)
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2007 2006
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Cash flows from operating activities
Cash receipts from customers $ 99,042,119 $ 60,158,788
Cash paid to suppliers and employees (108,443,338) (51,454,033)
Income taxes paid (489,421) (320,842)
Interest paid (273,977) (55,813)
Interest received 126,527 50,246
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(10,038,090) 8,378,346
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Cash flows from investing activities
Purchase of plant and equipment (12,386,635) (5,580,367)
Construction in process (145,159) (3,539,266)
Payments for land use rights (8,926,672) (2,946,440)
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(21,458,466) (12,066,073)
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Cash flows from financing activities
Proceeds from bank loan 3,168,150 1,410,000
Advances from (repayment to) related
parties, net (505,297) 268,808
Issuance of common shares, net 22,993,040 15,869,183
Proceeds from exercise of underwriters'
compensation options 1,565,256 -
Proceeds from exercise of warrants 5,127,524 -
Proceeds from exercise of stock options 285,000 -
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32,633,673 17,547,991
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Increase in cash and cash equivalents 1,137,117 13,860,264
Cash and cash equivalents, beginning of year 16,315,835 2,455,571
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Cash and cash equivalents, end of year $ 17,452,952 $ 16,315,835
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Cash and cash equivalents consist of:
Cash on hand $ 14,398,901 $ 12,112,572
Term deposit 40,000 40,000
Bank notes 3,014,051 4,163,263
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$ 17,452,952 $ 16,315,835
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The accompanying notes are an integral part of these consolidated financial
statements.


1. Nature of Operations

Nature of Operations

Migao Corporation ("the Company" or "Migao"), through its wholly owned Subsidiaries, is a manufacturer of specialty potash-based fertilizers, produced at its three operational facilities in the People's Republic of China ("PRC").

The Company

Migao holds 100% of the issued and outstanding capital of H.K. Migao Industry Limited ("HK Migao"), which in turns holds 100% of the issued and outstanding capital of Sichuan Migao Chemical Fertilizer Industry Co., Ltd. ("Sichuan Migao"), Guangdong Migao Chemical Co., Ltd. ("Guangdong Migao"), Liaoning Migao Chemical Co., Ltd. ("Liaoning Migao"), Migao Chemical Industry (Shanghai) Co., Ltd. ("Shanghai Migao") and Migao Chemical (Changchun) Co., Ltd. ("Changchun Migao") (collectively, the "Subsidiaries").

2. Significant Accounting Policies

Basis of presentation

These consolidated financial statements (the "financial statements") have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") and include the accounts of the Company and its subsidiaries in the PRC.

Cash equivalents

For the purpose of the consolidated statements of cash flows, the Company considers cash equivalents to be cash and highly liquid investments with original maturities of three months or less.

Inventory

Raw materials are valued at the lower of cost and replacement cost. Finished goods are valued at the lower of cost and net realizable value. The cost of finished goods comprises direct materials and, where applicable, direct labor costs and overhead costs. Cost is determined using the weighted-average method. Net realizable value represents the anticipated selling price less all further costs for distribution.

Plant and equipment

Plant and equipment are recorded at cost. Amortization is provided over the expected useful lives of the plant and equipment with a 10% residual value using the following methods and annual rates:

Building and improvements - 20 years straight line

Machinery and equipment - 10 years straight line

Vehicles - 5 years straight line

Office equipment - 5 years straight line

Construction in progress

Construction in progress represents properties under construction and is stated at cost. Construction in progress is not amortized until such time as the assets are completed and put into operational use.

Land use rights

Land use rights are recorded at cost and are amortized over 50 to 70 years, which are the terms of the land use rights set by the Chinese government.

Impairment of long-lived assets

Long-lived assets held for use are reviewed for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. When the carrying value is not recoverable from future cash flows on an undiscounted basis and the carrying value exceeds the assets' fair value, an impairment loss is recorded for the excess of carrying value over fair value.

Income taxes

The Company uses the liability method of accounting for income taxes. Under this method, income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on income tax assets and liabilities is reflected in operations in the period in which the change occurs. Valuation allowances are established when necessary to reduce future tax assets to the amount expected to be realized.

Income per share

Basic income per share is computed using the weighted average number of common shares outstanding during the year. Diluted income per share is computed giving effect to the potential dilution that would occur if securities or other contracts to issue common shares were exercised or converted to common shares using the treasury stock method, except when their effect would be anti-dilutive. The treasury stock method assumes that proceeds received from the exercise of stock options and warrants are used to repurchase common shares at the prevailing market rate.

Revenue recognition

Revenue is recognized when goods are shipped and all significant risks and rewards of ownership passed to the customer with collection of revenue reasonably assured. Payments received in advance for orders that do not yet qualify for recognition under the Company's policies are recorded as customer deposits.

Pre-operating costs

All expenditures incurred prior to the commencement of commercial operations are expensed.

Foreign exchange

The Company's functional currency is the Canadian dollar and the Subsidiaries' functional currency is the Chinese Renminbi ("RMB"). The accounts of the Subsidiaries are translated into Canadian dollars using the current rate method. Under this method, assets and liabilities are translated at the year end rate of exchange. Revenues and expenses are translated into Canadian dollars at the average rate of exchange for the period. Exchange gains and losses from foreign currency translations are recorded in shareholders' equity as other comprehensive income.

Measurement uncertainty

The preparation of financial statements in conformity with Canadian 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. Actual results could differ from those estimates.

Recent Canadian accounting pronouncements

Inventories

In June 2007, the Canadian Institute of Chartered Accountants ("CICA") released new Handbook Section 3031, "Inventories", replacing Section 3030, effective for annual and interim periods for fiscal years beginning on or after January 1, 2008. This Section provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

The Company is currently evaluating the impact of this new handbook section on the consolidated financial statements and will adopt the sections commencing fiscal 2008.

Financial Instruments - Disclosures and Presentation

In December 2006, the CICA released new Handbook Section 3862, "Financial Instruments - Disclosures", and Section 3863, "Financial Instruments - Presentation", replacing Section 3861, effective for annual and interim periods for fiscal years beginning on or after October 1, 2007.

Section 3862 is to require entities to provide disclosures in their financial statements that enable users to evaluate:

(a) the significance of financial instruments for the entity's financial position and performance; and

(b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks.

Section 3863 is to enhance financial statement users' understanding of the significance of financial instruments to an entity's financial position, performance and cash flows. This Section establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset.

The Company is currently evaluating the impact of these new handbook sections on the consolidated financial statements and will adopt the sections commencing fiscal 2008.

Accounting policy changes including initial adoption

Effective October 1, 2006, the Company implemented the new CICA accounting sections: 3855 (Financial Instruments - Recognition and Measurement), 3861 (Financial Instruments - Disclosure and Presentation), 3865 (Hedges), and 1530 (Comprehensive Income). These new accounting policy changes have been implemented prospectively with no restatement of comparative financial statements, except as noted below.

Comprehensive income includes net income and other comprehensive income. It is defined as the change in equity (net assets) of a company during the period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during the period except those resulting from investments by owners and distributions to owners. The only item included in other comprehensive income is the foreign currency translation of self-sustaining foreign operations. As a result, the previously recorded currency translation account on the consolidated balance sheets' shareholders' equity section has been eliminated and included as "accumulative other comprehensive income" in shareholders' equity. Furthermore, the gain (or loss) from translating the Company's self-sustaining foreign operations is now recorded as other comprehensive income. Prior years financial statements have been restated to reflect this change. The Company's earnings per share presented on the consolidated statements of income is based upon its net income and not comprehensive income.

The adoption of sections 3855, 3861 and 3865 had no impact on the Company's financial statements.

3. Prepayments, Deposits, and Other Receivables



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2007 2006
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Prepayments for raw materials $ 7,478,368 $ 2,689,982
Prepayments for construction costs 903,810 1,416,103
Prepayment for transportation services 22,968 1,390
Deposits for the supply of utilities 150,965 252,816
VAT receivable 582,526 347,177
Other receivables and deposits 1,475,124 183,914
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$ 10,613,761 $ 4,891,382
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4. Inventory

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2007 2006
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Raw materials $ 13,930,933 $ 3,670,084
Finished goods 1,075,089 213,129
Packing materials 89,818 63,980
Goods in transit 4,005,568 -
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$ 19,101,408 $ 3,947,193
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5. Related Party Balances

At the end of the years, the Company had related party balances as follows:
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2007 2006
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Amount due to:
Liaoning Yongcheng Economic and Trade
Development Co. Ltd. ("LYEDC") $ 45,387 $ 530,672
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Migao and LYEDC are related due to common control. The amounts are non-interest bearing and due on demand. Payments in the amount of $485,285 were made to LYEDC in paying off the balance owing.



6. Plant and Equipment
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2007
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Accumulated Net Book
Cost Amortization Value
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Buildings and improvements $ 10,684,094 $ 701,107 $ 9,982,987
Machinery and equipment 11,984,245 2,180,777 9,803,468
Vehicles 793,580 288,699 504,881
Office equipment 337,561 111,109 226,452
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$ 23,799,480 $ 3,281,692 $ 20,517,788
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2006
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Accumulated Net Book
Cost Amortization Value
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Buildings and improvements $ 6,708,599 $ 352,976 $ 6,355,623
Machinery and equipment 7,812,532 1,202,871 6,609,661
Vehicles 477,459 184,680 292,779
Office equipment 273,120 66,684 206,436
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$ 15,271,710 $ 1,807,211 $ 13,464,499
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Amortization expense for the year ended September 30, 2007 was $1,719,825 (September 30, 2006 - $841,137) and is included in cost of goods sold and general and administrative expense.

On June 11, 2007, Guangdong Migao was approved by the local tax authority for tax credits totalling $1,383,394 (RMB 10,424,975) on purchases of domestic equipment during calendar year 2006. Sichuan Migao was also approved for tax credits of $369,797 (RMB 2,786,714) and value-added tax refund of $210,962 (RMB 1,589,770). These credits and value-added tax refund were recorded to reduce the cost of equipment and the tax credits will be applied against profit taxes levied to Guangdong Migao and Sichuan Migao.



7. Land Use Rights
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2007 2006
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Land use rights $ 18,596,769 $ 7,859,142
Less: accumulated amortization 229,864 30,159
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$ 18,366,905 $ 7,828,983
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As of September 30, 2007, the Company had sixteen land leases from the Chinese government with terms of fifty to seventy years.

Amortization expense for the year ended September 30, 2007 was $223,816 (September 30, 2006 - $11,177) and is included in general and administrative expense.

As of September 30, 2007, the Company had not obtained the land use right certificates for eight of the land leases and approximately $4.7 million has been accrued as the balance due on the issuance of the certificates. It is common practice in the PRC that the land use right certificates are only issued when the government has serviced the land ready for construction.

Under the PRC law, land use rights can be revoked and the tenants can be forced to vacate at any time when re-development of the land is in the public interest.

8. Bank Indebtedness

At September 30, 2007, the Company has short-term bank loans outstanding totaling $4,578,150 (RMB 34.5 million) (September 30, 2006 - $1,410,000 or RMB 10 million) for working capital purposes.



Due Interest
Amount Date per annum Secured by
--------- -------- --------- -----------
$ 663,500 February 20, 2008 6.7095% certain land use rights
$ 663,500 April 16, 2008 6.7095% certain land use rights
$ 1,327,000 May 29, 2008 6.57% certain land use rights
$ 1,924,150 August 20, 2008 6.9084% certain land use rights
and buildings


Total carrying value of security was $4,149,062 (RMB 31,266,483). Total interest paid during the year amounted to $273,977 (2006 - $55,813).



9. Share Capital
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(a) Authorized:
Unlimited common shares without par value.

(b) Issued common shares
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Number of
Shares Amount
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Balance -- September 30, 2005 - $ -
Share capital is comprised of the number of
issued and outstanding common shares of Fox
Mountain and the stated capital of HK Migao 8,540,000 9,167,213
Consolidation of common share 1 for 17 basis (8,037,691) -
Issued to acquire HK Migao 20,400,000 -
Issued pursuant to a private placement at
$2.85 per share (i) 6,363,000 18,134,550
Share issuance costs - (2,265,367)
Private placement warrants (i) - (2,099,790)
Underwriters' compensation options (ii) - (485,497)
Issued on conversion of long-term debt (iii) 1,846,612 6,278,482
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Balance - September 30, 2006 29,111,921 $ 28,729,591
Issued on exercise of underwriters'
compensation options (iv) 53,449 152,330
Fair value of underwriters'
compensation options (iv) 58,259
Fair value of warrants issued (iv) (24,854)
Issued on exercise of underwriters'
compensation options (v) 10,000 28,500
Fair value of underwriters'
compensation options (v) - 10,900
Fair value of warrants issued (v) - (12,900)
Issued on exercise of underwriters'
compensation options (vi) 90,000 256,500
Fair value of underwriters'
compensation options (vi) 98,100
Fair value of warrants issued (vi) (58,950)
Issued on exercise of underwriters'
compensation options (vii) 12,271 34,972
Fair value of underwriters'
compensation options (vii) 13,375
Fair value of warrants issued (vii) (8,283)
Exercise of warrants (viii) 1,063,941 3,936,582
Fair value of warrants exercised (viii) - 702,201
Issued pursuant to a private placement at
$4.15 per share (ix) 6,025,000 25,003,750
Share issuance costs (ix) - (2,010,710)
Fair value of warrants issued
on private placement (ix) - (5,512,875)
Fair value of underwriters'
compensation options issued (ix) - (704,925)
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Sub-total 36,366,582 $ 50,691,563
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Balance forward 36,366,582 $ 50,691,563
Issued on exercise of underwriters'
compensation options (x) 75,312 312,545
Fair value of underwriters'
compensation options (x) 176,230
Fair value of warrants issued (x) (77,571)
Issued on exercise of underwriters'
compensation options (xi) 178,164 507,767
Fair value of underwriters'
compensation options (xi) 194,199
Fair value of warrants issued (xi) (128,278)
Issued on exercise of underwriters'
compensation options (xii) 88,164 251,267
Fair value of underwriters'
compensation options (xii) 96,099
Fair value of warrants issued (xii) (62,156)
Issued on exercise of underwriters'
compensation options (xiii) 5,000 14,250
Fair value of underwriters'
compensation options (xiii) 5,450
Fair value of warrants issued (xiii) (3,400)
Issued on exercise of underwriters'
compensation options (xiv) 2,500 7,125
Fair value of underwriters'
compensation options (xiv) 2,725
Fair value of warrants issued (xiv) (1,700)
Exercise of warrants (xv) 224,706 1,190,942
Fair value of warrants exercised (xv) - 411,212
Issued on exercise of stock options (xvi) 100,000 285,000
Fair value of stock options exercised (xvi) - 140,000
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Balance - September 30, 2007 37,040,428 $ 54,013,269
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(i) On May 18, 2006 (the "closing date"), the Company completed a private placement of 6,363,000 units priced at $2.85 per unit with each unit consisting of one common share and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one common share on payment of $3.70 per common share within two years from the closing date. The fair value of the warrants issued with the private placement was estimated using the Black-Scholes option pricing model on the closing date of the private placement to be $0.66 per warrant. Assumptions used to determine the value of the warrants were: dividend yield 0%; risk-free interest rate 4%; expected volatility 66%; and expected life of 2 years.

(ii) In addition to the agency fee paid in cash, the Company granted compensation options entitling the agents to acquire 445,410 units at price of $2.85 per unit two years from the closing date. Each agent compensation unit is comprised of one common share and one-half of one common share purchase warrant. Each whole warrant entitles the agent to acquire one common share on payment of $3.70 per common share within two years from the closing date. The fair value of the compensation options granted with the private placement was estimated using the Black-Scholes option pricing model on the closing date of the private placement to be $1.09 per option. Assumptions used to determine the value of the compensation options were: dividend yield 0%; risk-free interest rate 4%; expected volatility 66%; and expected life of 2 years.

(iii) On June 7, 2006, 1,846,612 common shares of the Company were issued at $3.40 per share upon the conversion of the long-term debt in the amount of $6,278,482 owing to LYEDC, related by common control.

(iv) Each of the 53,449 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $1.09 per option. The warrants issued on the exercise of these options are valued at $0.93 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.08%; expected volatility 66%; and expected life of 1.6 years.

(v) Each of the 10,000 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $1.09 per option. The warrants issued on the exercise of these options are valued at $2.58 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.10%; expected volatility 106%; and expected life of 1.3 years.

(vi) Each of the 90,000 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $1.09 per option. The warrants issued on the exercise of these options are valued at $1.31 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.18%; expected volatility 108%; and expected life of 1.1 years.

(vii) Each of the 12,271 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $1.09 per option. The warrants issued on the exercise of these options are valued at $1.35 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.69%; expected volatility 108%; and expected life of 0.92 years.

(viii) During the year ended September 30, 2007, 1,063,941 of the common share purchase warrants issued in relation to the private placement financing on May 18, 2006 were exercised at $3.70 per share. The warrants were valued at $0.66 per warrant using the following assumptions: dividend yield 0%; risk-free interest rate 4%; expected volatility 66%; and expected life of 2 years.

(ix) On February 22, 2007 (the "closing date"), the Company completed a private placement of 6,025,000 units priced at $4.15 per unit with each unit consisting of one common share and one-half of one common share purchase warrant. Each whole warrant entitles the holder to acquire one common share on payment of $5.30 per common share within two years from the closing date. The fair value of the warrants issued with the private placement was estimated using the Black-Scholes option pricing model on the closing date of the private placement to be $1.83 per warrant. Assumptions used to determine the value of the warrants were: dividend yield 0%; risk-free interest rate 4.11%; expected volatility 106%; and expected life of 2 years. In addition to the agency fee of $1,750,263 paid in cash, the Company granted compensation options entitling the agents to acquire 301,250 compensation units at price of $4.15 per unit within two years from the closing date. Each compensation unit comprises of one common share and one-half warrant. Each whole warrant entitles the agent to acquire one common share on payment of $5.30 per common share within two years from the closing date. The fair value of the compensation options granted with the private placement was estimated using the Black-Scholes option pricing model on the closing date of the private placement to be $2.34 per option. Assumptions used to determine the value of the compensation options were: dividend yield 0%; risk-free interest rate 4.11%; expected volatility 106%; and expected life of 2 years.

(x) Each of the 75,312 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $2.34 per option. The warrants issued on the exercise of these options are valued at $2.06 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.71%; expected volatility 110%; and expected life of 1.6 years.

(xi) Each of the 178,164 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $1.09 per option. The warrants issued on the exercise of these options are valued at $1.44 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.68%; expected volatility 110%; and expected life of 0.85 years.

(xii) Each of the 88,164 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $1.09 per option. The warrants issued on the exercise of these options are valued at $1.41 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.68%; expected volatility 110%; and expected life of 0.83 years.

(xiii) Each of the 5,000 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $1.09 per option. The warrants issued on the exercise of these options are valued at $1.36 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.68%; expected volatility 110%; and expected life of 0.82 years.

(xiv) Each of the 2,500 underwriters' compensation options exercised consisted of 1 common share and 1/2 common share purchase warrant. The fair value of options were estimated using the Black-Scholes option pricing model to be $1.09 per option. The warrants issued on the exercise of these options are valued at $1.36 per warrant with the following assumptions: dividend yield 0%; risk-free interest rate 4.27%; expected volatility 110%; and expected life of 0.68 years.

(xv) During the year ended September 30, 2007, 224,706 of the common share purchase warrants issued in relation to the private placement financing on February 22, 2007 were exercised at $5.30 per share. The warrants were valued at $1.83 per warrant using the following assumptions: dividend yield 0%; risk-free interest rate 4.11%; expected volatility 106%; and expected life of 2 years.

(xvi) During the year ended September 30, 2007, 100,000 of the common share purchase options issued to the employees and directors of the Company were exercised by a former director of the Company at a price of $2.85 per common share. The stock options were valued at $1.40 per stock option using the following assumptions: dividend yield 0%; risk-free interest rate 4%; expected volatility 66%; and expected life of 5 years.



(c) Contributed surplus

Amount
--------------------------------------------------------------------------
Balance -- September 30, 2005 $ -
Conversion of note payable in HK Migao 9,164,099
Elimination on consolidation (9,164,099)
Stock-based compensation expense 370,305
Compensation options to brokers 485,497
Warrants issuance on private placement 2,099,790
--------------------------------------------------------------------------
Balance - September 30, 2006 $ 2,955,592
Fair value of exercised underwriters' compensation options (655,337)
Fair value of warrants issued on the exercise of
underwriters' compensation options 378,092
Stock-based compensation expense 908,258
Fair value of warrants exercised (1,113,413)
Fair value of private placement warrants 5,512,875
Fair value of underwriters' compensation options 704,925
Fair value of stock options exercised (140,000)
--------------------------------------------------------------------------
Balance - September 30, 2007 $ 8,550,992
--------------------------------------------------------------------------
--------------------------------------------------------------------------


(d) Stock options

Under the Company's stock option plan, the Company may grant stock options to directors, senior officers, employees and advisors and is authorized to issue options to acquire up to 10% of the issued and outstanding shares of the Company. The board of directors or such other persons designated by the board administers the plan and determines the vesting and terms of each award.

The Black-Scholes option valuation model, used by the Company to determine fair values, was developed for use in estimating the fair value of freely traded options. This model requires the input of highly subjective assumptions including future stock price volatility and expected time until exercise. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing model does not necessarily provide a reliable single measure of the fair value of the Company's stock options granted during the year.

The following table summarizes the activity of the Company's stock option plan.



Weighted
average
Options exercise price
-------------------------------------------------------------------------
Outstanding -- September 30, 2005 - $ -
Granted during the year 1,165,000 2.85
-------------------------------------------------------------------------
Outstanding - September 30, 2006 1,165,000 $ 2.85
Granted during the year 120,000 8.08
Exercised during the year (100,000) 2.85
-------------------------------------------------------------------------
Outstanding -- September 30, 2007 1,185,000 $ 3.38
-------------------------------------------------------------------------
-------------------------------------------------------------------------



The following table summarizes the weighted average information about the outstanding stock options.



As of September 30, 2007
------------------------

Number Weighted average remaining Number
Exercise price outstanding contractual life (years) exercisable
-------------------------------------------------------------------------
$2.85 1,065,000 3.63 288,333
$7.69 60,000 4.75 NIL
$8.46 60,000 4.75 NIL
-------------------------------------------------------------------------
$3.38 1,185,000 3.75 288,333
-------------------------------------------------------------------------


During the year ended September 30, 2006, 1,165,000 options were issued to the employees and directors of the Company. Each option entitles the holder to purchase one common share of the Company at a price of $2.85 per common share. These options have vesting periods of up to three years and an exercise period of up to five years, expiring on May 18, 2011. The fair value of the options issued was estimated using the Black-Scholes option pricing model on the date of issue to be $1.40 per option. Assumptions used to determine the value of the options were: dividend yield 0%; risk-free interest rate 4%; expected volatility 66%; and expected life of 5 years. Stock-based compensation expense on these options for the year ended September 30, 2007 was $791,849 (September 30, 2006 - $370,305).

During the year ended September 30, 2007, 60,000 options were issued to a director of the Company. Each option entitles the holder to purchase one common share of the Company at a price of $7.69 per common share. These options have vesting periods of up to three years and an exercise period of up to five years, expiring on June 27, 2012. The fair value of the options issued was estimated using the Black-Scholes option pricing model on the date of issue to be $6.14 per option. Assumptions used to determine the value of the options were: dividend yield 0%; risk-free interest rate 4.5%; expected volatility 108%; and expected life of 5 years. Stock-based compensation expense on these options for the year ended September 30, 2007 was $58,579 (2006 - NIL).

During the year ended September 30, 2007, 60,000 options were issued to employees of the Company. Each option entitles the holder to purchase one common share of the Company at a price of $8.46 per common share. These options have vesting periods of up to three years and an exercise period of up to five years, expiring on June 27, 2012. The fair value of the options issued was estimated using the Black-Scholes option pricing model on the date of issue to be $6.06 per option. Assumptions used to determine the value of the options were: dividend yield 0%; risk-free interest rate 4.5%; expected volatility 108%; and expected life of 5 years. Stock-based compensation expense on these options for the year ended September 30, 2007 was $57,830 (2006 - NIL).

(e) Warrants

As at September 30, 2007 and 2006, the following share purchase warrants were outstanding:



Exer-
September 30, September 30, cise
2006 Issued Exercised Expired 2007 Price Expiry Date
---------------------------------------------------------------------------
3,181,500 219,774 1,063,941 - 2,337,333 $ 3.70 May 18, 2008
- 3,050,156 224,706 - 2,825,450 $ 5.30 February 22,
2009
---------------------------------------------------------------------------
3,181,500 3,269,930 1,288,647 - 5,162,783
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Exer-
September 30, September 30, cise
2005 Issued Exercised Expired 2006 Price Expiry Date
---------------------------------------------------------------------------
- 3,181,500 - - 3,181,500 $ 3.70 May 18, 2008
---------------------------------------------------------------------------


(f) Underwriters' Compensation Options

As at September 30, 2007 and 2006, the following underwriters' compensation options were outstanding:



September 30, September 30, Weighted
2006 2007 average
(outstanding (outstanding remaining
and and Exercise contractual
exercisable) Issued Exercised Expired exercisable) Price life (years)
---------------------------------------------------------------------------
445,410 - 439,548 - 5,862 $ 2.85 0.63
- 301,250 75,312 - 225,938 $ 4.15 1.40
---------------------------------------------------------------------------
445,410 301,250 514,860 - 231,800 $ 4.12 1.38
---------------------------------------------------------------------------
---------------------------------------------------------------------------


September 30, September 30, Weighted
2005 2006 average
(outstanding (outstanding remaining
and and Exercise contractual
exercisable) Issued Exercised Expired exercisable) Price life (years)
---------------------------------------------------------------------------
- 445,410 - - 445,410 $ 2.85 1.55
---------------------------------------------------------------------------
---------------------------------------------------------------------------


10. Retained Earnings

Under the laws of the PRC, all wholly owned foreign investment entities have to set aside a portion of their net income each year as a general reserve fund until the fund has reached 50% of the entity's paid in capital. The Company is also required to set aside a portion of net income as an expansion fund. These funds are allowed to be distributed to shareholders at the time of winding up. The fund accumulated by the Company as at September 30, 2007 was $2,283,903 (RMB 17,211,024; September 30, 2006 - $444,674 or RMB 3,153,714).

11. Accumulated Other Comprehensive Income



Unrealized gains (losses) on translating financial statements of self-
sustaining foreign operations:
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Balance - beginning of year $ (146,877) $ (142,388)
Unrealized foreign currency translation
losses during the period (6,949,100) (4,489)
---------------------------------------------------------------------------
Balance - end of year $ (7,095,977) $ (146,877)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


12. Income Tax

The components of income before income taxes are as follows:



---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Pre-tax income (loss) from operations:
Canada $ (2,708,938)$ (936,662)
Foreign - China 14,572,536 9,964,374
---------------------------------------------------------------------------
$ 11,863,598 $ 9,027,712
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The provision for income taxes consists of the
following:
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Income taxes for operations:
Current
Foreign - China $ 1,127,277 $ 430,150
Future
Foreign - China (470,000) -
---------------------------------------------------------------------------
$ 657,277 $ 430,150
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The subsidiaries are governed by the Income Tax Laws of the PRC concerning Foreign Investment Enterprises and various local income tax laws. Pursuant to the relevant laws and regulations in the PRC, the subsidiaries are subject to income tax at an effective rate of 18% to 28% on income as reported in their statutory financial statements. The subsidiaries are entitled to a full exemption from PRC income tax for two years starting from their first profitable year and a 50% exemption from PRC income tax for three years starting two years after the first profitable year.

Each subsidiary maintains a December 31st year end for tax purposes. Sichuan received a full exemption from tax for the years ended December 31, 2004 and 2005 having incurred a loss in its first year of operations being December 31, 2003. Sichuan also received a 50% exemption from tax for the year ended December 31, 2006. Guangdong received a full exemption from tax for the years ended December 31, 2005 and 2006 having incurred a loss in its first year of operations being December 31, 2004. Liaoning received a full exemption from tax for the year ending December 31, 2006 and is expected to receive a full exemption from tax for the year ending December 31, 2007 having incurred a loss in the first year of operations being December 31, 2005. Shanghai and Changchun are expected to receive full exemptions from tax for the years ending December 31, 2008 and 2009. As a result of their operating results, the Subsidiaries will be eligible for the 50% exemption from tax as follows: Sichuan for the years ending December 31, 2007 and 2008; Guangdong for the years ending December 31, 2007 through 2009; Liaoning for the years ending December 31, 2008 through 2010; and Shanghai Changchun for the years ending December 31, 2010 through 2012.

The Company (legal parent) is governed by the Income Tax Act of Canada. It is not anticipated to incur income taxes as no operational revenue is to be generated.

Income tax expense varies from the amount by applying the combined Canadian federal and provincial tax rate of 36.12% (2006 - 36.12%) to income before income taxes as follows:



---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Pre-tax income from continuing operations: $ 11,863,598 $ 9,027,712
---------------------------------------------------------------------------
Income taxes at combined Canadian tax rate $ 4,285,132 $ 3,260,810
Increase (decrease) in income taxes resulting
from:
Lower tax rates on earnings of foreign
subsidiaries (3,955,918) (3,168,982)
Non-deductible expenses 328,063 133,754
Change in valuation allowance - 204,568
---------------------------------------------------------------------------
$ 657,277 $ 430,150
---------------------------------------------------------------------------
---------------------------------------------------------------------------

A summary of the future income tax assets is as
follows:
---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Future income tax assets:
Plant and equipment and land use rights $ 380,000 $ -
Other timing differences 90,000 -
Loss carryforwards 1,043,000 403,099
---------------------------------------------------------------------------
1,513,000 403,099
Less: Valuation allowance 1,043,000 403,099
---------------------------------------------------------------------------
Total future income tax assets 470,000 -

Future income tax liabilities: - -
---------------------------------------------------------------------------
Net future income tax assets $ 470,000 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Company has established the above valuation allowances as of September 30, 2007 due to the uncertainty of future realization of future income tax assets. At September 30, 2007, the Company has approximately $4,003,000 of non-capital loss carry-forward in Canada. The utilization of the loss is uncertain therefore a valuation allowance has been applied and no future income tax asset is set up for these losses. These losses expire as follows:



2027 $ 1,116,000
2028 2,887,000
-----------

Total $ 4,003,000
-----------
-----------


13. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per common share for the years ended September 30:



---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Numerator:
Income attributable to common shareholders - basic
and diluted $11,206,321 $ 8,597,562
---------------------------------------------------------------------------
Denominator:
Weighted-average common shares outstanding - basic 33,479,987 23,539,842
---------------------------------------------------------------------------
Effect of dilutive securities:
Warrants 1,008,144 -
Stock options 544,374 -
Underwriters' compensation options 42,418 15,252
---------------------------------------------------------------------------
Weighted-average common shares outstanding
- diluted 35,074,923 23,555,094
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Basic earnings per common share $ 0.33 $ 0.37
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Diluted earnings per common share $ 0.32 $ 0.37
---------------------------------------------------------------------------
---------------------------------------------------------------------------


For the year ended September 30, 2007, approximately 120,000 potentially dilutive stock options were excluded from the computation of weighted-average number of diluted common shares outstanding, as the applicable exercise prices were greater than the average market price of the Company's common shares for the year.

For the year ended September 30, 2006, approximately 3,181,500 potentially dilutive warrants were excluded from the computation of weighted-average number of diluted common shares outstanding, as the applicable exercise prices were greater than the average market price of the Company's common shares for the year.

14. Segmented Information

The Company has one operating segment, being the production and sale of specialty potash-based fertilizer, along with their associated by-products. All of Company's assets and operations are located in the PRC.

Geographical information:



------------------------------------------------------------------
2007 Canada China Total
------------------------------------------------------------------
(000's)

Sales from operations $ NIL $ 101,804 $ 101,804
------------------------------------------------------------------
------------------------------------------------------------------

Net income (loss) $ (2,709)$ 13,915 $ 11,206
------------------------------------------------------------------
------------------------------------------------------------------

Total assets $ 242 $ 99,785 $ 100,027
------------------------------------------------------------------
------------------------------------------------------------------

Plant and equipment, land use rights
and construction in progress $ NIL $ 44,857 $ 44,857
------------------------------------------------------------------
------------------------------------------------------------------


------------------------------------------------------------------
2006 Canada China Total
------------------------------------------------------------------
(000's)

Sales from operations $ NIL $ 58,349 $ 58,349
------------------------------------------------------------------
------------------------------------------------------------------

Net income (loss) $ (936)$ 9,964 $ 8,598
------------------------------------------------------------------
------------------------------------------------------------------

Total assets $ 75 $ 57,012 $ 57,087
------------------------------------------------------------------
------------------------------------------------------------------

Plant and equipment, land use rights
and construction in progress $ NIL $ 27,497 $ 27,497
------------------------------------------------------------------
------------------------------------------------------------------


15. Commitments

Purchase commitments for raw materials and supplies in the amount of $2.4 million (RMB 18 million) exist as of September 30, 2007 (September 30, 2006 - $611,667 or RMB 4.3 million). These contracts are entered into in the normal course of business.

Commitments on capital expenditures in the amount of $3.9 million (RMB 29 million) exist as of September 30, 2007 (September 30, 2006 - $3,004,343 or RMB 21.3 million). These contracts are entered into in the normal course of business.

The Company signed an office lease on August 14, 2006. The term of the lease is five years from October 1, 2006. The lease obligations are reflected in the following table on a fiscal year basis.



2008 $ 70,194
2009 71,163
2010 72,132
2011 73,101
---------

Total $ 286,590
---------
---------


16. Financial Instruments

Fair value

The carrying amount of accounts receivable, other receivables, bank indebtedness, accounts payable and accrued liabilities approximates their fair value because of the short-term maturities of these items. The fair value of the amount due to related parties are not readily determinable due to the related party nature of the advances.

Credit risk

Under PRC business custom, the Company is required to pay deposits on most of their purchases and demands deposits on most of their sales other than those with the government, who is one of the significant customers of the Company. Consequently, exposure to credit risk is limited accordingly.

Currency risk

The Company is exposed to currency risk as the Company's business is carried out in RMB and the Company maintains RMB denominated bank accounts but uses Canadian dollars as its reporting currency. Unfavorable changes in the exchange rate between RMB and Canadian dollars may result in a material effect on the cumulative translation adjustment recorded as a charge in shareholders' equity. The Company does not use derivative instruments to reduce its exposure to foreign currency risk.

In addition, the RMB is not a freely convertible currency. The Company's subsidiaries are allowed to pay outstanding current account obligations in foreign currency but must present the proper documentation to a designated foreign exchange bank. There is not certainty that all future local currency can be repatriated.

Commodity price risk

The Company uses various commodity raw materials in the manufacture of chemical fertilizer. Commodity prices are subject to volatile price changes resulting from a variety of factors including international economic trends, global and regional demand, interest rates, global and regional consumption patterns. Accordingly, the Company is exposed to market risk from fluctuating market prices of certain raw materials. In addition, the Company is also exposed to market price risk on other inputs such as electricity and natural gas. The Company is currently not involved in any arrangement to mitigate the risk.

17. Economic Dependence

During 2007, two customers individually comprised 56% and 6% of revenue and two suppliers individually accounted for 37% and 16% of total purchases. At September 30, 2007, three customers individually represented 19%, 18% and 18% of total accounts receivable and two suppliers represented 36% and 19% of total accounts payable.

During 2006, two customers individually comprised 48% and 10% of revenue and two suppliers individually accounted for 41% and 19% of total purchases. At September 30, 2006, two customers individually represented 46% and 15% of total accounts receivable and one supplier represented 57% of total accounts payable.

18. Subsequent Event

Subsequent to September 30, 2007 and as of December 3, 2007, 235,590 warrants were exercised for gross proceeds of $1,126,403.

Contact Information