Migao Corporation
TSX : MGO

Migao Corporation

August 11, 2008 16:00 ET

Migao Reports Record Quarterly Financial Results

$50 million quarterly revenues $6.8 million net profit Gross profit margin improves to 25%

TORONTO, ONTARIO--(Marketwire - Aug. 11, 2008) - Migao Corporation (TSX:MGO), a China-based leading specialty potash fertilizer producer, today reported record quarterly sales of $49.7 million for the three-month period ended June 30, 2008 compared to $26.9 million for the comparable quarter in fiscal 2007, representing a 44% increase compared to the previous quarter and 85% increase as compared to the same quarter in 2007. Strong demand for Migao's potash-based fertilizers continued in light of significant price increases introduced by Migao during the quarter.

The Company reported EBITDA for the third quarter of $8.2 million versus $4.5 million in the same period last year. Net income of $6.8 million or 14% of revenue for the quarter was achieved compared to $3.1 million in the same quarter in 2007. The Company earned $0.16 per basic share outstanding for the quarter, compared to $0.09 per share in the third quarter in 2007. Earnings for the quarter ended June 30, 2008 include stock-based compensation expense of $0.8 million or ($0.02 per share).

Gross margin of $12.3 million or 25% of revenue reflects the impact of increased selling prices, somewhat balanced by increased cost of goods, primarily weighted with raw potash cost increases. The Company successfully passed through increased raw material prices during the quarter after realizing significant cost increases in the price of potash imported by Migao into China.

"Migao successfully negotiated customer price increases to reflect the rising costs of potash, sulphuric acid and energy to preserve Migao's healthy profit margins," said Mr. Liu Guocai, President and CEO of Migao. "The demand for potash and related products around the world is matched in China from our high-value crop customers. The return in yield, quality, and value to our agriculture customers remains economically compelling despite rising costs for them to continue consuming our fertilizers."

For the nine-month period ended June 30, 2008, Migao reported sales of $109 million compared to $76.3 million for the comparable period in fiscal 2007. EBITDA for the first three quarters of fiscal 2008 was $18.0 million or 17% of revenue versus $11.8 million or 16% of revenue for the same period last year. Net income was $14.4 million or $0.37 per basic share for the first nine months of fiscal 2008 compared to $8.9 million or $0.28 per basic share for the same period in 2007.

As at June 30, 2008, Migao reported cash of $22.6 million and working capital of $93.1 million. At June 30, 2008, long-term debt was nil and current bank debt was $10.3 million.



SUMMARY FINANCIAL STATEMENTS

3 months ended 3 months ended
June 30, 2008 June 30, 2007

($'000)
Sales 49,681 26,865
Gross Profit 12,320 6,339
Net Income 6,767 3,167
EBITDA 8,222 4,530
Basic EPS 0.16 0.09
Diluted EPS 0.15 0.08

Weighted average number of shares
(in millions of shares)
Basic 42.6 36.0
Diluted 44.7 38.4


Balance Sheet Highlights
($'000)
June 30, 2008 September 30, 2007

Current ratio 3.78:1 3.03:1
Cash 22.6 17.5
Working Capital 92.1 36.7
Total assets 182.8 100.0
Debt to Equity Ratio 0.22:1 0.22:1


Highlights for the quarter ended June 30, 2008 include:

On May 29, 2008, the Company announced that Mr. S. Randall Smallbone has been appointed Chief Financial Officer effective July 1, 2008. Mr. Smallbone is a financial executive with more than 30 years of operational and public company board experience in diverse, global industries and will serve as a valuable addition to the Company's senior management team.

On May 20, 2008, the Company announced that it had entered into a joint venture ("JV") with Sociedad Quimica y Minera de Chile S.A. ("SQM"), the world's largest producer and distributor of potassium nitrate, for the production of potassium nitrate in China for domestic and international distribution. The JV will create a new enterprise jointly owned 50/50 by Migao and SQM. The agreement calls for the construction of a new 40,000 tonne per year potassium nitrate facility in China, which is expected to be operational in the spring of 2009.

On May 6, 2008, the Company announced that a patent protecting the Company's process for producing potassium nitrate has been approved. The national patent has been granted to Sichuan Migao for its Double Decomposition Process, a method of producing potassium nitrate and ammonium chloride using an economically efficient and environmentally responsible process.

On April 24, 2008, the Company announced that it had negotiated prices for its potash-based products reflecting more than a 100% increase over the average selling price in 2007, thereby demonstrating the Company's commitment and ability to maintain gross margin as a percentage of revenue.

On April 2, 2008, the Company announced the start of construction of a 120,000 tonne sulphuric acid production at Liaoning Migao. This facility will ensure Migao is able to obtain reliable supplies of this key product while at the same time improving gross profit. Sulphuric acid production is scheduled to begin in the spring of 2009.

Conference Call

Migao will be hosting a conference call to discuss the third quarter results at 10:00am Tuesday August 12, 2008. The details are as follows:

Dial in number: 416-641-6144 or 1-866-303-7746

Taped replay (until August 19, 2008): 416-695-5800 or 1-800-408-3053

Taped replay access code: 3268327#

About Migao

Migao Corporation, through its wholly owned subsidiaries, owns and operates fertilizer production plants in various strategic locations across China for the production and sale of specialty potash fertilizer (potassium nitrate and potassium sulphate) to China's agricultural market. Migao Corporation is subject to, and complies with strict government regulations that govern safety, quality and environmental protection. Migao's Sichuan facility is ISO 14001 certified, an international environmental management standard. Please visit www.migaocorp.com for further information.

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.



Migao Corporation
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Interim Consolidated Balance Sheets
(in thousands of Canadian dollars)
----------------------------------------------------------------------------
June 30, September 30,
2008 2007
(Unaudited) (Audited)
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Assets
Current assets
Cash and cash equivalents $ 22,592 $ 17,453
Accounts receivable 20,389 6,373
Prepayments, deposits and other
receivables (note 2) 39,009 10,614
Inventory (note 3) 43,019 19,101
Income taxes receivable 575 1,159
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125,584 54,700
Plant and equipment (note 5) 31,794 20,518
Construction in progress 5,884 5,972
Land use rights (note 6) 19,409 18,367
Future income tax assets 470 470
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$ 183,141 $ 100,027
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Liabilities
Current liabilities
Bank loans (note 7) $ 10,328 $ 4,578
Accounts payable and accrued liabilities
(note 6) 15,809 9,958
Customer deposits 6,310 3,451
Due to related party (note 4) 24 45
Income taxes payable 1,033 -
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33,504 18,032
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Shareholders' equity
Share capital (note 8) 94,687 54,013
Contributed surplus (note 8) 7,201 8,551
Retained earnings (note 9) 40,959 26,527
Accumulated other comprehensive income
(loss) (note 10) 6,790 (7,096)
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149,637 81,995

Commitments (note 12)
Subsequent events (note 15)
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$ 183,141 $ 100,027
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The accompanying notes are an integral part of these interim consolidated
financial statements.

Approved on behalf of the Board of Directors

Signed by "Guocai Liu" Signed by "Michael Manley"
----------------------- ---------------------------
Director Director



Migao Corporation
----------------------------------------------------------------------------
Interim Consolidated Statements of Operations and Retained Earnings
(in thousands of Canadian dollars, except per share amounts)
(Unaudited)
----------------------------------------------------------------------------
For the three months ended For the nine months ended
------------------------------ ---------------------------
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Revenues $ 49,681 $ 26,865 $ 108,866 $ 76,308
Cost of goods
sold (note 5) 37,361 20,526 82,452 59,015
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Gross profit 12,320 6,339 26,414 17,293
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Operating expenses
General and
administrative
(notes 5 and 6) 1,367 968 3,383 2,732
Selling 2,185 950 4,595 3,265
Professional
and consulting 418 321 790 711
Stock-based
compensation
(note 8) 804 186 1,295 682
Finance costs 84 - 252 -
Pre-operating
costs 250 - 367 -
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5,108 2,425 10,682 7,390
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Income from
operations 7,212 3,914 15,732 9,903
Other income 131 44 208 130
Gain on sale
of non-operating
subsidiary
(note 1) 99 - 99 -
----------------------------------------------------------------------------
Income before
income taxes 7,442 3,958 16,039 10,033
Provision for
income taxes
- current 675 791 1,607 1,119
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Net income for
the period 6,767 3,167 14,432 8,914
Retained earnings,
beginning of
period 34,192 21,068 26,527 15,321
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Retained earnings,
end of period $ 40,959 $ 24,235 $ 40,959 $ 24,235
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Income per share:
Basic $ 0.16 $ 0.09 $ 0.37 $ 0.28
Diluted $ 0.15 $ 0.08 $ 0.34 $ 0.27
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Weighted average
number of common
shares
outstanding:
Basic 42,650,696 36,019,784 39,356,093 32,334,403
Diluted 44,703,286 38,399,026 42,214,482 33,292,664
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The accompanying notes are an integral part of these interim consolidated
financial statements.



Migao Corporation
----------------------------------------------------------------------------

Interim Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars)
(Unaudited)
----------------------------------------------------------------------------
For the three months ended For the nine months ended
------------------------------ ---------------------------
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------

Net income for
the period $ 6,767 $ 3,167 $ 14,432 $ 8,914
Other
comprehensive
income (loss),
net of tax:
Unrealized gains
(losses) on
translating
financial
statements of
self-sustaining
foreign
operations 3,861 (5,243) 13,886 (2,779)
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Comprehensive
income (loss) $ 10,628 $ (2,076) $ 28,318 $ 6,135
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The accompanying notes are an integral part of these interim consolidated
financial statements.



Migao Corporation
----------------------------------------------------------------------------

Interim Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)
(Unaudited)
----------------------------------------------------------------------------
For the three months ended For the nine months ended
------------------------------ ---------------------------
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------

Cash flows from
operating
activities

Net income $ 6,767 3,167 $ 14,432 8,914
Items not
affecting
cash:
Amortization 697 543 1,751 1,514
Stock-based
compensation 804 186 1,295 682
Gain on sale of
non-operating
subsidiary (99) - (99) -
Changes in
non-cash
working
capital items:
Accounts receivable (3,155) (6,920) (12,561) (7,185)
Prepayments,
deposits, and
other receivables (4,369) 1,812 (22,563) (2,103)
Inventory (11,477) (9,370) (20,773) (16,211)
Accounts payable
and accrued
liabilities (1,062) 836 5,467 1,866
Customer deposits (11,415) (1,065) 1,058 (2,289)
Income taxes
payable 1,070 (106) 1,761 (24)
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(22,239) (10,917) (30,232) (14,836)
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Cash flows from
investing activities
Purchase of plant
and equipment (897) (284) (2,278) (4,838)
Construction in
progress (1,792) (2,253) (7,770) (4,511)
Payments for land
use rights (871) (397) (1,360) (5,317)
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(3,560) (2,934) (11,408) (14,666)
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Cash flows from
financing activities
Proceeds from bank
loans 7,986 2,432 7,986 5,764
Repayment of bank
loans (2,178) - (2,879) (4,530)
Advances from
related parties,
net - (1,206) - (564)
Issuance of common
shares, net 24 (23) 26,568 22,993
Proceeds from
exercise of
underwriters'
compensation options 447 291 455 472
Proceeds from
exercise of warrants 7,060 2,249 10,108 3,269
Proceeds from
exercise of stock
options 727 - 898 -
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14,066 3,743 43,136 27,404
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The accompanying notes are an integral part of these interim consolidated
financial statements.



Migao Corporation
----------------------------------------------------------------------------

Interim Consolidated Statements of Cash Flows - continued
(in thousands of Canadian dollars)
(Unaudited)
----------------------------------------------------------------------------
For the three months ended For the nine months ended
------------------------------ ---------------------------
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
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Foreign exchange
gain on cash
held in foreign
currency 1,450 (143) 3,643 1,099
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Increase in cash
and cash
equivalents (10,283) (10,251) 5,139 (999)
Cash and cash
equivalents,
beginning of
period 32,875 25,568 17,453 16,316
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Cash and cash
equivalents,
end of period $ 22,592 $ 15,317 $ 22,592 $ 15,317
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Cash and cash
equivalents
consist of:
Cash on hand $ 14,213 $ 9,417
Term deposit 40 40
Bank notes 8,339 5,860
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$ 22,592 $ 15,317
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Total interest paid during the three and nine months period ended June 30,
2008 was $82 and $242 (RMB 0.6 million and RMB 1.8 million) (June 30, 2007
- $33 or RMB 0.2 million and $93 or RMB 0.6 million), respectively. Total
tax paid during the three and nine months period ended June 30, 2008 was
$481 and $852 (RMB 3.3 million and RMB 6.1 million) (June 30, 2007 - NIL
and $240 or RMB 1.6 million), respectively. Total tax refunded during the
three and nine months period ended June 30, 2008 were both $764 (RMB 5.3
million) (June 30, 2007 - NIL).

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



Notes to Interim Consolidated Financial Statements
For the three and nine months ended June 30, 2008 and 2007
(in thousands of Canadian dollars, except per share amounts)
(Unaudited)


1. Nature of Operations and Basis of Presentation

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 four 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, which in turn 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"), Migao Chemical (Changchun) Co., Ltd. ("Changchun Migao"), and Migao Chemical (Tianjin) Co., Ltd. ("Tianjin Migao") (collectively, the "Subsidiaries").

During the quarter, the Company disposed Migao Business Hotel Limited, a non-operating subsidiary of Guangdong Migao, for a gross proceeds of $1,165 (RMB 8.0 million) and a gain of $99 (RMB 0.7 million).

Basis of Presentation

These unaudited interim consolidated 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. These interim financial statements have been prepared by the management of the Company using the same accounting policies and methods as the most recently audited financial statements of Migao, except as disclosed below. These financial statements do not contain all disclosures required by Canadian GAAP for annual financial statements, and accordingly, these financial statements should be read in conjunction with the audited financial statements of Migao for the year ended September 30, 2007. Interim results are not necessarily indicative of the results expected for the fiscal year.

Adoption of New Accounting Policies

Effective October 1, 2007, the Company adopted the following new accounting standards.

Capital Management

The new standard 1535 - Capital Disclosures requires the Company to disclose information about the Company's objectives, policies and processes for the management of its capital.

Financial Instruments - Disclosure and Presentation

The new standards 3862 - Financial Instruments - Disclosures and 3863 - Financial Instruments - Presentation require the disclosure of information with regards to the significance of financial instruments for the Company's financial position and performance and the nature and extent of risks arising from financial instruments to which the Company is exposed during the period and at the balance sheet date, and how the Company manages those risks.

Recent Accounting Pronouncements

Goodwill and Intangible Assets

The Canadian Institute of Chartered Accountants issued the new Handbook Section 3064 - Goodwill and intangible assets, which will replace Section 3062 - Goodwill and Other Intangible Assets and Section 3450 - Research and Development Costs. The new standard establishes revised standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard also provides guidance for the treatment of preproduction and start-up costs and requires that these costs be expensed as incurred. The new standard applies to annual and interim financial statements relating to fiscal years beginning on or after October 1, 2008. Management is currently assessing the impact of these new accounting standards on its consolidated financial statements.

International Financial Reporting Standards ("IFRS")

In 2006, the Canadian Accounting Standards Board ("AcSB") published a new strategic plan that will significantly affect financial reporting requirements for Canadian companies. The AcSB strategic plan outlines the convergence of Canadian GAAP with IFRS over an expected five year transitional period. In February 2008 the AcSB announced that 2011 is the changeover date for publicly-listed companies to use IFRS, replacing Canada's own GAAP. The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by Migao for the year ended September 30, 2011. While Migao has begun assessing the adoption of IFRS for 2011, the reporting impact of the transition to IFRS cannot be reasonably estimated at this time.



2. Prepayments, Deposits, and Other Receivables
----------------------------------------------------------------------------
June 30, September 30,
2008 2007
(Unaudited) (Audited)
----------------------------------------------------------------------------

Prepayments for raw materials $ 30,784 $ 7,478
Prepayments for construction costs 1,311 904
Prepayments for transportation services 124 23
Prepayments for machinery 2,880 632
Deposits for the supply of utilities 201 151
Deposits for the sale of finished goods 150 -
VAT receivable 905 583
Other receivables and deposits 2,654 1,026
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$ 39,009 $ 10,614
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3. Inventory
----------------------------------------------------------------------------
June 30, September 30,
2008 2007
(Unaudited) (Audited)
----------------------------------------------------------------------------
Raw materials $ 34,048 $ 13,931
Finished goods 8,766 1,075
Packing materials 205 90
Goods in transit - 4,005
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$ 43,019 $ 19,101
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4. Related Party Balance
----------------------------------------------------------------------------

At the end of the periods, the Company had the following related party
balance:
----------------------------------------------------------------------------
June 30, September 30,
2008 2007
(Unaudited) (Audited)
----------------------------------------------------------------------------

Amount due to:
Liaoning Yongcheng Economic and Trade
Development Co. Ltd. ("LYEDC") $ 24 $ 45
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----------------------------------------------------------------------------

LYEDC is controlled by an officer and director of Migao. The amounts are
non-interest bearing, unsecured, and due on demand.

During the quarter, the Company prepaid $297 of import agency fee to Beijing
Wei De Sen, a company controlled by an officer and director of Migao. This
transaction was in the normal course of business and was measured at the
exchange amounts.

5. Plant and Equipment
----------------------------------------------------------------------------
June 30,
2008
(Unaudited)
----------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
----------------------------------------------------------------------------
Buildings and improvements $ 18,299 $ 1,323 $ 16,976
Machinery and equipment 17,390 3,493 13,897
Vehicles 1,092 428 664
Office equipment 435 178 257
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$ 37,216 $ 5,422 $ 31,794
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----------------------------------------------------------------------------
September 30,
2007
(Audited)
----------------------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
----------------------------------------------------------------------------
Buildings and improvements $ 10,684 $ 701 $ 9,983
Machinery and equipment 11,984 2,181 9,803
Vehicles 794 289 505
Office equipment 338 111 227
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$ 23,800 $ 3,282 $ 20,518
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----------------------------------------------------------------------------


Amortization expense for the three and nine months ended June 30, 2008 were $661 and $1,646 (June 30, 2007 - $513 and $1,334), respectively, and are included in cost of goods sold and general and administrative expense.

During the quarter ended June 30, 2008, Guangdong Migao and Changchun Migao were approved by the local tax authorities for value-added tax refund on purchases of domestic equipment of $102 (RMB 0.7 million) and $327 (RMB 2.2 million), respectively. These value-added tax refunds were recorded to reduce the cost of equipment.



6. Land Use Rights
----------------------------------------------------------------------------
June 30, September 30,
2008 2007
(Unaudited) (Audited)
----------------------------------------------------------------------------
Land use rights $ 19,778 $ 18,597
Less: accumulated amortization 369 230
----------------------------------------------------------------------------
$ 19,409 $ 18,367
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As of June 30, 2008, the Company had sixteen land leases from the Chinese government with terms of fifty to seventy years.

Amortization expense for the three and nine months ended June 30, 2008 were $36 and $105 (June 30, 2007 - $30 and $180), respectively, and are included in general and administrative expense.

As of June 30, 2008, the Company had not obtained the land use right certificates for eight of the land leases and approximately $3,900 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.

7. Bank Loans

At June 30, 2008, the Company has short-term bank loans outstanding totaling $10,328 (RMB 69.5 million) (September 30, 2007 - $4,578 or RMB 34.5 million) for working capital purposes.



Amount Due Date Interest per annum Secured by
------- --------------- ------------------ --------------------------------
$ 2,155 August 20, 2008 6.9084% certain land use rights and
buildings

$ 2,229 April 29, 2009 8.217% certain land use rights

$ 2,972 June 30, 2009 7.47% corporate guarantees from
Sichuan Migao and LYDEC

$ 2,972 June 30, 2009 7.47% corporate guarantees from
Sichuan Migao and LYDEC


Total carrying value of the security was $3,330 (RMB 22.4 million). Total interest expense during the three and nine months period ended June 30, 2008 was $82 and $242 (RMB 0.6 million and RMB 1.8 million) (June 30, 2007 - $33 or RMB 0.2 million and $93 or RMB 0.6 million), respectively.



8. Share Capital

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

(b) Issued common shares
Number of
Shares Amount
----------------------------------------------------------------------------
Balance - September 30, 2007 37,040,428 $ 54,013
Issued on exercise of underwriters'
compensation options (i) 2,862 8
Fair value of underwriters' compensation
options (i) - 3
Fair value of warrants issued (i) - (2)
Issued on exercise of underwriters'
compensation options (ii) 3,000 9
Fair value of underwriters' compensation
options (ii) - 3
Fair value of warrants issued (ii) - (2)
Issued on exercise of underwriters'
compensation options (iii) 105,438 438
Fair value of underwriters' compensation
options (iii) - 247
Fair value of warrants issued (iii) - (90)
Exercise of warrants (iv) 2,340,264 8,659
Fair value of warrants exercised (iv) - 1,545
Exercise of warrants (v) 273,369 1,449
Fair value of warrants exercised (v) - 500
Exercise of stock options (vi) 315,000 898
Fair value of stock options exercised (vi) - 441
Issued pursuant to a private placement (vii) 3,593,750 28,750
Share issuance costs (vii) - (2,182)
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Balance - June 30, 2008 43,674,111 $ 94,687
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(i) Each of the 2,862 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 $1.38 per warrant.

(ii) Each of the 3,000 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 $1.13 per warrant.

(iii) Each of the 105,438 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 $1.70 per warrant.

(iv) During the quarter ended June 30, 2008, 1,809,374 (2,340,264 for the
nine months ended June 30, 2008) 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
originally valued at $0.66 per warrant.

(v) During the quarter ended June 30, 2008, 68,919 (273,369 for the
nine months ended June 30, 2008) 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 originally valued at $1.83 per warrant.

(vi) During the quarter ended June 30, 2008, 255,000 (315,000 for the
nine months ended June 30, 2008) of the common share purchase options
with an exercise price of $2.85 per common share issued to the
employees and directors of the Company were exercised. The stock
options were originally valued at $1.40 per option.

(vii) On March 13, 2008, the Company completed a private placement of
3,593,750 common shares priced at $8.00 per share. Pursuant to the
Underwriting Agreement, the Company paid the agents an underwriting
commission of $0.46 per share, reflecting a commission of 5.75%. In
addition to the underwriting commission, the Company paid $529 in
total for expenses incurred on this private placement.



(c) Contributed surplus

Amount
----------------------------------------------------------------------------
Balance - September 30, 2007 $ 8,551
Fair value of exercised underwriters' compensation options (253)
Fair value of warrants issued on the exercise of underwriters'
compensation options 94
Stock-based compensation expense 1,295
Fair value of warrants exercised (2,045)
Fair value of stock options exercised (441)
----------------------------------------------------------------------------
Balance - June 30, 2008 $ 7,201
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----------------------------------------------------------------------------


(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 period.

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



Weighted
average
Options exercise price
----------------------------------------------------------------------------
Outstanding - September 30, 2007 1,185,000 $ 3.38
Granted during the period 515,000 9.51
Exercised during the period (315,000) 2.85
----------------------------------------------------------------------------
Outstanding - June 30, 2008 1,385,000 $ 5.78
----------------------------------------------------------------------------
----------------------------------------------------------------------------



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

As of June 30, 2008
-------------------

Weighted average Exercise Price
Exercise Number remaining contractual Number for exercisable
price outstanding life (years) exercisable options
----------------------------------------------------------------------------

$2.85 750,000 2.88 361,666 $2.85
$7.69 60,000 4.00 20,000 $7.69
$8.46 60,000 4.00 40,000 $8.46
$9.93 40,000 4.50 NIL N/A
$9.48 300,000 4.92 50,000 $9.48
$9.48 175,000 4.92 NIL N/A
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$5.78 1,385,000 3.72 471,666 $4.23
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During the quarter ended March 31, 2008, 40,000 options were issued to an employee of the Company. Each option entitles the holder to purchase one common share of the Company at a price of $9.93 per common share. These options have vesting periods of up to three years and an exercise period of up to five years, expiring on January 7, 2013. The fair value of the options issued was estimated using the Black-Scholes option pricing model on the date of issue to be $7.60 per option. Assumptions used to determine the value of the options were: dividend yield 0%; risk-free interest rate 3.22%; expected volatility 102%; and expected life of 5 years. Stock-based compensation expense for the three and nine months ended June 30, 2008 was $46 and $89 (June 30, 2007 - NIL), respectively.

During the quarter ended June 30, 2008, 300,000 options were issued to an officer of the Company. Each option entitles the holder to purchase one common share of the Company at a price of $9.48 per common share. Upon granting of the options, 50,000 options were vested immediately and the balance of the options have vesting periods of up to three years and an exercise period of up to five years, expiring on June 1, 2013. The fair value of the options issued was estimated using the Black-Scholes option pricing model on the date of issue to be $7.06 per option. Assumptions used to determine the value of the options were: dividend yield 0%; risk-free interest rate 3.14%; expected volatility 97%; and expected life of 5 years. Stock-based compensation expense for the three months ended June 30, 2008 was $439 (June 30, 2007 - NIL).

During the quarter ended June 30, 2008, 175,000 options were issued to directors and an officer of the Company. Each option entitles the holder to purchase one common share of the Company at a price of $9.48 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 1, 2013. The fair value of the options issued was estimated using the Black-Scholes option pricing model on the date of issue to be $7.06 per option. Assumptions used to determine the value of the options were: dividend yield 0%; risk-free interest rate 3.14%; expected volatility 97%; and expected life of 5 years. Stock-based compensation expense for the three months ended June 30, 2008 was $60 (June 30, 2007 - NIL).

Total stock-based compensation expense on the options granted in the prior years for the three and nine months ended June 30, 2008 was $259 and $707 (June 30, 2007 - $186 and $682), respectively.



(e) Warrants

As at June 30, 2008, the following share purchase warrants were outstanding:

September 30, June 30, Exercise
2007 Issued Exercised Expired 2008 Price Expiry Date
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2,337,333 2,931 2,340,264 - - $ 3.70 May 18, 2008

February 22,
2,825,450 52,719 273,369 - 2,604,800 $ 5.30 2009
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5,162,783 55,650 2,613,633 - 2,604,800
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(f) Underwriters' Compensation Options

As at June 30, 2008, the following underwriters' compensation options were
outstanding:

September 30, June 30, Weighted
2007 2008 average
(outstanding (outstanding remaining
and and Exercise contractual
exercisable) Issued Exercised Expired exercisable) Price life (years)
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5,862 - 5,862 - - $ 2.85 -
225,938 - 105,438 - 120,500 $ 4.15 0.65
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231,800 - 111,300 - 120,500 $ 4.15 0.65
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9. 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 June 30, 2008 was $4,503 (RMB 30.3 million; September 30, 2007 - $2,284 or RMB 17.2 million).



10. Accumulated Other Comprehensive Income (Loss)
----------------------------------------------------------------------------
Unrealized gains (losses) on
translating financial
statements of
self-sustaining
foreign operations
----------------------------------------------------------------------------
Balance - September 30, 2007 $ (7,096)
Unrealized foreign currency translation gains
during the period 13,886
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Balance - June 30, 2008 $ 6,790
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11. 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 the Company's assets and operations, with the exception of a corporate office in Toronto, Canada, are located in the PRC.

12. Commitments

Purchase commitments for raw materials and supplies in the amount of approximately $54,300 (RMB 365 million) exist as of June 30, 2008. These contracts were entered into in the normal course of business.

Commitments on capital expenditures in the amount of approximately $12,103 (RMB 81 million) exist as of June 30, 2008. These contracts were entered into in the normal course of business.

13. Capital Management

The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management defines capital as the Company's shareholders' equity. The Company has a small amount of debt for working capital purposes and therefore net earnings generated from operations are mostly available for reinvestment in the Company. The Board of Directors does not establish quantitative return on capital criteria for management; but rather promotes year over year sustainable profitable growth. The Company does not have a defined share repurchase plan and buy and sell decisions are made depending on market prices and regulatory restrictions. There were no changes in the Company's approach to capital management during the period. Except for as disclosed in Note 9, neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

14. Financial Instruments and Risk Management

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company's income or the value of its holding of financial instruments.

Foreign currency risk

The Company's global operations expose it to foreign currency fluctuations. Revenues and related expenses generated from the Company's Chinese subsidiaries are generally denominated in Chinese Renminbi ("RMB"), with certain raw material purchases and sales denominated in US dollars. Head office expenditures are generally denominated in Canadian dollars. Therefore, the Company's primary currencies include RMB, US dollars and Canadian dollars. The Consolidated Statements of Operations of the Company's global operations are translated into Canadian dollars at the average exchange rates in each applicable period. To the extent the Canadian dollar strengthens against foreign currencies, the foreign currency conversion of these foreign currency denominated transactions into Canadian dollars results in reduced revenues, operating expenses and net income for the Company's international operations. Similarly, the Company's revenues, operating expenses and net income will increase for its international operations if the Canadian dollar weakens against foreign currencies. The Company cannot predict the effect foreign exchange fluctuations will have on its results going forward. However, if there is an adverse change in foreign exchange rates versus the Canadian dollar, it could have a material effect on other comprehensive income.

At June 30, 2008, through its wholly owned, self-sustaining subsidiaries, the Company had cash and cash equivalents of $21,949, accounts receivable of $19,746, other receivables of $2,574, accounts payable and accrued liabilities of $15,719, and bank loans of $10,328, which were denominated in RMB. Gains and losses arising upon translation of these amounts into Canadian dollars for inclusion in the consolidated financial statements are recorded within other comprehensive income, a component of shareholders' equity. A 10% change in the average exchange rate between C$/RMB on the financial instruments would have a $1,827 effect on the other comprehensive income in Canadian dollars.

Interest rate risk

The Company is exposed to interest rate risk on its short-term bank loans and does not currently hold any financial instruments that mitigate this risk. Management does not believe that the impact of interest rate fluctuation will be significant.

Commodity Price Risk

Manufacturing costs for the Company's products are affected by the price of raw materials, namely potassium chloride, sulfuric acid, ammonium nitrate and certain other energy generating sources. In order to manage this risk, the Company includes a clause regarding transfer of risk to customers in all the medium and long-term sales contract in order to renegotiate the prices in the event of change. In addition, the Company had been utilizing its strong working capital position in stocking raw materials when their price is anticipated to rise.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable.

The Company's exposure to credit risk with its customers is influenced mainly by the individual characteristics of each customer. The Company's customers are for the most part, large PRC State-owned and private companies. A significant portion of the Company's accounts receivable is from long-time customers and the Company receives prepayments and deposits from them for a large portion of its sales. Over the last three years, the Company has not suffered any significant credit related losses with any of its customers.

At June 30, 2008, the Company does not consider any of its financial assets to be impaired.

The following table provides information regarding the ageing of financial assets that are past due but which are not impaired.



Carrying value on
Current 90 - 180 days 180 - 365 days 365 days + the balance sheet
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$15,804 $3,348 $1,169 $68 $20,389
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The definition of items that are past due is determined by reference to terms agreed with individual customers. None of the amounts outstanding have been challenged by the respective customer(s) and the Company continues to conduct business with them on an ongoing basis. Accordingly, management expects that this balance is fully collectible in the future.

The Company reviews financial assets past due on an ongoing basis with the objective of identifying potential matters which could delay the collection of funds at an early stage. Once items are identified as being past due, contact is made with the respective customer to determine the reason for the delay in payment and to establish an agreement to rectify the breach of contractual terms.

The carrying amount of financial assets represents the maximum credit exposure. Based on historic default rates, the Company believes that there are minimal requirements for an allowance for doubtful accounts. As well, deposits by certain customers are often made which also helps to mitigate the risk if there is any.

Liquidity risk

Liquidity risk is the risk that the Company is not able to meet its financial obligations as they fall due. The Company's growth is financed through a combination of the cash flows from operations, borrowing under the existing credit facilities and the issuance of equity. One of management's primary goals is to maintain an optimal level of liquidity through the active management of the assets and liabilities as well as the cash flows. Given the Company's available liquid resources as compared to the timing of the payments of liabilities, management assesses the Company's liquidity risk to be low.

At June 30, 2008 the Company's cash and cash equivalents balance was $22,592 and working capital balance was $92,080. As at June 30, 2008, short-term bank loans in the amount of $10,328 (RMB 69.5 million) were outstanding under the Company's credit facilities.

Fair Value

The fair value of cash and cash equivalents, accounts receivable, other receivables, bank indebtedness, accounts payable and accrued liabilities approximates their carrying values due to their short-term maturities. The fair value of the amount due to related party is not readily determinable due to the related party nature of the advances.

15. Subsequent Events

Subsequent to June 30, 2008 and as of August 11, 2008, 1,500 warrants were exercised for gross proceeds of $7,950.

Contact Information