Migao Reports Fiscal 2010 Third Quarter Financial Results

TORONTO, ONTARIO -- (MARKET WIRE) -- 02/11/10 -- Migao Corporation (TSX: MGO), a China-based leading specialty potash fertilizer producer, today reported quarterly earnings of $0.18 per share from sales of $67.0 million for the three-month period ended December 31, 2009, compared to earnings of $0.27 per share from sales of $76.5 million for the same period last year.

Revenue for the nine-month period of fiscal 2010 was $193.6 million, which is slightly below the $204.4 million in revenue for the similar nine-month period last year. Net income for the nine-month period ended December 31, 2009 was $27.9 million or $0.60 per basic share as compared to $31.6 million or $0.73 for the same nine-month period last year. The decline in sales and earnings is indicative of lower input costs, which is reflected in the Company's selling price of its potash-based specialty fertilizer products.

"Our revenue and gross profit percentage has been relatively stable despite lower average selling prices compared to last year, as a result of lower raw material costs. Our operational results are slightly ahead of expectations for this period with the volume of product sold increasing compared to the same period last year. 100% of our production capacity was sold in the quarter," said Mr. Liu Guocai, President and CEO of Migao. "From the end of last quarter to the beginning of this quarter, we believe we saw the bottom of potash prices as well as Migao's selling prices in China. Selling prices have trended up towards the end of the third quarter and we have received orders for all of our production capacity through to the end of May."

Gross profit for the quarter was $15.6 million or 23.3% of revenue. For the first three quarters of fiscal 2010, gross margin is in line with management's expectations for the fiscal year at 23.0% or $44.6 million.

Production for the quarter was approximately 100% of core capacity including regular minimum required maintenance performed during the quarter. In addition, approximately 50,000 tonnes of non-core, lower grade potassium sulphate was processed and sold to new vegetable crop customers.

The effective income tax rate for the quarter was approximately 13.5% of revenue. The Company is benefiting from grandfathered favourable tax policies, which would otherwise result in a corporate tax rate of 25%, not including any other, or new favourable tax treatments. EBITDA for the third quarter of fiscal 2010 was $11.6 million or 17.3% of revenue.

As at December 31, 2010, Migao reported cash and equivalents of $128.0 million and working capital of $184.6 million. Cash and inventory make up the vast majority of working capital. Long-term debt was nil and current bank debt was $40.9 million. During the quarter, the Company secured working capital lines of credit with a China-based bank of approximately RMB 260 million and project financing lines of credit of approximately RMB 136 million. Migao also successfully completed a bought deal financing of common shares for net proceeds of $38 million. Proceeds are to be used for expansion projects and general working capital purposes.

The Company continues to conduct due diligence and negotiations for potential expansion into Southeast Asia. A Chinese export tariff of 105% on potash and related products, including Migao's potassium sulphate precludes the Company from competing in nearby, international markets. The market for Migao's potassium sulphate product outside of China is strong and growing.

Average inventory cost of raw potash for the period was $389 per tonne, a decrease from the previous period's level of $476, reflecting declining raw material purchase costs for the Company's primary input - potassium chloride. At the end of the period, the Company had $25.0 million (64,292 tonnes) of potassium chloride inventory.

The Company also reports that Mr. Paul Haber has resigned from the Board of Directors. Mr. Haber served as a member of the audit committee as well as interim CFO for a period in 2008. The Board and management thank Paul for his contributions to Migao over the past years and wish him well with his current and future activities.

Subsequent to the end of the quarter, Migao is pleased to report that its 100,000 tonne per year specialty compound fertilizer facility at Sichuan Migao began shipping product. The compound fertilizer is specially formulated for tobacco customers and uses Migao's potassium nitrate and or potassium sulphate as one of the inputs.

The construction of a 40,000-tonne per year potassium nitrate plant through a joint venture with Chile-based SQM is ongoing with a completion date targeted for the end of calendar 2010 with production starting in January 2011. The green field construction of a 40,000-tonne per year potassium sulphate plant at Shanghai Migao is proceeding with construction and production to be completed within 1-3 months of the SQM joint venture timelines.

  SUMMARY FINANCIAL STATEMENTS                                           3 months ended     3 months ended                                        December 31, 2009  December 31, 2008 ($'000) Sales                                             67,034             76,531 Gross Profit                                      15,607             17,313 Net Income                                         8,706             11,951 EBITDA                                            11,618             13,982 Basic EPS                                           0.18               0.27 Diluted EPS                                         0.18               0.27  Weighted average number of  shares (in millions of shares) Basic                                               47.5               43.7 Diluted                                             48.0               43.9  Balance Sheet Highlights ($'000)                                        December 31, 2009     March 31, 2009  Current ratio                                     3.08:1             5.40:1 Cash                                               128.0               41.7 Working Capital                                    184.6              146.2 Total assets                                       355.5              275.2 Debt to Equity Ratio                              0.33:1             0.14:1  

Complete financial statements are available through the SEDAR website www.sedar.com.

Conference Call

Migao will be hosting a conference call to discuss the first quarter results at 10:00am Friday February 12, 2010. The details are as follows:

  Dial in number:                              416-340-8530 or 1-866-226-1793 Taped replay (until February 26, 2010):      416-695-5800 or 1-800-408-3053 Taped replay access code:                    5613471#  

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.

Caution Regarding Forward-Looking Statements

This news release may include forward-looking statements within the meaning of certain securities laws, including the "safe harbour" provisions of the Securities Act (Ontario) and other provincial securities laws in Canada. These forward-looking statements include, among others, statements with respect to our objectives and goals, and strategies to achieve those objectives and goals, as well as statements with respect to our beliefs, plans, objectives, expectations, anticipations, estimates and intentions.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. We caution readers not to place undue reliance on these statements as a number of important factors, many of which are beyond our control, could cause actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: risks related to raw materials; execution of the business plan; dependence on key personnel; key relationships; dependence on key customers; dependence on key suppliers; competition; market factors and volatility of commodity prices; environmental risks and hazards; operating risks; proprietary rights; infrastructure; future capital requirements; technical substitution; exchange rate fluctuation; insurance; foreign operations; weather conditions and natural disasters; control by management; seasonality; dividends; conflicts of interest; state ownership; government sector intervention; foreign investment; repatriation of profit and currency conversion; tax; shareholders' rights and enforcement of judgements; developing legal system; protection of intellectual property rights; permits and business licenses; appropriation; and availability of land. Should one or more of these factors materialize, or should our estimates or underlying assumptions prove incorrect, actual results, performance or achievements may vary materially from those described in forward-looking statements.

We caution that the foregoing list of important factors that may affect our future results is not exhaustive. When reviewing our forward-looking statements, readers should carefully consider the foregoing factors and other uncertainties and potential events. Additional information about factors that may cause actual results to differ materially from expectations, and about material factors or assumptions applied in making forward-looking statements, may be found under the "Risk Factors" sections in our Annual Information Form and annual MD&A and elsewhere in our filings with Canadian securities regulatory authorities. Except as required by Canadian securities laws, we do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf; such statements speak only as of the date made. We cannot assure readers that actual results will be consistent with these forward-looking statements, and the differences may be material. The forward-looking statements included herein are expressly qualified in their entirety by this cautionary language.

  Migao Corporation ---------------------------------------------------------------------------  Interim Consolidated Balance Sheets (in thousands of Canadian dollars) (unaudited) ---------------------------------------------------------------------------                                         December 31,               March 31,                                                2009                    2009 --------------------------------------------------------------------------- Assets  Current assets  Cash and cash equivalents                $ 128,025                $ 41,688  Restricted cash (note 2)                    14,529                     553  Accounts receivable                         17,365                  20,477  Prepayments, deposits and other   assets (note 3)                            72,897                  33,569  Inventory (note 4)                          37,726                  82,393  Due from related party (note 5)                 29                     158  Due from joint venture partner (note 6)      1,309                       -  Future income tax assets                     1,250                     636 ---------------------------------------------------------------------------                                             273,130                 179,474  Prepayments, deposits, and other   assets (note 3)                             2,082                   1,441  Plant and equipment (note 7)                49,459                  52,147  Construction in progress                    11,058                  16,017  Land use rights (note 8)                    18,830                  25,062  Future income tax assets                       914                   1,051 ---------------------------------------------------------------------------                                           $ 355,473               $ 275,192 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Liabilities  Current liabilities  Bank loans (note 9)                       $ 40,947                $ 20,745  Accounts payable and accrued   liabilities (note 8)                       10,874                   7,016  Notes payables (note 2)                     14,279                     553  Customer deposits                           19,682                   2,620  Income taxes payable                         1,531                   2,008  Future income tax liabilities                1,255                     322 ---------------------------------------------------------------------------                                              88,568                  33,264  Future income tax liabilities                  146                     375 ---------------------------------------------------------------------------                                              88,714                  33,639 --------------------------------------------------------------------------- Shareholders' equity  Share capital (note 10)                    152,306                 114,431  Contributed surplus (note 10)                5,306                   3,883  Retained earnings (note 11)                106,354                  78,492  Accumulated other comprehensive   income (note 12)                            2,793                  44,747 ---------------------------------------------------------------------------                                             266,759                 241,553 ---------------------------------------------------------------------------                                           $ 355,473               $ 275,192 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  The accompanying notes are an integral part of these interim consolidated financial statements.  Approved on behalf of the Board of Directors  Guocai Liu, Director  Keith Attoe, Director   Interim Consolidated Statements of Operations and Retained Earnings (in thousands of Canadian dollars, except per share amounts) (Unaudited) ---------------------------------------------------------------------------                                     For the three              For the nine                                      months ended              months ended                                     -------------              ------------                               Dec. 31,    Dec. 31,     Dec. 31,     Dec. 31,                                  2009        2008         2009         2008 --------------------------------------------------------------------------- Revenues                     $ 67,034    $ 76,531    $ 193,646    $ 204,373 Cost of goods sold (note 7)    51,427      59,218      149,082      155,636 --------------------------------------------------------------------------- Gross profit                   15,607      17,313       44,564       48,737 --------------------------------------------------------------------------- Operating expenses  Selling                        1,762       1,708        3,537        5,632  General and administrative   (notes 7 and 8)               2,804       2,114        6,132        6,344  Stock-based compensation   (note 10)                       391         592        1,347        1,989  Pre-operating costs              114         128          434          430  Finance costs                    523         305        1,093          596 ---------------------------------------------------------------------------                                 5,594       4,847       12,543       14,991 --------------------------------------------------------------------------- Income from operations         10,013      12,466       32,021       33,746 Other income                       57         309          124          413 Gain on sale of  non-operating subsidiary           -           -            -           98 --------------------------------------------------------------------------- Income before income taxes     10,070      12,775       32,145       34,257 Provision for income taxes:  Current                        1,262       1,307        4,056        2,838  Future                           102        (483)         227         (171) --------------------------------------------------------------------------- Net income for the period       8,706      11,951       27,862       31,590 Retained earnings,  beginning of period           97,648      53,830       78,492       34,191 --------------------------------------------------------------------------- Retained earnings,  end of period              $ 106,354    $ 65,781    $ 106,354     $ 65,781 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  Income per share:  Basic                         $ 0.18        0.27       $ 0.60         0.73  Diluted                       $ 0.18        0.27       $ 0.59         0.71 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  Weighted average number of common shares outstanding:  Basic                     47,509,411  43,675,611   46,810,850   43,336,212  Diluted                   47,965,124  43,883,557   47,283,044   44,439,824 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  The accompanying notes are an integral part of these interim consolidated financial statements.   Interim Consolidated Statements of Comprehensive Income (in thousands of Canadian dollars) (Unaudited) ---------------------------------------------------------------------------                                     For the three              For the nine                                      months ended              months ended                                     -------------              ------------                               Dec. 31,    Dec. 31,     Dec. 31,     Dec. 31,                                  2009        2008         2009         2008 --------------------------------------------------------------------------- Net income for the period     $ 8,706    $ 11,951     $ 27,862     $ 31,590 Other comprehensive (loss)  income, net of tax:  Unrealized (losses) gains   on translating financial   statements of   self-sustaining foreign   operations                   (4,949)     26,886      (41,954)      36,006 --------------------------------------------------------------------------- Comprehensive income (loss)   $ 3,757    $ 38,837    $ (14,092)    $ 67,596 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  The accompanying notes are an integral part of these interim consolidated financial statements.   Interim Consolidated Statements of Cash Flows (in thousands of Canadian dollars) (Unaudited) ---------------------------------------------------------------------------                                     For the three              For the nine                                      months ended              months ended                                     -------------              ------------                               Dec. 31,    Dec. 31,     Dec. 31,     Dec. 31,                                  2009        2008         2009         2008 --------------------------------------------------------------------------- Cash flows from operating  activities  Net income                   $ 8,706    $ 11,951     $ 27,862     $ 31,590   Items not affecting cash:    Amortization                 1,025         902        3,250        2,319    Stock-based compensation       391         592        1,347        1,989    (Loss) gain on sale of     non-operating subsidiary        -           -            -          (98)    Future income taxes            102        (483)         227         (171)    Amortization of deferred     transaction costs              47           -           47            -   Changes in non-cash    working capital items:    Restricted cash             (9,222)          -      (14,426)           -    Accounts receivable          2,549     (17,430)      (2,990)      (9,113)    Prepayments, deposits,     and other assets           (3,131)      1,166       (3,428)          58    Inventory                   27,787      13,421      (12,436)     (29,102)    Accounts payable and     accrued liabilities         3,342      (3,978)       4,408      (11,115)    Notes payables               8,226           -       14,263            -    Customer deposits           14,536      (1,389)      18,062       (4,064)    Due from related parties       128           -          129           33    Due to related parties           -           -            -          (45)    Due from joint venture     partner                    (1,321)          -       (1,321)           -    Income taxes payable           720         525         (235)       1,421 ---------------------------------------------------------------------------                                53,885       5,277       34,759      (16,298) --------------------------------------------------------------------------- Cash flows from investing  activities  Purchase of plant and   equipment                    (1,073)     (2,029)      (7,246)      (7,371)  Proceeds on sale of   non-operating subsidiary          -           -            -        1,143  Payment on construction   in process                   (2,435)     (5,088)      (5,487)     (11,966)  Refund for land use rights         -           -          770        1,866  Payment of land use rights         -        (186)         (76)      (3,018)  Proceeds from sale of land   use right                     1,069           -        1,069            -  Value-added tax refunds on   plant and equipment             460         225        1,660          225  Refund from prepayment   for equipment                 2,866           -        2,866            - ---------------------------------------------------------------------------                                   887      (7,078)      (6,444)     (19,121) ---------------------------------------------------------------------------   Interim Consolidated Statements of Cash Flows - continued (in thousands of Canadian dollars) (Unaudited) ---------------------------------------------------------------------------                                     For the three              For the nine                                      months ended              months ended                                     -------------              ------------                               Dec. 31,    Dec. 31,     Dec. 31,     Dec. 31,                                  2009        2008         2009         2008 --------------------------------------------------------------------------- Cash flows from financing  activities  Proceeds from bank loans       1,547         532       38,724       13,282  Repayment of bank loans       (1,392)          -      (13,782)      (4,214)  Issuance of common shares,   net                          37,876           -       37,876          (65)  Proceeds from exercise   of underwriters'   compensation options              -           -            -          446  Proceeds from exercise   of warrants                       -           -            -        7,068  Proceeds from exercise of   stock options                     -           -            -          727 ---------------------------------------------------------------------------                                38,031         532       62,818       17,244 --------------------------------------------------------------------------- Foreign exchange (loss) gain  on cash held in foreign  currency                      (1,020)      2,235       (4,796)       3,116 --------------------------------------------------------------------------- Increase (decrease) in  cash and cash equivalents     91,783         966       86,337      (15,059) Cash and cash equivalents,  beginning of period           36,242      16,850       41,688       32,875 --------------------------------------------------------------------------- Cash and cash equivalents,  end of period              $ 128,025    $ 17,816    $ 128,025     $ 17,816 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  Cash and cash equivalents  consist of:  Cash on hand                $ 73,747    $ 16,527  Term deposit                      40          40  Bank notes                    54,238       1,249 ---------------------------------------------------------------------------                             $ 128,025    $ 17,816 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  

Total interest paid during the three and nine month periods ended December 31, 2009 was $546 and $1,109 (RMB 3.5 million and RMB 7.0 million) (December 31, 2008 - $300 or RMB 1.7 million and $595 or RMB 3.7 million), respectively. Total tax paid during the three and nine month periods ended December 31, 2009 was $1,371 and $4,452 (RMB 8.8 million and RMB 27.3 million) (December 31, 2008 - $1,094 or RMB 6.2 million and $1,575 or RMB 9.5 million), respectively. Total tax refunded during the three and nine month periods ended December 31, 2009 were both $460 (RMB 3.0 million) (December 31, 2008 - $Nil and $1,331 or RMB 9.3 million), respectively. Total interest subsidy received by the Company during the three and nine month periods ended December 31, 2009 was $Nil and $126 (RMB Nil and RMB 0.7 million) (December 31, 2008 - $Nil and $Nil), respectively.

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 December 31, 2009 and 2008 (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 ("H.K. Migao"), 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").

On May 18, 2008, the Company and Sociedad Quimica y Minera de Chile S.A. ("SQM") entered into an agreement to create a joint venture, Sichuan SQM - Migao Chemical Fertilizer Co., Ltd. ("SQM JV"), for the production of potassium nitrate in PRC. The parties agreed that the registered capital of the SQM JV will be twenty million U.S. dollars, with the Company and SQM each contributing ten million US dollars in return for a 50% interest in the joint venture. The SQM JV is owned 50/50 by Migao (through H.K. Migao) and SQM. The SQM JV was set up on September 1, 2009 and the joint venture partners have started to make contributions to the joint venture during the quarter.

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 and the proportionate share of the accounts of its joint venture in the PRC. These unaudited interim consolidated financial statements have been prepared by the management of the Company using the same accounting policies and methods as the most recently audited annual consolidated financial statements of Migao. These unaudited interim consolidated 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 March 31, 2009. Interim results are not necessarily indicative of the results expected for the fiscal year.

Certain prior-period balances have been reclassified to conform to current period's presentation and policies.

Adoption of New Accounting Policies

Effective December 31, 2009, the Company adopted the following new accounting standards.

Joint Venture

The Company's 50% interest in the SQM JV, which is subject to joint control, is consolidated on a proportionate basis whereby the Company includes in these consolidated financial statements its proportionate share of the assets, liabilities, revenues, and expenses of the joint venture.

Deferred Transaction Costs

The Company's transaction costs that are directly attributable to the bank debt financing are amortized using the effective interest method. The unamortized portion related to bank loans withdrawn from the lines of credit is shown as a reduction of bank loans. The unamortized portion related to the unused portion of the lines of credit is recorded in prepayments, deposits and other assets.

2. Restricted Cash

As at December 31, 2009 and March 31, 2009, the Company had the following restricted cash balances:

  ---------------------------------------------------------------                                        December 31,    March 31,                                               2009         2009 --------------------------------------------------------------- Notes payable deposits                    $ 14,529        $ 553 --------------------------------------------------------------- ---------------------------------------------------------------  

During the quarter ended December 31, 2009, the Company was required to deposit cash with China Merchants Bank as pledge for its notes payables. Notes payable is a form of cheque, which defers the payment until the due date for redeeming the note. According to the notes payable agreement with the bank, a certain percentage of the payable amount is required to be deposited at the bank as security against the notes payables. The restrictions on the deposited cash will be released between January 2010 and June 2010, when the notes payables are redeemed.

  3. Prepayments, Deposits, and Other Assets ---------------------------------------------------------------------------                                                     December 31,   March 31,                                                            2009        2009 --------------------------------------------------------------------------- Current:  Prepayments for raw materials                         $ 66,389    $ 30,488  Prepayments for finished goods                             492           -  Prepayments for transportation services                     86          95  Deposits for the supply of utilities                       741         228  Deposits on obtaining sales contracts                      883           -  VAT receivable                                           1,471       1,696  Other receivables and deposits                           2,403       1,062  Deferred transaction costs                                 432           - --------------------------------------------------------------------------- Prepayments, deposits, and other assets - current      $ 72,897    $ 33,569 --------------------------------------------------------------------------- ---------------------------------------------------------------------------   ---------------------------------------------------------------------------                                                     December 31,   March 31,                                                            2009        2009 --------------------------------------------------------------------------- Long Term:  Prepayments for construction costs                       $ 116       $ 443  Prepayments for machinery                                1,853         998  Deferred transaction costs                                 113           - --------------------------------------------------------------------------- Prepayments, deposits, and other assets - long term     $ 2,082     $ 1,441 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  

H.K. Migao has engaged a Canadian based investment bank as its exclusive financial advisor in connection with a bank debt financing for the Company. In accordance with the agreement with the investment bank, the Company will pay a fee equal to 1.5% of the gross proceeds raised. As of December 31, 2009, lines of credit of $48,641 (RMB 317.3 million) relating to the bank debt financing have been finalized and approved. The total transaction costs is $729. For the quarter ended December 31, 2009, the Company has $545 as deferred transaction costs, $137 as a reduction of the bank loans withdrawn, and $47 as amortization of deferred transaction costs.

  4. Inventory ---------------------------------------------------------------                                         December 31,   March 31,                                                2009        2009 --------------------------------------------------------------- Raw materials                              $ 19,174    $ 35,744 Finished goods                                8,396      12,182 Packing and other materials                     876         199 Raw materials in transit                      9,280      34,268 ---------------------------------------------------------------                                            $ 37,726    $ 82,393 --------------------------------------------------------------- ---------------------------------------------------------------  

During the three and nine months ended December 31, 2009, the Company recorded no inventory write-downs and made no reversals of previous inventory write-downs (three and nine months ended December 31, 2008 - $Nil).

  5. Related Party Balances and Transactions  As at December 31, 2009 and March 31, 2009, the Company had the following related party balances:  -----------------------------------------------------------------                                         December 31,     March 31,                                                2009          2009 ----------------------------------------------------------------- Amount due from:  Beijing Wei De Sen ("BWDS")                   $ 29         $ 158 ----------------------------------------------------------------- -----------------------------------------------------------------  

During the three and nine months ended December 31, 2009, the Company paid an excess of $29 to BWDS for the cost of motor vehicles it previously purchased on behalf of the Company. As at March 31, 2009, the Company prepaid $158 to BWDS for import agency fees. These transactions were in the normal course of business and were measured at the exchange amounts, which are the amounts agreed upon by the parties.

Liaoning Yongcheng Economic and Trade Development Co. Ltd. ("LYEDC") contributed services to the Company and due to the difficulty in determining the fair market value and the cost of these services being immaterial, the values of these contributed services were not recognized in the interim consolidated financial statements. In addition, LYEDC has provided corporate guarantees on $9,198 (March 31, 2009 - $7,376) of the Company's short-term bank loans outstanding as of December 31, 2009 (note 9).

BWDS and LYEDC are both controlled by an officer and director of Migao.

During the three and nine months period ended December 31, 2009, an officer and director of the Company had forgiven his salary of $25 and $75 (December 31, 2008 - $25 and $75), respectively. The forgiven salary has been included in the Company's contributed surplus.

6. Joint Venture

As of December 31, 2009, the Company contributed cash of $5,940 in return for interest in the SQM JV. At the balance date, the Company had contributed in excess of SQM's contribution and this advanced funding is shown on the balance sheet as due from Joint venture partner of $1,309.

As of December 31, 2009, the Company's 50% share of the assets and liabilities of the SQM JV is as follows:

  ------------------------------------------------------------------------                                                December 31,     March 31,                                                       2009          2009 ------------------------------------------------------------------------  Cash and cash equivalents                         $ 3,235           $ -  Other non-cash current assets                         103             - ------------------------------------------------------------------------                                                      3,338             - ------------------------------------------------------------------------  Plant and equipment                                     1             -  Construction in progress                               16             -  Land use rights                                     1,122             - ------------------------------------------------------------------------ Proportionate share of assets                      $ 4,477           $ - ------------------------------------------------------------------------ ------------------------------------------------------------------------  Accounts payable and accrued liabilities             $ 48           $ - ------------------------------------------------------------------------ Proportionate share of liabilities                    $ 48           $ - ------------------------------------------------------------------------ ------------------------------------------------------------------------  As of December 31, 2009, the Company's 50% share of the results of operations and cash flows of the SQM JV is as follows:  -------------------------------------------------------------------------                                                 December 31,     March 31,                                                        2009          2009 ------------------------------------------------------------------------- Pre-operating costs                                    $ 20           $ - ------------------------------------------------------------------------- Proportionate share of net loss for the period        $ (20)          $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from operating activities               $ (1,286)          $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from investing activities               $ (1,259)          $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash flows from financing activities                $ 5,940           $ - ------------------------------------------------------------------------- -------------------------------------------------------------------------   7. Plant and Equipment ---------------------------------------------------------------------------                                                                 December 31,                                                                        2009 ---------------------------------------------------------------------------                                                  Accumulated       Net Book                                        Cost     Amortization          Value --------------------------------------------------------------------------- Buildings and improvements         $ 29,262          $ 3,077       $ 26,185 Machinery and equipment              28,815            6,463         22,352 Vehicles                              1,338              716            622 Office equipment                        636              336            300 ---------------------------------------------------------------------------                                    $ 60,051         $ 10,592       $ 49,459 --------------------------------------------------------------------------- ---------------------------------------------------------------------------   ---------------------------------------------------------------------------                                                                    March 31,                                                                        2009 ---------------------------------------------------------------------------                                                  Accumulated       Net Book                                        Cost     Amortization          Value --------------------------------------------------------------------------- Buildings and improvements         $ 31,887          $ 2,619       $ 29,268 Machinery and equipment              27,529            5,832         21,697 Vehicles                                743              310            433 Office equipment                      1,456              707            749 ---------------------------------------------------------------------------                                    $ 61,615          $ 9,468       $ 52,147 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  

Amortization expense for the three and nine months ended December 31, 2009 was $949 and $2,872 (December 31, 2008 - $845 and $2,188), respectively, and is included in cost of goods sold and general and administrative expense.

During the three and nine months ended December 31, 2009, Sichuan Migao and Liaoning Migao were approved and paid by the local tax authorities for value-added tax refunds on the purchases of domestic equipment for a total of $460 and $1,660 (RMB 3.0 million and RMB 10.2 million) (December 31, 2008 - $225 or RMB 1.3 million and $330 or RMB 2.0 million), respectively. These value-added tax refunds were recorded as a reduction of the cost of the related equipment.

  8. Land Use Rights -----------------------------------------------------------------------                                             December 31,       March 31,                                                    2009            2009 ----------------------------------------------------------------------- Land use rights                                $ 19,704        $ 25,720 Less: accumulated amortization                      874             658 -----------------------------------------------------------------------                                                $ 18,830        $ 25,062 ----------------------------------------------------------------------- -----------------------------------------------------------------------  

As of December 31, 2009, the Company had fourteen land leases from the Chinese government plus an interest in a joint venture holding one additional land lease. During the quarter, Sichuan Migao had sold one of its land leases to the SQM JV at the carrying value. All land leases have terms of fifty years. Amortization expense for the three and nine months ended December 31, 2009 were $76 and $378 (December 31, 2008 - $57 and $131), respectively, and is included in general and administrative expense.

As of December 31, 2009, the Company had not obtained the land use right certificates for five (March 31, 2009 - five) of the land leases and approximately $563 (March 31, 2009 - $677) 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.

9. Bank Loans

At December 31, 2009, the Company has short-term bank loans outstanding totaling $41,084 (RMB 268 million) (March 31, 2009 - $20,745 or RMB 112.5 million) for working capital purposes.

                                         Interest Rate  Amount       Due Date  Interest Rate  at Quarter End  Secured by  ------       --------  -------------  --------------  ---------- $ 6,132   Feb. 9, 2010          Fixed            4.78% corporate guarantee                                                        from Sichuan Migao $ 3,066   May 31, 2010          Fixed            5.31% corporate guarantees                                                        from Sichuan Migao,                                                        LYEDC, and the CEO                                                        of the Company $ 3,066  June 10, 2010          Fixed            5.31% corporate guarantees                                                        from Sichuan Migao,                                                        LYEDC, and the CEO of                                                        the Company $ 3,066  June 22, 2010          Fixed            5.31%  corporate guarantees                                                        from Sichuan Migao,                                                        LYEDC, and the CEO of                                                        the Company $ 3,066  June 22, 2010   95% of Prime            5.04% corporate guarantee                         rate in China                  from Sichuan Migao                                 ("PC") $ 7,665   July 1, 2010          Fixed            4.78% corporate guarantee                                                        from Guangdong Migao $ 1,533  Aug. 10, 2010      90% of PC            4.78% two land use rights $ 1,226  Aug. 12, 2010      90% of PC            4.78% two land use rights $ 3,066 Sept. 17, 2010          Fixed            4.78% N/A $ 7,665 Sept. 27, 2010             PC            5.31% corporate guarantee                                                        from Sichuan Migao $ 1,533  Oct. 19, 2010             PC            5.31% corporate guarantees                                                        from Sichuan Migao -------- $ 41,084     (137) Deferred Transaction Costs -------- -------- $ 40,947  

The deferred financing fees are accreted using effective interest rates of between 6.33% and 6.86%. The fair value of all the bank loans approximates their total carrying value. Total carrying value of the security was $689 (RMB 4.5 million) as of December 31, 2009 (March 31, 2009 - $1,338 or RMB 7.3 million). Total interest paid during the three and nine months period ended December 31, 2009 was $546 and $1,109 (RMB 3.5 million and RMB 7.0 million) (December 31, 2008 - $300 or RMB 1.7 million and $595 or RMB 3.7 million), respectively. Total interest subsidy received by the Company during the three and nine month periods ended December 31, 2009 was $Nil and $126 (RMB Nil and RMB 0.7 million) (December 31, 2008 - $Nil and $Nil), respectively.

As of December 31, 2009, the Company had a $115,126 or RMB 585.3 million (March 31, 2009 - $7,376 or RMB 40.0 million) line of credit arrangement in place, of which $41,084 or RMB 268.0 million (March 31, 2009 - $Nil) has been withdrawn.

10. Share Capital

  (a) Authorized:   Unlimited common shares without par value.  (b) Issued common shares                                                Number of                                                  Shares          Amount -----------------------------------------------------------------------  Balance - March 31, 2009                     46,459,661       $ 114,431 Issued pursuant to a private placement (i)    5,681,000          40,335 Share issuance costs (i)                              -          (2,460) ----------------------------------------------------------------------- Balance - December 31, 2009                  52,140,661       $ 152,306 ----------------------------------------------------------------------- -----------------------------------------------------------------------  

(i) On December 10, 2009, the Company completed a bought deal public offering of 5,681,000 common shares priced at $7.10 per share. Pursuant to the Underwriting Agreement, the Company paid the agents an underwriting commission of 5% of the gross proceeds raised in the offering. In addition to the underwriting commission, the Company paid $443 in total for expenses incurred on this public offering.

  (c) Contributed surplus                                                                  Amount ----------------------------------------------------------------------- Balance - March 31, 2009                                        $ 3,883 Stock-based compensation expense                                  1,348 Forgiven officer and director's salaries (note 5)                    75 ----------------------------------------------------------------------- Balance - December 31, 2009                                     $ 5,306 ----------------------------------------------------------------------- -----------------------------------------------------------------------  

(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 - March 31, 2009          1,355,000                      $ 5.72 Granted during the period               165,000                        6.40 --------------------------------------------------------------------------- Outstanding - December 31, 2009       1,520,000                      $ 5.80 --------------------------------------------------------------------------- ---------------------------------------------------------------------------   The following table summarizes the weighted average information with respect to the outstanding stock options.                                As of December 31, 2009                              -----------------------                              Weighted average                Exercise price Exercise       Number  remaining contractual       Number  for exercisable price     outstanding            life (years) exercisable          options --------------------------------------------------------------------------  $2.85         750,000                   1.38      750,000            $2.85 $7.69          60,000                   2.50       40,000            $7.69 $8.46          30,000                   2.50       20,000            $8.46 $9.93          40,000                   3.00       13,333            $9.93 $9.48         475,000                   3.42      191,666            $9.48 $6.40         165,000                   9.25          NIL              N/A -------------------------------------------------------------------------- $5.80       1,520,000                   2.98    1,014,999            $4.50 --------------------------------------------------------------------------  

During the quarter ended June 30, 2009, 165,000 options were issued to employees, officers, and directors of the Company. Each option entitles the holder to purchase one common share of the Company at a price of $6.40 per common share. These options have vesting periods of up to three years and an exercise period of up to ten years, expiring on April 26, 2019. The fair value of the options issued was estimated using the Black-Scholes option pricing model on the date of issue to be $5.70 per option. Assumptions used to determine the value of the options were: dividend yield 0%; risk-free interest rate 3.34%; expected volatility 96%; and expected life of 10 years. Stock-based compensation expense on these options for the three and nine months ended December 31, 2009 was $145 and $394 (December 31, 2008 - $Nil), respectively.

For the three and nine month periods ended December 31, 2009, total stock-based compensation expense on the options granted prior to the period ended June 30 , 2009 was $246 and $953 (December 31, 2008 - $592 and $1,989), respectively.

11. 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. As of December 31, 2009, the total paid in capital of the Company's PRC entities was $88,483 (RMB 577.2 million; March 31, 2009 - $99,508 or RMB 539.6 million). 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 December 31, 2009 was $12,003 (RMB 78.3 million; March 31, 2009 - $12,199 or RMB 66.2 million).

  12. Accumulated Other Comprehensive Income                                                Unrealized gains (losses) on                                                       translating financial                                               statements of self-sustaining                                                          foreign operations ---------------------------------------------------------------------------  Balance - March 31, 2009                                           $ 44,747 Unrealized foreign currency translation  losses during the period                                           (41,954) --------------------------------------------------------------------------- Balance - December 31, 2009                                         $ 2,793 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  

13. 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.

14. Commitments

Purchase commitments for raw materials and supplies in the amount of approximately $30,730 (RMB 200.5 million) existed as of December 31, 2009. These contracts are entered into in the normal course of business.

Commitments on capital expenditures in the amount of approximately $1,916 (RMB 12.5 million), including the Company's proportionate share of the joint venture's commitments of $699 (RMB 4.56 million), existed as of December 31, 2009. These contracts are entered into in the normal course of business.

15. Financial Instruments Risks

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"). Head office expenditures are generally denominated in Canadian dollars. Therefore, the Company's primary currencies include RMB 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 December 31, 2009, through its wholly-owned, self-sustaining subsidiaries and joint venture, the Company had cash and cash equivalents of $105,697 (March 31, 2009 - $40,831), restricted cash of $14,529 (March 31, 2009 - $553), accounts receivable of $17,365 (March 31, 2009 - $20,477), other receivables of $2,447 (March 31, 2009 - $2,426), accounts payable and accrued liabilities of $9,577 (March 31, 2009 - $7,159), notes payable of $14,279 (March 31, 2009 - $553), and bank loans of $41,084 (March 31, 2009 - $20,745), which were denominated in RMB. Gains and losses arising upon translation of these amounts into Canadian dollars for inclusion in the consolidated financial statements are recorded within accumulated other comprehensive income, a component of shareholders' equity. A 10% change in the average exchange rate between CDN$/RMB on the financial instruments would have a $8,918 (March 31, 2009 - $3,630) 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.

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-term customers. Over the last three years, the Company has not suffered any significant credit related losses with any of its customers.

At December 31, 2009 and March 31, 2009, the Company does not consider any of its financial assets to be impaired.

As of December 31, 2009, the following table provides information regarding the ageing of accounts receivable that are past due but which are not impaired.

                                                            Carrying value on Current     90 - 180 days   180 - 365 days   365 days +   the balance sheet --------------------------------------------------------------------------- $15,441              $566             $924         $434             $17,365 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  As of March 31, 2009, the following table provides information regarding the ageing of accounts receivable that are past due but which are not impaired.                                                            Carrying value on Current     90 - 180 days   180 - 365 days   365 days +   the balance sheet --------------------------------------------------------------------------- $13,771            $5,816             $529         $361             $20,477 --------------------------------------------------------------------------- ---------------------------------------------------------------------------  

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 accounts receivable 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 accounts receivable represents the maximum credit exposure. Based on historic default rates, the Company believes that there are minimal requirements for an allowance for doubtful accounts and as a result, no allowance has been recorded. 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 December 31, 2009, the Company's cash and cash equivalents balance was $128,025 (March 31, 2009 - $41,688) and working capital balance was $184,562 (March 31, 2009 - $146,210). As at December 31, 2009, short-term bank loans in the amount of $41,084 (March 31, 2009 - $20,745) were outstanding under the Company's credit facilities.

Fair Value

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

16. Other Risks

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 contracts allowing it 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.

Contacts: Migao Corporation Jay Hussey Vice President Corporate Finance 416-869-1108 ext. 104  Migao Corporation Randall Smallbone Chief Financial Officer 416-869-1108 ext. 103 [email protected]