Financial Results for the 2012 Fiscal Second Quarter Ended December 31st, 2011

Revenue for the 2012 fiscal second quarter ended December 31, 2011 totaled $5.1 million, a decrease of 16% as compared to $6.1 million for the same period the prior year. The three months revenue consisted of $2.7 million from milk sales and $2.4 million from sales commission. The decrease in revenue was primarily due to the change of our business operating activities which decreased the number of milk cows. The average number of milk cows for the quarter ended December 31, 2011 decreased from 10,231 to 2,657 comparing the quarter ended December 31, 2010. . In contrast to the decrease in number of milk cows, the revenue per milk cow per quarter increased from $597 for the three months ended December 31, 2010 to $1,009 for the three months ended December 31, 2011, an increase by $412 or 69% due to higher sales price of raw milk, disposing of inferior cows and younger milk cows. For the three months ended December 31, 2011, our revenue stream comprised sales of natural milk and sales commission from farmers, while it only comprised sales of natural milk for the three months ended December 31, 2010, The decrease in sales of natural milk was partially offset by sales commission from local farmers of $2.4 million for the three months ended December 31, 2011 and has become one of our main revenue streams.

Cost of goods sold for the 2012 fiscal second quarter ended December 31, 2011 was reduced to $1.6 million, which represented a decrease of $1.5 million or 49% compared to $3.1 million for the same period of 2010. Cost of goods sold consists of feed, feeding expenses, and other working capital. Cost of goods sold as a percentage of sales decreased mostly due to the reduced direct costs in food for livestock under the new business model.

Gross profit for the 2012 fiscal second quarter ended December 31, 2011 totaled $3.6 million, an increase of 18% compared to $3.0 million for the quarter ended December 31, 2010. Gross profit margin improved to 70% for the 2012 fiscal second quarter as compared to 50% for the same period last fiscal year. The improved gross profit margin was primarily due to the change of our operating activities as the new revenue stream reduced direct total costs especially in feeding food costs. However, the gross profit margin from milk sales decreased from 50% to 42% due to the increase in raw materials and feeding expenses. We believe the price of the raw materials keeps increasing in the future and that is one of the reasons we disposed a large number of adult cows.

Non-operating income consists of a bargain purchase gain from the acquisition of Yulong Cattle and other non-operating income. For the three months ended December 31, 2011, the bargain purchase gain was $5.7 million. The reason for such a large gain was because our share price was reduced significantly ($0.34 only as of November 23, 2011) when we signed the formal acquisition agreement with the original shareholders of Yulong Cattle. The other non-operating income consists primarily of the annual interest income of $199,545 charged on the outstanding notes receivable from the farmers. We also have a non-operating loss of $52,163 from disposal of biological properties assets.

Net income for the fiscal second quarter ended December 31, 2011 totaled $6.9 million, an increase of 215% compared to $2.2 million for the 2011 fiscal second quarter ended December 31, 2010. Earnings per share for the fiscal second quarter was $0.15, based on 43 million shares outstanding versus earnings per share of $0.06 for the 2010 fiscal second quarter, based on 36 million shares outstanding.

Financial Results for Six Months Ended December 31st, 2011
Revenue for the 2012 fiscal first six months ended December 31, 2011 totaled $10.1 million, a decrease of 3% as compared to $10.4 million for the same period the prior year. The six months revenue consisted of $6.4 million from milk sales and $3.7 million from sales commission.

Cost of goods sold for the fiscal first six months ended December 31, 2011 was reduced to $3.1 million, which represented a decrease of $2.1 million or 39% compared to $5.2 million for the same period of 2010.

Gross profit for the first six months ended December 31, 2011 totaled $6.9 million, an increase of 34% compared to $5.2 million for the fiscal six months ended December 31, 2010. Gross profit margin improved to 69% for the 2012 fiscal first six months as compared to 50% for the same period last fiscal year.

Non-operating income consists of a bargain purchase gain from the acquisition of Yulong Cattle and other non-operating income. For the six months ended December 31, 2011, the bargain purchase gain was $5.7 million. The other non-operating income consists primarily of the annual interest income of $286,667 charged on the outstanding notes receivable from the farmers. The non-operating gain from the disposal of biological properties was $145,712.

Net income for the fiscal first six months ended December 31, 2011 totaled $9.5 million, an increase of 155% compared to $3.7 million for the 2011 fiscal year ended December 31, 2010. Earnings per share for the fiscal first six months was $0.22, based on 43 million shares outstanding versus earnings per share of $0.10 for the 2010 fiscal first six months, based on 36 million shares outstanding.

Liquidity and Capital Resources
As of December 31, 2011, China Modern had approximately $6.7 million in cash as well as net working capital of $12.8 million. As of December 31, 2011, the operating activities provided $2.6 million in net cash, compared to $6 million for the same period ended December 31, 2010. Working capital increased year-over-year by $4.6 million to $12.8 million as of December 31, 2011, as compared to $8.2 million as of June 30, 2011. The main reason for a much lower operating cash flow in the six months ended December 31, 2011 was due to the payment of $4.7 million for the grassland lease.

Cautionary Statement Regarding Forward Looking Information
Certain statements in this release concerning our future growth prospects are forward-looking statements, within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, which involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. The risks and uncertainties relating to these statements include, but are not limited to, risks and uncertainties regarding the success of our investments, risks and uncertainties regarding fluctuations in earnings, our ability to sustain our previous levels of profitability including on account of our ability to manage growth, intense competition, wage increases in China, our ability to attract and retain highly skilled professionals, time and cost overruns on fixed-price, fixed-time frame contracts, client concentration, our ability to successfully complete and integrate potential acquisitions, withdrawal of governmental fiscal incentives, political instability and regional conflicts and legal restrictions on raising capital or acquiring companies outside China. Additional risks that could affect our future operating results are more fully described in our United States Securities and Exchange Commission filings including our 8K/A dated March 31, 2011, and other recent filings. These filings are available at http://www.sec.gov/.

Company Contact:
Wang Youliang, CEO
[email protected]