CAGC China Agritech, Inc. (MM)

BEIJING, Nov. 10, 2010 /PRNewswire-Asia-FirstCall/ -- China Agritech, Inc. (Nasdaq: CAGC) ("China Agritech", or the "Company"), a leading organic compound fertilizer manufacturer and distributor in the People's Republic of China, today announced its unaudited financial results for the third quarter and nine months ended September 30, 2010.

Third Quarter Financial and Operating Highlights

-- Net income was $1.8 million, or diluted EPS $0.09;

-- Excluding the allowance for doubtful debts and stock-based compensation, adjusted net income was $4.6 million, or diluted EPS $0.22;

-- Cash and cash equivalents were $45.8 million with no debt;

-- Entered into a strategic agreement with the Beijing Municipal Government to establish within Beijing the headquarters of its nationwide network of distribution centers.

Nine-Month Financial Highlights

-- Net revenue increased 41% year-over-year to $78.1 million;

-- Gross profit increased 24.8% year-over-year to $27.4 million;

-- Net income was $13.6 million, or $0.69 earning per diluted share;

-- Excluding the change in fair value of warrants, allowance for doubtful debts and share-based compensation, adjusted net income was $15.2 million, or diluted EPS $0.77.

Mr. Yu Chang, Chief Executive Officer and Chairman of China Agritech, commented, "During this summer, farmland in parts of China experienced possibly the most destructive floods since 1998. The Ministry of Water Resources estimated that financial damages reached tens of billions of dollars as farmland were destroyed along with infrastructures. Food supplies plummeted as the government estimated that 2 million acres of crops and farmland have been hit by the floods. As a result, our business was negatively affected, especially in southern provinces where a large portion of our granular fertilizer products were being sold. Our liquid fertilizer sales were also partially impacted in the Southern regions, however, sales growth in Northeast china remained intact."

Third Quarter 2010 Results

Net revenue for the third quarter of 2010 was $23.9 million compared with $27.0 million in the same quarter last year. Sales of the Company's organic liquid fertilizer were $14.2 million, while organic granular fertilizer sales registered $9.7 million during the quarter. The decline in the sales of organic granular fertilizers was mainly due to normalizing the credit sale policy. As the organic granular fertilizers move beyond its introductory stage, an increasingly larger proportion of the granular products sales are now cash based and it is expected to remain so going forward. Decreased sales of organic granular fertilizer were also due to seasonality as such products are usually applied by farmers prior to the seeding season. Unusually high temperature and precipitation hampered the production, storage, transportation of organic fertilizers, decreasing order sizes from some commercial users. In addition, severe weather in the central and southern parts of the country, such as Hubei ,Anhui  and Guangxi provinces, also negatively impacted overall fertilizer sales, and in particular that of the organic granular fertilizers.  

Gross profit for the third quarter of 2010 was $9.0 million, compared with $9.6 million during the same quarter in 2009. Gross margin for the quarter increased to 37.6% from 35.5% for the same period in 2009. The increase in the gross margin was because a greater proportion of the overall quarterly sales derived from the higher-margined organic liquid fertilizers.  In addition, enhanced production efficiency contributed to higher gross margin in organic granular fertilizers of 22% compared with 20% for the same period in 2009. Organic liquid fertilizer had a gross profit margin of 48%, in line with the previous year.

General and administrative ("G&A") expenses for the third quarter of 2010 were $4.1 million, or 17.1% of revenue, compared with $1.7 million, or 6.3% of revenue, for the comparable period in 2009. The increase in G&A in both absolute value and as a percentage of revenue was primarily due to non-cash charges of $1.3 million for share-based compensation as well as the additional $1.5 million allowance for doubtful debts. For the same period in 2009, allowance for doubtful debts was $0.45 million.

Selling expenses for the third quarter of 2010 were $0.8 million compared with $0.7 million in the third quarter of 2009. The increase in selling expenses was due to the increase in promotion and advertisement expenses. Selling expenses as a percentage of net revenues were 3.4% of revenue, compared with 2.7% in the third quarter of 2009.

Income from operations for the third quarter of 2010 was $4.1 million, compared with $7.2 million for the same period in 2009. Excluding the provision for doubtful debts and share-based compensation, adjusted income from operations for the third quarter of 2010 was $6.9 million, compared with $7.6 million for the third quarter in 2009.

Income tax expense of $2.1 million, representing an effective tax rate of 53.4%, for the three-month period ended September 30, 2010, compared to 20.6% for the same period in 2009.

GAAP net income for the third quarter of 2010 was $1.8 million compared with $5.7 million in the same period of 2009. Diluted earnings per share of $0.09 on a substantially greater number of shares outstanding, compared with diluted earnings per share of $0.41 in the previous year's same quarter.

Excluding the provision for doubtful debt and share-based compensation, adjusted net income attributable to common stockholders for the third quarter of 2010 was $4.6 million, compared with $6.2 million in the third quarter of 2009. Non-GAAP diluted earnings per share were $0.22 versus $0.44 for the same period in 2009, but on a substantially greater number of shares outstanding in the 2010 period. Diluted weighted average number of shares outstanding for the third quarter of 2010 was 20.6 million compared with 14.1 million shares in the third quarter of 2009.

Nine Month Results

Total revenue for the first nine months of 2010 increased 41% year-over-year to $78.1 million from $55.4 million for the first nine months last year. Gross profit for the first nine months of 2010 was $27.4 million, up 24.8% from $22.0 million in the comparable period a year ago. Gross margin was 35.1% for the first nine months of 2010, expectedly lower than the 39.6% for the same period in 2009 as the shifting product mix continues to carry more lower-margined organic granular products. Income from operations was $13.0 million, compared with $16.6 million in the first nine months of 2009. GAAP net income was $13.6 million, with fully diluted earnings per share of $0.69, compared with $12.8 million, or diluted earnings per share of $0.93 in the first nine months of 2009. Excluding the change in fair value of warrants, allowance for doubtful debt and share-based compensation, adjusted net income attributable to common stockholders for the first nine months of 2010 was $15.2 million, compared with $12.8 million for the comparable period in 2009. Non-GAAP diluted earnings per share were $0.77 versus $0.97 for the same period in 2009, but on substantially greater number of shares outstanding in the 2010 period.

Financial Conditions

As of September 30, 2010, total cash and cash equivalents were $45.8 million as compared to $20.3 million on December 31, 2009. Stockholders' equity increased to $144.0 million as of September 30, 2010 from $77.3 million as of December 31, 2009. Days sales outstanding (DS0) for the first nine months decreased from 205 days in 2009 to 181 days in 2010 mainly due to improved cash collection on organic granular fertilizers.  

Recent Events    

In August, 2010, the Company has entered into a strategic agreement with the Beijing Municipal Government to establish within Beijing the headquarters of its nationwide network of distribution centers. The network will consist of flagship regional distribution centers strategically located in key agricultural provinces throughout China. These distribution centers will sell Agritech-branded organic liquid and granular compound fertilizers, and other third-party procured agricultural products to the Company's franchised retail stores. As regional hubs for logistics, technology, and services, these distribution centers will provide one-stop solutions to farmers for their agricultural supplies and farming consultation.

The Board of Directors of China Agritech, based on the recommendation of the Company's Audit Committee, has selected and is going to engage one of Big Four as the Company's independent auditor for the year ended December 31, 2010. The final procedure of the dismissal of the current auditors and appointment of new auditors will be completed within the coming few days and an announcement will be made to the public accordingly. The decision to change auditors was not the result of any disagreements between the Company and Crowe Horwath on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

Business Outlook

Mr. Yu Chang, Chairman and Chief Executive Officer of China Agritech, concluded, "Entering the fourth quarter, weather conditions have become stable throughout China. Our granular sales are now accelerating. Seasonally, fourth quarter is the strongest quarter for granular products with solid payment receipt, as we have changed the payment terms for granular products from 90 days in the beginning of the year to current term of cash on delivery. The price of agricultural products, especially the cost-efficient and reliable organic fertilizers, has been rebounding as seeding resumes. We are capitalizing on this favorable trend to try our best to achieve our annual target."

Conference Call

The Company will host a conference call, to be simultaneously webcast on Wednesday, November 10, 2010 at 8:30 a.m. Eastern Standard Time, or 9:30 p.m. Beijing Time.

To participate, please call the following phone numbers:

A live web cast of the conference call will be available on China Agritech's website at http://www.chinaagritechinc.com. Please visit the website at least 15 minutes early to register for the web cast and download any necessary audio software.

A web cast replay will be available on the Company's website, and the call replay will be available shortly after the conclusion of the earnings conference call. To access the replay, please call the following phone numbers:

About China Agritech, Inc.

China Agritech, Inc. is engaged in the development, manufacture and distribution of liquid and granular organic compound fertilizers and related products in China. The Company has developed proprietary formulas that provide a continuous supply of high-quality agricultural products while maintaining soil fertility. The Company sells its products to farmers located in 28 provinces of China. For more information, please visit http://www.chinaagritechinc.com.

Safe Harbor Statement

This press release contains certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that the Company expects, projects, believes or anticipates will or may occur in the future, including, without limitation, statements about its business or growth strategy, general industry conditions, future operating results of the Company, capital expenditures, expansion and growth opportunities, financing activities and other such matters, are forward-looking statements. Although the Company believes that its expectations stated in this press release are based on reasonable assumptions, actual results may differ from those projected in the forward-looking statements. Certain of these risks and uncertainties are or will be described in greater detail in our filings with the SEC. Except as required by law, China Agritech is under no obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

Use of Non-GAAP Financial Measures

The non-GAAP adjusted net income and earnings per share information should not be considered an alternative to, or more meaningful than, net income and earnings per share as determined in accordance with GAAP, since it omits the impact of the change in fair value of warrants, allowance for doubtful debt and stock based compensation. Management believes that the presentation of this non-GAAP financial measure is warranted and useful to its stockholders because it provides an additional analytical tool for understanding the Company's financial performance by excluding certain items that may obscure trends in the core operating performance of the Company's business.

* as retroactively adjusted for the 2-for-1 forward stock split on February 1, 2010.

* as retroactively adjusted for  the 2-for-1 forward stock split on February 1, 2010.

SOURCE China Agritech, Inc.