China Agritech Further Responds to Misleading Allegations
China Agritech, Inc. (Nasdaq: CAGC) today provided a more detailed response to the inaccurate facts and misleading allegations in a recent report by LM Research, a short seller in the Company's stock.
Contrary to the LM Research report, management confirms that the Company's factories are fully operational and revenues which have been reported in accordance with U.S. GAAP and audited by independent accountants are accurate. The Company has no record of LM Research, who stands to benefit financially from a decline in the Company's stock price, ever contacting the Company for any information or requesting to visit or tour any of the Company's facilities. We have attempted to find out who or what LM Research is, but it seems to have no history as a research firm, other than its recent attack on our Company.
1) In response to the allegation of fictitious revenues, the Company's revenues have been recorded based on the U.S. GAAP standard and results have been audited by independent accountants for the past six years. China Agritech is a fully reporting company filing annual 10-Ks and quarterly 10-Qs with the SEC. The Company's financial statements will now be audited by Ernst & Young Hua Ming, a "Big 4" accounting firm, beginning with the fiscal year ended December 31, 2010.
The Company expects to release its fourth quarter and full year 2010 audited financial results in March 2011. This date is consistent with last year's 2009 year-end announcement on March 31, 2010.
With respect to the disclosure of the revenue numbers reported to the Chinese government stated in the short seller's report, the Company confirms that its filings with the SEC are accurate, correct and have been audited by independent accounting firms. In addition, the Chinese SAIC is a government-designated institution responsible for the creation and updating of corporate registrations. The SAIC is not tasked with the responsibility of examining, reviewing or auditing financial statements that are submitted by a company. The timing, process, standards and requirements for submission are different from those for financial reporting in the U.S.
2) Despite LM Research's allegations, the Company's factories are fully operational, functioning and none are or have been for sale. The complete addresses of each of the Company's facilities can be found below. All of these facilities are operating normally. In addition to the Company's independent auditors, a number of analysts, media, and professional investors have visited the Company's production facilities. The Company periodically invites current and prospective analysts to visit the Company's facilities. However, as part of the Company's standard operating procedures and to ensure that there is no disruption to normal business operations, any such visit must be scheduled in advance for a specified date and time so that the proper personnel are available to assist in such tour. China Agritech has no record of LM requesting such a site visit of any of its facilities. Furthermore, in management's experience it is highly unusual, and out of normal operating procedures for any manufacturing company, to allow anyone to randomly enter their facility and begin "touring" without a prior scheduled appointment.
Despite LM's allegation, the Company's Harbin facility has never been listed for sale. LM posted what it claimed was a "For Sale" sign in front of a facility but that facility was not the Company's. The sign has a telephone number, so a representative of the Company dialed it (+86 13945131618).The representative was told by a Mr. Bi that the actual factory for sale is addressed at No. 16, Dalian Road. As LM admits, the Company's Harbin facility is at an adjacent location - No. 20 Dalian Road. A careful reading of LM's false accusations reveals their tactic: first they falsely claim that the Company's facility is for sale.
Then they imply that China Agritech's filings with government are erroneous in some unspecified manner, and, by doing so, LM implies that the address of China Agritech's facility is also erroneous in the government filing. LM never says, however, that the Company's address is wrong, because it is not, and so they contradict their own allegation. Furthermore, the name referred to in the report "Harbin Agritech Company," is not the name for the Company's Harbin facility which has consistently been disclosed as "Pacific Dragon Fertilizer Co, Ltd. (PRC)." The Company is unaware of any entity known as "Harbin Agritech Company" and has no relationship with or to the facility for sale at No. 16, Dalian Road in Harbin.
Company facilities addresses:
Anhui: E. 1800 Meters, Bengu City, Anhui Province
Harbin: No. 20 Dalian Road, Development Zone, Harbin City, Heilongjiang Province
Xinjiang: No. 360 Dongrong St. Northern District, Urumqi, Xinjiang Province
Beijing: No. 8 M2-4 District, Xingu Economic Development Zone, Pinggu District, Beijing
3) In response to the allegation that the distribution centers do not exist, and the Company has not properly used $19M raised in 2010 for the construction of distribution centers, the Company today has 21 distribution centers in operation.
The Company has no record of ever having received a request from the short seller for a list of and locations of the Company's distribution centers. Photos of the Company's Wanzhuang flagship distribution center in Henan province has been uploaded onto the Company's website at http://www.chinaagritechinc.com/management.htm.
Addresses of other sample distribution centers are also provided here. Sample Distribution Centers addresses:
No. 7 Jiangpin Road, Xian'nv Town, Zhang Gang, Jiangdu City, Jiangsu Province
Wanzhuang Fertilizer Mart, Xingang Ave., Xingang District, Zhenzhou City, Henan Province
4) In response to the allegation that customers including SinoChem denied having business relationships with China Agritech, LM Research was not able to provide credible and verifiable evidence for its purported communication with SinoChem. In actuality, the Company has partnered with SinoChem for three years. Historic sales agreements with SinoChem have been filed with the SEC and can be viewed at:
5) In response to the allegation that China Agritech does not have production licenses, LM Research again was not able to provide credible and verifiable evidence for its purported communication with local governments. The Company has the necessary licenses for the production of all of its fertilizer products. China Agritech has obtained the necessary Formal Fertilizer Registration Certificate for all of our fertilizer products from the PRC Ministry of Agriculture. Our formal fertilizer certificate was renewed on May 28, 2008 and is valid for a period of five years starting from May 28, 2008.
In addition, license registration numbers are clearly marked on each of the Company's product. On average it takes 2 to 5 years to obtain production licenses for organic fertilizers in China. That is why our 17-year corporate history in this industry is valuable as we have accumulated a large number of production licenses.
The company provides a list of its product license registration numbers for our granular compound fertilizers within the share holder letter on the company's website "http://www.chinaagritechinc.com/management.htm".
6) In response to the allegation of being unable to locate a Company sample product or purchase the product, LM must not have tried very hard to purchase China Agritech products, as samples are readily available for sale. The Company has a designated customer service telephone line: +86-800-990-0686 to provide consultation to existing and prospective customers and distribution partners to assist in making purchases. The Company had no record of any request from LM Research for product samples. Products can be obtained at our distribution centers throughout the main agricultural areas in China. The addresses of these centers can be found on the Company's website. Although B2C online shopping platforms do not constitute the main distribution channel for the Company's products, product can be found on Taobao at http://item.taobao.com/item.htm?id=5540312720.
7) In response to the allegation that suppliers cannot be located, the Company's suppliers are publicly disclosed and have facilities near the Company. Contracts with the Company's suppliers have been disclosed in the FY2009 annual report and can be viewed on the SEC website at: http://www.sec.gov/Archives/edgar/data/1166389/000114420410017773/v17892....
8) LM says that there is only a small market for humic acid fertilizers, but the only objective facts they present is about the use of humic acid in medicine. As a result of the Company's purification, complexing technology, and proprietary formulas, China Agritech is able to produce high valued-added organic fertilizer products. LM's comments about humic acid manufacturers are irrelevant, as is a comparison of pricing between the end fertilizer product and the raw material humic acid.
The Chinese government has strict management standards on humic acid fertilizer, even though LM claims that there is no quality standard. The current implementation of the standard for the soluble fertilizer containing humic acid is NY1106-2006. China Agritech is one of the first companies that engaged in commercialized organic fertilizer production with leading humic acid purification techniques and depth trace elements with complex technology. With high-quality products and strict production processes, China Agritech products were highly promoted by the Chinese Ministry of Agriculture and Agricultural Technology Promotion Center.
In 2008, China Agritech's organic liquid compound fertilizer was highly praised by NATESC of Ministry of Agriculture of China. The Company maintains photocopies of relevant documents available upon request through our Investor Relations agency Grayling.
9) Regarding related party transactions, Harbin Tailong signed a rental contract with Yinlong, a related party which had owned 10% of Harbin Tailong relating to two factories and one office building with a total area of 7,018 square meters. Monthly rent included rental for the two factories and one office building as well as large quantities of electricity, gas and water expenses used for production, which increased with the expanded production scale. Therefore, the rental agreement was revised in 2005 and new terms were stipulated to begin from July 1, 2005. The property that the Company acquired in a related-party transaction was, according to an independent third-party appraisal firm, Knight Frank, assessed to have a fair value of $1.59 million, compared with the $1.49 million actual transaction price.
10) In response to the allegation about a formal FINRA investigation in 2010 for insider trading, the Company never received a formal investigation notice from FINRA regarding insider transactions. The Company has established a strict insider trading policy. Management has abided by such policy and has not engaged in any share transactions that are against their professional integrity or corporate governance. The total number of shares transacted since 2010 only amounts to 3% of insiders' holdings.
11) In response to the allegation regarding the Company's Beijing Representative Office, Tailong's Beijing Representative Office was established on August 31, 2005. At that time, the Company had not set up factories outside Harbin. Tailong's Beijing Representative Office served to gather information and formulate a development strategy for the Company. As the Company has grown over the years, the function of the Beijing Representative Office is being gradually satisfied by the Company's Beijing subsidiary. The Company is currently phasing out the Beijing Representative Office.
12) LM Research alleges that management engages in self-dealing and takes excessive compensation. In fact, management has never engaged in self-dealing and has proactively supported the Company's interest. The office Ms. Xiaorong Teng leased to the Company has a total area of 780 square meters with annual rent of 492K RMB, which is equivalent to 1.75 RMB per square meter per day (approx. 0.27 USD per square meter per day). Such rate is below the going market rate. In addition, between March 11 and March 13, 2009, Chairman Yu Chang and Ms. Xiaorong Teng bought back shares and took voluntary pay cuts during the global economic downturn to support the Company.
13) LM alleges that Linda Dai's employment at YellowStone Resource cannot be verified. However, Linda Dai's employment at YellowStone can be verified. The full name of the company where Ms. Linda Dai worked was Yellowstone Resource, Inc. The company was registered in the State of Texas and its registration number is 800515242. The Company maintains photocopies of relevant documents, available upon request, through our Investor Relations agency Grayling.
There are a few more important factual errors in the LM Research "report", which is riddled with errors, large and small, and misleading and mis-characterized allegations. It is clear that LM Research lacks even a fundamental knowledge of China's fertilizer industry. China Agritech is engaged in the production of organic compound fertilizers, not inorganic fertilizers. The gross margin of organic fertilizers is much higher than inorganic fertilizers. The organic fertilizer industry has vast market potential. The Chinese government is subsidizing the growth of this industry through a Value Added Tax exemption for organic fertilizer producers. The Ministry of Agriculture expects a 30% compound annual growth rate for organic fertilizers for the next few years.
China Agritech's products and services have been in the market for 17 years. With the government's support to the organic fertilizer industry, China Agritech has achieved a compound annualized sales growth rate of 35%.
In addition to the eight photos that have been posted onto the corporate website at http://www.chinaagritechinc.com/management.htm, the Company is in the process of presenting more evidence. Meanwhile, the Company invites investors to view a corporate video at: http://v.youku.com/v_show/id_XMjQyNTYxODc2.html.
The Company has retained a third party service provider to begin an investigation of LM Research. On a tour to LM Research's office in Hong Kong, per the address listed on its website, a receptionist informed that they had never heard of LM Research inside the building.
The Company will continue to defend the interests of its shareholders. China Agritech is currently considering all available actions against malicious short sellers.
The Company also announced that it has made available on its corporate website a detailed letter to shareholders from its Chairman and CEO, Mr. Yu Chang. This letter responds to recent negative allegations and factual inaccuracies by self-acknowledged short sellers, and provides factual responses and further clarifications to refute these attacks on China Agritech's business operations and policies. Included in this shareholder letter are a point-by-point response to inaccurate and misleading allegations made by the short sellers concerning China Agritech's accounting practices, use of raised capital, availability of proper licenses, activity of the Company's production facilities, the status of the growing distribution center network, related-party transactions, historic development and current condition of the industry, and the background of the Company's senior management and independent director. The Company believes that this letter will provide existing and potential shareholders of China Agritech greater insight into its operations, business model, the integrity of its management team, and it will dismiss inaccurate facts and misleading allegations.
The letter is currently available at China Agritech's website "http://www.chinaagritechinc.com/management.htm".
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