China Kangtai Cactus Bio (OTC BB:CKGT)

Third Quarter 2011 Results

• Revenue for the third quarter of 2011 increased 39% to $13.3 million, up from $9.5 million recorded in the same period of 2010.
• Income from operations increased 72% to $5.38 million, compared to $3.12 million in the third quarter of 2010.
• Net income increased 42% to $3.99 million or $0.18 per diluted share versus $2.8 million in the third quarter of 2010, or $0.13 per diluted share.
• Gross profit margin decreased to 37% compared with 38% in Q3 of 2010 as a result of changes in product mix.

China Kangtai CEO Jinjiang Wang said, “We are pleased to report another strong quarter of growth as our cactus product line continues to attract customers. The increase in sales in the third quarter was attributable to the introduction of new products and increased selling prices. Operating expenses for the third quarter was $499,562, an increase of $1,814, compared to $497,748 in the comparable period of 2010. The increase in operating expenses was mainly due to lower professional and consulting fees and research and development expenses, offset by a $99,846 increase in amortization of intangible assets, which resulted from our acquisition of patents and trademarks in 2010.

“Our agreement with Shandong Qingdao Tobacco Company in February is an important milestone for our company, which further increased our profitability this year. The increase in income from operations resulted mainly from increased net revenue from the Shandong Qingdao Cooperative Processing Agreement of $0.93 million this quarter and $2.3 million for the first nine month of 2011.

“Our Cactus feed posted excellent gains in the quarter, with revenues up 56%. Nutraceuticals were up 37% as that category continued to strengthen. We also saw an increase in the sale of raw and intermediate materials by 2,729% as a result of bulk sales of cactus raw materials to pharmaceutical customers. We do not expect to experience this growth rate going forward.

“The continuing decline in revenue from our beverage segment reflects our decision to terminate weak profit beverage products that were no longer competitive in the market. As previously reported, we also sold old beverage machines that were purchased in 2001-2003. Our beverage emphasis now is on dry red wine and cactus juice,” Mr. Wang said.

HARBIN, China--(BUSINESS WIRE)--China Kangtai Cactus Biotech Inc. (OTCBB: CKGT), a vertically integrated grower, developer, manufacturer and marketer of a variety of cactus-based products in China, announced today that it has signed sales agreements with Apollo Duty Free Shop GMBH and Tobosst Duty Free Shop GMBH, two of the biggest duty-free stores in Frankfurt, to sell Kangtai’s cactus-based “Sheng Cao” cigarettes in Germany.

The company has completed market surveys in Frankfurt and received positive consumer feedback. China Kangtai also invited several German tobacco dealers to help the company improve the taste and smell of “Sheng Cao” to enhance its quality. The company signed the agreements with the two duty-free companies in August and expects new revenue from the German market will be approximately 2.7 million EUR annually (approximately $3.7 million USD). Kangtai has initiated discussions with these two companies about possible sales of cactus powder and neutraceuticals.

Apollo is one of the largest professional duty-free companies in Germany and represents well-known European brands. Apollo’s retail store located at Romerberg serves 100,000 customers annually and has monthly sales of around one million EUR (approximately $1.4 million USD). Tobosst’s retail stores, along the Main River, sell luxury products such as watches, furniture, and tobacco products and have annual revenue over 10 million EUR (approximately $14 million USD).

China Kangtai CEO Jinjiang Wang said, “Expanding our market to Europe is an important step for our company. Besides the expected increase in cigarette revenue, this milestone for our company attests to the high quality of our products and demonstrates that Kangtai’s strong sales and promotion team has great potential to further penetrate the European markets and add new revenue streams that will increase the value of our company.

Second Quarter 2011 Results

• Revenue for the second quarter of 2011 increased 9% to $9.5 million, up from $8.7 million recorded in the same period of 2010.
• Income from operations increased 68% to $3.85 million, compared to $2.3 million in the second quarter of 2010.
• Net income decreased 6% to $2.8 million or $0.13 per diluted share versus $3.0 million in the second quarter of 2010.

“Earlier this month we announced our new 'Tai Shan Sheng Chao' cigarette that we have co-developed with China Tobacco Shandong. Initial product samples are already being produced by Shandong Jinan Tobacco Company, a subsidiary of China Tobacco Shandong. This new cigarette has been developed primarily for the Russian market, with cactus ingredients specially blended to appeal to this audience. We have a high degree of confidence in the success of this new product.”

“Our Nutraceuticals posted excellent gains in the quarter, with revenues up 21%. Cactus feed sales grew even faster, and were up 32%. We also saw an increase in the sale of raw and intermediate materials by 226% as a result of increased production stemming from crop rotation. But we do not expect this growth rate to be consistent going forward.”

“The decline in revenue from our beverage segment reflects our decision to terminate weak profit beverage products that were no longer competitive in the market. We also sold old beverage machines that were purchased in 2001-2003. Our beverage emphasis now is on dry red wine and cactus juice. Looking forward, we expect revenue from our beverage segment to be about 20% to 25% of total revenue,” Mr. Wang said.

 

CENTER VALLEY, Pa., Aug. 2, 2011 /PRNewswire/ -- TechPrecision Corporation (OTC Bulletin Board: TPCS) ("TechPrecision", or "the Company"), an industry leading manufacturer of precision, large-scale fabricated and machined metal components and systems with customers in the alternative energy, cleantech, medical, nuclear, defense, aerospace and other commercial industries, today announced that it has received orders for more than $4 million in new contracts from existing defense industry customers. These orders will ship during the next 12 months.

"We continue to benefit from a more strategic approach, partnering with new and existing customers to support their roadmaps and requirements, and these orders reflect our continuing success," commented James Molinaro, CEO of TechPrecision Corporation. "In addition, we recently qualified our manufacturing facility in Massachusetts to perform a broader spectrum of work for key defense customers. These qualifications serve to expand and diversify our opportunities for new and follow-on business in the defense sector. Our focus, corporate-wide, is on diversifying and growing our revenues, and these orders further prove that we are achieving those goals."

Mr. Molinaro continued, "We also look forward to bringing our new gantry mill on-line later this year, which will enable us to provide solutions for the defense sector on an even larger scale than our current tool set."

First Quarter Results:

• Revenue for the first quarter of 2011 increased 21% to $6.7 million, up from $5.5 million recorded in the same period of 2010
• Income from operations increased 72% to $2.0 million from $1.2 million in the first quarter of 2010.
• Adjusted net income (absent revaluation of Series A Preferred Stock and A, B, C and D warrants) rose 78% to $1.5 million or $0.07 per diluted share versus $0.8 million or $0.04 per diluted share in Q1 2010
• Net income decreased 21% to $1.9 million or $0.08 per diluted share versus $2.4 million in the first quarter of 2010
• Gross profit margin increased to 38% compared with 27% in Q1 of 2010

China Kangtai CEO Jinjiang Wang said, "Sales of our new cigarette products helped propel us to strong gains in revenue and net income in the quarter. Our low nicotine cactus cigarettes are proved to be very popular with consumers and this is playing a major role in driving our business forward. With the launch of our new low nicotine cigarette in April, we expect that cigarettes will play a major positive role in our financial results for the rest of 2011.

"With robust growth in almost all of our major categories, we expect we will continue to report good results, and will have a good year ahead," Mr. Wang said.

 

On April 18, 2011, China Kangtai Cactus Bio-Tech, Inc., a Nevada corporation  entered into an Investment Agreement  with Kodiak Capital Group, LLC (the “Investor”) pursuant to which the Company has agreed to issue and sell to the Investor, and the Investor has agreed to purchase from the Company, up to that number of the Company's common stock, at $0.001 par value per share, having an aggregate purchase price of one million five hundred thousand dollars ($1,500,000). Pursuant to the Investment Agreement, the price per share will be determined once the Company submits a written notice (the “Put Notice”) to the Investor stating the dollar amount in U.S. dollars the Company intends to sell to the Investor and will be based on the following formula: eighty five percent (85%) of the volume-weighted average price of the Company’s common stock five (5) days immediately preceding the date of the Put Notice and five (5) days immediately following the date of the Put Notice. Under the Investment Agreement, the Company may not deliver the Put Notice until after the resale of the Shares has been registered with the Securities and Exchange Commission.

China Kangtai Cactus Biotech Inc. said today that it stands by its 10-k financial reports with the SEC. The statement was given in response to a bulletin board posting alleging differences between the company’s Chinese SAIC filings and filings with the U.S. Securities and Exchange Commission.

China Kangtai CEO Jinjiang Wang said, "It is a well-known fact that there is rarely consistency between Chinese SAIC filings and U.S. SEC filings. Non-matching PRC and U.S. financial statements do not automatically indicate fraud or understatements of our real financial results. The SAIC reports are not consolidated nor do they use the same accounting standard as our SEC reports. We have three operating subsidiaries in China. It would be misleading to use only one SAIC report to match our SEC financial reports. Our SAIC reports were prepared in accordance with pertinent SAIC rules and policies. We stand by our numbers."

Fourth Quarter Results:

• Revenue for the fourth quarter of 2010 increased 44% to $12.3 million, up from $8.5 million in the same period of 2009
• Net income rose 959% to $3.6 million or $0.18 per diluted share versus a loss of $0.42 million in the fourth quarter of 2009
• Adjusted net income (excluding the reclassification of Series A preferred Stock and A, B, C and D warrants) rose 7% to $3.6 million or $0.17 per diluted share versus $3.3 million or $0.17 per diluted share in Q4 2009
• Gross profit margin increased to 42% compared to 39% in Q4 of 2009
• Income from operations increased 42% to $4.7 million from $3.3 million in Q4 2009

China Kangtai CEO, Jinjiang Wang, said, "2010 was a highly successful year for our company with significant improvement in our financial results. Our cactus cigarette, cactus feed and beverage and nutraceutical products all showed strong improvement. Revenue from the sale of cactus feed increased 99% reflecting the value of the cactus patent that we acquired in early 2010. The significant increase in total revenue was attributable to our efficient product marketing and increased customer acceptance."

In an open letter to shareholders, China Kangtai Cactus CEO Mr. Jinjiang Wang said, “We are nearing the end of our most successful year ever. Our profitable growth is accelerating as Chinese consumers and farmers increase their use of our cactus products.

• Fourth quarter revenue will reach a record $12.2 million. This will represent a revenue gain of 43% over revenue of $8.5 million in 2009.

• For the year, we are anticipating revenue of $36.0 million, a gain of 35% over 2009 revenue of $26.5 million.

• Although we are not yet prepared to provide specific EPS guidance for the quarter, we can point out that earnings per share in the first nine months of 2010 were $0.38 per diluted share and we currently expect good profitability in the fourth quarter.

“This shows that our valuation is extremely low and represents exceptional value for investors. The average P/E for fast growing profitable Chinese companies trading on the U.S. capital markets is approximately 8.85. Our current trailing twelve-month price to earnings ratio is 3.78.

“Our company generated cash flow from operations for the nine months of $6.9 million. We fully expect this to increase because we completed the $8 million patent payment at the end of August and our operating margins should remain in the 33% range.

“Our growth is driven by several important factors. Our cigarette business is growing even faster than we originally expected. For the first nine months cigarette revenue was $1.7 million up from $42,000 in the first nine months of 2009. In the third quarter of 2010, cigarette revenue was nearly $660,000. We believe we are going to continue to see robust growth in this segment of our business.

“Our other two strong growth segments are cactus feed, which was up 67% in the third quarter and beverages, still our largest segment, which was up 37% in the third quarter to $3.9 million. Our ability to continue to scale up our various business segments is positive,” Mr. Wang said.

• Sales for the three months ended September 30, 2010 totaled $9,522,875, an increase of $1,335,478, or 16% compared to the sales of $8,187,397 for the three months ended September 30, 2009.

• Net income totaled $2,807,217 for the three months ended September 30, 2010, an increase of $2,523,514, as compared to $283,703 in the same period of 2009. The increase in net income was caused partially by the income and loss from revaluation of Series A Preferred Stock and A, B, C, and D warrants with characteristics of liabilities at fair values.

Absent this income, the Company would have had a net income of $2,301,912 and basic and diluted earnings per common share would have been $0.11 and $0.11 for the three months ended September 30, 2010.

Absent the revaluation loss of $2,738,135 and the reduction in reserve for allowance, returns and doubtful account, the Company would have had a net income of $2,529,632 and basic and diluted earnings per common share would have been $0.14 and $0.13 for the three months ended September 30, 2009.

CKGT removed from the GeoSpecial on the Radar list.  

• Open issues about margins.
• Per Zack Bucklely's visit to China: Need more clarity on business model.

Second Quarter Financial Highlights 

• Revenue for the second quarter increased 34% to $8.7 million, up from $6.5 million recorded in the second quarter of 2009
• Net income rose 989% to $3 million of $0.14 per diluted share versus loss of $337,486 in Q2 2009.
• Adjusted net income (absent revaluation of Series A preferred Stock and A, B, C and D warrants) rose 10% to $1.6 million of $0.07 per diluted share versus $1.4 million or $0.07 per diluted share in Q2 2009
• Gross profit margin was 38% compared with 42% in the second quarter of 2009.
• Income from operations increased 25% to $2.3 million from $1.8 million in the second quarter of 2009.
• Weighted average number of diluted shares outstanding was 22.1 million as of June 30, 2010 compared with 19 million as of June 30, 2009

China Kangtai CEO Jinjiang Wang said, "The second quarter of 2010 was an exciting period for us. We achieved excellent sales levels in our cactus feed, beverage, cactus cigarette and nutraceutical segments. Revenue attributed to cactus feed increased 322% compared to the same period of 2009. Cigarette sales increased 294% from the first quarter of 2010. Significant growth resulted from the fact that our company’s products are efficiently marketed and well accepted by consumers. Another major factor is the feed patent bought last year, which provided us opportunities to further penetrate feed market.

“The decease in sales of raw and intermediated materials and packaged foods resulted from the changing of our product mix. The increase in cost of sales and decrease in gross profit rates was primarily attributable to the increased sales of our cactus feed products, which has gross profit rate of 17%.”

“Our newly acquired tobacco plant, which has the capacity to produce 260 million cigarettes a year, is an excellent opportunity for us our further expand this segment. Strong cactus cigarette revenue increases in the first half of year underscored the growing demand for our product. We anticipate cactus cigarettes revenue will continue to rise for the second half of the year,” Mr. Wang said.

The quarter's results highlights one of the concerns we had in our May 24 ,2010 research note:

 Operating income grew at a lesser rate than sales

Product mix played led to decreased margins:

"Sales of raw and intermediate materials were up 170% to $1.6 Million. This had a negative impact on our gross margin because the gross profit rate for raw and intermediate materials is about 11%, compared with substantially higher margins in the other two categories."

Management did not indicate if this situation would change. We can make the assumption that it will, but we need to hear it from the company. Maybe this is a clue to management's own margin uncertainties and lack of net income guidance?

This issue remains open.

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially)

-Is the company's auditor ranked in the top 100?
-Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm.  Short sellers have been using this information as a tool to validate their opinions. 
-Are the company's internal controls satisfactory?
-Are their any outstanding legal issues?
-Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.

- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better

- Is the company buying back stock?
- Chinese filings match respective SEC filings.(In process)

 

Criteria	Meets Criteria	Notes
Top 100 Auditor	No	Michael T. Studer CPA
Auditor Located U.S.A	Yes	Freeport, NY
Satisfactory Internal Controls	Yes	Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were operating effectively
No Legal issues	No	Risk Factors not included in recent filings
Customer Concentration	No	During the three months ended March 31, 2010, one customer accounted for 14% of net sales
Cash Flow Ratio is Greater than 1	Yes	5.39
Cash Ratio is Greater than 1	No	0.60
Buying Back Stock/Insider Buying	No	n/a

 

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors’ portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question.

We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task.  Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings.  Odds are we will identify some promising companies that will fail this litmus test.

China Kangtai Cactus Biotech Announces Acquisition of Tobacco Manufacturer

 Expanding and Broadening Cigarette Markets to Southeast Asia

Harbin, China – July 6, 2010 -- China Kangtai Cactus Biotech Inc. (OTCBB: CKGT), a vertically integrated grower, developer, manufacturer and marketer of a variety of cactus-based products in China, announced today that it has entered into a definitive assets purchase agreement to acquire the assets of Raoping County Dadi Tobacco Trade Center. (Hereinafter referred to as Dadi).

Pursuant to a definitive equity transfer agreement signed on June 28, 2010, the RMB 35 million (approximately $5.1 million) acquisition includes a building, equipment, a warehouse and established brands in Guangdong province and Macao.

Dadi is a tobacco product manufacturer and wholesaler of commodity, hardware and electric equipment. Dadi manufactures tobacco cigarettes in Guangdong province and Macao and sells them under its own brand name mainly throughout Southeast Asia including The Philippines, Taiwan and Myanmar; part of them are also sold to China.

Mr. JianDe Lin, CEO of Dadi, said: "China Kangtai Cactus is a great company that has shown remarkable growth with its line of excellent cactus-based products. We are confident this transaction provides a solid foundation for China Kangtai Cactus to continue building a strong cigarette business.”

China Kangtai Cactus currently outsources cactus-based cigarette production to a manufacturer approved by China’s State Administration for Industry & Commerce and China's State Tobacco Monopoly Bureau.

China Kangtai CEO Jinjiang Wang said, “This acquisition enables us to produce cactus-based cigarettes in our own facilities, which will provide us with stronger cost control and production flexibility. By leveraging Dadi’s brand name and sale channels in The Philippines, Taiwan and Myanmar, we can expand our cactus-based cigarette market sales to Southeast Asia, which we expect to help us significantly broaden future sales. We also expect this acquisition to be accretive to earnings and to significantly increase shareholder value in the long run.”

Investors require more details on this transaction:

1. Will it be accretive in the short-run?

2. More information on the payment terms. (Shares issued)?

On June 28, 2010, China Kangtai Cactus Bio-Tech, Inc., through its wholly-owned subsidiary, Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. entered into an Asset Purchase Agreement  with Dadi Tobacco Trade Center of Raoping County in Guangdong Province of China. The Company has agreed to purchase from Seller certain real property and all improvements thereon, and all equipment, fixtures used in connection with the Seller’s operations for RMB (“Renminbi”) 3,500,000 (approximately US$5,147,000) in cash. The real property consists of the land use right to 4,784 square meters of land located in Raoping County of Guangdong Province of China for a period of 50 years.
 
Pursuant to the Agreement, the Company will make payments to the Seller in three installments:

• First installment will consist of 30% of the total purchase price to be paid within 10 days from the date of the execution of the Agreement.
  
• Second installment of 30% of the total purchase price will be paid at the commencement of the title transfer for the assets to be purchased under the Agreement with the applicable regulatory agencies.
  
• The third installment of 40% of the total purchase price will be paid within 5 days following the completion of the title transfer of all assets purchased.

If the Seller does not complete all transfer of title of the assets required by law within 4 months from the date of the Agreement, the Seller will be subject to a penalty equal to 10% of the aggregate purchase price. If the Company does not make payment of the purchased price as set forth in the Agreement, the Company will be subject to a penalty payment equal to 10% of the amount of the installment payment not made at the time set out in the Agreement.
 
The Company currently outsources its cactus cigarettes. This acquisition will provide the Company with cigarette manufacturing capabilities to produce its own cactus cigarettes.

On May 17, 2010 CKGT reported first quarter results.

• First quarter ended March 31, 2010 increased 66% to $5.5 Million
• GAAP net income was $2.4 Million versus $956,673
• Adjusted net income (absent revaluation of Series A preferred Stock and A, B, C and D warrants) rose 20.5% to $836,723 of $0.04 per diluted share versus $693,948 or $0.04 per diluted share in Q1 2009
• Gross profit margin was 27% compared with 37% in the first quarter of 2009.
• Income from operations increased 34% to $1.2 Million from $880,530 in 2009.
• Weighted average number of diluted shares outstanding was 21.7 Million as of March 31, 2010 compared with 19 Million as of March 31, 2009

The stock has since sold off on this report. We suspect that even though the first quarter is historically the weakest quarter for CKGT, investors were likely expecting some EPS growth. Even though sales were robust and more than we had anticipated, lower margins did not allow operating earnings to keep pace.

Ideally, as a company expands, growth is also preferred in the slowest quarter even though the EPS is less then each of the remaining three quarters. It is unfortunate that U.S. investors analyze stocks on a quarterly basis. But we can't ignore the typical investor’s point of view.

We believe that the decline in CKGT shares could have been averted if the company did a better job of educating investors in its press release.

1. Recall from our Rodman conference interview, the company maintained that in order to accelerate its EPS grow rate it would require financing. Although the company's growth assumption may have been conservative, this issue could still lead to investor trepidation. The company did receive funds from a land deal which happened last year between China Kangtai and Government of Qitaihe Cityand and also canceled a pending private placement deal involving 2,100,000 shares. These events may ease the concern of possible dilution. CKGT needs to put this issue to rest.

2. The company did not reiterate guidance or explicitly mention that the first quarter is typically the weakest. Investors need clarity, so the fact that CKGT won't give net income guidance could be causing a perception problem as it pertains to margin uncertainties.

3. Operating income grew at a lesser rate than sales

Product mix played led to decreased margins:

"Sales of raw and intermediate materials were up 170% to $1.6 Million. This had a negative impact on our gross margin because the gross profit rate for raw and intermediate materials is about 11%, compared with substantially higher margins in the other two categories."

Management did not indicate if this situation would change. We can make the assumption that it will, but we need to hear it from the company. Maybe this is a clue to management's own margin uncertainties and lack of net income guidance?

4. We also have to remember that many novice investors are most likely applying a trailing GAAP EPS of $0.08 as opposed to non-GAAP EPS of $0.39 to value CKGT shares.

The GeoTeam has attempted to roughly calculate what the 2010 future quarters will look like.

Revenue estimates using:

• 2010 company revenue guidance of about $35.0 Million
• Past trends (Revenue per Qtr/total sales). This relationship has been remarkably consistent and can provide us with a conservative starting point.

	1st Qtr. 2010 Reported	2nd Qtr. 2010E	3rd Qtr. 2010E	4th Qtr. 2010E	2010 Full Year Estimate
Revenue	$5.5 Million	$8.8 Million	$10.4 Million	$10.5 Million	$35.0 Million

Aggressive Revenue estimate using:

• First quarter sales
• Past trends (Revenue per Qtr/total sales).

	1st Qtr. 2010 Actual	2nd Qtr. 2010E	3rd Qtr. 2010E	4th Qtr. 2010E	2010 Full Year Estimate
Revenue	$5.5 Million	$11.0 Million	$12.7 Million	$13.1 Million	$42.3 Million

Please note that past Revenue per Qtr/total sales relationships may not hold as new products are now in the mix.

The fact that no net income guidance was provided and that no color on margins was provided in the press release will keep investors in limbo regarding EPS. Using our low end EPS estimate from our April 20, 2010 research note of around $0.50 yields the following:

	1st Qtr. 2010 Reported	2nd Qtr. 2010E	3rd Qtr. 2010E	4th Qtr. 2010E	2010 Full Year Estimate
EPS	$0.04	$0.10	$0.17	$0.20	$0.51

The EPS calculation assumes that non-GAAP net margins will come in around 30%. Of course, if first quarter margins do not improve, EPS could come in lower, unless revenue growth is more robust than company expectations.

Using our more aggressive revenue assumption would yield higher results.

Investors have taken CKGT shares down to its book value per share and an adjusted P/E of 3.3. This low valuation will prompt us to keep CKGT coded as a GeoSpecial until the second quarter is reported or more information becomes available. We will be speaking with CKGT's IR firm on the issues in this research note.

Some good news that may help quell dilution fears:

On April 30, 2010, China Kangtai Cactus bio-Tech, Inc. entered into a termination agreement with Seaside 88, LP pursuant to which the parties agreed to mutually terminate the Common Stock Purchase Agreement, dated November 5, 2009, between the Company and Seaside 88, LP with no further obligations. The parties agreed to enter into the Termination Agreement because the Company believes the financing terms as contemplated by the Purchase Agreement is not in the best interest of the Company at the current time.

As previously disclosed in a Current Report on Form 8-K filed on November 9, 2009, the Purchase Agreement provides for the offer and sale of up to 2,100,000 shares of the Company’s common stock to Seaside.

CKGT reported 2009 results on April 15, 2010. The company posted 2009 adjusted annual EPS growth of around 30%.

	Full Year 2009	Full Year 2008	Period Change
GAAP Revenue	$26.5 million	$20.3 million	30.5%
GAAP EPS	$0.02	$0.29	-93.1%
Company Supplied Non-GAAP EPS a	$0.43	$0.29	48.3%
Fully Diluted Shares	19.5 million	18.6 million	4.8%

But more importantly, after breaking down the numbers and reviewing amended filings it appears that the 2009 fourth quarter adjusted EPS grew 36.4% and experienced sequential quarterly EPS growth throughout 2009:

Sequential Growth	4th Quarter 2009	4th Quarter 2008	Period Change
GAAP Revenue	$8.5 million	$6.3 million	34.9%
GAAP EPS	-$0.02	$0.12	n/a
GeoCalculated Fully Tax-Adjusted Non-GAAP EPS b	$0.15	$0.11	$36.4%
Fully Diluted Shares	20.0 million	18.4 million	8.7%

	4th Qtr. 2009	3rd Qtr. 2009	2nd Qtr. 2009	1st Qtr. 2009
GeoCalculated Fully Tax-Adjusted Non-GAAP EPS a	$0.15	$0.13	$0.07	$0.04

^aNon-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time, differ from company supplied figures.The GeoTeam® non-GAAP figures apply a 25% and 36% tax rate for Chinese and United States companies respectively.

Why the IR firm did not persuade CKGT provide fourth quarter information in the release baffles us. Investors are going to attempt the calculations anyway… Why make our life harder and results open to interpretation? At least in this case the fourth quarter results were positive.

On the bright side, CKGT reaffirmed its revenue guidance for 30% growth in 2010; but with no net income guidance we are still left somewhat in the dark. If we assume that adjusted 4^th quarter margins will hold, we are looking at 2010 EPS of $0.59 equating to a forward a P/E of 4.45. If we use adjusted year end margins, we are looking at 2010 EPS of $0.49 and a P/E of 5.36. Also, if seasonality is not an issue, then the next two quarters look like easy comps. The challenge for EPS growth begins in the 2010 third quarter where numbers become more challenging.

It is quite a frustrating situation in which a company that has a current ratio of 5.8, a growth rate of 30% and a P/E ratio of less than 10 to sell for less than two times its book value of $1.47.

At this point I can think of the following reasons for this conundrum:

1. Poor IR
2. Lack of clarity in quarterly press releases
3. Confusion over its Series A Preferred Stock/associated warrants and its effect on the income statement. The company needs to break down non-GAAP EPS on a quarterly basis, not just on an annually.
4. Dilution of about 10% from preferred stock and in money the warrants .
5. Investor speculation that the company will have to raise money? We think this would be egregious at these levels, but with ridiculous offerings terms that take place in the ChinaHybrid space, who knows anymore.

CKGT issued revenue guidance this morning.  The company did not provide any net income or EPS guidance. The stock did not react in a way that some may have hoped so we worked through the numbers to achieve a better grip of EPS implications. We came up with the following:

 

December Year	Full Year 2010 Guidance	Period Change	Full Year 2009 Guidance	Period Change	Full Year 2008
GAAP Revenue	$34.8 million	35.0%	$25.8 million	27.1%	$20.3 million
GAAP EPS	n/a	n/a	n/a	n/a	$0.28
Tax Rate	n/a	n/a	n/a	n/a	15.8%
Fully Tax-Adjusted GEO Supplied Non-GAAP EPS a,b	$0.56	40.0%	$0.40	33.3%	$0.30
Fully Diluted Shares	19.7M	0.0%	19.7M	5.9%	18.6M

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December Qtr.	4th Quarter 2009 Guidance	4th Quarter 2008	Period Change
GAAP Revenue	$7.7million	$6.3 million	22.2%
GAAP EPS	n/a	$0.03	n/a
Tax Rate	n/a	n/a	n/a
Fully Tax-Adjusted GEO Supplied Non-GAAP EPS a,b	$0.13	$0.13	0.0%

So, even though the 2009 year will show growth in EPS,  it is possible that short-term investors were unimpressed due to the possibility of a weak fourth quarter. (Our  EPS calculation for the 2008 4th qtr. is much less than the $0.18 GAAP EPS that Reuters portrays). We look forward to the company’s year end release and the light it might shed on 2010 prospects. We particularly would like to understand what CKGT financing needs are. Until this time we we will keep CKGT coded as a GeoSpecial.

^a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time, differ from company supplied figures.The GeoTeam® non-GAAP figures apply a 25% and 36% tax rate for Chinese and United States companies respectively.

^b China Kangtai Cactus Bio did not provide EPS guidance. The GeoTeam® calculated an implied EPS figure using the current outstanding share count, current margins and revenue guidance.  Using the current share count is likely an unrealistic assumption.

Recall from our research comments on August 14. 2009:

"While we are not particularly impressed with China Kangtai's second quarter earnings per share growth rate of 6%, the stock is selling at a discount to book with a trailing P/E of 3.7, prompting us to code CKGT as a GeoSpecial at $0.95 per share based on Repricing of Risk Premium. Achieving a price above book should require an acceleration in its earnings per share growth rate."

Closer inspection of the second quarter financial statements possibly indicate that non-GAAP EPS may have actually increased significantly more that the 6% we had originally calculated. It now appears that 2009 first quarter non-GAAP EPS may have increased 40.0% ($0.07 vs. $0.05).

The GeoTeam® is still verifying its findings with China Kangtai Cactus management.  We also need to attain a better grasp of second half growth opportunities.

China Kangtai Cactus (CKGT.OB), a developer, manufacturer and marketer of a variety of cactus-based consumer products, reported 2009 second quarter financial results yesterday.  Revenue increased 30% to $6.5 million, while Geo calculated non-GAAP earnings per share increased 6.0% to $0.07. The GeoTeam® has monitored this stock for some time now, but we were hesitant to take a manufacturer of a cactus based products seriously.  Well the joke has been on us. The stock has risen sharply from $0.25 in April to its current price of $0.95. We will be taking a closer look at China Kangtai Cactus due to its recent quarterly performance and its recent annual growth rate in sales and earnings:

	Full Year 2008	Full Year 2007	Period Change
GAAP Revenue	$20.3 million	$14.2 million	43.0%
Fully Tax-Adjusted GEO Supplied Non-GAAP EPS a	$0.17	$0.11	54.5%
Adjusted Trailing EPS	$0.26	n/a	n/a
Adjusted Trailing P/E	3.7	n/a	n/a

Please note that after a quick read of China Kangtai's cash flow statements, the GeoTeam® will have to likely seek a clarification on several items in these statements that may effect our earnings per share determinations along with P/E calculations and consequently our investment stance. Also going forward, second half financial comparisons appear to be more challenging. We have requested an interview with management.

Current book value per share based on GAAP is $1.43.

While we are not particularly impressed with China Kangtai's second quarter earnings per share growth rate of 6%, the stock is selling at a discount to book with a trailing P/E of 3.7, prompting us to code CKGT as a GeoSpecial at $0.95 per share based on Repricing of Risk Premium. Achieving a price above book should require an acceleration in its earnings per share growth rate.

^aNon-GAAP EPS Figures exclude certain; non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam non-GAAP figures may, from time to time, differ from company supplied figures.