China Organic Agriculture (CNOA) Q3 results disappointing

Some Highlights from their 10-Q

Sales

Sales for the three months ending September 30, 2010 totaled $42,632,862 compared to $39,656,537 for the three months ending September 30, 2009, a slight increase of 7.5%. Sales for the nine months ending September 30, 2010 totaled $106,281,386 compared to $106,402,273 for the nine months ending September 30, 2009, a slight decrease of 0.1%. Our revenue has slightly improved in the third quarter but is still restrained by the economic conditions in China. Almost all of the agricultural products we trade have stabilized at a higher market price compared to the previous year which results in our customers being more cautious with market conditions and placing fewer orders at a time.

Gross Profit

The Company's gross profit for the three months ending September 30, 2010 was $8,834,203 (or approximately 21% of revenue) compared to $11,108,812 (or approximately 28% of revenue) for the three months ending September 30, 2009. The gross profit for the nine months ending September 30, 2010 was $25,292,423 (or approximately 24% of revenue) compared to $26,423,441 (or approximately 25% of revenue) for the nine months ending September 30, 2009. The decreases in gross profit were attributable to increasing purchase prices of agriculture products. Although our blueberry products yield a higher profit margin, total sales derived from these products account for less than 5% of total revenue so they have not had a significant impact on our margins.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three and nine months ending September 30, 2010 reflected increases of $2,289,178 and $3,241,697, respectively from the comparable 2009 periods. These increases are largely due to higher storage expenses in 2010 which resulted from increased inventory balances and increased amortization expenses for intangible assets.

Interest Expense

Interest expenses were $767,164 and $1,378,916 for the three and nine month periods ending September 30, 2010 and $108,578 and $674,152 for the three and nine month periods ending September 30, 2009. The significant increases were due to the $8.5 million loan used to finance the purchase of Bellisimo Vineyard.

Provision for Income Taxes

The Company is subject to the income tax laws of the People's Republic of China ("PRC"). The PRC’s Enterprise Income Tax is now at a statutory rate of 25%. For the three and nine month periods ending September 30, 2010, the Company accrued $1,469,175 and $5,109,742 in income taxes. The effective tax rates of 25.3% and 25.6% represented by these accruals are higher than the statutory rate as expenses incurred in the US, including those pertaining to the Bellisimo Vineyard, are not deductible for PRC tax purposes.

Noncontrolling Interest

The Company owns 60% of Dalian Huiming, Xinbin Ice Wine, and Changbai Eco-Beverage, and thus 40% of total net income pertaining to these three subsidiaries was recorded as income attributed to noncontrolling interest. Noncontrolling interest decreased from $3,304,176 for the three months ended 2009 to $1,925,075 for the three months ended 2010 and decreased from $7,763,626 for the nine months ended 2009 to $6,686,234 for the nine months ended 2010 due to lower gross profits.


Net Income Attributable to CNOA Shareholders

Net income attributable to CNOA shareholders was $1,873,602 for the three months ending September 30, 2010, a decrease of 58.5% compared to $4,510,193 for the three months ending September 30, 2009. Net income attributable to CNOA shareholders was $7,634,357 for the nine months ending September 30, 2010, compared to net income of $10,916,474, a decrease of 30.1% as compared to the comparable 2009 period. As the Company owns only 60% of Dalian Huiming, Xinbin Ice Wine, and Changbai Eco-Beverage, 40% of total net income from these two entities was recorded as income attributed to noncontrolling interest.


Liquidity and Capital Resources

At September 30, 2010, cash and cash equivalents were $25,075,743 as compared to $18,512,835 at December 31, 2009. Current assets totaled $152,888,853, and current liabilities were $79,012,843. The Company’s current assets include $52,664,249 of inventory and its current liabilities include $57,885,859 in accounts payable. Both of these figures are substantially higher than the prior quarter, reflecting the Company’s decision to buy a substantial quantity of product immediately prior to the end of the second quarter in anticipation of increased prices and to maintain inventories at such levels through the third quarter. The components of the $6,562,908 increase of cash and cash equivalents are reflected below.

We anticipate that our available funds and cash flows generated from operations will be sufficient to meet our anticipated on-going operating needs for the next twelve months. However, we may need to raise additional capital in order to fund acquisitions and any substantive construction projects. We would expect to raise those funds through credit facilities obtained from lending institutions, the issuance of equity, or a combination of both. However, there can be no guarantee that we will be able to obtain such funding, whether through the issuance of debt or equity, on terms satisfactory to management and our Board of Directors.

The company's Q3 EPS was $0.03 and for the first nine months $0.10. Our projection EPS 2010 of $0.18 is not going to be achieved. Book value is $1.29 and cash per share $0.34. Despite the company is still profitable it looks like a fading business. Management clearly has to look for growth opportunities otherwise this company is doomed to left alone in the dark.