China Agritech Raising Cash (CAGC)

CHINA AGRITECH, INC. (NASDAQ: CAGC) was having a great day with gains north of 7%.  But at about 3:09 PM EST we saw a filing from the company.. the S-3… the ‘selling securities filing’ that often hits stocks if they have made large runs or developed a larger following.  The filing is to raise up to $100,000,000.00 in a mixed securities shelf registration.

While there are no assurances a sale of stock or other securities will ever be made, it filed to sell up to $100 million of any combination of Common Stock, Preferred Stock, Debt Securities, Warrants, and Units.  While no underwriters are named and while that usually means a deal is not imminent, there are some issues to consider below that would lead many to believe an offering is coming sooner rather than later.  The company manufactures and sells organic liquid compound fertilizers, organic granular compound fertilizers and related agricultural products in China.

Shares had traded as high as $18.48 today, but in about 10 minutes after the filing the stock is down to $16.91 and only up 0.65% now on the day on 1.97 million shares.  The company posted earnings just yesterday and had announced a forward split just before that, and calling its shares volatile might be an understatement.

Here is that language that is of concern that may bring a sooner securities sale:

On October 19, 2009 we issued (i) an aggregate of 2,785,536 shares of common stock and (ii) warrants to purchase up to an aggregate of 1,857,028 shares of common stock at an initial exercise price of approximately $5.38 per share, subject to adjustment, to Carlyle Asia Growth Partners IV, L.P. and CAGP IV Co-Investment, L.P. (collectively, the “Carlyle Investors”) for a purchase price of $15,000,000. The exercise price of the warrants has a floor of approximately $1.3285 per share, and in the event that the warrants are exercised at that price, we would issue an additional 2,333,331 shares (the “Additional Warrant Shares”).  We are obligated to issue up to 7,000,000 shares of common stock (the “Make-Good Shares”) to the Carlyle Investors in the event that we fail to meet a predetermined net income target of $11.5 million for the fiscal year ending December 31, 2009.  If we meet the net income target we will not issue any additional shares upon exercise of the warrants or any Make-Good Shares.  The warrants issued to the Carlyle Investors will become exercisable on April 19, 2010 and expire April 19, 2012.

We granted the Carlyle Investors a one-year right of participation in future offerings by us of shares of our common stock, debt or equity securities convertible, exercisable or exchangeable into common stock, or debt securities.  The right of participation was granted individually, on a pro rata basis based upon each investor’s original subscription amount, and collectively no less than $5 million and no more than $10 million.  In addition, we granted the Carlyle Investors the right to collectively designate one person to serve as a member of our board of directors.  On December 23, 2009, we appointed Carlyle’s designee, Zheng “Anne” Wang, to serve as a member of our Board of directors.  On January 8, 2010, the board of directors also appointed Charles Law to serve as a member of our board of directors.  The board of directors determined that Mr. Law was an “independent director” as that term is defined and determined in accordance with Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ Stock Market, LLC and Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended.

In connection with the transaction, we entered into a registration rights agreement, pursuant to which the Company agreed to prepare and file a registration statement covering the resale of the 1,392,768 shares and the warrants to purchase up to an aggregate of 928,514 shares of common stock (collectively, the “Registrable Securities”) no later than January 31, 2010.  On February 1, 2010, we agreed with Carlyle to extend the deadline for filing such registration statement until March 1, 2010.

As far as the use of funds, the company noted in the filing:

“We intend to use the net proceeds from the sale of the securities covered by this prospectus for general corporate purposes, which may include, but is not limited to, working capital, capital expenditures, research and development expenditures, acquisitions of new technologies or businesses and the establishment of branded chain stores.  The precise amount, use and timing of the application of such proceeds will depend upon our funding requirements and the availability and cost of other capital.”

JON C. OGG