Attached files
file | filename |
---|---|
EX-31.2 - China Kangtai Cactus Bio-tech, Inc. | v167283_ex31-2.htm |
EX-32.2 - China Kangtai Cactus Bio-tech, Inc. | v167283_ex32-2.htm |
EX-31.1 - China Kangtai Cactus Bio-tech, Inc. | v167283_ex31-1.htm |
EX-32.1 - China Kangtai Cactus Bio-tech, Inc. | v167283_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
for
the quarterly period ended September 30, 2009
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
for
the transition period from ____________ to ________________
Commission
File No. 000-33097
CHINA
KANGTAI CACTUS BIO-TECH, INC.
(Name of
Small Business Issuer in its Charter)
Nevada
|
87-0650263
|
(State
or Other Jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer I.D. No.)
|
99
Taibei Road
Limin
Economic and Technological Development Zone
Harbin, Heilongjiang Province,
People’s Republic of
China
(Address
of Principal Executive Offices)
(86)
451-57351189 ext 126
(Registrant’s
Telephone Number, Including International Code and Area Code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerate filer, an accelerate
filer, a non-accelerated filer, or a smaller reporting company. See the
definition of “large accelerated filer,” accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
|
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: As of November 19, 2009, the issuer
had outstanding 18,842,684 shares of common stock, $0.001 par
value.
Explanatory
Note
The
Company has determined that its financial statements being filed herein in the
Company’s quarterly report on Form 10-Q for the quarter ended September 30,
2009, as well as the accompanying condensed financial statement information for
the year ended December 31, 2008, will require further corrections resulting
from discussions of follow up correspondence received from the Commission on
November 20, 2009.
In order
for the Company to meet the extended filing due date of this quarterly report on
Form 10-Q, management has elected to file this quarterly report with the
intention of immediately amending this filing to reflect the corrections needed
based on discussions with the Commission.
The
corrections to be made will affect the following:
|
1.
|
The
Company expects to correct the deemed dividends for the year ended
December 31, 2008, to reflect higher deemed dividends based upon the
re-examination of the accounting literature that governs, Emerging Issues
Task Force Opinion (“EITF”) 98-5 as amended by EITF
00-27.
|
|
2.
|
Pursuant
to EITF 07-05, the Company also expects to correct the financial
statements for the three months and nine months ended September 30, 2009
to reflect an estimated liability for financial instruments consisting of
preferred stock and warrants to purchase common stock classified within
stockholders’ equity at December 31, 2008, that are required to be
classified as liabilities effective January 1, 2009 and measured at fair
value thereafter based upon these financial instruments containing
characteristics of liabilities. To accomplish the corrections described in
the preceding sentence, the Company expects to record a “cumulative effect
adjustment” to remove these financial instruments from stockholders’
equity on January 1, 2009 as if these financial instruments were included
in liabilities as of December 31, 2008. In addition, the Company expects
to re-measure the estimated liability of the financial instruments at fair
value at January 1, 2009 and also reflect that difference within a
cumulative effect adjustment. Finally, the Company expects to re-measure
this estimated liability at March 31, June 30, and September 30, 2009 and
reflect as a charge in the Statement of Operations for the three months
and nine months ended September 30, 2009, in the form of interest
expense, the amount of the change in fair value of the estimated liability
between January 1, 2009 and September 30,
2009.
|
CHINA
KANGTAI CACTUS BIO-TECH INC.
FORM 10-Q
INDEX
|
Page
|
|
PART
I - FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
|
1
|
Notes
to the Condensed Consolidated Financial Statements
(unaudited)
|
5
|
|
Item
2.
|
Management's
Discussion and Analysis or Plan of Operation
|
19
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk.
|
23
|
Item
4T.
|
Controls
and Procedures
|
23
|
PART
II - OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
24
|
Item
1A.
|
Risk
Factors
|
24
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
Item
3.
|
Defaults
upon Senior Securities
|
24
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
24
|
Item
5.
|
Other
Information
|
24
|
Item
6.
|
Exhibits
|
24
|
Signatures
|
25
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated
Balance Sheets
(Expressed
in US Dollars)
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Audited
as restated-
|
|||||||
Note
16)
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 3,398,563 | $ | 4,398,897 | ||||
Accounts
receivable, net of reserve for allowances, and doubtful accounts of
$1,466,800 and $979,700, respectively
|
3,201,832 | 3,869,985 | ||||||
Inventories
|
2,429,540 | 3,376,635 | ||||||
Other
receivables and prepaid expenses
|
2,756 | 1,005 | ||||||
Total
Current Assets
|
9,032,691 | 11,646,522 | ||||||
Property
and Equipment, net
|
9,999,523 | 6,236,914 | ||||||
Other
Assets
|
||||||||
Land
use rights, net
|
19,517,543 | 8,609,491 | ||||||
Intangible
assets, net
|
351,445 | 454,445 | ||||||
Total
Assets
|
$ | 38,901,202 | $ | 26,947,372 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 216,216 | $ | 315,639 | ||||
Payable
to seller of land use rights
|
6,815,304 | - | ||||||
Note
payable
|
887,414 | 887,475 | ||||||
Taxes
payable
|
596,221 | 570,855 | ||||||
Total
current liabilities
|
8,515,155 | 1,773,969 | ||||||
Commitments
and Contingencies
|
- | - | ||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, $0.001 par value; authorized 200,000,000 shares, issued and
outstanding: 733,333 and 1,150,000 shares, respectively
|
733 | 1,150 | ||||||
Common
stock, $0.001 par value; authorized 200,000,000 shares, issued and
outstanding: 18,409,351 and 17,885,625 shares,
respectively
|
18,410 | 17,886 | ||||||
Additional
paid-in capital
|
8,319,035 | 8,247,115 | ||||||
Retained
earnings
|
||||||||
Appropriated
|
3,469,968 | 2,682,345 | ||||||
Unappropriated
|
15,529,152 | 11,177,035 | ||||||
Accumulated
other comprehensive income
|
3,048,749 | 3,047,872 | ||||||
Total
stockholders' equity
|
30,386,047 | 25,173,403 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 38,901,202 | $ | 26,947,372 |
See
notes to consolidated financial statements.
1
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Income
(Expressed
in US Dollars)
Three Months Ended September
30,
|
Nine Months Ended September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
(Unaudited
as
restated-
|
(Unaudited)
|
(Unaudited
as
restated- |
|||||||||||||
Note
16)
|
Note
16)
|
|||||||||||||||
Net
Sales
|
$ | 8,187,397 | $ | 6,184,685 | $ | 18,030,093 | $ | 13,961,101 | ||||||||
Cost
of Sales
|
(4,941,881 | ) | (3,676,334 | ) | (10,810,714 | ) | (8,899,088 | ) | ||||||||
Gross
Profit
|
3,245,516 | 2,508,351 | 7,219,379 | 5,062,013 | ||||||||||||
Operating
Expenses
|
||||||||||||||||
Selling
expenses
|
71,625 | 136,214 | 129,569 | 211,273 | ||||||||||||
General
and administrative expenses
|
112,896 | 138,052 | 236,521 | 377,967 | ||||||||||||
Provision
for (reduction in) reserve for allowances, returns, and doubtful
accounts
|
(492,206 | ) | - | 457,307 | 136,125 | |||||||||||
Depreciation
|
19,210 | 19,675 | 58,267 | 57,453 | ||||||||||||
Amortization
of land use rights
|
9,543 | 9,588 | 28,620 | 27,991 | ||||||||||||
Amortization
of intangible assets
|
34,311 | 34,475 | 102,906 | 100,646 | ||||||||||||
Total
operating expenses
|
(244,621 | ) | 338,004 | 1,013,190 | 911,455 | |||||||||||
Income
from Operations
|
3,490,137 | 2,170,347 | 6,206,189 | 4,150,558 | ||||||||||||
Other
Income (Expenses)
|
||||||||||||||||
Interest
income
|
43 | 97 | 69 | 624 | ||||||||||||
Imputed
interest
|
(13,307 | ) | (13,370 | ) | (39,909 | ) | (39,032 | ) | ||||||||
Loss
on disposal of property and equipment
|
- | (197 | ) | (132 | ) | (14,246 | ) | |||||||||
Total
Other Income (Expenses)
|
(13,264 | ) | (13,470 | ) | (39,972 | ) | (52,654 | ) | ||||||||
Income
before Income Taxes
|
3,476,873 | 2,156,877 | 6,166,217 | 4,097,904 | ||||||||||||
Income
Tax Expense
|
(455,035 | ) | (389,737 | ) | (1,026,477 | ) | (685,942 | ) | ||||||||
Net
Income
|
3,021,838 | 1,767,140 | 5,139,740 | 3,411,962 | ||||||||||||
Deemed
dividends relating to the beneficial conversion feature and the value of
the warrants included in the sales of Series A preferred stock (as
restated for the three months andnine months ended September 30,
2008)
|
- | (250,000 | ) | - | (750,000 | ) | ||||||||||
Net
income attributable to common stockholders (as restated for the three
months and nine months ended September 30, 2008)
|
$ | 3,021,838 | $ | 1,517,140 | $ | 5,139,740 | $ | 2,661,962 | ||||||||
Net income per common share (as
restated for the three months and nine months ended September 30,
2008)
|
||||||||||||||||
Basic
|
$ | 0.17 | $ | 0.09 | $ | 0.29 | $ | 0.15 | ||||||||
Diluted
|
$ | 0.15 | $ | 0.08 | $ | 0.27 | $ | 0.14 | ||||||||
Weighted
average number of common shares outstanding
|
||||||||||||||||
Basic
|
18,030,492 | 17,739,625 | 17,933,914 | 17,739,625 | ||||||||||||
Diluted
|
19,702,898 | 18,921,690 | 19,258,049 | 18,446,263 | ||||||||||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
$ | 3,021,838 | $ | 1,767,140 | $ | 5,139,740 | $ | 3,411,962 | ||||||||
Foreign
currency translation adjustment
|
29,424 | 66,880 | 877 | 1,221,092 | ||||||||||||
Total
|
$ | 3,051,262 | $ | 1,834,020 | $ | 5,140,617 | $ | 4,633,054 |
See
notes to consolidated financial statements.
See
notes to consolidated financial statements.
2
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Equity
(Expressed
in US Dollars)
Additional
|
Unappropriated
|
Appropriated
|
Accumulated
other
|
|||||||||||||||||||||||||||||||||
Preferred
Stock $0.001 par value
|
Common
Stock $0.001 par value
|
paid-in
|
retained
|
retained
|
comprehensive
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
earnings
|
earnings
|
income
|
Total
|
||||||||||||||||||||||||||||
( As
restated for the year ended December
31,
2008- Note 16)
|
(As
restated for the year ended
December
31, 2008- Note 16)
|
|||||||||||||||||||||||||||||||||||
Balance
at December 31, 2006
|
- | $ | - | 17,739,625 | $ | 17,740 | $ | 6,558,082 | $ | 5,266,815 | $ | 1,361,365 | $ | 691,037 | $ | 13,895,039 | ||||||||||||||||||||
Imputed
interest on note payable
|
- | - | - | - | 49,766 | - | - | - | 49,766 | |||||||||||||||||||||||||||
Transfer
to statutory and
|
- | |||||||||||||||||||||||||||||||||||
staff
welfare reserves
|
- | - | - | - | - | (483,572 | ) | 483,572 | - | - | ||||||||||||||||||||||||||
Net
income for the year ended December 31, 2007
|
- | - | - | - | - | 2,299,700 | - | - | 2,299,700 | |||||||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | - | - | - | 1,047,589 | 1,047,589 | |||||||||||||||||||||||||||
Balance
at December 31, 2007
|
- | - | 17,739,625 | 17,740 | 6,607,848 | 7,082,943 | 1,844,937 | 1,738,626 | 17,292,094 | |||||||||||||||||||||||||||
Sale
of Series A
|
||||||||||||||||||||||||||||||||||||
preferred
stock
|
1,250,000 | 1,250 | - | - | 719,672 | - | - | 720,922 | ||||||||||||||||||||||||||||
Deemed
dividends (as restated- Note 16)
|
- | - | - | - | 750,000 | (750,000 | ) | - | - | |||||||||||||||||||||||||||
Issuance
of shares in consideration for
|
||||||||||||||||||||||||||||||||||||
the
waiver of liquidated damages
|
- | - | 46,000 | 46 | 26,634 | - | - | - | 26,680 | |||||||||||||||||||||||||||
Conversion
of Series A preferred stock
|
(100,000 | ) | (100 | ) | 100,000 | 100 | - | - | - | - | - | |||||||||||||||||||||||||
Stock
option expense (as restated- Note 16)
|
- | - | - | - | 90,635 | - | 90,635 | |||||||||||||||||||||||||||||
Imputed
interest on note payable
|
- | - | - | - | 52,326 | - | - | - | 52,326 | |||||||||||||||||||||||||||
Transfer
to statutory and
|
||||||||||||||||||||||||||||||||||||
staff
welfare reserves
|
- | - | - | - | - | (837,408 | ) | 837,408 | - | - | ||||||||||||||||||||||||||
Net
income for the year ended December 31, 2008
|
||||||||||||||||||||||||||||||||||||
(as
restated- Note 16)
|
- | - | - | - | - | 5,681,500 | - | - | 5,681,500 | |||||||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | - | - | - | 1,309,246 | 1,309,246 | |||||||||||||||||||||||||||
Balance
at December 31, 2008 (as restated- Note 16)
|
1,150,000 | 1,150 | 17,885,625 | 17,886 | 8,247,115 | 11,177,035 | 2,682,345 | 3,047,872 | 25,173,403 | |||||||||||||||||||||||||||
Imputed
interest on note payable
|
- | - | - | - | 39,909 | - | - | - | 39,909 | |||||||||||||||||||||||||||
Conversion
of Series A preferred stock
|
(416,667 | ) | (417 | ) | 416,667 | 417 | - | - | - | - | - | |||||||||||||||||||||||||
Excerise
of stock option
|
- | - | 107,059 | 107 | 32,011 | - | - | - | 32,118 | |||||||||||||||||||||||||||
Transfer
to statutory and
|
||||||||||||||||||||||||||||||||||||
staff
welfare reserves
|
- | - | - | - | - | (787,623 | ) | 787,623 | - | - | ||||||||||||||||||||||||||
Net
income for the nine months ended September 30, 2009
|
- | - | - | - | - | 5,139,740 | - | - | 5,139,740 | |||||||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | - | - | - | 877 | 877 | |||||||||||||||||||||||||||
Balance
at September 30, 2009 (Unaudited)
|
733,333 | $ | 733 | 18,409,351 | $ | 18,410 | $ | 8,319,035 | $ | 15,529,152 | $ | 3,469,968 | $ | 3,048,749 | $ | 30,386,047 |
See
notes to consolidated financial statements.
3
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Expressed
in US Dollars)
Nine Months Ended September
30,
|
||||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Unaudited
as restated -
Note
16)
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income
|
$ | 5,139,740 | $ | 3,411,962 | ||||
Adjustments
to reconcile net income to net cash provided by (used for) operating
activities
|
||||||||
Depreciation
- cost of sales
|
294,709 | 292,932 | ||||||
Depreciation
- operating expenses
|
58,267 | 57,453 | ||||||
Amortization
of land use rights -cost of sales
|
109,635 | - | ||||||
Amortization
of land use rights- operating expenses
|
28,620 | 27,991 | ||||||
Amortization
of intangible assets
|
102,906 | 100,646 | ||||||
Provision
for allowances, returns, and doubtful accounts
|
457,307 | 136,125 | ||||||
Stock
option expense
|
- | 59,225 | ||||||
Cashless
exercise of stock option charged to operations
|
32,118 | - | ||||||
Imputed
interest
|
39,909 | 39,032 | ||||||
Loss
on disposal of property and equipment
|
132 | 14,246 | ||||||
Changes
in operating assets and liabilities
|
||||||||
Accounts
receivable, net
|
211,148 | (560,609 | ) | |||||
Other
receivables and prepaid expenses
|
(1,751 | ) | 18,209 | |||||
Inventories
|
947,095 | 2,275,839 | ||||||
Accounts
payable and accrued liabilities
|
(99,423 | ) | (22,367 | ) | ||||
Taxes
payable
|
25,366 | 170,284 | ||||||
Net
cash provided by (used for) operating activities
|
7,345,778 | 6,020,968 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Proceeds
from disposals of property and equipment
|
- | 2,532 | ||||||
Purchases
of land use rights
|
(4,224,870 | ) | (7,255,081 | ) | ||||
Purchases
of property and equipment
|
(4,113,831 | ) | - | |||||
Net
cash provided by (used for) investing activities
|
(8,338,701 | ) | (7,252,549 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Sale
of Series A preferred stock-net
|
- | 670,917 | ||||||
Net
cash provided by (used for) financing activities
|
- | 670,917 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
(7,411 | ) | 699,243 | |||||
Increase
(decrease) in cash and cash equivalents
|
(1,000,334 | ) | 138,579 | |||||
Cash
and cash equivalents, beginning of period
|
4,398,897 | 509,901 | ||||||
Cash and cash equivalents, end
of period
|
$ | 3,398,563 | $ | 648,480 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$ | - | $ | - | ||||
Income
taxes paid
|
$ | 962,714 | $ | 515,658 | ||||
Schedule
of non-cash investing and financing activities:
|
||||||||
Acquisition
of Taichan Baisa land use rights
|
$ | 9,736,149 | $ | - | ||||
less
amount paid to September 30, 2009
|
(2,920,845 | ) | - | |||||
Due
seller at September 30, 2009
|
$ | 6,815,304 | $ | - |
See
notes to consolidated financial statements.
4
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
NOTE 1 – INTERIM FINANCIAL
STATEMENTS
The
unaudited financial statements as of September 30, 2009 and for the three and
nine months ended September 30, 2009 and 2008 have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with instructions to Form 10-Q. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the annual financial statements and reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
financial position as of September 30, 2009 and the results of operations and
cash flows for the periods ended September 30, 2009 and 2008. The financial data
and other information disclosed in these notes to the interim financial
statements related to these periods are unaudited. The results for the three and
nine months ended September 30, 2009 is not necessarily indicative of the
results to be expected for any subsequent quarter of the entire year ending
December 31, 2009. The balance sheet at December 31, 2008 has been derived from
the audited financial statements at that date.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the Securities and
Exchange Commission’s rules and regulations. These unaudited financial
statements should be read in conjunction with our audited financial statements
and notes thereto for the year ended December 31, 2008 as included in our report
on Form 10-K, as filed with the SEC on April 15, 2009.
NOTE 2 - ORGANIZATION AND
BUSINESS OPERATIONS
China
Kangtai Cactus Bio-Tech Inc. (“US China Kangtai”) was incorporated in Nevada on
March 16, 2000 as InvestNet, Inc. (“InvestNet”).
China
Kangtai Cactus Bio-tech Company Limited (“BVI China Kangtai”) was incorporated
in the British Virgin Islands (“BVI”) on November 26, 2004. Harbin Hainan
Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin Hainan Kangda”), a company with
limited liability, was incorporated in the People’s Republic of China (“PRC”) on
December 30, 1998.
US China
Kangtai and BVI China Kangtai are investment holding companies and Harbin Hainan
Kangda’s principal activities are planting and developing new types of cactus,
producing and trading in cactus health foods and related products in the
PRC.
In 2004,
BVI China Kangtai acquired Harbin Hainan Kangda. In 2005, US China Kangtai
acquired BVI China Kangtai.
On
September 26, 2006, Harbin Hainan Kangda acquired a 100% equity interest in
Guangdong Taishan Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a
PRC company with limited liability previously owned by two stockholders, for
$1,475,000 in cash. Taishan Kangda grows and sells cactus.
US China
Kangtai, BVI China Kangtai, Harbin Hainan Kangda and Taishan Kangda are
hereafter collectively referred to as the “Company”.
The
accompanying consolidated financial statements include the financial statements
of US China Kangtai and its 100% owned subsidiaries, BVI China Kangtai, Harbin
Hainan Kangda and Taishan Kangda. All significant inter-company accounts and
transactions have been eliminated in consolidation.
5
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
NOTE 3 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of
Presentation
The
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States and are expressed
in US dollars.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial
Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, other receivables, accounts payable and accrued liabilities, payable
to seller of land use rights, note payable, and taxes payable. The fair value of
these financial instruments approximate their carrying amounts reported in the
consolidated balance sheets due to the short term maturity of these instruments
and based on interest rates of comparable instruments.
Foreign Currency
Translation
The
functional currency of US China Kangtai and BVI China Kangtai is the United
States dollar. The functional currency of Harbin Hainan Kangda and Taishan
Kangda is the Chinese Renminbi (“RMB”). The reporting currency of the Company is
the United States dollar.
Harbin
Hainan Kangda and Taishan Kangda assets and liabilities are translated into
United States dollars at period-end exchange rates ($0.14668 and $0.14669 at
September 30, 2009 and December 31, 2008, respectively). Harbin Hainan Kangda
and Taishan Kangda revenues and expenses are translated into United States
dollars at weighted average exchange rates for the periods ($0.14659 and
$0.14337 for the nine months ended September 30, 2009 and 2008, respectively).
Resulting translation adjustments are recorded as a component of accumulated
other comprehensive income (loss) within stockholders’ equity.
Cash and Cash
Equivalents
Cash and
cash equivalents at September 30, 2009 and December 31, 2008 consist of cash on
hand and demand deposit accounts with banks. The Company considers all highly
liquid instruments with maturities of three months or less at the time of
issuance to be cash equivalents.
Accounts
receivable
The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. A reserve for allowances and doubtful
accounts is established and recorded based on historical experience and the
aging of the related accounts receivable.
6
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Inventories
Inventories
of cactus stock include trees and palms whose cost consists of seeds and an
allocation of fertilizers, direct labor and overhead costs such as depreciation,
rent, freight and fuel, among others. Inventories of cactus stock are stated at
the lower of cost or market value, cost being calculated on the weighted average
basis.
Other raw
materials are stated at the lower of cost or market value, cost being determined
on a first in, first out method.
Work in
progress and finished goods are stated at the lower of cost or market value,
cost being determined on a first in, first out method.
Property and
equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Expenditures for additions, major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of the respective assets (40 years for buildings, 12 years for plant
equipment and machinery, 10 years for motor vehicles, and 8 years for furniture
and office equipment).
Intangible and Other
Long-Lived Assets
Intangible
and other long-lived assets are stated at cost, less accumulated amortization
and impairments. Land use rights are being amortized on a straight-line basis
over the remaining term of the related agreements, which range from 40 to 50
years. Other intangible assets consist of patents and licenses. Patents and
licenses are being amortized over their expected useful economic life of 10
years.
The
Company reviews its long-lived assets for impairment annually or more frequently
if events or changes in circumstances indicate that the carrying amount of an
asset may no longer be recoverable. The Company measures impairment by comparing
the carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted cash flows is less than the
carrying amount of the assets, the Company would recognize an impairment loss
based on the fair value of the assets.
Revenue
Recognition
The
Company recognizes revenue upon delivery of the products, at which time title
passes to the customer provided that: there are no uncertainties regarding
customer acceptance; persuasive evidence of an arrangement exists; the sales
price is fixed or determinable; and collectability is deemed
probable.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising expenses totaled $73,295 and
$132,412 for the nine months ended September 30, 2009 and 2008,
respectively.
Research and
Development
Research
and development costs related to both present and future products are expensed
as incurred. Total expenditures on research and development charged to general
and administrative expenses for the nine months ended September 30, 2009 and
2008 were $58,636 and $12,330, respectively.
7
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Stock-Based
Compensation
Stock-based
compensation is accounted for at fair value in accordance with Accounting
Standards Codification (“ASC”) 718, “Compensation- Stock
Compensation”.
In
addition to requiring supplemental disclosures, FASB ASC 718, Compensation – Stock Compensation,
addresses the accounting for share-based payment transactions in which a company
receives goods or services in exchange for (a) equity instruments of the company
or (b) liabilities that are based on the fair value of the company’s equity
instruments or that may be settled by the issuance of such equity instruments.
FASB ASC 718 focuses primarily on accounting for transactions in which a company
obtains employee services in share-based payment transactions.
References
to the issuances of restricted stock refer to stock of a public company issued
in private placement transactions to individuals who are eligible to sell all or
some of their shares of restricted Common Stock pursuant to Rule 144,
promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain
limitations. In general, pursuant to Rule 144, a stockholder who is not an
affiliate and has satisfied a six-month holding period may sell all of his
restricted stock without restriction, provided that the Company has current
information publicly available. Rule 144 also permits, under certain
circumstances, the sale of restricted stock, without any limitations, by a
non-affiliate of the Company that has satisfied a one-year holding
period.
Income
Taxes
Deferred
income taxes are recognized for temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements by
applying enacted statutory tax rates expected to apply in the years in which
those temporary differences are expected to be recovered or settled. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is not more likely than not that some portion or all of the
deferred tax assets will be realized. Current income taxes are provided for in
accordance with the laws of the relevant taxing authorities.
Net Income Per Common
Share
Basic net
income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the period.
Diluted
net income per common share is computed on the basis of the weighted average
number of common shares and dilutive securities (such as stock options,
warrants, and convertible preferred stock) outstanding. Dilutive securities
having an anti-dilutive effect on diluted net income per common share are
excluded from the calculation.
8
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
following table provides a reconciliation of common shares used in the net
income per basic share and net income per diluted share computations for the
three and nine months ended September 30, 2009 and 2008:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Weighted
average shares outstanding - basic
|
18,030,492 | 17,739,625 | 17,933,914 | 17,739,625 | ||||||||||||
Series
A convertible preferred stock
|
1,150,000 | 1,182,065 | 1,150,000 | 706,638 | ||||||||||||
Incremental
common shares from stock options
|
||||||||||||||||
and
warrants
|
522,406 | - | 174,135 | - | ||||||||||||
Weighted
average shares outstanding - diluted
|
19,702,898 | 18,921,690 | 19,258,049 | 18,446,263 |
The
Company uses the treasury stock method to account for the dilutive effect of
unexercised stock options and warrants in net income per diluted share.
Antidilutive common shares related to stock options and warrants excluded from
the computation of net income per diluted share were approximately 3,577,594 and
4,100,000 for the three months ended September 30, 2009 and 2008, respectively,
and were approximately 3,925,865 and 4,100,000 for the nine months ended
September 30, 2009 and 2008, respectively.
Segment
Information
The
Company operates in only one segment, the sale of products made from cactus
plants. The Company sells to two customer groups; health foods comprising cactus
liquor and juice and sale of cactus powder to pharmaceutical companies for use
in medical products.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
Recent Accounting
Pronouncements
Certain
accounting pronouncements have been issued by the FASB and other standard
setting organizations which are not yet effective and have not yet been adopted
by the Company. The impact on the Company’s financial position and results of
operations from adoption of these standards is not expected to be
material.
NOTE 4 -
INVENTORIES
Inventories
consist of:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Cactus
stock
|
$ | 1,994,996 | $ | 2,810,861 | ||||
Other
raw materials and work-in-process
|
61,159 | 49,826 | ||||||
Finished
goods
|
373,385 | 515,948 | ||||||
Total
|
2,429,540 | 3,376,635 | ||||||
Less:
allowance for market adjustments to inventories
|
- | - | ||||||
Net
|
$ | 2,429,540 | $ | 3,376,635 |
9
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
NOTE 5 – ACQUISITION OF LAND
USE RIGHTS AND RELATED PROPERTY AND EQUIPMENT IN CURRENT PERIOD AND RELATED
FINANCING
On March
25, 2009, Harbin Hainan Kangda entered into an Asset Purchase Agreement (the
“Agreement”) with Qitaihe Kangwei Biotechnology Co., Ltd. (“Seller”). Under the
terms of the Agreement, the Company was to acquire (i) land use rights of
state-owned land located in Shuguang Village of Xinxing District in Qitaihe
City, covering an area of 49 thousand square meters, with a use life of 43
years, (ii) housing ownership of 5,606.20 square meters in Shuguang Village of
Xinxing District in Qitaihe City, HeiLongJiang Province and (iii) fixed assets
consisting of machinery, equipment and facilities (including equipment,
information, file data, spare parts and office supplies) located on the acquired
premises. The land use rights, housing ownership and fixed assets are
collectively referred to as the “Assets”.
The
purchase price for the Assets was 37,000,000 RMB ($5,421,610). The Company was
to also pay transfer fees and taxes in connection with the registration of the
sale of the Assets. The purchase price was to be paid in installments: 50%
within 5 days of signing the Agreement, 10% upon Seller completing the handover
procedure and the remaining 40% within 5 days of Seller’s completion of the
registration (“approval”) of the sale in the land administration and other
departments in the People’s Republic of China, which was expected to be
completed within 90 days of the payment of the first installment of the purchase
price. As of September 30, 2009, the Company has paid the 37,000,000 RMB
($5,421,610) purchase price. The registration of the sale was completed on
October 8, 2009 and amortization of the portion of the price attributed to the
land use rights of 8,936,484 RMB ($1,309,999) and the related property and
equipment of 28,063,516 RMB ($4,113,831) will begin to be charged to
operations.
On August
25, 2009, Harbin Hainan Kangda entered into an Asset Purchase Agreement (the
“Agreement”) with the Local Government of Baisha Town, Taishan City, Guangdong
Province (“Seller”). Under the terms of the Agreement, the Company was to
acquire land use rights of state-owned land located in Langbei Village, Baisha
Town covering an area of 181,854 square meters, with a useful life of 50 years
starting from the issue date of the land use right certificate.
The
purchase price for the Taishan Basha land use rights was 66,376,800 RMB
($9,736,149). The Company was to also pay transfer fees and taxes in connection
with the registration of the sale of the land use rights. The purchase price was
to be paid in installments: 30% within 30 days of signing the Agreement, and the
remainder due to the Seller upon completing the handover procedure including
completion of the registration (“approval”) of the sale in the land
administration and other departments in the People’s Republic of China, which is
expected to be completed in December 2009. The Company paid the initial 30%
installment of 19,913,040 RMB ($2,920,845) to the Seller on September 17, 2009,
leaving a remaining balance due of 46,463,760 RMB ($6,815,304) in unpaid Payable
to Seller of land use rights at September 30, 2009 to be paid to the Seller upon
receipt of approvals. These land use rights will be considered placed in service
and amortization of this cost will begin to be charged to operations commencing
December 2009 upon receipt of PRC approvals by the Company.
Below is
a summary of the land use rights and related property and equipment acquired in
the current period and the related financing:
Taishan Baisha
|
Qitaihe
|
Total
|
||||||||||||||||||||||
RMB
|
Dollars
|
RMB
|
Dollars
|
RMB
|
Dollars
|
|||||||||||||||||||
Land
use rights
|
66,376,800 | $ | 9,736,149 | 8,936,484 | $ | 1,309,999 | 75,313,284 | $ | 11,046,148 | |||||||||||||||
Building
|
- | - | 22,596,862 | 3,314,311 | 22,596,862 | 3,314,311 | ||||||||||||||||||
Equipment
|
- | - | 5,343,575 | 783,748 | 5,343,575 | 783,748 | ||||||||||||||||||
Other
|
- | - | 123,079 | 18,034 | 123,079 | 18,034 | ||||||||||||||||||
Total
|
66,376,800 | 9,736,149 | 37,000,000 | 5,426,092 | 103,376,800 | 15,162,241 | ||||||||||||||||||
Less,
cash paid during period
|
19,913,040 | 2,920,845 | 37,000,000 | 5,426,092 | 56,913,040 | 8,346,937 | ||||||||||||||||||
Unpaid
payable to Seller at September 30, 2009
|
46,463,760 | $ | 6,815,304 | - | $ | - | 46,463,760 | $ | 6,815,304 |
10
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
NOTE 6 - PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment, net consist of:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Buildings:
|
||||||||
Already
in service
|
$ | 2,928,548 | $ | 2,928,548 | ||||
Placed
in service in October
|
||||||||
2009 after PRC approval
|
||||||||
(Note 5)
|
3,314,311 | - | ||||||
Subtotal
|
6,242,859 | 2,928,548 | ||||||
Plant
equipment and machinery
|
5,438,103 | 4,654,625 | ||||||
Motor
vehicles
|
307,620 | 289,586 | ||||||
Furniture
and office equipment
|
11,167 | 13,817 | ||||||
Total
|
11,999,749 | 7,886,576 | ||||||
Less
accumulated depreciation
|
(2,000,226 | ) | (1,649,662 | ) | ||||
Net
|
$ | 9,999,523 | $ | 6,236,914 |
NOTE 7 - LAND USE
RIGHTS
Land use
rights, net consist of:
September
30, 2009
|
December
31, 2008
|
|||||||
Harbin Hainan Kangda | ||||||||
Already
in service
|
$ | 8,026,797 | $ | 8,026,397 | ||||
To be placed in
service after PRC approval expected in December 31, 2009 (Note
5)
|
11,046,010 | - | ||||||
19,072,807 | 8,026,397 | |||||||
Taishan
Kangda
|
873,003 | 873,035 | ||||||
Total
|
19,945,810 | 8,899,432 | ||||||
Less
accumulated amortization
|
(428,267 | ) | (289,941 | ) | ||||
Net
|
$ | 19,517,543 | $ | 8,609,491 |
11
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
expected amortization of the above land use rights for each of the five
succeeding fiscal years ending December 31, and in the aggregate, are as
follows:
Period
ending December 31,
|
Amount
|
|||
3
months 2009
|
$ | 115,957 | ||
Years:
|
||||
2010
|
463,829 | |||
2011
|
463,829 | |||
2012
|
463,829 | |||
2013
|
463,829 | |||
2014
|
463,829 | |||
Thereafter
|
17,082,441 | |||
Total
|
$ | 19,517,543 |
NOTE 8 - INTANGIBLE
ASSETS
Intangible
assets, net consist of:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Patents
and licenses
|
$ | 1,374,392 | $ | 1,374,485 | ||||
Total
|
1,374,392 | 1,374,485 | ||||||
Less
accumulated amortization
|
(1,022,947 | ) | (920,040 | ) | ||||
Net
|
$ | 351,445 | $ | 454,445 |
The
expected amortization of the above intangible assets for each of the five
succeeding fiscal years ending December 31, and in the aggregate, are as
follows:
Period
ending December 31,
|
Amount
|
|||
3
months 2009
|
$ | 34,518 | ||
Years:
|
||||
2010
|
137,208 | |||
2011
|
134,760 | |||
2012
|
44,959 | |||
2013
|
- | |||
2014
|
- | |||
Total
|
$ | 351,445 |
12
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
NOTE 9 - NOTE
PAYABLE
Note
payable consists of:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Note
payable to a financial institution, unsecured and due on
demand.
|
$ | 887,414 | $ | 887,475 |
The note
payable (6,050,000 RMB) is due to a PRC provincial government financial
institution which made the loan to the Company to promote the commercial
cultivation of cactus. The loan was made to the Company on an interest-free and
unsecured basis and is repayable on demand. Imputed interest is calculated at 6%
per annum on the amount due. Total imputed interest recorded as additional
paid-in capital amounted to $39,909 and $39,032 for the nine months ended
September 30, 2009 and 2008, respectively.
NOTE 10 - SERIES A
CONVERTIBLE PREFERRED STOCK
On March
21, 2008, the Company entered into a Preferred Stock Purchase Agreement (the
“Purchase Agreement”) with T Squared Investments LLC (the “Investor”) to sell in
a private placement to the Investor for an aggregate purchase price of $500,000,
(i) 833,333 shares of the Company’s newly designated Series A Convertible
Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) for
$0.60 per share (the “Shares”), (ii) warrants to purchase up to 1,250,000 shares
of Company common stock exercisable for a period of three years at an exercise
price of $0.75 per share (the “A Warrants”) or an aggregate exercise price of
$937,500 if all of the A Warrants were exercised, and (iii) warrants to purchase
up to 1,500,000 shares of Company common stock exercisable for a period of three
years at an exercise price of $1.00 per share (the “B Warrants”), or an
aggregate exercise price of $1,500,000 if all the B Warrants were exercised. The
Company issued the Shares, the A Warrants and B Warrants on the same day.
Westernking Financial Service acted as the sole placement agent in the
transaction for a fee of $30,000 (6% of the gross proceeds).
The
Company also entered into a Registration Rights Agreement with the Investor,
pursuant to which the Company was obligated to file and have declared effective
by the SEC a registration statement registering the resale of the Shares and
Common Stock issuable upon the conversion of the Series A Preferred Stock and
the exercise of the A Warrants and B Warrants. If the registration statement was
not declared effective by the SEC by August 28, 2008, the Registration Rights
Agreement provided for the Company to issue to the Investor as liquidated
damages an additional 1,000 shares of Series A Preferred Stock for each day
thereafter not declared effective (subject to a maximum of 250,000 shares). On
October 17, 2008, the SEC declared effective the Company’s registration
statement on Form S-1.
The
Series A Preferred Stock has no voting or dividend rights, is entitled to a
liquidation preference of $0.60 per share, and each share is convertible into
one share of Company common stock at the option of the holder (which was
adjustable to more shares if certain “defined EPS” performance thresholds were
not met for the six months ended September 30, 2008 or the year ended December
31, 2008; however, the performance thresholds were met).
The
Company recorded as a $500,000 deemed dividend and as a $500,000 increase in
additional paid-in capital based upon the total of $1,394,000 of the intrinsic
value of the beneficial conversion feature ($428,500) and the estimated fair
value of the A Warrants ($477,250) and the B Warrants ($488,250),which recording
is limited to the gross actual proceeds ($500,000) pursuant to Emerging Issues
Task Force Consensus (“EITF”) No. 98-5 as amended by EITF No. 00-27. The fair
value of the warrants was estimated using the Black-Scholes option pricing model
and the following assumptions: stock price of $0.75 per share, exercise price of
$0.75 per share for the A warrants, exercise price of $1.00 per share for the B
warrants, term of 3 years, expected volatility of 74%, and risk-free interest
rate of 4%.
13
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
On July
16, 2008, the Company sold the Investor, for an aggregate purchase price of
$250,000, an additional 416,667 shares of Series A Preferred Stock, warrants to
purchase up to 500,000 shares of Company common stock exercisable for a period
of three years at an exercise price of $0.9375 per share, and warrants to
purchase up to 600,000 shares of Company common stock exercisable for a
period of three years at an exercise price of $1.25 per share. The Company
recorded as a $250,000 deemed dividend and as a $250,000 increase in additional
paid-in capital, based upon the total of $442,155 of the intrinsic value of the
beneficial conversion feature ($160,875) and the estimated fair value of the
warrants ($281,580), which recording is limited to the gross actual proceeds
($250,000) pursuant to Emerging Issues Task Force Consensus (“EITF”) No. 98-5 as
amended by EITF No. 00-27. The fair value of the warrants was estimated using
the Black-Scholes option pricing model and the following assumptions: stock
price of $0.689 per share, exercise prices of $0.9375 and $1.25 per share, term
of 3 years, expected volatility of 71.4%, and risk-free interest rate of
4%.
On
October 27, 2008, the Company issued 100,000 shares of common stock to the
Investor for the conversion of 100,000 shares of Series A Preferred Stock. On
September 10, 2009, the Company issued 416,667 shares of common stock to the
Investor for the conversion of 416,667 shares of Series A Preferred
Stock.
NOTE 11 – STOCK OPTIONS AND
WARRANTS TO PURCHASE COMMON STOCK
A summary
of stock option and warrant activity for the year ended December 31, 2008 and
for the nine months ended September 30, 2009 follows:
Stock Options
|
Warrants
|
|||||||
Outstanding
at January 1, 2008
|
- | - | ||||||
Granted
and issued
|
400,000 | 3,850,000 | ||||||
Exercised
|
- | - | ||||||
Forfeited/expired/cancelled
|
- | - | ||||||
Outstanding
at December 31, 2008
|
400,000 | 3,850,000 | ||||||
Granted
and issued
|
- | - | ||||||
Exercised
|
(107,059 | ) | - | |||||
Forfeited/expired/cancelled
|
(42,941 | ) | - | |||||
Outstanding
at September 30, 2009
|
250,000 | 3,850,000 |
Stock
options outstanding at September 30, 2009 and December 31, 2008 consist
of:
Date
|
Number
|
Number
|
Exercise
|
Expiration
|
||||||||||
Granted
|
Outstanding
|
Exercisable
|
Price
|
Date
|
||||||||||
March
10, 2008
|
250,000 | 250,000 | $ | 1.00 |
March
10, 2012
|
|||||||||
Total
|
250,000 | 250,000 |
The
400,000 stock options granted in 2008 were all issued to the Company’s law firm
for services rendered.
On March
10, 2008, the Company granted 250,000 options to the law firm, all immediately
exercisable at $1.00 per share to March 10, 2012, and expensed the $59,225 fair
value of these options at March 10, 2008 (estimated using the Black-Scholes
option pricing model and the following assumptions: stock price of $0.41 per
share, exercise price of $1.00 per share, term of 4 years, expected volatility
of 100%, and risk-free interest rate of 4%.
14
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
On
December 31, 2008, the Company granted 150,000 options to the law firm, all
immediately exercisable at $0.30 per share to December 31, 2012. The Company
failed to include this transaction in the previously filed Form 10-K for the
year ended December 31, 2008, but has restated the December 31, 2008 balances in
this Form 10-Q to recognize an expense for the $31,410 fair value of these
options at December 31, 2008 and for the year then ended (estimated using the
Black-Scholes option pricing model and the following assumptions: stock price of
$0.29 per share, exercise price of $0.30 per share, term of 4 years, expected
volatility of 107%, and risk-free interest rate of 2%. In July 2009, pursuant to
a cashless exercise amendment, 107,059 options were converted into 107,059
shares of common stock and the remaining 42,941 options were cancelled. During
the nine months ended September 30, 2009, the Company expensed the $32,118
exercise amount relating to the 107,059 shares.
Warrants
outstanding at September 30, 2009 and December 31, 2008 consist of:
Date
|
Number
|
Number
|
Exercise
|
Expiration
|
|||||||||
Granted
|
Outstanding
|
Exercisable
|
Price
|
Date
|
|||||||||
March
21, 2008
|
1,250,000 | 1,250,000 | $ | 0.75 |
March
21, 2011
|
||||||||
March
21, 2008
|
1,500,000 | 1,500,000 | $ | 1.00 |
March
21, 2011
|
||||||||
July
16, 2008
|
500,000 | 500,000 | $ | 0.9375 |
July
16, 2011
|
||||||||
July
16, 2008
|
600,000 | 600,000 | $ | 1.25 |
July
16, 2011
|
||||||||
Total
|
3,850,000 | 3,850,000 |
NOTE 12 – RESTRICTED NET
ASSETS
Relevant
PRC statutory laws and regulations permit payments of dividends by Harbin Hainan
Kangda and Taishan Kangda only out of their retained earnings, if any, as
determined in accordance with PRC accounting standards and
regulations. In addition, PRC laws and regulations require that
annual appropriations of after-tax income should be set aside prior to payments
of dividends as a reserve fund. As a result of these PRC laws and
regulations Harbin Hainan Kangda and Taishan Kangda are restricted in their
ability to transfer a portion of their net assets in the form of dividends,
loans or advances, which restricted portion amounted to $11,656,524 and
$10,185,183 at September 30, 2009 and December 31, 2008,
respectively.
NOTE 13 - INCOME
TAXES
The
Company is subject to current income taxes on an entity basis on taxable income
arising in or derived from the tax jurisdiction in which each entity is
domiciled.
US China
Kangtai was incorporated in the United States and is subject to United States
income tax. No United States income taxes were provided in 2009 and 2008 since
US China Kangtai had taxable losses in those periods.
At
September 30, 2009, US China Kangtai has an unrecognized deferred United States
income tax liability relating to undistributed earnings of Harbin Hainan Kangda.
These earnings are considered to be permanently invested in operations outside
the United States. Generally, such earnings become subject to United States
income tax upon the remittance of dividends and under certain other
circumstances. Determination of the amount of the unrecognized deferred United
States income tax liability with respect to such earnings is not
practicable.
BVI China
Kangtai was incorporated in the BVI and is not subject to tax on income or on
capital gains.
15
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
Harbin
Hainan Kangda and Taishan Kangda were incorporated in the PRC and are subject to
PRC income tax which is computed according to the relevant laws and regulations
in the PRC. Harbin Hainan Kangda located its factories in a special economic
region in Harbin, the PRC. This economic region allows foreign owned enterprises
a two-year income tax exemption beginning in the first year after they become
profitable, being 2005 and 2006, and a 50% income tax reduction for the
following three years, being 2007 to 2009. Harbin Hainan Kangda was approved as
a wholly owned foreign enterprise in March 2005.
The
provision for income taxes differs from the amount computed by applying the
statutory United States federal income tax rate of 35% to income (loss) before
income taxes. The sources of the difference follow:
Nine Months Ended September
30,
|
||||||||
2009
|
2008
|
|||||||
Expected
tax at 35%
|
$ | 2,158,176 | $ | 1,434,266 | ||||
Tax
effect of unutilized losses of
|
||||||||
US
China Kangtai and BVI China Kangtai
|
12,171 | 77,837 | ||||||
Tax
effect of PRC income taxed at lower rate
|
(1,143,870 | ) | (826,161 | ) | ||||
Actual
provision for income taxes
|
$ | 1,026,477 | $ | 685,942 |
NOTE 14 - COMMITMENTS AND
CONTINGENCIES
Concentrations
and risks
During
2009 and 2008, substantially all of the Company’s assets were located in China
and 100% of the Company’s revenues were derived from customers located in China
and Taiwan.
Substantially
all of Harbin Hainan Kangda and Taishan Kangda’s business operations are
conducted in the PRC and governed by PRC laws and
regulations. Because these laws and regulations are relatively new,
the interpretation and enforcement of these laws and regulations involve
uncertainties.
The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the
PRC. Under existing PRC foreign exchange regulations, payment of
current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval
from appropriate governmental authorities is required where RMB is to be
converted into foreign currency and remitted out of the PRC to pay capital
expenses, such as the repayment of bank loans denominated in foreign
currencies. The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.
16
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
NOTE 15 – SEGMENT AND OTHER
INFORMATION
The
Company operates in one industry segment – the production and sale of cactus,
cactus health food, and other cactus products. Substantially all of
the Company’s identifiable assets at September 30, 2009 and December 31, 2008
were located in the PRC. Net sales for the periods presented were all
derived from PRC and Taiwan customers. During the nine months ended September
30, 2009, two customers accounted for 17% and 15% of net sales,
respectively.
Net sales
consisted of:
Three months ended September
30,
|
Nine months ended September
30,
|
|||||||||||||||
20009
|
2008
|
20009
|
2008
|
|||||||||||||
Finished
goods
|
$ | 7,208,086 | $ | 5,329,127 | $ | 15,858,087 | $ | 10,785,295 | ||||||||
Cactus
stock
|
937,326 | 855,558 | 2,130,021 | 3,175,806 | ||||||||||||
Other
|
41,985 | - | 41,985 | - | ||||||||||||
Total
|
$ | 8,187,397 | $ | 6,184,685 | $ | 18,030,093 | $ | 13,961,101 |
NOTE 16 – RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The
Company expects to restate its consolidated financial statements at December 31,
2008 and for the year then ended (which were previously included in the
Company’s Form 10-K filed with the SEC on April 15, 2009) in order to (1)
correct errors relating to the accounting for deemed dividends from the sales of
convertible preferred stock and warrants on March 21, 2008 and July 16, 2008
(see Note 10) and (2) correct for the non-accounting for the grant of 150,000
stock options to the Company’s law firm on December 31, 2008 (see Note
11).
The
effect of the restatement adjustments on the consolidated balance sheet at
December 31, 2008 follows:
As
|
||||||||||||
Previously
|
As
|
|||||||||||
Reported
|
Adjustments
|
Restated
|
||||||||||
Total
assets
|
$ | 26,947,372 | $ | - | $ | 26,947,372 | ||||||
Total
liabilities
|
$ | 1,773,969 | $ | - | $ | 1,773,969 | ||||||
Stockholders'
equity:
|
||||||||||||
Preferred
stock, $0.001 par value
|
1,150 | - | 1,150 | |||||||||
Common
stock, $0.001 par value
|
17,886 | - | 17,886 | |||||||||
Additional
paid-in capital
|
8,874,869 | (1) | (659,164 | ) | 8,247,115 | |||||||
(2) | 31,410 | |||||||||||
Retained
earnings:
|
||||||||||||
Appropriated
|
2,682,345 | - | 2,682,345 | |||||||||
Unappropriated
|
10,549,281 | (1) | 659,164 | 11,177,035 | ||||||||
(2) | (31,410 | ) | ||||||||||
Accumulated
other comprehensive income
|
3,047,872 | - | 3,047,872 | |||||||||
Total
stockholders' equity
|
25,173,403 | - | 25,173,403 | |||||||||
Total
liabilities and stockholders' equity
|
$ | 26,947,372 | $ | - | $ | 26,947,372 |
(1)
Deemed dividends are limited to gross proceeds received from sales of units of
Series A Convertible Preferred Stock and A and B warrants.
(2) To
record the 150,000 stock options issued to the Company’s law firm on December
31, 2008.
17
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(Unaudited)
The
effect of the restatement adjustments on the consolidated statement of
operations for the nine months ended September 30, 2008 follows:
As
|
||||||||||||
Previously
|
As
|
|||||||||||
Reported
|
Adjustments
|
Restated
|
||||||||||
Net
income
|
$ | 3,411,962 | $ | - | $ | 3,411,962 | ||||||
Deemed
dividends relating to the beneficial conversion feature and the value of
the warrants included in the sales of Series A preferred
stock
|
(1,409,164 | )(1) | 659,164 | (750,000 | ) | |||||||
Net
income attributable to common stockholders
|
$ | 2,002,798 | $ | 659,164 | $ | 2,661,962 | ||||||
Net
income per common share:
|
||||||||||||
Basic
|
$ | 0.11 | $ | 0.04 | $ | 0.15 | ||||||
Diluted
|
$ | 0.11 | $ | 0.03 | $ | 0.14 |
NOTE
17-SUBSEQUENT EVENTS
On
October 22, 2009, the Company issued 433,333 shares of common stock to the
Investor for the conversion of 433,333 shares of Series A Preferred
Stock.
On November
15, 2009, the Company entered into a Common Stock Purchase Agreement (the
“Agreement”) with Seaside 88, LP (“ Seaside”), relating to the
offering and sale of up to 2,100,000 shares of Company common stock. Subject to
the limitations and qualifications set forth therein, the Agreement requires the
Company to issue and sell, and Seaside to purchase, up to 150,000 shares of
common stock once every two weeks, subject to the satisfaction of customary
closing conditions. At the initial closing and at each subsequent closing, on
each 14th day
thereafter for twenty-six (26) weeks, the offing price of the Common stock will
equal 87% of the volume weighted average trading price of the Common Stock for
the ten consecutive trading days immediately preceding each subsequent closing
date. If, with respect to any subsequent closing, the volume weighted average
trading price of the Common Stock for the three trading
days immediately prior to such closing is below $1.25 per share, then
the particular subsequent closing will not occur and the aggregate number of
Shares to be purchased shall be reduced by 150,000 shares of Common Stock, The
Agreement provides that the Company may, at its sole discretion, upon thirty
(30) days’ prior written notice to Seaside, terminate the Agreement after the
fifth subsequent closing. The Agreement contains representations and warranties
and covenants for each party, which must be true and have been performed at each
closing. The Agreement may be terminated by Seaside, by written notice to the
Company, if the initial closing has not been consummated on or before March 31,
2010, provided, however, if the Company receives comments from the Securities
and Exchange Commission on the registration statement covering the sale to
Seaside, or the resale by Seaside, of the Shares, this date shall be extended
until April 30, 2010.
The
Company has evaluated subsequent events through the filing date of this Form
10-Q and has determined that there were no additional subsequent events to
recognize or disclose in these financial statements.
18
Item 2. Management’s Discussion and Analysis
or Plan of Operation
DISCLAIMER
REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in this report, including statements in the following discussion,
which are not statements of historical fact, may be deemed to be
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 which are basically statements about the future.
For that reason, these statements involve risk and uncertainty since no one can
accurately predict the future. Words such as “plans,” “intends,” “will,”
“hopes,” “seeks,” “anticipates,” “expects,” and the like, often identify such
forward-looking statements, but are not the only indication that a statement is
a forward-looking statement. Such forward-looking statements include statements
concerning our plans and objectives with respect to the present and future
operations of the Company, and statements which express or imply that such
present and future operations will or may produce revenues, income or profits.
Numerous factors and future events could cause the Company to change such plans
and objectives, or fail to successfully implement such plans or achieve such
objectives, or cause such present and future operations to fail to produce
revenues, income or profits. Therefore, the reader is advised that the following
discussion should be considered in light of the discussion of risks and other
factors contained in this report on Form 10-Q and in the Company’s other
filings with the Securities and Exchange Commission. No statements contained in
the following discussion should be construed as a guarantee or assurance of
future performance or future results. These forward-looking statements are made
as of the date of the filing of this Form 10-Q and the Company undertakes
no responsibility to update these forward-looking statements.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes and the other financial information appearing in Part I,
Item 1 and elsewhere in this report. The Company’s fiscal year end is
December 31.
Company
Overview
The
Company is principally engaged in the production, R&D, sales and marketing
of products derived from cacti. The Company’s product lines include cactus
nutraceuticals, cactus nutritional food and drinks, as well as cactus raw and
intermediate materials.
The
Company has over 387 acres of cactus-farming bases in the Guangdong and
Heilongjiang Provinces of China. The Company predominantly grows three species
of cacti which are Mexican Pyramid, Mexican Milpa-Alta and Mexican Queen.
Mexican Pyramid and Queen cacti are used for cactus fruit drinks and
nutraceutical products; Mexican Milpa-Alta is mainly used for cactus nutritional
food products. Most of the cactus fruits are processed into cactus fruit juice,
which is the raw material for cactus nutritional drinks. Most of the harvested
edible cacti are processed into dry powders, which are raw materials for
cactus nutraceuticals. The Company’s annual production capability of edible
cacti in 2008 was 14,425 tons.
The
Company engages with, by co-operative production agreements, local
pharmaceutical, food and beverage manufacturers to produce its products. This
strategy allows the Company to fill the orders quickly with short production
runs and to reduce the requirements in fixed assets investment. The Company
currently has entered into co-production agreements with five processors in
China. They are Harbin Bin County Hualan Dairy Factory, Harbin Ice Lantern
Noodle Factory, Tsingtao Brewry (Harbin) Inc., Harbin Diwang Pharmacy Co., Ltd.
(a GMP certified
processor), and Mudanjiang Kangwei Health Food Company, Ltd. Pursuant to these
contracts, the Company provides raw materials, quality control guidelines and
technical support while the processors provide other materials, processing
facilities and labor to manufacture products for the Company. These processors
are required to follow strictly the Company’s guidelines and instructions for
production. The Company inspects all final products. The Company currently has
long term agreements with all five processors which may be renewed at expiration
in 2012.
GMP or
Good Manufacturing Practice certifications are awarded by the State Food and
Drug Administration of China to processors which meet the safety and quality
assurance standards set by the State Food and Drug Administration of
China.
19
In 2006,
the Company had entered two new co-processing agreements with Huimeijia Bio-tech
Ltd. to produce nutraceutical soft capsules and Kangwei Health Foods Ltd. of
Mudanjiang City to produce cactus palm dry powder products.
In
October 2007, the Company has signed a new agreement with Harbin Meijia Bio-Tech
Co., Ltd.
All of
the above co-operative production agreements have been renewed during January
and March of 2008.
The
Company has also established its own cactus beverage and fruit wine production
facilities. The Company’s cactus beverage product category includes cactus beer,
cactus fruit wine (including the brand name of Overlord Scourge Flower Imperial
Wine), cactus palm juices and cactus fruit drinks,
In
addition, the Company has its own R&D facility, the Heilongjiang Sino-Mexico
Cactus Development and Utilization Institute, which is certified by Heilongjiang
Science & Technology Committee. The Institute has independently
developed many patented cactus -based nutraceuticals and nutritional food and
drink product formulas and production processes.
Company
History
Our
Company was initially incorporated as InvestNet, Inc. (“InvestNet”) on
March 16, 2000 under the laws of the State of Nevada. Prior to June 3,
2005, the Company’s operations consisted of real time software and IT solutions
which the Company held through its subsidiaries, Champion Agents Limited (which
wholly owned DSI Computer Technology Company Limited) and Interchance Limited.
Due to the fact that the Company was unable to generate sufficient cash flows
from operations, obtain funding to sustain operations nor reduce or stabilize
expenses to the point where it could have realized a net positive cash flow,
management and the board of directors determined that it was in the best
interests of the stockholders to seek a strategic alternative so that the
Company could continue to operate. On May 13, 2005, InvestNet entered into
a series of agreements to effect a “reverse merger transaction” via a share
exchange and through the conversion of a convertible promissory note, as
described below, with China Kangtai Cactus Bio-tech Company Limited (“BVI China
Kangtai”), a British Virgin Islands (“BVI”) incorporated on November 26,
2004.
These
documents included a Stock Purchase Agreement, pursuant to which InvestNet
issued 30,000,000 shares to a stockholder of BVI China Kangtai for $300,000.
Additionally, InvestNet entered into an Agreement and Plan of Reorganization,
pursuant to which the stockholders of BVI China Kangtai exchanged 12% of BVI
China Kangtai’s outstanding shares for 110,130,615 shares of InvestNet.
Additionally, InvestNet issued a Convertible Promissory Note to BVI China
Kangtai or its designees in the amount of $8,070,000 plus accrued interest at a
rate of 5% per annum or convertible at the option of the holder(s) in the event
that InvestNet effected a one for seventy reverse split of InvestNet’s common
stock into the remaining 88% of the outstanding shares of BVI China Kangtai (the
“Convertible Note”). The Company did effect a one for seventy reverse split of
all of its outstanding shares of Common Stock and changed its name (to “China
Kangtai Cactus Bio-Tech Inc.”) and trading symbol on the OTC Bulletin Board (to
“CKGT”) on August 25, 2005. The holders of the Convertible Note converted
the Convertible Note a day later on August 26, 2005 into 14,248,395 shares
of Common Stock of the Company. As the result of the share exchange and
conversion of the Convertible Note, the Company completed a “reverse merger
transaction” whereby InvestNet acquired 100% of BVI China Kangtai, which wholly
owns Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin Hainan
Kangda”).
Harbin
Hainan Kangda is presently our main operating subsidiary. Harbin Hainan
Kangda is in the business of selling and producing cactus and cactus related
products in the PRC as more fully described below. In connection with the
“reverse merger transaction”, we completely sold all the Company’s real time
software and IT solutions operations by selling all of the stock held by the
Company in its prior wholly owned subsidiaries, Champion Agents Limited (which
wholly owned DSI Computer Technology Company Limited) and Interchance Limited to
V-Capital Limited, a Republic of Mauritius corporation which is controlled by a
former director of InvestNet.
20
On
June 3, 2005, in connection with the reorganization of the Company and the
acquisition of BVI China Kangtai and its wholly owned subsidiary, Harbin Hainan
Kangda, the Company’s executive officers and directors significantly changed.
Specifically, Norman Koo resigned as a director, Chief Executive Officer and
President of the Company; Terence Ho resigned as a director, Chief Financial
Officer, and Treasurer of the Company; Vivian Szeto resigned as a director
(However, Ms. Szeto’s resignation from the Board of Directors was
contingent on the Company completing its filing and mailing requirements of its
Schedule 14f-1 which occurred on July 22, 2005 and so, from
June 3, 2005 to July 22, 2005 she served as the Company’s sole
director) and Secretary of the Company; Johnny Lu resigned as a director of the
Company; and Mantin Lu resigned as a director of the Company.
In
contemplation of the aforementioned resignations, also on June 3, 2005, the
Board of Directors appointed in accordance with Section 3.04 of the
Company’s Bylaws, Jinjiang Wang, Chengzhi Wang, Hong Bu, Jiping Wang and Song
Yang as members of the Company’s Board of Directors, subject to the fulfillment
of the filing and mailing requirements, including the 10 day waiting period of
its Schedule 14f-1 that was sent to all stockholders of the Company
pursuant to section 14(f) of the Securities Exchange Act of 1934 which
occurred on July 22, 2005 and appointed the following officers to serve
immediately: Jinjiang Wang, President; Chengzhi Wang, General Manager; Hong Bu,
Chief Financial Officer and Treasurer; Fengxi Lang, Secretary; Changfu Wang,
Vice General Manager; Zhimin Zhan, Vice General Manager; and Lixian Zhou,
Assistant General Manager of the Company.
On
July 20, 2005, InvestNet’s sole director, Vivian Szeto, and a majority of
the Company’s stockholders unanimously approved and ratified a one for seventy
reverse split (the “Reverse Split”) of the Company’s common stock and the
amendment and restatement of the Company’s Articles of Incorporation to effect a
name change of the Company from “Investnet, Inc.” to “China Kangtai Cactus
Bio-Tech Inc.”. The Reverse Split became effective on August 25, 2005; 20
days after the Company sent an Information Statement to all of its
stockholders and after the filing of the Amended and Restated Articles of
Incorporation with the Secretary of State of Nevada. As a result of the Reverse
Split, the number of issued and outstanding shares of common stock of the
Company, now named China Kangtai Cactus Bio-Tech Inc., was reduced from a total
of 200,000,000 shares outstanding to 2,857,143 shares outstanding. A day after
the Reverse Split on August 26, 2005, the Convertible Note was converted by
its holders(s) into 14,248,395 shares of the Company, which increased the total
outstanding shares of the Company to 17,105,625 shares. The Company’s trading
symbol was changed by the OTC Bulletin Board Stock Market (“OTCBB”) to “CKGT” to
better reflect the Company’s new name. The Company has also changed its Web site
to www.xrz.cn.
On June
26, 2006, the Company acquired a 100% equity interest in Guangdong Taishan
Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a company with
limited liability formed under the laws of the People’s Republic of China for
$1,574,000 in cash. Taishan Kangda’s assets include large areas of cactus
plantation and production facilities in Guangdong Province in southeast China.
The acquisition allows the Company to establish production facilities closer to
its existing cactus plantations in Guangdong Province in order to reduce
transportation cost and to distribute its products more effectively in southeast
China.
The
Company currently has three 100% owned subsidiaries: China Kangtai Cactus
Bio-Tech Company Limited, a British Virgin Islands company (Kangtai BVI”) ;
Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd., a PRC company
“Harbin Hainan Kangda”); and Taishan Kangda.
Kangtai
BVI is a holding company and does not have any operations. Harbin Hainan Kangda
handles all of the production, research and development, sales and marketing of
our products derived from edible cactus plants, fruits and extracts. Taishan
Kangda handles all of the cultivation and harvest of cactus plants and the
production of our cactus raw materials.
Consolidated
Results of Operations
The
three-month period ended September 30, 2009 as compared to the three months
ended September 30, 2008
For the
three months ended September 30, 2009, revenues increased by $2,002,712 or 32%
to $8,187,397 from $6,184,685, in the corresponding period of the prior
year. The increase in revenues was attributable to the fact that, the
Company is continuing to expand its productions and distribution, and its
products are better accepted by the Chinese market customers. These products
include Cactus Protein Nutrient, Cactus Calcium Peptide Soft Capsule and Cactus
Shuxin Capsule, among others. In addition, the Company successfully launched two
new products, cactus fish feed and cattle feed, in July 2008, which also
contributed to the increase in sales.
21
For the
three months ended September 30, 2009, cost of sales increased by $1,262,547 or
34% to $4,941,881 from $3,676,334, as compared to the corresponding period of
the prior year. This increase was mainly due to an increase in net sales,
specifically the sales of our newly launched cactus fish and cattle
feed.
Our gross
profit for the three months period ended September 30, 2009 was $3,245,516 which
increased by $737,165 or 29% from $2,508,351 for the same period last year. This
increase was mainly attributable to the sales increase of
$2,002,712.
For the
three months ended September 30, 2009, operating expenses decrease by $582,625,
or approximately 172% to $(244,621), as compared to $338,004 for the three
months ended September 30, 2008. The decrease in operating expenses is
mainly attributable to the reduction in reserve for allowances and doubtful
accounts of $492,206 during the three months ended September 30, 2009 compared
to no reduction or provisions during the three months ended September 30, 2008.
In addition to the $492,206 reduction there were also decreases in “Selling
Expenses” of $64,589 and “General and Administrative Expenses” of $25,159 in the
current period compared to the prior fiscal 3 months.
For the
three months ended September 30, 2009, income before income taxes increased by
$1,319,996 or 61%, to $3,476,873 from $2,156,877 for the corresponding period of
the prior year. The increase was primarily due to the increase in gross profit
based on the increased sales. As a result, net income also increased by
$1,254,698 or 71% to $3,021,838 from $1,767,140. This increase is due to the
increase in net sales, specifically the sales of our newly launched cactus fish
and cattle feed.
The
nine month period ended September 30, 2009 as compared to the nine months ended
September 30, 2008
For the
nine months ended September 30, 2009, revenues increased by $4,068,992 or 29% to
$18,030,093 from $13,961,101, in the corresponding period of the prior
year. The increase in revenues was attributable to the fact that, the
Company is continuing to expand its productions and distribution, and its
products are better accepted by the Chinese market customers. These products
include Cactus Protein Nutrient, Cactus Calcium Peptide Soft Capsule and Cactus
Shuxin Capsule, among others. In addition, the Company successfully launched two
new products, cactus fish feed and cattle feed, in July 2008, which also
contributed to the increase in sales.
For the
nine months ended September 30, 2009, cost of sales increased by $1,911,626 or
21% to $10,810,714 from $8,899,088, as compared to the corresponding period of
the prior year. This increase was mainly due to an increase in net sales,
specifically the sales of our newly launched cactus fish and cattle
feed.
Our gross
profit for the nine months period ended September 30, 2009 was $7,219,379 which
increased by $2,157,366 or 43% from $5,062,013 for the same period last year.
This increase was mainly attributable to the increase in sales in the current
period.
For the
nine months ended September 30, 2009, operating expenses increase by $101,735,
or approximately 11% to $1,013,190, as compared to $911,455 for the nine months
ended September 30, 2008. The increase in operating expenses is mainly
attributable to increase in the provision for reserve for allowances and
doubtful accounts of $321,182 in the current period, and an increase in current
period amortization and depreciation of $8,730 attributed to acquisition of land
use rights placed in service in 2008 and, offset by reduced current period’s
selling expenses of $84,704 and general and administrative expenses of
$141,446.
For the
nine months ended September 30, 2009, income before income taxes increased by
$2,068,313 or 50%, to $6,166,217 from $4,097,904 for the corresponding period of
the prior year. The increase was primarily due to the increase in gross profit.
As a result, net income also increased by $1,727,778 or 51% to $5,139,740 from
$3,411,962. This increase is due to the increase in gross profit based on the
increase in net sales, specifically the sales of our newly launched cactus fish
and cattle feed, nominally offset by an increase in income tax expense
attributable to the increase in income before those taxes because of the sales
increase.
22
Liquidity
and Capital Resources –June 30, 2009
Operating. For
the nine months period ended September 30, 2009, the Company’s operations
provided cash resources of $7,345,778 as compared to $6,020,968 for the nine
months period ended September 30, 2009, an increase of cash provided by
operating activities of $1,342,810, or 22%. The increase was mainly due to
increased net income during the nine months ended September 30, 2009 compared to
the same period last year attributable to increased gross profit on increased
sales, offset by increased income tax expense based on the impact of those sales
on income before income taxes.
Investing and
financing. For the nine months period ended September 30, 2009, the
Company used $8,338,701 in investment activities compared to $7,252,549 for the
same period a year ago. The increase was mainly attributable to costs associated
with the acquisition of land use rights and related property and equipment in
Taishan Baisha and Qitaihe in March of 2009 and August of 2009.
For the
nine months period ended September 30, 2009, the Company did not generate any
cash from financing activities, as compared to $670,917 for the same period
ended September 30, 2008. The Company did not engage in any financing activities
during the first three quarters in 2009 compared to the PIPEs financing
transactions completed in March 2008 and July 16, 2008 whereby the company
issued Series A preferred stock and two classes of warrants to T-Squared
Investments, LLC.
The
company had a cash position of $3,398,563 on September 30, 2009, an increase of
$2,750,083, or 424% from $648,480 on September 30, 2008.
Off-Balance Sheet
Arrangements
The
Company does not have any off-balance sheet arrangements that have, or are in
the opinion of management likely to have, a current or future material effect on
the Company’s financial condition or results of operations.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Not
required.
Item
4T. Controls and Procedures.
Evaluation of Disclosure Controls
and Procedures. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end
of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation
Date”). The purpose of this evaluation is to determine if, as of the Evaluation
Date, our disclosure controls and procedures were operating effectively such
that the information, required to be disclosed in our Securities and Exchange
Commission (“SEC”) reports (i) was recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and (ii) was
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
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.
Changes in Internal Control over
Financial Reporting. There have been no changes in our
internal controls over financial reporting that occurred during the second
quarter of fiscal year 2009 that have materially affected, or are reasonably
likely to materially affect our internal controls over financial
reporting.
23
PART II
- OTHER INFORMATION
Item
1. Legal Proceedings
To the
best knowledge of the Officers and Directors of the Company, the Company is not
a party to any material legal proceeding or litigation and such persons know of
no other material legal proceeding or litigation contemplated or
threatened.
Item
1A. Risk Factors
As of the
date of this filing, there have been no material changes from the risk factors
disclosed in the Company’s Annual Report on Form 10-K filed on April 15,
2009. We operate in a changing environment that involves numerous known and
unknown risks and uncertainties that could materially affect our operations. The
risks, uncertainties and other factors set forth in our Annual Report on
Form 10-K may cause our actual results, performances and achievements to be
materially different from those expressed or implied by our forward-looking
statements. If any of these risks or events occur, our business, financial
condition or results of operations may be adversely affected.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
(a)
Exhibits
EXHIBIT INDEX
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended and
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended and
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
24
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA
KANGTAI CACTUS BIO-TECH INC.
|
||
|
|
|
Date: November
20, 2009
|
By:
|
/s/ JINJIANG WANG
|
JINJIANG
WANG
|
||
President,
Chief Executive Officer, Director and
Principal
Executive Officer
|
Date: November
20, 2009
|
By:
|
/s/ HONG BU
|
HONG
BU
|
||
Chief
Financial Officer, Director and
Principal
Financial and Accounting
Officer
|
25