Attached files
file | filename |
---|---|
EX-31.1 - China Kangtai Cactus Bio-tech, Inc. | v185275_ex31-1.htm |
EX-31.2 - China Kangtai Cactus Bio-tech, Inc. | v185275_ex31-2.htm |
EX-10.1 - China Kangtai Cactus Bio-tech, Inc. | v185275_ex10-1.htm |
EX-32.1 - China Kangtai Cactus Bio-tech, Inc. | v185275_ex32-1.htm |
EX-32.2 - China Kangtai Cactus Bio-tech, Inc. | v185275_ex32-2.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 March 31, 2010
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 May 12, 2010, the issuer had
outstanding 20,990,762 shares of common stock, $0.001 par value.
CHINA
KANGTAI CACTUS BIO-TECH INC.
FORM 10-Q
INDEX
|
Page
|
|
PART
I - FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
|
F-1 -
F-4
|
Notes
to the Condensed Consolidated Financial Statements
(unaudited)
|
F-5
- F-23
|
|
Item
2.
|
Management's
Discussion and Analysis or Plan of Operation
|
3
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk.
|
10
|
Item
4T.
|
Controls
and Procedures
|
10
|
PART
II - OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
11
|
Item
1A.
|
Risk
Factors
|
11
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
11
|
Item
3.
|
Defaults
upon Senior Securities
|
11
|
Item
4.
|
Other
Information
|
11
|
Item
5.
|
Exhibits
|
11
|
Signatures
|
12
|
2
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 2,029,202 | $ | 2,918,068 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $976,827 and
$1,006,597, respectively
|
3,735,529 | 2,283,257 | ||||||
Inventories
|
1,052,703 | 2,440,904 | ||||||
Prepaid
expenses
|
75,322 | 1,265 | ||||||
Other
receivables
|
10,569 | 3,992,562 | ||||||
Total
Current Assets
|
6,903,325 | 11,636,056 | ||||||
Property,
plant and equipment, net of accumulated depreciation of $2,232,189 and
$2,112,093, respectively
|
5,642,847 | 5,750,876 | ||||||
Other
Assets
|
||||||||
Intangible
assets, net of accumulated amortization of $1,088,788 and $1,054,531,
respectively
|
8,209,962 | 316,300 | ||||||
Land
use rights, net of accumulated amortization of $567,743 and $473,151,
respectively
|
17,912,471 | 17,981,834 | ||||||
Total
Assets
|
$ | 38,668,605 | $ | 35,685,066 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 279,503 | $ | 311,417 | ||||
Note
payable
|
886,325 | 885,115 | ||||||
Taxes
payable
|
563,558 | 789,141 | ||||||
Payable
to seller of patent
|
1,628,011 | - | ||||||
Other
payable
|
- | 5,042 | ||||||
Total
Current Liabilities
|
3,357,397 | 1,990,715 | ||||||
Estimated
liability for equity-based financial instruments with characteristics of
liabilities:
|
||||||||
Designated
as Series A convertible Preferred Stock (50,000 shares issued and
outstanding at March 31, 2010 and December 31, 2009,
respectively)
|
107,000 | 135,500 | ||||||
Warrants
|
2,822,695 | 4,922,860 | ||||||
Total
|
2,929,695 | 5,058,360 | ||||||
Total
Liabilities
|
6,287,092 | 7,049,075 | ||||||
Commitments
and Contingencies
|
- | - | ||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, par value $.001 per share; authorized 200,000,000 shares; issued
and outstanding: 50,000 and 50,000 shares, respectively
|
- | - | ||||||
Common
stock, par value $.001 per share; authorized 200,000,000
shares,
|
||||||||
issued or issuable and outstanding: 20,740,762 and 20,024,024 shares,
respectively
|
20,741 | 20,024 | ||||||
Additional
paid-in capital
|
12,321,404 | 11,003,276 | ||||||
Retained
earnings
|
||||||||
Appropriated
|
4,030,658 | 3,881,804 | ||||||
Unappropriated
|
13,107,495 | 10,903,711 | ||||||
Accumulated
other comprehensive income (Foreign currency translation
adjustments)
|
2,901,215 | 2,827,176 | ||||||
Total
stockholders' equity
|
32,381,513 | 28,635,991 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 38,668,605 | $ | 35,685,066 |
The
accompanying notes are an integral part of these financial
statements.
F-1
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Condensed
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
For the Three Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
Sales
|
$ | 5,519,034 | $ | 3,329,952 | ||||
Cost
of Sales
|
(4,039,862 | ) | (2,092,786 | ) | ||||
Gross
Profit
|
1,479,172 | 1,237,166 | ||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
24,611 | 36,329 | ||||||
Provision
for reserve for allowances, returns and doubtful accounts
|
(31,146 | ) | - | |||||
General
and administrative expenses
|
242,202 | 257,600 | ||||||
Depreciation
|
19,033 | 18,889 | ||||||
Amortization
of land use rights
|
9,534 | 9,535 | ||||||
Amortization
of intangible assets
|
34,281 | 34,283 | ||||||
Total
operating expenses
|
298,515 | 356,636 | ||||||
Income
from Operations
|
1,180,657 | 880,530 | ||||||
Other
Income (Expense)
|
||||||||
Interest
income
|
147 | - | ||||||
Imputed
interest expense
|
(13,295 | ) | (13,296 | ) | ||||
Income
from revaluation of Series A Preferred Stock and A, B, C, and D warrants
with characteristics of liabilities at fair values
|
1,515,915 | 262,725 | ||||||
Total
Other Income (Expenses)
|
1,502,767 | 249,429 | ||||||
Income
before Income Tax
|
2,683,424 | 1,129,959 | ||||||
Income
tax expense
|
(330,786 | ) | (173,286 | ) | ||||
Net
Income Attributable to Common Stockholders
|
$ | 2,352,638 | $ | 956,673 | ||||
Net
Income Per Common Share
|
||||||||
Basic
|
$ | 0.12 | $ | 0.05 | ||||
Diluted
|
$ | 0.11 | $ | 0.05 | ||||
Weighted
Average Number of Common Shares Used to Compute Earnings per Common
Share:
|
||||||||
Basic
|
20,326,260 | 17,885,625 | ||||||
Diluted
|
21,699,317 | 19,035,625 | ||||||
Comprehensive
Income:
|
||||||||
Net
income
|
$ | 2,352,638 | $ | 956,673 | ||||
Foreign
currency translation adjustment
|
74,039 | (30,891 | ) | |||||
Comprehensive
Income
|
$ | 2,426,677 | $ | 925,782 |
The
accompanying notes are an integral part of these financial
statements.
F-2
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Condensed
Consolidated Statements of Stockholders' Equity
|
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
|
|||||||||||||||||||||||||||
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
|
- | - | - | - | 322,750 | (322,750 | ) | - | - | |||||||||||||||||||||||||||
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 | 0 | - | - | - | - | |||||||||||||||||||||||||
Stock
option expense
|
- | - | - | - | 90,635 | - | 90,635 | |||||||||||||||||||||||||||||
Imputed
interest on note payable
|
- | - | - | - | 52,326 | - | - | - | 52,326 | |||||||||||||||||||||||||||
Transfer
to statutory and staff welfare reserves
|
- | - | - | - | 0 | (837,408 | ) | 837,408 | - | - | ||||||||||||||||||||||||||
Net
income for the year ended December 31, 2008
|
5,681,500 | 5,681,500 | ||||||||||||||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | 0 | - | - | 1,309,246 | 1,309,246 | |||||||||||||||||||||||||||
Balance
at December 31, 2008 (as restated)
|
1,150,000 | 1,150 | 17,885,625 | 17,886 | 7,819,865 | 11,604,285 | 2,682,345 | 3,047,872 | 25,173,403 | |||||||||||||||||||||||||||
January
1, 2009 cumulative effect of change in accounting
principle:
|
||||||||||||||||||||||||||||||||||||
Reclassification
of Series A Preferred Stock and A, B, C, and D Warrants
from stockholder's equity to liabilities, including revaluation at
fair value of $18,760
|
(1,150,000 | ) | (1,150 | ) | (688,850 | ) | 18,760 | (671,240 | ) | |||||||||||||||||||||||||||
Balance
at January 1, 2009 after cumulative effect adjustment
|
- | - | 17,885,625 | 17,886 | 7,131,015 | 11,623,045 | 2,682,345 | 3,047,872 | 24,502,163 | |||||||||||||||||||||||||||
Conversion
of Series A preferred stock
|
- | - | 1,100,000 | 1,100 | 1,948,067 | - | - | - | 1,949,167 | |||||||||||||||||||||||||||
Cashless
exercise of A warrants
|
- | - | 598,006 | 598 | 1,290,630 | - | - | - | 1,291,228 | |||||||||||||||||||||||||||
Cash
exercise of A warrants
|
- | - | 333,334 | 333 | 548,334 | - | - | - | 548,667 | |||||||||||||||||||||||||||
Exercise
of stock option
|
- | - | 107,059 | 107 | 32,011 | - | - | - | 32,118 | |||||||||||||||||||||||||||
Imputed
interest on note payable
|
- | - | - | - | 53,219 | - | - | - | 53,219 | |||||||||||||||||||||||||||
Transfer
to statutory and staff welfare reserves
|
- | - | - | - | - | (1,199,459 | ) | 1,199,459 | - | - | ||||||||||||||||||||||||||
Net
income for the year ended December 31, 2009
|
- | - | - | - | - | 480,125 | - | - | 480,125 | |||||||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | - | - | - | (220,696 | ) | (220,696 | ) | |||||||||||||||||||||||||
Balance at December 31, 2009
|
- | - | 20,024,024 | 20,024 | 11,003,276 | 10,903,711 | 3,881,804 | 2,827,176 | 28,635,991 | |||||||||||||||||||||||||||
Cashless exercise of options
|
- | - | 76,738 | 77 | (77 | ) | - | - | - | - | ||||||||||||||||||||||||||
Stock issued for consulting services
|
- | - | 40,000 | 40 | 92,760 | - | - | - | 92,800 | |||||||||||||||||||||||||||
Exercise of B warrants
|
- | - | 475,000 | 475 | 1,087,275 | - | - | - | 1,087,750 | |||||||||||||||||||||||||||
Exercise of $1.00 options
|
- | - | 125,000 | 125 | 124,875 | - | - | - | 125,000 | |||||||||||||||||||||||||||
Imputed interest on note payable
|
- | - | - | - | 13,295 | - | - | - | 13,295 | |||||||||||||||||||||||||||
Transfer to statutory and staff welfare reserves
|
- | - | - | - | - | (148,854 | ) | 148,854 | - | - | ||||||||||||||||||||||||||
Net
income for the three months ended March 31, 2010
(Unaudited)
|
- | - | - | - | - | 2,352,638 | - | - | 2,352,638 | |||||||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | - | - | - | 74,039 | 74,039 | |||||||||||||||||||||||||||
Balance
at March 31, 2010 (Unaudited)
|
- | $ | - | 20,740,762 | $ | 20,741 | $ | 12,321,404 | $ | 13,107,495 | $ | 4,030,658 | $ | 2,901,215 | $ | 32,381,513 |
The
accompanying notes are an integral part of these financial
statements.
F-3
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
For the Three Months Ended March 31,
|
|||||||
|
2010
|
2009
|
||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income
|
$ | 2,352,638 | $ | 956,673 | ||||
Adjustments
to reconcile net income
|
||||||||
to
net cash provided by operating activities:
|
||||||||
(Gain)
from revaluation of Series A Preferred Stock and A, B, C, and
D
warrants with characteristics of liabilities at fair
values
|
(1,515,915 | ) | (262,725 | ) | ||||
Issuance
of shares in consideration for consulting services
|
92,800 | - | ||||||
Provision
for allowances, returns and doubtful accounts
|
(31,146 | ) | - | |||||
Depreciation
- cost of sales
|
98,176 | 98,823 | ||||||
Depreciation
- operating expenses
|
19,033 | 18,889 | ||||||
Amortization
of land use rights -cost of sales
|
85,143 | - | ||||||
Amortization
of land use rights- operating expenses
|
9,534 | 9,535 | ||||||
Amortization
of intangible assets
|
34,281 | 34,283 | ||||||
Imputed
interest
|
13,295 | 13,296 | ||||||
Collections
of other receivables
|
3,747,926 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable, net
|
(1,422,502 | ) | (1,391 | ) | ||||
Inventories
|
1,388,201 | 243,388 | ||||||
Prepaid
expenses
|
(74,057 | ) | (286 | ) | ||||
Other
receivables
|
(10,569 | ) | - | |||||
Accounts
payable and accrued liabilities
|
(31,914 | ) | (35,690 | ) | ||||
Taxes
payable
|
(225,583 | ) | (217,888 | ) | ||||
Net
cash provided by operating activities
|
4,529,341 | 856,907 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Purchase
of patent
|
(6,299,500 | ) | - | |||||
Purchase
of fixed assets
|
(1,318 | ) | - | |||||
Collection
of amount previously advanced to related party
|
244,636 | - | ||||||
Deposit
for purchase of land use rights and property and equipment
|
- | (2,930,200 | ) | |||||
Net
cash (used for) investing activities
|
(6,056,182 | ) | (2,930,200 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Repayment
to related party
|
(5,042 | ) | - | |||||
Cash
exercise of options
|
125,000 | - | ||||||
Exercise
of B warrants
|
475,000 | - | ||||||
Net
cash provided by financing activities
|
594,958 | - | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
43,017 | 23,148 | ||||||
Decrease
in cash and cash equivalents
|
(888,866 | ) | (2,050,145 | ) | ||||
Cash
and cash equivalents, beginning of period
|
2,918,068 | 4,398,897 | ||||||
Cash
and cash equivalents, end of period
|
$ | 2,029,202 | $ | 2,348,752 | ||||
Supplemental
Schedule of Non-Cash Investing and Financing Activities:
|
||||||||
Cost
of patent acquired
|
$ | 7,927,511 | ||||||
Less,
purchase price paid in cash
|
6,299,500 | |||||||
Obligation
payable to seller of patent
|
$ | 1,628,011 | ||||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$ | - | $ | - | ||||
Income
taxes paid
|
$ | 535,681 | $ | 391,174 |
The
accompanying notes are an integral part of these financial
statements.
F-4
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 1 - 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 unaudited condensed 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.
NOTE 2 – INTERIM FINANCIAL
STATEMENTS
The
unaudited condensed financial statements as of March 31, 2010 and for the three
months ended March 31, 2010 and 2009 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 condensed 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 March 31, 2010 and the results of
operations and cash flows for the periods ended March 31, 2010 and
2009. 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 months ended March 31, 2010 is
not necessarily indicative of the results to be expected for any subsequent
quarter of the entire year ending December 31, 2010. The balance
sheet at December 31, 2009 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
condensed financial statements should be read in conjunction with our audited
financial statements and notes thereto for the year ended December 31, 2009 as
included in our report on Form 10-K, as filed with the SEC on April 15,
2010.
F-5
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(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, note
payable, taxes payable and other 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 ($0.14650 and $0.14630 at
March 31, 2010 and December 31, 2009, respectively). Harbin Hainan
Kangda and Taishan Kangda revenues and expenses are translated into United
States dollars at weighted average exchange rates for the periods ($0.14650 and
$0.14661 for the three months ended March 31, 2010 and 2009,
respectively). Resulting translation adjustments are recorded as a
component of accumulated other comprehensive income (loss) within stockholders’
equity.
Transaction
gains or losses arising from exchange rate fluctuation on transactions
denominated in a currency other than the functional currency are included in the
consolidated results of operations. There are no material foreign
currency transaction gains or losses for three months ended March 2010 and
2009.
F-6
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Cash and Cash
Equivalents
Cash and
cash equivalents at December 31, 2009 and 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.
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, plant 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 30 to 50 years. Other intangible assets consist of patents and
licenses. Patents and licenses are amortized over their expected useful economic
lives, which range from 10 to 20 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.
F-7
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
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 collectibility is deemed
probable.
Advertising
Costs
Advertising
costs are expensed as incurred. There were no significant advertising expenses
for the three months ended March 31, 2010 and 2009.
Research and
Development
Research
and development costs related to both present and future products are expensed
as incurred. There were no significant expenses relating to research and
development for the three months ended March 31, 2010 and 2009.
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.
F-8
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
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.
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 months ended March 31, 2010 and 2009.
March
31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Weighted
average shares outstanding – basic
|
20,326,260 | 17,885,625 | ||||||
Series
A convertible preferred stock
|
50,000 | 1,150,000 | ||||||
Incremental
common shares from stock options and warrants
|
1,323,057 | - | ||||||
Weighted
average shares outstanding - diluted
|
21,699,317 | 19,035,625 |
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 0 and
4,250,000 for the three months ended March 31, 2010 and
2009, 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.
Statement of Cash
Flows
In
accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
F-9
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 4 -
INVENTORIES
Inventories
consist of:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Cactus
stock
|
$ | 826,194 | $ | 2,149,643 | ||||
Other
raw materials and work-in-process
|
37,841 | 28,158 | ||||||
Finished
goods
|
289,128 | 311,761 | ||||||
Total
|
1,153,163 | 2,489,562 | ||||||
Less:
allowance for market adjustments to inventories
|
(100,460 | ) | (48,658 | ) | ||||
Net
|
$ | 1,052,703 | $ | 2,440,904 |
NOTE 5 – OTHER
RECEIVABLES
Other
receivables at March 31, 2010 and December 31, 2009 consist of:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unudited)
|
||||||||
Land
Center of Qitaihe
|
$ | - | $ | 3,116,843 | ||||
QitaiheTianhe
Pharmaceutical Co. Ltd
|
- | 631,083 | ||||||
Due
from related party
|
10,569 | 244,636 | ||||||
Total
|
$ | 10,569 | $ | 3,992,562 |
Disposal of property, plant
and equipment
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 were
collectively referred to as the “Assets”. Total purchase price under the
Agreement was RMB 37,000,000 ($5,413,100).
On
December 19, 2009, the Company entered into a draft agreement with the
Government of Qitaihe City and agreed to give up all the rights acquired from
the above purchase to the Qitaihe local government for rebuilding the city of
Qitaihe. In return for forfeiting the properties purchased, the Company received
a total of RMB 36,304,461 (approximately US$5.3 million) as compensation from
the City of Qitaihe. The agreement of forfeiting was signed on January 27,
2010.
On
December 20, 2009, the Company sold certain equipment it had previously acquired
to an unrelated third party in the amount of RMB 4,313,620 (approximately
$631,000).
F-10
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
As a
result of transactions described in the preceding two paragraphs, the Company
recognized a net gain of RMB 3,378,675 ($495,348) on the “Disposal of property,
plant and equipment,” which was included within “Other Income (Expense)” in the
Statement of Operations for the year ended December 31, 2009.
The
balance due from Land Center of Qitaihe and proceeds receivable from sale of
equipment were collected in the first quarter 2010.
Due from related
party
At March
31, 2010 and at December 31, 2009, due from related party, Mr. Chengzhi Wang,
the General Manager and Director of the Company, of $10,659 and $244,636,
respectively, was interest free and due on demand.
NOTE 6 - PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment, net consist of:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Buildings
|
$ | 2,924,758 | $ | 2,920,766 | ||||
Plant
equipment and machinery
|
4,648,595 | 4,642,249 | ||||||
Motor
vehicles
|
289,211 | 288,816 | ||||||
Furniture
and office equipment
|
12,471 | 11,138 | ||||||
Total
|
7,875,035 | 7,862,969 | ||||||
Less
accumulated depreciation
|
(2,232,188 | ) | (2,112,093 | ) | ||||
Net
|
$ | 5,642,847 | $ | 5,750,876 |
Depreciation
expense was $117,209 and $117,712 for the three months ended March 31, 2010 and
2009, respectively, of which $98,176 and $98,823, were included in cost of
sales, respectively.
F-11
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 7 - LAND USE
RIGHTS
Land use
rights, net consist of:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Harbin
Hainan Kangda
|
$ | 17,608,282 | $ | 17,584,244 | ||||
Taishan
Kangda
|
871,932 | 870,741 | ||||||
Total
|
18,480,214 | 18,454,985 | ||||||
Less
accumulated amortization
|
(567,743 | ) | (473,151 | ) | ||||
Net
|
$ | 17,912,471 | $ | 17,981,834 |
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 of 66,376,800 RMB
($9,710,926) was paid in full as of December 31, 2009. Commencing January 2010,
amortization of the cost is being charged to operations.
Amortization
of land use rights was $94,677 and $9,535 for the three months ended March 31,
2010 and 2009, respectively, of which $85,143 and $0, respectively, were
included in cost of goods sold.
The
expected amortization of the above land use rights for each of the five
succeeding years ending March 31, and in the aggregate, is as
follows:
Year
Ending
March
31,
|
Amount
(Unaudited)
|
|||
2011
|
$ | 414,970 | ||
2012
|
414,970 | |||
2013
|
414,970 | |||
2014
|
414,970 | |||
2015
|
414,970 | |||
Thereafter
|
15,837,567 | |||
Total
|
$ | 17,912,417 |
F-12
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 8 - INTANGIBLE
ASSETS
Intangible
assets, net consist of:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Patents
and licenses
|
$ | 9,298,750 | $ | 1,370,831 | ||||
Less
accumulated amortization
|
(1,088,788 | ) | (1,054,531 | ) | ||||
Net
|
$ | 8,209,962 | $ | 316,300 |
In
January 2010, the Company purchased a group of cactus patents for cattle, hog
and fish feed for $7,927,511 (RMB 54,112,700) under a “Patent Transfer
Agreement” which provided for the Company to make 4 installment payments to the
transferor of the patent, as follows: 25% at the end of January 2010; 25% at the
end of March 2010; 20% at the end of June 2010; and 30% at the end of August
2010.
The
agreement also placed certain requirements on the Transferor concerning timely
providing the materials necessary so that title to the patent could promptly be
received by the Company. In addition, the agreement imposes liquidated damages
fees to the Company if it fails to make payment to the Transferor whom has the
right to rescind the contract and return of all materials related to the patent,
or if the Company is late in paying an amount, in particular if it is 2 months
tardy. There were liquidated damages fees imposed on the Transferor if they were
tardy as well.
The
Company has paid $6,299,500 in cash, which amount exceeded payments required by
the agreement through March 31, 2010, resulting in a $1,628,011 balance due
which is reflected in the Balance Sheet at March 31, 2010 as a liability
“Payable to the Seller of the Patent.” The additional payments were the result
of an informal agreement between the Transferor and the Company based upon a
timely delivery of materials by the Transferor to facilitate the transfer of
title to the Company, which occurred on April 21, 2010. The patent period
granted under PRC governmental authority commenced on April 10, 2010 and expires
on April 10, 2025. The Company expects to pay the remainder amount to the
Transferor during the remainder of May 2010. Prior to the Patent Transfer
Agreement the Company had been using the patents on an experimental basis since
2008.
Patent
amortization expense was $34,281 and $34,283 for the three months ended March
31, 2010 and 2009, respectively.
The
expected amortization of the above intangible assets for each of the five
succeeding years ending March 31, and in the aggregate, is as
follows:
Year
Ending March 31,
|
Amount
(Unaudited)
|
|||
2011
|
$ | 335,415 | ||
2012
|
533,603 | |||
2013
|
438,222 | |||
2014
|
396,376 | |||
2015
|
396,376 | |||
Thereafter
|
6,109,970 | |||
Total
|
$ | 8,209,962 |
NOTE 9 - NOTE
PAYABLE
Note
payable consists of:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Note
payable to a financial institution, interest
free, unsecured and due on demand
|
$ | 886,325 | $ | 885,115 |
F-13
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
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
$13,295 and $13,296 for the three months ended March 31, 2010 and 2009,
respectively.
NOTE 10 – TAXES
PAYABLE
Taxes
payable consist of:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
PRC
corporation income tax
|
$ | 322,369 | $ | 527,264 | ||||
Value
added tax payable
|
88,389 | 74,419 | ||||||
Consumption
tax
|
152,117 | 151,751 | ||||||
Other
taxes
|
683 | 35,707 | ||||||
Total
|
$ | 563,558 | $ | 789,141 |
NOTE 11 – ESTIMATED
LIABILITY FOR EQUITY-BASED FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
LIABIILTIES
Effective
January 1, 2009, in accordance with EITF Issue No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock”, the
Company reclassified the fair values at January 1, 2009 of the outstanding
Series A Convertible Preferred Stock and the warrants comprising the March 21,
2008 and the July 16, 2008 sales of units (see Note 12) from stockholders’
equity to liabilities, as follows:
Shares
/ Warrants
|
Fair
Value
|
|||||||
Series
A Convertible Preferred Stock
|
1,150,000 | $ | 333,500 | |||||
A
warrants
|
1,250,000 | 122,000 | ||||||
B
warrants
|
1,500,000 | 120,150 | ||||||
C
warrants
|
500,000 | 47,950 | ||||||
D
warrants
|
600,000 | 47,640 | ||||||
Total
warrants
|
3,850,000 | 337,740 | ||||||
Total
Financial Instruments
|
5,000,000 | $ | 671,240 |
Since at
January 1, 2009 the carrying value of the outstanding financial instruments was
$690,000, the Company recognized a cumulative effect adjustment resulting from a
change in accounting principle of $18,760, or a net of $671,240. Accordingly,
the unappropriated retained earnings balance at December 31, 2008 was increased
from $11,604,285 to $11,623,045, as adjusted, on January 1, 2009.
F-14
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
The
characteristics which require classification of the Series A Preferred Stock and
warrants as liabilities are the Company’s obligations to reduce the conversion
price of the Series A Preferred Stock and the exercise price of the warrants in
the event that the Company sells, grants, or issues any shares, options
warrants, or any convertible instrument at a price below the $0.60 current
conversion price of the Series A Preferred Stock or the current exercise prices
of the warrants. As a result, the Company remeasures the fair values of these
financial instruments each quarter, adjusts the liability balances, and reflects
changes in operations as “income (expense) from revaluation of Series A
Preferred Stock and A, B, C, and D warrants with characteristics of liabilities
at fair values”.
At March
31, 2010, the fair values of the financial instruments consisted
of:
Shares
/ Warrants
|
Fair
Value
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Series
A Convertible Preferred Stock
|
50,000 | $ | 107,000 | |||||
A
warrants
|
- | - | ||||||
B
warrants
|
1,025,000 | 1,352,385 | ||||||
C
warrants
|
500,000 | 710,950 | ||||||
D
warrants
|
600,000 | 759,360 | ||||||
Total
warrants
|
2,125,000 | 2,822,695 | ||||||
Total
Financial Instruments
|
2,175,000 | $ | 2,929,695 |
Below is
a reconciliation of the change in the fair values of the financial instruments
from January 1, 2009 through March 31, 2010.
Shares
/ Warrants
|
Fair
Value
|
|||||||
Balance,
January 1, 2009
|
5,000,000 | $ | 671,240 | |||||
Revaluation
credited to operations
|
- | (262,725 | ) | |||||
Balance,
March 31, 2009
|
5,000,000 | 408,515 | ||||||
Revaluation
charged to operations
|
- | 1,761,440 | ||||||
Balance,
June 30, 2009
|
5,000,000 | 2,169,955 | ||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(416,667 | ) | (666,667 | ) | ||||
Revaluation
charged to operations
|
- | 2,738,135 | ||||||
Balance,
September 30, 2009
|
4,583,333 | 4,241,423 | ||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(683,333 | ) | (1,282,500 | ) | ||||
Exercise
of A warants
|
(1,250,000 | ) | (1,589,895 | ) | ||||
Revaluation
charged to operations
|
- | 3,689,332 | ||||||
Balance,
December 31, 2009
|
2,650,000 | 5,058,360 | ||||||
Exercise
of B warrants (Unaudited)
|
(475,000 | ) | (612,750 | ) | ||||
Revaluation
credited to operations (Unaudited)
|
- | (1,515,915 | ) | |||||
Balance,
March 31, 2010 (Unaudited)
|
2,175,000 | $ | 2,929,695 |
The
Series A Convertible Preferred Stock is valued based on the trading price of the
Company’s common stock. The warrants are valued using the Black-Scholes option
pricing model with a 100% volatility assumption regarding the trading price of
the Company’s common stock.
F-15
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 12 - 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. On October 15, 2008, the Company issued 46,000 shares of
common stock to the investor in consideration for the waiver of liquidated
damages.
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). In
addition, the Investor had the right to participate in any subsequent funding by
the Company on a pro-rata basis at 100% of the offering price for a three month
period following the closing. In addition, the conversion price of the Series A
Preferred Stock and the exercise price of the warrants is to be reduced in the
event of any stock splits or stock dividends or in the event that the Company
sells, grants, or issues any shares, options, warrants, or any convertible
instrument at a price below the $0.60 current conversion price of the Series A
Preferred Stock or the current exercise prices of the warrants.
The
Company recorded as a $196,500 deemed dividend and as a $196,500 increase in
additional paid-in capital , the beneficial conversion feature allocated to the
convertible preferred stock only ($196,500) based on a relative allocation of
the fair values of the convertible preferred stock ($625,000), the A warrants
($477,250) and the B warrants ($488,250) to the gross actual proceeds received
($500,000). 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%.
F-16
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(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 $126,250 deemed dividend and as a $126,250 increase in additional
paid-in capital, the beneficial conversion feature allocated to the convertible
preferred stock only ($126,250) based on a relative allocation of the fair
values of the convertible preferred stock ($287,083) and the warrants ($281,580)
to the gross actual proceeds received ($250,000). 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%.
Below is
summary of the deemed dividends for the year ended December 31,
2008:
March
21, 2008
|
$ | 196,500 | ||
July
16, 2008
|
126,250 | |||
Total
|
$ | 322,750 |
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. 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 23, 2009, the Company issued 250,000 shares of common stock to the
Investor for the conversion of 250,000 shares of Series A Preferred Stock. There
are 50,000 shares of Series A Preferred Stock remaining.
In
November and December 2009, the aforementioned A warrant holder exercised
916,666 A warrants in a cashless exercise and received 598,006 shares of common
stock.
In
October 2009, the aforementioned A warrant holder exercised 333,334 A warrants
at a price of $0.75 per share, or $250,000 total, and was issued 333,334 shares
on January 18, 2010.
In
February 2010, the aforementioned B warrant holder exercised 475,000 B warrants
at a price of $1.00 per share, or $475,000 total.
NOTE 13 – STOCK OPTIONS AND
WARRANTS TO PURCHASE COMMON STOCK; AND OTHER COMMON STOCK
ISSUANCES
Options and
Warrants
A summary
of stock option and warrant activity for the years ended December 31, 2008 and
2009 and for the three months ended March 31, 2010 as follows:
F-17
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
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 | ) | (1,250,000 | ) | ||||
Forfeited/expired/cancelled
|
(42,941 | ) | - | |||||
Outstanding
at December 31, 2009
|
250,000 | 2,600,000 | ||||||
Granted
and issued
|
- | - | ||||||
Exercised
|
(201,738 | ) | (475,000 | ) | ||||
Forfeited/expired/cancelled
|
(48,262 | ) | - | |||||
Outstanding
at March 31, 2010 (Unaudited)
|
- | 2,125,000 |
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 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%).
On
December 31, 2008, the Company granted 150,000 options to the law firm, all
exercisable at $0.30 per share to December 31, 2012, and expensed the $31,410
fair value of these options at December 31, 2008 (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. The Company expensed the $32,118 exercise amount relating to the
107,059 shares.
On
January 26, 2010, the Company issued 76,738 shares of its common stock to Crone
Law Group in a cashless exercise of 125,000 stock options exercisable at a price
of $1.00 per share.
On
February 25, 2010, the Company issued 475,000 shares of its common stock to T
Squared Investments LLC, a B warrant holder, at the price of $1.00 per share
pursuant to an exercise of B warrants.
On March
3, 2010, the Company issued 125,000 shares of its common stock to Crone Law
Group in an exercise of 125,000 stock options at the price of $1.00 per
share.
There are
no stock options outstanding as of March 31, 2010.
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Warrants
outstanding at March 31, 2010 consist of:
Date
|
Number
|
Number
|
Exercise
|
Expiration
|
|||||||||
Granted
|
Outstanding
|
Exercisable
|
Price
|
Date
|
|||||||||
March
21, 2008
|
1,025,000 | 1,025,000 | $ | 1.0000 |
March
21, 2011
|
||||||||
July
16, 2008
|
500,000 | 500,000 | $ | 0.9375 |
July
16, 2011
|
||||||||
July
16, 2008
|
600,000 | 600,000 | $ | 1.2500 |
July
16, 2011
|
||||||||
Total
|
2,125,000 | 2,125,000 |
Other Common Stock
Issuances
On
February 8, 2010, the Company issued 40,000 shares to First Trust China Ltd.
pursuant to the consulting agreement signed on September 1, 2009 (see Note
16).
NOTE 14– 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 $10,468,309 and
$10,306,160 at March 31, 2010 and December 31, 2009, respectively.
NOTE 15 - 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 2010 and 2009 since
US China Kangtai had taxable losses in those periods.
At March
31, 2010, 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.
Based on
managements’ present assessment, the Company has not yet determined it to be
more likely than not that a deferred tax assets of approximately $350,000
($297,500 at December 31, 2009) attributable to the future utilization of the
approximately $1,000,000 net operating loss carryforward of US China Kangtai as
of March 31, 2010 will be realized. Accordingly, the Company has provided a 100%
allowance against the deferred tax asset in the financial statements at March
31, 2010. The Company will continue to review this valuation allowance and make
adjustments as appropriate. The net operating loss carryforward expires in
varying amounts from year 2005 to year 2010.
F-19
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Current
United States income tax laws limit the amount of loss available to be offset
against future taxable income when a substantial change in ownership occurs.
Therefore, the amount available to offset future taxable income may be
limited.
BVI China
Kangtai was incorporated in the BVI and is not subject to tax on income or on
capital gains.
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 effective income tax
rate was 15% for the years ended December 31, 2009 and 2008. The income tax rate
is increased to 25% beginning from January 1, 2010.
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:
March
31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Expected
tax at 35%
|
$ | 939,198 | $ | 395,486 | ||||
Tax
effect of unutilized losses of US China Kangtai and BVI China
Kangtai
|
53,484 | 9,658 | ||||||
Tax
effect of PRC income taxed at lower rate
|
(131,326 | ) | (139,904 | ) | ||||
Non-taxable
income from revaluation of Series A Preferred Stock and A, B, C, and D
warrants with characteristics of liabilities at fair value
|
(530,570 | ) | (91,954 | ) | ||||
Actual
provision for income taxes
|
$ | 330,786 | $ | 173,286 |
NOTE 16 - COMMITMENTS AND
CONTINGENCIES
Operating lease
commitments
The
Company leases farm sheds and land for growing cactus from third parties under
operating leases. Rental expenses for all operating leases for the three months
ended March 31, 2010 and 2009 were approximately $1,500 and $2,000
respectively.
At March
31, 2010, future minimum rental commitments under all non-cancellable operating
leases are due as follows:
F-20
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
For
the Year Ending
|
||||
March
31,
|
||||
2011
|
$ | 6,272 | ||
2012
|
6,272 | |||
2013
|
6,272 | |||
2014
|
6,272 | |||
2015
|
2,175 | |||
Thereafter
|
50,644 | |||
Total
|
$ | 77,907 |
Consulting
Agreements
The
Company entered into a six months investor relations consulting contract on July
1, 2009. The Company is required to pay the consultant a fee of $5,000 per
month, consisting of $2,500 in cash and $2,500 in Company restricted common
stock. The contract is to be automatically renewed for six months unless either
of the two parties gives 30 days written notice of termination. The contract is
still active currently.
The
Company entered into a one year consulting agreement with First Trust China Ltd.
on September 1, 2009. The Company is required to pay the consultant a monthly
cash retainer of $2,000 paid quarterly, of which the first 3 months was due upon
signing of the contract. In addition, the Company is required to issue a total
of 80,000 shares of its common stock to the consultant semi-annually; the first
40,000 shares were issued February 9, 2010.
General
and administrative expenses for the three months ended March 31, 2010 includes
$92,800 consulting fee incurred relating to the issuing of 40,000 shares to the
consultants, which was valued at market price of $2.32 per share.
Concentrations and
risks
Substantially
all of the Company’s assets are located in China and 100% of the Company’s
revenues have been 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.
F-21
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 17 – 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 March 31, 2010 and December 31, 2009 were
located in the PRC. Net sales for the periods presented were all
derived from PRC customers. During the three months ended March 31, 2010, one
customer accounted for 14% of net sales. During the three months
ended March 31, 2009, one customer accounted for 12% of net sales.
Net sales
consisted of:
March
31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Finished
goods
|
$ | 3,909,263 | $ | 2,725,120 | ||||
Cactus
stock
|
1,609,771 | 604,832 | ||||||
Total
|
$ | 5,519,034 | $ | 3,329,952 |
NOTE 18 - TERMINATION OF
COMMON STOCK PURCHASE AGREEMENT (LIMITED PRIVATE PLACEMENT OFFERING WITH SEASIDE
88, LP) ENTERED INTO IN NOVEMBER 2009
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.
As of
April 30, 2010, the registration statement to register the shares of common
stock for resale has not been filed and, no shares of common stock have been
issued to Seaside under the Agreement. At this point, Seaside has not filed
notice under Section 5.1 of the Agreement, or commenced or threatened legal
action against the Company for the $200,000 in liquidated damages that may be
due Seaside under the Agreement. The Agreement provided that such liquidating
damages would be due in the event the Company exercises its
termination right and within six months of such terminations initiates another
financing having committed funding dates scheduled at pre-determined intervals
of between one week and two months.
F-22
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
On April
30, 2010, the Company entered into a termination agreement (the “Termination
Agreement”) with Seaside (see Note 18) pursuant to which the parties agreed to
mutually terminate the Common Stock Purchase Agreement, dated November 5, 2009,
between the Company and Seaside (the “Purchase Agreement”) with no further
obligations. The parties agreed to enter into the Termination Agreement because
the Company believes the financing terms as contemplated by the Purchase
Agreement is not in the best interest of the Company at the current time. The
Company has not incurred any early termination penalties and there are no
further obligations outstanding under the Purchase Agreement.
NOTE 19 - SUBSEQUENT
EVENTS
On April
20, 2010, the Company issued 250,000 shares of its common stock to T Squared
Investments LLC, a B warrant holder, at the price of $1.00 per share pursuant to
an exercise of B warrants.
The
Company has evaluated subsequent events through the filing date of this Form
10-K and has determined that there were no additional subsequent events to
recognize or disclose in these financial statements.
F-23
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 the 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, cactus feed, 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.
3
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.
4
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.
The
following discussion should be read in conjunction with our financial statements
and notes thereto included in this Form 10-Q and Form 10-K filed on April 15,
2010.
5
Results
of Operations
Comparison of Sales for
the Three Months Ended March 31, 2010 and 2009
Three
Months Ended March 31,
|
||||||||||||
2010
|
2009
|
%
of changes
|
||||||||||
Sales
by categories
|
||||||||||||
Nutraceuticals
|
$ | 1,805,747 | $ | 1,362,351 | 32.55 | % | ||||||
Beverages
|
1,398,701 | 981,332 | 42.53 | % | ||||||||
Raw
& intermediate materials
|
1,633,575 | 604,833 | 170.09 | % | ||||||||
Packaged
foods
|
- | 123,592 | - | |||||||||
Cactus
cigarettes
|
212,638 | - | - | |||||||||
Cactus
feed
|
468,373 | 257,844 | 81.65 | % | ||||||||
Total
Sales
|
$ | 5,519,034 | $ | 3,329,952 | 65.74 | % |
Sales for
the three months ended March 31, 2010 totaled $5,519,034, an increase of
$2,189,082, or 66% compared to the sales of $3,329,952 for the three months
ended March 31, 2009. The increase in sales is attributable to the
fact that the Company’s products are efficiently marketed and well accepted by
consumers. The sale of our raw and intermediate materials products was
$1,633,575, an increase of $1,028,742, or 170% as compared to the sales of
$604,833 in the same period of 2009. Increased raw and intermediate materials
sales accounted for 47% of total increased sales. The sale of
nutraceuticals products was $1,805,747 in the three months ended March 31, 2010,
an increase of $443,396, or 33%, as compared to the sales of $1,362,351 in the
same period of 2009. The sale of beverages products was $1,398,701 in the three
months ended March 31, 2010, an increase of $417,369, or 43%, as compared to the
sales of $981,332 in the same period of 2009.
Cost of
Sales
Cost of
sales totaled $4,039,862 for the three months ended March 31, 2010, an increase
of $1,947,076, or 93% as compared to $2,092,786 in the same quarter of 2009. The
gross profit rate was 27% for the three months ended March 31, 2010, a decrease
10 percentage points as compared to 37% in the same quarter of 2009. The
increase in cost of sales and decrease in gross profit rates was primarily
attributable to the increased sales of our raw and intermediate materials. The
gross profit rate is about 11% for our raw and intermediate materials
products.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2010 totaled $298,515,
representing a decrease of $58,121, or 16%, compared to $356,636 for the three
months ended March 31, 2009. The decrease in operating expenses was mainly
attributable to a negative adjustment of $31,146 to provision for allowances,
returns and doubtful accounts.
Other Income and
Expenses
Other
income (net) for the three months ended March 31, 2010 totaled $1,502,767, an
increase of $1,253,338, compared to $249,429 for the same period of 2009. The
increased net other income mainly resulted from the income from revaluation of
Series A Preferred Stock and A, B, C, and D warrants with characteristics of
liabilities at fair values. (See Note 11 to Financial Statements). Such income
totaled $1,515,915 in the first quarter of 2010.
6
Income from
Operations
Income
from operations totaled $1,180,657 in the three months ended March 31, 2010, an
increase of $300,127, or 34%, as compared to $880,530 in the same period of
2009. The increase resulted mainly from increased sales and decreased operating
expenses as discussed above.
Net
Income
Net
income totaled $2,352,638 for the three months ended March 31, 2010 as compared
to the net income of $956,673 in the same period of 2009. The increase in net
income was caused partially by the income from revaluation of Series A Preferred
Stock and A, B, C, and D warrants with characteristics of liabilities at fair
values. (See Note 11 to Financial Statements). Absent this income, the Company
would have had a net income of $836,723 in the first quarter of 2010, as
compared to net income of $693,948 in the same period in 2009; and basic and
diluted earnings per share would have been $0.04 and $0.04, for the three months
ended March 31, 2010 and 2009, respectively.
Liquidity
and Capital Resources
We had
cash and cash equivalents of approximately $2,029,000 and $2,918,000, as of
March 31, 2010 and December 31, 2009. Our funds are kept in financial
institutions located in China, which do not provide insurance for amounts on
deposit. Moreover, we are subject to the regulations of the PRC which
restrict the transfer of cash from China, except under certain specific
circumstances. Accordingly, such funds may not be readily available to us to
satisfy obligations which have been incurred outside the PRC.
Net cash
provided by operating activities was $4,529,341 and $856,907 for the three
months ended March 31, 2010 and 2009, respectively. The increase in net cash
provided by operating activities in 2010 was due to the increase of our sales
and collections of other receivables totaling $3,747,926, which related to sale
of land use rights and certain equipment in 2009.
Net cash
used in investing activities was $6,056,182 and $2,930,200 for the three months
ended March 31, 2010 and 2009, respectively. In January 2010, the Company
purchased a livestock feed patent in the amount of $7,927,511 (RMB 54,112,700).
The Company paid $6,299,500 in cash. During the three months ended March 31,
2009, the Company deposited $2,930,200 pursuant to the Assets Purchase Agreement
entered on March 25, 2009 for land use rights.
Net cash
provided by financing activities was $594,958 and $0 for the three months ended
March 31, 2010 and 2009. During the three months ended March 31,
2010, the Company received net proceeds of $125,000 from cash exercise of
options and net proceeds of $475,000 from exercise of B warrants. The Company
repaid $5,042 to a related party.
Note Payable to a Financial
Institution
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 $13,295 and $13,296 for the three months ended March
31, 2010 and 2009, respectively.
Estimated Liability for
Equity-Based Financial Instruments with Characteristics of
Liabilities
Effective
January 1, 2009, in accordance with EITF Issue No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock”, the
Company reclassified the fair values at January 1, 2009 of the outstanding
Series A Convertible Preferred Stock and the warrants comprising the March 21,
2008 and the July 16, 2008 sales of units (see Note 12) from stockholders’
equity to liabilities, as follows:
7
Shares
/ Warrants
|
Fair
Value
|
|||||||
Series
A Convertible Preferred Stock
|
1,150,000 | $ | 333,500 | |||||
A
warrants
|
1,250,000 | 122,000 | ||||||
B
warrants
|
1,500,000 | 120,150 | ||||||
C
warrants
|
500,000 | 47,950 | ||||||
D
warrants
|
600,000 | 47,640 | ||||||
Total
warrants
|
3,850,000 | 337,740 | ||||||
Total
Financial Instruments
|
5,000,000 | $ | 671,240 |
Since at
January 1, 2009 the carrying value of the outstanding financial instruments was
$690,000, the Company recognized a cumulative effect adjustment resulting from a
change in accounting principle of $18,760, or a net of $671,240. Accordingly,
the unappropriated retained earnings balance at December 31, 2008 was increased
from $11,604,285 to $11,623,045, as adjusted, on January 1, 2009.
The
characteristics which require classification of the Series A Preferred Stock and
warrants as liabilities are the Company’s obligations to reduce the conversion
price of the Series A Preferred Stock and the exercise price of the warrants in
the event that the Company sells, grants, or issues any shares, options
warrants, or any convertible instrument at a price below the $0.60 current
conversion price of the Series A Preferred Stock or the current exercise prices
of the warrants. As a result, the Company remeasures the fair values of these
financial instruments each quarter, adjusts the liability balances, and reflects
changes in operations as “income (expense) from revaluation of Series A
Preferred Stock and A, B, C, and D warrants with characteristics of liabilities
at fair values”.
At March
31, 2010, the fair values of the financial instruments consisted
of:
Shares
/ Warrants
|
Fair
Value
|
|||||||
Series
A Convertible Preferred Stock
|
50,000 | $ | 107,000 | |||||
A
warrants
|
- | - | ||||||
B
warrants
|
1,025,000 | 1,352,385 | ||||||
C
warrants
|
500,000 | 710,950 | ||||||
D
warrants
|
600,000 | 759,360 | ||||||
Total
warrants
|
2,125,000 | 2,822,695 | ||||||
Total
Financial Instruments
|
2,175,000 | $ | 2,929,695 |
Below is
a reconciliation of the change in the fair values of the financial instruments
from January 1, 2009 through March 31, 2010.
8
Shares
/ Warrants
|
Fair
Value
|
|||||||
Balance,
January 1, 2009
|
5,000,000 | $ | 671,240 | |||||
Revaluation
credited to operations
|
- | (262,725 | ) | |||||
Balance,
March 31, 2009
|
5,000,000 | 408,515 | ||||||
Revaluation
charged to operations
|
- | 1,761,440 | ||||||
Balance,
June 30, 2009
|
5,000,000 | 2,169,955 | ||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(416,667 | ) | (666,667 | ) | ||||
Revaluation
charged to operations
|
- | 2,738,135 | ||||||
Balance,
September 30, 2009
|
4,583,333 | 4,241,423 | ||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(683,333 | ) | (1,282,500 | ) | ||||
Exercise
of A warants
|
(1,250,000 | ) | (1,589,895 | ) | ||||
Revaluation
charged to operations
|
- | 3,689,332 | ||||||
Balance,
December 31, 2009
|
2,650,000 | 5,058,360 | ||||||
Exercise
of B warrants
|
(475,000 | ) | (612,750 | ) | ||||
Revaluation
credited to operations
|
- | (1,515,915 | ) | |||||
Balance,
March 31, 2010
|
2,175,000 | $ | 2,929,695 |
Critical
Accounting Policies and Estimates
In Note 2
to the audited consolidated financial statements for the quarter ended March 31,
2010 included in this report, the Company discusses those accounting policies
that are considered to be significant in determining the results of operations
and its financial position. The Company believes that the accounting principles
utilized by it conform to accounting principles generally accepted in the
United States of America. The Company applies the following critical accounting
policies related to revenue recognition in the preparation of its financial
statements.
General
The
Company’s Consolidated Financial Statements are prepared in accordance with U.S.
generally accepted accounting principles, which require management to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, net revenue and expenses, and the disclosure of contingent assets
and liabilities. Management bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Senior management has discussed the development, selection and
disclosure of these estimates with the Board of Directors. Management believes
that the accounting estimates employed and the resulting balances are
reasonable; however, actual results may differ from these estimates under
different assumptions or conditions.
Revenue
Recognition
Sales of
products are recognized when title to the product and risk of loss transfer to
the customer (which depends on 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 collectibility
is deemed probable. Sales terms provide for passage of title either at the time
shipment is made or at the time of the delivery of product and generally do not
include any customer right of return. Shipping and handling costs are included
as a component of cost of sales.
Fair Value of Financial
Instruments
In
connection with the determination of estimated liability for equity-based
financial instruments with characteristics of liabilities (see Note 10 to
consolidated financial statements), the Company used the Black-Scholes option
pricing model and the following assumptions: expected volatility of 100%, and
risk-free interest rate of 2%.
9
Foreign Currency
Translation
The
consolidated financial statements of the Company are translated pursuant to
Accounting Standard Codification (“ASC”) 830, “Foreign Currency Matters.” The
Company’s subsidiaries, Harbin Hainan Kangda and Guangdong Taishan Kangda, are
located and operated in China. The Chinese Yuan is the functional currency.
The financial statements of China Kangtai are translated to U.S. dollars using
period-end exchange rates for assets and liabilities, and average exchange rates
for revenues, costs and expenses. Translation adjustments are recorded in
accumulated other comprehensive income as a component of stockholders’ equity.
Transaction gains or losses arising from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the consolidated results of operations.
Recently Adopted Accounting
Standards
In
February 2010, the Company adopted an amendment to previously adopted accounting
guidance on subsequent event disclosure, which established standards of
accounting for and disclosure of events or transactions that occur after the
balance sheet date but before financial statements are issued or available to be
issued. Under the amended guidance, the Company is no longer required to
disclose the date through which subsequent events have been evaluated. The
adoption of this requirement did not have a material impact on the Company’s
financial condition or results of operations.
Recently Issued Accounting
Standards
In
January 2010, the Financial Accounting Standards Board issued guidance which
expands the required disclosures about fair value measurements. This guidance
requires disclosures about transfers of investments between levels in the fair
value hierarchy and disclosures relating to the reconciliation of fair value
measurements using significant unobservable inputs (level 3 investments). This
guidance is effective for the Company as of January 1, 2011. The adoption
of this guidance will not have a material impact on its financial condition or
results of operations.
Certain
other 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.
Off-Balance Sheet
Arrangements
We have
never entered into any off-balance sheet financing arrangements and have never
established any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.
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.
10
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.
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,
2010. 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. Other Information
None.
Item
5. Exhibits
(a)
Exhibits
EXHIBIT INDEX
10.1 | Patent Transfer Agreement | |
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.
|
11
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: May
17, 2010
|
By:
|
/s/ JINJIANG
WANG
|
JINJIANG
WANG
|
||
President,
Chief Executive Officer, Director and
Principal
Executive Officer
|
Date: May
17, 2010
|
By:
|
/s/ HONG
BU
|
HONG
BU
|
||
Chief
Financial Officer, Director and
Principal
Financial and Accounting
Officer
|
12