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EX-32.1 - China Kangtai Cactus Bio-tech, Inc.v167283_ex32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 2009

o
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____________ to ________________

Commission File No. 000-33097

CHINA KANGTAI CACTUS BIO-TECH, INC.
(Name of Small Business Issuer in its Charter)

Nevada
87-0650263
(State or Other Jurisdiction of
incorporation or organization)
(I.R.S. Employer I.D. No.)
 
99 Taibei Road
Limin Economic and Technological Development Zone
Harbin, Heilongjiang Province, People’s Republic of China
(Address of Principal Executive Offices)

(86) 451-57351189 ext 126
(Registrant’s Telephone Number, Including International Code and Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨   No ¨

Indicate by check mark whether the registrant is a large accelerate filer, an accelerate filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 19, 2009, the issuer had outstanding 18,842,684 shares of common stock, $0.001 par value.

 
 

 
 
Explanatory Note

The Company has determined that its financial statements being filed herein in the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2009, as well as the accompanying condensed financial statement information for the year ended December 31, 2008, will require further corrections resulting from discussions of follow up correspondence received from the Commission on November 20, 2009.

In order for the Company to meet the extended filing due date of this quarterly report on Form 10-Q, management has elected to file this quarterly report with the intention of immediately amending this filing to reflect the corrections needed based on discussions with the Commission.

The corrections to be made will affect the following:

 
1.
The Company expects to correct the deemed dividends for the year ended December 31, 2008, to reflect higher deemed dividends based upon the re-examination of the accounting literature that governs, Emerging Issues Task Force Opinion (“EITF”) 98-5 as amended by EITF 00-27.

 
2.
Pursuant to EITF 07-05, the Company also expects to correct the financial statements for the three months and nine months ended September 30, 2009 to reflect an estimated liability for financial instruments consisting of preferred stock and warrants to purchase common stock classified within stockholders’ equity at December 31, 2008, that are required to be classified as liabilities effective January 1, 2009 and measured at fair value thereafter based upon these financial instruments containing characteristics of liabilities. To accomplish the corrections described in the preceding sentence, the Company expects to record a “cumulative effect adjustment” to remove these financial instruments from stockholders’ equity on January 1, 2009 as if these financial instruments were included in liabilities as of December 31, 2008. In addition, the Company expects to re-measure the estimated liability of the financial instruments at fair value at January 1, 2009 and also reflect that difference within a cumulative effect adjustment. Finally, the Company expects to re-measure this estimated liability at March 31, June 30, and September 30, 2009 and reflect as a charge in the Statement of Operations for the three months and nine months ended September 30, 2009, in the form of interest expense, the amount of the change in fair value of the estimated liability between January 1, 2009 and September 30, 2009.
 

 
CHINA KANGTAI CACTUS BIO-TECH INC.
FORM 10-Q

INDEX
 
   
Page
PART I - FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
1
 
Notes to the Condensed Consolidated Financial Statements (unaudited)
5
Item 2.
Management's Discussion and Analysis or Plan of Operation
19
Item 3.
Quantitative and Qualitative Disclosure About Market Risk.
23
Item 4T.
Controls and Procedures
23
     
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
24
Item 1A.
Risk Factors
24
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24
Item 3.
Defaults upon Senior Securities
24
Item 4.
Submission of Matters to a Vote of Security Holders
24
Item 5.
Other Information
24
Item 6.
Exhibits
24
Signatures
25

 
 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated Balance Sheets
(Expressed in US Dollars)
 

 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Audited as restated-
 
         
Note 16)
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 3,398,563     $ 4,398,897  
Accounts receivable, net of reserve for allowances, and doubtful accounts of $1,466,800 and $979,700, respectively
    3,201,832       3,869,985  
Inventories
    2,429,540       3,376,635  
Other receivables and prepaid expenses
    2,756       1,005  
Total Current Assets
    9,032,691       11,646,522  
                 
Property and Equipment, net
    9,999,523       6,236,914  
                 
Other Assets
               
Land use rights, net
    19,517,543       8,609,491  
Intangible assets, net
    351,445       454,445  
Total Assets
  $ 38,901,202     $ 26,947,372  
                 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities
               
Accounts payable and accrued liabilities
  $ 216,216     $ 315,639  
Payable to seller of land use rights
    6,815,304       -  
Note payable
    887,414       887,475  
Taxes payable
    596,221       570,855  
Total current liabilities
    8,515,155       1,773,969  
                 
Commitments and Contingencies
    -       -  
Stockholders' Equity
               
Preferred stock, $0.001 par value; authorized 200,000,000 shares, issued and outstanding: 733,333 and 1,150,000 shares, respectively
    733       1,150  
Common stock, $0.001 par value; authorized 200,000,000 shares, issued and outstanding: 18,409,351 and 17,885,625 shares, respectively
    18,410       17,886  
Additional paid-in capital
    8,319,035       8,247,115  
Retained earnings
               
Appropriated
    3,469,968       2,682,345  
Unappropriated
    15,529,152       11,177,035  
Accumulated other comprehensive income
    3,048,749       3,047,872  
Total stockholders' equity
    30,386,047       25,173,403  
Total Liabilities and Stockholders' Equity
  $ 38,901,202     $ 26,947,372  

See notes to consolidated financial statements.

 
1

 

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Expressed in US Dollars)
 

 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited as
restated-
   
(Unaudited)
   
(Unaudited as
restated-
 
         
Note 16)
         
Note 16)
 
                         
Net Sales
  $ 8,187,397     $ 6,184,685     $ 18,030,093     $ 13,961,101  
                                 
Cost of Sales
    (4,941,881 )     (3,676,334 )     (10,810,714 )     (8,899,088 )
                                 
Gross Profit
    3,245,516       2,508,351       7,219,379       5,062,013  
                                 
Operating Expenses
                               
Selling expenses
    71,625       136,214       129,569       211,273  
General and administrative expenses
    112,896       138,052       236,521       377,967  
Provision for (reduction in) reserve for allowances, returns, and doubtful accounts
    (492,206 )     -       457,307       136,125  
Depreciation
    19,210       19,675       58,267       57,453  
Amortization of land use rights
    9,543       9,588       28,620       27,991  
Amortization of intangible assets
    34,311       34,475       102,906       100,646  
Total operating expenses
    (244,621 )     338,004       1,013,190       911,455  
Income from Operations
    3,490,137       2,170,347       6,206,189       4,150,558  
                                 
Other Income (Expenses)
                               
Interest income
    43       97       69       624  
Imputed interest
    (13,307 )     (13,370 )     (39,909 )     (39,032 )
Loss on disposal of property and equipment
    -       (197 )     (132 )     (14,246 )
Total Other Income (Expenses)
    (13,264 )     (13,470 )     (39,972 )     (52,654 )
Income before Income Taxes
    3,476,873       2,156,877       6,166,217       4,097,904  
Income Tax Expense
    (455,035 )     (389,737 )     (1,026,477 )     (685,942 )
Net Income
    3,021,838       1,767,140       5,139,740       3,411,962  
Deemed dividends relating to the beneficial conversion feature and the value of the warrants included in the sales of Series A preferred stock (as restated for the three months andnine months ended September 30, 2008)
        -           (250,000 )         -           (750,000 )
Net income attributable to common stockholders (as restated for the three months and nine months ended September 30, 2008)
  $ 3,021,838     $ 1,517,140     $ 5,139,740     $ 2,661,962  
Net income per common share (as restated for the three months and nine months ended September 30, 2008)
                               
Basic
  $ 0.17     $ 0.09     $ 0.29     $ 0.15  
Diluted
  $ 0.15     $ 0.08     $ 0.27     $ 0.14  
                                 
Weighted average number of common shares outstanding
                               
Basic
    18,030,492       17,739,625       17,933,914       17,739,625  
Diluted
    19,702,898       18,921,690       19,258,049       18,446,263  
                                 
Comprehensive income:
                               
Net income
  $ 3,021,838     $ 1,767,140     $ 5,139,740     $ 3,411,962  
Foreign currency translation adjustment
    29,424       66,880       877       1,221,092  
Total
  $ 3,051,262     $ 1,834,020     $ 5,140,617     $ 4,633,054  

See notes to consolidated financial statements.

See notes to consolidated financial statements.

 
2

 

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Expressed in US Dollars)
 

 
               
Additional
   
Unappropriated
   
Appropriated
   
Accumulated other
       
   
Preferred Stock $0.001 par value
   
Common Stock $0.001 par value
   
paid-in
   
retained
   
retained
   
comprehensive
       
   
Shares
   
Amount
   
Shares
   
Amount
   
capital
   
earnings
   
earnings
   
income
   
Total
 
                           
( As restated for the year ended December
31, 2008- Note 16)
               
(As restated for the year ended
December 31, 2008- Note 16)
 
                                                 
Balance at December 31, 2006
    -     $ -       17,739,625     $ 17,740     $ 6,558,082     $ 5,266,815     $ 1,361,365     $ 691,037     $ 13,895,039  
Imputed interest on note payable
    -       -       -       -       49,766       -       -       -       49,766  
Transfer to statutory and
                                                                    -  
staff welfare reserves
    -       -       -       -       -       (483,572 )     483,572       -       -  
Net income for the year ended December 31, 2007
    -       -       -       -       -       2,299,700       -       -       2,299,700  
Currency translation adjustment
    -       -       -       -       -       -       -       1,047,589       1,047,589  
Balance at December 31, 2007
    -       -       17,739,625       17,740       6,607,848       7,082,943       1,844,937       1,738,626       17,292,094  
Sale of Series A
                                                                       
preferred stock
    1,250,000       1,250       -       -       719,672       -       -               720,922  
Deemed dividends (as restated- Note 16)
    -       -       -       -       750,000       (750,000 )     -               -  
Issuance of shares in consideration for
                                                                       
the waiver of liquidated damages
    -       -       46,000       46       26,634       -       -       -       26,680  
Conversion of Series A preferred stock
    (100,000 )     (100 )     100,000       100       -       -       -       -       -  
Stock option expense (as restated- Note 16)
    -       -       -       -       90,635               -               90,635  
Imputed interest on note payable
    -       -       -       -       52,326       -       -       -       52,326  
Transfer to statutory and
                                                                       
staff welfare reserves
    -       -       -       -       -       (837,408 )     837,408       -       -  
Net income for the year ended December 31, 2008
                                                                       
(as restated- Note 16)
    -       -       -       -       -       5,681,500       -       -       5,681,500  
Currency translation adjustment
    -       -       -       -       -       -       -       1,309,246       1,309,246  
Balance at December 31, 2008 (as restated- Note 16)
    1,150,000       1,150       17,885,625       17,886       8,247,115       11,177,035       2,682,345       3,047,872       25,173,403  
Imputed interest on note payable
    -       -       -       -       39,909       -       -       -       39,909  
Conversion of Series A preferred stock
    (416,667 )     (417 )     416,667       417       -       -       -       -       -  
Excerise of stock option
    -       -       107,059       107       32,011       -       -       -       32,118  
Transfer to statutory and
                                                                       
staff welfare reserves
    -       -       -       -       -       (787,623 )     787,623       -       -  
Net income for the nine months ended September 30, 2009
    -       -       -       -       -       5,139,740       -       -       5,139,740  
Currency translation adjustment
    -       -       -       -       -       -       -       877       877  
Balance at September 30, 2009 (Unaudited)
    733,333     $ 733       18,409,351     $ 18,410     $ 8,319,035     $ 15,529,152     $ 3,469,968     $ 3,048,749     $ 30,386,047  

See notes to consolidated financial statements.

 
3

 

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
 

 
   
Nine Months Ended September 30,
 
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited as restated -
Note 16)
 
Cash Flows from Operating Activities
           
Net income
  $ 5,139,740     $ 3,411,962  
Adjustments to reconcile net income to net cash provided by (used for) operating activities
               
Depreciation - cost of sales
    294,709       292,932  
Depreciation - operating expenses
    58,267       57,453  
Amortization of land use rights -cost of sales
    109,635       -  
Amortization of land use rights- operating expenses
    28,620       27,991  
Amortization of intangible assets
    102,906       100,646  
Provision for allowances, returns, and doubtful accounts
    457,307       136,125  
Stock option expense
    -       59,225  
Cashless exercise of stock option charged to operations
    32,118       -  
Imputed interest
    39,909       39,032  
Loss on disposal of property and equipment
    132       14,246  
Changes in operating assets and liabilities
               
Accounts receivable, net
    211,148       (560,609 )
Other receivables and prepaid expenses
    (1,751 )     18,209  
Inventories
    947,095       2,275,839  
Accounts payable and accrued liabilities
    (99,423 )     (22,367 )
Taxes payable
    25,366       170,284  
Net cash provided by (used for) operating activities
    7,345,778       6,020,968  
Cash Flows from Investing Activities
               
Proceeds from disposals of property and equipment
    -       2,532  
Purchases of land use rights
    (4,224,870 )     (7,255,081 )
Purchases of property and equipment
    (4,113,831 )     -  
Net cash provided by (used for) investing activities
    (8,338,701 )     (7,252,549 )
Cash Flows from Financing Activities
               
Sale of Series A preferred stock-net
    -       670,917  
Net cash provided by (used for) financing activities
    -       670,917  
                 
Effect of exchange rate changes on cash and cash equivalents
    (7,411 )     699,243  
Increase (decrease) in cash and cash equivalents
    (1,000,334 )     138,579  
                 
Cash and cash equivalents, beginning of period
    4,398,897       509,901  
                 
Cash and cash equivalents, end of period 
  3,398,563     $ 648,480  
                 
Supplemental disclosures of cash flow information:
               
Interest paid
  $ -     $ -  
Income taxes paid
  $ 962,714     $ 515,658  
                 
Schedule of non-cash investing and financing activities:
               
Acquisition of Taichan Baisa land use rights
  $ 9,736,149     $ -  
less amount paid to September 30, 2009
    (2,920,845 )     -  
Due seller at September 30, 2009
  $ 6,815,304     $ -  

See notes to consolidated financial statements.

 
4

 

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)

NOTE 1 – INTERIM FINANCIAL STATEMENTS

The unaudited financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2009 and the results of operations and cash flows for the periods ended September 30, 2009 and 2008. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three and nine months ended September 30, 2009 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2009. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2008 as included in our report on Form 10-K, as filed with the SEC on April 15, 2009.

NOTE 2 - ORGANIZATION AND BUSINESS OPERATIONS

China Kangtai Cactus Bio-Tech Inc. (“US China Kangtai”) was incorporated in Nevada on March 16, 2000 as InvestNet, Inc. (“InvestNet”).

China Kangtai Cactus Bio-tech Company Limited (“BVI China Kangtai”) was incorporated in the British Virgin Islands (“BVI”) on November 26, 2004. Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin Hainan Kangda”), a company with limited liability, was incorporated in the People’s Republic of China (“PRC”) on December 30, 1998.

US China Kangtai and BVI China Kangtai are investment holding companies and Harbin Hainan Kangda’s principal activities are planting and developing new types of cactus, producing and trading in cactus health foods and related products in the PRC.

In 2004, BVI China Kangtai acquired Harbin Hainan Kangda. In 2005, US China Kangtai acquired BVI China Kangtai.

On September 26, 2006, Harbin Hainan Kangda acquired a 100% equity interest in Guangdong Taishan Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a PRC company with limited liability previously owned by two stockholders, for $1,475,000 in cash. Taishan Kangda grows and sells cactus.

US China Kangtai, BVI China Kangtai, Harbin Hainan Kangda and Taishan Kangda are hereafter collectively referred to as the “Company”.
 
The accompanying consolidated financial statements include the financial statements of US China Kangtai and its 100% owned subsidiaries, BVI China Kangtai, Harbin Hainan Kangda and Taishan Kangda. All significant inter-company accounts and transactions have been eliminated in consolidation.

 
5

 

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
 
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States and are expressed in US dollars.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the Unites States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, accounts payable and accrued liabilities, payable to seller of land use rights, note payable, and taxes payable. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments and based on interest rates of comparable instruments.

Foreign Currency Translation

The functional currency of US China Kangtai and BVI China Kangtai is the United States dollar. The functional currency of Harbin Hainan Kangda and Taishan Kangda is the Chinese Renminbi (“RMB”). The reporting currency of the Company is the United States dollar.

Harbin Hainan Kangda and Taishan Kangda assets and liabilities are translated into United States dollars at period-end exchange rates ($0.14668 and $0.14669 at September 30, 2009 and December 31, 2008, respectively). Harbin Hainan Kangda and Taishan Kangda revenues and expenses are translated into United States dollars at weighted average exchange rates for the periods ($0.14659 and $0.14337 for the nine months ended September 30, 2009 and 2008, respectively). Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity.

Cash and Cash Equivalents

Cash and cash equivalents at September 30, 2009 and December 31, 2008 consist of cash on hand and demand deposit accounts with banks. The Company considers all highly liquid instruments with maturities of three months or less at the time of issuance to be cash equivalents.

Accounts receivable

The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. A reserve for allowances and doubtful accounts is established and recorded based on historical experience and the aging of the related accounts receivable.

 
6

 
 
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
  
Inventories

Inventories of cactus stock include trees and palms whose cost consists of seeds and an allocation of fertilizers, direct labor and overhead costs such as depreciation, rent, freight and fuel, among others. Inventories of cactus stock are stated at the lower of cost or market value, cost being calculated on the weighted average basis.

Other raw materials are stated at the lower of cost or market value, cost being determined on a first in, first out method.

Work in progress and finished goods are stated at the lower of cost or market value, cost being determined on a first in, first out method.

Property and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets (40 years for buildings, 12 years for plant equipment and machinery, 10 years for motor vehicles, and 8 years for furniture and office equipment).

Intangible and Other Long-Lived Assets
 
Intangible and other long-lived assets are stated at cost, less accumulated amortization and impairments. Land use rights are being amortized on a straight-line basis over the remaining term of the related agreements, which range from 40 to 50 years. Other intangible assets consist of patents and licenses. Patents and licenses are being amortized over their expected useful economic life of 10 years.
 
The Company reviews its long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. The Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.
 
Revenue Recognition

The Company recognizes revenue upon delivery of the products, at which time title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is deemed probable.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expenses totaled $73,295 and $132,412 for the nine months ended September 30, 2009 and 2008, respectively.

Research and Development

Research and development costs related to both present and future products are expensed as incurred. Total expenditures on research and development charged to general and administrative expenses for the nine months ended September 30, 2009 and 2008 were $58,636 and $12,330, respectively.

 
7

 
 
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
 
Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”) 718, “Compensation- Stock Compensation”.

In addition to requiring supplemental disclosures, FASB ASC 718, Compensation Stock Compensation, addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FASB ASC 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions.

References to the issuances of restricted stock refer to stock of a public company issued in private placement transactions to individuals who are eligible to sell all or some of their shares of restricted Common Stock pursuant to Rule 144, promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder who is not an affiliate and has satisfied a six-month holding period may sell all of his restricted stock without restriction, provided that the Company has current information publicly available. Rule 144 also permits, under certain circumstances, the sale of restricted stock, without any limitations, by a non-affiliate of the Company that has satisfied a one-year holding period.

Income Taxes

Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements by applying enacted statutory tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not more likely than not that some portion or all of the deferred tax assets will be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

Net Income Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.

Diluted net income per common share is computed on the basis of the weighted average number of common shares and dilutive securities (such as stock options, warrants, and convertible preferred stock) outstanding. Dilutive securities having an anti-dilutive effect on diluted net income per common share are excluded from the calculation.

 
8

 
 
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
 
The following table provides a reconciliation of common shares used in the net income per basic share and net income per diluted share computations for the three and nine months ended September 30, 2009 and 2008:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Weighted average shares outstanding - basic
    18,030,492       17,739,625       17,933,914       17,739,625  
Series A convertible preferred stock
    1,150,000       1,182,065       1,150,000       706,638  
Incremental common shares from stock options
                               
and warrants
    522,406       -       174,135       -  
Weighted average shares outstanding - diluted
    19,702,898       18,921,690       19,258,049       18,446,263  

The Company uses the treasury stock method to account for the dilutive effect of unexercised stock options and warrants in net income per diluted share. Antidilutive common shares related to stock options and warrants excluded from the computation of net income per diluted share were approximately 3,577,594 and 4,100,000 for the three months ended September 30, 2009 and 2008, respectively, and were approximately 3,925,865 and 4,100,000 for the nine months ended September 30, 2009 and 2008, respectively.

Segment Information

The Company operates in only one segment, the sale of products made from cactus plants. The Company sells to two customer groups; health foods comprising cactus liquor and juice and sale of cactus powder to pharmaceutical companies for use in medical products.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.

NOTE 4 - INVENTORIES

Inventories consist of:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
Cactus stock
  $ 1,994,996     $ 2,810,861  
Other raw materials and work-in-process
    61,159       49,826  
Finished goods
    373,385       515,948  
Total
    2,429,540       3,376,635  
Less: allowance for market adjustments to inventories
    -       -  
Net
  $ 2,429,540     $ 3,376,635  

 
9

 

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)

NOTE 5 – ACQUISITION OF LAND USE RIGHTS AND RELATED PROPERTY AND EQUIPMENT IN CURRENT PERIOD AND RELATED FINANCING

On March 25, 2009, Harbin Hainan Kangda entered into an Asset Purchase Agreement (the “Agreement”) with Qitaihe Kangwei Biotechnology Co., Ltd. (“Seller”). Under the terms of the Agreement, the Company was to acquire (i) land use rights of state-owned land located in Shuguang Village of Xinxing District in Qitaihe City, covering an area of 49 thousand square meters, with a use life of 43 years, (ii) housing ownership of 5,606.20 square meters in Shuguang Village of Xinxing District in Qitaihe City, HeiLongJiang Province and (iii) fixed assets consisting of machinery, equipment and facilities (including equipment, information, file data, spare parts and office supplies) located on the acquired premises. The land use rights, housing ownership and fixed assets are collectively referred to as the “Assets”.

The purchase price for the Assets was 37,000,000 RMB ($5,421,610). The Company was to also pay transfer fees and taxes in connection with the registration of the sale of the Assets. The purchase price was to be paid in installments: 50% within 5 days of signing the Agreement, 10% upon Seller completing the handover procedure and the remaining 40% within 5 days of Seller’s completion of the registration (“approval”) of the sale in the land administration and other departments in the People’s Republic of China, which was expected to be completed within 90 days of the payment of the first installment of the purchase price. As of September 30, 2009, the Company has paid the 37,000,000 RMB ($5,421,610) purchase price. The registration of the sale was completed on October 8, 2009 and amortization of the portion of the price attributed to the land use rights of 8,936,484 RMB ($1,309,999) and the related property and equipment of 28,063,516 RMB ($4,113,831) will begin to be charged to operations.

On August 25, 2009, Harbin Hainan Kangda entered into an Asset Purchase Agreement (the “Agreement”) with the Local Government of Baisha Town, Taishan City, Guangdong Province (“Seller”). Under the terms of the Agreement, the Company was to acquire land use rights of state-owned land located in Langbei Village, Baisha Town covering an area of 181,854 square meters, with a useful life of 50 years starting from the issue date of the land use right certificate.

The purchase price for the Taishan Basha land use rights was 66,376,800 RMB ($9,736,149). The Company was to also pay transfer fees and taxes in connection with the registration of the sale of the land use rights. The purchase price was to be paid in installments: 30% within 30 days of signing the Agreement, and the remainder due to the Seller upon completing the handover procedure including completion of the registration (“approval”) of the sale in the land administration and other departments in the People’s Republic of China, which is expected to be completed in December 2009. The Company paid the initial 30% installment of 19,913,040 RMB ($2,920,845) to the Seller on September 17, 2009, leaving a remaining balance due of 46,463,760 RMB ($6,815,304) in unpaid Payable to Seller of land use rights at September 30, 2009 to be paid to the Seller upon receipt of approvals. These land use rights will be considered placed in service and amortization of this cost will begin to be charged to operations commencing December 2009 upon receipt of PRC approvals by the Company.

Below is a summary of the land use rights and related property and equipment acquired in the current period and the related financing:
 
   
Taishan Baisha
   
Qitaihe
   
Total
 
   
RMB
   
Dollars
   
RMB
   
Dollars
   
RMB
   
Dollars
 
Land use rights
    66,376,800     $ 9,736,149       8,936,484     $ 1,309,999       75,313,284     $ 11,046,148  
Building
    -       -       22,596,862       3,314,311       22,596,862       3,314,311  
Equipment
    -       -       5,343,575       783,748       5,343,575       783,748  
Other
    -       -       123,079       18,034       123,079       18,034  
Total
    66,376,800       9,736,149       37,000,000       5,426,092       103,376,800       15,162,241  
Less, cash paid during period
    19,913,040       2,920,845       37,000,000       5,426,092       56,913,040       8,346,937  
Unpaid payable to Seller at September 30, 2009
    46,463,760     $ 6,815,304       -     $ -       46,463,760     $ 6,815,304  

 
10

 
 
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consist of:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
Buildings:
           
Already in service
  $ 2,928,548     $ 2,928,548  
Placed in service in October
               
   2009 after PRC approval
               
   (Note 5)
    3,314,311       -  
 Subtotal
    6,242,859       2,928,548  
Plant equipment and machinery
    5,438,103       4,654,625  
Motor vehicles
    307,620       289,586  
Furniture and office equipment
    11,167       13,817  
Total
    11,999,749       7,886,576  
Less accumulated depreciation
    (2,000,226 )     (1,649,662 )
Net
  $ 9,999,523     $ 6,236,914  

NOTE 7 - LAND USE RIGHTS

Land use rights, net consist of:

   
September 30, 2009
   
December 31, 2008
 
Harbin Hainan Kangda                  
Already in service
  $ 8,026,797     $ 8,026,397  
To be placed in service after PRC approval expected in December 31, 2009 (Note 5)
    11,046,010       -  
      19,072,807       8,026,397  
Taishan Kangda
    873,003       873,035  
Total
    19,945,810       8,899,432  
Less accumulated amortization
    (428,267 )     (289,941 )
Net
  $ 19,517,543     $ 8,609,491  

 
11

 
 
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
 
The expected amortization of the above land use rights for each of the five succeeding fiscal years ending December 31, and in the aggregate, are as follows:

Period ending December 31,
 
Amount
 
3 months 2009
  $ 115,957  
Years:
       
2010
    463,829  
2011
    463,829  
2012
    463,829  
2013
    463,829  
2014
    463,829  
Thereafter
    17,082,441  
Total
  $ 19,517,543  

NOTE 8 - INTANGIBLE ASSETS

Intangible assets, net consist of:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
Patents and licenses
  $ 1,374,392     $ 1,374,485  
Total
    1,374,392       1,374,485  
Less accumulated amortization
    (1,022,947 )     (920,040 )
Net
  $ 351,445     $ 454,445  

The expected amortization of the above intangible assets for each of the five succeeding fiscal years ending December 31, and in the aggregate, are as follows:

Period ending December 31,
 
Amount
 
3 months 2009
  $ 34,518  
Years:
       
2010
    137,208  
2011
    134,760  
2012
    44,959  
2013
    -  
2014
    -  
Total
  $ 351,445  

 
12

 
 
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)
 
NOTE 9 - NOTE PAYABLE
 
Note payable consists of:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Note payable to a financial institution, unsecured and due on demand.
  $ 887,414     $ 887,475  

The note payable (6,050,000 RMB) is due to a PRC provincial government financial institution which made the loan to the Company to promote the commercial cultivation of cactus. The loan was made to the Company on an interest-free and unsecured basis and is repayable on demand. Imputed interest is calculated at 6% per annum on the amount due. Total imputed interest recorded as additional paid-in capital amounted to $39,909 and $39,032 for the nine months ended September 30, 2009 and 2008, respectively.
 
NOTE 10 - SERIES A CONVERTIBLE PREFERRED STOCK

On March 21, 2008, the Company entered into a Preferred Stock Purchase Agreement (the “Purchase Agreement”) with T Squared Investments LLC (the “Investor”) to sell in a private placement to the Investor for an aggregate purchase price of $500,000, (i) 833,333 shares of the Company’s newly designated Series A Convertible Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) for $0.60 per share (the “Shares”), (ii) warrants to purchase up to 1,250,000 shares of Company common stock exercisable for a period of three years at an exercise price of $0.75 per share (the “A Warrants”) or an aggregate exercise price of $937,500 if all of the A Warrants were exercised, and (iii) warrants to purchase up to 1,500,000 shares of Company common stock exercisable for a period of three years at an exercise price of $1.00 per share (the “B Warrants”), or an aggregate exercise price of $1,500,000 if all the B Warrants were exercised. The Company issued the Shares, the A Warrants and B Warrants on the same day. Westernking Financial Service acted as the sole placement agent in the transaction for a fee of $30,000 (6% of the gross proceeds).

The Company also entered into a Registration Rights Agreement with the Investor, pursuant to which the Company was obligated to file and have declared effective by the SEC a registration statement registering the resale of the Shares and Common Stock issuable upon the conversion of the Series A Preferred Stock and the exercise of the A Warrants and B Warrants. If the registration statement was not declared effective by the SEC by August 28, 2008, the Registration Rights Agreement provided for the Company to issue to the Investor as liquidated damages an additional 1,000 shares of Series A Preferred Stock for each day thereafter not declared effective (subject to a maximum of 250,000 shares). On October 17, 2008, the SEC declared effective the Company’s registration statement on Form S-1.
 
The Series A Preferred Stock has no voting or dividend rights, is entitled to a liquidation preference of $0.60 per share, and each share is convertible into one share of Company common stock at the option of the holder (which was adjustable to more shares if certain “defined EPS” performance thresholds were not met for the six months ended September 30, 2008 or the year ended December 31, 2008; however, the performance thresholds were met).

The Company recorded as a $500,000 deemed dividend and as a $500,000 increase in additional paid-in capital based upon the total of $1,394,000 of the intrinsic value of the beneficial conversion feature ($428,500) and the estimated fair value of the A Warrants ($477,250) and the B Warrants ($488,250),which recording is limited to the gross actual proceeds ($500,000) pursuant to Emerging Issues Task Force Consensus (“EITF”) No. 98-5 as amended by EITF No. 00-27. The fair value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.75 per share, exercise price of $0.75 per share for the A warrants, exercise price of $1.00 per share for the B warrants, term of 3 years, expected volatility of 74%, and risk-free interest rate of 4%.

 
13

 
 
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)

On July 16, 2008, the Company sold the Investor, for an aggregate purchase price of $250,000, an additional 416,667 shares of Series A Preferred Stock, warrants to purchase up to 500,000 shares of Company common stock exercisable for a period of three years at an exercise price of $0.9375 per share, and warrants to purchase up to 600,000 shares of Company common stock exercisable for a period of three years at an exercise price of $1.25 per share. The Company recorded as a $250,000 deemed dividend and as a $250,000 increase in additional paid-in capital, based upon the total of $442,155 of the intrinsic value of the beneficial conversion feature ($160,875) and the estimated fair value of the warrants ($281,580), which recording is limited to the gross actual proceeds ($250,000) pursuant to Emerging Issues Task Force Consensus (“EITF”) No. 98-5 as amended by EITF No. 00-27. The fair value of the warrants was estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.689 per share, exercise prices of $0.9375 and $1.25 per share, term of 3 years, expected volatility of 71.4%, and risk-free interest rate of 4%.

On October 27, 2008, the Company issued 100,000 shares of common stock to the Investor for the conversion of 100,000 shares of Series A Preferred Stock. On September 10, 2009, the Company issued 416,667 shares of common stock to the Investor for the conversion of 416,667 shares of Series A Preferred Stock.

NOTE 11 – STOCK OPTIONS AND WARRANTS TO PURCHASE COMMON STOCK

A summary of stock option and warrant activity for the year ended December 31, 2008 and for the nine months ended September 30, 2009 follows:

   
Stock Options
   
Warrants
 
Outstanding at January 1, 2008
    -       -  
Granted and issued
    400,000       3,850,000  
Exercised
    -       -  
Forfeited/expired/cancelled
    -       -  
Outstanding at December 31, 2008
    400,000       3,850,000  
Granted and issued
    -       -  
Exercised
    (107,059 )     -  
Forfeited/expired/cancelled
    (42,941 )     -  
Outstanding at September 30, 2009
    250,000       3,850,000  

Stock options outstanding at September 30, 2009 and December 31, 2008 consist of:

Date
 
Number
   
Number
   
Exercise
 
Expiration
 
Granted
 
Outstanding
   
Exercisable
   
Price
 
Date
 
                       
March 10, 2008
    250,000       250,000     $ 1.00  
March 10, 2012
 
                             
Total
    250,000       250,000              

The 400,000 stock options granted in 2008 were all issued to the Company’s law firm for services rendered.

On March 10, 2008, the Company granted 250,000 options to the law firm, all immediately exercisable at $1.00 per share to March 10, 2012, and expensed the $59,225 fair value of these options at March 10, 2008 (estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.41 per share, exercise price of $1.00 per share, term of 4 years, expected volatility of 100%, and risk-free interest rate of 4%.

 
14

 
 
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)

On December 31, 2008, the Company granted 150,000 options to the law firm, all immediately exercisable at $0.30 per share to December 31, 2012. The Company failed to include this transaction in the previously filed Form 10-K for the year ended December 31, 2008, but has restated the December 31, 2008 balances in this Form 10-Q to recognize an expense for the $31,410 fair value of these options at December 31, 2008 and for the year then ended (estimated using the Black-Scholes option pricing model and the following assumptions: stock price of $0.29 per share, exercise price of $0.30 per share, term of 4 years, expected volatility of 107%, and risk-free interest rate of 2%. In July 2009, pursuant to a cashless exercise amendment, 107,059 options were converted into 107,059 shares of common stock and the remaining 42,941 options were cancelled. During the nine months ended September 30, 2009, the Company expensed the $32,118 exercise amount relating to the 107,059 shares.

Warrants outstanding at September 30, 2009 and December 31, 2008 consist of:
 
Date
 
Number
   
Number
   
Exercise
 
Expiration
Granted
 
Outstanding
   
Exercisable
   
Price
 
Date
                     
March 21, 2008
    1,250,000       1,250,000     $ 0.75  
March 21, 2011
March 21, 2008
    1,500,000       1,500,000     $ 1.00  
March 21, 2011
July 16, 2008
    500,000       500,000     $ 0.9375  
July 16, 2011
July 16, 2008
    600,000       600,000     $ 1.25  
July 16, 2011
                           
Total
    3,850,000       3,850,000            

NOTE 12 – RESTRICTED NET ASSETS

Relevant PRC statutory laws and regulations permit payments of dividends by Harbin Hainan Kangda and Taishan Kangda only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.  In addition, PRC laws and regulations require that annual appropriations of after-tax income should be set aside prior to payments of dividends as a reserve fund.  As a result of these PRC laws and regulations Harbin Hainan Kangda and Taishan Kangda are restricted in their ability to transfer a portion of their net assets in the form of dividends, loans or advances, which restricted portion amounted to $11,656,524 and $10,185,183 at September 30, 2009 and December 31, 2008, respectively.

NOTE 13 - INCOME TAXES
 
The Company is subject to current income taxes on an entity basis on taxable income arising in or derived from the tax jurisdiction in which each entity is domiciled.
 
US China Kangtai was incorporated in the United States and is subject to United States income tax. No United States income taxes were provided in 2009 and 2008 since US China Kangtai had taxable losses in those periods.

At September 30, 2009, US China Kangtai has an unrecognized deferred United States income tax liability relating to undistributed earnings of Harbin Hainan Kangda. These earnings are considered to be permanently invested in operations outside the United States. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. Determination of the amount of the unrecognized deferred United States income tax liability with respect to such earnings is not practicable.
 
BVI China Kangtai was incorporated in the BVI and is not subject to tax on income or on capital gains.

 
15

 

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)

Harbin Hainan Kangda and Taishan Kangda were incorporated in the PRC and are subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. Harbin Hainan Kangda located its factories in a special economic region in Harbin, the PRC. This economic region allows foreign owned enterprises a two-year income tax exemption beginning in the first year after they become profitable, being 2005 and 2006, and a 50% income tax reduction for the following three years, being 2007 to 2009. Harbin Hainan Kangda was approved as a wholly owned foreign enterprise in March 2005.

The provision for income taxes differs from the amount computed by applying the statutory United States federal income tax rate of 35% to income (loss) before income taxes. The sources of the difference follow:

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Expected tax at 35%
  $ 2,158,176     $ 1,434,266  
Tax effect of unutilized losses of
               
US China Kangtai and BVI China Kangtai
    12,171       77,837  
                 
Tax effect of PRC income taxed at lower rate
    (1,143,870 )     (826,161 )
                 
Actual provision for income taxes
  $ 1,026,477     $ 685,942  

NOTE 14 - COMMITMENTS AND CONTINGENCIES
 
Concentrations and risks

During 2009 and 2008, substantially all of the Company’s assets were located in China and 100% of the Company’s revenues were derived from customers located in China and Taiwan.
 
Substantially all of Harbin Hainan Kangda and Taishan Kangda’s business operations are conducted in the PRC and governed by PRC laws and regulations.  Because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC.  Under existing PRC foreign exchange regulations, payment of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements.  However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies.  The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.

 
16

 

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)

NOTE 15 – SEGMENT AND OTHER INFORMATION

The Company operates in one industry segment – the production and sale of cactus, cactus health food, and other cactus products.  Substantially all of the Company’s identifiable assets at September 30, 2009 and December 31, 2008 were located in the PRC.  Net sales for the periods presented were all derived from PRC and Taiwan customers. During the nine months ended September 30, 2009, two customers accounted for 17% and 15% of net sales, respectively.

Net sales consisted of:
   
Three months ended September 30,
   
Nine months ended September 30,
 
     
20009
   
2008
     
20009
   
2008
 
                             
Finished goods
  $ 7,208,086     $ 5,329,127     $ 15,858,087     $ 10,785,295  
Cactus stock
    937,326       855,558       2,130,021       3,175,806  
Other
    41,985       -       41,985       -  
Total
  $ 8,187,397     $ 6,184,685     $ 18,030,093     $ 13,961,101  
 
NOTE 16 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company expects to restate its consolidated financial statements at December 31, 2008 and for the year then ended (which were previously included in the Company’s Form 10-K filed with the SEC on April 15, 2009) in order to (1) correct errors relating to the accounting for deemed dividends from the sales of convertible preferred stock and warrants on March 21, 2008 and July 16, 2008 (see Note 10) and (2) correct for the non-accounting for the grant of 150,000 stock options to the Company’s law firm on December 31, 2008 (see Note 11).

The effect of the restatement adjustments on the consolidated balance sheet at December 31, 2008 follows:
 
   
As
             
   
Previously
         
As
 
   
Reported
   
Adjustments
   
Restated
 
                         
Total assets
  $ 26,947,372     $ -     $ 26,947,372  
                         
Total liabilities
  $ 1,773,969     $ -     $ 1,773,969  
                         
Stockholders' equity:
                       
Preferred stock, $0.001 par value
    1,150       -       1,150  
Common stock, $0.001 par value
    17,886       -       17,886  
Additional paid-in capital
    8,874,869 (1)     (659,164 )     8,247,115  
         (2)     31,410          
Retained earnings:
                       
 Appropriated
    2,682,345       -       2,682,345  
Unappropriated
    10,549,281 (1)     659,164       11,177,035  
         (2)     (31,410 )        
Accumulated other comprehensive income
    3,047,872       -       3,047,872  
                         
Total stockholders' equity
    25,173,403       -       25,173,403  
                         
Total liabilities and stockholders' equity
  $ 26,947,372     $ -     $ 26,947,372  
 
(1) Deemed dividends are limited to gross proceeds received from sales of units of Series A Convertible Preferred Stock and A and B warrants.
(2) To record the 150,000 stock options issued to the Company’s law firm on December 31, 2008.

 
17

 

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(Unaudited)

The effect of the restatement adjustments on the consolidated statement of operations for the nine months ended September 30, 2008 follows:
 
   
As
             
   
Previously
         
As
 
   
Reported
   
Adjustments
   
Restated