Attached files
file | filename |
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EX-31.2 - China Kangtai Cactus Bio-tech, Inc. | v180979_ex31-2.htm |
EX-32.2 - China Kangtai Cactus Bio-tech, Inc. | v180979_ex32-2.htm |
EX-31.1 - China Kangtai Cactus Bio-tech, Inc. | v180979_ex31-1.htm |
EX-32.1 - China Kangtai Cactus Bio-tech, Inc. | v180979_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-K
x ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
o TRANSITION REPORT
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from to
.
CHINA
KANGTAI CACTUS BIO-TECH INC.
(Name of
small business issuer in its charter)
Nevada
|
000-33097
|
87-0650263
|
(State or other jurisdiction
of incorporation)
|
(Commission
File Number)
|
(IRS Employer
Identification Number)
|
99 Taibei
Road
Limin
Economic and Technological Development Zone
Harbin,
Heilongjiang Province, People’s Republic China
Zip Code:
150025
(Address
of principal executive offices)
Issuer’s
telephone number: (86) 451-57351189 ext 126
Securities
to be registered under Section 12(b) of the Act: None
Securities
to be registered under Section 12(g) of the Act: Common Stock, $.001
par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No x
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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" 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 Act). Yes o No x
The
aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant, as of June 30, 2009, was approximately $5,343,956. All
executive officers and directors of the registrant have been deemed, solely for
the purpose of the foregoing calculation, to be "affiliates" of the
registrant.
As of
April 12, 2010, there were 20,740,762 shares of the issuer's common stock,
$0.001 par value per share, issued and outstanding.
TABLE
OF CONTENTS
Page
|
||
PART I
|
||
Item
1.
|
Business
|
1
|
Item
1A
|
Risk
Factors
|
|
Item
1B
|
Unresolved
Staff Comments
|
|
Item
2.
|
Description
of Property
|
6
|
Item
3.
|
Legal
Proceedings
|
7
|
PART II
|
||
Item
4.
|
Market
for Common Equity and Related Stockholder Matters
|
7
|
Item
5.
|
Selected
Financial Data
|
7
|
Item
6.
|
Management’s
Discussion and Analysis
|
8
|
Item
7.
|
Financial
Statements
|
13
|
Item
8.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
13
|
Item
8A(T)
|
Controls
and Procedures
|
14
|
Item
8B
|
Other
Information
|
14
|
PART III
|
||
Item
9.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act.
|
14
|
Item
10.
|
Executive
Compensation
|
16
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management
|
17
|
Item
12.
|
Certain
Relationships and Related Transactions
|
18
|
Item
13.
|
Principal
Accountant Fees and Services
|
18
|
Item
14.
|
Exhibits
|
18
|
SIGNATURES
|
22
|
PART I
ITEM
1. BUSINESS.
Corporate
History
As used
in this report, “we”, “us”, “our”, “CKGT”, “our Company”, “the Company”, or
“China Kangtai” refers to China Kangtai Cactus Bio-Tech Inc. and all of its
subsidiaries and affiliated companies.
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.
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.
1
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.
Overview
The
Company is principally engaged in the production, R&D, sales and marketing
of products derived from cacti. The Company’s product lines include cactus
nutraceuticals, cactus nutritional food and drinks, as well as cactus raw and
intermediate materials.
The
Company has over 387 acres of cactus-farming bases in the Guangdong and
Heilongjiang Provinces of China. The Company predominantly grows three species
of cacti which are Mexican Pyramid, Mexican Milpa-Alta and Mexican Queen.
Mexican Pyramid and Queen cacti are used for cactus fruit drinks and
nutraceutical products; Mexican Milpa-Alta is mainly used for cactus nutritional
food products. Most of the cactus fruits are processed into cactus fruit juice,
which is the raw material for cactus nutritional drinks. Most of the harvested
edible cacti are processed into dry powders, which are raw materials for
cactus nutraceuticals. The Company’s annual production capability of edible
cacti in 2009 is 19,184 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.
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,
Cacti
have been proven to contain the following elements by the Chinese Center for
Disease Control and Prevention in an analysis report issued on October 29,
2003:
1. Protein and amino
acids
2. Organic fat and
acids
3. Carbohydrates
4. Vitamins
5. Minerals
6. Microelements
2
The
Company’s nutraceutical products containing cactus extracts include Cactus
Protein Nutrient, Cactus Calcium Peptide Soft Capsule, and Cactus Shuxin
Capsule.
Cactus Protein
Nutrient
Cactus
Protein Nutrient is produced with protein and agglomerate element. It has been
proven to be effective on stomachaches, tardiness gastritis, digestibility
canker and duodenum canker by the Research Institute of the Traditional Chinese
Medicine of Heilongjiang Province.
Cactus Calcium Peptide Soft
Capsule
Cactus
Calcium Peptide Soft Capsule is made of cactus, active albumen peptide of
soybean and liquid calcium. It has the following characteristics:
A) Several
nutritional components that can be easily absorbed; and
B) It
contains an albumen peptide of soybean which can enhance the absorption of
calcium, phosphor and other mineral elements, consequently raising the calcium
in the body and fighting fatigue.
Cactus Shuxin
Capsule
Cactus
Shuxin Capsule is made with cactus and haws extracts. It has been proven to have
an effect on raising the flow capacity of coronary artery blood, alleviating
drowsiness and improving red cell’s oxygen carrying capability by the Research
Institute of the Traditional Chinese Medicine of Heilongjiang
Province.
The
revenue generated from sales of nutraceutical products was approximately
$10,722,568 in fiscal year 2009, or about 40% of the total net
sales.
The
revenue generated from sales of cactus food, beverage and wine was approximately
$9,702,993 in year 2009, or about 36%. The remaining 24% of the sales is cactus
raw and intermediate materials.
The
Company currently has four product categories which are nutraceuticals,
beverages, raw and intermediate materials and packaged foods. The table below
sets forth revenue derived from each product category and the percentage of
total revenue each product category accounts for in 2009:
Product Categories
|
Sales revenue
in 2009 (in US$)
|
Percentage
of Total Revenue in 2009
|
||||||
Nutraceuticals
|
10,722,568 | 40 | % | |||||
Beverages
|
9,318,655 | 35 | % | |||||
Raw
& Intermediate Materials
|
3,485,604 | 13 | % | |||||
Packaged
Foods
|
384,337 | 1 | % | |||||
Cactus
Feed
|
2,309,059 | 10 | % | |||||
Cactus
cigarettes
|
317,133 | 1 | % | |||||
Total
Revenue
|
26,537,356 |
The
following table sets forth further breakdown of the Nutraceuticals by specific
products and the percentage each product accounts for in
2009:
Name of Nutraceutical Products
|
Sales (in US$)
|
Percentage
of Total Revenue
|
||||||
Cactus
Calcium Peptide Soft Capsule
|
2,191,772 | 8 | % | |||||
Cactus
Protein Nutrient
|
3,105,938 | 12 | % | |||||
Cactus
Calcium Peptide Soft Capsule for Children
|
2,347,819 | 9 | % | |||||
Cactus
Shuxin Capsule
|
3,077,039 | 11 | % | |||||
Total
|
10,722,568 | 40 | % |
3
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.
The
Company manufactures and sells the following products launched between January
2001 and January 2005. Currently our products have maintained satisfactory
levels of acceptance by distributors and customers. The table below sets forth
our product lines and the launch date of each product line.
Line
|
Cactus Related Products
|
Varieties
|
Brand
|
Sub-Brand
|
Launch
Date
|
|||||
Nutraceutical
|
Cactus
Calcium Peptide Soft Capsule
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2001
|
|||||
Nutraceutical
|
Cactus
Calcium Peptide Soft Capsule for Children
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2003
|
|||||
Nutraceutical
|
Cactus
Shuxin Capsule
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2001
|
|||||
Nutraceutical
|
Cactus
Tangkang Capsule
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jul.
2004
|
|||||
Nutraceutical
|
Cactus
Delicious Vinegar for Noble Lady
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2001
|
|||||
Nutraceutical
|
Cactus
Protein Nutrient
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2002
|
|||||
Nutraceutical
|
Cactus
Fruit Health Oral Liquid
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Aug.
2004
|
|||||
Beverage
|
Cactus
Prickly Pear Wine
|
Five
|
Kangda
Cactus
|
Magic
Baby
|
Oct.
2003
|
|||||
Beverage
|
Cactus
Overlord Scourge Flower Imperial Wine
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Apr.
2003
|
|||||
Beverage
|
Cactus
Fruit Wine
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2005
|
|||||
Beverage
|
Cactus
Tang Gong Tian Bao Liquor
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jun.
2004
|
|||||
Beverage
|
Cactus
Double Flowers Tea
|
Several
|
Kangda
Cactus
|
Magic
Baby
|
Oct.
2001
|
|||||
Beverage
|
Cactus
Beer
|
One
|
Kangda
Cactus/ Tsingtao
Co-Brand
|
N/A |
Jan.
2005
|
|||||
Beverage
|
Cactus
Juice Beverage
|
Two
|
Kangda
Cactus
|
Magic
Baby
|
Nov.
2006
|
|||||
Beverage
|
Cactus
Iced Black Tea
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2003
|
|||||
Beverage
|
Cactus
Iced Green Tea
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2003
|
|||||
Beverage
|
Cactus
Fruit Dry Red Wine
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2005
|
|||||
Beverage
|
Cactus
Fruit Juice Beverage
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2006
|
|||||
Beverage
|
Cactus
Honeysuckle Beverage
|
One
|
Kangda
Cactus
|
Magic
Baby
|
Jan.
2003
|
|||||
Packaged
Food
|
Cactus
Noodles
|
Several
|
Kangda
Cactus
|
Magic
Baby
|
Sep.
2004
|
|||||
Packaged
Food
|
Cactus
Perserved Bag Vegetables
|
Two
|
Kangda
Cactus
|
Magic
Child
|
Jan.
2001
|
|||||
R&I
Materials
|
Cactus
Palm Leaves
|
Several
|
Kangda
Cactus
|
Milpa-Alta
and Pyramid
|
Jan.
2001
|
|||||
R&I
Materials
|
Cactus
Dry Powder
|
Several
|
Kangda
Cactus
|
Milpa-Alta |
Jan.
2004
|
|||||
Animal
Feed
|
Cactus
fish feed
|
One
|
Kangda
Cactus
|
Kang Tai Bao |
Jul.
2008
|
|||||
Animal
Feed
|
Cactus
cattle feed
|
One
|
Kangda
Cactus
|
Kang Tai Bao |
Jul.
2008
|
|||||
Animal
Feed
|
Cactus
hog feed
|
One
|
Kangda
Cactus
|
Kang Tai Bao |
Oct.
2009
|
|||||
Cigarette
|
|
Cactus
Cigarette
|
|
Two
|
|
Kangda
Cactus
|
|
Shengcao
|
|
Sep.
2009
|
In order
to quickly penetrate the markets in China, enhance the efficiency of
distributions, lower sales costs and administrative overheads, starting August
2006, the Company has reformed its sales and distribution models and gradually
disposed its own domestic distribution network of approximately 200 self-owned,
franchised chain and Kangtai branded stores in Harbin, Beijing, Guangzhou and
other cities in China. The Company has adopted the strategies of distributions
and sales of its products primarily through various types and levels of
provincial and municipal distributors and agents in Dalian, Heilongjiang,
Harbin, Beijing, Guangzhou, Tianjin, Shenzhen, Jilin, Hebei, Liaoning, Shanxi,
Hunan, Gansu and Shandong in China. The Company’s major revenue breakdown
by region in China for the 2009 fiscal year is as follows:
|
US$
|
|||
Heilongjiang
|
$
|
7,678,840
|
||
Jilin
|
$
|
797,438
|
||
Shandong
|
$
|
1,950,825
|
||
Beijing
|
$
|
3,789,993
|
||
Guangdong
|
$
|
4,878,831
|
||
Liaoning
|
$
|
740,510
|
||
Shanxi
|
$
|
806,762
|
||
Hunan
|
$
|
837,216
|
||
Gansu
|
$
|
1,005,715
|
||
Other
|
$
|
4,051,226
|
4
Harbin
Huadingwei Trading Company, Ltd., Fujian Tianyi Economic and Trading Company,
Ltd., and Jilin Yanji Economic and Trading Company, Ltd. are our top three
distributors. Together, they account for 19% of our total sales.
Competition
The
cactus product industry in China is not highly competitive, and no published
data is available regarding China Kangtai’s relative position in the markets in
which it operates. Although no major competitor currently competes against the
Company across its entire product line, competitive products are available from
a number of different vendors offering features similar to those of China
Kangtai’s products. There can be no assurance that one or more of these
competitors will not develop products that are equal or superior to the products
the Company markets. In addition, many potential competitors for China
Kangtai’s products have in-house capabilities to develop cactus products that
can provide some or all of the functionality of China Kangtai’s products. Our
top five competitors are Anhui Haozhou Xingbang Cactus Co., Hunan Yongzhou
Sino-Mexico Cactus Development Co., Ltd., Henan Luxin Cactus Co., Ltd.,
Zhengshou Milpa-Alta Cactus Co., Ltd., and Ningxia Milpa-Alta Edible Cactus
Development Co., Ltd.
The
Company believes that there are distinguishing competitive factors in the
selection of its cactus products. These include price/performance
characteristics, marketing and sales expertise, R&D expertise and patents
protections, management proprietary knowledge and experiences on cactus
production, ownership of large cactus plantations, product benefit and
functions, and reliability and integration of cactus into a variety of other
products. The Company believes that it competes favorably with regard to these
factors.
A major
competitive asset for the Company is that it offers quality assurance of its
products from the raw material stage all the way to the final products
stage.
We are
currently the leading cactus grower and cactus related products producer in
China. We have cactus farm covering over 387 acres and an active research and
development department which currently holds 18 patents and is seeking 12 new
ones in various product categories. Our products are sold in supermarkets, food
stores, hotels and restaurants though our growing distribution network in 12
provinces and two municipalities in China. We have a total of 31 product lines
compare to our top five competitors which combined have a total of about 30
product lines. In addition, our competitive advantages include the
following:
Control
from the source:
• 3 species of
Mexican Cacti
• Seed
cloning
• Farm
ownership
• Planting
• Growing without
chemicals
• Harvesting
Product
innovation and research:
• Strong team and
advisors
• Strategic
partners
• R&D
Institute
• Research
facilities
Manufacturing
and production:
• Processing
facilities
• Co-operative
processing partners
• Quality control
monitoring
• Quality
packaging
Sales and
distribution:
• A network of
regional distributors
• Third party
distributors
• Seminar and
conference orders
• Repeat purchase
group customers
5
The
Company believes it is in compliance in all material respects with all laws,
rules, regulations and requirements that affect its business. Further, the
Company believes that compliance with such laws, rules, regulations and
requirements does not impose a material impediment on its ability to conduct
business.
Employees
At
December 31, 2009, the Company has a total of 132 full time employees and
generally enjoys good employer-employee relationship. In addition, the
Management of the Company expects to continue to use consultants, attorneys, and
accountants as necessary, to complement services rendered by its employees. The
table below sets forth the number of our full time employees by department and
location:
DEPARTMENT
|
NUMBER
|
LOCATION
|
||
Administration
|
10
|
Harbin
|
||
Sales
|
25
|
Harbin
|
||
Production
|
52
|
Harbin
|
||
Baisha
Base (cactus crop growing and production)
|
27
|
Taishan
|
||
Shalan
Base (cactus crop growing and production)
|
8
|
Taishan
|
||
Research
and Development
|
10
|
Harbin
|
||
Total
|
132
|
Administrative
Offices
China
Kangtai’s registered statutory office is located at CSC Services of
Nevada, Inc., 502 East John Street, Suite E, Carson City, Nevada
89706. The
Company’s operations office is located at 99 Taibei Road, Limin
Economic and Technological Development Zone, Harbin, Heilongjiang Province, P.
R. China. Zip Code: 150025 and its telephone number is (86) 451
57351189.
Reports to Security
Holders
China
Kangtai is not required to deliver an annual report to security holders and will
not automatically deliver a copy of the annual report to its security holders
unless a request is made for such delivery. The Company files all of its
required reports and other information with the Securities and Exchange
Commission (the “Commission”).
The
public may read and copy any materials that are filed by China Kangtai with
the Commission at the Commission’s Public Reference Room at 100 F Street,
NE, Room 2521, Washington, D. C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The statements and forms filed by InvestNet with
the Commission have also been filed electronically and are available for viewing
or copy on the Commission maintained Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the Commission. The Internet address for this site can be
found at http://www.sec.gov.
Governmental
Regulations
The
Chinese government requires all nutraceutical products related manufacturers to
obtain Food Production Permit for their nutraceutical manufacturing facilities.
China Kangtai obtained its Food Production Permit from relevant governmental
regulatory bodies in September 2005. Other than the Food Production Permit
requirements, there was no significant change in the regulatory environment in
China.
ITEM
2. DESCRIPTION OF PROPERTY.
China
Kangtai’s operations office is located at 99 Taibei Road, Limin
Economic and Technological Development Zone, Harbin, Heilongjiang Province, P.
R. China, Zip Code: 150025 and its telephone number is (86) 451 57351189. In
addition, the Company has over 387 acres of cactus farming bases in China,
production facilities and an R&D facility.
6
ITEM
3. LEGAL PROCEEDINGS.
The
Company is not a party to any pending legal proceedings, and no such proceedings
are known to be contemplated. No director, officer or affiliate of the Company
and no owner of record or beneficial owner of more than 5.0% of the securities
of the Company, or any associate of any such director, officer or security
holder is a party adverse to the Company or has a material interest adverse to
the Company in reference to pending litigation.
PART II
ITEM
4. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
for Common Stock
Since
August 25, 2005, our Common Stock has been quoted on the OTC
Bulletin Board under the symbol “CKGT.OB.” Prior to that, our Common
Stock was quoted on the OTC Bulletin Board under the symbol “IVNE.OB.”
The following table lists the high and low bid price for our Common Stock as
quoted, in U.S. dollars, by the OTC Bulletin Board during each quarter within
the last two fiscal years. These quotations reflect inter-dealer prices, without
retail mark-up, markdown, or commission and may not represent actual
transactions.
Year
|
Quarter Ended
|
High
|
Low
|
|||||||
2009
|
December
31
|
$ | 2.71 | $ | 2.60 | |||||
September
30
|
$ | 1.48 | $ | 1.40 | ||||||
June
30
|
$ | 0.75 | $ | 0.73 | ||||||
March
31
|
$ | 0.29 | $ | 0.20 | ||||||
2008
|
December
31
|
$ | 0.51 | $ | 0.12 | |||||
September
30
|
$ | 0.83 | $ | 0.31 | ||||||
June
30
|
$ | 0.73 | $ | 0.53 | ||||||
March
31
|
$ | 0.92 | $ | 0.65 |
Record
Holders
As April
12, 2010 there were approximately 92 shareholders of record holding a total of
20,740,762 shares of common stock.
The
holders of the common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of the common
stock have no preemptive rights and no right to convert their common stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the common stock.
Dividends
CKGT has
not declared any cash dividends since inception and does not anticipate paying
any dividends in the foreseeable future. The payment of dividends is within the
discretion of the board of directors and will depend on CKGT’s earnings, capital
requirements, financial condition, and other relevant factors. There are no
restrictions that currently limit CKGT’s ability to pay dividends on its common
stock other than those generally imposed by applicable state law.
Stock
Re-Purchases
We did
not make any re-purchases of shares of our common stock during the fourth
quarter of fiscal 2008 and we do not currently have any publicly-announced
repurchase plans in effect.
ITEM
5. SELECTED FINANCIAL DATA
Not
required.
7
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
CAUTIONARY
STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
Certain
statements in this report, including statements in the following discussion
which are not statements of historical fact, are what are known as “forward
looking statements,” 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 10K 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.
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 elsewhere in
this report. CKGT’s fiscal year end is December 31.
CKGT’s
short-term strategy is to realize net cash flow from operations and financing
activities to be used to expand marketing efforts in China and research and
development. CKGT is committed to ensuring that its products remain at the
forefront of providing a variety of quality cactus based nutriceuticals,
nutritional food from cactus, and beverages from cactus, including but not
limited to beer and wine derived from cactus. The realization of net cash flows
in the near term will require a significant increase in CKGT’s revenues without
a substantial increase in expenses. Financing activities will focus on equity
financing. Once CKGT has additional positive net cash flow, its longer-term
strategy is to expand marketing efforts beyond China into other Asian
markets based on anticipated increases in marketing spending over the next
several years in South Korea, Singapore, Taiwan and other southeastern Asian
countries.
CKGT’s
business development strategy is prone to significant risks and uncertainties
certain of which can have an immediate impact on its efforts to realize positive
net cash flow and deter future prospects of revenue growth.
CKGT’s
financial condition and results of operations depend primarily on the revenue
generated from the sale of its products and its ability to control the cost of
sales. CKGT has a limited history of generating revenue which cannot be viewed
as an indication of continued growth and a recent historical record of incurring
losses. Should CKGT be unable to consistently generate revenue through the
successful implementation of its business model and reduce or stabilize expenses
to the point where it can realize a net cash flow such failure will have a
short-term impact on CKGT’s ability to continue its business
operations.
The
following discussion should be read in conjunction with our financial statements
and notes thereto included in this report. All information presented herein is
based on our fiscal years ended December 31, 2009 and 2008.
Results
of Operations
Comparison of Sales for the
Years Ended December 31, 2009 and 2008
2009
|
2008
|
% of changes
|
||||||||||
Sales
by categories
|
||||||||||||
Nutraceuticals
|
$ | 10,722,568 | $ | 10,125,570 | 5.90 | % | ||||||
Beverages
|
9,318,655 | 5,395,341 | 72.72 | % | ||||||||
Raw
& intermediate materials
|
3,485,604 | 3,800,383 | -8.28 | % | ||||||||
Packaged
foods
|
384,337 | 119,285 | 222.20 | % | ||||||||
Cactus
cigarettes
|
317,133 | - | - | |||||||||
Cactus
feed
|
2,309,059 | 860,004 | 168.49 | % | ||||||||
Total
Sales
|
$ | 26,537,356 | $ | 20,300,583 | 30.72 | % |
Sales for
the year ended December 31, 2009 totaled $26,537,356, an increase of $6,236,773,
or 30.72% compared to the sale of $20,300,583 for the year ended December 31,
2008. 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 beverage products was $9,318,655, an increase of $3,923,314, or 72.72% as
compared to the sale of $5,395,341in 2008. Increased beverage sales accounted
for 63% of total increased sales. The sale of cactus feed products was
$2,309,059, an increase of $1,449,055, or 168.49%, as compared to the sale of
$860,004 in 2008. Increased cactus feed sales accounted for 23% of total
increased sales.
8
Cost of
Sales
Cost of
sales totaled $16,016,434 in 2009, an increase of $3,709,131, or 30.14% as
compared to $12, 307,303 in 2008. The increase of cost of sales was in line with
the increase of our sales in 2009. The gross profit rate was 39.65% in 2009. It
was about same as compared to the gross profit rate of 39.37% in
2008.
Comparison of Operating
Expenses for the Years Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
$ | 249,083 | $ | 214,285 | ||||
Provision for reserve for allowances, return and doubtful accounts | 26,897 | 136,125 | ||||||
Research
and development
|
102,627 | 12,397 | ||||||
Depreciation
and amortization expenses
|
252,715 | 285,700 | ||||||
Public
company related professional and other expenses
|
193,835 | 262,735 | ||||||
Other
general and administrative expenses
|
168,235 | 268,797 | ||||||
Total
Operating Expenses
|
$ | 993,392 | $ | 1,180,039 |
Operating
expenses for the year ended December 31, 2009 totaled $993,392, representing a
decrease of $186,647, or 16%, compared to $1,180,039 for the year ended December
31, 2008. The decrease in operating expenses was mainly attributable
to decrease in public company related professional and other expenses and
other general and administrative expenses.
Public
company related professional and other expenses consist of audit, legal,
investor relations and other filing expenses.
During
2009, public company related professional and other expenses totaled $193,835,
decreased by $68,900 as compared to $262,735 in 2008. The decrease is mainly
attributable to a decrease of $51,000 in legal fees and $13,256 in fees related
to investor relations.
Other
general and administrative expenses consist of auto expenses, bad debts expense,
office, rent and utilities, salaries and wages and others. Other general and
administrative expenses totaled $168,235 in 2009, a decrease of $100,562, or 37%
as compared to $268,797 in 2008. The decrease is mainly attributable to a
decrease of $58,517 in stock option expense incurred from 90,635
in 2008 to $32,118 incurred in 2009 and a decrease of $26,680 incurred for
shares issued by the Company in 2008 to obtain a waiver of liquidated
damages and liability.
Comparison of Other Income
and Expenses for the Years Ended December 31, 2009 and 2008
Other
general and administrative expenses consist of auto expenses, bad debts expense,
office, rent and utilities, salaries and wages and others. Other general and
administrative expenses totaled $168,235 in 2009, a decrease of $100,562, or 37%
as compared to $268,797 in 2008. The decrease is mainly attributable to a
decrease of $58,517 in stock option expense incurred from $90,635 in 2008 to
$32,118 incurred in 2009, and a decrease of $26,680 incurred for shares issued
by the Company in 2008 to obtain a waiver of liquidated damages
liability.
During
2009, the Company recorded a gain of $495,348 on disposal of property, plant and
equipment (see Note 4 to Financial Statements) as compared a loss of $14,323 in
2008.
Income from
Operations
Income
from operations totaled $9,527,530 in 2009, an increase of $2,714,289, or 40%,
as compared to $6,813,241 in 2008.
It was
mainly resulted from increased sales and decreased operating expenses as
discussed above.
Net
Income
Net
income totaled $480,125 in 2009 as compared to the net income of $5,681,500 in
2008. The decrease of net income was caused mainly by the expense from
revaluation of Series A Preferred Stock and A, B, C, and D warrants with
characteristics of liabilities at fair values. (See Note 10 to Financial
Statements). Absent this expense, the Company would have a net income of
$8,406,307; basic earnings per share $0.46 and diluted earnings per share $0.43
in 2009.
Liquidity
and Capital Resources
We had
cash and cash equivalents of approximately $2,918,000 as of December 31, 2009,
as compared to approximately $4,399,000 as of December 31, 2008. 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.
9
Net cash
provided by operating activities was $7,749,649 and $9,676,505 for the year
ended December 31, 2009 and 2008, respectively. The decrease in net cash
provided by operating activities in 2009 was due to the increase of other
receivable in the amount of $3,747,926 resulted from the buy and sale of land
use rights and certain equipment in 2009 (see Note 4).
Net cash
used by investing activities was $9,460,214 in 2009, compared to $7,184,232 in
2008. On August 25, 2009, the Company acquired 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 Baisha land use rights
of 66,376,800 RMB ($9,710,926) was paid in full as of December 31,
2009.
Net cash
provided by financing activities was $255,042 in 2009, compared to $720,922 in
2008. During 2008, the Company received net proceeds of 720,922 from the sale of
Series A preferred stock. During 2009, the Company received deposits of $250,000
for exercise 333,334 shares of warrant A.
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 $53,219 and $52,326 for the years ended December 31,
2009 and 2008, respectively.
Estimated Liability for
Equity-Based Financial Instruments with Characteristics of
Liabilities
Effective
January 1, 2009, 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 11 to
Financial Statements) 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.
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”.
10
At
December 31, 2009, the fair values of the financial instruments consisted
of:
Shares / Warrants
|
Fair Value
|
|||||||
Series
A Convertible Preferred Stock
|
50,000 | $ | 135,500 | |||||
A
warrants
|
- | - | ||||||
B
warrants
|
1,500,000 | 2,839,500 | ||||||
C
warrants
|
500,000 | 992,500 | ||||||
D
warrants
|
600,000 | 1,090,860 | ||||||
Total
warrants
|
2,600,000 | 4,922,860 | ||||||
Total
Financial Instruments
|
2,650,000 | $ | 5,058,360 |
Accordingly,
total of $5,058,360 was recorded as estimated liabilities for equity-based
financial instruments with characteristics of liabilities in the balance sheet
as of December 31, 2009, and the same amount was recognized as expense from
valuation of Series A Preferred Stock and A, B, C, and D warrants with
characteristics of liabilities at fair values in the income statement for the
year ended December 31, 2009.
Critical
Accounting Policies and Estimates
In Note 2
to the audited consolidated financial statements for the years ended
December 31, 2009 and 2008 included in this annual 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%.
11
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.
Recent Accounting
Pronouncements
In
June 2009, the Financial Accounting Standards Board (FASB) issued a
standard that established the FASB (ASC) and amended the hierarchy of generally
accepted accounting principles (GAAP) such that the ASC became the single source
of authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S.
GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place. All previously existing accounting standard documents were superseded and
all other accounting literature not included in the ASC is considered
non-authoritative. New accounting standards issued subsequent to June 30,
2009 are communicated by the FASB through Accounting Standards Updates (ASUs).
The Company adopted the ASC. This standard did not have an impact on the
Company’s consolidated results of operations or financial condition. However,
throughout the notes to the consolidated financial statements references that
were previously made to various former authoritative U.S. GAAP pronouncements
have been changed to coincide with the appropriate section of the
ASC.
In
December 2007, the FASB issued and, in April 2009, amended a new
business combinations standard codified within ASC 805, which changed the
accounting for business acquisitions. Accounting for business combinations under
this standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination. Certain provisions of this standard impact the determination of
acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquisition-related
restructuring costs, in-process research and development, indemnification
assets, and tax benefits. The adoption of this standard did not have a material
impact on the Company’s results of operations or financial
condition.
In
April 2009, the FASB issued an accounting standard which provides guidance
on (1) estimating the fair value of an asset or liability when the volume
and level of activity for the asset or liability have significantly declined and
(2) identifying transactions that are not orderly. The standard also
amended certain disclosure provisions for fair value measurements and
disclosures in ASC 820 to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value as
well as disclosure of the hierarchy of the source of underlying fair value
information on a disaggregated basis by specific major category of investment.
The standard was effective prospectively beginning April 1, 2009. The
adoption of this standard did not have a material impact on the Company’s
results of operations or financial condition.
In
April 2009, the FASB issued an accounting standard which modifies the
requirements for recognizing other-than-temporarily impaired debt securities and
changes the existing impairment model for such securities. The standard also
requires additional disclosures for both annual and interim periods with respect
to both debt and equity securities. Under the standard, impairment of debt
securities will be considered other-than-temporary if an entity (1) intends
to sell the security, (2) more likely than not will be required to sell the
security before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The standard further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary,
(1) the entire shortfall of the security’s fair value versus its amortized
cost basis or (2) only the credit loss portion would be recognized in
earnings while the remaining shortfall (if any) would be recorded in other
comprehensive income. The standard requires entities to initially apply its
provisions to previously other-than-temporarily impaired debt securities
existing as of the date of initial adoption by making a cumulative-effect
adjustment to the opening balance of retained earnings in the period of
adoption. The cumulative-effect adjustment potentially reclassifies the
noncredit portion of a previously other-than-temporarily impaired debt security
held as of the date of initial adoption from retained earnings to accumulated
other comprehensive income. The adoption of this standard did not have a
material impact on the Company’s results of operations or financial
condition.
In
April 2009, the FASB issued an accounting standard regarding interim
disclosures about fair value of financial instruments. The standard essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the standard requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. The adoption of this standard did not have a
material impact on the Company’s results of operations or financial
condition.
In
May 2009, the FASB issued a new accounting standard regarding subsequent
events. This standard incorporates into authoritative accounting literature
certain guidance that already existed within generally accepted auditing
standards, with the requirements concerning recognition and disclosure of
subsequent events remaining essentially unchanged. This guidance addresses
events which occur after the balance sheet date but before the issuance of
financial statements. Under the new standard, as under previous practice, an
entity must record the effects of subsequent events that provide evidence about
conditions that existed at the balance sheet date and must disclose but not
record the effects of subsequent events which provide evidence about conditions
that did not exist at the balance sheet date. For the Company, this
standard was effective beginning April 1, 2009 and adoption of this standard did
not have a material impact on the Company’s results of operations or financial
condition
12
In
June 2009, the FASB issued a new standard regarding the accounting for
transfers of financial assets amending the existing guidance on transfers of
financial assets to, among other things, eliminate the qualifying
special-purpose entity concept, include a new unit of account definition that
must be met for transfers of portions of financial assets to be eligible for
sale accounting, clarify and change the derecognition criteria for a transfer to
be accounted for as a sale, and require significant additional disclosure. The
standard is effective for new transfers of financial assets beginning
January 1, 2010. The Company is currently evaluating the impact of this
standard, but does not expect to have a material impact on the Company’s results
of operations or financial condition.
In
June 2009, the FASB issued an accounting standard that revised the
consolidation guidance for variable-interest entities. The modifications include
the elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The
Company is currently evaluating the impact of this standard, but does not expect
it to have a material impact on the Company’s results of operations or financial
condition.
In
August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at
Fair Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value. This ASU is effective October 1, 2009.
Adoption of this standard did not have a material impact on the Company’s
results of operations or financial condition.
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable
Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, that
provides amendments to the criteria for separating consideration in
multiple-deliverable arrangements. As a result of these amendments,
multiple-deliverable revenue arrangements will be separated in more
circumstances than under existing U.S. GAAP. The ASU does this by establishing a
selling price hierarchy for determining the selling price of a deliverable. The
selling price used for each deliverable will be based on vendor-specific
objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither
vendor-specific objective evidence nor third-party evidence is available. A
vendor will be required to determine its best estimate of selling price in a
manner that is consistent with that used to determine the price to sell the
deliverable on a standalone basis. This ASU also eliminates the residual method
of allocation and will require that arrangement consideration be allocated at
the inception of the arrangement to all deliverables using the relative selling
price method, which allocates any discount in the overall arrangement
proportionally to each deliverable based on its relative selling price. Expanded
disclosures of qualitative and quantitative information regarding application of
the multiple-deliverable revenue arrangement guidance are also required under
the ASU. The ASU does not apply to arrangements for which industry specific
allocation and measurement guidance exists, such as long-term construction
contracts and software transactions. The ASU is effective
January 1, 2011. The Company is currently evaluating the impact of this
standard on the Company’s results of operations and financial
condition.
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
7. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
The
information required by this Item is incorporated by reference to the financial
statements beginning on page F-1.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
ITEM
8A(T). CONTROLS AND PROCEDURES.
Evaluation
of Disclosure controls and Procedures
An
evaluation was carried out under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness of the Company’s
disclosure controls and procedures as of December 31, 2009 which was
designed to provide reasonable assurance. Based on that evaluation, the CEO and
CFO have concluded that the Company’s disclosure controls and procedures are
effective to provide reasonable assurance that: (i) information required to
be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is accumulated and communicated to the Company’s
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure by the Company; and (ii) information required
to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission
rules and forms. During the year ended December 31, 2009, there were
no changes in the Company’s internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, its internal
control over financial reporting.
Management’s
Annual Report On Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company in accordance with as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the (i) effectiveness and efficiency of operations, (ii) reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and (iii)
compliance with applicable laws and regulations. Our internal controls framework
is based on the criteria set forth in the Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management’s
assessment of the effectiveness of the small business issuer’s internal control
over financial reporting is as of the year ended December 31, 2009. We believe
that internal control over financial reporting is effective. We have not
identified any, current material weaknesses considering the nature and extent of
our current operations and any risks or errors in financial reporting under
current operations.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permits us to provide only management’s report in this
annual report.
ITEM
8B. OTHER INFORMATION.
None.
PART III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The
directors and executive officers currently serving the Company are as
follows:
Name
|
|
Age
|
|
Positions Held
|
Jinjiang
Wang
|
60
|
President,
Chief Executive Officer and Chairman of the Board of
Directors
|
||
Chengzhi
Wang
|
39
|
General
Manager and a Director
|
||
Hong
Bu
|
35
|
Chief
Financial Officer and a Director
|
||
Jiping
Wang
|
48
|
Director
|
||
Song
Yang
|
35
|
Director
|
The
directors named above will serve until the next annual special meeting of the
Company’s stockholders. Thereafter, directors will be elected for one-year terms
at the annual stockholders’ meeting. Officers will hold their positions at the
pleasure of the board of directors, absent any employment agreement, of which
none currently exists or is contemplated. There is no arrangement or
understanding between any of the directors or officers of the Company and any
other person pursuant to which any director or officer was or is to be selected
as a director or officer.
14
The
directors and officers will devote their time to the Company’s affairs on an “as
needed” basis, which, depending on the circumstances, could amount to as little
as two hours per month, or more than forty hours per month, but more than likely
will fall within the range of five to ten hours per month. All of the Company’s
officers are full time employees of the Company.
Biographical
Information
Jinjiang
Wang was appointed as the Chairman of the Board, President and Chief Executive
Officer of CKGT on June 3, 2005 and appointed a director of CKGT on
July 22, 2005. Since 1998 Mr. Wang has served as a director and Chairman of
the board of the Company’s subsidiary, Harbin Hainan Kangda. Mr. Wang
was born in the Heilongjiang Province of the P.R.C. Mr. Wang graduated from
Northeast Agricultural University with a degree in Agriculture & Forest
Engineering. Mr. Wang has over 20 years of experience in management,
production development and sales. He is a founder of Harbin Hainan Kangda and a
pioneer of the now established edible cactus trade of China.
Chengzhi
Wang was appointed as the General Manager CKGT on June 3, 2005 and
appointed a director of CKGT on July 22, 2005. Mr. Wang also serves as a
director and general manager of the Company’s subsidiary, Harbin Hainan Kangda
and has held these positions since 1998. Mr. Wang was born in
Heilongjiang Province of the P.R.C. Mr. Wang graduated from Architectonics
Department of Harbin Institute of Technology with an engineer degree.
Mr. Wang has over five years experience in management, production and
sales. Mr. Wang is a founder of Harbin Hainan Kangda and a pioneer in the
edible cactus trade of the P.R.C.
Hong Bu
was appointed as Chief Financial Officer of CKGT on June 3, 2005 and
appointed a director of CKGT on July 22, 2005. From 1998 to
2005 Ms. Bu served as senior accountant of Harbin Hainan
Kangda. Ms. Bu graduated with a degree in Finance from the Finance and
Economics Institute of Harbin. She is a CPA (certified public accountant).
Ms. Bu has over five years of experience as Harbin Hainan Kangda’s senior
accountant. Ms. Bu was a founder of Harbin Hainan Kangda and a pioneer in
the edible cactus trade of the P.R.C.
Jiping
Wang was appointed
as a director of CKGT on July 22, 2005. Since 1979 Ms. Wang has served as
an officer of Heilongjian Food Control and Drought Prevention
Center. Ms. Wang was born in Heilongjiang Province; P.R.C.
Ms. Wang graduated from the Economic Managerial Cadre’s Institute of
Harbin.
Song
Yang was appointed
as a director of CKGT on July 22, 2005. Ms. Yang has over
15 years of experience in the Government Administrative Department. From
2000 to 2004 Ms. Yang served as a financing manager of Heilongjian Securities
Corporation. Ms. Yang was a founder of Harbin Hainan Kangda and a
pioneer in the edible cactus trade of the P.R.C. Ms. Yang has not served as
an officer and director of any other public companies over the last five
years.
Board
Leadership Structure
The Board
of Directors believes that Mr. Wang’s service as both Chairman of the Board and
Chief Executive Officer is in the best interest of the Company and its
stockholders. Mr. Wang possesses detailed and in-depth knowledge of the issues,
opportunities and challenges facing the Company and its business and is thus
best positioned to develop agendas that ensure that the Board’s time and
attention are focused on the most critical matters. His combined role enables
decisive leadership, ensures clear accountability, and enhances the Company’s
ability to communicate its message and strategy clearly and consistently to the
Company’s shareholders, employees, customers and suppliers.
Family
Relationships
Our
Chairman, President and CEO, Mr. Jinjiang Wang is the father of our General
Manager, Mr. Chengzhi Wang and our CFO Ms. Hong Bu is the wife of Mr. Chengzhi
Wang and daughter in law of Mr. Jinjiang Wang. Other than the relationship
described above, there are no family relationships between or among any of our
current directors, executive officers or persons nominated or charged by the
Company to become directors or executive officers.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten years:
(a)
|
Had any bankruptcy petition filed
by or against any business of which such person was a general partner or
executive officer either at the time of the bankruptcy or within two years
prior to that time;
|
(b)
|
Been
convicted in a criminal proceeding or subject to a pending criminal
proceeding;
|
15
(c)
|
Been subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction or any federal or state authority,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting his involvement in any type of business, securities, futures,
commodities or banking activities;
and
|
(d)
|
Been
found by a court of competent jurisdiction (in a civil action), the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended, or
vacated.
|
Board
Committees
The board
of directors has established an audit committee. The audit committee is
comprised of Jinjiang Wang and Chengzhi Wang. The audit committee has yet to
adopt a definitive charter though it typically reviews, acts on, and reports to
the board of directors with respect to various auditing and accounting matters.
The matters typically considered by CKGT’s audit committee include
recommendations as to the performance of its independent auditors, the scope of
the annual audits, fees to be paid to the independent auditors, and internal
accounting and financial control policies and procedures. Certain stock
exchanges currently require companies to adopt a formal written charter that
establishes an audit committee that specifies the scope of an audit committee’s
responsibilities and the means by which it carries out those responsibilities.
We do not have a financial expert serving on our audit committee.
In order
to be listed on any of these exchanges, CKGT would be required to adopt a
definitive charter for its audit committee. The board of directors has not yet
established a compensation committee or a nominating committee.
Compliance
with Section 16(a) of the Exchange Act.
Section 16(a) of
the Securities Exchange Act of 1934 requires the Company’s executive officers
and directors, and persons who own more that 10% of the Company’s capital
stock, to file reports of ownership and changes of ownership on Forms 3, 4 and 5
with the Securities and Exchange Commission. Executive officers, directors and
greater than 10% shareholders are required to furnish the Company with copies of
all Forms 3, 4 and 5 they file.
Based
solely on the Company’s review of the copies of such forms it has received, and
written representations from certain reporting persons during the 2009 fiscal
year, the Company believes that all of its executive officers and directors
complied with all Section 16(a) filing requirements applicable to
them.
Code
of Ethics
CKGT has
adopted a Code of Ethics within the meaning of Item 406(b) of Regulation
S-B of the Securities Exchange Act of 1934. The Code of Ethics applies to
directors and senior officers, such as the principal executive officer,
principal financial officer, controller, and persons performing similar
functions. CKGT has filed a copy of its Code of Ethics as Exhibit 14 to its
Form 10-KSB for the fiscal year ended 2003. Further, CKGT’s Code of Ethics
is available in print, at no charge, to any security holder who requests such
information by contacting CKGT.
ITEM
10. EXECUTIVE COMPENSATION.
The
following table provides summary compensation information for the years 2009 and
2008 concerning cash and non-cash compensation paid or accrued by the Company to
or on behalf of the chief executive officer:
Summary
Compensation Table
Name and Principal Position
|
Year
|
|
Salary
($)(1)
|
|
Bonus
($)
|
|
Stock
Award(s)
($)
|
|
Option
Award(s)
($)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Change in
Pension
Value and
Non-qualified
Compensation
Earnings
($)
|
All other
Compensation
($)
|
|
Total
($)
|
|
||||||
Jinjiang
Wang,
|
2009
|
$
|
17,556
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
17,556
|
||||||||||||
President,
Chief Executive
|
2008
|
$
|
14,630
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
14,630
|
||||||||||||
Officer
and Chairman
|
|||||||||||||||||||||||
Chengzhi
Wang,
|
2009
|
$ |
14,045
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
14,045
|
||||||||||||
General
Manager
|
2008
|
$
|
11,118
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
11,118
|
||||||||||||
Hong
Bu,
|
2009
|
$ |
14,045
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
14,045
|
||||||||||||
Chief
Financial Officer
|
2008
|
$
|
11,118
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
11,118
|
16
(1)
Converted from RMB at the exchange rate of 1RMB=US$0.1463
No
executive officer received compensation in excess of $100,000 during the fiscal
years ended December 31, 2009 and 2008. In addition, members of the Board of
Directors did not receive compensation for their services during the fiscal
years ending December 31, 2009 and 2008.
Director
Compensation
Directors
currently are not reimbursed for out-of-pocket costs incurred in attending
meetings and no director receives any compensation for services rendered as a
director. CKGT does not anticipate adopting a provision for compensating
directors in the future.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of April 12, 2010, the number of shares of Common
Stock owned of record and beneficially by executive officers, directors and
persons who hold 5.0% or more of the outstanding Common Stock of the Company.
Also included are the shares held by all executive officers and directors as a
group.
Title of
Class
|
Name and Address of Owner
|
Amount and Nature
of Ownership
|
Percent of
Class(1)
|
|||||
Executive
Officers and Directors
|
||||||||
Common
Stock
|
Jinjiang
Wang
The
4th Group, 21st Residents’
Committee
Xinhua Street, Boli Town,
Boli
County Heilongjiang Province P.R.C.
|
4,801,390
Direct
|
(2)
|
23.1 |
%
|
|||
Common
Stock
|
Chengzhi
Wang
No.
98 Xiangshun Street
Xiangfang
District, Harbin, P.R.C.
|
3,892,970
Direct
|
18.7 |
%
|
||||
Common
Stock
|
Hong
Bu
No.
99 Taibei Road
Limin
Economy and Technology
Developing
District, Harbin, P.R.C.
|
750,046
Direct
|
3.6 |
%
|
||||
Common
Stock
|
Jiping
Wang
No.
99 Taibei Road
Limin
Economy and Technology
Developing
District, Harbin, P.R.C.
|
700,734
Direct
|
3.3 |
%
|
||||
Common
Stock
|
Song
Yang
No.
99 Taibei Road
Limin
Economy and Technology
Developing
District, Harbin, P.R.C.
|
726,688
Direct
|
3.5 |
%
|
||||
Common
Stock
|
All
Directors and Executive Officers as a Group (5 persons)
|
10,871,828
Direct
|
52.4 |
%
|
||||
5%
Holder
|
||||||||
Common
Stock
|
T
Squared Investments LLC.
1325
Sixth Avenue, Floor 28
New
York, NY 10019
|
2,743,660
Direct
|
(3)
|
13.2 |
%
|
(1) Applicable
percentage ownership is based on 20,740,762 shares of common stock outstanding
as of April 12, 2010, together with securities exercisable or convertible into
shares of common stock within 60 days of April 12, 2010 for each
stockholder. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock that are
currently exercisable or exercisable within 60 days of April 12, 2010are deemed
to be beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.
(2) Jinjiang
Wang has been the President of the Company since June 3, 2005. He has been
and is the President of Harbin Hainan Kangda since 2000. Jinjiang Wang acquired
165,182 shares of the Company pursuant to the Reorganization Agreement on
June 3, 2005 and 428,572 shares of the Company as Kangtai’s sole designee
pursuant to the Stock Purchase Agreement on June 3, 2005. 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 and Mr. Jinjiang Wang
acquired 4,207,636 shares from 14,248,395 shares of the
Company.
17
(3) Of
which 50,000 shares of common stock are issuable upon conversion of 50,000
shares of Series A Convertible Preferred Stock at the election of the holder at
any time and 2,125,000 shares of common stock are issuable upon the exercise of
warrants which are immediately exercisable. Pursuant to the Preferred Stock
Purchase Agreements and Common Stock Purchase Warrants by and between the
Company and the T Squared Investments LLC (“T Squared”) dated March 21, 2008 and
July 16, 2008, T Squared is not entitled to exercise any warrant which will
result in beneficial ownership by T Squared and its affiliates of more than 4.9%
of the outstanding shares of the Company’s common stock.
ITEM
12. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
There are
no transactions to which the Company was or is a party in which the amount
involved exceeds $120,000 and in which any director, executive officer, five
percent stockholder or any member of the immediate family or any of the
foregoing persons had or will have a direct or indirect material
interest.
The Board
of Directors has determined that none of the Company’s current directors are
independent directors within the meaning set forth in the rules of NASDAQ as
currently in effect.
ITEM
13. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Our
registered independent public accounting firm is Michael T. Studer, C.P.A., P.C.
The fees billed by Michael T. Studer, C.P.A., P.C. in 2009 and 2008 were as
follows:
|
2009
|
2008
|
|||
Audit
Fees
|
$102,218
|
$
|
94,000
|
||
Audit-Related
Fees
|
-
|
||||
Total
Audit and Audit-Related Fees
|
$102,218
|
$
|
94,000
|
||
Tax
Fees
|
-
|
||||
All
Other Fees
|
-
|
||||
Total
for independent public audit firms
|
$102,218
|
$
|
94,000
|
Tax Fees
The
aggregate fees billed by P. C. Liu, CPA, P.C. for tax compliance, tax
advice and tax planning were $1,000 for the fiscal years ended December 31, 2009
and $1,000 for the fiscal years ended December 31, 2008.
Audit Committee
Pre-Approval
The
Company's Audit Committee pre-approved the engagement of Michael T. Studer,
C.P.A., P.C. to act as its independent auditor for the fiscal year ended
December 31, 2009. The Company's Audit Committee also pre-approved Michael T.
Studer, C.P.A., P.C. to provide the audit, audit related services, and all
other services described above for the fiscal year ended December 31, 2009. The
Company's board of directors also pre-approved P. C. Liu,
C.P.A, P.C. to provide the tax services for the fiscal period ended
December 31, 2009.
ITEM
14. EXHIBITS
The
Exhibits listed below are filed as part of this Annual
Report.
|
|
3.1
|
Articles
of Incorporation (incorporated by reference from Registration Statement on
Form SB-2/A filed with the Securities and Exchange Commission on
October 18, 2000).
|
3.2
|
Amended
Articles of Incorporation (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on
November 3, 2003)
|
3.3
|
Amended
and Restated Articles of Incorporation (incorporated by reference to the
Form 10KSB filed with the Securities and Exchange Commission April 17,
2006.
|
3.4
|
Bylaws
(incorporated by reference from Registration Statement on Form SB-2/A
filed with the Securities and Exchange Commission on October 18,
2000).
|
3.5
|
Certificate
of Designations of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock as filed with the Secretary of State of Nevada
on March 21, 2008 (incorporated by reference to the From 8-K filed with
the Securities and Exchange Commission on March 27,
2008).
|
18
3.6
|
First
Amended and Restated Certificate of Designations of Preferences, Rights
and Limitations of Series A Convertible Preferred Stock as filed with the
Secretary of State of Nevada on July 16, 2008. (incorporated by reference
to the Form 8-K filed on July 21, 2008)
|
10.1
|
Distribution
Agreement Between China Kangtai Cactus Bio-tech, Inc and Hunan Tianxiang
Trading Company, Ltd (incorporated by reference to the Form 10QSB
filed with the Securities and Exchange Commission on November 19,
2007).
|
10.2
|
Distribution
Agreement Between China Kangtai Cactus Bio-tech, Inc and Jinan Qitai
Economic and Trading Center (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on
November 19, 2007).
|
10.3
|
Distribution
Agreement Between China Kangtai Cactus Bio-tech, Inc and Lanzhou Xinhui
Economic and Trading Company, Ltd. (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on
November 19, 2007).
|
10.4
|
Distribution
Agreement Between China Kangtai Cactus Bio-tech, Inc and Qingdao Furui
Economic and Trading Company, Ltd. (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on
November 19, 2007).
|
10.5
|
Distribution
Agreement Between China Kangtai Cactus Bio-tech, Inc and Shanxi Anyang
Food Distribution Company (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on
November 19, 2007).
|
10.6
|
Processing
Agreement dated January 8, 2006, between the Company and Shandong
Tsingtao Beer Inc. Harbin subsidiary (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
16, 2007).
|
10.7
|
Processing
Agreement dated January 20, 2006, between the Company and Harbin
Ice Lantern Noodle Factory (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
16, 2007).
|
10.8
|
Processing
Agreement dated March 30, 2005, between the Company and
Harbin Diwang Pharmacy Co. Ltd. (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
16, 2007).
|
10.9
|
Processing
Agreement dated July 10, 2005, between the Company and
Harbin Bin County HuaLan Dairy Factory (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
16, 2007).
|
10.10
|
Processing
Agreement dated March 2, 2006, between the Company and Kangwei Health
Foods Ltd. Of Mudanjiang City (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
16, 2007).
|
10.11
|
Distributions
Agreement dated February 15, 2007, with Jilin Yanji Economic and Trading
Company, Ltd. (incorporated by reference to the Form 10QSB filed with
the Securities and Exchange Commission on May 16,
2007).
|
10.12
|
Distributions
Agreement dated January 16, 2007, with Liaoning Shenneng Trading and
Development Ltd. (incorporated by reference to the Form 10QSB filed
with the Securities and Exchange Commission on May 16,
2007).
|
10.13
|
Distributions
Agreement dated February 9, 2007, with Jianshuang Zhang - Hubei
(incorporated by reference to the Form 10QSB filed with the
Securities and Exchange Commission on May 16, 2007).
|
10.14
|
Distributions
Agreement, dated February 3, 2007, with Hunan Green Food Distribution
Company, Ltd. (incorporated by reference to the Form 10QSB filed with
the Securities and Exchange Commission on May 16,
2007).
|
10.15
|
Distributions
Agreement dated January 29, 2007, with Harbin Huadingwei Trading Company,
Ltd. (incorporated by reference to the Form 10QSB filed with the
Securities and Exchange Commission on May 16, 2007).
|
10.16
|
Distributions
Agreement dated February 6, 2007, with Hangzhou Hesheng Economic and
Trading Company, Ltd. (incorporated by reference to the Form 10QSB
filed with the Securities and Exchange Commission on May 16,
2007).
|
10.17
|
Distributions
Agreement dated January 16, 2007, with Guangdong Jinpei Lin (incorporated
by reference to the Form 10QSB filed with the Securities and Exchange
Commission on May 16, 2007).
|
10.18
|
Distributions
Agreement dated January 9, 2007, with Fujian Tianyi Economic and Trading
Company Ltd (incorporated by reference to the Form 10QSB filed with
the Securities and Exchange Commission on May 16,
2007).
|
10.19
|
Distributions
Agreement, Dated January 20, 2007, With Beijing Yaping Liu (incorporated
by reference to the Form 10QSB filed with the Securities and Exchange
Commission on May 16, 2007).
|
10.20
|
Cooperation
Agreement between Harbin Hainan Kangda Cactus Hygienical Foods Co., Ltd
and Party B: Harbin Meijia Bio-Tech Co., Ltd. dated October 8,
2007.
|
10.21
|
Contract
of Termination of Lease, dated January 10, 2006, by and between the
Company and the Lijia Village, Tongling Town Jixi City (incorporated by
reference to the Form 10QSB filed with the Securities and Exchange
Commission on May 15, 2006).
|
10.22
|
Contract
of Termination of Lease, dated January 18, 2006, by and between the
Company and Lindian Cactus Farming Base (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
15, 2006).
|
10.23
|
Contract
of Termination of Lease, dated January 9, 2006, by and between the Company
and the Qiqihar Angangxi Green Park (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
15, 2006).
|
10.24
|
Contract
of Termination of Lease, dated January 13, 2006, by and between the
Company and the Beian Huashengnongfeng Planting Base (incorporated by
reference to the Form 10QSB filed with the Securities and Exchange
Commission on May 15,
2006).
|
19
10.25
|
Contract
of Termination of Lease, dated January 6, 2006, by and between the Company
and the Hongqi Jinxing Planting Base (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
15, 2006).
|
10.26
|
Contract
of Termination of Lease, dated January 17, 2006, by and between the
Company and the Hailin Luming Planting Base (incorporated by reference to
the Form 10QSB filed with the Securities and Exchange Commission on
May 15, 2006).
|
10.27
|
Contract
of Termination of Lease, dated January 5, 2006, by and between the Company
and the Dalian River Planting Base (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
15, 2006).
|
10.28
|
Contract
of Termination of Lease, dated January 23, 2006, by and between the
Company and the Wanbao Planting Base (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
15, 2006).
|
10.29
|
Transfer
Agreement for Greenhouse, dated January 13, 2006, by and between the
Company and the Lijia Village, Tongling Town Jixi City (incorporated by
reference to the Form 10QSB filed with the Securities and Exchange
Commission on May 15, 2006).
|
10.30
|
Transfer
Agreement for Greenhouse, dated January 18, 2006, by and between the
Company and the Lindian Cactus Farming Base. (incorporated by reference to
the Form 10QSB filed with the Securities and Exchange Commission on
May 15, 2006).
|
10.31
|
Transfer
Agreement for Greenhouse, dated January 9, 2006, by and between the
Company and the Qiqihar Angangxi Green Park (incorporated by reference to
the Form 10QSB filed with the Securities and Exchange Commission on
May 15, 2006).
|
10.32
|
Transfer
Agreement for Greenhouse, dated January 11, 2006, by and between the
Company and the Beian Huashengnongfeng Planting Base (incorporated by
reference to the Form 10QSB filed with the Securities and Exchange
Commission on May 15, 2006).
|
10.33
|
Transfer
Agreement for Greenhouse, dated January 6, 2006, by and between the
Company and the Hongqi Jinxing Planting Base (incorporated by reference to
the Form 10QSB filed with the Securities and Exchange Commission on
May 15, 2006).
|
10.34
|
Transfer
Agreement for Greenhouse, dated January 17, 2006, by and between the
Company and the Hailin Luming Planting Base (incorporated by reference to
the Form 10QSB filed with the Securities and Exchange Commission on
May 15, 2006).
|
10.35
|
Transfer
Agreement for Greenhouse, dated January 5, 2006, by and between the
Company and the Dalian River Planting Base (incorporated by reference to
the Form 10QSB filed with the Securities and Exchange Commission on
May 15, 2006).
|
10.36
|
Transfer
Agreement for Greenhouse, dated January 23, 2006, by and between the
Company and the Wanbao Planting Base (incorporated by reference to the
Form 10QSB filed with the Securities and Exchange Commission on May
15, 2006).
|
10.37
|
Transfer
Agreement for Greenhouse, dated January 24, 2006, by and between the
Company and the Daqing Ranghulu Hi-tech Zone (incorporated by reference to
the Form 10QSB filed with the Securities and Exchange Commission on
May 15, 2006).
|
10.38
|
Preferred
Stock Purchase Agreement dated as of March 21, 2008 by and between the
Company and T Squared Investments LLC (incorporated by reference to the
From 8-K filed with the Securities and Exchange Commission on March 27,
2008).
|
10.39
|
Registration
Rights Agreement dated as of March 21, 2008 by and between the Company and
the Investors named therein (incorporated by reference to the From 8-K
filed with the Securities and Exchange Commission on March 27,
2008).
|
10.40
|
Common
Stock Purchase Warrant “A” (incorporated by reference to the From 8-K
filed with the Securities and Exchange Commission on March 27,
2008).
|
10.41
|
Common
Stock Purchase Warrant “B” (incorporated by reference to the From 8-K
filed with the Securities and Exchange Commission on March 27,
2008).
|
10.42
|
Form
of Preferred Stock Purchase Agreement dated as of July 16, 2008 by and
between the Company and T Squared Investments LLC. (incorporated by
reference to the Form 8-K filed on July 21, 2008)
|
10.43
|
Common
Stock Purchase Warrant “A” (incorporated by reference to the Form 8-K
filed on July 21, 2008)
|
10.44
|
Common
Stock Purchase Warrant “B” (incorporated by reference to the Form 8-K
filed on July 21, 2008)
|
10.45
|
Asset
Purchase Agreement dated as of March 25, 2009, between Harbin Hainan
Kangda Cactus Health Food Co., Ltd., a wholly owned subsidiary of China
Kangtai Cactus Bio-Tech, Inc., and Qitaihe Kangwei Biotechnology Co., Ltd.
(incorporated by reference to the Form 8-K filed on March 30,
2009)
|
10.46
|
Form
of Common Stock Purchase Agreement by and between China Kangtai Cactus
Bio-Tech, Inc. and Seaside 88, LP, dated as of November 5, 2009
(incorporated by reference to the From 8-K filed on November 9,
2009)
|
20
10.47
|
Agreement
by and between Harbin Hainan Kangda Cactus Health Food Co., Ltd. and City
of Qitaihe, China dated January 27, 2010 (incorporated by reference to the
From 8-K filed on January 28, 2010)
|
21.1
|
List
of Subsidiaries (incorporated by reference to the From 10-KSB filed on
April 15, 2008)
|
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.
|
*
|
Filed
Herewith
|
21
SIGNATURES
In
accordance with Section 13 or 15(d) 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.
By:
|
/s/ Jinjiang Wang
|
President
(CEO) and a Director and Principal Executive Officer
|
|
Date:
April 15, 2010
|
|||
By:
|
/s/ Hong Bu
|
Chief
Financial Officer and a Director and Principal Financial
and
Accounting Officer
|
|
Date:
April 15, 2010
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
|
/s/ Jinjiang Wang
|
President
(CEO) and a Director and Principal Executive Officer
|
|
Date:
April 15, 2010
|
|||
By:
|
/s/ Chengzhi Wang
|
General
Manager and a Director
|
|
Date:
April 15, 2010
|
|||
By:
|
/s/ Hong Bu
|
Chief
Financial Officer and a Director and Principal Financial
and
Accounting Officer
|
|
Date:
April 15, 2010
|
|||
By:
|
/s/ Jiping Wang
|
Director
|
|
Date:
April 15, 2010
|
|||
By:
|
/s/ Song Yang
|
Director
|
|
Date:
April 15, 2010
|
22
Index
to Financial Statements
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-2
|
Consolidated
Statements of Income and Comprehensive Income for the years ended
December 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2009, 2008 and 2007
|
F-4
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
F-5
|
Notes
to Consolidated Financial Statements
|
F-6
|
23
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of China Kangtai Cactus Bio-Tech
Inc.
I have
audited the accompanying consolidated balance sheets of China Kangtai Cactus
Bio-Tech Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008
and the related consolidated statements of income and comprehensive income,
stockholders’ equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. My responsibility
is to express an opinion on these financial statements based on my
audits.
I
conducted my audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audits provide a reasonable
basis for my opinion.
In my
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Kangtai Cactus
Bio-Tech Inc. and subsidiaries as of December 31, 2009 and 2008 and the results
of their operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
/S/ Michael T. Studer CPA
P.C.
|
||
Michael
T. Studer CPA P.C.
|
Freeport,
New York
April 14,
2010
F-1
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated
Balance Sheets
As of
December 31,
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 2,918,068 | $ | 4,398,897 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $1,006,597
and $979,700, respectively
|
2,283,257 | 3,869,985 | ||||||
Inventories
|
2,440,904 | 3,376,635 | ||||||
Prepaid
expenses
|
1,265 | 1,005 | ||||||
Other
receivables
|
3,992,562 | - | ||||||
Total
Current Assets
|
11,636,056 | 11,646,522 | ||||||
Property,
plant and equipment, net of accumulated depreciation of $2,112,093 and
$1,649,662, respectively
|
5,750,876 | 6,236,914 | ||||||
Other
Assets
|
||||||||
Intangible
assets, net of accumulated amortization of $1,054,531 and $920,040,
respectively
|
316,300 | 454,445 | ||||||
Land
use rights, net of accumulated amortization of $473,151 and $289,941,
respectively
|
17,981,834 | 8,609,491 | ||||||
Total
Assets
|
$ | 35,685,066 | $ | 26,947,372 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$ | 311,417 | $ | 315,639 | ||||
Note
payable
|
885,115 | 887,475 | ||||||
Taxes
payable
|
789,141 | 570,855 | ||||||
Other
payable
|
5,042 | - | ||||||
Total
Current Liabilities
|
1,990,715 | 1,773,969 | ||||||
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 December 31, 2009)
|
135,500 | - | ||||||
Warrants
|
4,922,860 | - | ||||||
Total
|
5,058,360 | - | ||||||
Total
Liabilities
|
7,049,075 | 1,773,969 | ||||||
Commitments
and Contingencies
|
- | - | ||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, par value $.001 per share; authorized 200,000,000 shares; issued
and outstand: 50,000 and 1,150,000 shares, respectively
|
- | 1,150 | ||||||
Common
stock, par value $.001 per share; authorized 200,000,000 shares, issued or
issuable and outstanding: 20,024,024 and 17,885,625 shares,
respectively
|
20,024 | 17,886 | ||||||
Additional
paid-in capital
|
11,003,276 | 7,819,865 | ||||||
Retained
earnings
|
||||||||
Appropriated
|
3,881,804 | 2,682,345 | ||||||
Unappropriated
|
10,903,711 | 11,604,285 | ||||||
Accumulated
other comprehensive income
|
2,827,176 | 3,047,872 | ||||||
Total
stockholders' equity
|
28,635,991 | 25,173,403 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 35,685,066 | $ | 26,947,372 |
The
accompanying notes are an integral part of these financial
statements.
F-2
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated
Statements of Income and Comprehensive Income
For The
Years Ended December 31,
2009
|
2008
|
|||||||
Net
Sales
|
$ | 26,537,356 | $ | 20,300,583 | ||||
Cost
of Sales
|
(16,016,434 | ) | (12,307,303 | ) | ||||
Gross
Profit
|
10,520,922 | 7,993,280 | ||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
249,083 | 214,285 | ||||||
Provision
for reserve for allowances, returns and doubtful accounts
|
26,897 | 136,125 | ||||||
General
and administrative expenses
|
464,697 | 543,929 | ||||||
Depreciation
|
77,323 | 77,015 | ||||||
Amortization
of land use rights
|
38,165 | 73,761 | ||||||
Amortization
of intangible assets
|
137,227 | 134,924 | ||||||
Total
operating expenses
|
993,392 | 1,180,039 | ||||||
Income
from Operations
|
9,527,530 | 6,813,241 | ||||||
Other
Income (Expense)
|
||||||||
Interest
income
|
69 | 838 | ||||||
Imputed
interest expense
|
(53,219 | ) | (52,326 | ) | ||||
Expense
from revaluation of Series A Preferred Stock and A, B, C, and D warrants
with characteristics of liabilities at fair values
|
(7,926,182 | ) | - | |||||
Net
gain (loss) on disposal of property, plant and equipment
|
495,348 | (14,323 | ) | |||||
Total
Other Income (Expenses)
|
(7,483,984 | ) | (65,811 | ) | ||||
Income
before Income Tax
|
2,043,546 | 6,747,430 | ||||||
Income
tax expense
|
(1,563,421 | ) | (1,065,930 | ) | ||||
Net
Income
|
480,125 | 5,681,500 | ||||||
Deemed
dividends relating to the beneficial conversion feature included in the
sale of the Series A preferred stock and warrants
|
- | (322,750 | ) | |||||
Net
Income Attributable to Common Stockholders
|
$ | 480,125 | $ | 5,358,750 | ||||
Net
Income Per Common Share
|
||||||||
Basic
|
$ | 0.03 | $ | 0.30 | ||||
Diluted
|
$ | 0.02 | $ | 0.29 | ||||
Weighted
Average Number of Common Shares Used to Compute Earnings per Common
Share:
|
||||||||
Basic
|
18,304,775 | 17,767,461 | ||||||
Diluted
|
19,469,714 | 18,597,561 | ||||||
Comprehensive
Income:
|
||||||||
Net
income
|
$ | 480,125 | $ | 5,681,500 | ||||
Foreign
currency translation adjustment
|
(220,696 | ) | 1,309,246 | |||||
Comprehensive
Income
|
$ | 259,429 | $ | 6,990,746 |
The
accompanying notes are an integral part of these financial
statements.
F-3
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Equity
For the
Years Ended December 31, 2009 and 2008
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 | - | - | - | - | - | |||||||||||||||||||||||||
Stock
option expense
|
- | - | - | - | 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
|
5,681,500 | 5,681,500 | ||||||||||||||||||||||||||||||||||
Currency
translation adjustment
|
- | - | - | - | - | - | - | 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 cummulative effect of change in accounting
principle:
|
||||||||||||||||||||||||||||||||||||
Reclassification
of Series A Preferred Stock and A, B, C, and D Warrants
from stockholder's equity
to liablities, 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 |
The
accompanying notes are an integral part of these financial
statements.
F-4
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
For the
Years Ended December 31,
2009
|
2008
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income
|
$ | 480,125 | $ | 5,681,500 | ||||
Adjustmens
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Expense
from revaluation of Series A Preferred Stock and A, B, C, and D warrants
with characteristics of liabilities at fair values
|
7,926,182 | - | ||||||
Provision
for reserve for allowances, returns and doubtful accounts
|
26,897 | 136,125 | ||||||
Net
(gain) loss on disposal of property, plant and equipment
|
(495,348 | ) | 14,323 | |||||
Depreciation
- cost of sales
|
392,999 | 408,351 | ||||||
Depreciation
- operating expenses
|
77,322 | 77,015 | ||||||
Amortization
of land use rights -cost of sales
|
146,200 | - | ||||||
Amortization
of land use rights- operating expenses
|
38,165 | 73,761 | ||||||
Amortization
of intangible assets
|
137,227 | 134,924 | ||||||
Issurance
of shares in consideration for the waiver of liquidated
damages
|
- | 26,680 | ||||||
Stock
option expense
|
32,118 | 90,635 | ||||||
Imputed
interest
|
53,219 | 52,326 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable, net
|
1,532,934 | 30,059 | ||||||
Prepaid
expenses
|
(260 | ) | 19,232 | |||||
Other
receivables
|
(3,747,926 | ) | - | |||||
Inventories
|
935,731 | 2,717,320 | ||||||
Accounts
payable and accrued liabilities
|
(4,222 | ) | (37,452 | ) | ||||
Taxes
payable
|
218,286 | 251,706 | ||||||
Net
cash provided by operating activities
|
7,749,649 | 9,676,505 | ||||||
Cash
Flows from Investing Activities
|
||||||||
Purchases
of land use rights
|
(9,710,926 | ) | (7,186,778 | ) | ||||
Net
proceeds from disposals of property, plant and equipment
|
495,348 | 2,546 | ||||||
Advances
to related party
|
(244,636 | ) | - | |||||
Net
cash (used for) investing activities
|
(9,460,214 | ) | (7,184,232 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Proceeds
from related party
|
5,042 | - | ||||||
Cash
exercise of A warrants
|
250,000 | - | ||||||
Sale
of Series A preferred stock-net
|
- | 720,922 | ||||||
Net
cash provided by financing activities
|
255,042 | 720,922 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
(25,306 | ) | 675,801 | |||||
Increase
(decrease) in cash and cash equivalents
|
(1,480,829 | ) | 3,888,996 | |||||
Cash
and cash equivalents, beginning of period
|
4,398,897 | 509,901 | ||||||
Cash
and cash equivalents, end of period
|
2,918,068 | 4,398,897 | ||||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$ | - | $ | - | ||||
Income
taxes paid
|
$ | 1,419,189 | $ | 814,224 |
The
accompanying notes are an integral part of these financial
statements.
F-5
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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 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 - 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.
F-6
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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 ($0.14630 and $0.14669 at
December 31, 2009 and 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 ($0.14661 and $0.14415 for
the years ended December 31, 2009 and 2008, 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 2009 and 2008.
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.
F-7
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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 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 collectibility is deemed
probable.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising expenses totaled $161,271 and
$133,133 for the years ended December 31, 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 years ended December 31, 2009 and 2008 were
$102,627 and $12,397, respectively.
Stock-Based
Compensation
Stock-based
compensation is accounted for at fair value in accordance with Accounting
Standards Codification (“ASC”) 718, “Compensation- Stock
Compensation”.
F-8
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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.
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
years ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Weighted
average shares outstanding – basic
|
18,304,775 | 17,767,461 | ||||||
Series
A convertible preferred stock
|
910,000 | 830,100 | ||||||
Incremental common shares from
stock options and
warrants
|
254,939 | - | ||||||
Weighted
average shares outstanding - diluted
|
19,469,714 | 18,597,561 |
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 2,350,000 and
3,850,000 for the years ended December 31, 2009 and 2008,
respectively.
F-9
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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.
Recent Accounting
Pronouncements
In June
2009, the Financial Accounting Standards Board (FASB) issued a standard that
established the FASB (ASC) and amended the hierarchy of generally accepted
accounting principles (GAAP) such that the ASC became the single source of
authoritative nongovernmental U.S. GAAP. The ASC did not change current U.S.
GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in one
place. All previously existing accounting standard documents were superseded and
all other accounting literature not included in the ASC is considered
non-authoritative. New accounting standards issued subsequent to June 30, 2009
are communicated by the FASB through Accounting Standards Updates (ASUs). The
Company adopted the ASC. This standard did not have an impact on the Company’s
consolidated results of operations or financial condition. However, throughout
the notes to the consolidated financial statements references that were
previously made to various former authoritative U.S. GAAP pronouncements have
been changed to coincide with the appropriate section of the ASC.
In
December 2007, the FASB issued and, in April 2009, amended a new business
combinations standard codified within ASC 805, which changed the accounting for
business acquisitions. Accounting for business combinations under this standard
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction and
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed in a business combination. Certain
provisions of this standard impact the determination of acquisition-date fair
value of consideration paid in a business combination (including contingent
consideration); exclude transaction costs from acquisition accounting; and
change accounting practices for acquisition-related restructuring costs,
in-process research and development, indemnification assets, and tax benefits.
The adoption of this standard did not have a material impact on the Company’s
results of operations or financial condition.
F-10
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
In April
2009, the FASB issued an accounting standard which provides guidance on (1)
estimating the fair value of an asset or liability when the volume and level of
activity for the asset or liability have significantly declined and (2)
identifying transactions that are not orderly. The standard also amended certain
disclosure provisions for fair value measurements and disclosures in ASC 820 to
require, among other things, disclosures in interim periods of the inputs and
valuation techniques used to measure fair value as well as disclosure of the
hierarchy of the source of underlying fair value information on a disaggregated
basis by specific major category of investment. The standard was effective
prospectively beginning April 1, 2009. The adoption of this standard did not
have a material impact on the Company’s results of operations or financial
condition.
In April
2009, the FASB issued an accounting standard which modifies the requirements for
recognizing other-than-temporarily impaired debt securities and changes the
existing impairment model for such securities. The standard also requires
additional disclosures for both annual and interim periods with respect to both
debt and equity securities. Under the standard, impairment of debt securities
will be considered other-than-temporary if an entity (1) intends to sell the
security, (2) more likely than not will be required to sell the security before
recovering its cost, or (3) does not expect to recover the security’s entire
amortized cost basis (even if the entity does not intend to sell). The standard
further indicates that, depending on which of the above factor(s) causes the
impairment to be considered other-than-temporary, (1) the entire shortfall of
the security’s fair value versus its amortized cost basis or (2) only the credit
loss portion would be recognized in earnings while the remaining shortfall (if
any) would be recorded in other comprehensive income. The standard requires
entities to initially apply its provisions to previously other-than-temporarily
impaired debt securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulated other comprehensive income. The adoption of this standard did not
have a material impact on the Company’s results of operations or financial
condition.
In April
2009, the FASB issued an accounting standard regarding interim disclosures about
fair value of financial instruments. The standard essentially expands the
disclosure about fair value of financial instruments that were previously
required only annually to also be required for interim period reporting. In
addition, the standard requires certain additional disclosures regarding the
methods and significant assumptions used to estimate the fair value of financial
instruments. The adoption of this standard did not have a material impact on the
Company’s results of operations or financial condition.
In May
2009, the FASB issued a new accounting standard regarding subsequent events.
This standard incorporates into authoritative accounting literature certain
guidance that already existed within generally accepted auditing standards, with
the requirements concerning recognition and disclosure of subsequent events
remaining essentially unchanged. This guidance addresses events which occur
after the balance sheet date but before the issuance of financial statements.
Under the new standard, as under previous practice, an entity must record the
effects of subsequent events that provide evidence about conditions that existed
at the balance sheet date and must disclose but not record the effects of
subsequent events which provide evidence about conditions that did not exist at
the balance sheet date. For the Company, this standard was effective
beginning April 1, 2009 and adoption of this standard did not have a material
impact on the Company’s results of operations or financial
condition
In
June 2009, the FASB issued a new standard regarding the accounting for transfers
of financial assets amending the existing guidance on transfers of financial
assets to, among other things, eliminate the qualifying special-purpose entity
concept, include a new unit of account definition that must be met for transfers
of portions of financial assets to be eligible for sale accounting, clarify and
change the derecognition criteria for a transfer to be accounted for as a sale,
and require significant additional disclosure. The standard is effective for new
transfers of financial assets beginning January 1, 2010. The Company is
currently evaluating the impact of this standard, but does not expect to have a
material impact on the Company’s results of operations or financial
condition.
F-11
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
In June
2009, the FASB issued an accounting standard that revised the consolidation
guidance for variable-interest entities. The modifications include the
elimination of the exemption for qualifying special purpose entities, a new
approach for determining who should consolidate a variable-interest entity, and
changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The standard is effective January 1, 2010. The Company
is currently evaluating the impact of this standard, but does not expect it to
have a material impact on the Company’s results of operations or financial
condition.
In August
2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value,
which provides additional guidance on how companies should measure liabilities
at fair value under ASC 820. The ASU clarifies that the quoted price for an
identical liability should be used. However, if such information is not
available, a entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value. This ASU is effective October 1, 2009. Adoption
of this standard did not have a material impact on the Company’s results of
operations or financial condition.
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force, that provides
amendments to the criteria for separating consideration in multiple-deliverable
arrangements. As a result of these amendments, multiple-deliverable revenue
arrangements will be separated in more circumstances than under existing U.S.
GAAP. The ASU does this by establishing a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each
deliverable will be based on vendor-specific objective evidence if available,
third-party evidence if vendor-specific objective evidence is not available, or
estimated selling price if neither vendor-specific objective evidence nor
third-party evidence is available. A vendor will be required to determine its
best estimate of selling price in a manner that is consistent with that used to
determine the price to sell the deliverable on a standalone basis. This ASU also
eliminates the residual method of allocation and will require that arrangement
consideration be allocated at the inception of the arrangement to all
deliverables using the relative selling price method, which allocates any
discount in the overall arrangement proportionally to each deliverable based on
its relative selling price. Expanded disclosures of qualitative and quantitative
information regarding application of the multiple-deliverable revenue
arrangement guidance are also required under the ASU. The ASU does not apply to
arrangements for which industry specific allocation and measurement guidance
exists, such as long-term construction contracts and software
transactions. The ASU is effective January 1, 2011. The Company is
currently evaluating the impact of this standard on the Company’s results of
operations and financial condition.
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.
F-12
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
NOTE 3 -
INVENTORIES
Inventories
consist of:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Cactus stock
|
$ | 2,149,643 | $ | 2,810,861 | ||||
Other
raw materials and work-in-process
|
28,158 | 49,826 | ||||||
Finished
goods
|
311,761 | 515,948 | ||||||
Total
|
2,489,562 | 3,376,635 | ||||||
Less:
allowance for market adjustments to inventories
|
(48,658 | ) | - | |||||
Net
|
$ | 2,440,904 | $ | 3,376,635 |
NOTE 4 – OTHER
RECEIVABLES
Disposal of property, plant
and equipment
Other
receivables at December 31, 2009 and 2008 consist of:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Land
Center of Qitaihe
|
$ | 3,116,843 | $ | - | ||||
QitaiheTianhe
Pharmaceutical Co. Ltd
|
631,083 | - | ||||||
Total
|
$ | 3,747,926 | $ | - |
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).
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 is included within “Other Income (Expense) in the
Statement of Operations for the year ended December 31, 2009.
F-13
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
The
balance due from Land Center of Qitaihe and proceeds receivable from sale of
equipment are included in “Other receivables” totaling 25,618,801 RMB
($3,747,926) at December 31, 2009, of which the $631,083 receivable from the
sale of equipment was collected in January 2010 and $3,116,843 receivable from
the sale of the Qitaihe City Assets was collected in the first quarter
2010.
Due from related
party
At
December 31, 2009, other receivable includes due from related party, as
follows:
2009
|
2008
|
|||||||
Due
from Chengzhi Wang,
|
||||||||
General Manager and a
Director, interest
free, due on demand
|
$ | 244,636 | $ | - |
The
Company received full repayment from Mr. Chengzhi Wang in January
2010.
NOTE 5 - PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment, net consist of:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Buildings
|
$ | 2,920,766 | $ | 2,928,548 | ||||
Plant
equipment and machinery
|
4,642,249 | 4,654,625 | ||||||
Motor
vehicles
|
288,816 | 289,586 | ||||||
Furniture
and office equipment
|
11,138 | 13,817 | ||||||
Total
|
7,862,969 | 7,886,576 | ||||||
Less
accumulated depreciation
|
(2,112,093 | ) | (1,649,662 | ) | ||||
Net
|
$ | 5,750,876 | $ | 6,236,914 |
Depreciation
expense was $470,321and $485,366 for the years ended December 31, 2009 and 2008,
respectively, of which $392,999 and $408,351, were included in cost of sales,
respectively.
F-14
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
NOTE 6 - LAND USE
RIGHTS
Land use
rights, net consist of:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Harbin
Hainan Kangda
|
$ | 17,584,244 | $ | 8,026,397 | ||||
Taishan
Kangda
|
870,741 | 873,035 | ||||||
Total
|
18,454,985 | 8,899,432 | ||||||
Less
accumulated amortization
|
(473,151 | ) | (289,941 | ) | ||||
Net
|
$ | 17,981,834 | $ | 8,609,491 |
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. The land use rights were
considered placed in service and amortization of the cost is to begin being
charged to operations commencing after December 31, 2009, based upon an approval
received from the PRC by the Company on January 5, 2010.
Amortization
of land use rights was $184,365 and $73,761 for the years ended December 31,
2009 and 2008, respectively, of which $146,200 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 fiscal years ending December 31, and in the aggregate, are as
follows:
Years:
|
Amount
|
|||
2010
|
$ | 414,970 | ||
2011
|
414,970 | |||
2012
|
414,970 | |||
2013
|
414,970 | |||
2014
|
414,970 | |||
Thereafter
|
15,906,984 | |||
Total
|
$ | 17,981,834 |
F-15
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
NOTE 7 - INTANGIBLE
ASSETS
Intangible
assets, net consist of:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Patents
and licenses
|
$ | 1,370,831 | $ | 1,374,485 | ||||
Less
accumulated amortization
|
(1,054,531 | ) | (920,040 | ) | ||||
Net
|
$ | 316,300 | $ | 454,445 |
Patent
amortization expense was $137,227 and $134,924 for the years ended December 31,
2009 and 2008, respectively.
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:
Years:
|
Amount
|
|||
2010
|
$ | 137,227 | ||
2011
|
137,227 | |||
2012
|
41,846 | |||
2013
|
- | |||
2014
|
- | |||
Total
|
$ | 316,300 |
NOTE 8 - NOTE
PAYABLE
Note
payable consists of:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Note
payable to a financial institution, interest free, unsecured and due on
demand.
|
$ | 885,115 | $ | 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
$53,219 and $52,326 for the years ended December 31, 2009 and 2008,
respectively.
F-16
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
NOTE 9 – TAXES
PAYABLE
Taxes
payable consist of:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Value
added tax payable
|
$ | 74,419 | $ | 132,745 | ||||
Consumption
tax
|
151,751 | 54,397 | ||||||
Business
taxes
|
31,554 | - | ||||||
Miscellaneous
taxes and fees
|
4,153 | 681 | ||||||
Various
taxes subtotal
|
261,877 | 187,823 | ||||||
Corporation
income tax payable
|
527,264 | 383,032 | ||||||
Total
Taxes Payable
|
$ | 789,141 | $ | 570,855 |
NOTE 10 – 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 11) 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.
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”.
F-17
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
At
December 31, 2009, the fair values of the financial instruments consisted
of:
Shares / Warrants
|
Fair Value
|
|||||||
Series
A Convertible Preferred Stock
|
50,000 | $ | 135,500 | |||||
A
warrants
|
- | - | ||||||
B
warrants
|
1,500,000 | 2,839,500 | ||||||
C
warrants
|
500,000 | 992,500 | ||||||
D
warrants
|
600,000 | 1,090,860 | ||||||
Total
warrants
|
2,600,000 | 4,922,860 | ||||||
Total
Financial Instruments
|
2,650,000 | $ | 5,058,360 |
Below is
a reconciliation of the change in the fair values of the financial instruments
from January 1, 2009 through December 31, 2009.
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 | ||||||
Revaluation
charged to operations
|
- | 2,738,135 | ||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(416,667 | ) | (666,667 | ) | ||||
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 |
NOTE 11 - 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).
F-18
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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%.
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:
F-19
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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.
NOTE 12 – STOCK OPTIONS AND
WARRANTS TO PURCHASE COMMON STOCK
A summary
of stock option and warrant activity for the years ended December 31, 2009 and
2008 as 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 | ) | (1,250,000 | ) | ||||
Forfeited/expired/cancelled
|
(42,941 | ) | - | |||||
Outstanding
at December 31, 2009
|
250,000 | 2,600,000 |
Stock
options outstanding at December 31, 2009 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.
F-20
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
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.
Warrants
outstanding at December 31, 2009 consist of:
Date
|
Number
|
Number
|
Exercise
|
Expiration
|
|||||||||
Granted
|
Outstanding
|
Exercisable
|
Price
|
Date
|
|||||||||
March
21, 2008
|
1,500,000 | 1,500,000 | $ | 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
|
2,600,000 | 2,600,000 |
NOTE 13 – 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 $10,306,160 and
$10,185,183 at December 31, 2009 and 2008, respectively.
NOTE 14 - 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.
F-21
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
At
December 31, 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.
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:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Expected
tax at 35%
|
$ | 715,241 | $ | 2,361,601 | ||||
Non-deductible
expense from revaluation of Series A Preferred Stock and A, B, C, and D
warrants with characteristics of liabilities at fair value
|
2,774,164 | - | ||||||
Tax
effect of unutilized losses of US China Kangtai and BVI China
Kangtai
|
63,797 | 143,313 | ||||||
Tax
effect of PRC income taxed at lower rate
|
(1,989,781 | ) | (1,438,984 | ) | ||||
Actual
provision for income taxes
|
$ | 1,563,421 | $ | 1,065,930 |
NOTE 15 - 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 years ended
December 31, 2009 and 2008 were $ 8,056 and $12,210 respectively.
At
December 31, 2009, future minimum rental commitments under all non-cancellable
operating leases are due as follows:
F-22
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
For the Year Ended
|
||||
December 31,
|
||||
2010
|
$
|
6,272 | ||
2011
|
6,272 | |||
2012
|
6,272 | |||
2013
|
6,272 | |||
2014
|
2,175 | |||
Thereafter
|
52,212 | |||
Total
|
$ | 79,475 |
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. At April 13,
2010, the Contract is still active.
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 80,000
shares of its common stock to the consultant semi-annually, the first 40,000
shares (which were issued February 9, 2009) of which were to be issued within 3
months of signing the agreement.
General
and administrative expenses for the year ended December 31, 2009 includes
$16,831 incurred to the consultants.
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.
F-23
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
NOTE 16 – 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 December 31, 2009 and 2008 were located in
the PRC. Net sales for the periods presented were all derived from
PRC and Taiwan customers. During the years ended December 31, 2009 and 2008, two
customers accounted for 18.6% and 14.3% of net sales, and 12.6% and 15.9% of net
sales, respectively.
Net sales
consisted of:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Finished
goods
|
$ | 23,791,283 | $ | 16,500,200 | ||||
Cactus
stock
|
2,746,073 | 3,800,383 | ||||||
Total
|
$ | 26,537,356 | $ | 20,300,583 |
NOTE 17- STATUS 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.
At April
14, 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 provides 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. The Company, now not interested in pursuing the Agreement,
is currently attempting to negotiate an amicable resolution of the matter with
Seaside.
F-24
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
NOTE 18 - SUBSEQUENT
EVENTS
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 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
15).
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.
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-25