Attached files
file | filename |
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EX-5.1 - China Kangtai Cactus Bio-tech, Inc. | v191885_ex5-1.htm |
EX-23.1 - China Kangtai Cactus Bio-tech, Inc. | v191885_ex23-1.htm |
EX-10.37 - China Kangtai Cactus Bio-tech, Inc. | v191885_ex10-37.htm |
EX-10.36 - China Kangtai Cactus Bio-tech, Inc. | v191885_ex10-36.htm |
EX-10.32 - China Kangtai Cactus Bio-tech, Inc. | v191885_ex10-32.htm |
EX-10.31 - China Kangtai Cactus Bio-tech, Inc. | v191885_ex10-31.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
KANGTAI CACTUS BIO-TECH INC.
(Name of
small business issuer in its charter)
Nevada
|
2834
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87-0650263
|
(State
or Jurisdiction of
|
(Primary
Standard Industry
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Classification
Code Number)
|
Identification
No.)
|
99 Taibei
Road
Limin
Economic and Technological Development Zone
Harbin,
Heilongjiang Province
People’s
Republic of China 150025
011-86-451-57351189
ext. 126
(Address
and telephone number of principal executive offices)
CSC
Services of Nevada, Inc.
502 John
Street
Carson
City, NV 89706
(702)
882-3072
(Name,
address and telephone number of agent for service)
Copies
to:
Mark E.
Crone, Esq.
The Crone
Law Group
101
Montgomery Street, Suite 1950
San
Francisco, California 94104
(415)
955-8900
(415)
955-8910 (fax)
Approximate date of commencement of
proposed sale to the public: As soon as practicable after this
registration statement becomes effective.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended (the “Securities Act”), check the following box: x
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. ¨
Indicate
by check mark whether registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer (do not check if a smaller
reporting
company) ¨
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
Title of each class of
securities to be registered
|
Amount to be
registered (1)
|
Proposed
maximum
offering price
per unit
|
Proposed
maximum
aggregate
offering price
|
Amount of
registration fee(3)
|
||||||||||||
Common
Stock(4)
|
1,000,000 | $ | 1.29 |
(2)
|
$ | 1,290,000 | $ | 91.98 |
(1)
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Represents
shares of our common stock being registered for resale that have been
issued or will be issued to the selling stockholders named in the
registration statement.
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(2)
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Price
per share shown is the average of the high and low prices as reported on
the OTC Bulletin Board on July 28, 2010.
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(3)
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Estimated
solely for the purposes of computing the registration fee in accordance
with Rule 457 of the Securities Act of 1933, as
amended.
|
(4)
|
Represents
shares we may put to Kodiak Capital Group, LLC pursuant to the terms of an
Investment Agreement. That Investment Agreement provides that
we can put to Kodiak up to $1,000,000 worth of our shares of common
stock. The 1,000,000 shares represent our estimate of the
maximum number of shares we may issue under the Investment
Agreement. The actual number of shares issued may be lower then
1,000,000.
|
The registrant hereby amends
this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section
8(a) of the Securities Act of
1933 or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to
said Section 8(a), may determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT IS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND BECOMES EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE SALE IS NOT
PERMITTED.
SUBJECT
TO COMPLETION, DATED July 30, 2010
PROSPECTUS
CHINA
KANGTAI CACTUS BIO-TECH INC.
1,000,000
SHARES OF COMMON STOCK
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 1,000,000 shares of common stock subject to the terms of an
Investment Agreement with Kodiak Capital Group, LLC, a Delaware limited
liability company (“Kodiak”) pursuant to which we
have the right to “put” to Kodiak (the “Put”) up to $1 million in
shares of our common stock (the “Investment Agreement”). All of
the shares, when sold, will be sold by these selling stockholders.
We will
not receive any proceeds from the sale of our common stock by the selling
stockholders. However, we will receive proceeds from the sale of securities
pursuant to our exercise of the Put. We will bear all costs associated with this
registration.
Kodiak is
an “underwriter” within the meaning of the Securities Act of 1933, as amended
(the “Securities Act”)
in connection with the resale of our common stock under the Investment
Agreement. Kodiak will pay us 83% of the volume-weighted average price of our
common stock during five consecutive days immediately preceding and five
consecutive days immediately following the date of our notice to Kodiak of our
election to put shares pursuant to the Investment Agreement.
The
selling stockholders may sell these shares from time to time in the open market
at prevailing prices or in individually negotiated transactions, through agents
designated from time to time or through underwriters or dealers. We will not
control or determine the price at which the selling stockholders decide to sell
their shares. The selling stockholders may be deemed underwriters of the shares
of common stock, which they are offering. The selling stockholders will pay any
underwriting discounts and commissions in connection with their offering of our
shares of common stock.
Our
common stock is listed on the Over-The-Counter Bulletin Board under the symbol
“CKGT.OB.” The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on July 28, 2010, was
$1.25.
Investing in our securities involves
a high degree of risk. See “Risk Factors” in this Prospectus beginning on page 4
for a discussion of information that should be considered in connection with an
investment in our securities.
Kodiak is
an underwriter in connection with the resale of our common stock issued under
the Investment Agreement. No other underwriter or person has been engaged to
facilitate the sale of shares of common stock in this offering. None of the
proceeds from the sale of stock by the selling stockholders will be placed in
escrow, trust or any similar account.
We may
amend or supplement this prospectus from time to time by filing amendments or
supplements as required. You should read the entire prospectus and any
amendments or supplements carefully before you make your investment
decision.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date
of this prospectus is _________, 2010.
TABLE
OF CONTENTS
PAGE NO.
|
|
PROSPECTUS
SUMMARY
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1
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ABOUT
THIS OFFERING
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3
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RISK
FACTORS
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4
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SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
|
14
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USE
OF PROCEEDS
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14
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SELLING
STOCKHOLDERS
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14
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PLAN
OF DISTRIBUTION
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15
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DESCRIPTION
OF SECURITIES
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16
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INTERESTS
OF NAMED EXPERTS AND COUNSEL
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19
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DESCRIPTION
OF BUSINESS
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19
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MARKET
FOR COMMON EQUITY AND RELATED STOCHOLDER MATTERS
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27
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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28
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DIRECTORS
AND EXECUTIVE OFFICERS
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37
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EXECUTIVE
COMPENSATION
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40
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND CORPORATE
GOVERNANCE
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41
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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41
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DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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42
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LEGAL
MATTERS
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42
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EXPERTS
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42
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WHERE
YOU CAN FIND MORE INFORMATION
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42
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INDEX
TO FINANCIAL STATEMENTS
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43
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PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the "risk factors" section, the
financial statements and the notes to the financial statements. As used
throughout this prospectus, the terms “China Kangtai,” “CKGT,” the “Company,”
“we,” “us,” and “our” refer to China Kangtai Cactus Bio-Tech Inc., and all of
its subsidiaries and affiliated companies.
OUR
COMPANY
The
Company is principally engaged in the production, research and development,
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), Mudanjiang Kangwei Health Food Company, Ltd. and
Harbin Meijia Bio-Tech Co., 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.
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,
The
Company sells its products through a large network of distributors throughout
China consisting of 17 general distributors which in turn manage over 200 city
level distributing agents. This network of distributors accounts for about 76%
of the total sales by the Company. The Company began using this distribution
model in late 2006, which has resulted in a reduction in sales cost and allowed
the Company to penetrate the regional markets in China rapidly. Currently, the
Company sells its products through provincial and municipal distributors in
various regions of China, including, Heilongjiang, Beijing, Guangzhou, Tianjin,
Shenzhen, Jilin, Hebei, Liaoning, Shanxi, Hunan, Gansu, Shangdong, Suzhou,
Hangzhou, Fujian and Hubei.
Some of
our regional distributors are:
Harbin
Huadingwei Trading Company, Ltd.
Hunan
Green food Distribution Company, Ltd.
Jilin
Yanji Economic and Trading Company, Ltd.
Qindao
Furui Economic and Trading Company, Ltd.
Fujian
Tianyi Economic and Trading Company, Ltd.
1
Liaoning
Shenneng Trading and Developing Company, Ltd.
Suzhou
Hongde Trading Company, Ltd.
Lanzhou
Xinhui Trading Company, Ltd.
Hangzhou
Hesheng Economic and Trading Company, Ltd.
In
addition to the network of regional distributors, the Company also uses other
third party distributors who buy and resell our products to supermarkets, food
and nutrition stores, department store counters, liquor boutiques, hotels,
restaurants, and disco and karaoke bars. There are also consumer groups and
individuals, such as schools, factories, community groups and government
organizations, who buy our products directly from the Company for their own
consumption in large volumes on a regular basis.
Our
principal executive offices are located at 99 Taibei Road, Limin Economic and
Technological Development Zone, Harbin, Heilongjiang Province, People’s Republic
of China, and our telephone number at that address is 86-451-5735-1189. We
maintain Internet websites at www.xrz.cn (Chinese language) and
www.biocactus.com (English language). Information on our websites is not part of
this prospectus.
2
ABOUT
THIS OFFERING
This
prospectus relates to the resale by the selling stockholders identified in this
prospectus of up to 1,000,000 shares of common stock. All of the shares, when
sold, will be sold by these selling stockholders. The selling stockholders may
sell their shares of common stock from time to time at prevailing market prices.
This prospectus also covers such indeterminate number of additional shares of
common stock as may become issuable upon stock splits, stock dividends or
similar transactions in accordance with Rule 416 promulgated under the
Securities Act of 1933. We will not receive any proceeds from the sale of the
shares of common stock by the selling stockholders.
Common
Stock Offered:
|
Up
to 1,000,000 shares of our common stock issuable to Kodiak Capital Group,
LLC for investment banking services pursuant to an Investment Agreement
with us dated as of July 9, 2010 (the “Investment
Agreement”).
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Common
Stock Outstanding at July 19, 2010:
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21,227,527
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Use
of Proceeds:
|
We
will not receive any proceeds from the sale of the 1,000,000 shares of
common stock subject to sale by the selling stockholders under this
prospectus. However, we will receive proceeds from the sale of securities
pursuant to our exercise of the Put. Any net proceeds we receive from the
selling stockholders through our exercise of the Put will be used for
general corporate purposes.
|
|
OTC
Bulletin Board Symbol:
|
CKGT.OB
|
3
RISK
FACTORS
An
investment in our common stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this prospectus, including the
consolidated financial statements and notes thereto of our Company, before
deciding to invest in our common stock. The risks described below are not the
only ones facing our Company. Additional risks not presently known to us or that
we presently consider immaterial may also adversely affect our Company. If any
of the following risks occur, our business, financial condition and results of
operations and the value of our common stock could be materially and adversely
affected.
RISKS
RELATED TO OUR BUSINESS
WE
ARE A DEVELOPING COMPANY AND OUR PROSPECTS MUST BE CONSIDERED IN LIGHT OF OUR
SHORT OPERATING HISTORY AND SHORTAGE OF WORKING CAPITAL.
We are a
developing company with a short operating history. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by developing companies, including dealing with a shortage of
necessary funds in the very competitive marketplace in which the alcoholic and
non-alcoholic beverage business is carried on, as well as the many risks
commonly anticipated or experienced by mature companies. Our ability to sustain
profitable operations will be dependent on such factors as the success of our
business model and marketing strategy, market penetration of existing products,
competition, future brand additions, continued development of distribution
relationships and the availability of financing. No assurance can be given that
we will be able successfully to develop our business under the foregoing
conditions.
TO
MAXIMIZE OUR POTENTIAL FOR FUTURE GROWTH AND ACHIEVE OUR EXPECTED REVENUES, WE
NEED TO MANAGE GROWTH IN OUR CURRENT OPERATIONS AND TO ALIGN OUR
OPERATIONAL, FINANCIAL AND MANAGEMENT PROCESS AND SYSTEM TO U.S. STANDARDS AND
PRACTICES.
In order
to maximize potential growth in our current and potential markets, we
believe that we must expand our manufacturing and marketing operations. This
expansion will place a significant strain on our management and on our
operational, accounting, and information systems. We expect that as we continue
to grow we will need to improve our financial controls, operating procedures,
and management information systems to handle increased operations. We will also
need to effectively train, motivate, and manage our employees. Failure to manage
our growth could disrupt our operations and ultimately prevent us from
generating the revenues we expect. If we fail to generate any revenue, we can
maintain normal operations for approximately seven months with our current cash
and cash equivalents. In addition, to gain acceptance and interest of investors
in the U.S., the management will need to revise our operational, financial and
management process and system to align such process and systems to U.S.
standards and practices.
WE
CANNOT GUARANTEE THAT OUR ORGANIC GROWTH STRATEGY WILL BE
SUCCESSFUL.
One of
our growth strategies is to grow organically by increasing the distribution and
sales of our products in new markets within and outside of China. However, many
obstacles to entering new markets exist, such as the costs associated with
entering into new markets, developing and implementing effective marketing
efforts abroad and maintaining attractive foreign exchange ratios. We cannot,
therefore, assure you that we will be able to successfully overcome such
obstacles and establish our products in any additional markets. Our inability to
successfully implement our organic growth strategy may have a negative impact on
our growth strategy and on our future financial condition, results of operations
or cash flows.
4
IF
WE ARE NOT ABLE TO IMPLEMENT OUR STRATEGIES TO ACHIEVE OUR BUSINESS OBJECTIVES,
OUR BUSINESS OPERATIONS AND FINANCIAL PERFORMANCE MAY BE ADVERSELY
AFFECTED.
Our business plan and growth strategy
is based on currently prevailing circumstances and the assumption that certain
circumstances will or will not occur, as well as the inherent risks and
uncertainties involved in various stages of development. However, there is no
assurance that we will be successful in implementing our strategies or that our
strategies, even if implemented, will lead to the successful achievement of our
objectives. If we are not able to successfully implement our strategies, our
business operations and financial performance may be adversely
affected.
IF
WE NEED ADDITIONAL CAPITAL TO FUND OUR GROWING OPERATIONS, WE MAY NOT BE ABLE TO
OBTAIN SUFFICIENT CAPITAL AND MAY BE FORCED TO LIMIT THE SCOPE OF OUR
OPERATIONS.
As we
implement our growth strategies, we may experience increased capital needs and
we may not have enough capital to fund future operations without additional
capital investments. Our capital needs will depend on numerous factors,
including (1) our profitability; (2) the release of competitive products by our
competition; (3) the level of our investment in research and development; and
(4) the amount of our capital expenditures. We cannot assure you that we will be
able to obtain capital in the future to meet our needs.
If we
cannot obtain additional funding, we may be required to:
|
·
|
reduce our investments in
research and development;
|
|
·
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limit our marketing efforts;
and
|
|
·
|
decrease or eliminate capital
expenditures.
|
Such
reductions could have a material adverse effect on our business and our ability
to compete. Even if we do find a source of additional capital, we may not be
able to negotiate acceptable terms and conditions for receiving the additional
capital. Any future capital investments could dilute or otherwise materially and
adversely affect the holdings or rights of our existing shareholders. In
addition, new equity or convertible debt securities issued by us to obtain
financing could have rights, preferences and privileges senior to our common
stock. We cannot give you any assurance that any additional financing will be
available to us, or if available, will be on terms favorable to us.
WE
RELY HEAVILY ON OUR RELIABLE INDEPENDENT DISTRIBUTORS, AND THIS COULD AFFECT OUR
ABILITY TO EFFICIENTLY AND PROFITABILITY DISTRIBUTE AND MARKET OUR PRODUCTS, AND
MAINTAIN OUR EXISTING MARKETS AND EXPAND OUR BUSINESS INTO OTHER GEOGRAPHIC
MARKETS.
Our
ability to establish a market of our unique brands and products in new
geographic distribution areas, as well as maintain and expand existing markets,
is dependent on our ability to establish and maintain successful relationships
with our developing independent distributors strategically positioned to serve
those areas. Many of our distributors sell and distribute competing products,
including non-alcoholic and alcoholic beverages, and our products may represent
a small portion of their business. To the extent that our distributors are
distracted from selling our products or do not expend sufficient efforts in
managing and selling our products, our sales will be adversely affected. Our
ability to maintain our distribution network and attract additional distributors
will depend on a number of factors, many of which are outside our control. Some
of these factors include:
|
·
|
The level of demand for our
brands and products in a particular distribution
area
|
|
·
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Our ability to price our products
at levels competitive with those offered by competing
products
|
|
·
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Our ability to deliver products
in the quantity and at the time ordered by
distributors.
|
We cannot
ensure that we will be able to meet all or any of these factors in any of our
current or prospective geographic areas of distribution. Our inability to
achieve any of these factors in a geographic distribution area will have a
material adverse effect on our relationships with our distributors in that
particular geographic area, thus limiting our ability to expand our market,
which will likely adversely affect our revenues and financial
results.
5
WE
RELY ON A LIMITED NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR REVENUE. IF OUR
CUSTOMERS CANCEL THEIR COMMITMENTS OR DO NOT PURCHASE OUR PRODUCTS IN CONNECTION
WITH FUTURE PRODUCT LINES, OUR REVENUE COULD SIGNIFICANTLY DECREASE, WHICH WOULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND FUTURE GROWTH.
Currently
a majority of our sales are derived from customers in the People’s Republic of
China (the “PRC”). Additionally, one of our customers accounts for a sizeable
portion of our net revenue. Specifically, Harbin Huadingwei Trading Company,
Ltd. represented approximately 18% of our total sales in 2009 and it accounted
for approximately 13% of our total sales in 2008. No other customer accounted
for more than 10% of our total revenue during any of these periods. In 2007,
Harbin Huadingwei Trading Company, Ltd. accounted for 22% of our total
revenue.
WE
COMPETE IN AN INDUSTRY THAT IS BRAND-CONSCIOUS, SO BRAND NAME RECOGNITION AND
ACCEPTANCE OF OUR PRODUCTS ARE CRITICAL TO OUR SUCCESS.
Our
business is substantially dependent upon awareness and market acceptance of our
products and brands by our targeted consumers. In addition, our business depends
on acceptance by our independent distributors of our brands as beverage brands
that have the potential to provide incremental sales growth rather than reduce
distributors’ existing beverage sales. Although we believe that we have been
relatively successful towards establishing our brands as recognizable to date in
both the alcoholic and non-alcoholic beverage industry, it may be too early in
the product life cycle of these brands to determine whether our products and
brands will achieve and maintain satisfactory levels of acceptance by
independent distributors and retail consumers.
WE
COMPETE IN AN INDUSTRY CHARACTERIZED BY RAPID CHANGES IN CONSUMER PREFERENCES,
SO OUR ABILITY TO CONTINUE DEVELOPING NEW PRODUCTS TO SATISFY OUR CONSUMERS'
CHANGING PREFERENCES WILL DETERMINE OUR LONG-TERM SUCCESS.
Our
current market distribution and penetration may be limited with respect to the
population as a whole to determine whether the brand has achieved initial
consumer acceptance, and there can be no assurance that this acceptance will
ultimately be achieved. In addition, customer preferences are also affected by
factors other than taste, such as the recent media focus on obesity in youth. If
we do not adjust to respond to these and other changes in customer preferences,
our sales may be adversely affected.
A
DECLINE IN THE CONSUMPTION OF ALCOHOL COULD ADVERSELY AFFECT OUR
BUSINESS.
There
have been periods in history during which alcohol consumption declined
substantially. A decline in alcohol consumption could occur in the future due to
a variety of factors including: (i) a general decline in economic conditions,
(ii) increased concern about health consequences and concerns about drinking and
driving, (iii) a trend toward other beverages such as juices and water, (iv)
increased activity of anti-alcohol consumer groups, and (v) increase federal,
state or foreign excise taxes. A decline in the consumption of alcohol would
likely negatively affect our business.
THE
LOSS OF KEY PERSONNEL WOULD DIRECTLY AFFECT OF EFFICIENCY AND ECONOMIC
RESULTS.
We are
dependent upon the creative skills and leadership of our founder, Jinjing Wang,
who serves as our President and Chief Executive Officer, as well as Hong Bu, our
Chief Financial Officer, and the management, financial and operational skills of
Chengzhi Wang, our General Manager. The loss of the services of any of our
officers could have a material adverse effect on our business and operations,
including our ability to develop and execute a long-term, profitable business
plan.
6
COMPETITION
FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT OUR REVENUES AND
PROFITABILITY.
We
compete with other companies, many of whom are developing, or can be expected to
develop, products similar to ours. 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 cactus industry in China is
not highly competitive, and no published data is available regarding the
Company’s relative position in the markets in which it operates. Although no
major competitor currently competes with the Company across its entire product
line, competitive products are available from a number of different vendors
offering features similar to those of the Company’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. We intend to continue
to create greater brand awareness for our brand name so that we can successfully
compete with our competitors. We cannot guarantee that we will be able to
compete effectively with current or future competitors or that the competitive
pressures we face will not harm our business.
WE
DEPEND ON EIGHT SUPPLIERS FOR OUR SUPPLY OF RAW MATERIALS AND WRAPPAGE, WHICH IS
A KEY COMPONENT OF OUR PRODUCTS. IF ANY OF OUR EIGHT SUPPLIERS CANCELS ITS
COMMITMENTS OR IS UNABLE TO MEET OUR DEMAND AND/OR REQUIREMENTS, OUR BUSINESS
COULD BE HARMED.
We rely
on a limited number of suppliers to produce cactus based products, which is a
key component of our products. For the three months ended March 31, 2010,
four suppliers represented approximately 46% of our purchases from all of our
suppliers, and for the three months ended March 31, 2009, four suppliers
represented approximately 51% of purchases from all of our suppliers. For the
years ended December 31, 2009, 2008 and 2007, four suppliers represented
approximately 51%, 53% and 55%, respectively, of our purchases from all of our
suppliers. If any of our suppliers were to cancel or materially change its
commitment with us or fail to meet the quality or delivery requirements
needed to satisfy customer orders for our products, we could lose customer
orders, be unable to develop or sell our products cost-effectively or on a
timely basis, if at all, and have significantly decreased revenue, which would
harm our business, operating results and financial condition.
IF
WE ARE UNABLE TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR
COMPETITIVE POSITION COULD BE HARMED AND WE COULD BE REQUIRED TO INCUR
SIGNIFICANT EXPENSES TO ENFORCE OUR RIGHTS.
We depend
on our ability to protect our proprietary technology. We rely on trade secrets,
patent, and trademark laws and confidentiality agreements with employees and
third parties, all of which offer only limited protection. We hold 18 PRC
patents relating to our products. The terms of these patents will begin to
expire in 2022, at which time we could become more vulnerable to increased
competition. In addition, we have applied for 12 new PRC patents. We do not know
whether any of our pending patent applications will result in the issuance of
patents or whether the examination process will require us to narrow our claims,
and even if patents are issued, they may be contested, circumvented or
invalidated. Protecting against the unauthorized use of our products,
trademarks and other proprietary rights is expensive, difficult and, in some
cases, impossible. Litigation may be necessary in the future to enforce or
defend our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. This litigation could result in substantial
costs and diversion of management resources, either of which could harm our
business.
CLAIMS
BY OTHERS THAT WE INFRINGE THEIR PROPRIETARY RIGHTS COULD HARM OUR
BUSINESS.
Third
parties could claim that our technology infringes their proprietary rights. In
addition, we may be contacted by third parties suggesting that we obtain a
license to certain of their intellectual property rights they may believe we are
infringing. We expect that infringement claims against us may increase as the
number of products and competitors in our market increases and overlaps occur.
In addition, to the extent that we gain greater visibility, we believe that we
will face a higher risk of being the subject of intellectual property
infringement claims. Any claim of infringement by a third party, even those
without merit, could cause us to incur substantial costs defending against the
claim, and could distract our management from our business. Furthermore, a party
making such a claim, if successful, could secure a judgment that requires us to
pay substantial damages. A judgment against us could also include an injunction
or other court order that could prevent us from offering our products. In
addition, we might be required to seek a license for the use of such
intellectual property, which may not be available on commercially reasonable
terms, or at all. Alternatively, we may be required to develop non-infringing
technology, which could require significant effort and expense and may
ultimately not be successful. Any of these events could seriously harm our
business.
7
IF
WE FAIL TO EXPAND OUR MANUFACTURING FACILITIES TO MEET OUR FUTURE GROWTH, OUR
OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
Our
existing manufacturing facilities are capable of meeting current demand and
demand for the foreseeable future. However, the future growth of our business
depends on our ability to successfully expand our manufacturing and research
& development facilities. We intend to add new facilities or expand existing
facilities as the demand for our products increases. However, we cannot ensure
that suitable additional or substitute space will be available to accommodate
any such expansion of our operations.
WE
MAY INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH U.S. CORPORATE GOVERNANCE
AND ACCOUNTING REQUIREMENTS.
We may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the Securities and Exchange Commission and the OTCBB.
We expect all of these applicable rules and regulations to increase our legal
and financial compliance costs and to make some activities more time-consuming
and costly. We also expect that these applicable rules and regulations may make
it more difficult and more expensive for us to obtain director and officer
liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain
qualified individuals to serve on our board of directors or as executive
officers. We are currently evaluating and monitoring developments with respect
to these newly applicable rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
WE
MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS, CAUSE
DILUTION TO OUR STOCKHOLDERS AND HARM OUR FINANCIAL CONDITION AND OPERATING
RESULTS.
In the
future, we may acquire companies or assets that we believe may enhance our
market position. We may not be able to find suitable acquisition candidates and
we may not be able to complete acquisitions on favorable terms, if at all. If we
do complete acquisitions, we cannot assure you that they will ultimately
strengthen our competitive position or that they will not be viewed negatively
by customers, financial markets or investors. In addition, any acquisitions that
we make could lead to difficulties in integrating personnel and operations from
the acquired businesses and in retaining and motivating key personnel from these
businesses. Acquisitions may disrupt our ongoing operations, divert management
from day-to-day responsibilities, increase our expenses and harm our operating
results or financial condition. Future acquisitions may reduce our cash
available for operations and other uses and could result in an increase in
amortization expense related to identifiable assets acquired, potentially
dilutive issuances of equity securities or the incurrence of debt, any of which
could harm our business, operating results and financial condition.
WE
MAY HAVE DIFFICULTY RAISING NECESSARY CAPITAL TO FUND OPERATIONS AS A RESULT OF
MARKET PRICE VOLATILITY OF OUR SHARES OF COMMON STOCK.
If our
business development plans are successful, we may require additional financing
to continue to develop and exploit existing and new technologies and to expand
into new markets. The exploitation of our technologies may, therefore, be
dependent upon our ability to obtain equity financing through debt and equity or
other means. In recent years, the securities markets in the United States have
experienced a high level of price and volume volatility, and the market price of
securities of many companies have experienced wide fluctuations that have not
necessarily been related to the operations, performance, underlying asset values
or prospects of such companies.
8
For these
reasons, our shares of common stock can also be expected to be subject to
volatility resulting from purely market forces over which we will have no
control. Such volatility may make it more difficult to find investors willing to
invest in our common stock, or to negotiate equity financing or terms that are
acceptable to us.
RISKS
RELATING TO THE PEOPLE'S REPUBLIC OF CHINA
THERE
COULD BE CHANGES IN GOVERNMENT REGULATIONS TOWARDS THE NUTRACEUTICAL AND HEALTH
SUPPLEMENT INDUSTRIES THAT MAY ADVERSELY AFFECT OUR BUSINESS.
The
manufacture and sale of nutraceutical products in the PRC is heavily regulated
by many state, provincial and local authorities. These regulations significantly
increase the difficulty and costs involved in obtaining and maintaining
regulatory approvals for marketing new and existing products. Our future growth
and profitability depend to a large extent on our ability to obtain regulatory
approvals. The State Food and Drug Administration of China recently implemented
new guidelines for licensing of nutraceutical products. All existing
manufacturers with licenses, which are currently valid under the previous
guidelines, are required to apply for the “Food Production Permit,” and we
received approvals in September 2005. However, should we fail to maintain the
Food Production Permit under the new guidelines in the future; our businesses
would be materially and adversely affected. Moreover, the laws and regulations
regarding acquisitions of the nutraceutical industry in the PRC may also change
and may significantly impact our ability to grow through
acquisitions.
CURRENCY
CONVERSION AND EXCHANGE RATE VOLATILITY COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
The PRC
government imposes control over the conversion of Renminbi into foreign
currencies. Under the current unified floating exchange rate system, the
People's Bank of China publishes an exchange rate, which we refer to as the
People's Bank of China exchange rate, based on the previous day's dealings in
the inter-bank foreign exchange market. Financial institutions authorized to
deal in foreign currency may enter into foreign exchange transactions at
exchange rates within an authorized range above or below the People's Bank of
China exchange rate according to market conditions. Pursuant to the Foreign
Exchange Control Regulations of the PRC issued by the State Council which came
into effect on April 1, 1996, and the Regulations on the Administration of
Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect
on July 1, 1996, regarding foreign exchange control, conversion of Renminbi into
foreign exchange by Foreign Investment Enterprises, for use on current account
items, including the distribution of dividends and profits to foreign investors,
is permissible. Foreign Investment Enterprises are permitted to convert their
after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in the PRC. Conversion of
Renminbi into foreign currencies for capital account items, including direct
investment, loans, and security investment, is still under certain restrictions.
On January 14, 1997, the State Council amended the Foreign Exchange Control
Regulations and added, among other things, an important provision, which
provides that the PRC government shall not impose restrictions on recurring
international payments and transfers under current account items.
Enterprises
in the PRC (including Foreign Investment Enterprises) which require foreign
exchange for transactions relating to current account items, may, without
approval of the State Administration of Foreign Exchange, or SAFE, effect
payment from their foreign exchange account or convert and pay at the designated
foreign exchange banks by providing valid receipts and proofs.
MOST
OF OUR ASSETS ARE LOCATED IN CHINA, ANY DIVIDENDS OF PROCEEDS FROM LIQUIDATION
IS SUBJECT TO THE APPROVAL OF THE RELEVANT CHINESE GOVERNMENT
AGENCIES.
Our
assets are predominantly located inside China. Under the laws governing foreign
invested enterprises in China, dividend distribution and liquidation are allowed
but subject to special procedures under the relevant laws and rules. Any
dividend payment will be subject to the decision of the board of directors and
subject to foreign exchange rules governing such repatriation. Any liquidation
is subject to both the relevant government agency's approval and supervision as
well the foreign exchange control. This may generate additional risk for our
investors in case of dividend payment and liquidation.
9
CHINA’S
ECONOMIC POLICIES COULD AFFECT OUR BUSINESS.
Substantially
all of our assets are located in China and substantially all of our revenue is
derived from our operations in China. Accordingly, our results of operations and
prospects are subject, to a significant extent, to the economic, political and
legal developments in China.
While
China's economy has experienced a significant growth in the past twenty years,
growth has been irregular, both geographically and among various sectors of the
economy. The Chinese government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall economy of China, but may also have a negative effect on us.
For example, our operating results and financial condition may be adversely
affected by the government control over capital investments or changes in tax
regulations.
The
economy of China has been transitioning from a planned economy to a more
market-oriented economy. In recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform and
the reduction of state ownership of productive assets and the establishment of
corporate governance in business enterprises; however, a substantial portion of
productive assets in China are still owned by the Chinese government. In
addition, the Chinese government continues to play a significant role in
regulating industry development by imposing industrial policies. It also
exercises significant control over China's economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies.
WE
MAY FACE OBSTACLES FROM THE COMMUNIST SYSTEM IN THE PEOPLE'S REPUBLIC OF
CHINA.
Foreign
companies conducting operations in The People's Republic of China face
significant political, economic and legal risks. The Communist regime in The
People's Republic of China, including a stifling bureaucracy may hinder Western
investment.
WE
MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND FINANCIAL
CONTROLS IN THE PEOPLE'S REPUBLIC OF CHINA.
The
People's Republic of China historically has been deficient in Western style
management and financial reporting concepts and practices, as well as in modern
banking, computer and other control systems. We may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in The People's
Republic of China. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
BECAUSE
OUR ASSETS AND OPERATIONS ARE LOCATED IN CHINA, YOU MAY HAVE DIFFICULTY
ENFORCING ANY CIVIL LIABILITIES AGAINST US UNDER THE SECURITIES AND OTHER LAWS
OF THE UNITED STATES OR ANY STATE.
We are a
holding company, and all of our assets are located in the People’s Republic of
China. In addition, our directors and officers are non-residents of the United
States, and all or a substantial portion of the assets of these non-residents
are located outside the United States. As a result, it may be difficult for
investors to effect service of process within the United States upon these
non-residents, or to enforce against them judgments obtained in United States
courts, including judgments based upon the civil liability provisions of the
securities laws of the United States or any state.
There is
uncertainty as to whether courts of the People’s Republic of China would
enforce:
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·
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Judgments
of United States courts obtained against us or these non-residents based
on the civil liability provisions of the securities laws of the United
States or any state; or
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10
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·
|
In original actions brought in
the People’s Republic of China, liabilities against us or non-residents
predicated upon the securities laws of the United States or any state.
Enforcement of a foreign judgment in the People’s Republic of China also
may be limited or otherwise affected by applicable bankruptcy, insolvency,
liquidation, arrangement, moratorium or similar laws relating to or
affecting creditors' rights generally and will be subject to a statutory
limitation of time within which proceedings may be
brought.
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THE
PRC LEGAL SYSTEM EMBODIES UNCERTAINTIES, WHICH COULD LIMIT LAW ENFORCEMENT
AVAILABILITY.
The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, decided legal cases have little precedence. In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation over the past 27
years has significantly enhanced the protections afforded to various forms of
foreign investment in China. Each of our PRC operating subsidiaries and
affiliates is subject to PRC laws and regulations. However, these laws and
regulations change frequently and the interpretation and enforcement involve
uncertainties. For instance, we may have to resort to administrative and court
proceedings to enforce the legal protection that we are entitled to by law or
contract. However, since PRC administrative and court authorities have
significant discretion in interpreting statutory and contractual terms, it may
be difficult to evaluate the outcome of administrative court proceedings and the
level of law enforcement that we would receive in more developed legal systems.
Such uncertainties, including the inability to enforce our contracts, could
affect our business and operation. In addition, intellectual property rights and
confidentiality protections in China may not be as effective as in the United
States or other countries. Accordingly, we cannot predict the effect of future
developments in the PRC legal system, particularly with regard to the industries
in which we operate, including the promulgation of new laws. This may include
changes to existing laws or the interpretation or enforcement thereof, or the
preemption of local regulations by national laws. These uncertainties could
limit the availability of law enforcement, including our ability to enforce our
agreements with the government entities and other foreign
investors.
RISKS
RELATED TO CORPORATE AND STOCK MATTERS
OUR
CORPORATE ACTIONS ARE SUBSTANTIALLY CONTROLLED BY OUR PRINCIPAL
SHAREHOLDERS.
Our
principal shareholders, which include our officers and directors, own
approximately 49% of our outstanding shares of common stock as of July 19, 2010.
These shareholders, acting individually or as a group, could exert substantial
influence over matters such as electing directors and approving mergers or other
business combination transactions. In addition, because of the percentage of
ownership and voting concentration in these principal shareholders and their
affiliated entities, elections of our board of directors will generally be
within the control of these shareholders. While all of our shareholders are
entitled to vote on matters submitted to our shareholders for approval, the
concentration of shares and voting control presently lies with these principal
shareholders. As such, it would be difficult for shareholders to propose and
have approved proposals not supported by management. There can be no assurances
that matters voted upon by our officers and directors in their capacity as
shareholders will be viewed favorably by all of our shareholders.
FUTURE
EQUITY TRANSACTIONS, INCLUDING EXERCISE OF WARRANTS, COULD RESULT IN
DILUTION.
From time
to time the Company may sell restricted stock and warrants to investors in
private placements in negotiated transactions to raise capital. The stock may be
sold at a greater discount to market prices compared to a public stock offering,
and the exercise price of the warrants sometimes is at or lower than market
prices. These transactions cause dilution to existing
shareholders.
11
THE
LIMITED TRADING VOLUME IN OUR STOCK MAY CAUSE VOLATILITY IN THE MARKET PRICE OF
OUR COMMON STOCK.
Our
common stock is currently quoted on a limited basis on the OTCBB under the
symbol, "CKGT.OB." The quotation of our common stock on the OTCBB does not
assure that a meaningful, consistent and liquid trading market currently exists,
and in recent years, such market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of many smaller
companies like us. Our common stock is thus subject to volatility and for the
last two years, the price of our common stock has fluctuated between $3.00 and
$0.12. In the absence of an active trading market:
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·
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investors may have difficulty
buying and selling or obtaining market
quotations;
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·
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market visibility for our common
stock may be limited; and
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·
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a lack of visibility for our
common stock may have a depressive effect on the market for our common
stock.
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OUR
STOCK IS A PENNY STOCK. TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC'S
PENNY STOCK REGULATIONS WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL
OUR STOCK.
Our stock
is a penny stock. The SEC has adopted Rule 15g-9 which generally defines "penny
stock" to be any equity security that has a market price (as defined) less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Our securities are covered by the penny stock rules, which
impose additional sales practice requirements on broker-dealers who sell to
persons other than established customers and "accredited investors". The term
"accredited investor" refers generally to institutions with assets in excess of
$5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the SEC which provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with tthe customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock no otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny stock rules discourage investor interest in and limit the
marketability of our common stock.
NASD SALES
PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR
STOCK.
Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document
before effecting any transaction in a penny stock for the investor's
account.
Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or
otherwise.
12
SHARES
ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK, AS THE FUTURE SALE OF A SUBSTANTIAL AMOUNT OF OUR RESTRICTED STOCK IN THE
PUBLIC MARKETPLACE COULD REDUCE THE PRICE OF OUR COMMON STOCK.
From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act ("Rule
144"), subject to certain limitations. In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who has satisfied a
one-year holding period may, under certain circumstances, sell within any
three-month period a number of securities which does not exceed the greater of
1% of the then outstanding shares of common stock or the average weekly trading
-volume of the class during the four calendar weeks prior to such sale. Rule 144
also permits, under certain circumstances, the sale of securities, without any
limitations, by a non-affiliate of our company that has satisfied a two-year
holding period. Any substantial sale of common stock pursuant to Rule 144 or
pursuant to any resale prospectus may have an adverse effect on the market price
of our securities.
If we or
our independent registered public accountants cannot attest our adequacy in the
internal control measures over our financial reporting, as required by Section
404 of the U.S. Sarbanes-Oxley Act, for the fiscal year ending December 31,
2010, we may be adversely affected.
As a
public company, we are subject to report our internal control structure and
procedures for financial reporting in our annual reports on Form 10-KSB, as a
requirement of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the U.S.
Securities and Exchange Commission (the "SEC"). The report must contain an
assessment by management about the effectiveness of our internal controls over
financial reporting. Moreover, the independent registered public accountants of
our Company must attest to and report on management's assessment of the same.
Even if our management attests to our internal control measures to be effective,
our independent registered public accountants may not be satisfied with our
internal control structure and procedures. We cannot guarantee the outcome of
the report and it could result in an adverse impact on us in the financial
marketplace due to the loss of investor confidence in the reliability of our
financial statements, which could negative influence to our stock market
price.
13
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of
the statements under “Prospectus Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
“Business,” and elsewhere in this prospectus constitute forward-looking
statements. These statements involve risks known to us, significant
uncertainties, and other factors which may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by those forward-looking statements.
You can
identify forward-looking statements by the use of the words “may,” “will,”
“should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “intends,” “potential,” “proposed,” or “continue” or the negative of
those terms. These statements are only predictions. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined above. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although
we believe that the exceptions reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of our common stock by the selling
stockholders. However, we will receive proceeds from the sale of our common
stock to Kodiak pursuant to the Investment Agreement. We may also receive the
sale price of any common stock we sell to the selling stockholders upon exercise
of outstanding warrants.
Unless
otherwise indicated in the applicable prospectus supplement, we anticipate that
any net proceeds from the sale of securities that we offer under this prospectus
and any accompanying prospectus supplement will be used for general corporate
purposes. Such general purposes may include acquisitions, investments, repayment
of debt, capital expenditures, repurchase of our capital stock and any other
purposes that we may specify in any prospectus supplement. We may invest the net
proceeds temporarily until we use them for their stated purpose.
THE
SELLING STOCKHOLDER
The
following table sets forth as of July 19, 2010, information regarding the
current beneficial ownership of our common stock by the persons identified,
based on information provided to us by them, which we have not independently
verified. Although we have assumed for purposes of the table that the selling
stockholders will sell all of the shares offered by this prospectus, because
they may from time to time offer all or some of their shares under this
prospectus or in another manner, no assurance can be given as to the actual
number of shares that will be resold by the selling stockholder (or any of
them), or that will be held after completion of the sales. In addition, a
selling stockholder may have sold or otherwise disposed of shares in
transactions exempt from the registration requirements of the Securities Act or
otherwise since the date he or she provided information to us. The selling
stockholders are not making any representation that the shares covered by this
prospectus will be offered for sale. Except as set forth below, no selling
stockholder has held any position nor had any material relationship with us or
our affiliates during the past three years.
Name of selling security holder
|
Amount of
securities of the
class owned by the
security holder
before this
offering
|
Amount to be
offered for the
security holder’s
account
|
Amount of the
class to be owned
by security holder
after the offering
is complete(1)
|
Percentage of the
class to be owned by
the security holder
after the offering is
complete(2)
|
|||||||||
Kodiak
Capital Group, LLC(3)
|
0 |
Up
to 1,000,000
shares
|
0 | 0 | % |
(1)
|
Assumes
that all securities registered will be
sold.
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14
(2)
|
Applicable
percentage ownership is based on 21,227527 shares of common stock
outstanding as of July 19, 2010, together with securities exercisable or
convertible into shares of common stock within 60 days July 19, 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 July
19, 2010 are 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.
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(3)
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Pursuant
to Put as set forth in the Investment Agreement. The natural person with
voting and dispositive power for Kodiak Capital Group LLC is Ryan
Hodson.
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PLAN
OF DISTRIBUTION
This
prospectus includes 1,000,000 shares of common stock offered by the selling
stockholder.
The
selling stockholder and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
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·
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ordinary brokerage transactions
and transactions in which the broker-dealer solicits
Investors;
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|
block trades in which the
broker-dealer will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
·
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
·
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
·
|
privately negotiated
transactions;
|
|
·
|
to cover short sales made after
the date that this Registration Statement is declared effective by the
Commission;
|
|
·
|
broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a
stipulated price per share;
|
|
·
|
a combination of any such methods
of sale; and
|
|
·
|
any other method permitted
pursuant to applicable law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of common stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
15
Upon the
Company being notified in writing by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of common
stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such selling stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such shares of common stock were sold, (iv)the commissions
paid or discounts or concessions allowed to such broker-dealer(s), where
applicable, (v) that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus,
and (vi) other facts material to the transaction. In addition, upon the Company
being notified in writing by a selling stockholder that a donee or pledgee
intends to sell more than 500 shares of common stock, a supplement to this
prospectus will be filed if then required in accordance with applicable
securities law.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
Securities will be paid by the selling stockholder and/or the purchasers. Each
selling stockholder has represented and warranted to the Company that it
acquired the securities subject to this registration statement in the ordinary
course of such selling stockholder’s business and, at the time of its purchase
of such securities such selling stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such
securities.
The
Company has advised each selling stockholder that it may not use shares
registered on this Registration Statement to cover short sales of common stock
made prior to the date on which this Registration Statement shall have been
declared effective by the Commission. In addition, the Company has advised each
selling stockholder that the Commission currently takes the position that
coverage of short sales “against the box” prior to the effective date of the
registration statement of which this prospectus is a part would be a violation
of Section 5 of the Securities Act, as described in Item 65, Section A, of the
Manual of Publicly Available Telephone Interpretations, dated July 1997,
compiled by the Office of Chief Counsel, Division of Corporate
Finance.
If a
selling stockholder uses this prospectus for any sale of the common stock, it
will be subject to the prospectus delivery requirements of the Securities Act.
The selling stockholders will be responsible to comply with the applicable
provisions of the Securities Act and Exchange Act, and the rules and regulations
thereunder promulgated, including, without limitation, Regulation M, as
applicable to such selling stockholders in connection with resales of their
respective shares under this Registration Statement.
The
Company is paying all fees and expenses incident to the registration of the
shares, excluding brokerage commissions or underwriter discounts. The selling
stockholders, alternatively, may sell all or any part of the shares offered in
this prospectus through an underwriter. No selling stockholder has entered into
any agreement with a prospective underwriter and there is no assurance that any
such agreement will be entered into.
The
Company has agreed to indemnify the selling stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities Act
pursuant to the Investment Agreement.
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 200,000,000 shares of common stock, par
value $0.001 per share, and 200,000,000 shares of preferred stock, par value
$0.001 per share. As of July 16, 2010, 21,227,527 shares of common stock were
issued and outstanding and 50,000 shares of Series A Convertible Preferred Stock
were issued and outstanding. In addition, at such date, 3,150,000 shares of
common stock were reserved for issuance upon the issuance of up to 1,000,000
shares of common stock to Kodiak pursuant to the Investment Agreement and
registered under this registration statement, the conversion of the Series A
Convertible Preferred Stock and the exercise of outstanding common stock
purchase warrants and common stock purchase options.
16
Common
Stock
Voting, Dividend and Other
Rights. Each outstanding share of common stock entitles the holder to one
vote on all matters presented to the shareholders for a vote. Holders of shares
of common stock have no cumulative voting, preemptive, subscription or
conversion rights. All shares of common stock to be issued pursuant to this
registration statement will be duly authorized, fully paid and non-assessable.
Our Board of Directors determines if and when distributions may be paid out of
legally available funds to the holders. To date, we have not declared any
dividends with respect to our common stock. Our declaration of any cash
dividends in the future will depend on our Board of
Directors’ determination as to whether, in light of our earnings, financial
position, cash requirements and other relevant factors existing at the time, it
appears advisable to do so. We do not anticipate paying cash dividends on the
common stock in the foreseeable future. However, while the Series A Convertible
Preferred Stock is outstanding, no dividends shall be payable with respect to
the common stock.
Rights Upon Liquidation. Upon
liquidation, subject to the right of any holders of the preferred stock to
receive preferential distributions, each outstanding share of common stock may
participate pro rata in the assets remaining after payment of, or adequate
provision for, all our known debts and liabilities.
Majority Voting. The holders
of a majority of the outstanding shares of common stock constitute a quorum at
any meeting of the shareholders. A plurality of the votes cast at a meeting of
shareholders elects our directors. The common stock does not have cumulative
voting rights. Therefore, the holders of a majority of the outstanding shares of
common stock can elect all of our directors. In general, a majority of the votes
cast at a meeting of shareholders must authorize shareholder actions other than
the election of directors. Most amendments to our certificate of
incorporation require the vote of the holders of a majority of all outstanding
voting shares.
Preferred
Stock
Authority of Board of Directors to
Create Series and Fix Rights. Under our certificate of incorporation, as
amended, our Board of Directors can issue up to 200,000,000 shares of preferred
stock from time to time in one or more series. The Board of Directors is
authorized to fix by resolution as to any series the designation and number of
shares of the series, the voting rights, the dividend rights, the redemption
price, the amount payable upon liquidation or dissolution, the conversion
rights, and any other designations, preferences or special rights or
restrictions as may be permitted by law. Unless the nature of a particular
transaction and the rules of law applicable thereto require such approval, our
Board of Directors has the authority to issue these shares of preferred stock
without shareholder approval. Our Board of Directors has not designated any
shares of the authorized but unissued preferred stock.
Series
A Convertible Preferred Stock
We
authorized 1,250,000 shares of preferred stock, designated as Series A
Convertible Preferred Stock, $0.001 par value per share, of which 1,200,000
shares have been converted into common stock and 50,000 shares are currently
issued and outstanding.
Voting, Dividend and Other
Rights. The holders of Series A Convertible Preferred Stock have no
voting rights. The Series A Convertible Preferred Stock is not entitled to
receive any dividends.
Rights Upon Liquidation. Upon
liquidation, each outstanding share of Series A Convertible Preferred Stock
shall be entitled to receive an amount equal to $0.60 in the assets remaining
after payment of, or adequate provision for, all our known debts and liabilities
before any distribution or payment is made to any securities junior to the
Series A Convertible Preferred Stock.
Conversion Rights. Each
shares of Series A Convertible Preferred Stock shall be initially convertible
into one share of common stock at the option of the holders at any time, subject
to certain adjustments and limitations.
17
Warrants
As of the
date of this registration statement, there are outstanding warrants to purchase
up to 750,000 shares of common sock at the initial exercise price of $1.00 per
share, 500,000 shares of common stock at an initial exercise price of $0.9375
per share and warrants to purchase up to 600,000 shares of common stock at an
initial exercise price of $1.25 per share. Pursuant to the terms of such
warrants, the exercise price of such warrants is subject to certain
adjustments.
Options
As of the
date of this registration statement, there are outstanding options to purchase
up to 250,000 shares of common stock at the exercise price of $1.49 per
share.
Nevada
Anti-Takeover Law And Certain Charter And Bylaw Provisions
We are
subject to the provisions of the Nevada private corporation law, which are
anti-takeover provisions. In general, the provisions of Sections 78.411-444
prohibit a publicly held Nevada corporation from engaging in a “business
combination” with an “interested stockholder” for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 10% or more of a
corporation's voting stock. The existence of this provision may have an
anti-takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the board and in the policies formulated by the board and to
discourage some types of transactions that may involve actual or threatened
change of control of our company. These provisions are designed to reduce our
vulnerability to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all of our outstanding shares or an unsolicited
proposal for the potential restructuring or sale of all or a part of our
company. However, these provisions could discourage potential acquisition
proposals and could delay or prevent a change in control of CKGT. They may also
have the effect of preventing changes in our management.
Our
articles of incorporation and bylaws do not exclude us from these
restrictions.
Registration
Rights
In
connection with the issuance of our common stock to Kodiak, the Company is
required to file with the SEC this registration statement on Form S-1
registering the shares of our common stock issued to Kodiak. The Company has
agreed to use commercially reasonable efforts to maintain the effectiveness of
the registration statement, of which this prospectus is part, until the earlier
of the date on which (i) Kodiak has sold all of the shares of our common stock
issued or issuable pursuant to the Investment Agreement; (ii) Kodiak has sold
all of the shares of our common stock issued or issuable pursuant to the
Investment agreement without registration in compliance with Rule 144 of the
1933 Act; or (iii) Kodiak has no right to acquire any additional shares of our
common stock pursuant to the Investment Agreement. We cannot assure you that we
will be able to keep this registration statement continuously effective for the
required period.
Piggyback
Registration Rights
Pursuant
to a certain Preferred Stock Purchase Agreement between the Company and T
Squared Investments LLC dated July 16, 2008, if we propose to register any
shares of our common stock under the Securities Act in connection with a public
offering, upon request, we are required to include in the registration
statement, which covers such securities we have proposed to register, warrants
held by T Squared Investments LLC to purchase up to 1,100,000 shares of the
Company’s common stock. T Squared Investments LLC has elected not to have such
warrants included in this registration statement.
18
Transfer
Agent And Register
The
transfer agent and registrar for our common stock is Interwest Transfer Co.
Inc., telephone number (801) 272-9294.
Market
Information
Our
common stock price is quoted on the OTC Bulletin Board, or OTCBB, under the
symbol “CKGT.”
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No expert
or counsel named in this prospectus as having prepared or certified any part of
this prospectus or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis or had, or
is to receive, in connection with the offering, a substantial interest, directly
or indirectly, in the registrant or any of its subsidiaries.
DESCRIPTION
OF 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.
19
On
June 3, 2005, in connection with the reorganization of the Company and the
acquisition of BVI China Kangtai and its wholly owned subsidiary, Harbin Hainan
Kangda, the Company’s executive officers and directors significantly changed.
Specifically, Norman Koo resigned as a director, Chief Executive Officer and
President of the Company; Terence Ho resigned as a director, Chief Financial
Officer, and Treasurer of the Company; Vivian Szeto resigned as a director
(However, Ms. Szeto’s resignation from the Board of Directors was
contingent on the Company completing its filing and mailing requirements of its
Schedule 14f-1 which occurred on July 22, 2005 and so, from
June 3, 2005 to July 22, 2005 she served as the Company’s sole
director) and Secretary of the Company; Johnny Lu resigned as a director of the
Company; and Mantin Lu resigned as a director of the Company.
In
contemplation of the aforementioned resignations, also on June 3, 2005, the
Board of Directors appointed in accordance with Section 3.04 of the
Company’s Bylaws, Jinjiang Wang, Chengzhi Wang, Hong Bu, Jiping Wang and Song
Yang as members of the Company’s Board of Directors, subject to the fulfillment
of the filing and mailing requirements, including the 10 day waiting period of
its Schedule 14f-1 that was sent to all stockholders of the Company
pursuant to section 14(f) of the Securities Exchange Act of 1934 which
occurred on July 22, 2005 and appointed the following officers to serve
immediately: Jinjiang Wang, President; Chengzhi Wang, General Manager; Hong Bu,
Chief Financial Officer and Treasurer; Fengxi Lang, Secretary; Changfu Wang,
Vice General Manager; Zhimin Zhan, Vice General Manager; and Lixian Zhou,
Assistant General Manager of the Company.
On
July 20, 2005, InvestNet’s sole director, Vivian Szeto, and a majority of
the Company’s stockholders unanimously approved and ratified a one for seventy
reverse split (the “Reverse Split”) of the Company’s common stock and the
amendment and restatement of the Company’s Articles of Incorporation to effect a
name change of the Company from “Investnet, Inc.” to “China Kangtai Cactus
Bio-Tech Inc.”. The Reverse Split became effective on August 25, 2005; 20
days after the Company sent an Information Statement to all of its
stockholders and after the filing of the Amended and Restated Articles of
Incorporation with the Secretary of State of Nevada. As a result of the Reverse
Split, the number of issued and outstanding shares of common stock of the
Company, now named China Kangtai Cactus Bio-Tech Inc., was reduced from a total
of 200,000,000 shares outstanding to 2,857,143 shares outstanding. A day after
the Reverse Split on August 26, 2005, the Convertible Note was converted by
its holders(s) into 14,248,395 shares of the Company, which increased the total
outstanding shares of the Company to 17,105,625 shares. The Company’s trading
symbol was changed by the OTC Bulletin Board Stock Market (“OTCBB”) to “CKGT” to
better reflect the Company’s new name. The Company has also changed its Web site
to www.xrz.cn.
On June
26, 2006, the Company acquired a 100% equity interest in Guangdong Taishan
Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a company with
limited liability formed under the laws of the People’s Republic of China for
$1,574,000 in cash. Taishan Kangda’s assets include large areas of cactus
plantation and production facilities in Guangdong Province in southeast China.
The acquisition allows the Company to establish production facilities closer to
its existing cactus plantations in Guangdong Province in order to reduce
transportation cost and to distribute its products more effectively in southeast
China.
The
Company currently has three 100% owned subsidiaries: China Kangtai Cactus
Bio-Tech Company Limited, a British Virgin Islands company (Kangtai BVI”) ;
Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd., a PRC company
(“Harbin Hainan Kangda”); and Taishan Kangda.
Kangtai
BVI is a holding company and does not have any operations. Harbin Hainan Kangda
handles all of the production, research and development, sales and marketing of
our products derived from edible cactus plants, fruits and extracts. Taishan
Kangda handles all of the cultivation and harvest of cactus plants and the
production of our cactus raw materials.
20
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), Mudanjiang Kangwei Health Food Company, Ltd. and
Harbin Meijia Bio-Tech Co., 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 automatically renew at expiration in 2012 for one year
terms unless terminated by either party 30 day prior to the expiration of the
agreements.
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
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
21
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 2009, or about 40% of the total net sales.
The
revenue generated from sales of cactus food, beverage and wine was approximately
$9,702,993 in fiscal 2009, or about 36%. The remaining 24% of the sales is
cactus raw and intermediate materials.
The
Company currently has four product categories which are nutraceuticals,
beverages, raw and intermediate materials and packaged foods. The table below
sets forth revenue derived from each product category and the percentage of
total revenue each product category accounts for in 2009:
Product Categories
|
Sales revenue
in 2009 (in US$)
|
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 revenue
in 2009(in US$)
|
Percentage
of Total Revenue in 2009
|
||||||
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
|
%
|
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. Spending for R&D for was
$102,627 for fiscal 2009 and $12,397 for fiscal 2008.
The
Company manufactures and sells the following products launched between January
2001 and October 2009. 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.
22
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 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:
23
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
|
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 a 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. The patents, which we currently hold will
begin to expire in 2022. 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 27 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
|
24
•
|
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
|
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.
Customers
Currently
a majority of our sales are derived from customers in the PRC. Additionally, one
of our customers accounts for a sizeable portion of our net revenue.
Specifically, Harbin Huadingwei Trading Company, Ltd. represented approximately
18% of our total sales in 2009 and it accounted for approximately 13% of our
total sales in 2008. No other customer accounted for more than 10% of our total
revenue during any of these periods. In 2007, Harbin Huadingwei Trading Company,
Ltd. accounted for 22% of our total revenue.
Supplier
Concentration
Certain
of the raw materials and components used by us in the manufacture of our
products are available from a limited number of suppliers. Shortages could occur
in these essential materials and components due to an interruption of supply or
increased demand in the industry. If we were unable to procure certain of such
materials or components, we would be required to reduce our manufacturing
operations, which could have a material adverse effect on our results of
operations.
For the
three months ended March 31, 2010, four suppliers represented approximately
46% of total purchases of the Company. As of March 31, 2009, approximately
5% of the Company’s accounts payable were due to these
suppliers.
For the
years ended December 31, 2009, 2008 and 2007, four suppliers represented
approximately 51%, 53%, 55%, respectively, of the total purchases of the
Company. As of December 31, 2009 and 2008, approximately 5% and 3%,
respectively, of the Company’s accounts payable were due to these
suppliers.
Employees
As of
July 15, 2010, the Company had 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:
25
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
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. The
processors the Company uses which have been awarded the GMP certification are
Harbin Diwang Pharmacy Co., Ltd. and Harbin Meijia Bio-Tech Co.,
Ltd.
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.
Description
of Property
China
Kangtai’s operations office, production facilities are 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. The Company’s R&D facility is located in Harbin, Heilongjiang
Province, P. R. China. In addition, the Company has over 387 acres of cactus
farming bases in Taishan, Guangdong Province, P.R. China. The Company also has
production facilities which are used to produce cactus-base food and placed in
Harbin Meijia Bio-Tech Co., Ltd. which is our cooperative
processor.
26
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.
Submission
of Matters to a Vote of Security Holders
No
matters were submitted to a vote of the security holders of the Company during
the fourth quarter of the fiscal year ended December 31, 2009.
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 and the first two quarters of 2010. These quotations
reflect inter-dealer prices, without retail mark-up, markdown, or commission and
may not represent actual transactions.
Year
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|||
2010
|
June
30
|
$
|
1.40
|
$
|
1.32
|
|||||
March
31
|
$
|
2.14
|
$
|
2.10
|
||||||
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 July
19, 2010 there were approximately 78 shareholders of record holding a total of
21,227,527 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.
27
Stock
Re-Purchases
We did
not make any re-purchases of shares of our common stock during the fourth
quarter of fiscal 2009 and we do not currently have any publicly-announced
repurchase plans in effect.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain
statements in this registration statement, 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 registration statement on Form S-1 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 nutraceuticals,
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, and other southeastern Asian countries
and Taiwan region.
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. 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.
28
Results
of Operations
Three Months Ended March 31,
2010 Compared to the Three Months Ended March 31, 2009
Sales
|
Three Months Ended March 31,
|
|||||||||||
|
2010
|
2009
|
% of changes
|
|||||||||
Sales
by categories
|
||||||||||||
Nutraceuticals
|
$
|
1,805,747
|
$
|
1,362,351
|
32.55
|
%
|
||||||
Beverages
|
1,398,701
|
981,332
|
42.53
|
%
|
||||||||
Raw
& intermediate materials
|
1,633,575
|
604,833
|
170.09
|
%
|
||||||||
Packaged
foods
|
-
|
123,592
|
-
|
|||||||||
Cactus
cigarettes
|
212,638
|
-
|
-
|
|||||||||
Cactus
feed
|
468,373
|
257,844
|
81.65
|
%
|
||||||||
Total
Sales
|
$
|
5,519,034
|
$
|
3,329,952
|
65.74
|
%
|
Sales for
the three months ended March 31, 2010 totaled $5,519,034, an increase of
$2,189,082, or 66% compared to the sales of $3,329,952 for the three months
ended March 31, 2009. The increase in sales is attributable to the
fact that the Company’s products are efficiently marketed and well accepted by
consumers. The sale of our raw and intermediate materials products was
$1,633,575, an increase of $1,028,742, or 170% as compared to the sales of
$604,833 in the same period of 2009. Increased raw and intermediate materials
sales accounted for 47% of total increased sales. The sale of
nutraceuticals products was $1,805,747 in the three months ended March 31, 2010,
an increase of $443,396, or 33%, as compared to the sales of $1,362,351 in the
same period of 2009. The sale of beverages products was $1,398,701 in the three
months ended March 31, 2010, an increase of $417,369, or 43%, as compared to the
sales of $981,332 in the same period of 2009.
Cost
of Sales
Cost of
sales totaled $4,039,862 for the three months ended March 31, 2010, an increase
of $1,947,076, or 93% as compared to $2,092,786 in the same quarter of 2009. The
gross profit rate was 27% for the three months ended March 31, 2010, a decrease
10 percentage points as compared to 37% in the same quarter of 2009. The
increase in cost of sales and decrease in gross profit rates was primarily
attributable to the increased sales of our raw and intermediate materials. The
gross profit rate is about 11% for our raw and intermediate materials
products.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2010 totaled $298,515,
representing a decrease of $58,121, or 16%, compared to $356,636 for the three
months ended March 31, 2009. The decrease in operating expenses was mainly
attributable to a negative adjustment of $31,146 to provision for allowances,
returns and doubtful accounts.
Other
Income and Expenses
Other
income (net) for the three months ended March 31, 2010 totaled $1,502,767, an
increase of $1,253,338, compared to $249,429 for the same period of 2009. The
increased net other income mainly resulted from the income from revaluation of
Series A Preferred Stock and A, B, C, and D warrants with characteristics of
liabilities at fair values. (See Note 11 to Financial Statements). Such income
totaled $1,515,915 in the first quarter of 2010.
Income
from Operations
Income
from operations totaled $1,180,657 in the three months ended March 31, 2010, an
increase of $300,127, or 34%, as compared to $880,530 in the same period of
2009. The increase resulted mainly from increased sales and decreased operating
expenses as discussed above.
29
Net
Income
Net
income totaled $2,352,638 for the three months ended March 31, 2010 as compared
to the net income of $956,673 in the same period of 2009. The increase in net
income was caused partially by the income from revaluation of Series A Preferred
Stock and A, B, C, and D warrants with characteristics of liabilities at fair
values. (See Note 11 to Financial Statements). Absent this income, the Company
would have had a net income of $836,723 in the first quarter of 2010, as
compared to net income of $693,948 in the same period in 2009; and basic and
diluted earnings per share would have been $0.04 and $0.04, for the three months
ended March 31, 2010 and 2009, respectively.
The year Ended
December 31, 2009 Compared to the Year Ended December 31,
2008
Sales
|
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.
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.
Operating
Expenses
|
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.
30
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
Income and Expenses
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.
During
2009, the Company recorded a gain of $495,348 on disposal of property, plant and
equipment 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
As of
March 31, 2010 and December 31, 2009, we had cash and cash
equivalents of $2,029,000 and $2,918,000, respectively. Our funds are kept
in financial institutions located in China, which do not provide insurance for
amounts on deposit. Moreover, we are subject to the regulations of
the PRC which restrict the transfer of cash from China, except under certain
specific circumstances. Accordingly, such funds may not be readily available to
us to satisfy obligations which have been incurred outside the PRC.
Net
Cash Provided by Operating Activities
Net cash
provided by operating activities was $4,529,341 and $856,907 for the three
months ended March 31, 2010 and 2009, respectively. The increase in net cash
provided by operating activities in 2010 was due to the increase of our sales
and collections of other receivables totaling $3,747,926, which related to sale
of land use rights and certain equipment in 2009.
Net cash
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.
31
Net
Cash Used in Investing Activities
Net cash
used in investing activities was $6,056,182 and $2,930,200 for the three months
ended March 31, 2010 and 2009, respectively. In January 2010, the Company
purchased a livestock feed patent in the amount of $7,927,511 (RMB 54,112,700).
The Company paid $6,299,500 in cash. During the three months ended March 31,
2009, the Company deposited $2,930,200 pursuant to the Assets Purchase Agreement
entered on March 25, 2009 for land use rights.
Net cash
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
Net cash
provided by financing activities was $594,958 and $0 for the three months ended
March 31, 2010 and 2009. During the three months ended March 31,
2010, the Company received net proceeds of $125,000 from cash exercise of
options and net proceeds of $475,000 from exercise of B warrants. The Company
repaid $5,042 to a related party.
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.
The
Company’s operations for the year ended December 31, 2009 resulted in
comprehensive income of $259,429. The Company has funded its cash needs from
revenue.
Note
Payable to a Financial Institution
The note
payable (6,050,000 RMB) is due to a PRC provincial government financial
institution which made the loan to the Company to promote the commercial
cultivation of cactus. The loan was made to the Company on an interest-free and
unsecured basis and is repayable on demand. Imputed interest is calculated at 6%
per annum on the amount due. Total imputed interest recorded as additional
paid-in capital amounted to $13,295 and $13,296 for the three months ended March
31, 2010 and 2009, respectively and $53,219 and $52,326 for the years 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 10 to the
Consolidated Financial Statements for quarter ended March 31, 2010) 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
|
32
Since at
January 1, 2009 the carrying value of the outstanding financial instruments was
$690,000, the Company recognized a cumulative effect adjustment resulting from a
change in accounting principle of $18,760, or a net of $671,240. Accordingly,
the unappropriated retained earnings balance at December 31, 2008 was increased
from $11,604,285 to $11,623,045, as adjusted, on January 1, 2009.
The
characteristics which require classification of the Series A Preferred Stock and
warrants as liabilities are the Company’s obligations to reduce the conversion
price of the Series A Preferred Stock and the exercise price of the warrants in
the event that the Company sells, grants, or issues any shares, options
warrants, or any convertible instrument at a price below the $0.60 current
conversion price of the Series A Preferred Stock or the current exercise prices
of the warrants. As a result, the Company remeasures the fair values of these
financial instruments each quarter, adjusts the liability balances, and reflects
changes in operations as “income (expense) from revaluation of Series A
Preferred Stock and A, B, C, and D warrants with characteristics of liabilities
at fair values”.
At March
31, 2010, the fair values of the financial instruments consisted
of:
|
Shares / Warrants
|
Fair Value
|
||||||
Series
A Convertible Preferred Stock
|
50,000
|
$
|
107,000
|
|||||
A
warrants
|
-
|
-
|
||||||
B
warrants
|
1,025,000
|
1,352,385
|
||||||
C
warrants
|
500,000
|
710,950
|
||||||
D
warrants
|
600,000
|
759,360
|
||||||
Total
warrants
|
2,125,000
|
2,822,695
|
||||||
Total
Financial Instruments
|
2,175,000
|
$
|
2,929,695
|
Below is
a reconciliation of the change in the fair values of the financial instruments
from January 1, 2009 through March 31, 2010.
|
Shares / Warrants
|
Fair Value
|
||||||
Balance,
January 1, 2009
|
5,000,000
|
$
|
671,240
|
|||||
Revaluation
credited to operations
|
-
|
(262,725
|
)
|
|||||
Balance,
March 31, 2009
|
5,000,000
|
408,515
|
||||||
Revaluation
charged to operations
|
-
|
1,761,440
|
||||||
Balance,
June 30, 2009
|
5,000,000
|
2,169,955
|
||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(416,667
|
)
|
(666,667
|
)
|
||||
Revaluation
charged to operations
|
-
|
2,738,135
|
||||||
Balance,
September 30, 2009
|
4,583,333
|
4,241,423
|
||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(683,333
|
)
|
(1,282,500
|
)
|
||||
Exercise
of A warants
|
(1,250,000
|
)
|
(1,589,895
|
)
|
||||
Revaluation
charged to operations
|
-
|
3,689,332
|
||||||
Balance,
December 31, 2009
|
2,650,000
|
5,058,360
|
||||||
Exercise
of B warrants
|
(475,000
|
)
|
(612,750
|
)
|
||||
Revaluation
credited to operations
|
-
|
(1,515,915
|
)
|
|||||
Balance,
March 31, 2010
|
2,175,000
|
$
|
2,929,695
|
Accordingly,
a total of $2,929,695 was recorded as estimated liabilities for equity-based
financial instruments with characteristics of liabilities in the balance sheet
as of March 31, 2010. $1,515,915 was recognized as income 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 three months ended
March 31, 2010, and $7,926,182 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.
CKGT has
no defined benefit plan or contractual commitment with any of its officers or
directors.
33
CKGT has
no current plans for the purchase or sale of any plant or equipment, outside of
normal items to be utilized by office personnel.
CKGT has
no current plans to make any significant changes in the number of
employees.
Impact
of Inflation
CKGT
believes that inflation has had a negligible effect on operations over the past
three years. CKGT believes that it can offset inflationary increases in
operating costs by increasing prices.
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.
Critical
Accounting Policies
In Note 3
to the reviewed consolidated financial statements for the quarter ended March
31, 2010 and 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.
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.
CKGT
applies the following critical accounting policies related to revenue
recognition in the preparation of its financial statements.
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 11 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%.
34
Foreign
Currency Translation
The
consolidated financial statements of the Company are translated pursuant to
Accounting Standard Codification (“ASC”) 830, “Foreign Currency Matters.” The
Company’s subsidiaries, Harbin Hainan Kangda and Guangdong Taishan Kangda, are
located and operated in China. The Chinese Yuan is the functional currency. The
financial statements of China Kangtai are translated to U.S. dollars using
period-end exchange rates for assets and liabilities, and average exchange rates
for revenues, costs and expenses. Translation adjustments are recorded in
accumulated other comprehensive income as a component of stockholders’ equity.
Transaction gains or losses arising from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the consolidated results of operations.
Recently
Adopted Accounting Standards
In
February 2010, the Company adopted an amendment to previously adopted accounting
guidance on subsequent event disclosure, which established standards of
accounting for and disclosure of events or transactions that occur after the
balance sheet date but before financial statements are issued or available to be
issued. Under the amended guidance, the Company is no longer required to
disclose the date through which subsequent events have been evaluated. The
adoption of this requirement did not have a material impact on the Company’s
financial condition or results of operations.
Recent
Accounting Pronouncements
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.
35
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.
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
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
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.
36
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.
In
January 2010, the Financial Accounting Standards Board issued guidance which
expands the required disclosures about fair value measurements. This guidance
requires disclosures about transfers of investments between levels in the fair
value hierarchy and disclosures relating to the reconciliation of fair value
measurements using significant unobservable inputs (level 3 investments). This
guidance is effective for the Company as of January 1, 2011. The adoption
of this guidance will not have a material impact on its financial condition or
results of operations.
Certain
other accounting pronouncements have been issued by the FASB and other standard
setting organizations which are not yet effective and have not yet been adopted
by the Company. The impact on the Company’s financial position and results of
operations from adoption of these standards is not expected to be
material.
DIRECTORS
AND EXECUTIVE OFFICERS
The
directors and executive officers currently serving the Company are as
follows:
Name
|
|
Age
|
|
Positions Held
|
Jinjiang
Wang
|
61
|
President,
Chief Executive Officer and Chairman of the Board of
Directors
|
||
Chengzhi
Wang
|
40
|
General
Manager and a Director
|
||
Hong
Bu
|
36
|
Chief
Financial Officer and a Director
|
||
Jiping
Wang
|
49
|
Director
|
||
Song
Yang
|
36
|
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.
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.
37
Biographical
Information
Jinjiang Wang has served as
the Chairman of the Board, President and Chief Executive Officer of the Company
since June 2005 and a director of the Company since July 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 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. Mr. Wang graduated from Northeast Agricultural University with a degree
in Agriculture & Forest Engineering. Mr. Wang was selected to serve as
a director based on his prior experience and knowledge of the
industry.
Chengzhi Wang has served as
the Company’s director since July 2005 and as the General Manager of CKGT since
June 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 has over five years experience in management, production and
sales. He is a founder of Harbin Hainan Kangda and a pioneer in the edible
cactus trade of the P.R.C. Mr. Wang graduated from Architectonics
Department of Harbin Institute of Technology with an engineer degree. Mr. Wang
was selected to serve as a director because of his prior experience and
knowledge of the industry.
Hong Bu has served as the
Company’s director since July 2005 and the Chief Financial Officer of CKGT since
June 2005. From 1998 to 2005 Ms. Bu served as senior accountant of
Harbin Hainan Kangda. 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. 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 was selected to serve
as a director because of her prior experience and knowledge of the
industry.
Jiping Wang has served
as a director of the Company since July 2005. Since 1979, Ms. Wang has served as
an officer of Heilongjian Food Control and Drought Prevention Center.
Ms. Wang graduated from the Economic Managerial Cadre’s Institute of
Harbin. Ms. Wang was selected to serve as a director because of her prior
experience and knowledge in the industry.
Song Yang has served as
a director of the Company since July 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 graduated from
Heilongjiang_University with a degree in Economics. Ms. Yang was selected to
serve as a director because of her prior experience and knowledge of the
industry.
Family
Relationships
Our
Chairman, President and CEO, Mr. Jinjiang Wang, is the father of our General
Manager, Mr. Chengzhi Wang. 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.
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.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten
years:
38
(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;
|
(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.
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.
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.
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, the Company believes
that all of its executive officers and directors complied with all
Section 16(a) filing requirements applicable to them with one
exception. A Form 3 for Chengzhi Wang, a director of the Company, was
inadvertently filed a day late in connection with the Company’s reorganization
transaction occurring in June 2005.
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.
39
Indemnification
of Directors and Officers
Our
articles of incorporation limit the liability of directors to the maximum extent
permitted by Nevada law. This limitation of liability is subject to exceptions
including intentional misconduct, obtaining an improper personal benefit and
abdication or reckless disregard of director duties. Our articles of
incorporation and bylaws provide that we may indemnify our directors, officers,
employees and other agents to the fullest extent permitted by law. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification. We
currently do not have such an insurance policy.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted for our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
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
|
(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.
Employment
Contracts
We have
the following agreements with our named executive officers.
Hong
Bu
On June
3, 2010, we entered into a Contract of Employment, pursuant to which we pay Ms.
Bu RMB 4,000 per month. This agreement is for a term of five years expiring June
3, 2015. However, either party may terminate this agreement at anytime upon 30
days’ advanced notice.
40
Chengzhi
Wang
On June
3, 2010, we entered into a Contract of Employment, pursuant to which we pay Mr.
Wang RMB 4,000 per month. This agreement is for a term of five years expiring
June 3, 2015. However, either party may terminate this agreement at anytime upon
30 days’ advanced notice.
CERTAIN RELATIONSHIPS AND RELATED
PARTY TRANSACTIONS, AND
CORPORATE GOVERNANCE
There are
no transactions since the beginning of the Company’s last fiscal year, or any
currently proposed transaction, 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 (5%) 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.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of July 16, 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.
|
4,372,818
Direct
|
20.5
|
%
|
||||
Common
Stock
|
Chengzhi
Wang
No.
98 Xiangshun Street
Xiangfang
District, Harbin, P.R.C.
|
3,892,970
Direct
|
18.3
|
%
|
||||
Common
Stock
|
Hong
Bu
No.
99 Taibei Road
Limin
Economy and Technology
Developing
District, Harbin, P.R.C.
|
750,046
Direct
|
3.5]
|
%
|
||||
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
|
3.4
|
%
|
||||
Common
Stock
|
All
Directors and Executive Officers as a Group (5 persons)
|
10,443,256
Direct
|
49.1
|
%
|
||||
5%
Holder
|
||||||||
Common
Stock
|
T
Squared Investments LLC.
1325
Sixth Avenue, Floor 28
New
York, NY 10019
|
1,900,000
Direct
(2)
|
8.9
|
%
|
(1)
|
Applicable
percentage ownership is based on 21,227,527 shares of common stock
outstanding as of July 16, 2010, together with securities exercisable or
convertible into shares of common stock within 60 days of July 16,
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 July 16, 2010 are 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.
|
41
(2)
|
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 1,900,000 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.
|
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
The
Company’s directors and executive officers are indemnified as provided by the
Nevada Revised Statutes and the Company’s Bylaws. Under the Nevada Revised
Statutes, director immunity from liability to a company or its shareholders from
monetary liabilities applies automatically unless it is specifically limited by
a company's articles of incorporation. Our articles of incorporation limit the
liability of directors to the maximum extent permitted by Nevada law. This
limitation of liability is subject to exceptions including intentional
misconduct, obtaining an improper personal benefit and abdication or reckless
disregard of director duties. Our articles of incorporation and bylaws provide
that we may indemnify our directors, officers, employees and other agents to the
fullest extent permitted by law. Our bylaws also permit us to secure insurance
on behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
bylaws would permit indemnification. We currently do not have such an insurance
policy.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
LEGAL
MATTERS
The
legality of the issuance of the shares offered in this prospectus will be passed
upon for us by The Crone Law Group, San Francisco, California. The Crone Law
Group holds an option to purchase 250,000 shares of common stock at an initial
exercise price of $1.49 per share and 208,115 shares of common
stock.
EXPERTS
The
consolidated financial statements of our company as of December 31, 2009 and
2008 included in this prospectus have been audited by Michael T. Studer, CPA,
P.C., independent registered public accountants, as stated in its report
appearing herein and elsewhere in this prospectus, and have been so included in
reliance upon the report of this firm given upon their authority as experts in
auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the Securities and Exchange Commission a registration statement on
Form S-1 (including exhibits) under the Securities Act, with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
with respect to our company and the common stock offered in this prospectus,
reference is made to the registration statement, including the exhibits filed
thereto, and the financial statements and notes filed as a part thereof. With
respect to each such document filed with the SEC as an exhibit to the
registration statement, reference is made to the exhibit for a more complete
description of the matter involved.
We file
quarterly and annual reports, proxy statements and other information with the
SEC. You may read and copy any document that we file at the public reference
facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Our SEC filings are also
available to the public from the SEC’s website at
http://www.sec.gov.
42
Index
to Financial Statements
Interim Financial
Statement
|
||
Condensed
Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December
31, 2009 (audited)
|
F-1
|
|
Condensed
Consolidated Statements of Income and Comprehensive Income for the three
months ended March 31, 2010 and 2009 (unaudited)
|
F-2
|
|
Condensed
Statements of Stockholders' Equity (unaudited)
|
F-3
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended March 31,
2010 and 2009 (unaudited)
|
F-4
|
|
Notes
to the Condensed Consolidated Financial Statements
(unaudited)
|
F-5
|
|
Audited Financial
Statements
|
||
Report
of Independent Registered Public Accounting Firm
|
F-23
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-24
|
|
Consolidated
Statements of Income and Comprehensive Income for the years ended December
31, 2009 and 2008
|
F-25
|
|
Consolidated
Statements of Stockholders' Equity for the years ended December 31,
2009 and 2008
|
F-26
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
F-27
|
|
Notes
to Consolidated Financial Statements
|
F-28
|
43
PART
I—FINANCIAL INFORMAION
Item 1. Financial
Statements
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
|
March 31,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$
|
2,029,202
|
$
|
2,918,068
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $976,827 and
$1,006,597, respectively
|
3,735,529
|
2,283,257
|
||||||
Inventories
|
1,052,703
|
2,440,904
|
||||||
Prepaid
expenses
|
75,322
|
1,265
|
||||||
Other
receivables
|
10,569
|
3,992,562
|
||||||
Total
Current Assets
|
6,903,325
|
11,636,056
|
||||||
Property,
plant and equipment, net of accumulated depreciation of $2,232,189 and
$2,112,093, respectively
|
5,642,847
|
5,750,876
|
||||||
Other
Assets
|
||||||||
Intangible
assets, net of accumulated amortization of $1,088,788 and $1,054,531,
respectively
|
8,209,962
|
316,300
|
||||||
Land
use rights, net of accumulated amortization of $567,743 and $473,151,
respectively
|
17,912,471
|
17,981,834
|
||||||
Total
Assets
|
$
|
38,668,605
|
$
|
35,685,066
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued liabilities
|
$
|
279,503
|
$
|
311,417
|
||||
Note
payable
|
886,325
|
885,115
|
||||||
Taxes
payable
|
563,558
|
789,141
|
||||||
Payable
to seller of patent
|
1,628,011
|
-
|
||||||
Other
payable
|
-
|
5,042
|
||||||
Total
Current Liabilities
|
3,357,397
|
1,990,715
|
||||||
Estimated
liability for equity-based financial instruments with characteristics of
liabilities:
|
||||||||
Designated
as Series A convertible Preferred Stock (50,000 shares issued and
outstanding at March 31, 2010 and December 31, 2009,
respectively)
|
107,000
|
135,500
|
||||||
Warrants
|
2,822,695
|
4,922,860
|
||||||
Total
|
2,929,695
|
5,058,360
|
||||||
Total
Liabilities
|
6,287,092
|
7,049,075
|
||||||
Commitments
and Contingencies
|
-
|
-
|
||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, par value $.001 per share; authorized 200,000,000 shares; issued
and outstanding: 50,000 and 50,000 shares, respectively
|
-
|
-
|
||||||
Common
stock, par value $.001 per share; authorized 200,000,000 shares, issued or
issuable and outstanding: 20,740,762 and 20,024,024 shares,
respectively
|
20,741
|
20,024
|
||||||
Additional
paid-in capital
|
12,321,404
|
11,003,276
|
||||||
Retained
earnings
|
||||||||
Appropriated
|
4,030,658
|
3,881,804
|
||||||
Unappropriated
|
13,107,495
|
10,903,711
|
||||||
Accumulated
other comprehensive income (Foreign currency translation
adjustments)
|
2,901,215
|
2,827,176
|
||||||
Total
stockholders' equity
|
32,381,513
|
28,635,991
|
||||||
Total
Liabilities and Stockholders' Equity
|
$
|
38,668,605
|
$
|
35,685,066
|
The
accompanying notes are an integral part of these financial
statements.
F-1
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Condensed
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
For the Three Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
Sales
|
$
|
5,519,034
|
$
|
3,329,952
|
||||
Cost
of Sales
|
(4,039,862
|
)
|
(2,092,786
|
)
|
||||
Gross
Profit
|
1,479,172
|
1,237,166
|
||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
24,611
|
36,329
|
||||||
Provision
for reserve for allowances, returns and doubtful accounts
|
(31,146
|
)
|
-
|
|||||
General
and administrative expenses
|
242,202
|
257,600
|
||||||
Depreciation
|
19,033
|
18,889
|
||||||
Amortization
of land use rights
|
9,534
|
9,535
|
||||||
Amortization
of intangible assets
|
34,281
|
34,283
|
||||||
Total
operating expenses
|
298,515
|
356,636
|
||||||
Income
from Operations
|
1,180,657
|
880,530
|
||||||
Other
Income (Expense)
|
||||||||
Interest
income
|
147
|
-
|
||||||
Imputed
interest expense
|
(13,295
|
)
|
(13,296
|
)
|
||||
Income
from revaluation of Series A Preferred Stock and A, B, C, and D warrants
with characteristics of liabilities at fair values
|
1,515,915
|
262,725
|
||||||
Total
Other Income (Expenses)
|
1,502,767
|
249,429
|
||||||
Income
before Income Tax
|
2,683,424
|
1,129,959
|
||||||
Income
tax expense
|
(330,786
|
)
|
(173,286
|
)
|
||||
Net
Income Attributable to Common Stockholders
|
$
|
2,352,638
|
$
|
956,673
|
||||
Net
Income Per Common Share
|
||||||||
Basic
|
$
|
0.12
|
$
|
0.05
|
||||
Diluted
|
$
|
0.11
|
$
|
0.05
|
||||
Weighted
Average Number of Common Shares Used to Compute Earnings per Common
Share:
|
||||||||
Basic
|
20,326,260
|
17,885,625
|
||||||
Diluted
|
21,699,317
|
19,035,625
|
||||||
Comprehensive
Income:
|
||||||||
Net
income
|
$
|
2,352,638
|
$
|
956,673
|
||||
Foreign
currency translation adjustment
|
74,039
|
(30,891
|
)
|
|||||
Comprehensive
Income
|
$
|
2,426,677
|
$
|
925,782
|
The
accompanying notes are an integral part of these financial
statements.
F-2
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Condensed
Consolidated Statements of Stockholders' Equity
Additional
|
Unappropriated
|
Appropriated
|
Accumulated other
|
|||||||||||||||||||||||||||||||||
Preferred Stock $0.001 par value
|
Common Stock $0.001 par value
|
paid-in
|
retained
|
retained
|
comprehensive
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
earnings
|
earnings
|
income
|
Total
|
||||||||||||||||||||||||||||
Balance
at December 31, 2007
|
-
|
$
|
-
|
17,739,625
|
$
|
17,740
|
6,607,848
|
$
|
7,082,943
|
$
|
1,844,937
|
$
|
1,738,626
|
$
|
17,292,094
|
|||||||||||||||||||||
Sale
of Series A preferred stock
|
1,250,000
|
1,250
|
-
|
-
|
719,672
|
-
|
-
|
720,922
|
||||||||||||||||||||||||||||
Deemed
dividends
|
-
|
-
|
-
|
-
|
322,750
|
(322,750
|
)
|
-
|
-
|
|||||||||||||||||||||||||||
Issuance
of shares in consideration for the waiver of liquidated
damages
|
-
|
-
|
46,000
|
46
|
26,634
|
-
|
-
|
-
|
26,680
|
|||||||||||||||||||||||||||
Conversion
of Series A preferred stock
|
(100,000
|
)
|
(100
|
)
|
100,000
|
100
|
0
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Stock
option expense
|
-
|
-
|
-
|
-
|
90,635
|
-
|
90,635
|
|||||||||||||||||||||||||||||
Imputed
interest on note payable
|
-
|
-
|
-
|
-
|
52,326
|
-
|
-
|
-
|
52,326
|
|||||||||||||||||||||||||||
Transfer
to statutory and staff welfare reserves
|
-
|
-
|
-
|
-
|
0
|
(837,408
|
)
|
837,408
|
-
|
-
|
||||||||||||||||||||||||||
Net
income for the year ended December 31, 2008
|
5,681,500
|
5,681,500
|
||||||||||||||||||||||||||||||||||
Currency
translation adjustment
|
-
|
-
|
-
|
-
|
0
|
-
|
-
|
1,309,246
|
1,309,246
|
|||||||||||||||||||||||||||
Balance
at December 31, 2008 (as restated)
|
1,150,000
|
1,150
|
17,885,625
|
17,886
|
7,819,865
|
11,604,285
|
2,682,345
|
3,047,872
|
25,173,403
|
|||||||||||||||||||||||||||
January
1, 2009 cumulative effect of change in accounting
principle:
|
||||||||||||||||||||||||||||||||||||
Reclassification
of Series A Preferred Stock and A, B, C, and D Warrants from stockholder's
equity to liabilities, including revaluation at fair value of
$18,760
|
(1,150,000
|
)
|
(1,150
|
)
|
(688,850
|
)
|
18,760
|
(671,240
|
)
|
|||||||||||||||||||||||||||
Balance
at January 1, 2009 after cumulative effect adjustment
|
-
|
-
|
17,885,625
|
17,886
|
7,131,015
|
11,623,045
|
2,682,345
|
3,047,872
|
24,502,163
|
|||||||||||||||||||||||||||
Conversion
of Series A preferred stock
|
-
|
-
|
1,100,000
|
1,100
|
1,948,067
|
-
|
-
|
-
|
1,949,167
|
|||||||||||||||||||||||||||
Cashless
exercise of A warrants
|
-
|
-
|
598,006
|
598
|
1,290,630
|
-
|
-
|
-
|
1,291,228
|
|||||||||||||||||||||||||||
Cash
exercise of A warrants
|
-
|
-
|
333,334
|
333
|
548,334
|
-
|
-
|
-
|
548,667
|
|||||||||||||||||||||||||||
Exercise
of stock option
|
-
|
-
|
107,059
|
107
|
32,011
|
-
|
-
|
-
|
32,118
|
|||||||||||||||||||||||||||
Imputed
interest on note payable
|
-
|
-
|
-
|
-
|
53,219
|
-
|
-
|
-
|
53,219
|
|||||||||||||||||||||||||||
Transfer
to statutory and staff welfare reserves
|
-
|
-
|
-
|
-
|
-
|
(1,199,459
|
)
|
1,199,459
|
-
|
-
|
||||||||||||||||||||||||||
Net
income for the year ended December 31, 2009
|
-
|
-
|
-
|
-
|
-
|
480,125
|
-
|
-
|
480,125
|
|||||||||||||||||||||||||||
Currency
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(220,696
|
)
|
(220,696
|
)
|
|||||||||||||||||||||||||
Balance
at December 31, 2009
|
-
|
-
|
20,024,024
|
20,024
|
11,003,276
|
10,903,711
|
3,881,804
|
2,827,176
|
28,635,991
|
|||||||||||||||||||||||||||
Cashless
exercise of options
|
-
|
-
|
76,738
|
77
|
(77
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||
Stock
issued for consulting services
|
-
|
-
|
40,000
|
40
|
92,760
|
-
|
-
|
-
|
92,800
|
|||||||||||||||||||||||||||
Exercise
of B warrants
|
-
|
-
|
475,000
|
475
|
1,087,275
|
-
|
-
|
-
|
1,087,750
|
|||||||||||||||||||||||||||
Exercise
of $1.00 options
|
-
|
-
|
125,000
|
125
|
124,875
|
-
|
-
|
-
|
125,000
|
|||||||||||||||||||||||||||
Imputed
interest on note payable
|
-
|
-
|
-
|
-
|
13,295
|
-
|
-
|
-
|
13,295
|
|||||||||||||||||||||||||||
Transfer
to statutory and staff welfare reserves
|
-
|
-
|
-
|
-
|
-
|
(148,854
|
)
|
148,854
|
-
|
-
|
||||||||||||||||||||||||||
Net
income for the three months ended March 31, 2010
(Unaudited)
|
-
|
-
|
-
|
-
|
-
|
2,352,638
|
-
|
-
|
2,352,638
|
|||||||||||||||||||||||||||
Currency
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
74,039
|
74,039
|
|||||||||||||||||||||||||||
Balance
at March 31, 2010 (Unaudited)
|
-
|
$
|
-
|
20,740,762
|
$
|
20,741
|
$
|
12,321,404
|
$
|
13,107,495
|
$
|
4,030,658
|
$
|
2,901,215
|
$
|
32,381,513
|
The
accompanying notes are an integral part of these financial
statements.
F-3
China
Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income
|
$
|
2,352,638
|
$
|
956,673
|
||||
Adjustments
to reconcile net income
|
||||||||
to
net cash provided by operating activities:
|
||||||||
(Gain)
from revaluation of Series A Preferred Stock and A, B, C, and D warrants
with characteristics of liabilities at fair values
|
(1,515,915
|
)
|
(262,725
|
)
|
||||
Issuance
of shares in consideration for consulting services
|
92,800
|
-
|
||||||
Provision
for allowances, returns and doubtful accounts
|
(31,146
|
)
|
-
|
|||||
Depreciation
- cost of sales
|
98,176
|
98,823
|
||||||
Depreciation
- operating expenses
|
19,033
|
18,889
|
||||||
Amortization
of land use rights -cost of sales
|
85,143
|
-
|
||||||
Amortization
of land use rights- operating expenses
|
9,534
|
9,535
|
||||||
Amortization
of intangible assets
|
34,281
|
34,283
|
||||||
Imputed
interest
|
13,295
|
13,296
|
||||||
Collections
of other receivables
|
3,747,926
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable, net
|
(1,422,502
|
)
|
(1,391
|
)
|
||||
Inventories
|
1,388,201
|
243,388
|
||||||
Prepaid
expenses
|
(74,057
|
)
|
(286
|
)
|
||||
Other
receivables
|
(10,569
|
)
|
-
|
|||||
Accounts
payable and accrued liabilities
|
(31,914
|
)
|
(35,690
|
)
|
||||
Taxes
payable
|
(225,583
|
)
|
(217,888
|
)
|
||||
Net
cash provided by operating activities
|
4,529,341
|
856,907
|
||||||
Cash
Flows from Investing Activities
|
||||||||
Purchase
of patent
|
(6,299,500
|
)
|
-
|
|||||
Purchase
of fixed assets
|
(1,318
|
)
|
-
|
|||||
Collection
of amount previously advanced to related party
|
244,636
|
-
|
||||||
Deposit
for purchase of land use rights and property and equipment
|
-
|
(2,930,200
|
)
|
|||||
Net
cash (used for) investing activities
|
(6,056,182
|
)
|
(2,930,200
|
)
|
||||
Cash
Flows from Financing Activities
|
||||||||
Repayment
to related party
|
(5,042
|
)
|
-
|
|||||
Cash
exercise of options
|
125,000
|
-
|
||||||
Exercise
of B warrants
|
475,000
|
-
|
||||||
Net
cash provided by financing activities
|
594,958
|
-
|
||||||
Effect
of exchange rate changes on cash and cash equivalents
|
43,017
|
23,148
|
||||||
Decrease
in cash and cash equivalents
|
(888,866
|
)
|
(2,050,145
|
)
|
||||
Cash
and cash equivalents, beginning of period
|
2,918,068
|
4,398,897
|
||||||
Cash
and cash equivalents, end of period
|
$
|
2,029,202
|
$
|
2,348,752
|
||||
Supplemental
Schedule of Non-Cash Investing and Financing Activities:
|
||||||||
Cost
of patent acquired
|
$
|
7,927,511
|
||||||
Less,
purchase price paid in cash
|
6,299,500
|
|||||||
Obligation
payable to seller of patent
|
$
|
1,628,011
|
||||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$
|
-
|
$
|
-
|
||||
Income
taxes paid
|
$
|
535,681
|
$
|
391,174
|
The
accompanying notes are an integral part of these financial
statements.
F-4
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 1 - ORGANIZATION AND
BUSINESS OPERATIONS
China
Kangtai Cactus Bio-Tech Inc. (“US China Kangtai”) was incorporated in Nevada on
March 16, 2000 as InvestNet, Inc. (“InvestNet”).
China
Kangtai Cactus Bio-tech Company Limited (“BVI China Kangtai”) was incorporated
in the British Virgin Islands (“BVI”) on November 26, 2004. Harbin Hainan
Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin Hainan Kangda”), a company with
limited liability, was incorporated in the People’s Republic of China (“PRC”) on
December 30, 1998.
US China
Kangtai and BVI China Kangtai are investment holding companies and Harbin Hainan
Kangda’s principal activities are planting and developing new types of cactus,
producing and trading in cactus health foods and related products in the
PRC.
In 2004,
BVI China Kangtai acquired Harbin Hainan Kangda. In 2005, US China Kangtai
acquired BVI China Kangtai.
On
September 26, 2006, Harbin Hainan Kangda acquired a 100% equity interest in
Guangdong Taishan Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a
PRC company with limited liability previously owned by two stockholders, for
$1,475,000 in cash. Taishan Kangda grows and sells cactus.
US China
Kangtai, BVI China Kangtai, Harbin Hainan Kangda and Taishan Kangda are
hereafter collectively referred to as the “Company”.
The
accompanying unaudited condensed consolidated financial statements include the
financial statements of US China Kangtai and its 100% owned subsidiaries, BVI
China Kangtai, Harbin Hainan Kangda and Taishan Kangda. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
NOTE 2 – INTERIM FINANCIAL
STATEMENTS
The
unaudited condensed financial statements as of March 31, 2010 and for the three
months ended March 31, 2010 and 2009 have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with instructions to Form 10-Q. In the
opinion of management, the unaudited condensed financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of March 31, 2010 and the results of
operations and cash flows for the periods ended March 31, 2010 and
2009. The financial data and other information disclosed in these
notes to the interim financial statements related to these periods are
unaudited. The results for the three months ended March 31, 2010 is
not necessarily indicative of the results to be expected for any subsequent
quarter of the entire year ending December 31, 2010. The balance
sheet at December 31, 2009 has been derived from the audited financial
statements at that date.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the Securities and
Exchange Commission’s rules and regulations. These unaudited
condensed financial statements should be read in conjunction with our audited
financial statements and notes thereto for the year ended December 31, 2009 as
included in our report on Form 10-K, as filed with the SEC on April 15,
2010.
F-5
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 3 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States and are expressed
in US dollars.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial
Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, other receivables, accounts payable and accrued liabilities, note
payable, taxes payable and other payable. The fair value of these
financial instruments approximate their carrying amounts reported in the
consolidated balance sheets due to the short term maturity of these instruments
and based on interest rates of comparable instruments.
Foreign Currency
Translation
The
functional currency of US China Kangtai and BVI China Kangtai is the United
States dollar. The functional currency of Harbin Hainan Kangda and
Taishan Kangda is the Chinese Renminbi (“RMB”). The reporting
currency of the Company is the United States dollar.
Harbin
Hainan Kangda and Taishan Kangda assets and liabilities are translated into
United States dollars at period-end exchange rates ($0.14650 and $0.14630 at
March 31, 2010 and December 31, 2009, respectively). Harbin Hainan
Kangda and Taishan Kangda revenues and expenses are translated into United
States dollars at weighted average exchange rates for the periods ($0.14650 and
$0.14661 for the three months ended March 31, 2010 and 2009,
respectively). Resulting translation adjustments are recorded as a
component of accumulated other comprehensive income (loss) within stockholders’
equity.
Transaction
gains or losses arising from exchange rate fluctuation on transactions
denominated in a currency other than the functional currency are included in the
consolidated results of operations. There are no material foreign
currency transaction gains or losses for three months ended March 2010 and
2009.
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.
F-6
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Inventories
Inventories
of cactus stock include trees and palms whose cost consists of seeds and an
allocation of fertilizers, direct labor and overhead costs such as depreciation,
rent, freight and fuel, among others. Inventories of cactus stock are stated at
the lower of cost or market value, cost being calculated on the weighted average
basis.
Other raw
materials are stated at the lower of cost or market value, cost being determined
on a first in, first out method.
Work in
progress and finished goods are stated at the lower of cost or market value,
cost being determined on a first in, first out method.
Property, plant and
equipment
Property,
plant and equipment are stated at cost less accumulated
depreciation. Expenditures for additions, major renewals and
betterments are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the respective assets (40 years for
buildings, 12 years for plant equipment and machinery, 10 years for motor
vehicles, and 8 years for furniture and office equipment).
Intangible and Other
Long-Lived Assets
Intangible
and other long-lived assets are stated at cost, less accumulated amortization
and impairments. Land use rights are being amortized on a
straight-line basis over the remaining term of the related agreements, which
range from 30 to 50 years. Other intangible assets consist of patents and
licenses. Patents and licenses are amortized over their expected useful economic
lives, which range from 10 to 20 years.
The
Company reviews its long-lived assets for impairment annually or more frequently
if events or changes in circumstances indicate that the carrying amount of an
asset may no longer be recoverable. The Company measures impairment
by comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to result from the use of the assets and
their eventual disposition. If the sum of the expected undiscounted
cash flows is less than the carrying amount of the assets, the Company would
recognize an impairment loss based on the fair value of the assets.
Revenue
Recognition
The
Company recognizes revenue upon delivery of the products, at which time title
passes to the customer provided that: there are no uncertainties regarding
customer acceptance; persuasive evidence of an arrangement exists; the sales
price is fixed or determinable; and collectibility is deemed
probable.
Advertising
Costs
Advertising
costs are expensed as incurred. There were no significant advertising expenses
for the three months ended March 31, 2010 and 2009.
F-7
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Research and
Development
Research
and development costs related to both present and future products are expensed
as incurred. There were no significant expenses relating to research and
development for the three months ended March 31, 2010 and 2009.
Stock-Based
Compensation
Stock-based
compensation is accounted for at fair value in accordance with Accounting
Standards Codification (“ASC”) 718, “Compensation- Stock
Compensation”.
In
addition to requiring supplemental disclosures, FASB ASC 718, Compensation – Stock
Compensation, addresses the accounting for share-based payment
transactions in which a company receives goods or services in exchange for (a)
equity instruments of the company or (b) liabilities that are based on the fair
value of the company’s equity instruments or that may be settled by the issuance
of such equity instruments. FASB ASC 718 focuses primarily on accounting for
transactions in which a company obtains employee services in share-based
payment transactions.
References
to the issuances of restricted stock refer to stock of a public company issued
in private placement transactions to individuals who are eligible to sell all or
some of their shares of restricted common stock pursuant to Rule 144,
promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain
limitations. In general, pursuant to Rule 144, a stockholder who is not an
affiliate and has satisfied a six-month holding period may sell all of his
restricted stock without restriction, provided that the Company has current
information publicly available. Rule 144 also permits, under certain
circumstances, the sale of restricted stock, without any limitations, by a
non-affiliate of the Company that has satisfied a one-year holding
period.
Income
Taxes
Deferred
income taxes are recognized for temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements by
applying enacted statutory tax rates expected to apply in the years in which
those temporary differences are expected to be recovered or
settled. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is not more likely than not that some
portion or all of the deferred tax assets will be realized. Current
income taxes are provided for in accordance with the laws of the relevant taxing
authorities.
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.
F-8
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
The
following table provides a reconciliation of common shares used in the net
income per basic share and net income per diluted share computations for the
three months ended March 31, 2010 and 2009.
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Weighted
average shares outstanding – basic
|
20,326,260
|
17,885,625
|
||||||
Series
A convertible preferred stock
|
50,000
|
1,150,000
|
||||||
Incremental
common shares from stock options and warrants
|
1,323,057
|
-
|
||||||
Weighted
average shares outstanding - diluted
|
21,699,317
|
19,035,625
|
The
Company uses the treasury stock method to account for the dilutive effect of
unexercised stock options and warrants in net income per diluted share.
Antidilutive common shares related to stock options and warrants excluded from
the computation of net income per diluted share were approximately 0 and
4,250,000 for the three months ended March 31, 2010 and
2009, respectively.
Segment
Information
The
Company operates in only one segment, the sale of products made from cactus
plants. The Company sells to two customer groups; health foods comprising cactus
liquor and juice and sale of cactus powder to pharmaceutical companies for use
in medical products.
Statement of Cash
Flows
In
accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
NOTE 4 -
INVENTORIES
Inventories
consist of:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Cactus
stock
|
$
|
826,194
|
$
|
2,149,643
|
||||
Other
raw materials and work-in-process
|
37,841
|
28,158
|
||||||
Finished
goods
|
289,128
|
311,761
|
||||||
Total
|
1,153,163
|
2,489,562
|
||||||
Less:
allowance for market adjustments to inventories
|
(100,460
|
)
|
(48,658
|
)
|
||||
Net
|
$
|
1,052,703
|
$
|
2,440,904
|
F-9
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 5 – OTHER
RECEIVABLES
Other
receivables at March 31, 2010 and December 31, 2009 consist of:
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unudited)
|
||||||||
Land
Center of Qitaihe
|
$
|
-
|
$
|
3,116,843
|
||||
QitaiheTianhe
Pharmaceutical Co. Ltd
|
-
|
631,083
|
||||||
Due
from related party
|
10,569
|
244,636
|
||||||
Total
|
$
|
10,569
|
$
|
3,992,562
|
Disposal of property, plant
and equipment
On March
25, 2009, Harbin Hainan Kangda entered into an Asset Purchase Agreement (the
“Agreement”) with Qitaihe Kangwei Biotechnology Co., Ltd. (“Seller”). Under the
terms of the Agreement, the Company was to acquire (i) land use rights of
state-owned land located in Shuguang Village of Xinxing District in Qitaihe
City, covering an area of 49 thousand square meters, with a use life of 43
years, (ii) housing ownership of 5,606.20 square meters in Shuguang Village of
Xinxing District in Qitaihe City, HeiLongJiang Province and (iii) fixed assets
consisting of machinery, equipment and facilities (including equipment,
information, file data, spare parts and office supplies) located on the acquired
premises. The land use rights, housing ownership and fixed assets were
collectively referred to as the “Assets”. Total purchase price under the
Agreement was RMB 37,000,000 ($5,413,100).
On
December 19, 2009, the Company entered into a draft agreement with the
Government of Qitaihe City and agreed to give up all the rights acquired from
the above purchase to the Qitaihe local government for rebuilding the city of
Qitaihe. In return for forfeiting the properties purchased, the Company received
a total of RMB 36,304,461 (approximately US$5.3 million) as compensation from
the City of Qitaihe. The agreement of forfeiting was signed on January 27,
2010.
On
December 20, 2009, the Company sold certain equipment it had previously acquired
to an unrelated third party in the amount of RMB 4,313,620 (approximately
$631,000).
As a
result of transactions described in the preceding two paragraphs, the Company
recognized a net gain of RMB 3,378,675 ($495,348) on the “Disposal of property,
plant and equipment,” which was included within “Other Income (Expense)” in the
Statement of Operations for the year ended December 31, 2009.
The
balance due from Land Center of Qitaihe and proceeds receivable from sale of
equipment were collected in the first quarter 2010.
Due from related
party
At March
31, 2010 and at December 31, 2009, due from related party, Mr. Chengzhi Wang,
the General Manager and Director of the Company, of $10,659 and $244,636,
respectively, was interest free and due on demand.
F-10
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 6 - PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment, net consist of:
|
March 31,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Buildings
|
$
|
2,924,758
|
$
|
2,920,766
|
||||
Plant
equipment and machinery
|
4,648,595
|
4,642,249
|
||||||
Motor
vehicles
|
289,211
|
288,816
|
||||||
Furniture
and office equipment
|
12,471
|
11,138
|
||||||
Total
|
7,875,035
|
7,862,969
|
||||||
Less
accumulated depreciation
|
(2,232,188
|
)
|
(2,112,093
|
)
|
||||
Net
|
$
|
5,642,847
|
$
|
5,750,876
|
Depreciation
expense was $117,209 and $117,712 for the three months ended March 31, 2010 and
2009, respectively, of which $98,176 and $98,823, were included in cost of
sales, respectively.
NOTE 7 - LAND USE
RIGHTS
Land use
rights, net consist of:
|
March 31,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Harbin
Hainan Kangda
|
$
|
17,608,282
|
$
|
17,584,244
|
||||
Taishan
Kangda
|
871,932
|
870,741
|
||||||
Total
|
18,480,214
|
18,454,985
|
||||||
Less
accumulated amortization
|
(567,743
|
)
|
(473,151
|
)
|
||||
Net
|
$
|
17,912,471
|
$
|
17,981,834
|
On August
25, 2009, Harbin Hainan Kangda entered into an Asset Purchase Agreement (the
“Agreement”) with the Local Government of Baisha Town, Taishan City, Guangdong
Province (“Seller”). Under the terms of the Agreement, the Company was to
acquire land use rights of state-owned land located in Langbei Village, Baisha
Town covering an area of 181,854 square meters, with a useful life of 50 years
starting from the issue date of the land use right certificate.
The
purchase price for the Taishan Basha land use rights of 66,376,800 RMB
($9,710,926) was paid in full as of December 31, 2009. Commencing January 2010,
amortization of the cost is being charged to operations.
Amortization
of land use rights was $94,677 and $9,535 for the three months ended March 31,
2010 and 2009, respectively, of which $85,143 and $0, respectively, were
included in cost of goods sold.
F-11
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
The
expected amortization of the above land use rights for each of the five
succeeding years ending March 31, and in the aggregate, is as
follows:
Year Ending
March 31,
|
Amount
(Unaudited)
|
|||
2011
|
$
|
414,970
|
||
2012
|
414,970
|
|||
2013
|
414,970
|
|||
2014
|
414,970
|
|||
2015
|
414,970
|
|||
Thereafter
|
15,837,567
|
|||
Total
|
$
|
17,912,417
|
NOTE 8 - INTANGIBLE
ASSETS
Intangible
assets, net consist of:
|
March 31,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Patents
and licenses
|
$
|
9,298,750
|
$
|
1,370,831
|
||||
Less
accumulated amortization
|
(1,088,788
|
)
|
(1,054,531
|
)
|
||||
Net
|
$
|
8,209,962
|
$
|
316,300
|
In
January 2010, the Company purchased a group of cactus patents for cattle, hog
and fish feed for $7,927,511 (RMB 54,112,700) under a “Patent Transfer
Agreement” which provided for the Company to make 4 installment payments to the
transferor of the patent, as follows: 25% at the end of January 2010; 25% at the
end of March 2010; 20% at the end of June 2010; and 30% at the end of August
2010.
The
agreement also placed certain requirements on the Transferor concerning timely
providing the materials necessary so that title to the patent could promptly be
received by the Company. In addition, the agreement imposes liquidated damages
fees to the Company if it fails to make payment to the Transferor whom has the
right to rescind the contract and return of all materials related to the patent,
or if the Company is late in paying an amount, in particular if it is 2 months
tardy. There were liquidated damages fees imposed on the Transferor if they were
tardy as well.
The
Company has paid $6,299,500 in cash, which amount exceeded payments required by
the agreement through March 31, 2010, resulting in a $1,628,011 balance due
which is reflected in the Balance Sheet at March 31, 2010 as a liability
“Payable to the Seller of the Patent.” The additional payments were the result
of an informal agreement between the Transferor and the Company based upon a
timely delivery of materials by the Transferor to facilitate the transfer of
title to the Company, which occurred on April 21, 2010. The patent period
granted under PRC governmental authority commenced on April 10, 2010 and expires
on April 10, 2025. The Company expects to pay the remainder amount to the
Transferor during the remainder of May 2010. Prior to the Patent Transfer
Agreement the Company had been using the patents on an experimental basis since
2008.
F-12
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Patent
amortization expense was $34,281 and $34,283 for the three months ended March
31, 2010 and 2009, respectively.
The
expected amortization of the above intangible assets for each of the five
succeeding years ending March 31, and in the aggregate, is as
follows:
Year Ending March 31,
|
Amount
(Unaudited)
|
|||
2011
|
$
|
335,415
|
||
2012
|
533,603
|
|||
2013
|
438,222
|
|||
2014
|
396,376
|
|||
2015
|
396,376
|
|||
Thereafter
|
6,109,970
|
|||
Total
|
$
|
8,209,962
|
NOTE 9 - NOTE
PAYABLE
Note
payable consists of:
|
March 31,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Note
payable to a financial institution, interest free, unsecured and due
on demand
|
$
|
886,325
|
$
|
885,115
|
The note
payable (6,050,000 RMB) is due to a PRC provincial government financial
institution which made the loan to the Company to promote the commercial
cultivation of cactus. The loan was made to the Company on an interest-free and
unsecured basis and is repayable on demand. Imputed interest is calculated at 6%
per annum on the amount due. Total imputed interest recorded as additional
paid-in capital amounted to $13,295 and $13,296 for the three months ended March
31, 2010 and 2009, respectively.
NOTE 10 – TAXES
PAYABLE
Taxes
payable consist of:
|
March 31,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
PRC
corporation income tax
|
$
|
322,369
|
$
|
527,264
|
||||
Value
added tax payable
|
88,389
|
74,419
|
||||||
Consumption
tax
|
152,117
|
151,751
|
||||||
Other
taxes
|
683
|
35,707
|
||||||
Total
|
$
|
563,558
|
$
|
789,141
|
F-13
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 11 – ESTIMATED
LIABILITY FOR EQUITY-BASED FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
LIABIILTIES
Effective
January 1, 2009, in accordance with EITF Issue No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock”, the
Company reclassified the fair values at January 1, 2009 of the outstanding
Series A Convertible Preferred Stock and the warrants comprising the March 21,
2008 and the July 16, 2008 sales of units (see Note 12) from stockholders’
equity to liabilities, as follows:
|
Shares / Warrants
|
Fair Value
|
||||||
Series
A Convertible Preferred Stock
|
1,150,000
|
$
|
333,500
|
|||||
A
warrants
|
1,250,000
|
122,000
|
||||||
B
warrants
|
1,500,000
|
120,150
|
||||||
C
warrants
|
500,000
|
47,950
|
||||||
D
warrants
|
600,000
|
47,640
|
||||||
Total
warrants
|
3,850,000
|
337,740
|
||||||
Total
Financial Instruments
|
5,000,000
|
$
|
671,240
|
Since at
January 1, 2009 the carrying value of the outstanding financial instruments was
$690,000, the Company recognized a cumulative effect adjustment resulting from a
change in accounting principle of $18,760, or a net of $671,240. Accordingly,
the unappropriated retained earnings balance at December 31, 2008 was increased
from $11,604,285 to $11,623,045, as adjusted, on January 1, 2009.
The
characteristics which require classification of the Series A Preferred Stock and
warrants as liabilities are the Company’s obligations to reduce the conversion
price of the Series A Preferred Stock and the exercise price of the warrants in
the event that the Company sells, grants, or issues any shares, options
warrants, or any convertible instrument at a price below the $0.60 current
conversion price of the Series A Preferred Stock or the current exercise prices
of the warrants. As a result, the Company remeasures the fair values of these
financial instruments each quarter, adjusts the liability balances, and reflects
changes in operations as “income (expense) from revaluation of Series A
Preferred Stock and A, B, C, and D warrants with characteristics of liabilities
at fair values”.
At March
31, 2010, the fair values of the financial instruments consisted
of:
|
Shares / Warrants
|
Fair Value
|
||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Series
A Convertible Preferred Stock
|
50,000
|
$
|
107,000
|
|||||
A
warrants
|
-
|
-
|
||||||
B
warrants
|
1,025,000
|
1,352,385
|
||||||
C
warrants
|
500,000
|
710,950
|
||||||
D
warrants
|
600,000
|
759,360
|
||||||
Total
warrants
|
2,125,000
|
2,822,695
|
||||||
Total
Financial Instruments
|
2,175,000
|
$
|
2,929,695
|
F-14
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Below is
a reconciliation of the change in the fair values of the financial instruments
from January 1, 2009 through March 31, 2010.
|
Shares / Warrants
|
Fair Value
|
||||||
Balance,
January 1, 2009
|
5,000,000
|
$
|
671,240
|
|||||
Revaluation
credited to operations
|
-
|
(262,725
|
)
|
|||||
Balance,
March 31, 2009
|
5,000,000
|
408,515
|
||||||
Revaluation
charged to operations
|
-
|
1,761,440
|
||||||
Balance,
June 30, 2009
|
5,000,000
|
2,169,955
|
||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(416,667
|
)
|
(666,667
|
)
|
||||
Revaluation
charged to operations
|
-
|
2,738,135
|
||||||
Balance,
September 30, 2009
|
4,583,333
|
4,241,423
|
||||||
Conversion
of Series A Preferred Stock to Common Stock
|
(683,333
|
)
|
(1,282,500
|
)
|
||||
Exercise
of A warants
|
(1,250,000
|
)
|
(1,589,895
|
)
|
||||
Revaluation
charged to operations
|
-
|
3,689,332
|
||||||
Balance,
December 31, 2009
|
2,650,000
|
5,058,360
|
||||||
Exercise
of B warrants (Unaudited)
|
(475,000
|
)
|
(612,750
|
)
|
||||
Revaluation
credited to operations (Unaudited)
|
-
|
(1,515,915
|
)
|
|||||
Balance,
March 31, 2010 (Unaudited)
|
2,175,000
|
$
|
2,929,695
|
The
Series A Convertible Preferred Stock is valued based on the trading price of the
Company’s common stock. The warrants are valued using the Black-Scholes option
pricing model with a 100% volatility assumption regarding the trading price of
the Company’s common stock.
NOTE 12 - SERIES A
CONVERTIBLE PREFERRED STOCK
On March
21, 2008, the Company entered into a Preferred Stock Purchase Agreement (the
“Purchase Agreement”) with T Squared Investments LLC (the “Investor”) to sell in
a private placement to the Investor for an aggregate purchase price of $500,000,
(i) 833,333 shares of the Company’s newly designated Series A Convertible
Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) for
$0.60 per share (the “Shares”), (ii) warrants to purchase up to 1,250,000 shares
of Company common stock exercisable for a period of three years at an exercise
price of $0.75 per share (the “A Warrants”) or an aggregate exercise price of
$937,500 if all of the A Warrants were exercised, and (iii) warrants to purchase
up to 1,500,000 shares of Company common stock exercisable for a period of three
years at an exercise price of $1.00 per share (the “B Warrants”), or an
aggregate exercise price of $1,500,000 if all the B Warrants were exercised. The
Company issued the Shares, the A Warrants and B Warrants on the same day.
Westernking Financial Service acted as the sole placement agent in the
transaction for a fee of $30,000 (6% of the gross proceeds).
The
Company also entered into a Registration Rights Agreement with the Investor,
pursuant to which the Company was obligated to file and have declared effective
by the SEC a registration statement registering the resale of the Shares and
common stock issuable upon the conversion of the Series A Preferred Stock and
the exercise of the A Warrants and B Warrants. If the registration statement was
not declared effective by the SEC by August 28, 2008, the Registration Rights
Agreement provided for the Company to issue to the Investor as liquidated
damages an additional 1,000 shares of Series A Preferred Stock for each day
thereafter not declared effective (subject to a maximum of 250,000 shares). On
October 17, 2008, the SEC declared effective the Company’s registration
statement on Form S-1. On October 15, 2008, the Company issued 46,000 shares of
common stock to the investor in consideration for the waiver of liquidated
damages.
F-15
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
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:
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.
F-16
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
In
October 2009, the aforementioned A warrant holder exercised 333,334 A warrants
at a price of $0.75 per share, or $250,000 total, and was issued 333,334 shares
on January 18, 2010.
In
February 2010, the aforementioned B warrant holder exercised 475,000 B warrants
at a price of $1.00 per share, or $475,000 total.
NOTE 13 – STOCK OPTIONS AND
WARRANTS TO PURCHASE COMMON STOCK; AND OTHER COMMON STOCK
ISSUANCES
Options and
Warrants
A summary
of stock option and warrant activity for the years ended December 31, 2008 and
2009 and for the three months ended March 31, 2010 as follows:
|
Stock Options
|
Warrants
|
||||||
Outstanding
at January 1, 2008
|
-
|
-
|
||||||
Granted
and issued
|
400,000
|
3,850,000
|
||||||
Exercised
|
-
|
-
|
||||||
Forfeited/expired/cancelled
|
-
|
-
|
||||||
Outstanding
at December 31, 2008
|
400,000
|
3,850,000
|
||||||
Granted
and issued
|
-
|
-
|
||||||
Exercised
|
(107,059
|
)
|
(1,250,000
|
)
|
||||
Forfeited/expired/cancelled
|
(42,941
|
)
|
-
|
|||||
Outstanding
at December 31, 2009
|
250,000
|
2,600,000
|
||||||
Granted
and issued
|
-
|
-
|
||||||
Exercised
|
(201,738
|
)
|
(475,000
|
)
|
||||
Forfeited/expired/cancelled
|
(48,262
|
)
|
-
|
|||||
Outstanding
at March 31, 2010 (Unaudited)
|
-
|
2,125,000
|
The
400,000 stock options granted in 2008 were all issued to the Company’s law firm
for services rendered.
On March
10, 2008, the Company granted 250,000 options to the law firm, all exercisable
at $1.00 per share to March 10, 2012, and expensed the $59,225 fair value of
these options at March 10, 2008 (estimated using the Black-Scholes option
pricing model and the following assumptions: stock price of $0.41 per share,
exercise price of $1.00 per share, term of 4 years, expected volatility of 100%,
and risk-free interest rate of 4%).
On
December 31, 2008, the Company granted 150,000 options to the law firm, all
exercisable at $0.30 per share to December 31, 2012, and expensed the $31,410
fair value of these options at December 31, 2008 (estimated using the
Black-Scholes option pricing model and the following assumptions: stock price of
$0.29 per share, exercise price of $0.30 per share, term of 4 years, expected
volatility of 107%, and risk-free interest rate of 2%).
In July
2009, pursuant to a cashless exercise amendment, 107,059 options were converted
into 107,059 shares of common stock and the remaining 42,941 options were
cancelled. The Company expensed the $32,118 exercise amount relating to the
107,059 shares.
On
January 26, 2010, the Company issued 76,738 shares of its common stock to Crone
Law Group in a cashless exercise of 125,000 stock options exercisable at a price
of $1.00 per share.
F-17
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
On
February 25, 2010, the Company issued 475,000 shares of its common stock to T
Squared Investments LLC, a B warrant holder, at the price of $1.00 per share
pursuant to an exercise of B warrants.
On March
3, 2010, the Company issued 125,000 shares of its common stock to Crone Law
Group in an exercise of 125,000 stock options at the price of $1.00 per
share.
There are
no stock options outstanding as of March 31, 2010.
Warrants
outstanding at March 31, 2010 consist of:
Date
|
Number
|
Number
|
Exercise
|
Expiration
|
|||||||||
Granted
|
Outstanding
|
Exercisable
|
Price
|
Date
|
|||||||||
March
21, 2008
|
1,025,000
|
1,025,000
|
$
|
1.0000
|
March
21, 2011
|
||||||||
July
16, 2008
|
500,000
|
500,000
|
$
|
0.9375
|
July
16, 2011
|
||||||||
July
16, 2008
|
600,000
|
600,000
|
$
|
1.2500
|
July
16, 2011
|
||||||||
Total
|
2,125,000
|
2,125,000
|
Other Common Stock
Issuances
On
February 8, 2010, the Company issued 40,000 shares to First Trust China Ltd.
pursuant to the consulting agreement signed on September 1, 2009 (see Note
16).
NOTE 14– RESTRICTED NET
ASSETS
Relevant
PRC statutory laws and regulations permit payments of dividends by Harbin Hainan
Kangda and Taishan Kangda only out of their retained earnings, if any, as
determined in accordance with PRC accounting standards and
regulations. In addition, PRC laws and regulations require that
annual appropriations of after-tax income should be set aside prior to payments
of dividends as a reserve fund. As a result of these PRC laws and
regulations, Harbin Hainan Kangda and Taishan Kangda are restricted in their
ability to transfer a portion of their net assets in the form of dividends,
loans or advances, which restricted portion amounted to $10,468,309 and
$10,306,160 at March 31, 2010 and December 31, 2009, respectively.
NOTE 15 - INCOME
TAXES
The
Company is subject to current income taxes on an entity basis on taxable income
arising in or derived from the tax jurisdiction in which each entity is
domiciled.
US China
Kangtai was incorporated in the United States and is subject to United States
income tax. No United States income taxes were provided in 2010 and 2009 since
US China Kangtai had taxable losses in those periods.
At March
31, 2010, US China Kangtai has an unrecognized deferred United States income tax
liability relating to undistributed earnings of Harbin Hainan Kangda. These
earnings are considered to be permanently invested in operations outside the
United States. Generally, such earnings become subject to United States income
tax upon the remittance of dividends and under certain other circumstances.
Determination of the amount of the unrecognized deferred United States income
tax liability with respect to such earnings is not practicable.
F-18
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
Based on
managements’ present assessment, the Company has not yet determined it to be
more likely than not that a deferred tax assets of approximately $350,000
($297,500 at December 31, 2009) attributable to the future utilization of the
approximately $1,000,000 net operating loss carryforward of US China Kangtai as
of March 31, 2010 will be realized. Accordingly, the Company has provided a 100%
allowance against the deferred tax asset in the financial statements at March
31, 2010. The Company will continue to review this valuation allowance and make
adjustments as appropriate. The net operating loss carryforward expires in
varying amounts from year 2005 to year 2010.
Current
United States income tax laws limit the amount of loss available to be offset
against future taxable income when a substantial change in ownership occurs.
Therefore, the amount available to offset future taxable income may be
limited.
BVI China
Kangtai was incorporated in the BVI and is not subject to tax on income or on
capital gains.
Harbin
Hainan Kangda and Taishan Kangda were incorporated in the PRC and are subject to
PRC income tax which is computed according to the relevant laws and regulations
in the PRC. Harbin Hainan Kangda located its factories in a special economic
region in Harbin, the PRC. This economic region allows foreign owned enterprises
a two-year income tax exemption beginning in the first year after they become
profitable, being 2005 and 2006, and a 50% income tax reduction for the
following three years, being 2007 to 2009. Harbin Hainan Kangda was approved as
a wholly owned foreign enterprise in March 2005. The effective income tax
rate was 15% for the years ended December 31, 2009 and 2008. The income tax rate
is increased to 25% beginning from January 1, 2010.
The
provision for income taxes differs from the amount computed by applying the
statutory United States federal income tax rate of 35% to income (loss) before
income taxes. The sources of the difference follow:
March 31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Expected
tax at 35%
|
$
|
939,198
|
$
|
395,486
|
||||
Tax
effect of unutilized losses of US China Kangtai and BVI China
Kangtai
|
53,484
|
9,658
|
||||||
Tax
effect of PRC income taxed at lower rate
|
(131,326
|
)
|
(139,904
|
)
|
||||
Non-taxable
income from revaluation of Series A Preferred Stock and A, B, C, and D
warrants with characteristics of liabilities at fair value
|
(530,570
|
)
|
(91,954
|
)
|
||||
Actual
provision for income taxes
|
$
|
330,786
|
$
|
173,286
|
NOTE 16 - COMMITMENTS AND
CONTINGENCIES
Operating lease
commitments
The
Company leases farm sheds and land for growing cactus from third parties under
operating leases. Rental expenses for all operating leases for the three months
ended March 31, 2010 and 2009 were approximately $1,500 and $2,000
respectively.
At March
31, 2010, future minimum rental commitments under all non-cancellable operating
leases are due as follows:
F-19
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
For the Year Ending
|
||||
March 31,
|
||||
2011
|
$
|
6,272
|
||
2012
|
6,272
|
|||
2013
|
6,272
|
|||
2014
|
6,272
|
|||
2015
|
2,175
|
|||
Thereafter
|
50,644
|
|||
Total
|
$
|
77,907
|
Consulting
Agreements
The
Company entered into a six months investor relations consulting contract on July
1, 2009. The Company is required to pay the consultant a fee of $5,000 per
month, consisting of $2,500 in cash and $2,500 in Company restricted common
stock. The contract is to be automatically renewed for six months unless either
of the two parties gives 30 days written notice of termination. The contract is
still active currently.
The
Company entered into a one year consulting agreement with First Trust China Ltd.
on September 1, 2009. The Company is required to pay the consultant a monthly
cash retainer of $2,000 paid quarterly, of which the first 3 months was due upon
signing of the contract. In addition, the Company is required to issue a total
of 80,000 shares of its common stock to the consultant semi-annually; the first
40,000 shares were issued February 9, 2010.
General
and administrative expenses for the three months ended March 31, 2010 includes
$92,800 consulting fee incurred relating to the issuing of 40,000 shares to the
consultants, which was valued at market price of $2.32 per share.
Concentrations and
risks
Substantially
all of the Company’s assets are located in China and 100% of the Company’s
revenues have been derived from customers located in China and
Taiwan.
Substantially
all of Harbin Hainan Kangda and Taishan Kangda’s business operations are
conducted in the PRC and governed by PRC laws and
regulations. Because these laws and regulations are relatively new,
the interpretation and enforcement of these laws and regulations involve
uncertainties.
The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the
PRC. Under existing PRC foreign exchange regulations, payment of
current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval
from appropriate governmental authorities is required where RMB is to be
converted into foreign currency and remitted out of the PRC to pay capital
expenses, such as the repayment of bank loans denominated in foreign
currencies. The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.
F-20
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
NOTE 17 – SEGMENT AND OTHER
INFORMATION
The
Company operates in one industry segment – the production and sale of cactus,
cactus health food, and other cactus products. Substantially all of
the Company’s identifiable assets at March 31, 2010 and December 31, 2009 were
located in the PRC. Net sales for the periods presented were all
derived from PRC customers. During the three months ended March 31, 2010, one
customer accounted for 14% of net sales. During the three months
ended March 31, 2009, one customer accounted for 12% of net sales.
Net sales
consisted of:
|
March 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Finished
goods
|
$
|
3,909,263
|
$
|
2,725,120
|
||||
Cactus
stock
|
1,609,771
|
604,832
|
||||||
Total
|
$
|
5,519,034
|
$
|
3,329,952
|
NOTE 18 - TERMINATION OF
COMMON STOCK PURCHASE AGREEMENT (LIMITED PRIVATE PLACEMENT OFFERING WITH SEASIDE
88, LP) ENTERED INTO IN NOVEMBER 2009
On November
15, 2009, the Company entered into a Common Stock Purchase Agreement (the
“Agreement”) with Seaside 88, LP (“ Seaside”), relating to the
offering and sale of up to 2,100,000 shares of Company common stock. Subject to
the limitations and qualifications set forth therein, the Agreement requires the
Company to issue and sell, and Seaside to purchase, up to 150,000 shares of
common stock once every two weeks, subject to the satisfaction of customary
closing conditions. At the initial closing and at each subsequent closing, on
each 14th day
thereafter for twenty-six (26) weeks, the offing price of the common stock will
equal 87% of the volume weighted average trading price of the common stock for
the ten consecutive trading days immediately preceding each subsequent closing
date. If, with respect to any subsequent closing, the volume weighted average
trading price of the common stock for the three trading
days immediately prior to such closing is below $1.25 per share, then
the particular subsequent closing will not occur and the aggregate number of
Shares to be purchased shall be reduced by 150,000 shares of common stock, The
Agreement provides that the Company may, at its sole discretion, upon thirty
(30) days’ prior written notice to Seaside, terminate the Agreement after the
fifth subsequent closing. The Agreement contains representations and warranties
and covenants for each party, which must be true and have been performed at each
closing. The Agreement may be terminated by Seaside, by written notice to the
Company, if the initial closing has not been consummated on or before March 31,
2010, provided, however, if the Company receives comments from the Securities
and Exchange Commission on the registration statement covering the sale to
Seaside, or the resale by Seaside, of the Shares, this date shall be extended
until April 30, 2010.
As of
April 30, 2010, the registration statement to register the shares of common
stock for resale has not been filed and, no shares of common stock have been
issued to Seaside under the Agreement. At this point, Seaside has not filed
notice under Section 5.1 of the Agreement, or commenced or threatened legal
action against the Company for the $200,000 in liquidated damages that may be
due Seaside under the Agreement. The Agreement provided that such liquidating
damages would be due in the event the Company exercises its
termination right and within six months of such terminations initiates another
financing having committed funding dates scheduled at pre-determined intervals
of between one week and two months.
F-21
CHINA
KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
(UNAUDITED)
On April
30, 2010, the Company entered into a termination agreement (the “Termination
Agreement”) with Seaside (see Note 18) pursuant to which the parties agreed to
mutually terminate the Common Stock Purchase Agreement, dated November 5, 2009,
between the Company and Seaside (the “Purchase Agreement”) with no further
obligations. The parties agreed to enter into the Termination Agreement because
the Company believes the financing terms as contemplated by the Purchase
Agreement is not in the best interest of the Company at the current time. The
Company has not incurred any early termination penalties and there are no
further obligations outstanding under the Purchase Agreement.
NOTE 19 - SUBSEQUENT
EVENTS
On April
20, 2010, the Company issued 250,000 shares of its common stock to T Squared
Investments LLC, a B warrant holder, at the price of $1.00 per share pursuant to
an exercise of B warrants.
The
Company has evaluated subsequent events through the filing date of this Form
10-K and has determined that there were no additional subsequent events to
recognize or disclose in these financial statements.
F-22
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-23
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-24
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-25
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-26
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-27
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-28
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-29
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-30
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-31
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-32
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-33
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-34
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-35
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-36
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-37
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-38
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-39
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-40
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-41
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-42
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-43
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-44
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-45
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-46
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-47
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
We
estimate that expenses in connection with the distribution described in this
registration statement (other than brokerage commissions, discounts or other
expenses relating to the sale of the shares by the selling security holders)
will be as set forth below. We will pay all of these expenses. The amounts shown
below, with the exception of the Securities and Exchange Commission registration
fee, are estimates.
SEC
registration fee
|
$
|
121.00
|
||
Accounting
Fees and Expenses
|
5,000.00
|
|||
Legal
Fees and Expense
|
25,000.00
|
|||
Printing
Expenses
|
1,000.00
|
|||
Transfer
Agent Fees
|
||||
Miscellaneous
|
||||
Total
|
$
|
31,121.00
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Company’s directors and executive officers are indemnified as provided by the
Nevada Revised Statutes and the Company’s Bylaws. Under the Nevada Revised
Statutes, director immunity from liability to a company or its shareholders from
monetary liabilities applies automatically unless it is specifically limited by
a company's articles of incorporation. Our articles of incorporation limit the
liability of directors to the maximum extent permitted by Nevada law. This
limitation of liability is subject to exceptions including intentional
misconduct, obtaining an improper personal benefit and abdication or reckless
disregard of director duties. Our articles of incorporation and bylaws provide
that we may indemnify our directors, officers, employees and other agents to the
fullest extent permitted by law. Our bylaws also permit us to secure insurance
on behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
bylaws would permit indemnification. We currently do not have such an insurance
policy.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
RECENT
SALES OF UNREGISTERED SECURITIES
The
following securities were issued within the past three years and were not
registered under the Securities Act of 1933.
On March
21, 2008, the Company entered into a Preferred Stock Purchase Agreement (the
“Purchase Agreement”) with T Squared Investments LLC (“T Squared”) to sell in a
private placement to T Squred 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). As of
the date of this registration statement 750,000 B Warrants remain
outstanding.
II-2
The
Company also entered into a Registration Rights Agreement with T Squared,
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 T Squared in consideration for the waiver of liquidated
damages.
On July
16, 2008, the Company sold T Squared, 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. As of the date of this registration statement 50,000
Series A preferred shares and the additional warrants remain
outstanding.
On
December 31, 2008, the Company granted 150,000 options to the Company’s legal
counsel for services rendered, all exercisable at $0.30 per share to December
31, 2012. All of these options were exercised and none remains
outstanding.
On March
10, 2008, the Company granted 250,000 options to the Company’s legal counsel for
services rendered, all exercisable at $1.00 per share to March 10, 2012. All of
these options were exercised and none remains outstanding.
On
September 25, 2008, the Company issued 250,000 options to the Company’s legal
counsel for services rendered, all exercisable at $.60 per shares to September
25, 2012. All of these options were exercised and none remains
outstanding.
On August
28, 2009 the Company issued 10,000 shares to its business consultant pursuant to
the consulting agreement dated July 1, 2009 for services rendered.
On
February 8, 2010, the Company issued 40,000 shares to its business consultant
pursuant to the consulting agreement signed on September 1, 2009 for services
rendered.
On April
20, 2010 the Company issued 50,000 shares to its business consultant pursuant to
the consulting agreement signed on April 2, 2010 for services
rendered.
All of
the above offerings and sales were deemed to be exempt under Section 4(2) of the
Securities Act of 1933, as amended. No advertising or general solicitation was
employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, business
associates of our company or executive officers of our company, and transfer was
restricted by our company in accordance with the requirements of the Securities
Act of 1933. In addition to representations by the above-referenced persons, we
have made independent determinations that all of the above-referenced persons
were accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
Except as
expressly set forth above, the individuals and entities to which we issued
securities as indicated in this section of the registration statement are
unaffiliated with us.
II-3
EXHIBITS
Exhibit
No.
|
Description
|
|
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).
|
|
5.1*
|
Opinion
of the Crone Law Group (filed herewith)
|
|
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).
|
II-4
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
(incorporated by reference to the Form 10-KSB filed with the Securities
and Exchange Commission on April 15, 2008).
|
|
10.21
|
|
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).
|
10.22
|
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).
|
|
10.23
|
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).
|
|
10.24
|
Common
Stock Purchase Warrant “A” (incorporated by reference to the From 8-K
filed with the Securities and Exchange Commission on March 27,
2008).
|
II-5
10.25
|
|
Common
Stock Purchase Warrant “B” (incorporated by reference to the From 8-K
filed with the Securities and Exchange Commission on March 27,
2008).
|
10.26
|
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)
|
|
10.27
|
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)
|
|
10.28
|
Common
Stock Purchase Warrant “A” (incorporated by reference to the Form 8-K
filed on July 21, 2008)
|
|
10.29
|
Common
Stock Purchase Warrant “B” (incorporated by reference to the Form 8-K
filed on July 21, 2008)
|
|
10.30
|
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)
|
|
10.31*
|
Asset
Purchase Agreement dated as of August 25, 2009 between Harbin Hainan
Kangda and the Local Government of Baisha Town, Taishan City. (filed
herewith)
|
|
10.32*
|
English
translation of the Patent Transfer Agreement dated as of January 2010
between Harbin Hainan Kangda Cactus Hygienical Foods Co., Ltd and
Heilongjiang Yatai Bio Development and Research Institute. (filed
herewith)
|
|
10.33
|
English
Translation of the Asset Purchase Agreement dated June 28, 2010 between
Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. and Dadi Tobacco
Trade Center (incorporated by reference to the Form 8-K filed on July 2,
2010)
|
|
10.34
|
Investment Agreement dated as of
July 8, 2010 by and between the Company and Kodiak Capital Group,
LLC. (incorporated
by reference to the Form 8-K filed on July 13,
2010)
|
|
10.35
|
Registration
Rights Agreement dated as of July 8, 2010 by and between the Company and
Kodiak Capital Group, LLC. (incorporated by reference to the Form 8-K
filed on July 13, 2010)
|
|
10.36*
|
Contract
of Employment dated June 3, 2010 by and between the Company and Chengzhi
Wang (filed herewith)
|
|
10.37*
|
Contract
of Employment dated June 3, 2010 by and between the Company and Hong Bu
(filed herewith)
|
|
21.1
|
List
of Subsidiaries (incorporated by reference to the Form 10-KSB filed with
the Securities and Exchange Commission on April 15,
2008).
|
|
23.1*
|
|
Consent
of Michael T. Studer CPA, P.C. (filed herewith)
|
23.2
|
Consent
of the Crone Law Group (contained in Exhibit 5.1).
|
|
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.
(incorporated by reference to the Form 10-K filed with the Securities and
Exchange Commission on April 15,
2010)
|
II-6
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.
(incorporated by reference to the Form 10-K filed with the Securities and
Exchange Commission on April 15, 2010)
|
|
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.
(incorporated by reference to the Form 10-K filed with the Securities and
Exchange Commission on April 15, 2010)
|
|
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.
(incorporated by reference to the Form 10-K filed with the Securities and
Exchange Commission on April 15,
2010)
|
*Filed
Herewith
UNDERTAKINGS
(a) The
undersigned registrant hereby undertakes:
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(b) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the
securities:
The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(1) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424 (§ 230.424 of this
chapter);
II-7
(2) Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(3) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(c)
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-8
In
accordance with the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it met all the
requirements of filing on this Registration Statement and authorized this
Registration Statement to be signed on its behalf by the undersigned, in Harbin,
Heilongjiang Province, the People’s Republic of China, on July 30,
2010.
China
Kangtai Cactus Bio-Tech Inc.
|
|||
By:
|
/s/ Jinjiang Wang
|
||
Jinjiang
Wang
Chief
Executive Officer
|
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jinjiang Wang as true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution and for him/her and in
his/her name, place and stead, in any and all capacities to sign any and all
amendments (including pre-effective and post-effective amendments) to this
Registration Statement, as well as any new registration statement filed to
register additional securities pursuant to Rule 462(b) under the Securities Act,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
In
accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE
|
TITLE
|
DATE
|
||
/s/ Jinjiang Wang
|
Chairman
and Chief Executive Office
|
July
30, 2010
|
||
Jinjiang
Wang
|
(Principal
Executive Officer)
|
|||
/s/ Hong Bu
|
Chief
Financing Officer
|
July
30, 2010
|
||
Hong
Bu
|
(Principal
Financial Officer and
Principal Accounting
Officer)
|
|||
/s/Chengzhi Wang
|
General
Manager and Director
|
July
30, 2010
|
||
Chengzhi
Wang
|
||||
/s/Jiping Wang
|
Director
|
July
30, 2010
|
||
Jiping
Wang
|
||||
/s/Song Yang
|
Director
|
July
30, 2010
|
||
Song
Yang
|
II-9