China Kangtai Cactus Bio-tech (IVNE) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the quarterly period ended September 30, 2008
o	TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the transition period from ____________ to ________________

Commission File No. 000-33097

CHINA KANGTAI CACTUS BIO-TECH, INC.

(Name of Small Business Issuer in its Charter)

Nevada	87-0650263
(State or Other Jurisdiction of incorporation or organization)	(I.R.S. Employer I.D. No.)

99 Taibei Road

Limin Economic and Technological Development Zone

Harbin, Heilongjiang Province

People’s Republic of China

(Address of Principal Executive Offices)

(86) 451-57351189 ext 126

(Registrant’s Telephone Number, Including International Code and Area Code)

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

Yes x    No o

Indicate by check mark whether the registrant is a large accelerate filer, an accelerate filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 11, 2008, the issuer had outstanding 17,885,625 shares of common stock, $.001 par value.

CHINA KANGTAI CACTUS BIO-TECH INC.

FORM 10-Q

September 30, 2008

INDEX

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:	1
Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007 (audited)	1
Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2008 and 2007 (unaudited)	2
Statements of Stockholders' Equity (unaudited)	3
Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	4
Notes to the Condensed Consolidated Financial Statements (unaudited)	5
Item 2. Management's Discussion and Analysis or Plan of Operation	11
Item 3. Quantitative and Qualitative Disclosure About Market Risk.	15
Item 4T. Controls and Procedures	15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	16
Item 1A. Risk Factors	16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3. Defaults upon Senior Securities	16
Item 4. Submission of Matters to a Vote of Security Holders	16
Item 5. Other Information	16
Item 6. Exhibits	16
Signatures	17

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries

Consolidated Balance Sheets

(Expressed in US Dollars)

  

	September 30,		December 31,
	2008		2007
	(Unaudited)		(Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	648,480	$	509,901
Accounts receivable, net of allowance for returns and doubtful accounts
of $979,700 and $838,736, respectively		4,460,653		4,036,169
Inventories		3,818,116		6,093,955
Other receivables and prepaid expenses		2,028		20,237
Total Current Assets		8,929,277		10,660,262
Property and Equipment, net		6,319,716		6,290,330
Other Assets
Intangible assets, net		486,072		553,038
Land use rights, net		8,608,851		1,290,141
Total Assets	$	24,343,916	$	18,793,771
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	235,917	$	160,543
Other payables and accrued liabilities		41,670		192,548
Note payable		882,574		829,437
Taxes payable		489,433		319,149
Total current liabilities		1,649,594		1,501,677
Commitments and Contingencies		—		—
Stockholders' Equity
Preferred stock, $0.001 par value; authorized 200,000,000 shares,
issued and outstanding: 1,250,000 and 0 shares, respectively		1,250		—
Common stock, $0.001 par value; authorized 200,000,000 shares,
issued and outstanding: 17,739,625 and 17,739,625 shares, respectively		17,740		17,740
Additional paid-in capital		8,784,936		6,607,848
Retained earnings
Appropriated		2,401,377		1,844,937
Unappropriated		8,529,301		7,082,943
Accumulated other comprehensive income		2,959,718		1,738,626
Total stockholders' equity		22,694,322		17,292,094
Total Liabilities and Stockholders' Equity	$	24,343,916	$	18,793,771

See notes to consolidated financial statements.

1

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(Expressed in US Dollars)

	Three Months Ended September 30,						Nine Months ended September 30,
	2008			2007			2008			2007
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net Sales	$	6,184,685		$	3,955,472		$	13,961,101		$	10,044,895
Cost of Sales		(3,676,334	)		(2,547,635	)		(8,899,088	)		(6,521,893	)
Gross Profit		2,508,351			1,407,837			5,062,013			3,523,002
Operating Expenses
Selling expenses		136,214			99,820			211,273			197,647
General and administrative expenses		138,052			155,729			514,092			330,523
Provision for returns and doubtful accounts		—			188,348			—			188,348
Depreciation		19,675			17,188			57,453			50,839
Amortization of land use rights		9,588			9,251			27,991			26,974
Amortization of intangible assets		34,475			32,474			100,646			93,633
Total operating expenses		338,004			502,810			911,455			887,964
Income from Operations		2,170,347			905,027			4,150,558			2,635,038
Other Income (Expenses)
Interest income		97			—			624			—
Imputed interest		(13,370	)		(12,446	)		(39,032	)		(36,313	)
Loss on disposal of property and equipment		(197	)		—			(14,246	)		—
Total Other Income (Expenses)		(13,470	)		(12,446	)		(52,654	)		(36,313	)
Income before Income Taxes		2,156,877			892,581			4,097,904			2,598,725
Income Tax Expense		(389,737	)		(109,073	)		(685,942	)		(404,684	)
Net Income		1,767,140			783,508			3,411,962			2,194,041
Deemed dividend relating to the beneficial conversion
feature and the value of the warrants included in
the sale of the Series A preferred stock		(318,664	)		—			(1,409,164	)		—
Net income attributable to common stockholders	$	1,448,476		$	783,508		$	2,002,798		$	2,194,041
Net income per common share
Basic	$	0.08		$	0.04		$	0.11		$	0.12
Diluted	$	0.08		$	0.04		$	0.11		$	0.12
Weighted average number of common shares outstanding
Basic		17,739,625			17,739,625			17,739,625			17,739,625
Diluted		18,921,690			17,739,625			18,446,263			17,739,625
Comprehensive income:
Net income	$	1,767,140		$	783,508		$	3,411,962		$	2,194,041
Foreign currency translation adjustment		66,880			262,255			1,221,092			634,825
Total	$	1,834,020		$	1,045,763		$	4,633,054		$	2,828,866
See notes to consolidated financial statements.

2

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(Expressed in US Dollars)

	Preferred Stock $0.001 par value				Common Stock $0.001 par value				Additional paid-in		Unappropriated retained			Appropriated retained		Accumulated other comprehensive
	Shares		Amount		Shares		Amount		capital		earnings			earnings		income		Total
Balance at December 31, 2005		—	$	—		17,105,625	$	17,105	$	5,530,435	$	4,308,398		$	885,137	$	132,500	$	10,873,575
Stock issued for services		—		—		634,000		635		982,065		—			—		—		982,700
Imputed interest on note payable		—		—		—		—		45,582		—			—		—		45,582
Transfer to statutory and
staff welfare reserves		—		—		—		—		—		(476,228	)		476,228		—		—
Net income for the year ended December 31, 2006		—		—		—		—		—		1,434,645			—		—		1,434,645
Currency translation adjustment		—		—		—		—		—		—			—		558,537		558,537
Balance at December 31, 2006		—		—		17,739,625		17,740		6,558,082		5,266,815			1,361,365		691,037		13,895,039
Imputed interest on note payable		—		—		—		—		49,766		—			—		—		49,766
Transfer to statutory and
staff welfare reserves		—		—		—		—		—		(483,572	)		483,572		—		—
Net income for the year ended December 31, 2007		—		—		—		—		—		2,299,700			—		—		2,299,700
Currency translation adjustment		—		—		—		—		—		—			—		1,047,589		1,047,589
Balance at December 31, 2007		—		—		17,739,625		17,740		6,607,848		7,082,943			1,844,937		1,738,626		17,292,094
Unaudited:
Sale of Series A
preferred stock		1,250,000		1,250		—		—		669,667		—			—				670,917
Deemed dividend		—		—		—		—		1,409,164		(1,409,164	)		—				—
Stock option expense		—		—		—		—		59,225					—				59,225
Imputed interest on note payable		—		—		—		—		39,032		—			—		—		39,032
Transfer to statutory and
staff welfare reserves		—		—		—		—		—		(556,440	)		556,440		—		—
Net income for the nine months ended September 30, 2008		—		—		—		—		—		3,411,962			—		—		3,411,962
Currency translation adjustment		—		—		—		—		—		—			—		1,221,092		1,221,092
Balance at September 30, 2008		1,250,000	$	1,250		17,739,625	$	17,740	$	8,784,936	$	8,529,301		$	2,401,377	$	2,959,718	$	22,694,322
See notes to consolidated financial statements.

3

China Kangtai Cactus Bio-Tech Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Expressed in US Dollars)

	Nine Months Ended September 30,
	2008			2007
	(Unaudited)			(Unaudited)
Cash Flows from Operating Activities
Net income	$	3,411,962		$	2,194,041
Adjustmens to reconcile net income
to net cash provided by (used for) operating activities
Depreciation - cost of sales		292,932			110,528
Depreciation - operating expenses		57,453			50,839
Amortization of land use rights		27,991			26,974
Amortization of intangible assets		100,646			93,633
Stock option expense		59,225			—
Imputed interest		39,032			36,313
Loss on disposal of property and equipment		14,246
Changes in operating assets and liabilities
Accounts receivable, net		(424,484	)		(2,895,997	)
Accounts receivable - related party		—			1,924
Other receivables and prepaid expenses		18,209			(3,821	)
Inventories		2,275,839			7,034
Accounts payable		75,374			(19,258	)
Other payables and accrued liabilities		(97,741	)		23,189
Taxes payable		170,284			130,184
Net cash provided by (used for) operating activities		6,020,968			(244,417	)
Cash Flows from Investing Activities
Proceeds from disposals of property and equipment		2,532			—
Purchase of property and equipment		—			(1,686	)
Purchase of land use right		(7,255,081	)		—
Net cash provided by (used for) investing activities		(7,252,549	)		(1,686	)
Cash Flows from Financing Activities
Note payable		—			—
Sale of Series A preferred stock-net		670,917			—
Net cash provided by (used for) financing activities		670,917			—
Effect of exchange rate on cash		699,243			461,519
Increase (decrease) in cash and cash equivalents		138,579			215,416
Cash and cash equivalents, beginning of period		509,901			451,936
Cash and cash equivalents, end of period	$	648,480		$	667,352
Supplemental disclosures of cash flow information:
Interest paid	$	—		$	—
Income taxes paid	$	515,658		$	—
See notes to consolidated financial statements.

4

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

NOTE 1 - INTERIM FINANCIAL STATEMENTS

The unaudited financial statements as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2008 and the results of operations and cash flows for the periods ended September 30, 2008 and 2007. 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 nine month period ended September 30, 2008 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2008. The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2007 as included in our report on Form 10-KSB.

NOTE 2 - ORGANIZATION AND BUSINESS OPERATIONS

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

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

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

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

On June 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. At June 26, 2006, Taishan Kangda had not yet commenced business operations but owned a piece of land approximating 240,000 square metres in Guangdong Taishan used for growing cactus and a factory property.

US China Kangtai, BVI China Kangtai, Harbin Hainan Kangda and Taishan Kangda are hereafter collectively referred to as the “Company”.

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

5

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

NOTE 3 - INVENTORIES

Inventories consist of:

	September 30, 2008		December 31, 2007
Cactus stock	$	2,906,090	$	5,512,782
Other raw materials and work-in-process		215,963		85,572
Finished goods		696,063		495,601
Total		3,818,116		6,093,955
Less: allowance for market adjustments to inventories		-		-
Net	$	3,818,116	$	6,093,955

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net consist of:

	September 30, 2008			December 31, 2007
Buildings	$	2,912,380		$	2,831,657
Plant equipment and machinery		4,450,007			4,350,191
Motor vehicles		287,987			270,654
Furniture and office equipment		13,741			14,649
Total		7,664,115			7,467,151
Less accumulated depreciation		(1,344,399	)		(1,176,821	)
Net	$	6,319,716		$	6,290,330

NOTE 5 - INTANGIBLE ASSETS

Intangible assets, net consist of:

	September 30, 2008			December 31, 2007
Patents and licenses	$	1,366,896		$	1,284,604
Total		1,366,896			1,284,604
Less accumulated amortization		(880,824	)		(731,566	)
Net	$	486,072		$	553,038

The estimated amortization of the above intangible assets for each of the five succeeding fiscal years ending December 31, 2009, 2010, 2011, 2012, and 2013 is $136,207, $136,207, $133,672, $33,551, and $11,184, respectively.

6

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

NOTE 6 - LAND USE RIGHTS

Land use rights, net consist of:

	September 30, 2008			December 31, 2007
Harbin Hainan Kangda	$	7,982,805		$	674,994
Taishan Kangda		868,242			815,985
Total		8,851,047			1,490,979
Less accumulated amortization		(242,196	)		(200,838	)
Net	$	8,608,851		$	1,290,141

The estimated amortization of the above land use rights for each of the five succeeding fiscal years ending December 31, 2009, 2010, 2011, 2012 and 2013 is $185,000.

NOTE 7 - NOTE PAYABLE

Note payable consists of:

	September 30, 2008		December 31, 2007
Note payable to a financial institution, unsecured and due on demand.	$	882,574	$	829,437

The note payable (6,050,000 RMB) is due to a PRC provincial government financial institution which made the loan to the Company to promote the commercial cultivation of cactus. The loan was made to the Company on an interest-free and unsecured basis and is repayable on demand. Imputed interest is calculated at 6% per annum on the amount due. Total imputed interest recorded as additional paid-in capital amounted to $39,032 and $36,313 for the nine months ended September 30, 2008 and 2007, respectively.

7

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

NOTE 8 - 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’s 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’s 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 and received 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 is 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 is not declared effective by the SEC by August 28, 2008, the Registration Rights Agreement provides for the Company to issue to the Investor as liquidated damages an additional 1,000 shares of Series A Preferred Stock for each day thereafter not declared effective (subject to a maximum of 250,000 shares). On October 17, 2008, the SEC declared effective the Company’s registration statement on Form S-1.

The Series A Preferred Stock has no voting or dividend rights, is entitled to a liquidation preference of $0.60 per share, and each share is convertible into one share of Company common stock at the option of the holder (adjustable to more shares if certain performance thresholds are not met for the six months ending June 30, 2008 or the year ending December 30, 2008).

The Company recorded as a $1,090,500 deemed dividend and as a $1,090,500 increase in additional paid-in capital the total of the intrinsic value of the beneficial conversion feature ($125,000) and the estimated fair value of the A Warrants ($477,250) and the B Warrants ($488,250).

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 $318,664 deemed dividend and as a $318,664 increase in additional paid-in capital, the total of the intrinsic value of the beneficial conversion feature ($37,084) and the estimated fair value of the warrants ($281,580).

NOTE 9 - 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 $9,931,799 and $8,745,639 at September 30, 2008 and December 31, 2007, respectively.

8

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

NOTE 10 - 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 2008 and 2007 since US China Kangtai had taxable losses in those periods.

At September 30, 2008, 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 provision for income taxes differs from the amount computed by applying the statutory United States federal income tax rate of 35% to income (loss) before income taxes. The sources of the difference follow:

	Nine Months Ended September 30,
	2008			2007
Expected tax at 35%	$	1,434,266		$	597,150
Tax effect of untilized losses of
US China Kangtai, BVI China Kangtai and Taishan Kangda		77,837			27,012
Effect of lower PRC income tax rate granted to Harbin Hainan Kangda		(864,006	)		(355,012	)
Other		37,845			26,461
Actual provision for income taxes	$	685,942		$	295,611

9

CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(Unaudited)

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Concentrations and risks

During 2008 and 2007, 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.

NOTE 12 - SEGMENT INFORMATION

The Company operates in one industry segment - the production and sale of cactus, cactus health food, and other cactus products. Substantially all of the Company’s identifiable assets at September 30, 2008 and December 31, 2007 were located in the PRC. Net sales for the periods presented were all derived from PRC and Taiwan customers. During the three months ended September 30, 2008, two customers accounted for 16%, and 14%, respectively, of net sales.

Net sales consisted of:

	Three months ended				Nine months ended
	September 30, 2008		September 30, 2007		September 30, 2008		September 30, 2007
Finished goods	$	5,329,127	$	3,299,196	$	10,785,295	$	8,783,871
Cactus stock		855,558		656,276		3,175,806		1,261,024
Total	$	6,184,685	$	3,955,472	$	13,961,101	$	10,044,895

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Item 2. Management’s Discussion and Analysis or Plan of Operation

DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this report, including statements in the following discussion, which are not statements of historical fact, may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as “plans,” “intends,” “will,” “hopes,” “seeks,” “anticipates,” “expects,” and the like, often identify such forward-looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. Numerous factors and future events could cause the Company to change such plans and objectives, or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10-Q and in the Company’s other filings with the Securities and Exchange Commission. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results. These forward-looking statements are made as of August 14, 2008; the date of the filing of this Form 10-Q and the Company undertakes no responsibility to update these forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing in Part I, Item 1 and elsewhere in this report. The Company’s fiscal year end is December 31.

Company Overview

The Company is principally engaged in the production, R&D, sales and marketing of products derived from cacti. The Company’s product lines include cactus nutraceuticals, cactus nutritional food and drinks, as well as cactus raw and intermediate materials.

The Company has over 387 acres of cactus-farming bases in the Guangdong and Heilongjiang Provinces of China. The Company predominantly grows three species of cacti which are Mexican Pyramid, Mexican Milpa-Alta and Mexican Queen. Mexican Pyramid and Queen cacti are used for cactus fruit drinks and nutraceutical products; Mexican Milpa-Alta is mainly used for cactus nutritional food products. Most of the cactus fruits are processed into cactus fruit juice, which is the raw material for cactus nutritional drinks. Most of the harvested edible cacti are processed into dry powders, which are raw materials for cactus nutraceuticals. The Company’s annual production capability of edible cacti in 2007 is 73,000 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 GMP¹certified processor), and Mudanjiang Kangwei Health Food Company, Ltd. Pursuant to these contracts, the Company provides raw materials, quality control guidelines and technical support while the processors provide other materials, processing facilities and labor to manufacture products for the Company. These processors are required to follow strictly the Company’s guidelines and instructions for production. The Company inspects all final products. The Company currently has long term agreements with all five processors which may be renewed at expiration in 2012. 

In 2006, the Company had entered two new co-processing agreements with Huimeijia Bio-tech Ltd. to produce nutraceutical soft capsules and Kangwei Health Foods Ltd. of Mudanjiang City to produce cactus palm dry powder products.

In October 2007, the Company has signed a new agreement with Harbin Meijia Bio-Tech Co., Ltd.

¹ 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.

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All of the above co-operative production agreements have been renewed during January and March of 2008.

The Company has also established its own cactus beverage and fruit wine production facilities. The Company’s cactus beverage product category includes cactus beer, cactus fruit wine (including the brand name of Overlord Scourge Flower Imperial Wine), cactus palm juices and cactus fruit drinks,

In addition, the Company has its own R&D facility, the Heilongjiang Sino-Mexico Cactus Development and Utilization Institute, which is certified by Heilongjiang Science & Technology Committee. The Institute has independently developed many patented cactus -based nutraceuticals and nutritional food and drink product formulas and production processes.

Company History

Our Company was initially incorporated as InvestNet, Inc. (“InvestNet”) on March 16, 2000 under the laws of the State of Nevada. Prior to June 3, 2005, the Company’s operations consisted of real time software and IT solutions which the Company held through its subsidiaries, Champion Agents Limited (which wholly owned DSI Computer Technology Company Limited) and Interchance Limited. Due to the fact that the Company was unable to generate sufficient cash flows from operations, obtain funding to sustain operations nor reduce or stabilize expenses to the point where it could have realized a net positive cash flow, management and the board of directors determined that it was in the best interests of the stockholders to seek a strategic alternative so that the Company could continue to operate. On May 13, 2005, InvestNet entered into a series of agreements to effect a “reverse merger transaction” via a share exchange and through the conversion of a convertible promissory note, as described below, with China Kangtai Cactus Bio-tech Company Limited (“BVI China Kangtai”), a British Virgin Islands (“BVI”) incorporated on November 26, 2004.

These documents included a Stock Purchase Agreement, pursuant to which InvestNet issued 30,000,000 shares to a stockholder of BVI China Kangtai for $300,000. Additionally, InvestNet entered into an Agreement and Plan of Reorganization, pursuant to which the stockholders of BVI China Kangtai exchanged 12% of BVI China Kangtai’s outstanding shares for 110,130,615 shares of InvestNet. Additionally, InvestNet issued a Convertible Promissory Note to BVI China Kangtai or its designees in the amount of $8,070,000 plus accrued interest at a rate of 5% per annum or convertible at the option of the holder(s) in the event that InvestNet effected a one for seventy reverse split of InvestNet’s common stock into the remaining 88% of the outstanding shares of BVI China Kangtai (the “Convertible Note”). The Company did effect a one for seventy reverse split of all of its outstanding shares of Common Stock and changed its name (to “China Kangtai Cactus Bio-Tech Inc.”) and trading symbol on the OTC Bulletin Board (to “CKGT”) on August 25, 2005. The holders of the Convertible Note converted the Convertible Note a day later on August 26, 2005 into 14,248,395 shares of Common Stock of the Company. As the result of the share exchange and conversion of the Convertible Note, the Company completed a “reverse merger transaction” whereby InvestNet acquired 100% of BVI China Kangtai, which wholly owns Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin Hainan Kangda”).

Harbin Hainan Kangda is presently our main operating subsidiary.  Harbin Hainan Kangda is in the business of selling and producing cactus and cactus related products in the PRC as more fully described below. In connection with the “reverse merger transaction”, we completely sold all the Company’s real time software and IT solutions operations by selling all of the stock held by the Company in its prior wholly owned subsidiaries, Champion Agents Limited (which wholly owned DSI Computer Technology Company Limited) and Interchance Limited to V-Capital Limited, a Republic of Mauritius corporation which is controlled by a former director of InvestNet.

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.

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In contemplation of the aforementioned resignations, also on June 3, 2005, the Board of Directors appointed in accordance with Section 3.04 of the Company’s Bylaws, Jinjiang Wang, Chengzhi Wang, Hong Bu, Jiping Wang and Song Yang as members of the Company’s Board of Directors, subject to the fulfillment of the filing and mailing requirements, including the 10 day waiting period of its Schedule 14f-1 that was sent to all stockholders of the Company pursuant to section 14(f) of the Securities Exchange Act of 1934 which occurred on July 22, 2005 and appointed the following officers to serve immediately: Jinjiang Wang, President; Chengzhi Wang, General Manager; Hong Bu, Chief Financial Officer and Treasurer; Fengxi Lang, Secretary; Changfu Wang, Vice General Manager; Zhimin Zhan, Vice General Manager; and Lixian Zhou, Assistant General Manager of the Company.

On July 20, 2005, InvestNet’s sole director, Vivian Szeto, and a majority of the Company’s stockholders unanimously approved and ratified a one for seventy reverse split (the “Reverse Split”) of the Company’s common stock and the amendment and restatement of the Company’s Articles of Incorporation to effect a name change of the Company from “Investnet, Inc.” to “China Kangtai Cactus Bio-Tech Inc.”. The Reverse Split became effective on August 25, 2005; 20 days after the Company sent an Information Statement to all of its stockholders and after the filing of the Amended and Restated Articles of Incorporation with the Secretary of State of Nevada. As a result of the Reverse Split, the number of issued and outstanding shares of common stock of the Company, now named China Kangtai Cactus Bio-Tech Inc., was reduced from a total of 200,000,000 shares outstanding to 2,857,143 shares outstanding. A day after the Reverse Split on August 26, 2005, the Convertible Note was converted by its holders(s) into 14,248,395 shares of the Company, which increased the total outstanding shares of the Company to 17,105,625 shares. The Company’s trading symbol was changed by the OTC Bulletin Board Stock Market (“OTCBB”) to “CKGT” to better reflect the Company’s new name. The Company has also changed its Web site to www.xrz.cn.

On June 26, 2006, the Company acquired a 100% equity interest in Guangdong Taishan Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a company with limited liability formed under the laws of the People’s Republic of China for $1,574,000 in cash. Taishan Kangda’s assets include large areas of cactus plantation and production facilities in Guangdong Province in southeast China. The acquisition allows the Company to establish production facilities closer to its existing cactus plantations in Guangdong Province in order to reduce transportation cost and to distribute its products more effectively in southeast China.

The Company currently has three 100% owned subsidiaries: China Kangtai Cactus Bio-Tech Company Limited, a British Virgin Islands company (Kangtai BVI”) ; Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd., a PRC company “Harbin Hainan Kangda”); and Taishan Kangda.

Kangtai BVI is a holding company and does not have any operations. Harbin Hainan Kangda handles all of the production, research and development, sales and marketing of our products derived from edible cactus plants, fruits and extracts. Taishan Kangda handles all of the cultivation and harvest of cactus plants and the production of our cactus raw materials.

Consolidated Results of Operations

The three-month period ended September 30, 2008 as compared to the three months ended September 30, 2007

For the three months ended September 30, 2008, revenues increased by $2,229,213 or 56.4% to $6,184,685 from $3,955,472 in the corresponding period of the prior year.  The increase in revenues was attributable to the fact that the Company is continuing to expand its productions and distribution, and its products are better accepted by the Chinese market customers. These products include Cactus Protein Nutrient, Cactus Calcium Peptide Soft Capsule and Cactus Shuxin Capsule, among others. In addition, the Company successfully launched two new products, cactus fish feed and cattle feed, in July 2008, which also contributed to the increase in sales.

For the three months ended September 30, 2008, cost of sales increased by $1,128,699 or 44.3% to $3,676,334 from $2,547,635, as compared to the corresponding period of the prior year. This increase was mainly due to an increase in net sales, specifically the sales of our newly launched cactus fish and cattle feed.

Our gross profit for the three months period ended September 30, 2008 was $2,508,351 which increased by $1,100,514 or 78.2% from $1,407,837 for the same period last year. This increase was mainly attributable to the increase in net sales.

For the three months ended September 30, 2008, operating expenses decreased by $164,806, or approximately 32.8% to $338,004, as compared to $502,810 for the three months ended September 30, 2007.  The decrease in operating expenses is mainly attributable to the elimination of expenses associated with returns and doubtful accounts which accounted for $188,348 for the same period in 2007.

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For the three months ended September 30, 2008, income before income taxes increased by $1,264,296 or 141.6%, to $2,156,877 from $892,581 for the corresponding period of the prior year. The increase was primarily due to the increase in gross profit. As a result, net income also increased by $983,632 or 125.5% to $1,767,140 from $783,508. This increase is due to the increase in net sales, specifically the sales of our newly launched cactus fish and cattle feed and a reduction in cost of sales as a result of the measures taken by the management.

As an effort to reduce production cost, the Company purchased certain processing equipment back in the previous quarter. The Company entered into an arrangement with one of its cooperating partners, Harbin Meijia Bio-Tech Co., Ltd. (“Meijia”), whereby Meijia would house and have full use of the equipment and in return will process and manufacture the Company’s products for a management fee. As a result, the Company is no longer required to pay Meijia a processing fee which is much higher than the management fee the Company currently pays to Meijia.

For the three months ended September 30, 2008, net income increased by $983,632, or 126% from $783,508 to $1,767,140. This increase was due to the increase in net sales as a result of the sales of the newly launched cactus fish and cattle feed and the reduction in cost associated with processing charges paid to Meijia.

The nine month period ended September 30, 2008 as compared to the nine month period ended September 30, 2007

For the nine months ended September 30, 2008, revenues increased by $3,916,206 or 39% to $ 13,961,101 from $10,044,895 in the corresponding period of the prior year.  The increase in revenues was attributable to the fact that the Company is continuing to expand its productions and distribution, and its products are better accepted by the Chinese market customers. These products include Cactus Protein Nutrient, Cactus Calcium Peptide Soft Capsule and Cactus Shuxin Capsule, among others. In addition, the Company successfully launched two new products, cactus fish feed and cattle feed, in July 2008, which also contributed to the increase in sales.

For the nine months ended September 30, 2008, cost of sales increased by $2,377,195 or 36.4% to $8,899,088 from $6,521,893, as compared to the corresponding period of the prior year. This increase was mainly due to an increase in net sales, specifically the sales of our newly launched cactus fish and cattle feed.

For the nine months ended September 30, 2008, operating expenses increased by $23,491, or approximately 2.6% to $911,455, as compared to $887,964 for the nine months ended September 30, 2007. Despite the substantial increases in general and administrative expenses, the Company eliminated expenses associated with returns and doubtful accounts which accounted for $188,348 in same period last year. As a result, our operating expenses increased only slightly.

For the nine months ended September 30, 2008, selling expenses decreased by $13,626, or 7% to $211,273 from $197,647 as compared to the corresponding period of the prior year. General and administrative expenses increased by $183,569 or 55.5% to $514,092 from $330,523 as compared to the corresponding period of the prior year. The increase in selling expenses was due to an increase in advertising expenses. The increase in general and administrative expenses was mainly due to (i) warrants issued to the Company’s new attorney valued at $59,225; (ii) increase in salaries and related benefits, and (iii) increase in expenditures in our investor relations program.

For the nine months ended September 30, 2008, income before income taxes increased by $1,499,179 or 57.7%, to $4,097,904 from $2,598,725 for the corresponding period of the prior year. The increase was primarily due to the increase in gross profit. As a result, net income also increased by $$1,217,921 or 55.5% to $3,411,962 from $2,194,041.

For the nine months ended September 30, 2008, net income increased by $1,217,921, or 55.5% from $2,194,041 to $3,411,962. This increase was due to larger foreign currency translation adjustment gains, sales of newly launched cactus fish and cattle feed, and the reduction in processing fees paid to Meijia.

Liquidity and Capital Resources -September 30, 2008

Operating.  For the nine months period ended September 30, 2008, the Company’s operations provided cash resources of $6,020,968 as compared to a shortfall of $244,417 cash resources used for the nine months period ended September 30, 2007, an increase of cash provided by operating activities of $6,265,385, or 2,563%. The increase was mainly due to (i) $2,268,805 decrease in inventories in 2008 as compared to the same period in 2007 and (ii) $2,471,513 increase in accounts receivable, net in 2008 as compared to the same period in 2007.

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Investing and financing.  For the nine months period ended September 30, 2008, the Company used $7,252,549 in investment activities an increase of $7,250,863 or 430,000% compared to $1,686 for the same period a year ago. The increase was mainly attributable to money invested in the purchase of land use right for property located in Guangdong Province, PRC, for $7,255,081 which amount was fully paid as of September 30, 2008.

For the nine months period ended September 30, 2008, the Company’s financing activities generated $670,917 cash resources, as compared to $0 for the same period ended September 30, 2007. This is due to the PIPEs financing transactions completed in March 2008 and July 16, 2008. In each financing transaction, the company issued Series A preferred stock and two classes of warrants to T-Squared Investments, LLC. (See note 8 to the notes to consolidated financial statements contained in this report for details). The conversion feature and the value of the warrants included in the issuance of Series A preferred stock had a negative impact on the common shareholders and resulted in a net loss attributable to common stockholders of $1,409,164, and a net income per share of $0.08 for the quarter.

The company had a cash position of $648,480 on September 30, 2008, an increase of $138,579, or 27% from $509,901 on December 31, 2007.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have, or are in the opinion of management likely to have, a current or future material effect on the Company’s financial condition or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4T.  Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were operating effectively.

(b) Changes in Internal Control over Financial Reporting.  There have been no significant changes in our internal controls over financial reporting that occurred during the second quarter of fiscal year 2008 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Limitations on the Effectiveness of Disclosure Controls and Procedures.

Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

To the best knowledge of the Officers and Directors of the Company, the Company is not a party to any material legal proceeding or litigation and such persons know of no other material legal proceeding or litigation contemplated or threatened.

Item 1A. Risk Factors

Not Required.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5.  Other Information

None.

Item 6.  Exhibits

(a) Exhibits.

EXHIBIT INDEX

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA KANGTAI CACTUS BIO-TECH INC.
Date: November 14, 2008	By:	/s/ JINJIANG WANG
		JINJIANG WANG
		President, Chief Executive Officer, Director and Principal Executive Officer

Date: November 14, 2008	By:	/s/ HONG BU
		HONG BU
		Chief Financial Officer, Director and Principal Financial and Accounting Officer

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