UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
o TRANSITION REPORT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
CHINA KANGTAI CACTUS BIO-TECH INC.
(Name of small business issuer in its charter)
| Nevada | 000-33097 | 87-0650263 |
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification Number) |
99 Taibei Road
Limin Economic and Technological Development Zone
Harbin, Heilongjiang Province
People’s Republic China
Zip Code: 150025
(Address of principal executive offices)
Issuer’s telephone number: (86) 451-57351189 ext 126
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, as of June 30, 2008, was approximately $4,699,244. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be "affiliates" of the registrant.
As of March 11, 2009, there were 17,885,625 shares of the issuer's common stock, $0.001 par value per share, issued and outstanding.
TABLE OF CONTENTS
| | | Page |
| PART I | | |
| Item 1. | Business | 1 |
| Item 2. | Description of Property | 9 |
| Item 3. | Legal Proceedings | 9 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 9 |
| | | |
| PART II | | |
| Item 5. | Market for Common Equity and Related Stockholder Matters | 9 |
| Item 6. | Selected Financial Data | 10 |
| Item 7. | Management’s Discussion and Analysis | 10 |
| Item 8. | Financial Statements | 13 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 13 |
| Item 9A(T) | Controls and Procedures | 14 |
| Item 9B | Other Information | 14 |
| | | |
| PART III | | |
| Item 10. | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. | 14 |
| Item 11. | Executive Compensation | 16 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management | 17 |
| Item 13. | Certain Relationships and Related Transactions | 18 |
| Item 14. | Principal Accountant Fees and Services | 19 |
| Item 14. | Exhibits | 19 |
| | | |
| SIGNATURES | 23 |
PART I
ITEM 1. BUSINESS.
Corporate History
As used in this report, “we”, “us”, “our”, “CKGT”, “our Company”, “the Company”, or “China Kangtai” refers to China Kangtai Cactus Bio-Tech Inc. and all of its subsidiaries and affiliated companies.
Our Company was initially incorporated as InvestNet, Inc. (“InvestNet”) on March 16, 2000 under the laws of the State of Nevada. Prior to June 3, 2005, the Company’s operations consisted of real time software and IT solutions which the Company held through its subsidiaries, Champion Agents Limited (which wholly owned DSI Computer Technology Company Limited) and Interchance Limited. Due to the fact that the Company was unable to generate sufficient cash flows from operations, obtain funding to sustain operations nor reduce or stabilize expenses to the point where it could have realized a net positive cash flow, management and the board of directors determined that it was in the best interests of the stockholders to seek a strategic alternative so that the Company could continue to operate. On May 13, 2005, InvestNet entered into a series of agreements to effect a “reverse merger transaction” via a share exchange and through the conversion of a convertible promissory note, as described below, with China Kangtai Cactus Bio-tech Company Limited (“BVI China Kangtai”), a British Virgin Islands (“BVI”) incorporated on November 26, 2004.
These documents included a Stock Purchase Agreement, pursuant to which InvestNet issued 30,000,000 shares to a stockholder of BVI China Kangtai for $300,000. Additionally, InvestNet entered into an Agreement and Plan of Reorganization, pursuant to which the stockholders of BVI China Kangtai exchanged 12% of BVI China Kangtai’s outstanding shares for 110,130,615 shares of InvestNet. Additionally, InvestNet issued a Convertible Promissory Note to BVI China Kangtai or its designees in the amount of $8,070,000 plus accrued interest at a rate of 5% per annum or convertible at the option of the holder(s) in the event that InvestNet effected a one for seventy reverse split of InvestNet’s common stock into the remaining 88% of the outstanding shares of BVI China Kangtai (the “Convertible Note”). The Company did effect a one for seventy reverse split of all of its outstanding shares of Common Stock and changed its name (to “China Kangtai Cactus Bio-Tech Inc.”) and trading symbol on the OTC Bulletin Board (to “CKGT”) on August 25, 2005. The holders of the Convertible Note converted the Convertible Note a day later on August 26, 2005 into 14,248,395 shares of Common Stock of the Company. As the result of the share exchange and conversion of the Convertible Note, the Company completed a “reverse merger transaction” whereby InvestNet acquired 100% of BVI China Kangtai, which wholly owns Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin Hainan Kangda”).
Harbin Hainan Kangda is presently our main operating subsidiary. Harbin Hainan Kangda is in the business of selling and producing cactus and cactus related products in the PRC as more fully described below. In connection with the “reverse merger transaction”, we completely sold all the Company’s real time software and IT solutions operations by selling all of the stock held by the Company in its prior wholly owned subsidiaries, Champion Agents Limited (which wholly owned DSI Computer Technology Company Limited) and Interchance Limited to V-Capital Limited, a Republic of Mauritius corporation which is controlled by a former director of InvestNet.
On June 3, 2005, in connection with the reorganization of the Company and the acquisition of BVI China Kangtai and its wholly owned subsidiary, Harbin Hainan Kangda, the Company’s executive officers and directors significantly changed. Specifically, Norman Koo resigned as a director, Chief Executive Officer and President of the Company; Terence Ho resigned as a director, Chief Financial Officer, and Treasurer of the Company; Vivian Szeto resigned as a director (However, Ms. Szeto’s resignation from the Board of Directors was contingent on the Company completing its filing and mailing requirements of its Schedule 14f-1 which occurred on July 22, 2005 and so, from June 3, 2005 to July 22, 2005 she served as the Company’s sole director) and Secretary of the Company; Johnny Lu resigned as a director of the Company; and Mantin Lu resigned as a director of the Company.
In contemplation of the aforementioned resignations, also on June 3, 2005, the Board of Directors appointed in accordance with Section 3.04 of the Company’s Bylaws, Jinjiang Wang, Chengzhi Wang, Hong Bu, Jiping Wang and Song Yang as members of the Company’s Board of Directors, subject to the fulfillment of the filing and mailing requirements, including the 10 day waiting period of its Schedule 14f-1 that was sent to all stockholders of the Company pursuant to section 14(f) of the Securities Exchange Act of 1934 which occurred on July 22, 2005 and appointed the following officers to serve immediately: Jinjiang Wang, President; Chengzhi Wang, General Manager; Hong Bu, Chief Financial Officer and Treasurer; Fengxi Lang, Secretary; Changfu Wang, Vice General Manager; Zhimin Zhan, Vice General Manager; and Lixian Zhou, Assistant General Manager of the Company.
On July 20, 2005, InvestNet’s sole director, Vivian Szeto, and a majority of the Company’s stockholders unanimously approved and ratified a one for seventy reverse split (the “Reverse Split”) of the Company’s common stock and the amendment and restatement of the Company’s Articles of Incorporation to effect a name change of the Company from “Investnet, Inc.” to “China Kangtai Cactus Bio-Tech Inc.”. The Reverse Split became effective on August 25, 2005; 20 days after the Company sent an Information Statement to all of its stockholders and after the filing of the Amended and Restated Articles of Incorporation with the Secretary of State of Nevada. As a result of the Reverse Split, the number of issued and outstanding shares of common stock of the Company, now named China Kangtai Cactus Bio-Tech Inc., was reduced from a total of 200,000,000 shares outstanding to 2,857,143 shares outstanding. A day after the Reverse Split on August 26, 2005, the Convertible Note was converted by its holders(s) into 14,248,395 shares of the Company, which increased the total outstanding shares of the Company to 17,105,625 shares. The Company’s trading symbol was changed by the OTC Bulletin Board Stock Market (“OTCBB”) to “CKGT” to better reflect the Company’s new name. The Company has also changed its Web site to www.xrz.cn.
On June 26, 2006, the Company acquired a 100% equity interest in Guangdong Taishan Kangda Cactus Hygienical Food Co., Ltd. (“Taishan Kangda”), a company with limited liability formed under the laws of the People’s Republic of China for $1,574,000 in cash. Taishan Kangda’s assets include large areas of cactus plantation and production facilities in Guangdong Province in southeast China. The acquisition allows the Company to establish production facilities closer to its existing cactus plantations in Guangdong Province in order to reduce transportation cost and to distribute its products more effectively in southeast China.
The Company currently has three 100% owned subsidiaries: China Kangtai Cactus Bio-Tech Company Limited, a British Virgin Islands company (Kangtai BVI”) ; Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd., a PRC company “Harbin Hainan Kangda”); and Taishan Kangda.
Kangtai BVI is a holding company and does not have any operations. Harbin Hainan Kangda handles all of the production, research and development, sales and marketing of our products derived from edible cactus plants, fruits and extracts. Taishan Kangda handles all of the cultivation and harvest of cactus plants and the production of our cactus raw materials.
Overview
The Company is principally engaged in the production, R&D, sales and marketing of products derived from cacti. The Company’s product lines include cactus nutraceuticals, cactus nutritional food and drinks, as well as cactus raw and intermediate materials.
The Company has over 387 acres of cactus-farming bases in the Guangdong and Heilongjiang Provinces of China. The Company predominantly grows three species of cacti which are Mexican Pyramid, Mexican Milpa-Alta and Mexican Queen. Mexican Pyramid and Queen cacti are used for cactus fruit drinks and nutraceutical products; Mexican Milpa-Alta is mainly used for cactus nutritional food products. Most of the cactus fruits are processed into cactus fruit juice, which is the raw material for cactus nutritional drinks. Most of the harvested edible cacti are processed into dry powders, which are raw materials for cactus nutraceuticals. The Company’s annual production capability of edible cacti in 2008 is 14,425 tons.
The Company engages with, by co-operative production agreements, local pharmaceutical, food and beverage manufacturers to produce its products. This strategy allows the Company to fill the orders quickly with short production runs and to reduce the requirements in fixed assets investment. The Company currently has entered into co-production agreements with five processors in China. They are Harbin Bin County Hualan Dairy Factory, Harbin Ice Lantern Noodle Factory, Tsingtao Brewry (Harbin) Inc., Harbin Diwang Pharmacy Co., Ltd. (a GMP certified processor), and Mudanjiang Kangwei Health Food Company, Ltd. Pursuant to these contracts, the Company provides raw materials, quality control guidelines and technical support while the processors provide other materials, processing facilities and labor to manufacture products for the Company. These processors are required to follow strictly the Company’s guidelines and instructions for production. The Company inspects all final products. The Company currently has long term agreements with all five processors which may be renewed at expiration in 2012.
GMP or Good Manufacturing Practice certifications are awarded by the State Food and Drug Administration of China to processors which meet the safety and quality assurance standards set by the State Food and Drug Administration of China.
In 2006, the Company had entered two new co-processing agreements with Huimeijia Bio-tech Ltd. to produce nutraceutical soft capsules and Kangwei Health Foods Ltd. of Mudanjiang City to produce cactus palm dry powder products.
In October 2007, the Company has signed a new agreement with Harbin Meijia Bio-Tech Co., Ltd.
All of the above co-operative production agreements have been renewed during January and March of 2008.
The Company has also established its own cactus beverage and fruit wine production facilities. The Company’s cactus beverage product category includes cactus beer, cactus fruit wine (including the brand name of Overlord Scourge Flower Imperial Wine), cactus palm juices and cactus fruit drinks,
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 |
The Company’s nutraceutical products containing cactus extracts include Cactus Protein Nutrient, Cactus Calcium Peptide Soft Capsule, and Cactus Shuxin Capsule.
Cactus Protein Nutrient
Cactus Protein Nutrient is produced with protein and agglomerate element. It has been proven to be effective on stomachaches, tardiness gastritis, digestibility canker and duodenum canker by the Research Institute of the Traditional Chinese Medicine of Heilongjiang Province.
Cactus Calcium Peptide Soft Capsule
Cactus Calcium Peptide Soft Capsule is made of cactus, active albumen peptide of soybean and liquid calcium. It has the following characteristics:
A) Several nutritional components that can be easily absorbed; and
B) It contains an albumen peptide of soybean which can enhance the absorption of calcium, phosphor and other mineral elements, consequently raising the calcium in the body and fighting fatigue.
Cactus Shuxin Capsule
Cactus Shuxin Capsule is made with cactus and haws extracts. It has been proven to have an effect on raising the flow capacity of coronary artery blood, alleviating drowsiness and improving red cell’s oxygen carrying capability by the Research Institute of the Traditional Chinese Medicine of Heilongjiang Province.
The revenue generated from sales of nutraceutical products was approximately $10,177,000 in fiscal year 2008, or about 49% of the total net sales.
The revenue generated from sales of cactus food, beverage and wine was approximately $5,288,500 in year 2008, or about 26% %. The remaining 25% of the sales is cactus raw and intermediate materials.
The Company currently has four product categories which are nutraceuticals, beverages, raw and intermediate materials and packaged foods. The table below sets forth revenue derived from each product category and the percentage of total revenue each product category accounts for in 2008:
| Product Categories | | Sales revenue in 2008 (in US$) | | | Percentage of Total Revenue in 2008 | |
| Nutraceuticals | | | 10,125,570 | | | | 49.9 | % |
| Beverages | | | 5,395,341 | | | | 26.6 | % |
| Raw & Intermediate Materials | | | 3,800,383 | | | | 18.7 | % |
| Packaged Foods | | | 119,285 | | | | 0.6 | % |
| Cactus Feed | | | 860,004 | | | | 4.2 | % |
| Total Revenue | | | 20,300,583 | | | | 100 | % |
The following table sets forth further breakdown of the Nutraceuticals by specific products and the percentage each product accounts for in 2008:
| Name of Nutraceutical Products | | Sales (in US$) | | | Percentage of Total Revenue | |
| Cactus Calcium Peptide Soft Capsule | | | 3,824,348 | | | | 37.8 | % |
| Cactus Protein Nutrient | | | 1,785,863 | | | | 17.6 | % |
| Cactus Calcium Peptide Soft Capsule for Children | | | 2,617,179 | | | | 25.9 | % |
| Cactus Shuxin Capsule | | | 1,897,178 | | | | 18.7 | % |
| Cactus Tang Gong Tian Bao Liquor | | | 1,002 | | | | 0.01 | % |
| Total | | | 10,125,570 | | | | 100 | % |
The Company has its own R&D facility, the Heilongjiang Sino-Mexico Cactus Development and Utilization Institute, which is certified by Heilongjiang Science & Technology Committee. The Institute has independently developed many patented cactus-based nutraceuticals and nutritional food and drink product formulas and production processes.
The Company manufactures and sells the following products launched between January 2001 and January 2005. Currently our products have maintained satisfactory levels of acceptance by distributors and customers. The table below sets forth our product lines and the launch date of each product line.
| Line | | Cactus Related Products | | Varieties | | Brand | | Sub-Brand | | Lunch 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 | | | | 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 | | | | Jan. 2001 |
| R&I Materials | | Cactus Dry Powder | | Several | | Kangda Cactus | | | | Jan. 2004 |
In order to quickly penetrate the markets in China, enhance the efficiency of distributions, lower sales costs and administrative overheads, starting August 2006, the Company has reformed its sales and distribution models and gradually disposed its own domestic distribution network of approximately 200 self-owned, franchised chain and Kangtai branded stores in Harbin, Beijing, Guangzhou and other cities in China. The Company has adopted the strategies of distributions and sales of its products primarily through various types and levels of provincial and municipal distributors and agents in Dalian, Heilongjiang, Harbin, Beijing, Guangzhou, Tianjin, Shenzhen, Jilin, Hebei, Liaoning, Shanxi, Hunan, Gansu and Shandong in China. The Company’s major revenue breakdown by region in China for the 2008 fiscal year is as follows:
| | | US$(1) | |
| Heilongjiang | | $ | 4,119,552 | |
| Jilin | | $ | 641,272 | |
| Shandong | | $ | 1,766,454 | |
| Beijing | | $ | 3,271,948 | |
| Guangdong | | $ | 4,762,895 | |
| Liaoning | | $ | 881,807 | |
| Shanxi | | $ | 825,943 | |
| Hunan | | $ | 1,008,800 | |
| Gansu | | $ | 850,219 | |
| Other | | $ | 2,171,693 | |
Harbin Huadingwei Trading Company, Ltd., Fujian Tianyi Economic and Trading Company, Ltd., and Jilin Yanji Economic and Trading Company, Ltd. are our top three distributors. Together, they account for 19% of our total sales.
Competition
The cactus product industry in China is not highly competitive, and no published data is available regarding China Kangtai’s relative position in the markets in which it operates. Although no major competitor currently competes against the Company across its entire product line, competitive products are available from a number of different vendors offering features similar to those of China Kangtai’s products. There can be no assurance that one or more of these competitors will not develop products that are equal or superior to the products the Company markets. In addition, many potential competitors for China Kangtai’s products have in-house capabilities to develop cactus products that can provide some or all of the functionality of China Kangtai’s products. Our top five competitors are Anhui Haozhou Xingbang Cactus Co., Hunan Yongzhou Sino-Mexico Cactus Development Co., Ltd., Henan Luxin Cactus Co., Ltd., Zhengshou Milpa-Alta Cactus Co., Ltd., and Ningxia Milpa-Alta Edible Cactus Development Co., Ltd.
The Company believes that there are distinguishing competitive factors in the selection of its cactus products. These include price/performance characteristics, marketing and sales expertise, R&D expertise and patents protections, management proprietary knowledge and experiences on cactus production, ownership of large cactus plantations, product benefit and functions, and reliability and integration of cactus into a variety of other products. The Company believes that it competes favorably with regard to these factors.
A major competitive asset for the Company is that it offers quality assurance of its products from the raw material stage all the way to the final products stage.
We are currently the leading cactus grower and cactus related products producer in China. We have cactus farm covering over 387 acres and an active research and development department which currently holds 17 patents and is seeking 13 new ones in various product categories. Our products are sold in supermarkets, food stores, hotels and restaurants though our growing distribution network in 12 provinces and two municipalities in China. W have a total of 23 product lines compare to our top five competitors which combined have a total of 26 product lines. In addition, our competitive advantages include the following:
Control from the source:
| • | 3 species of Mexican Cacti |
| • | Growing without chemicals |
Product innovation and research:
| • | Strong team and advisors |
Manufacturing and production:
| • | Co-operative processing partners |
| • | Quality control monitoring |
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.
Employees
At December 31, 2008, the Company has a total of 144 employees and generally enjoys good employer-employee relationship. The table below sets forth the number of our employees by department and location:
| DEPARTMENT | | NUMBER | | LOCATION |
| Administration | | 18 | | Harbin |
| Sales | | 25 | | Harbin |
| Production | | 52 | | Harbin |
| Baisha Base (cactus crop growing and production) | | 25 | | Taishan |
| Shalan Base (cactus crop growing and production) | | 12 | | Taishan |
| Research and Development | | 12 | | Harbin |
| Total | | 144 | | |
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.
Employees
As of December 31, 2008, China Kangtai has 144 full-time employees. The Management of the Company expects to continue to use consultants, attorneys, and accountants as necessary, to complement services rendered by its employees.
Reports to Security Holders
China Kangtai is not required to deliver an annual report to security holders and will not automatically deliver a copy of the annual report to its security holders unless a request is made for such delivery. The Company files all of its required reports and other information with the Securities and Exchange Commission (the “Commission”).
The public may read and copy any materials that are filed by China Kangtai with the Commission at the Commission’s Public Reference Room at 100 F Street, NE, Room 2521, Washington, D. C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The statements and forms filed by InvestNet with the Commission have also been filed electronically and are available for viewing or copy on the Commission maintained Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission. The Internet address for this site can be found at http://www.sec.gov.
Governmental Regulations
The Chinese government requires all nutraceutical products related manufacturers to obtain Food Production Permit for their nutraceutical manufacturing facilities. China Kangtai obtained its Food Production Permit from relevant governmental regulatory bodies in September 2005. Other than the Food Production Permit requirements, there was no significant change in the regulatory environment in China.
ITEM 2. DESCRIPTION OF PROPERTY.
China Kangtai’s operations office is located at 99 Taibei Road, Limin Economic and Technological Development Zone, Harbin, Heilongjiang Province, P. R. China, Zip Code: 150025 and its telephone number is (86) 451 57351189. In addition, the Company has over 387 acres of cactus farming bases in China, production facilities and an R&D facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings, and no such proceedings are known to be contemplated. No director, officer or affiliate of the Company and no owner of record or beneficial owner of more than 5.0% of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
ITEM 4. 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, 2008.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
Since August 25, 2005, our Common Stock has been quoted on the OTC Bulletin Board under the symbol “CKGT.OB.” Prior to that, our Common Stock was quoted on the OTC Bulletin Board under the symbol “IVNE.OB.” The following table lists the high and low bid price for our Common Stock as quoted, in U.S. dollars, by the OTC Bulletin Board during each quarter within the last two fiscal years. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions.
| | | | | | | | |
| 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 | |
| | | | | | | | | | | |
| 2007 | | December 31 | | $ | 1.40 | | | $ | 0.72 | |
| | | September 30 | | $ | 0.95 | | | $ | 0.60 | |
| | | June 30 | | $ | 1.32 | | | $ | 0.54 | |
| | | March 31 | | $ | 1.97 | | | $ | 1.01 | |
Record Holders
As March 11, 2009, there were approximately 99 shareholders of record holding a total of 17,885,625 shares of common stock.
The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.
Dividends
CKGT has not declared any cash dividends since inception and does not anticipate paying any dividends in the foreseeable future. The payment of dividends is within the discretion of the board of directors and will depend on CKGT’s earnings, capital requirements, financial condition, and other relevant factors. There are no restrictions that currently limit CKGT’s ability to pay dividends on its common stock other than those generally imposed by applicable state law.
Stock Re-Purchases
We did not make any re-purchases of shares of our common stock during the fourth quarter of fiscal 2008 and we do not currently have any publicly-announced repurchase plans in effect.
ITEM 6. SELECTED FINANCIAL DATA
Not required.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Certain statements in this report, including statements in the following discussion which are not statements of historical fact, are what are known as “forward looking statements,” which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as “plans,” “intends,” “will,” “hopes,” “seeks,” “anticipates,” “expects” and the like often identify such forward looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward looking statements include statements concerning our plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. Numerous factors and future events could cause the Company to change such plans and objectives or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10KSB and in the Company’s other filings with the Securities and Exchange Commission. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing elsewhere in this report. CKGT’s fiscal year end is December 31.
CKGT’s short-term strategy is to realize net cash flow from operations and financing activities to be used to expand marketing efforts in China and research and development. CKGT is committed to ensuring that its products remain at the forefront of providing a variety of quality cactus based nutriceuticals, nutritional food from cactus, and beverages from cactus, including but not limited to beer and wine derived from cactus. The realization of net cash flows in the near term will require a significant increase in CKGT’s revenues without a substantial increase in expenses. Financing activities will focus on equity financing. Once CKGT has additional positive net cash flow, its longer-term strategy is to expand marketing efforts beyond China into other Asian markets based on anticipated increases in marketing spending over the next several years in South Korea, Singapore, Taiwan and other southeastern Asian countries.
CKGT’s business development strategy is prone to significant risks and uncertainties certain of which can have an immediate impact on its efforts to realize positive net cash flow and deter future prospects of revenue growth.
CKGT’s financial condition and results of operations depend primarily on the revenue generated from the sale of its products and its ability to control the cost of sales. CKGT has a limited history of generating revenue which cannot be viewed as an indication of continued growth and a recent historical record of incurring losses. Should CKGT be unable to consistently generate revenue through the successful implementation of its business model and reduce or stabilize expenses to the point where it can realize a net cash flow such failure will have a short-term impact on CKGT’s ability to continue its business operations.
Results of Operations
During the period from March 31, 2004 through December 31, 2008, CKGT has been engaged in the development and marketing of its products from Harbin, China. CKGT expects that over the next twelve months it will continue to market its products in Harbin, China.
Year Ended December 31, 2008 and Year Ended December 31, 2007
Sales
For the fiscal year ended December 31, 2008, sales increased by $6,059,928 or by 42.6% to $20,300,583 from $14,240,655 for the year ended December 31, 2007. The increase in sales is attributable to the fact that the Company’s products are more efficiently marketed and increasingly well accepted by the domestic market customers and the addition of cactus feed as a new product which accounted for approximately $873,400 of our total sales.
Cost of Sales
For the fiscal year ended December 31, 2008, cost of sales increased by $2,678,052 or 27.8% to $12,307,303 from $9,629,251 as compared to the corresponding period of the prior year. The increase in the cost of sales is a direct result of the increase in our sales.
Selling and Distribution Expenses
For the fiscal year ended December 31, 2008, selling expenses decreased by $65,018 or 23.3% to $214,285 from $279,303 as compared to the corresponding period of the prior year. The decrease is primarily attributable to the Company’s optimization of its operating team and sales forces, allocated sales and distribution expenses to the sales agent companies in different provinces of China, all of which reduced the unit selling and distribution expenses of the Company.
General and Administrative Expenses
For the fiscal year ended December 31, 2008, general and administrative expenses decreased by $502,890 or 43.7% to $648,644 from $1,151,534 as compared to the prior year. The decrease is primarily due to a decrease in outstanding accounts receivables and a decrease in the provision for doubtful accounts in 2008 as a result of the enhancement of our policy on collections.
Total Operating Expenses
For the fiscal year ended December 31, 2008, operating expenses decreased by $512,484, or 30.9% from $1,661,113 to $1,148,629, as compared to the prior year. The decrease is mainly attributable to a decrease in the provision for doubtful accounts for reasons discussed above.
Net Income
For the fiscal year ended December 31, 2008, the net income increased by $3,413,210 or 148.4% to $5,712,910 from $2,299,700 as compared to the prior year. The increase mainly resulted from rapid growth in the sales of the Company’s products, the addition of cactus feed as a new product and the reduction in the operating expenses.
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.
Liquidity and Capital Resources
For the fiscal year ended December 31, 2008, cash flows provided by operating activities increased by $7,546,519 or 354% to $9,676,505 from $2,129,986 as compared to the corresponding fiscal year ended December 31, 2007. The increase is primarily due to the increase in sales and the decrease in inventories.
For the fiscal year ended December 31, 2008, cash flows used for investing activities increased by $4,553,215 or 173% to $7,184,232 from $2,631,017 as compared to the prior year. The decrease is due to increased investments in acquiring land use rights in 2008.
For the fiscal year ended December 31, 2008, cash flow provided by financing activities increased by $667,398 or 1,247% to $720,922 from $53,524 as compared to fiscal year ended December 31, 2007. The primary factor responsible for the increase is due to financing transactions completed in 2008 and the increase in note payable.
The Company’s operations for the year ended December 31, 2008 resulted in comprehensive income of $7,022,156. The Company has funded its cash needs from revenue.
CKGT has no defined benefit plan or contractual commitment with any of its officers or directors.
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.
Critical Accounting Policies
In Note 2 to the audited consolidated financial statements for the years ended December 31, 2008 and 2007 included in this annual report, CKGT discusses those accounting policies that are considered to be significant in determining the results of operations and its financial position. CKGT believes that the accounting principles utilized by it conform to accounting principles generally accepted in the United States of America.
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. CKGT bases its estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The 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.
Recent Accounting Pronouncements
Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
The information required by this Item is incorporated by reference to the financial statements beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES.
Evaluation of Disclosure controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2008 which was designed to provide reasonable assurance. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that: (i) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure by the Company; and (ii) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the year ended December 31, 2007, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Management’s Annual Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s assessment of the effectiveness of the small business issuer’s internal control over financial reporting is as of the year ended December 31, 2008. We believe that internal control over financial reporting is effective. We have not identified any, current material weaknesses considering the nature and extent of our current operations and any risks or errors in financial reporting under current operations.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits us to provide only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The directors and executive officers currently serving the Company are as follows:
| Name | | Age | | Positions Held |
| Jinjiang Wang | | 59 | | President, Chief Executive Officer and Chairman of the Board of Directors |
| Chengzhi Wang | | 38 | | General Manager and a Director |
| Hong Bu | | 34 | | Chief Financial Officer and a Director |
| Jiping Wang | | 47 | | Director |
| Song Yang | | 34 | | 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.
Biographical Information
Jinjiang Wang was appointed as the Chairman of the Board, President and Chief Executive Officer of CKGT on June 3, 2005 and appointed a director of CKGT on July 22, 2005. Since 1998 Mr. Wang has served as a director and Chairman of the board of the Company’s subsidiary, Harbin Hainan Kangda. Mr. Wang was born in the Heilongjiang Province of the P.R.C. Mr. Wang graduated from Northeast Agricultural University with a degree in Agriculture & Forest Engineering. Mr. Wang has over 20 years of experience in management, production development and sales. He is a founder of Harbin Hainan Kangda and a pioneer of the now established edible cactus trade of China.
Chengzhi Wang was appointed as the General Manager CKGT on June 3, 2005 and appointed a director of CKGT on July 22, 2005. Mr. Wang also serves as a director and general manager of the Company’s subsidiary, Harbin Hainan Kangda and has held these positions since 1998. Mr. Wang was born in Heilongjiang Province of the P.R.C. Mr. Wang graduated from Architectonics Department of Harbin Institute of Technology with an engineer degree. Mr. Wang has over five years experience in management, production and sales. Mr. Wang is a founder of Harbin Hainan Kangda and a pioneer in the edible cactus trade of the P.R.C.
Hong Bu was appointed as Chief Financial Officer of CKGT on June 3, 2005 and appointed a director of CKGT on July 22, 2005. From 1998 to 2005 Ms. Bu served as senior accountant of Harbin Hainan Kangda. Ms. Bu graduated with a degree in Finance from the Finance and Economics Institute of Harbin. She is a CPA (certified public accountant). Ms. Bu has over five years of experience as Harbin Hainan Kangda’s senior accountant. Ms. Bu was a founder of Harbin Hainan Kangda and a pioneer in the edible cactus trade of the P.R.C.
Jiping Wang was appointed as a director of CKGT on July 22, 2005. Since 1979 Ms. Wang has served as an officer of Heilongjian Food Control and Drought Prevention Center. Ms. Wang was born in Heilongjiang Province; P.R.C. Ms. Wang graduated from the Economic Managerial Cadre’s Institute of Harbin.
Song Yang was appointed as a director of CKGT on July 22, 2005. Ms. Yang has over 15 years of experience in the Government Administrative Department. From 2000 to 2004 Ms. Yang served as a financing manager of Heilongjian Securities Corporation. Ms. Yang was a founder of Harbin Hainan Kangda and a pioneer in the edible cactus trade of the P.R.C. Ms. Yang has not served as an officer and director of any other public companies over the last five years.
Audit Committee/ Compensation Committee / Director Compensation
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. 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.
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides summary compensation information for the years 2008, 2007 and 2006 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, | | 2008 | | $ | 14,630 | | - | | | - | | - | | | - | | - | - | | $ | 14,630 | |
| President, Chief Executive | | 2007 | | $ | 7,900 | | - | | | - | | - | | | - | | - | - | | $ | 7,900 | |
| Officer and Chairman | | 2006 | | $ | 2,600 | | - | | | - | | - | | | - | | - | - | | $ | 2,600 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Chengzhi Wang, | | 2008 | | | 11,118 | | - | | | - | | - | | | - | | - | - | | $ | 11,118 | |
| General Manager | | 2007 | | $ | 6,320 | | - | | | - | | - | | | - | | - | - | | $ | 6,320 | |
| | | 2006 | | | - | | - | | | - | | - | | | - | | - | - | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Hong Bu, | | 2008 | | | 11,118 | | - | | | - | | - | | | - | | - | - | | $ | 11,118 | |
| Chief Financial Officer | | 2007 | | $ | 6,320 | | - | | | - | | - | | | - | | - | - | | $ | 6,320 | |
| | | 2006 | | | - | | - | | | - | | - | | | - | | - | - | | | - | |
(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, 2008, 2007 and 2006. In addition, members of the Board of Directors did not receive compensation for their services during the fiscal years ending December 31, 2008, 2007 and 2006.
Director Compensation
Directors currently are not reimbursed for out-of-pocket costs incurred in attending meetings and no director receives any compensation for services rendered as a director. CKGT does not anticipate adopting a provision for compensating directors in the future.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 11, 2009, the number of shares of Common Stock owned of record and beneficially by executive officers, directors and persons who hold 5.0% or more of the outstanding Common Stock of the Company. Also included are the shares held by all executive officers and directors as a group.
Title of Class | | Name and Address of Owner | | Amount and Nature of Ownership | | Percent of Class(1) | |
| Executive Officers and Directors | |
| Common Stock | | | Jinjiang Wang The 4th Group, 21st Residents’ Committee Xinhua Street, Boli Town, Boli County Heilongjiang Province P.R.C. | | | 4,801,390 Direct | (2) | | 26.8 | % |
| Common Stock | | | Chengzhi Wang No. 98 Xiangshun Street Xiangfang District, Harbin, P.R.C. | | | 3,892,970 Direct | | | 21.8 | % |
| Common Stock | | | Hong Bu No. 99 Taibei Road Limin Economy and Technology Developing District, Harbin, P.R.C. | | | 750,046 Direct | | | 4.2 | % |
| Common Stock | | | Jiping Wang No. 99 Taibei Road Limin Economy and Technology Developing District, Harbin, P.R.C. | | | 700,734 Direct | | | 3.9 | % |
| Common Stock | | | Song Yang No. 99 Taibei Road Limin Economy and Technology Developing District, Harbin, P.R.C. | | | 726,688 Direct | | | 4.1 | % |
| Common Stock | | | All Directors and Executive Officers as a Group (5 persons) | | 10,871,828 Direct | | | 60.8 | % |
| 5% Holder |
| Common Stock | | | T Squared Investments LLC. 1325 Sixth Avenue, Floor 28 New York, NY 10019 | | | 5,100,000 Direct | (3) | | 22.2 | % |
(1) Applicable percentage ownership is based on 17,885,625 shares of common stock outstanding as of March 11, 2009, together with securities exercisable or convertible into shares of common stock within 60 days of March 11, 2009 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 March 11, 2009 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.
(2) Jinjiang Wang has been the President of the Company since June 3, 2005. He has been and is the President of Harbin Hainan Kangda since 2000. Jinjiang Wang acquired 165,182 shares of the Company pursuant to the Reorganization Agreement on June 3, 2005 and 428,572 shares of the Company as Kangtai’s sole designee pursuant to the Stock Purchase Agreement on June 3, 2005. A day after the Reverse Split on August 26, 2005, the Convertible Note was converted by its holders(s) into 14,248,395 shares of the Company and Mr. Jinjiang Wang acquired 4,207,636 shares from 14,248,395 shares of the Company.
(3) Of which 1,250,000 shares of common stock are issuable upon conversion of 1,250,000 shares of Series A Convertible Preferred Stock at the election of the holder at any time and 3,850,000 shares of common stock are issuable upon the exercise of warrants which are immediately exercisable. Pursuant to the Preferred Stock Purchase Agreements and Common Stock Purchase Warrants by and between the Company and the T Squared Investments LLC (“T Squared”) dated March 21, 2008 and July 16, 2008, T Squared is not entitled to exercise any warrant which will result in beneficial ownership by T Squared and its affiliates of more than 4.9% of the outstanding shares of the Company’s common stock.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
There are no transactions to which the Company was or is a party in which the amount involved exceeds $120,000 and in which any director, executive officer, five percent stockholder or any member of the immediate family or any of the foregoing persons had or will have a direct or indirect material interest.
The Board of Directors has determined that none of the Company’s current directors are independent directors within the meaning set forth in the rules of NASDAQ as currently in effect.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Our registered independent public accounting firm is Michael T. Studer, C.P.A., P.C. The fees billed by Michael T. Studer, C.P.A., P.C. in 2008 and 2007 were as follows:
| | | 2008 | | | 2007 | |
| Audit Fees | | $ | 94,000 | | | $ | 94,000 | |
| Audit-Related Fees | | | - | | | | - | |
| Total Audit and Audit-Related Fees | | $ | 94,000 | | | $ | 94,000 | |
| Tax Fees | | | - | | | | - | |
| All Other Fees | | | - | | | | - | |
| Total for independent public audit firms | | $ | 94,000 | | | $ | 94,000 | |
Tax Fees
The aggregate fees billed by P. C. Liu, CPA, P.C. for tax compliance, tax advice and tax planning were $1,000 for the fiscal years ended December 31, 2008 and $1,000 for the fiscal years ended December 31, 2007.
Audit Committee Pre-Approval
The Company's Audit Committee pre-approved the engagement of Michael T. Studer, C.P.A., P.C. to act as its independent auditor for the fiscal year ended December 31, 2008. The Company's Audit Committee also pre-approved Michael T. Studer, C.P.A., P.C. to provide the audit, audit related services, and all other services described above for the fiscal year ended December 31, 2008. The Company's board of directors also pre-approved P. C. Liu, C.P.A, P.C. to provide the tax services for the fiscal period ended December 31, 2008.
ITEM 15. EXHIBITS
| | The Exhibits listed below are filed as part of this Annual Report. |
| | |
| 3.1 | Articles of Incorporation (incorporated by reference from Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on October 18, 2000). |
| 3.2 | Amended Articles of Incorporation (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on November 3, 2003) |
| 3.3 | Amended and Restated Articles of Incorporation (incorporated by reference to the Form 10KSB filed with the Securities and Exchange Commission April 17, 2006. |
| 3.4 | Bylaws (incorporated by reference from Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on October 18, 2000). |
| 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 January 20, 2006, between the Company and Huimeijia Bio-tech Ltd. (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 16, 2007). |
| 10.11 | Processing Agreement dated March 2, 2006, between the Company and Kangwei Health Foods Ltd. Of Mudanjiang City (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 16, 2007). |
| 10.12 | 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). |
| 10.13 | 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). |
| 10.14 | 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). |
| 10.15 | 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). |
| 10.16 | 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). |
| 10.17 | 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). |
| 10.18 | 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). |
| 10.19 | 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). |
| 10.20 | 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). |
| 10.21 | Cooperation Agreement between Harbin Hainan Kangda Cactus Hygienical Foods Co., Ltd and Party B: Harbin Meijia Bio-Tech Co., Ltd. dated October 8, 2007 * |
| 10.22 | Contract of Termination of Lease, dated January 10, 2006, by and between the Company and the Lijia Village, Tongling Town Jixi City (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.23 | Contract of Termination of Lease, dated January 18, 2006, by and between the Company and Lindian Cactus Farming Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.24 | Contract of Termination of Lease, dated January 9, 2006, by and between the Company and the Qiqihar Angangxi Green Park (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.25 | Contract of Termination of Lease, dated January 13, 2006, by and between the Company and the Beian Huashengnongfeng Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.26 | Contract of Termination of Lease, dated January 6, 2006, by and between the Company and the Hongqi Jinxing Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.27 | Contract of Termination of Lease, dated January 17, 2006, by and between the Company and the Hailin Luming Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.28 | Contract of Termination of Lease, dated January 5, 2006, by and between the Company and the Dalian River Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.29 | Contract of Termination of Lease, dated January 23, 2006, by and between the Company and the Wanbao Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.30 | Transfer Agreement for Greenhouse, dated January 13, 2006, by and between the Company and the Lijia Village, Tongling Town Jixi City (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.31 | Transfer Agreement for Greenhouse, dated January 18, 2006, by and between the Company and the Lindian Cactus Farming Base. (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.32 | Transfer Agreement for Greenhouse, dated January 9, 2006, by and between the Company and the Qiqihar Angangxi Green Park (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.33 | Transfer Agreement for Greenhouse, dated January 11, 2006, by and between the Company and the Beian Huashengnongfeng Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.34 | Transfer Agreement for Greenhouse, dated January 6, 2006, by and between the Company and the Hongqi Jinxing Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.35 | Transfer Agreement for Greenhouse, dated January 17, 2006, by and between the Company and the Hailin Luming Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.36 | Transfer Agreement for Greenhouse, dated January 5, 2006, by and between the Company and the Dalian River Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.37 | Transfer Agreement for Greenhouse, dated January 23, 2006, by and between the Company and the Wanbao Planting Base (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.38 | Transfer Agreement for Greenhouse, dated January 24, 2006, by and between the Company and the Daqing Ranghulu Hi-tech Zone (incorporated by reference to the Form 10QSB filed with the Securities and Exchange Commission on May 15, 2006). |
| 10.39 | 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). |
| 10.40 | 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). |
| 10.41 | 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). |
| 10.42 | Common Stock Purchase Warrant “A” (incorporated by reference to the From 8-K filed with the Securities and Exchange Commission on March 27, 2008). |
| 10.43 | Common Stock Purchase Warrant “B” (incorporated by reference to the From 8-K filed with the Securities and Exchange Commission on March 27, 2008). |
| 10.44 | 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) |
| 10.45 | 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) |
| 10.46 | Common Stock Purchase Warrant “A” (incorporated by reference to the Form 8-K filed on July 21, 2008) |
| 10.47 | Common Stock Purchase Warrant “B” (incorporated by reference to the Form 8-K filed on July 21, 2008) |
| 21.1 | List of Subsidiaries (incorporated by reference to the From 10-KSB filed on April 15, 2008) |
| 31.1* | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2* | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1* | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2* | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA KANGTAI CACTUS BIO-TECH INC.
| By: | /s/ Jinjiang Wang | | President (CEO) and a Director and Principal Executive Officer |
| | | | |
| Date: April 15, 2009 | | |
| | | | |
| By: | /s/ Hong Bu | | Chief Financial Officer and a Director and Principal Financial and Accounting Officer |
| | | | |
| Date: April 15, 2009 | | |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Jinjiang Wang | | President (CEO) and a Director and Principal Executive Officer |
| Date: April 15, 2009 | | |
| | | | |
| By: | /s/ Chengzhi Wang | | General Manager and a Director |
| Date: April 15, 2009 | | |
| | | | |
| By: | /s/ Hong Bu | | Chief Financial Officer and a Director and Principal Financial and Accounting Officer |
| Date: April 15, 2009 | | |
| | | | |
| By: | /s/ Jiping Wang | | Director |
| Date: April 15, 2009 | | |
| | | | |
| By: | /s/ Song Yang | | Director |
| Date: April 15, 2009 | | |
Index to Financial Statements
| Report of Independent Registered Public Accounting Firm | F-1 |
| | |
| Consolidated Balance Sheets as of December 31, 2008 and 2007 | F-2 |
| | |
| Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2008 and 2007 | F-3 |
| | |
| Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006 | F-4 |
| | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007 | F-5 |
| | |
| Notes to Consolidated Financial Statements | F-6 |
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, 2008 and 2007 and the related consolidated statements of operations 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, 2008 and 2007 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 10, 2009
China Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated Balance Sheets
(Expressed in US Dollars)
| | | December 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Audited) | | | (Audited) | |
| ASSETS | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 4,398,897 | | | $ | 509,901 | |
| Accounts receivable, net of allowance for returns and doubtful accounts of $979,700 and $838,736, respectively | | | 3,869,985 | | | | 4,036,169 | |
| Inventories | | | 3,376,635 | | | | 6,093,955 | |
| Other receivables and prepaid expenses | | | 1,005 | | | | 20,237 | |
| Total Current Assets | | | 11,646,522 | | | | 10,660,262 | |
| | | | | | | | | |
| Property and Equipment, net | | | 6,236,914 | | | | 6,290,330 | |
| | | | | | | | | |
| Other Assets | | | | | | | | |
| Intangible assets, net | | | 454,445 | | | | 553,038 | |
| Land use rights, net | | | 8,609,491 | | | | 1,290,141 | |
| Total Assets | | $ | 26,947,372 | | | $ | 18,793,771 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 315,639 | | | $ | 353,091 | |
| Note payable | | | 887,475 | | | | 829,437 | |
| Taxes payable | | | 570,855 | | | | 319,149 | |
| Total current liabilities | | | 1,773,969 | | | | 1,501,677 | |
| | | | | | | | | |
| Commitments and Contingencies | | | - | | | | - | |
| Stockholders' Equity | | | | | | | | |
| Preferred stock, $0.001 par value; authorized 200,000,000 shares, issued and outstanding: 1,150,000 and 0 shares, respectively | | | 1,150 | | | | - | |
| Common stock, $0.001 par value; authorized 200,000,000 shares, issued and outstanding: 17,885,625 and 17,739,625 shares, respectively | | | 17,886 | | | | 17,740 | |
| Additional paid-in capital | | | 8,874,869 | | | | 6,607,848 | |
| Retained earnings | | | | | | | | |
| Appropriated | | | 2,682,345 | | | | 1,844,937 | |
| Unappropriated | | | 10,549,281 | | | | 7,082,943 | |
| Accumulated other comprehensive income | | | 3,047,872 | | | | 1,738,626 | |
| Total stockholders' equity | | | 25,173,403 | | | | 17,292,094 | |
| Total Liabilities and Stockholders' Equity | | $ | 26,947,372 | | | $ | 18,793,771 | |
See notes to consolidated financial statements.
China Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Expressed in US Dollars)
| | | December 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Audited) | | | (Audited) | |
| | | | | | | |
| Net Sales | | $ | 20,300,583 | | | $ | 14,240,655 | |
| | | | | | | | | |
| Cost of Sales | | | (12,307,303 | ) | | | (9,629,251 | ) |
| | | | | | | | | |
| Gross Profit | | | 7,993,280 | | | | 4,611,404 | |
| | | | | | | | | |
| Operating Expenses | | | | | | | | |
| Selling expenses | | | 214,285 | | | | 279,303 | |
| General and administrative expenses | | | 648,644 | | | | 1,151,534 | |
| Depreciation | | | 77,015 | | | | 70,589 | |
| Amortization of land use rights | | | 73,761 | | | | 35,983 | |
| Amortization of intangible assets | | | 134,924 | | | | 123,704 | |
| Total operating expenses | | | 1,148,629 | | | | 1,661,113 | |
| Income from Operations | | | 6,844,651 | | | | 2,950,291 | |
| | | | | | | | | |
| Other Income (Expenses) | | | | | | | | |
| Interest income | | | 838 | | | | 603 | |
| Imputed interest | | | (52,326 | ) | | | (47,796 | ) |
| Loss on disposal of property and equipment | | | (14,323 | ) | | | - | |
| Other income (expense) - net | | | | | | | (171 | ) |
| Total Other Income (Expenses) | | | (65,811 | ) | | | (47,364 | ) |
| Income before Income Taxes | | | 6,778,840 | | | | 2,902,927 | |
| Income Tax Expense | | | (1,065,930 | ) | | | (603,227 | ) |
| Net Income | | | 5,712,910 | | | | 2,299,700 | |
| Deemed dividend relating to the beneficial conversion feature and the value of the warrants included in the sale of the | | | | | | | | |
| Series A preferred stock | | | (1,409,164 | ) | | | - | |
| Net income attributable to common stockholders | | $ | 4,303,746 | | | $ | 2,299,700 | |
| Net income per common share | | | | | | | | |
| Basic | | $ | 0.24 | | | $ | 0.13 | |
| Diluted | | $ | 0.23 | | | $ | 0.13 | |
| | | | | | | | | |
| Weighted average number of common shares outstanding | | | | | | | | |
| Basic | | | 17,767,461 | | | | 17,739,625 | |
| Diluted | | | 18,597,561 | | | | 17,739,625 | |
| | | | | | | | | |
| Comprehensive income: | | | | | | | | |
| Net income | | $ | 5,712,910 | | | $ | 2,299,700 | |
| Foreign currency translation adjustment | | | 1,309,246 | | | | 1,047,589 | |
| Total | | $ | 7,022,156 | | | $ | 3,347,289 | |
See notes to consolidated financial statements.
China Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Expressed in US Dollars)
| | | Preferred Stock $0.001 par | | | Common Stock $0.001 par | | | Additional | | | Unappropriated | | | Appropriated | | | Accumulated other | | | | |
| | | value | | | value | | | paid-in | | | retained | | | retained | | | comprehensive | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | capital | | | earnings | | | earnings | | | income | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2006 | | | - | | | $ | - | | | | 17,739,625 | | | $ | 17,740 | | | $ | 6,558,082 | | | $ | 5,266,815 | | | $ | 1,361,365 | | | $ | 691,037 | | | $ | 13,895,03939 | |
| Imputed interest on note payable | | | - | | | | - | | | | - | | | | - | | | | 49,766 | | | | - | | | | - | | | | - | | | | 49,766 | |
| Transfer to statutory and staff welfare reserves | | | - | | | | - | | | | - | | | | - | | | | - | | | | (483,572 | ) | | | 483,572 | | | | - | | | | - | |
| Net income for the year ended December 31, 2007 | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,299,700 | | | | - | | | | - | | | | 2,299,700 | |
| Currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,047,589 | | | | 1,047,589 | |
| Balance at December 31, 2007 | | | - | | | | - | | | | 17,739,625 | | | | 17,740 | | | | 6,607,848 | | | | 7,082,943 | | | | 1,844,937 | | | | 1,738,626 | | | | 17,292,094 | |
| Sale of Series A preferred stock | | | 1,250,000 | | | | 1,250 | | | | - | | | | - | | | | 719,672 | | | | - | | | | - | | | | | | | | 720,922 | |
| Deemed dividend | | | - | | | | - | | | | - | | | | - | | | | 1,409,164 | | | | (1,409,164 | ) | | | - | | | | | | | | - | |
| 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 | | | - | | | | - | | | | - | | | | - | | | | 59,225 | | | | | | | | - | | | | | | | | 59,225 | |
| 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 | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,712,910 | | | | - | | | | - | | | | 5,712,910 | |
| Currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,309,246 | | | | 1,309,246 | |
| Balance at December 31, 2008 | | | 1,150,000 | | | $ | 1,150 | | | | 17,885,625 | | | $ | 17,886 | | | $ | 8,874,869 | | | $ | 10,549,281 | | | $ | 2,682,345 | | | $ | 3,047,872 | | | $ | 25,173,403 | |
See notes to consolidated financial statements.
China Kangtai Cactus Bio-Tech Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Expressed in US Dollars)
| | | December 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Audited) | | | (Audited) | |
| | | | | | | |
| Cash Flows from Operating Activities | | | | | | |
| Net income | | $ | 5,712,910 | | | $ | 2,299,700 | |
| Adjustmens to reconcile net income to net cash provided by (used for) operating activities | | | | | | | | |
| Depreciation - cost of sales | | | 408,351 | | | | 143,937 | |
| Depreciation - operating expenses | | | 77,015 | | | | 70,589 | |
| Amortization of land use rights | | | 73,761 | | | | 35,983 | |
| Amortization of intangible assets | | | 134,924 | | | | 123,704 | |
| Issuance of shares in consideration for the waiver of liquidated damages | | | 26,680 | | | | - | |
| Stock option expense | | | 59,225 | | | | - | |
| Imputed interest | | | 52,326 | | | | 47,796 | |
| Loss on disposal of property and equipment | | | 14,323 | | | | - | |
| Changes in operating assets and liabilities | | | | | | | | |
| Accounts receivable, net | | | 166,184 | | | | (2,258,662 | ) |
| Accounts receivable - related party | | | - | | | | 1,924 | |
| Other receivables and prepaid expenses | | | 19,232 | | | | 4,073 | |
| Inventories | | | 2,717,320 | | | | 1,288,489 | |
| Accounts payable and accrued liabilities | | | (37,452 | ) | | | 131,640 | |
| Taxes payable | | | 251,706 | | | | 240,813 | |
| Net cash provided by (used for) operating activities | | | 9,676,505 | | | | 2,129,986 | |
| Cash Flows from Investing Activities | | | | | | | | |
| Proceeds from disposals of property and equipment | | | 2,546 | | | | - | |
| Purchase of property and equipment | | | - | | | | (2,631,017 | ) |
| Purchase of land use right | | | (7,186,778 | ) | | | - | |
| Net cash provided by (used for) investing activities | | | (7,184,232 | ) | | | (2,631,017 | ) |
| Cash Flows from Financing Activities | | | | | | | | |
| Note payable | | | - | | | | 53,524 | |
| Sale of Series A preferred stock-net | | | 720,922 | | | | - | |
| Net cash provided by (used for) financing activities | | | 720,922 | | | | 53,524 | |
| | | | | | | | | |
| Effect of exchange rate on cash | | | 675,801 | | | | 505,472 | |
| Increase (decrease) in cash and cash equivalents | | | 3,888,996 | | | | 57,965 | |
| | | | | | | | | |
| Cash and cash equivalents, beginning of period | | | 509,901 | | | | 451,936 | |
| | | | | | | | | |
| Cash and cash equivalents, end of period | | $ | 4,398,897 | | | $ | 509,901 | |
| | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | |
| Interest paid | | $ | - | | | $ | - | |
| Income taxes paid | | $ | 814,224 | | | $ | 610,792 | |
See notes to consolidated financial statements.
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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 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”.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements for 2008 and 2007 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.
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.
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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, and taxes payable. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments and based on interest rates of comparable instruments.
Foreign Currency Translation
The functional currency of US China Kangtai and BVI China Kangtai is the United States dollar. The functional currency of Harbin Hainan Kangda and Taishan Kangda is the Chinese Renminbi (“RMB”). The reporting currency of the Company is the United States dollar.
Harbin Hainan Kangda and Taishan Kangda assets and liabilities are translated into United States dollars at period-end exchange rates ($0.14669 and $0.13710 at December 31, 2008 and 2007, respectively). Harbin Hainan Kangda and Taishan Kangda revenues and expenses are translated into United States dollars at weighted average exchange rates for the periods ($0.14415 and $0.13167 for the years ended December 31, 2008 and 2007, respectively). Resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 2008 and 2007 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. An allowance for returns 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 lower of cost or market value, cost being determined on a first in first out method.
Property and equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets (40 years for buildings, 12 years for plant equipment and machinery, 10 years for motor vehicles, and 8 years for furniture and office equipment).
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Intangible and Other Long-Lived Assets
Intangible and other long-lived assets are stated at cost, less accumulated amortization and impairments. Land use rights are being amortized on a straight-line basis over the remaining term of the related agreements, which range from 40 to 50 years. Other intangible assets consist of patents and licenses. Patents and licenses are being amortized over their expected useful economic life of 10 years.
The Company reviews its long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. The Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.
Revenue Recognition
The Company recognizes revenue upon delivery of the products, at which time title passes to the customer provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectibility is deemed probable.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses totaled $133,133 and $218,083 for the years ended December 31, 2008 and 2007, 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, 2008 and 2007 were $12,397 and $72,961, respectively.
Stock-Based Compensation
Stock-based compensation is accounted for at fair value in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No.123(R), “Share-Based Payment”. No stock options or warrants are outstanding at December 31, 2008.
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.
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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 and convertible securities) outstanding. Dilutive securities having an anti-dilutive effect on diluted net income per common share are excluded from the calculation.
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.
Recent Accounting Pronouncements
Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Note 3. Inventories
Inventories consist of:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Cactus stock | | $ | 2,810,861 | | | $ | 5,512,782 | |
| Other raw materials | | | 49,826 | | | | 82,872 | |
| Work-in-progress | | | - | | | | 2,700 | |
| Finished goods | | | 515,948 | | | | 495,601 | |
| Total | | | 3,376,635 | | | | 6,093,955 | |
| Less: allowance for market adjustments to inventories | | | - | | | | - | |
| Net | | $ | 3,376,635 | | | $ | 6,093,955 | |
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Note 4. Property, Plant and Equipment
Property, plant and equipment, net consist of:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Buildings | | $ | 2,928,548 | | | $ | 2,831,657 | |
| Plant equipment and machinery | | | 4,654,625 | | | | 4,350,191 | |
| Motor vehicles | | | 289,586 | | | | 270,654 | |
| Furniture and office equipment | | | 13,817 | | | | 14,649 | |
| Total | | | 7,886,576 | | | | 7,467,151 | |
| Less accumulated depreciation | | | (1,649,662 | ) | | | (1,176,821 | ) |
| Net | | $ | 6,236,914 | | | $ | 6,290,330 | |
Note 5. Intangible Assets
Intangible assets, net consist of:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Patents and licenses | | $ | 1,374,485 | | | $ | 1,284,604 | |
| Total | | | 1,374,485 | | | | 1,284,604 | |
| Less accumulated amortization | | | (920,040 | ) | | | (731,566 | ) |
| Net | | $ | 454,445 | | | $ | 553,038 | |
The estimated amortization of intangible assets expense for each of the five succeeding fiscal years ending December 31, 2009, 2010, 2011, 2012, and 2013 is $137,448.
Note 6. Land Use Rights
Land use rights, net consist of:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Harbin Hainan Kangda | | $ | 8,026,397 | | | $ | 674,994 | |
| Taishan Kangda | | | 873,035 | | | | 815,985 | |
| Total | | | 8,899,432 | | | | 1,490,979 | |
| Less accumulated amortization | | | (289,941 | ) | | | (200,838 | ) |
| Net | | $ | 8,609,491 | | | $ | 1,290,141 | |
The estimated amortization of land use rights expense for each of the five succeeding fiscal years ending December 31, 2009, 2010, 2011, 2012, and 2013 is $185,016.
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Note 7. Note Payable
Note payable consists of:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Note payable to a financial institution, unsecured and due on demand. | | $ | 887,475 | | | $ | 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 $52,326 and $49,766 for the years ended December 31, 2008 and 2007, respectively.
Note 8. Stockholders’ Equity
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 $10,185,183 and $8,745,639 at December 31, 2008 and 2007, respectively.
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. On October 15, 2008, the Company issued 46,000 shares of common stock to the Investor in consideration for the waiver of liquidated damages.
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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).
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.
Note 9. 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 income taxes were provided in 2008 and 2007 since US China Kangtai had taxable losses in those years. At December 31, 2008, US China Kangtai had net operating loss carryforwards of approximately $773,000 which may be available to offset future taxable income. Management has not yet determined it to be more likely than not that a deferred tax asset of up to approximately $270,000 attributable to the utilization of these net operating loss carryforwards (which expire in 2028) will be realized. Accordingly, the Company has provided a 100% valuation allowance against the deferred tax asset in the financial statements at December 31, 2008.
At December 31, 2008, US China Kangtai has an unrecognized deferred United States income tax liability relating to undistributed earnings of Harbin Hainan Kangda and Taishan 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 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 to income before income taxes. A reconciliation follows:
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
| | | Year Ended | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Expected tax at 35% | | $ | 2,372,594 | | | $ | 1,016,024 | |
| Tax effect of unutilized losses of USA China Kangtai; BVI China Kangtai; and Taishan Kangda | | | 132,320 | | | | 75,109 | |
| Tax effect of PRC income taxed at lower rate | | | (1,438,984 | ) | | | (487,906 | ) |
| Acutal provision for income taxes | | $ | 1,065,930 | | | $ | 603,227 | |
Note 10. Commitments and Contingencies
Operating lease commitments
The Company leases office space and land for growing cactus from third parties under operating leases. Rental expenses for all operating leases for the years ended December 31, 2008 and 2007 were $ 12,210 and $17,371 respectively.
At December 31, 2008, future minimum rental commitments under all non-cancellable operating leases are due as follows:
| 2009 | | $ | 8,077 | |
| 2010 | | | 3,940 | |
| 2011 | | | 3,940 | |
| 2012 | | | 3,940 | |
| 2013 | | | 3,426 | |
| Thereafter | | | 133,553 | |
| | | | | |
| Total | | $ | 156,876 | |
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 companies located in China.
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.
CHINA KANGTAI CACTUS BIO-TECH INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Note 11. 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 December 31, 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 2008, two customers accounted for 16% and 13%, respectively, of net sales.
Net sales consisted of:
| | | Year Ended December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Finished goods | | $ | 16,500,200 | | | $ | 11,901,805 | |
| Cactus stock | | | 3,800,383 | | | | 2,338,850 | |
| Total | | $ | 20,300,583 | | | $ | 14,240,655 | |
Note 12. Subsequent Event
On March 25, 2009, Harbin Hainan Kangda Entered into Asset Purchase Agreement (the “Agreement”) with Qitaihe Kangwei T Biotechnology Co., Ltd. (“Seller”). Under the terms of the Agreement, the Company will 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 the use life of 47 years and the development area of the first phase of 13 thousand square meters, (ii) housing ownership of 5,606.20 square meters in Shuguang village of Xinxing District in Qitaihe City and (iii) fixed assets consisting of machinery, equipment and facilities (including equipment, information, file data, spare parts and office suppliers) located on the acquired premises. The land use rights, housing ownership and fixed assets are collectively referred to as the “Assets”.
The purchase price for the Assets is 37,000,000 RMB (approximately $5,400,000). The Company will pay transfer fees and taxes in connection with the registration of the sale of the Assets. The purchase price will be paid in installments: 50% within 5 days of signing the Agreement, 10% upon Seller completing the handover procedure and the remaining 40% within 5 days of Seller’s completion of the registration of the sale in the land administration and other departments in the People’s Republic of China, which is expected to be completed within 90 days of the payment of the first installment of the purchase price.
