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| CKGT.OB > SEC Filings for CKGT.OB > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report, including statements in the following discussion, which are not statements of historical fact, may be deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as "plans," "intends," "will," "hopes," "seeks," "anticipates," "expects," and the like, often identify such forward-looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. Numerous factors and future events could cause the Company to change such plans and objectives, or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report on Form 10-Q and in the Company's other filings with the Securities and Exchange Commission. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results. These forward-looking statements are made as of August 14, 2008; the date of the filing of this Form 10-Q and the Company undertakes no responsibility to update these forward-looking statements.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing in Part I, Item 1 and elsewhere in this report. The Company's fiscal year end is December 31.
Company Overview
The Company is principally engaged in the production, R&D, sales and marketing of products derived from cacti. The Company's product lines include cactus nutraceuticals, cactus nutritional food and drinks, as well as cactus raw and intermediate materials.
The Company has over 387 acres of cactus-farming bases in the Guangdong and Heilongjiang Provinces of China. The Company predominantly grows three species of cacti which are Mexican Pyramid, Mexican Milpa-Alta and Mexican Queen. Mexican Pyramid and Queen cacti are used for cactus fruit drinks and nutraceutical products; Mexican Milpa-Alta is mainly used for cactus nutritional food products. Most of the cactus fruits are processed into cactus fruit juice, which is the raw material for cactus nutritional drinks. Most of the harvested edible cacti are processed into dry powders, which are raw materials for cactus nutraceuticals. The Company's annual production capability of edible cacti in 2007 is 73,000 tons.
The Company engages with, by co-operative production agreements, local pharmaceutical, food and beverage manufacturers to produce its products. This strategy allows the Company to fill the orders quickly with short production runs and to reduce the requirements in fixed assets investment. The Company currently has entered into co-production agreements with five processors in China. They are Harbin Bin County Hualan Dairy Factory, Harbin Ice Lantern Noodle Factory, Tsingtao Brewry (Harbin) Inc., Harbin Diwang Pharmacy Co., Ltd. (a GMP1 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.
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,
In addition, the Company has its own R&D facility, the Heilongjiang Sino-Mexico Cactus Development and Utilization Institute, which is certified by Heilongjiang Science & Technology Committee. The Institute has independently developed many patented cactus -based nutraceuticals and nutritional food and drink product formulas and production processes.
Company History
Our Company was initially incorporated as InvestNet, Inc. ("InvestNet") on March 16, 2000 under the laws of the State of Nevada. Prior to June 3, 2005, the Company's operations consisted of real time software and IT solutions which the Company held through its subsidiaries, Champion Agents Limited (which wholly owned DSI Computer Technology Company Limited) and Interchance Limited. Due to the fact that the Company was unable to generate sufficient cash flows from operations, obtain funding to sustain operations nor reduce or stabilize expenses to the point where it could have realized a net positive cash flow, management and the board of directors determined that it was in the best interests of the stockholders to seek a strategic alternative so that the Company could continue to operate. On May 13, 2005, InvestNet entered into a series of agreements to effect a "reverse merger transaction" via a share exchange and through the conversion of a convertible promissory note, as described below, with China Kangtai Cactus Bio-tech Company Limited ("BVI China Kangtai"), a British Virgin Islands ("BVI") incorporated on November 26, 2004.
These documents included a Stock Purchase Agreement, pursuant to which InvestNet issued 30,000,000 shares to a stockholder of BVI China Kangtai for $300,000. Additionally, InvestNet entered into an Agreement and Plan of Reorganization, pursuant to which the stockholders of BVI China Kangtai exchanged 12% of BVI China Kangtai's outstanding shares for 110,130,615 shares of InvestNet. Additionally, InvestNet issued a Convertible Promissory Note to BVI China Kangtai or its designees in the amount of $8,070,000 plus accrued interest at a rate of 5% per annum or convertible at the option of the holder(s) in the event that InvestNet effected a one for seventy reverse split of InvestNet's common stock into the remaining 88% of the outstanding shares of BVI China Kangtai (the "Convertible Note"). The Company did effect a one for seventy reverse split of all of its outstanding shares of Common Stock and changed its name (to "China Kangtai Cactus Bio-Tech Inc.") and trading symbol on the OTC Bulletin Board (to "CKGT") on August 25, 2005. The holders of the Convertible Note converted the Convertible Note a day later on August 26, 2005 into 14,248,395 shares of Common Stock of the Company. As the result of the share exchange and conversion of the Convertible Note, the Company completed a "reverse merger transaction" whereby InvestNet acquired 100% of BVI China Kangtai, which wholly owns Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. ("Harbin Hainan Kangda").
Harbin Hainan Kangda is presently our main operating subsidiary. Harbin Hainan Kangda is in the business of selling and producing cactus and cactus related products in the PRC as more fully described below. In connection with the "reverse merger transaction", we completely sold all the Company's real time software and IT solutions operations by selling all of the stock held by the Company in its prior wholly owned subsidiaries, Champion Agents Limited (which wholly owned DSI Computer Technology Company Limited) and Interchance Limited to V-Capital Limited, a Republic of Mauritius corporation which is controlled by a former director of InvestNet.
On June 3, 2005, in connection with the reorganization of the Company and the acquisition of BVI China Kangtai and its wholly owned subsidiary, Harbin Hainan Kangda, the Company's executive officers and directors significantly changed. Specifically, Norman Koo resigned as a director, Chief Executive Officer and President of the Company; Terence Ho resigned as a director, Chief Financial Officer, and Treasurer of the Company; Vivian Szeto resigned as a director (However, Ms. Szeto's resignation from the Board of Directors was contingent on the Company completing its filing and mailing requirements of its Schedule 14f-1 which occurred on July 22, 2005 and so, from June 3, 2005 to July 22, 2005 she served as the Company's sole director) and Secretary of the Company; Johnny Lu resigned as a director of the Company; and Mantin Lu resigned as a director of the Company.
In contemplation of the aforementioned resignations, also on June 3, 2005, the Board of Directors appointed in accordance with Section 3.04 of the Company's Bylaws, Jinjiang Wang, Chengzhi Wang, Hong Bu, Jiping Wang and Song Yang as members of the Company's Board of Directors, subject to the fulfillment of the filing and mailing requirements, including the 10 day waiting period of its Schedule 14f-1 that was sent to all stockholders of the Company pursuant to section 14(f) of the Securities Exchange Act of 1934 which occurred on July 22, 2005 and appointed the following officers to serve immediately: Jinjiang Wang, President; Chengzhi Wang, General Manager; Hong Bu, Chief Financial Officer and Treasurer; Fengxi Lang, Secretary; Changfu Wang, Vice General Manager; Zhimin Zhan, Vice General Manager; and Lixian Zhou, Assistant General Manager of the Company.
On July 20, 2005, InvestNet's sole director, Vivian Szeto, and a majority of the Company's stockholders unanimously approved and ratified a one for seventy reverse split (the "Reverse Split") of the Company's common stock and the amendment and restatement of the Company's Articles of Incorporation to effect a name change of the Company from "Investnet, Inc." to "China Kangtai Cactus Bio-Tech Inc.". The Reverse Split became effective on August 25, 2005; 20 days after the Company sent an Information Statement to all of its stockholders and after the filing of the Amended and Restated Articles of Incorporation with the Secretary of State of Nevada. As a result of the Reverse Split, the number of issued and outstanding shares of common stock of the Company, now named China Kangtai Cactus Bio-Tech Inc., was reduced from a total of 200,000,000 shares outstanding to 2,857,143 shares outstanding. A day after the Reverse Split on August 26, 2005, the Convertible Note was converted by its holders(s) into 14,248,395 shares of the Company, which increased the total outstanding shares of the Company to 17,105,625 shares. The Company's trading symbol was changed by the OTC Bulletin Board Stock Market ("OTCBB") to "CKGT" to better reflect the Company's new name. The Company has also changed its Web site to www.xrz.cn.
On June 26, 2006, the Company acquired a 100% equity interest in Guangdong Taishan Kangda Cactus Hygienical Food Co., Ltd. ("Taishan Kangda"), a company with limited liability formed under the laws of the People's Republic of China for $1,574,000 in cash. Taishan Kangda's assets include large areas of cactus plantation and production facilities in Guangdong Province in southeast China. The acquisition allows the Company to establish production facilities closer to its existing cactus plantations in Guangdong Province in order to reduce transportation cost and to distribute its products more effectively in southeast China.
The Company currently has three 100% owned subsidiaries: China Kangtai Cactus Bio-Tech Company Limited, a British Virgin Islands company (Kangtai BVI") ; Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd., a PRC company "Harbin Hainan Kangda"); and Taishan Kangda.
Kangtai BVI is a holding company and does not have any operations. Harbin Hainan Kangda handles all of the production, research and development, sales and marketing of our products derived from edible cactus plants, fruits and extracts. Taishan Kangda handles all of the cultivation and harvest of cactus plants and the production of our cactus raw materials.
Consolidated Results of Operations
The three-month period ended September 30, 2008 as compared to the three months ended September 30, 2007
For the three months ended September 30, 2008, revenues increased by $2,229,213 or 56.4% to $6,184,685 from $3,955,472 in the corresponding period of the prior year. The increase in revenues was attributable to the fact that the Company is continuing to expand its productions and distribution, and its products are better accepted by the Chinese market customers. These products include Cactus Protein Nutrient, Cactus Calcium Peptide Soft Capsule and Cactus Shuxin Capsule, among others. In addition, the Company successfully launched two new products, cactus fish feed and cattle feed, in July 2008, which also contributed to the increase in sales.
For the three months ended September 30, 2008, cost of sales increased by $1,128,699 or 44.3% to $3,676,334 from $2,547,635, as compared to the corresponding period of the prior year. This increase was mainly due to an increase in net sales, specifically the sales of our newly launched cactus fish and cattle feed.
Our gross profit for the three months period ended September 30, 2008 was $2,508,351 which increased by $1,100,514 or 78.2% from $1,407,837 for the same period last year. This increase was mainly attributable to the increase in net sales.
For the three months ended September 30, 2008, operating expenses decreased by $164,806, or approximately 32.8% to $338,004, as compared to $502,810 for the three months ended September 30, 2007. The decrease in operating expenses is mainly attributable to the elimination of expenses associated with returns and doubtful accounts which accounted for $188,348 for the same period in 2007.
For the three months ended September 30, 2008, income before income taxes increased by $1,264,296 or 141.6%, to $2,156,877 from $892,581 for the corresponding period of the prior year. The increase was primarily due to the increase in gross profit. As a result, net income also increased by $983,632 or 125.5% to $1,767,140 from $783,508. This increase is due to the increase in net sales, specifically the sales of our newly launched cactus fish and cattle feed and a reduction in cost of sales as a result of the measures taken by the management.
As an effort to reduce production cost, the Company purchased certain processing equipment back in the previous quarter. The Company entered into an arrangement with one of its cooperating partners, Harbin Meijia Bio-Tech Co., Ltd. ("Meijia"), whereby Meijia would house and have full use of the equipment and in return will process and manufacture the Company's products for a management fee. As a result, the Company is no longer required to pay Meijia a processing fee which is much higher than the management fee the Company currently pays to Meijia.
For the three months ended September 30, 2008, net income increased by $983,632, or 126% from $783,508 to $1,767,140. This increase was due to the increase in net sales as a result of the sales of the newly launched cactus fish and cattle feed and the reduction in cost associated with processing charges paid to Meijia.
The nine month period ended September 30, 2008 as compared to the nine month period ended September 30, 2007
For the nine months ended September 30, 2008, revenues increased by $3,916,206 or 39% to $ 13,961,101 from $10,044,895 in the corresponding period of the prior year. The increase in revenues was attributable to the fact that the Company is continuing to expand its productions and distribution, and its products are better accepted by the Chinese market customers. These products include Cactus Protein Nutrient, Cactus Calcium Peptide Soft Capsule and Cactus Shuxin Capsule, among others. In addition, the Company successfully launched two new products, cactus fish feed and cattle feed, in July 2008, which also contributed to the increase in sales.
For the nine months ended September 30, 2008, cost of sales increased by $2,377,195 or 36.4% to $8,899,088 from $6,521,893, as compared to the corresponding period of the prior year. This increase was mainly due to an increase in net sales, specifically the sales of our newly launched cactus fish and cattle feed.
For the nine months ended September 30, 2008, operating expenses increased by $23,491, or approximately 2.6% to $911,455, as compared to $887,964 for the nine months ended September 30, 2007. Despite the substantial increases in general and administrative expenses, the Company eliminated expenses associated with returns and doubtful accounts which accounted for $188,348 in same period last year. As a result, our operating expenses increased only slightly.
For the nine months ended September 30, 2008, selling expenses decreased by $13,626, or 7% to $211,273 from $197,647 as compared to the corresponding period of the prior year. General and administrative expenses increased by $183,569 or 55.5% to $514,092 from $330,523 as compared to the corresponding period of the prior year. The increase in selling expenses was due to an increase in advertising expenses. The increase in general and administrative expenses was mainly due to (i) warrants issued to the Company's new attorney valued at $59,225; (ii) increase in salaries and related benefits, and (iii) increase in expenditures in our investor relations program.
For the nine months ended September 30, 2008, income before income taxes increased by $1,499,179 or 57.7%, to $4,097,904 from $2,598,725 for the corresponding period of the prior year. The increase was primarily due to the increase in gross profit. As a result, net income also increased by $$1,217,921 or 55.5% to $3,411,962 from $2,194,041.
For the nine months ended September 30, 2008, net income increased by $1,217,921, or 55.5% from $2,194,041 to $3,411,962. This increase was due to larger foreign currency translation adjustment gains, sales of newly launched cactus fish and cattle feed, and the reduction in processing fees paid to Meijia.
Liquidity and Capital Resources -September 30, 2008
Operating. For the nine months period ended September 30, 2008, the Company's operations provided cash resources of $6,020,968 as compared to a shortfall of $244,417 cash resources used for the nine months period ended September 30, 2007, an increase of cash provided by operating activities of $6,265,385, or 2,563%. The increase was mainly due to (i) $2,268,805 decrease in inventories in 2008 as compared to the same period in 2007 and (ii) $2,471,513 increase in accounts receivable, net in 2008 as compared to the same period in 2007.
Investing and financing. For the nine months period ended September 30, 2008, the Company used $7,252,549 in investment activities an increase of $7,250,863 or 430,000% compared to $1,686 for the same period a year ago. The increase was mainly attributable to money invested in the purchase of land use right for property located in Guangdong Province, PRC, for $7,255,081 which amount was fully paid as of September 30, 2008.
For the nine months period ended September 30, 2008, the Company's financing activities generated $670,917 cash resources, as compared to $0 for the same period ended September 30, 2007. This is due to the PIPEs financing transactions completed in March 2008 and July 16, 2008. In each financing transaction, the company issued Series A preferred stock and two classes of warrants to T-Squared Investments, LLC. (See note 8 to the notes to consolidated financial statements contained in this report for details). The conversion feature and the value of the warrants included in the issuance of Series A preferred stock had a negative impact on the common shareholders and resulted in a net loss attributable to common stockholders of $1,409,164, and a net income per share of $0.08 for the quarter.
The company had a cash position of $648,480 on September 30, 2008, an increase of $138,579, or 27% from $509,901 on December 31, 2007.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are in the opinion of management likely to have, a current or future material effect on the Company's financial condition or results of operations.
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