China Kangtai Cactus Biotech Adopts EITF 07-05, Expects to File Amended 10-Q, 10-K

As a result of this change in accounting treatment, the company anticipates making a negative non-cash adjustment of approximately $2.7 million to its income statement for the third quarter of 2009.

28 Dec 2009 --- China Kangtai Cactus Biotech Inc., a vertically integrated grower, developer, manufacturer and marketer of a variety of cactus-based products in China, announced that the company expects to restate its previously filed annual report on Form 10-K for year 2008 to correct errors relating to the accounting for deemed dividends from the sales of convertible preferred stock and warrants issued on March 21, 2008 and July 16, 2008 and correct the non-accounting for the grant of 150,000 stock options to the company’s legal counsel on December 31, 2008 and also restate its quarterly reports on form 10-Q for the first three quarters of fiscal 2009. This reflects the adoption of non-cash related accounting treatment of warrants and convertible preferred stock the company issued in connection with the "Preferred Stock Purchase Agreement" dated March 21, 2008, based on Emerging Issues Task Force Issue No. 07-05, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock" ("EITF 07-05").

EITF 07-05 requires issuers to record as liabilities financial instruments which provide "down round" protection in the form of a "hard ratchet" adjustment mechanism to the relevant exercise or conversion price, which was originally designed to protect holders from dilutive issuances of a company's stock. EITF 07-05 was enacted for fiscal years beginning after December 15, 2008 and requires that warrants with such provisions no longer be recorded as equities and instead be recorded as liabilities since a hard ratchet provision may be considered a type of guarantee provided to the holder of the financial instrument.

China Kangtai adopted EITF 07-05 to properly account for the value of the convertible preferred stock and warrants the company issued in March and July 2008.

As a result of this change in accounting treatment, the company anticipates making a negative non-cash adjustment of approximately $2.7 million to its income statement for the third quarter of 2009, due to the expense incurred on the revaluation of Series A Preferred Stock and A, B, C, and D Warrants with characteristics of liabilities at fair value. The company also expects to record non-cash adjustments in subsequent reporting periods, depending on the changes in the fair value of the company's convertible preferred stock and warrants, which will be subject to, among other factors, changes in the company's share price. This adjustment has no impact on the company’s cash flow or income from operations.

The company intends to file amendments to its Form 10-Q and 10-K for the affected quarterly and annual periods as soon as possible.