UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
CHINA PHARMACEUTICALS, INC.
(Name of small business issuer in its charter)
| Nevada | 2834 | 20-2638087 |
(State or other jurisdiction of incorporation or organization) | (primary standard industrial classification code number) | (I.R.S. Employer Identification No.) |
24th Floor, Building A, Zhengxin Mansion
No. 5 of 1st Gaoxin Rd, Hi-Tech Development Zone
Xi’an City, People’s Republic of China
86-29-8406-7215
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
c/o Incorp Services, Inc.
375 North Stephanie Street, Suite 1411
Henderson, NV 89014-8909
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
William L. MacDonald
Macdonald Tuskey Corporate & Securities Lawyers
Suite #1210, 777 Hornby Street, Vancouver, B.C., V6Z 1S4, Canada
Telephone: (604) 648-1670, Facsimile: (604) 681-4760
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: þ
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |
| Non-Accelerated Filer | ¨ | Smaller Reporting Company | þ |
Title Of Each Class of Securities To be Registered | Amount To Be Registered | Proposed Maximum Offering Price Per Share(1) | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee(3) | ||||||||||||
| Common stock, par value $0.001 per share (2)(3) | 4,300,000 | $ | 1.42 | $ | 8,084,000 | $ | ||||||||||
| Warrants (2)(3) | 3,500,000 | $ | 1.42 | $ | 6,580,000 | $ | ||||||||||
| Total | 7,800,000 | 1.42 | $ | 11,076,000 | $ | 789.72 | ||||||||||
———————
(1) Estimated solely for purposes of calculating the registration fee. The registration fee is calculated pursuant to Rule 457(c).
(2) We are registering 7,800,000 shares of our common stock including 4,300,000 issued shares and 3,500,000 unissued shares underlying warrants.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the United States Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.
PROSPECTUS
CHINA PHARMACEUTICALS, INC.
4,300,000 Shares of Issued Common Stock
3,500,000 Shares of Common Stock Underlying Warrants
This prospectus relates to the resale by the selling stockholders of up to 7,800,000 shares of our common stock, par value $0.001 per share, including 4,300,000 issued shares and 3,500,000 unissued shares issuable upon the exercise of purchase warrants.
The selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. The selling stockholders may be deemed underwriters of the shares of common stock, which they are offering. We will pay the expenses of registering these shares.
We are not selling any shares of common stock in this offering and therefore will not receive any proceeds from the sale of common stock hereunder. We would receive proceeds from the exercise of any of the 3,500,000 outstanding warrants to purchase common shares that are being registered in this prospectus. Our common stock is quoted on the OTC Bulletin Board under the symbol "CFMI". The last sale price of our common stock was $1.63 per share on July 9, 2010.
Investing in these securities involves significant risks. See “Risk Factors” beginning on page 5.
No other underwriter or person has been engaged to facilitate the sale of shares of common stock in this offering. None of the proceeds from the sale of stock by the selling stockholders will be placed in escrow, trust or any similar account.
We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is July 20, 2010
Table of Contents
ABOUT THIS PROSPECTUS
You should rely only on the information contained in the prospectus. We have not authorized anyone to provide you with information or to make any representations about us, the selling stockholders, the securities or any matter discussed in this prospectus, other than that contained in the prospectus. If any other information or representation is given or made, such information or representations may not be relied upon as having been authorized by us or any selling stockholder. The selling stockholders are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy the securities in any circumstances under which the offer or solicitation is unlawful. The information contained in this prospe ctus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Neither the delivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus. The prospectus will be updated and updated prospectuses made available for delivery to the extent required by the federal securities laws.
When used in this prospectus, the following terms shall have the meanings stated below:
| ● | “China Pharmaceuticals”, the “Company”, “we”, “our”, “us” or similar terms, refers to China Pharmaceuticals, Inc., a Delaware corporation, and, where appropriate, to our subsidiaries. |
| ● | China Qinba,” refers to our wholly owned subsidiary China QinBa Pharmaceuticals, Inc., a Delaware corporation. |
| ● | “Xi’an Development” refers to our wholly owned subsidiary Xi’an Pharmaceuticals Development Co., Ltd., a limited liability company organized under the laws of the Peoples Republic of China. |
| ● | “Xi’an Pharmaceuticals” refers to our variable interest entity (“VIE”), Xi’an Qinba Pharmaceuticals Co., Ltd., a company organized under the laws of the Peoples Republic of China that has entered into a series of agreements with Xi’an Development that (i) give Xi’an Development control over the board of directors, officers, operations and finances of Xi’an Pharmaceuticals; (ii) permit Xi’an Pharmaceuticals to be treated as a subsidiary of Xi’an Development under the laws of the People’s Republic of China; and (iii) allow us to consolidate its financial statements under GAAP. |
| ● | “WOFE” refers to Xi’an Development which is a “wholly owned foreign enterprise” under the laws of the People’s Republic of China. |
| ● | “Xi’an Shareholders” refers to the shareholders of Xi’an Pharmaceuticals who are also the shareholders of China QinBa. |
| ● | “Yuan” or “RMB” refer to the Chinese Yuan (also known as the Renminbi). According to the currency website xe.com, as of December 31, 2009 (the close of our last completed fiscal year), USD$1 = Yuan 6.82. As of March 31, 2009, (the close of our last completed fiscal quarter) and as of December 31, 2009, (the close of our last completed fiscal year) USD$1=Yuan 6.82. |
| ● | “PRC” or “China” refers to the People’s Republic of China. |
| ● | “SFDA” refers to the PRC State Food and Drug Administration. |
| ● | “OTC Bulletin Board” or the “OTCBB” refers to the Over-the-Counter Bulletin Board, an electronic quotation system for equity securities overseen by the Financial Industry Regulatory Authority (formerly the National Association of Securities Dealers), which is accessible through its website at WWW.OTCBB.COM. |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
This prospectus contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) projected sales, profitability, and cash flows, (b) growth strategies, (c) anticipated trends, (d) future financing plans and (e) anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipates,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,̶ 1; “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. These statements may be found
under “Management’s Discussion and Analysis of Financial Condition and Plan of Operation” and “Business,” as well as in this prospectus generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.
Any or all of the forward-looking statements in this prospectus may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in the prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. The summary is intended for quick reference only and does not contain all of the information that you should consider before investing in our common stock. To understand this offering fully, you should read the entire prospectus and all exhibits to this prospectus carefully, including but not limited to the section entitled “Risk Factors”, and the Consolidated Financial Statements and the Related Notes.
The Company
Business Overview
China Pharmaceuticals, Inc. (formerly Allstar Restaurants) was incorporated in the State of Nevada on December 22, 2004. On February 12, 2010, pursuant to the closing of a merger agreement with China Qinba Pharmaceuticals, Inc., an interest holder of Xi’an Qinba Pharmaceuticals, Co., Ltd.’s (“Xi’an Pharmaceuticals”), Xi’an Pharmaceuticals became our variable interest entity, making us the primary beneficiary of its business, and permitting us to consolidate its financial statements with our own. Xi’an Pharmaceuticals was formed in October 15, 1969 under the laws of the Peoples Republic of China (“PRC”) and is engaged in the research, development, manufacture, packaging, marketing, and distribution of pharmaceutical and medical products in China for human u se for the treatment of a variety of diseases and conditions. Our business is conducted primarily through Xi’an Pharmaceuticals in Xixiang County, Hanzhong, PRC, and the Xi’an Jinghe Industrial Zone, PRC, where our two manufacturing facilities are located. Through Zi’an Pharmaceuticals, we manufacture pharmaceutical products in the form of capsules, oral solutions, tablets, granules, syrups, medicinal teas, tinctures and freeze dried powders for the preparation of small and large volume solutions for injection (parenteral solutions). Applications for the pharmaceutical products that we manufacture include the treatment of viral pneumonia, hypotonicity dehydration, viral influenza and many other diseases and indications.
We currently manufacture 85 pharmaceutical products which are sold to numerous distributors who distribute our products pursuant to distribution agreements to licensed healthcare providers such as hospitals, clinics and pharmacies. We currently have 35 active distribution agreements. The raw materials used to manufacture our products include various medicinal herbs such as tumeric and zedoary, which we obtain from specified and PRC qualified suppliers.Other raw materials include sulfamethoxazole, an antibiotic, which is primarily used in the manufacture of our product “Fufang Qiguanyan Pian, a medication for the treatment of chronic cough and bronchitis. We also enter into trading agreements for the supply of many of the materials used to manufacture and package our products including aluminum foil, which we use as the inner packing materials for products in tablet form. Xi’an Pharmaceuticals has entered into written agreements with substantially all of its suppliers. The agreements with three of Xi’an Pharmaceuticals’ largest suppliers each commenced January 1, 2008 and expire December 31, 2010. These agreements typically provide that the suppliers are to supply product to Xi’an Pharmaceuticals within a specified period of time following the placement of an order by Xi’an Pharmaceuticals’. Typically, Xi’an Pharmaceuticals is required to pay for the products within 60 days of their receipt. The price paid for the products is the market price published at the time of purchase.
Our focus has been on the development and sale of pharmaceutical products based on traditional Chinese medicines designed to address numerous diseases and indications, with an emphasis on sales to community hospitals and rural medical institutions.
For more information about our business you should read the section entitled “OUR BUSINESS” on page 32 of this prospectus.
Our Corporate Information
We maintain our corporate headquarters at 24th Floor, Building A, Zhengxin Mansion, No. 5 of 1st Gaoxin Rd, Hi-Tech Development Zone, Xi’an City, People’s Republic of China. Our telephone number is 86-29-8406-7215 and our facsimile number is 86-29-8781-5521.
Background
On December 17, 2009, our subsidiary, China Qinba Pharmaceuticals, Inc. entered into an agreement with Dragon Link Investments, Inc. to obtain certain consulting services. As consideration for the services provided by Dragon Link Investments, Inc., (and in accordance with a warrant placement agreement dated February 12, 2010 between us and Dragon Link) China Qinba Pharmaceuticals agreed to issue to Dragon Link Investments, Inc., warrants to acquire 1,200,000 shares of our common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,000,000 shares post reverse split), with registration rights, and exercisable at a price of $1.00 per post-split share within three years after the control acquisition or merger by China Qinba with a public company identified by Dragon Link . ;The warrants will expire on February 11, 2013.
On January 5, 2010, our subsidiary, China Qinba Pharmaceuticals, Inc., entered into an agreement with IFG Investments Services, Inc. to obtain certain consulting services including advising on a merger/acquisition transaction and regulatory filings, and other services and support as requested. In consideration for the consulting services to be performed by IFG Investments (and in accordance with a warrant placement agreement dated February 12, 2010 between us and IFG Investments), China Qinba Pharmaceuticals agreed to issue to IFG Investments warrants to acquire 1,800,000 shares of our common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,500,000 shares post reverse split), with registration rights, exercisable at $1.00 per post-split share within three years after the closing of the control acquisition or merger by China Qinba with public company. The warrants will expire on February 11, 2013.
On January 27, 2010, our subsidiary, China Qinba Pharmaceuticals, Inc., entered into an investor relations agreement with HACG Investor Relations Services, Inc., to obtain certain public company sector services, including advising on and with respect to investor relations. The term of the contract expires January 31, 2011. As consideration for the services to be performed by HACG (and in accordance with a warrant placement agreement dated February 12, 2010 between us us and HACG), China Qinba Pharmaceuticals agreed to issue to HACG warrants to acquire 1,200,000 common shares of the Company’s stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,000,000 shares post reverse split), with registration rights, exercisable at $1.00 per post-split share until January 31, 2013.
The above noted securities issued to our consultants, Dragon Link Investments, Inc., IFG Investments Services, Inc., and HACG Investor Relations Services, Inc. were not registered under the Securities Act of 1933. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act. We made this determination based on the representations of the consultants, which included, in pertinent part, that such consultants were "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act and that the consultants were acquiring our securities for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the consultants understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
On February 12, 2010, pursuant to a merger agreement with China Qinba Pharmaceuticals, Inc., dated of the same date (the “Merger Agreement”), we issued 33,600,000 shares of our Common Stock to the shareholders China Qinba Pharmaceuticals in exchange for 100% of the outstanding shares of China Qinba Pharmaceuticals. The 33,600,000 shares (which were subsequently reduced to 28,000,000 shares post reverse split) were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration, in part pursuant to Regulation S and Regulation D under the Securities Act of 1933 and in part pursuant to Section 4(2) of the Securities Act of 1933. We made this determination based on the representations of China Qinba Pharmaceuticals, which included, in pertinent part, that suc h shareholders were either (a) "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, or (b) not a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the Act, and that such shareholders were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that China Qinba Pharmaceuticals’ shareholders understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
Pursuant to a share exchange agreement between us and Terry G. Bowering dated February 12, 2010, Mr. Bowering transferred 5,100,000 shares of our common stock for cancellation in exchange for 100% of the issued and outstanding of our former subsidiary, China Doll Foods Ltd. The 5,100,000 shares were cancelled on February 12, 2010.
On June 8, 2010, we effected a five-for six reverse split of our common stock reducing our number of outstanding common shares from 38,450,000 to 32,041,667 shares.
The Offering
| Common stock outstanding prior to this offering (on July 14, 2010) | 32,041,667 | ||||
| Common stock being offered for resale to the public | 7,800,000 | (1) | |||
| Common stock outstanding after this offering | 35,541,667 | (2) | |||
| Percentage of common stock outstanding before this offering that shares being registered for resale represent | 21.94.0 | %(2) | |||
| (1) | Includes 4,300,000 issued shares of common stock and 3,500,000 shares of unissued common stock underlying warrants. | ||||
| (2) | Assumes the issuance of 3,500,000 shares of common stock underlying warrants being registered in this prospectus. | ||||
Total proceeds raised in the offering: We will not receive any proceeds from the resale of the 4,300,000 shares of issued common stock being registered in this prospectus. We will receive proceeds in the event that the selling shareholders purchase any of the 3,500,000 unissued common shares underlying warrants being registered in this prospectus.
Warrants
The consultants who have been issued warrants are granted the right to purchase in the aggregate 3,500,000 shares of our common stock. We have agreed to register 100% of the shares underlying these warrants, or 3,500,000 common shares, pursuant to the consulting agreements we have entered into with each of the warrant holders. The warrant entitles its holder to one share of our common stock upon exercise. The warrants may be exercised at any time on or after the initial exercise eligibility date of February 12, 2010 through January 31, 2010 (with respect to 1,000,000 shares/warrants) or February 11, 2013 (with respect to 2,500,000 shares/ warrants), at an exercise price of $1.00 per share. The exercise price was negotiated based on the price of our common stock as quoted on the OTC Bulletin Board at the time the wa rrants were issued.
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Some of the statements contained in this Form S-1 that are not historical facts are “forward-looking statements” which can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form S-1, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of fut ure results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:
| ● | Our ability to attract and retain management, and to integrate and maintain technical information and management information systems; |
| ● | Our ability to raise capital when needed and on acceptable terms and conditions; |
| ● | The intensity of competition; and |
| ● | General economic conditions. |
All written and oral forward-looking statements made in connection with this Form S-1 that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Plan of Distribution
This offering is not being underwritten. The selling stockholders directly, through agents designated by them from time to time or through brokers or dealers also to be designated, may sell their shares from time to time, in or through privately negotiated transactions, or in one or more transactions, including block transactions, on the OTC Bulletin Board or on any stock exchange on which the shares may be listed in the future pursuant to and in accordance with the applicable rules of such exchange or otherwise. The selling price of the shares may be at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices after the shares are quoted on the OTC Bulletin Board. To the extent required, the specific shares to be sold, the names of the selling stockholders, the respec tive purchase prices and public offering prices, the names of any such agent, broker or dealer and any applicable commission or discounts with respect to a particular offer will be described in an accompanying prospectus. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. We will keep this prospectus current until the expiration dates of the convertible securities, even if the convertible securities which underlie certain shares of our common stock subject to this prospectus are out of the money.
The selling security holders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling security holders or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.
We will not receive any proceeds from sales of shares by the selling stockholders. However, if any of the selling stockholders decide to exercise their Warrants, we will receive the net proceeds of the exercise of such security held by the selling stockholders. We intend to use any proceeds we receive from the exercise of the Warrants for working capital and other general corporate purposes. We cannot assure you that any of the Warrants will ever be exercised.
We will pay all expenses of registration incurred in connection with this offering (estimated to be $37,000), but the selling stockholders will pay all of the selling commissions, brokerage fees and related expenses.
The selling stockholders and any broker-dealers or agents that participate with the selling stockholders in the distribution of any of the shares may be deemed to be “underwriters” within the meaning of the Securities Act, and any commissions received by them and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
RISK FACTORS
You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision with regard to our securities. The statements contained in or incorporated into this offering that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Our operating history may not serve as an adequate basis to judge our future prospects and results of operations.
We conduct substantially all of our business through our variable interest entity (“VIR”), Xi’an Pharmaceuticals, a company organized under the laws of the Peoples Republic of China which we manage and control by contractual arrangement through our subsidiaries, and whose financial statement are consolidated with our own. Xi’an Pharmaceuticals commenced its current line of business operations in October 15, 1969 and received its Good
Manufacturing Practices (“GMP”) certifications in March 2006 and January 2007. These certifications must be renewed every five years for Xi’an Pharmaceuticals to stay in business. Xi’an Pharmaceuticals’ operating history may not provide a meaningful basis on which to evaluate its business. We cannot assure you that Xi’an Pharmaceuticals will maintain its profitability or that we will not incur net losses in the future. We expect that Xi’an Pharmaceuticals’ operating expenses will increase as it expands. Any significant failure to realize anticipated revenue growth could result in significant operating losses. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to:
| ● | raise adequate capital for expansion and operations; | |
| ● | implement our business model and strategy and adapt and modify them as needed; | |
| ● | increase awareness of our brand name, protect our reputation and develop customer loyalty; | |
| ● | manage our expanding operations and service offerings, including the integration of any future acquisitions; | |
| ● | maintain adequate control of our expenses; | |
| ● | anticipate and adapt to changing conditions in the medical over the counter, pharmaceutical and nutritional supplement markets in which we operate as well as the impact of any changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics |
If we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.
The loss of Xi’an Pharmaceuticals as our operating business would have a material adverse effect on our business and the price of our common stock.
We have no equity ownership interest in Xi’an Pharmaceuticals. Our ability to control Xi’an Pharmaceuticals and consolidate its financial results is through a series of contractual agreements between Xi’an Pharmaceuticals and our wholly-owned subsidiary Xi’an Development. The management of Xi’an Pharmaceuticals is an affiliate of us and of Xi’an Development and the stockholders of Xi’an Pharmaceuticals are also our shareholders. Thus the Management Entrustment Agreement was not entered into as a result of arms’ length negotiations because the parties to the agreement are under common control. Mr. Wang, our CEO and Chairman, and Mr. Guiping Zhang, our President, hold in the aggregate approximately 34.25% of the shares of Xi’an Pharmaceuticals and approximately 29% of o ur common stock. The Management Entrustment Agreement may be terminated upon the termination of the business of Xi’an Pharmaceuticals or upon the date upon which Xi’an Development completes the acquisition of Xi’an Pharmaceuticals. Any other termination would be a breach of the agreement. While the Company has been advised by its PRC counsel that the Management Entrustment Agreement is legal and enforceable under PRC law, these affiliates control the parties to the Management Entrustment Agreement and it could be possible for them to cause Xi’an Pharmaceuticals to breach the Management Entrustment Agreement and our unaffiliated investors would have little or no recourse because of the inherent difficulties in enforcing their rights since all our assets are located in the PRC. (See, Risk Factor “The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any ch anges in such PRC laws and regulations may harm our business.”) In the event that management of Xi’an Pharmaceuticals decides to breach the Management Entrustment Agreement, the risk of loss of the affiliated shareholders of Xi’an Pharmaceuticals could be lower than unaffiliated investors and the interests of the management and shareholders of Xi’an Pharmaceuticals would be in conflict with the interest of our other stockholders.
Xi’an Pharmaceuticals’ failure to compete effectively may adversely affect our ability to generate revenue.
Xi’an Pharmaceuticals competes with other companies, many of whom are developing or can be expected to develop products similar to Xi’an Pharmaceuticals. Xi’an Pharmaceuticals’ market is a large market with many competitors. Many of its competitors are more established than Xi’an Pharmaceuticals is, and have significantly greater financial, technical, marketing and other resources than it presently possess. Some of Xi’an Pharmaceuticals’ competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We cannot a ssure you that Xi’an Pharmaceuticals will be able to compete effectively with current or future competitors or that the competitive pressures it faces will not harm it business.
We may not be able to effectively control and manage the growth of Xi’an Pharmaceuticals.
If Xi’an Pharmaceuticals’ business and markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. An expansion would increase demands on existing management, workforce and facilities. Failure to satisfy such increased demands could interrupt or adversely affect its operations and cause delay in production and delivery of its pharmaceutical prescription, over the counter and medical nutrient products as well as administrative inefficiencies.
We may require additional financing in the future and a failure to obtain such required financing will inhibit Xi’an Pharmaceuticals’ ability to grow.
The continued growth of Xi’an Pharmaceuticals’ business may require additional funding from time to time, which we expect to raise in private placements of our equity or debt securities with accredited investors or by offering our securities for sale pursuant to an effective registration statement on a market where our common stock is traded. The proceeds of these funding will be forwarded to Xi’an Pharmaceuticals and accounted for as a loan to Xi’an Pharmaceuticals and eliminated during consolidation. The proceeds would be used for general corporate purposes of Xi’an Pharmaceuticals, which could include acquisitions, investments, repayment of debt and capital expenditures among other things. We may also use the proceeds to repurchase our capital stock or for our corporate overhead expenses. If we borrow funds we expect to be the primary obligor on any debt. Obtaining additional funding would be subject to a number of factors including market conditions, operating performance and investor sentiment, many of which are outside of our control. These factors could make the timing, amount, terms and conditions of additional funding unattractive or unavailable to us. Our management believes that we currently have sufficient funds from working capital to meet our current operating costs over the next 12 months.
The terms of any future financing may adversely affect your interest as stockholders.
If we require additional financing in the future, we may be required to incur indebtedness or issue equity securities, the terms of which may adversely affect your interests in us. For example, the issuance of additional indebtedness may be senior in right of payment to your shares upon our liquidation. In addition, indebtedness may be under terms that make the operation of Xi’an Pharmaceuticals’ business more difficult because the lender's consent could be required before we take certain actions. Similarly the terms of any equity securities we issue may be senior in right of payment of dividends to your common stock and may contain superior rights and other rights as compared to your common stock. Further, any such issuance of equity securities may dilute your interest in us.
We, through our subsidiary and affiliated companies, China Qinba, Xi’an Development, or Xi’an Pharmaceuticals, may engage in future acquisitions that could dilute the ownership interests of our stockholders, cause us to incur debt and assume contingent liabilities.
We, through our subsidiary and affiliated companies, China Qinba, Xi’an Development or Xi’an Pharmaceuticals, may review acquisition and strategic investment prospects that we believe would complement the current product offerings of Xi’an Pharmaceuticals, augment its market coverage or enhance its technical capabilities, or otherwise offer growth opportunities. From time to time Xi’an Pharmaceuticals reviews investments in new businesses and we, through our subsidiaries/affiliated companies China Qinba, Xi’an Development or Xi’an Pharmaceuticals, expect to make investments in, and to acquire, businesses, products, or technologies in the future. We expect that when we raise funds from investors for any of these purposes we will be either the issuer or the primary obligor while the proceeds will be forwarded to Xi’an Pharmaceuticals and accounted for as a loan to Xi’an Pharmaceuticals and eliminated during consolidation. In the event of any future acquisitions, we could:
| ● | issue equity securities which would dilute current stockholders’ percentage ownership; | |
| ● | incur substantial debt; | |
| ● | assume contingent liabilities; or | |
| ● | expend significant cash. |
These actions could have a material adverse effect on our operating results or the price of our common stock. Moreover, even if through our subsidiary, Xi’an Development or Xi’an Pharmaceuticals, we do obtain benefits in the form of increased sales and earnings, there may be a lag between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits. Acquisitions and investment activities also entail numerous risks, including:
| ● | difficulties in the assimilation of acquired operations, technologies and/or products; | |
| ● | unanticipated costs associated with the acquisition or investment transaction; |
We may not have adequate internal accounting controls. While we have certain internal procedures in our budgeting, forecasting and in the management and allocation of funds, our internal controls may not be adequate.
We are constantly striving to improve our internal accounting controls. We expect to continue to improve our internal accounting control for budgeting, forecasting, managing and allocating our funds and to better account for them as we grow. There is no guarantee that such improvements will be adequate or successful or that such improvements will be carried out on a timely basis. If we do not have adequate internal accounting controls, we may not be able to appropriately budget, forecast and manage our funds, we may also be unable to prepare accurate accounts on a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under US securities laws.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our company's independent registered public accountants. The SEC extended the compliance dates for "non-accelerated filers," as defined by the SEC. Accordingly, we believe that the annual assessment of our internal controls requirement first applied to our annual report for the 2007 fiscal year and the attestation requirement of management's assessment by our independent registered public accountants will first apply to our annual report for the 2010 fiscal year. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, te sting and possible remediation to meet the detailed standards. We have not yet evaluated our internal controls over financial reporting in order to allow management to report on, and our independent auditors to attest to, our internal controls over financial reporting, as will be required by Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC. We have never performed the system and process evaluation and testing required in an effort to comply with the management assessment and auditor certification requirements of Section 404, which will initially apply to us as of December 31, 2007 and December 31, 2010 respectively. Our lack of familiarity with Section 404 may unduly divert management's time and resources in executing the business plan. If, in the future, management identifies one or more material weaknesses, or our external auditors are unable to attest that our management's report is fairly stated or to express an opinion on the effectiveness of our internal controls, this could result in a loss of investor confidence in our financial reports, have an adverse effect on our stock price and/or subject us to sanctions or investigation by regulatory authorities. So far, our external auditors have not reported to our board of directors any significant weakness on our internal control and provided recommendations accordingly.
We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.
Our success is, to a certain extent, attributable to the management, sales and marketing, and pharmaceutical factory operational expertise of key personnel. Guozhu Wang, our Chief Executive Officer and Chairman of the Board, Guiping Zhang, our President, and Tao Lei, our Chief Financial Officer, perform key functions in the operation of our and Xi’an Pharmaceuticals’ business. There can be no assurance that Xi’an Pharmaceuticals will be able to retain these officers after the term of their employment contracts expire. The loss of these officers could have a material adverse effect upon our business, financial condition, and results of operations. Xi’an Pharmaceuticals must attract, recruit and retain a sizeable workforce of technically competent employees. We do not carry key man l ife insurance for any of our key personnel or personnel nor do we foresee purchasing such insurance to protect against a loss of key personnel and the key personnel.
We are dependent upon the services of Mr. Wang and Mr. Zhang, for the continued growth and operation of our company because of their experience in the industry and his personal and business contacts in the PRC. Although we have entered into two-year employment agreements with Mr. Wang and Mr. Zhang and we have no reason to believe that they will discontinue their services with the Company or Xi’an Pharmaceuticals, the interruption or loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as our results of operations.
We may not be able to hire and retain qualified personnel to support its growth and if it is unable to retain or hire these personnel in the future, its ability to improve its products and implement its business objectives could be adversely affected.
Competition for senior management and senior personnel in the PRC is intense, the pool of qualified candidates in the PRC is very limited, and we may not be able to retain the services of our senior executives or senior personnel, or attract and retain high-quality senior executives or senior personnel in the future. This failure could materially and adversely affect our future growth and financial condition. We expect to hire additional sales and plant personnel throughout fiscal year 2010 in order to accommodate its growth.
If we fail to increase our brand recognition, we may face difficulty in obtaining new customers and business partners.
We believe that establishing, maintaining and enhancing our brand in a cost-effective manner is critical to achieving widespread acceptance of our current and future products and services and is an important element in our effort to increase our customer base and obtain new business partners. We believe that the importance of brand recognition will increase as competition in our market develops. Some of our potential competitors already have well-established brands in the pharmaceutical promotion and distribution industry. Successful promotion of our brand will depend largely on our ability to maintain a sizeable and active customer base, our marketing efforts and ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we will incur in building our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, in which case our business, operating results and financial condition, would be materially adversely affected.
Our operating results may fluctuate as a result of factors beyond our control.
Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include:
| ● | the costs of pharmaceutical products and development; | |
| ● | the relative speed and success with which we can obtain and maintain customers, merchants and vendors for our products; | |
| ● | capital expenditure for equipment; | |
| ● | marketing and promotional activities and other costs; | |
| ● | changes in our pricing policies, suppliers and competitors; | |
| ● | the ability of our suppliers to provide products in a timely manner to their customers; | |
| ● | changes in operating expenses; | |
| ● | increased competition in the pharmaceutical markets; and | |
| ● | other general economic and seasonal factors. |
We face risks related to product liability claims.
We presently do not maintain product liability insurance. We face the risk of loss because of adverse publicity associated with product liability lawsuits, whether or not such claims are valid. We may not be able to avoid such claims. Although product liability lawsuits in the PRC are rare, and we have not, to date, experienced significant failure of our products, there is no guarantee that we will not face such liability in the future. This liability could be substantial and the occurrence of such loss or liability may have a material adverse effect on our business, financial condition and prospects.
We face marketing risks.
Newly developed drugs and technology may not be compatible with market needs. Because markets for drugs differentiate geographically inside the PRC, we must develop and manufacture our products to accurately target specific markets to ensure product sales. If we fail to invest in extensive market research to understand the health needs of consumers in different geographic areas, we may face limited market acceptance of our products, which could have material adverse effect on our sales and earnings.
We face risks relating to difficulty in defending intellectual property rights from infringement.
Our success depends on protection of our current and future technology and products and our ability to defend our intellectual property rights. Xi’an Pharmaceuticals has filed for trademark protection for the various names and brands of its products sold in the PRC. However, it is possible for its competitors to develop similar competitive products even thought it has taken steps to protect its intellectual property. If we fail to protect Xi’an Pharmaceuticals’ intellectual property adequately, competitors may manufacture and market products similar to Xi’an Pharmaceuticals. We expect to file patent applications seeking to protect newly developed technology and products in various countries, including the PRC. Some patent applications in the PRC are maintained in secrecy until the patent is issued . Because the publication of discoveries tends to follow their actual discovery by many months, we may not be the first to invent, or file patent applications on any of our discoveries. Patents may not be issued with respect to any of our patent applications and existing or future patents issued to or licensed by us may not provide competitive advantages for our products. Patents that are issued may be challenged, invalidated or circumvented by our competitors. Furthermore, our patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products.
We also rely on trade secrets, non-patented proprietary expertise and continuing technological innovation that we shall seek to protect, in part, by entering into confidentiality agreements with licensees, suppliers, employees and consultants. These agreements may be breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors. If patents are not issued with respect to products arising from research, we may not be able to maintain the confidentiality of information relating to these products.
We face risks relating to third parties that may claim that we infringe on their proprietary rights and may prevent us from manufacturing and selling certain of our products.
There has been substantial litigation in the pharmaceutical industry with respect to the manufacturing, use and sale of new products. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. We may be required to commence or defend against charges relating to the infringement of patents or proprietary rights. Any such litigation could:
| ● | require us to incur substantial expense, even if covered by insurance or are successful in the litigation; | |
| ● | require us to divert significant time and effort of our technical and management personnel; | |
| ● | result in the loss of our rights to develop or make certain products; and | |
| ● | require us to pay substantial monetary damages or royalties in order to license proprietary rights from third parties. |
Although intellectual property disputes within the pharmaceutical industry have often been settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include the long-term payment of royalties. These arrangements may be investigated by regulatory agencies and, if improper, may be invalidated. Furthermore, the required licenses may not be made available to us on acceptable terms. Accordingly, an adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing and selling some of our products or increase our costs to market these products.
In addition, when seeking regulatory approval for some of our products, we may be required to certify to regulatory authorities, including the SFDA, that such products do not infringe upon third party patent rights. Filing a certification against a patent gives the patent holder the right to bring a patent infringement lawsuit against us. Any lawsuit would delay the receipt of regulatory approvals. A claim of infringement and the resulting delay could result in substantial expenses and even prevent us from manufacturing and selling certain of our products.
Our launch of a product prior to a final court decision or the expiration of a patent held by a third party may result in substantial damages to us. If we are found to infringe a patent held by a third party and become subject to such damages, these damages could have a material adverse effect on the results of our operations and financial condition.
We face risks related to research and the ability to develop new drugs.
Our growth and survival depends on our ability to consistently discover, develop and commercialize new products and find new and improve on existing technology and platforms. As such, if we fail to make sufficient investments in research, be attentive to consumer needs or does not focus on the most advanced technology, our current and future products could be surpassed by more effective or advanced products of other companies.
Risk Related To the Pharmaceutical Industry
Our certificates, permits, and licenses related to our pharmaceutical operations are subject to governmental control and renewal and failure to obtain renewal will cause all or part of our operations to be terminated.
Xi’an Pharmaceuticals is subject to various PRC laws and regulations pertaining to the pharmaceutical industry. Xi’an Pharmaceuticals has obtained certificates, permits, and licenses required for the operation of a pharmaceutical enterprise and the manufacturing of pharmaceutical products in the PRC.
In 1998, the SFDA introduced the Good Manufacturing Practice (GMP) Certificate in order to promote quality and safety of pharmaceutical production. The Good Manufacturing Practices were revised in July and October, 2004. We and our competitors are required to meet GMP standards in order to continue manufacturing pharmaceutical products and health foods. For each new product, Xi’an Pharmaceuticals prepares documentation of pharmacological, toxicity, pharmacokinetics and drug metabolism studies in addition to providing samples of the drug. The documentation and samples are then submitted to provincial food and drug administration. This process typically takes approximately three months. After the documentation and samples have been approved by the provincial food and drug administration, the provincial administration submits the approved doc umentation and samples to the SFDA. The SFDA examines the documentation and tests the samples and presents the findings to the New Drug Examination Committee for approval. If the application is approved by the SFDA, the SFDA will issue a clinical trial license to the applicant for clinical trials. This clinical trial license approval typically takes one year, followed by approximately two years of trials, depending on the category and class of the new drug. The SFDA then examines the documentation from the trial and, if approved, issues the new drug license to the applicant. This process usually takes eight months. The entire process takes anywhere from three to four years.
Xi’an Pharmaceuticals initially obtained pharmaceutical products and health food production permits by submitting its manufacturing processes and product tests to the SFDA who verified that its production processes and products met the standards by onsite inspections, review of test results and a determination that the market was not saturated by its products. The production permits are permanent once issued as long as they are renewed by the expiration date.
The GMP certificate is valid for a term of five years, the pharmaceutical products production permits are subject to renewal every five years, and each must be renewed before its expiration, if applicable. We manufacture and package our products at two factories, one located in Xixiang County in Hanzhong and one in Xi’an Jinghe Industrial Zone, China. Both facilities are in compliance with Good Manufacturing Practice (GMP) standards and have three GMP certificates for its 85 products, dated March 9, 2006 (Certificate No. H0192 for Xi’an Production Base), January 8, 2007 (Certificate No. H4109 for Xi’an Production Base) and January 8, 2007 (Certificate No. H4119 for Hanzong Production Base), respectively. The certificates remain valid until March 8, 2011, January 7, 2012 and January 7, 2012, respectively. All of the complete production lines at each facility meet international food and drug safety guidelines. If the GMP certificates expire without renewal, Xi’an Pharmaceuticals will not be able to continue medicine production, which will cause its operations to be terminated. Xi’an Pharmaceuticals intends to apply for renewed GMP certificates for its two production facilities before its current certificates expire.
According to Drug Administration Law of the PRC and its implementing rules, the SFDA approvals, including Pharmaceutical Manufacturing Permit and Drug Approval Numbers, may be suspended or revoked prior to the expiration date under circumstances that include:
| ● | producing counterfeit medicine; | |
| ● | producing inferior quality products; | |
| ● | failing to meet the drug GMP standards; | |
| ● | purchasing medical ingredients used in the production of products sources that do not have Pharmaceutical Manufacturing Permit or Pharmaceutical Trade Permit; | |
| ● | fraudulent reporting of results or product samples in application process; | |
| ● | failing to meet drug labeling and direction standards; | |
| ● | bribing doctors or hospital personnel to entice them to use products, | |
| ● | producing pharmaceuticals for use or resale by companies that are not approved by the SFDA, or | |
| ● | the approved drug has a serious side effect. |
If our pharmaceutical products fail to receive regulatory approval or are severely limited in these products' scope of use, we may be unable to recoup considerable research and development expenditures.
Our research and development of pharmaceutical products is subject to the regulatory approval of the SFDA in the PRC. The regulatory approval procedure for pharmaceuticals can be quite lengthy, costly, and uncertain. Depending upon the discretion of the SFDA, the approval process may be significantly delayed by additional clinical testing and require the expenditure of resources not currently available; in such an event, it may be necessary for us to abandon our application. Even where approval of the product is granted, it may contain significant limitations in the form of narrow indications, warnings, precautions, or contra-indications with respect to conditions of use. If approval of our product is denied, abandoned, or severely limited in terms of the scope of products use, it may result in the inability to recoup considerable research and development expenditures. During the fiscal year ended December 31, 2008, we obtained certificates and approvals of drug production for thirteen new drug batches, ten of which we have begun to sell. During the year ended December 31, 2009, we obtained certificates and approvals for two new drug batches, and we began production of these two new drug batches in October 2009. If we do not receive timely approval for any of our drugs, then production will be delayed and sales of the products cannot be planned for.
Price control regulations may decrease our profitability.
The laws of the PRC provide for the government to fix and adjust prices. The prices of certain medicines we distribute, including those listed in the Chinese government's catalogue of medications that are reimbursable under the PRC’s social insurance program, or the Insurance Catalogue, are subject to control by the relevant state or provincial price administration authorities. The PRC establishes price levels for products based on market conditions, average industry cost, supply and demand and social responsibility. In practice, price control with respect to these medicines sets a ceiling on their retail price. The actual price of such medicines set by manufacturers, wholesalers and retailers cannot historically exceed the price ceiling imposed by applicable government price control regulations. Although, as a general matte r, government price control regulations have resulted in drug prices tending to decline over time, there has been no predictable pattern for such decreases.
For the year ended December 31, 2009 and December 31, 2008, we have not had any products subject to specific pricing control and production and trading of none of our pharmaceutical products constitutes a monopoly. However, it is possible that our products may be subject to price control in the future. To the extent that our products are subject to price control, our revenue, gross profit, gross margin and net income will be affected since the revenue we derive from our sales will be limited and we may face no limitation on our costs. Further, if price controls affect both our revenue and costs, our ability to be profitable and the extent of our profitability will be effectively subject to determination by the applicable regulatory authorities in the PRC.
If the medicines we produce are replaced by other medicines or are removed from the PRC's insurance catalogue in the future, our revenue may suffer.
Under PRC regulations, patients purchasing medicine listed by the PRC's state and/or provincial governments in the Insurance Catalogue may be reimbursed, in part or in whole, by a social medicine fund. Accordingly, pharmaceutical distributors prefer to engage in the distribution of medicine listed in the Insurance Catalogue. Currently, our main prescription products are listed in the Insurance Catalogue. The content of the Insurance Catalogue is subject to change by the PRC Ministry of Labor and Social Security, and new medicine may be added to the Insurance Catalogue by provincial level authorities as part of their limited ability to change certain medicines listed in the Insurance Catalogue. If the medicine we produce are replaced by other medicines or removed from the Insurance Catalogue in the future, our revenue may suffer.
Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results.
The results of our operations may be significantly affected by the public's perception of our product and similar companies. This perception is dependent upon opinions concerning:
| ● | the safety and quality of our products and ingredients; | |
| ● | the safety and quality of similar products and ingredients distributed by other companies; and | |
| ● | our sales force. |
Adverse publicity concerning any actual or purported failure to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, or other aspects of our business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse affect on our goodwill and could negatively affect our sales and ability to generate revenue.
In addition, our consumers' perception of the safety and quality of products and ingredients as well as similar products and ingredients distributed by other companies can be significantly influenced by media attention, publicized scientific research or findings, widespread product liability claims and other publicity concerning our products or ingredients or similar products and ingredients distributed by other companies. Adverse publicity, whether or not accurate or resulting from consumers' use or misuse of our products, that associates consumption of our products or ingredients or any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similar products or claims that any such products are ineffective, inappropriately labeled or have inaccurate instructions as t o their use, could negatively impact our reputation or the market demand for our products.
If we fail to develop new products with high profit margins, and our high profit margin products are substituted by competitor's products, our gross and net profit margins will be adversely affected.
There is no assurance that we will be able to sustain our profit margins in the future. The pharmaceutical industry is very competitive, and there may be pressure to reduce sale prices of products without a corresponding decrease in the price of raw materials. In addition, the medical industry in the PRC is highly competitive and new products are constantly being introduced to the market. In order to increase our sales and expand our market share, we may be forced to reduce prices in the future, leading to a decrease in gross profit margin. The research and development of new products and technology is costly and time consuming, and there are no assurances that our research and development of new products will either be successful or completed within the anticipated timeframe, if ever at all. There is no assurance that&# 160;our competitors' new products, technology, and processes will not render our existing products obsolete or non-competitive. To the extent that we fail to develop new products with high profit margins and our high profit margin products are substituted by competitors' products, our gross profit margins will be adversely affected.
The commercial success of our products depends upon the degree of market acceptance among the medical community and failure to attain market acceptance among the medical community may have an adverse impact on our operations and profitability.
The commercial success of our products depends upon the degree of market acceptance among the medical community, such as hospitals and physicians. Even if our products are approved by the SFDA, there is no assurance that physicians will prescribe or recommend our products to patients. Furthermore, a product's prevalence and use at hospitals may be contingent upon its relationship with the medical community, particularly products that are only available by medical prescription. The acceptance of our products among the medical community may depend upon several factors, including but not limited to, the product's acceptance by physicians and patients as a safe and effective treatment, cost effectiveness, potential advantages over alternative treatments, and the prevalence and severity of side effects. Failure to attain market accepta nce among the medical community may have an adverse impact on our operations and profitability.
We enjoy certain preferential tax concessions and loss of these preferential tax concessions will cause its tax liabilities to increase and its profitability to decline.
Xi’an Pharmaceuticals enjoys preferential tax concessions in the PRC as a high-tech enterprise because of the research and development methodologies it employs to develop new products. Pursuant to the State Council's Regulations on Encouraging Investment in and Development, Xi’an Pharmaceuticals was granted a reduction in its income tax rate under which it paid no income taxes from January 1, 2005 to December 31, 2006 and had had an income tax rate of 16.5% since January 1, 2007 which is a 50% reduction on the current effective income tax rate. This favorable 50% tax exemption treatment expired on December 31, 2009. There is no assurance that the preferential tax treatment in the PRC will remain unchanged and effective. Its tax liabilities will increase and its profits may accordingly decline if its reduced income tax rate is no longer applicable and/or the tax relief on investment in PRC is no longer available.
Additionally, as a company organized in the PRC, Xi’an Pharmaceuticals is subject to the PRC Enterprise Income Tax Law (the "EIT Law"), which was enacted on March 16, 2007. Under the EIT Law, effective January 1, 2008, the PRC adopted a uniform tax rate of 25.0% for all enterprises (including foreign-invested enterprises) and cancelled several tax incentives enjoyed by foreign-invested enterprises. However, for foreign-invested enterprises established
before the promulgation of the EIT Law, a five-year transition period is provided during which reduced rates will apply but gradually be phased out. As a high-tech enterprise and under the EIT Law, Xi’an Pharmaceuticals enjoyed a two-year tax exemption for 2006 through 2007, and since 2008, it has received the statutory rate of 15%. Since the PRC government has not announced implementation measures for the transitional policy with regards to such preferential tax rates, we cannot reasonably estimate the financial impact of the new tax law to Xi’an Pharmaceuticals at this time. Further, any future increase in the enterprise income tax rate applicable to it or other adverse tax treatments, such as the discontinuation of preferential tax treatments for high and new technology enterprises, would have a material a dverse effect on its results of operations and financial condition.
Risks Related to Doing Business in the PRC
Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.
Our business operations may be adversely affected by the current and future political environment in the PRC. The PRC has operated as a socialist state since the mid-1900s and is controlled by the PRC’s Communist Party. The Chinese government exerts substantial influence and control over the manner in which we and it must conduct our business activities. The PRC has only permitted provincial and local economic autonomy and private economic activities since 1988. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy, particularly the pharmaceutical industry, through regulation and state ownership. Our ability to operate in the PRC may be adversely affected by changes in Chinese laws and regulations, including those relating to taxatio n, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under current leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
The PRC's economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance that this will be the case.
A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic and social life.
The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may harm its business.
The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. The PRC’s legal system is a civil law system based on written statutes, in which system decided legal cases have little value as precedents unlike the common law system prevalent in the United States. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations deal ing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We are considered a foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on its businesses. If the relevant authorities find that we are in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
| ● | levying fines; | |
| ● | revoking Xi’an Pharmaceuticals’ business and other licenses; | |
| ● | requiring that we restructure our ownership or operations; and | |
| ● | requiring that we discontinue any portion or all of our business. |
Among the material laws that we are subject to are the Medicine Management Law, governing the management of pharmaceutical companies, medicine production procedure, packaging, prices, Advertisement Law of the People’s Republic of China and Rules of Medicine Advertisements Management from State Admission for Industry and Commerce, Regulations on Control of Advertisements from State Council, governing rules on advertising, Standardization of the Management on the Quality of Medicine Production issued by SFDA, providing standards for staff, plants, equipment, materials, environment, production management, products laws, and the Price Law of The People’s Republic of China, Measurement Law of The People’s Republic of China, Tax Law, Environmental Protection Law, Contract Law, Patent Law, Accounting Laws and Labor Law.
A slowdown, inflation or other adverse developments in the PRC economy may harm our customers and the demand for our services and products.
All of our operations are conducted in the PRC and all of our revenue is generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that this growth will continue. A slowdown in overall economic growth, an economic downturn, a recession or other adverse economic developments in the PRC could significantly reduce the demand for our products and harm our business.
While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth could lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may harm our profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state bank lending. Such an austere policy can lead to a slowing of economic growth. In October 2004, the People's Bank of China, the PRC's central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely slow economic activity in the PRC which could, in turn, materially increase its costs and also reduce demand for its products.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenue in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments 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 government al authorities is required where Renminbi 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 in the future restrict access to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The fluctuation of the Renminbi may harm your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. According to the currency website xe.com, as of December 31, 2009, and as of March 31, 2010, $1 = 6.82 Renminbi. As we rely entirely on revenue earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenue and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for Xi’an Pharmaceuticals’ operations, appreciation of the Renminbi against the U.S.
dollar would diminish the value of the proceeds of the offering and this could harm Xi��an Pharmaceuticals’ business, financial condition and results of operations because it would reduce the proceeds available to us for capital investment in proportion to the appreciation of the Renminbi. Thus if we raise 1,000,000 dollars and the Renminbi appreciates against the U.S. dollar by 15%, then the proceeds will be worth only RMB 5,803,800 as opposed to RMB 6,828,000 prior to the appreciation. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi; the U.S. dollar equivalent of the Renminbi we convert would be reduced in proportion to the amount the U. S. dollar appreciates. In addition, the depreciation of significant RMB denominated assets could result in a charge to our income statement and a reduction in the dollar value of these assets. Thus if Xi’an Pharmaceuticals has RMB 1,000,000 in assets and Renminbi is depreciated against the U.S. dollar by 15%, then the assets will be valued at $124,487 as opposed to $146,456 prior to the depreciation.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 17.5% appreciation of the Renminbi against the U.S. dollar as of December 31, 2009. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
PRC state administration of foreign exchange ("SAFE") regulations regarding offshore financing activities by PRC residents which may increase the administrative burden we face. The failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.
SAFE issued a public notice ("SAFE #75") effective from November 1, 2005, which requires registration with SAFE by the PRC resident shareholders of any foreign holding company of a PRC entity. Without registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise.
In October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, or the SAFE notice, which requires PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of the PRC, referred to as an "offshore special purpose company," for the purpose of overseas equity financing involving onshore assets or equity interests held by them. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with any increase or decrease o f capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in the PRC. Moreover, if the offshore special purpose company was established and owned the onshore assets or equity interests before the implementation date of the SAFE notice, a retroactive SAFE registration is required to have been completed before March 31, 2006. If any PRC shareholder of any offshore special purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
It is unclear whether our other PRC resident shareholders must make disclosure to SAFE. While our PRC counsel has advised us that only PRC resident shareholders who receive ownership of the foreign holding company in exchange for ownership in the PRC operating company are subject to SAFE #75, there can be no assurance that SAFE will not require our other PRC resident shareholders to register and make the applicable disclosure. In addition, SAFE #75 requires that any monies remitted to PRC residents outside of the PRC be returned within 180 days; however, there is no indication of what the penalty will be for failure to comply or if shareholder non-compliance will be considered to be a violation of SAFE #75 by us or otherwise affect us.
In the event that the proper procedures are not followed under SAFE #75, Xi’an Development could lose the ability to remit monies outside of the PRC and would therefore be unable to pay dividends or make other distributions. Our PRC resident shareholders could be subject to fines, other sanctions and even criminal liabilities under the PRC Foreign Exchange Administrative Regulations promulgated January 29, 1996, as amended.
The PRC's legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.
The PRC legal and judicial system may negatively impact foreign investors. In 1982, the National People's Congress amended the Constitution of the PRC to authorize foreign investment and guarantee the "lawful rights and interests" of foreign investors in the PRC. However, the PRC's system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is inconsistent. Many judges in the PRC lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the PRC judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of l aws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC's legal system is based on the civil law regime, that is, it is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect domestic political changes.
The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting the PRC's political, economic or social life, will not affect the PRC government's ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
The practical effect of the PRC legal system on our business operations in the PRC can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are qualitatively different from the general corporation laws of the United States. Similarly, the PRC accounting laws mandate accounting practices, which are not consistent with U.S. generally accepted accounting principles. PRC's accounting laws require that an annual "statutory audit" be performed in accordanc e with PRC accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation. While the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Any award rendered by an arbitration tribunal is enforceable in accordance with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, whil e different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.
Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could harm our operations.
A renewed outbreak of SARS or another widespread public health problem (such as bird flu) in the PRC, where all of our revenue is derived, could significantly harm our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that would adversely disrupt our operations. Any of the foregoing events or other unforeseen consequences of public health problems could significantly harm our operations.
Because our principal assets are located outside of the United States and most of our directors and all of our officers reside outside of the United States, it may be difficult for you to enforce your rights based on U.S. Federal Securities Laws against us and our officers or to enforce U.S. Court Judgments against us or them in the PRC.
Most of our directors and all of our officers reside outside of the United States. In addition, our operating company is located in the PRC and substantially all of our assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are
obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.
The relative lack of public company experience of our management team may put us at a competitive disadvantage.
Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. The individuals who now constitute our senior management have never had responsibility for managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately responds to such increased legal, regulatory compliance and reporting requirements. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties and distract our management from attending to the growth of our business.
Risks Related to our Common Stock
Our officers and directors control us through their positions and stock ownership and their interests may differ from other stockholders.
As of July 14, 2010, there were 32,041,667 shares of our common stock issued and outstanding. Our officers and directors own approximately 24.0% of our common stock. As a result, they are able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions including business combinations. Yet our officers’ and directors’ interests may differ from those of other stockholders. Furthermore, ownership of 24.0% of our common stock by our officers and directors reduces the public float and liquidity, and may affect the market price, of our common stock when and if our common stock becomes eligible to trade on the OTCBB.
We are not likely to pay cash dividends in the foreseeable future.
We intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.
Our common stock is subject to price volatility unrelated to our operations.
If an active market for our common stock does develop, its market price could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting us or our competitors. In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
Investors may have difficulty liquidating their investment because our common stock is subject to the penny Stock" rules, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale.
Our common stock may be subject to regulations prescribed by the SEC relating to "penny stocks." The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price (as defined in such regulations) of less than $5 per share, subject to certain exceptions. These regulations impose additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 and individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 (individually) or $300,000 (jointly with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of these securities and have rec eived the purchaser's prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Legal remedies, which may be available to the investor, are as follows:
| ● | If penny stocks are sold in violation of the investor's rights listed above, or other federal or state securities laws, the investor may be able to cancel his purchase and get his money back; | |
| ● | If the stocks are sold in a fraudulent manner, the investor may be able to sue the persons and firms that caused the fraud for damages; | |
| ● | If the investor has signed an arbitration agreement, however, s/he may have to pursue a claim through arbitration. |
If the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve the potential customer's account by obtaining information concerning the customer's financial situation, investment experience and investment objectives. The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the SEC's rules may limit the number of potential purchasers of the shares of our common stock and stockholders may have difficulty selling their securities.
A large number of shares will be eligible for future sale and may depress our stock price.
We may be required, under terms of future financing arrangements, to offer a large number of common shares to the public, or to register for sale by future private investors a large number of shares sold in private sales to them.
Sales of substantial amounts of common stock, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices that may be below the then-current market price of our common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities, either of which would decrease the value of any earlier investment in our common stock.
Risks Related to the Offering
We will have broad discretion in applying the net proceeds of this offering and may not use these proceeds in ways that will enhance the market value of our common stock.
We have broad discretion in applying the net proceeds we will receive in this offering. Such proceeds may be used to fund product development, corporate growth and for other general corporate purposes. For more information, see “Use of Proceeds.” As part of your investment decision, you will not be able to assess or direct how we apply these net proceeds.
If the China Securities Regulatory Commission, or CSRC, or another Chinese regulatory agency, determines that CSRC approval is required in connection with this offering or our contractual arrangement with Xi’an Pharmaceuticals and its shareholders,, this offering may be delayed or cancelled, or we may become subject to penalties.
On August 8, 2006, six Chinese regulatory agencies, including the Chinese Securities Regulatory Commission, or CSRC, promulgated the M&A Regulation, which became effective on September 8, 2006. This regulation, among other things, has certain provisions that require offshore special purpose vehicles formed for the purpose of acquiring Chinese domestic companies and directly or indirectly established or controlled by Chinese entities or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval. It is not clear how the provisions in the regulation regarding the offshore listing and tra ding of the securities of a special purpose vehicle apply to us. We believe that CSRC approval is not required for this offering or our contractual arrangement with Xi’an Pharmaceuticals and its shareholders. There remains some uncertainty as to how this regulation will be interpreted or implemented. If the CSRC or another Chinese regulatory agency subsequently determines that the CSRC’s approval is required for this offering or our contractual arrangement with Xi’an Pharmaceuticals and its shareholders, we may face sanctions by the CSRC or another Chinese regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of our net
proceeds from this offering into China, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares of common stock. The CSRC or other Chinese regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel this offering before settlement and delivery of the shares being offered by us.
There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
We are not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The issuance of any additional shares of common stock or securities convertible into, exchangeable for or that represent the right to receive common stock or the exercise of such securities could be substantially dilutive to holders of our common stock. Holders of shares of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series. The market price of our common stock could decline as a result of sales of shares of our common stock made after this offering or the perception that such sales could occur. Because our decision to issue securities in any future offering w ill depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our shareholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interests in us.
USE OF PROCEEDS
The shares of common stock offered hereby are being registered for the account of the selling stockholders named in this prospectus. As a result, all proceeds from the sales of the common stock will go to the selling stockholders and we will not receive any proceeds from the resale of the common stock by the selling stockholders, although we would receive proceeds of up to $3,500,000 if all of the 3,500,000 common shares underlying warrants being registered in this prospectus were exercised. We intend to use the proceeds from the exercise of the Warrants, if any, for working capital and other general corporate purposes. We cannot assure you that any of the Warrants will ever be exercised, if at all. We will, however, incur all costs associated with this registration statement and prospectus.
DILUTION
Of the 7,800,000 common shares to be sold by the selling security holders, 4,300,000 are currently issued and outstanding. As such, they will not cause dilution to our existing security holders. The issuance of common shares upon the exercise of warrants, however, will result in dilution to the interest of other stockholders. As of July 14, 2010, there are 3,500,000 warrants outstanding which would result in an additional 3,500,000 shares issued if all were exercised. This would increase our outstanding shares by approximately 10.9% and result in an immediate dilution to shareholders.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, having $0.001 par value per share, is traded on the Over-The-Counter Bulletin Board ("OTCBB") under the symbol "CFMI". Prior to March 30, 2010, we traded under the symbol “AREN”
The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for CFMI’s common stock as reported on the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail mark-ups, markdowns or commissions and do not necessarily reflect actual transactions.
Common Stock
The range of high and low bid quotations by quarter from January 1, 2008 through March 30, 2010 is listed below. The quotations are taken from the OTC Bulletin Board. They reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
| Period Ended: | High | Low | ||||||
| January 1, 2010 to March 30, 2010 | 1.70 | 0.67 | ||||||
| October 1, 2009 to December 31, 2009 | 1.05 | 0.12 | ||||||
| July 1, 2009 to September 30, 2009 | 1.05 | 0.12 | ||||||
| April 1, 2008 to June 30, 2009 | 0.12 | 0.12 | ||||||
| January 1, 2009 to March 31, 2009 | 0.20 | 0.12 | ||||||
| October 1, 2008 to December 30, 2008 | 0.45 | 0.20 | ||||||
| July 1, 2008 to September 30, 2008 | 0.45 | 0.45 | ||||||
| April 1, 2008 to June 30, 2008 | 0.76 | 0.45 | ||||||
| January 1, 2008 to March 31, 2008 | 0.15 | 0.15 | ||||||
Holders
As of July 14, 2010, we had approximately 96 shareholders of record of our common stock, including the shares held in street name by brokerage firms.
Penny Stock Regulations
The SEC has adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share. Our common stock, falls within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell their common stock in the secondary market.
Dividends
Any future determination as to the declaration and payment of dividends on shares of our common stock will be made at the discretion of our board of directors out of funds legally available for such purpose. We are under no contractual obligations or restrictions to declare or pay dividends on our shares of common stock. In addition, we currently have no plans to pay such dividends. Our board of directors currently intends to retain all earnings for use in the business for the foreseeable future. See “Risk Factors.”
Determination of Market Price
Our shares of common stock are very thinly traded, and if traded their price may not reflect our value. The selling stockholders may offer to sell the shares of common stock being offered in this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or at negotiated prices. Our common stock is quoted on the OTC Bulletin Board under the symbol "CFMI". On July 9, 2010, the closing sale price for one share of our common stock on the OTC Bulletin Board was $1.63.
The fixed post-split exercise price of $1.00 per warrant was determined after the Company entered into the Management Agreement and related agreements with Xi’an Pharmaceuticals, based upon advice of investment bankers after taking into account our prospects, revenue anticipated to be generated by Xi’an Pharmaceuticals and by using the overall valuation of our Company. No assurance, however, can be given that any warrants will be exercised at the $1.00 price. The public offering price does not necessarily bear any relation to our asset value, earnings, net financial condition or other established
criteria of value applicable to us and should not be regarded as the actual value or future market price of our common stock. Such prices are subject to change as a result of market conditions and other factors and no assurance can be given that the shares can be resold at the public offering price.
Securities Authorized for Issuance Under Equity Compensation Plans
As of the date of this registration statement, we do not have any securities authorized for issuance under any equity compensation plans and we do not have any equity compensation plans.
Shares Eligible for Future Sale
There is no established trading market for our common stock. Future sales of substantial amounts of our common stock in the trading market could adversely affect market prices.
This is an offering of 7,800,000 shares of our common stock by the selling stockholders including 4,300,000 issued shares and 3,500,000 unissued shares underlying warrants. As of July 14, 2010, the following securities were issued and outstanding (i) 32,041,667 shares of common stock, (ii) Warrants to purchase 3,500,000 shares of common stock; and (iii) no outstanding options. Assuming exercise of all of the Warrants, there will be 35,541,667 shares of common stock outstanding. All of the shares underlying the Warrants are being registered for resale in this prospectus.
Registration Rights
Other than the registration rights set forth in the 3,500,000 warrants being registered in this prospectus, we have no other obligation to register under the Securities Act any of our shares of common stock.
Reports
We are subject to certain filing requirements and furnish annual financial reports to our stockholders, certified by our independent accountant, and un-audited quarterly financial reports in our quarterly reports filed electronically with the SEC. The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operation of the Company for the three month period ended March 31, 2010, and for the years ended December 31, 2009, and 2008, should be read in conjunction with the respective consolidated financial statements for those periods and the notes to those statements that are included elsewhere in this prospectus.
Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Cautionary Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements. For this purpose, any statements contained in this prospectus that are not statements of historical fact may be deemed to be forward-looking statements, including any statements relating to future actions and outcomes including but not limited to prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expense trends, future interest rates, outcome of contingencies and their future impact on financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “expects,” “anticipates,” 220;targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,”
“will,” “should,” “contemplates,” “predicts,” “potential,” or “continue” or variations and/or the negative of these similar terms. Forward-looking statements are based on current expectations, estimates, forecasts and projections about the Company, us, our future performance, our beliefs and our Management’s assumptions. All forward-looking statements made in this prospectus, including any future written or oral statements made by us or on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. Any assumptions, upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this prospectus. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficie ntly and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash. Please refer to Part I, Item 1A under “Risk Factors” contained in this prospectus for additional discussion. Please also refer to our other filings with the Securities and Exchange Commission. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2010.
Results of Operations
Comparison of the Three Months Ended March 31, 2010 and 2009
Net Sales
In the three months ended March 31, 2010, we had net sales of $ 7,053,199, an increase of 50% as compared with $ 4,693,433 sold in the same period ended on March 31, 2009. This increase was primarily due to increased sales and manufacturing efforts.
Gross Profit
Gross profit increased 53% to $4,233,021 for the three months ended March 31, 2010, as compared to $$2,764,139 for the three months ended March 31, 2009. Our gross profit margin rose from 59% as of the three months ended March 31, 2009 to 60% as of the same period of 2010, mainly due to a decrease in raw material expenses.
Income from Operations
Operating income decreased 3% to $2,118,935 for the three months ended March 31, 2010, as compared with $2,189,154 for the three months ended March 31, 2009. The decrease was primarily a result of an increase of selling and administrative expenses.
Cost of Sales
Cost of sales increased to $2,820,178 for the three months ended March 31, 2010, representing a 46% increase as compared with $1,929,294 for the same period of 2009. This increase is due primarily to sales increase.
Operating Expenses
Operating expenses were $2,114,086 for the three months ended March 31, 2010, an increase 268% as compared to $574,985 for the same period of 2009. This increase was due primarily to an increase of sales cost due to an increase of selling and administrative expenses resulting from an increase in provision for impairment of intangible assets.
Net Income
Net income was $1,547,876 for the three months ended March 31, 2010, a decrease of 14% from $1,802,769 for the same period of 2009. This decrease is primarily attributable to an increase of operating expenses. Our net profit margin dropped 16% from 38% as of the three months ended March 31, 2009 to 22% as of the three months ended March 31, 2010. This decrease was primarily attributable to an increase of operating expenses.
Accounts Receivable
Accounts Receivable increased 3% to $5,538,987 as of March 31, 2010, compared with $5,376,919 as of March 31, 2009. This increase in accounts receivable was primarily attributable to an increase of sales.
Inventory
Inventory consists of raw materials and finished goods as of March 31, 2010. During this period, the recorded value of our inventory decreased 100% to $1,014 from $336,632 as of March 31, 2009. In addition, direct raw materials decreased from $311,358 as of March 31, 2009 to $1014 as of March 31, 2010, a decrease of 100%. These decreases were mainly due to preparations to move the Company’s headquarters to its Xian factory location in Jingwei Development Zone, as a result of which most of the Company’s raw material inventory was depleted so as to reduce administrative and moving expenses associated with the anticipated move. In the beginning of April 2010, the Company resumed purchasing raw materials for regular manufacturing.
Accounts payable
Accounts payable amounted to $515,229 as of March 31, 2010, a decrease of 67% from $1,560,221 as of March 31, 2009. This decrease is mainly due to prompt payment.
Liquidity and Capital Resources
Overview
We had net working capital surplus $11,006,657 at March 31, 2010, an increase of $4,235,342 over a net working capital deficit of $6,771,315 at March 31, 2009.
We incurred a gain from operations of $2,118,935 for the three months ended March 31, 2010; a decrease of $70,219 compared to a gain from operations of $2,189,154 for the three months ended March 31, 2009. We generated a net gain for the three months ended March 31, 2010 and 2009 of $1,547,876 and $1,802,769, respectively.
Cash and Cash Equivalent
Our cash and cash equivalents were $6,685,630 at the beginning of the three months ended March 31, 2010 and decreased to $5,518,587 by the end of such period, a decrease of $1,167,043 or 17%. The net change in cash and cash equivalents represented an increase of 27% or $1,411,359 from $5,242,845 for the comparable period in 2009. The decrease was primarily attributable to repayment of short-term bank loans.
Net cash provided by operating activities
Net cash provided by operating activities was $1,341,061 for the three months ended March 31, 2010, a decrease of $ 397,598 or 23% from $1,738,659 for the comparable period in 2009. The decrease was primarily attributable to a decrease of net income.
Net cash used in investing activities
Net cash used in investing activities was $3,872 for the three months ended March 31, 2010, a decrease of $26,094 or 117% from $22,222 for the comparable period in 2009. The increase was primarily attributable to a decrease of purchase of equipment.
Net cash used in financing activities
Net cash used in financing activities was 2,493,692 for the three months ended March 31, 2010, compared to $137,242 for the same period in 2009. The difference was primarily attributable to repayment of short-term bank loans.
Contractual Obligations and Off-Balance Sheet Arrangements.
As of March 31, 2010, we have certain fixed contractual obligations and commitments that may include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.
To date, our business has been dependent upon short- to mid-term bank loans. We have paid in full our outstanding loans and at March 31, 2010, we had total outstanding bank loans of $0.
The following summarizes short-term bank loan as of March 31, 2010 and December 31, 2009:
| 3/31/2010 | 12/31/2009 | ||||||
| Agricultural Bank of China | $ | Agricultural Bank of China | $ | - | |||
| Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009 | - | Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009 ($2,484,653 paid in full in October 2009) | |||||
| Industrial and Commercial Bank of China -Xixiang Branch | 0 | Industrial and Commercial Bank of China -Xixiang Branch | 1,760,253 | ||||
| Term of the loans call for interest at 5.31% per annum to a floating rate, with principal due in 2010 | - | Term of these loans called for interest from 7.956% to 8.541% per annum, with principal due in 2009 | - | ||||
| Xixiang rural cooperative bank | 0 | Xixiang rural cooperative bank | 733,439 | ||||
| Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010 | - | Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010 | - | ||||
| Total | $ | 0 | $2,493,692 | ||||
| Current Portion | 0 | 2,493,692 | |||||
| Long term Portion | $ | - | $ | - |
Our anticipated needs for the future are to be negotiated in accordance with manufacturing and operation needs, and market conditions of next year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us 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 periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates (See Note 2 in the Notes to Financial Statements).
Valuation of Intangibles
From time to time, we acquire intangible assets that are beneficial to our product development processes. Management periodically evaluates the carrying value of intangibles, including the related amortization periods. In evaluating acquired intangible assets, management determines whether there has been impairment by comparing the anticipated undiscounted cash flows from the operation and eventual disposition of the product line with its carrying value. If the undiscounted cash flows are less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each intangible asset with its fair value. Fair value is generally based on either a discounted cash flows analysis or market analysis. Future operating income is based on various assumptions, including regulatory approvals, patents being granted, and the type an d nature of competing products. If regulatory approvals or patents are not obtained or are substantially delayed, or other competing technologies are developed and obtain general market acceptance or market conditions otherwise change, our intangibles may have a substantially reduced value, which could be material.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this new FSP did not have a material impact on the Company’s financial position, results of operations or cash flows.
The Fair Value Option for Financial Assets and Financial Liabilities
In February, 2007, FASB issued SFAS 159, ‘The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for uncertainty in Income Taxes." FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, "Accounting for Contingencies." FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of implementing FIN 48, there have been no adjustments to the Company's financial statements.
Statutory Reserve
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public welfare fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of March 31, 2010 and March 31, 2009, the Company had allocated $ 2,137,797 and $1,247,175, respectively, to these non-distributable reserve funds.
Inflation
Inflation in recent years has affected the business results of the Company. First of all, on the global economic expansion, supply has been restricted and coupled with the fact that USA has adopted a relaxed currency policy etc., these increase inflation risks. Secondly, GNP increases in China also elevates consumption ability and production cost, prices increase as a natural tendency. Finally, as a result of the macro economic trends and price increases, the Company’s procurement prices are also affected resulting in increase in cost of sales.
The Company operates in China and as such, the Company’s business activities, financial position and operational results will be affected by PRC politics, economic and legal environments and also affected by the overall economic situation of China. The business of the Company may be affected by the relevant laws, regulations, anti-inflation measures, currency conversion and overseas remittance and exchange rates issues etc that are related to China politics.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
New Financial Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), included in the Codification as ASC 810-10-65-1. This topic establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This topic also establishes disclosure requirements that clearly identify and distinguish between the interests of the pa rent and the interests of the noncontrolling owners. This topic is effective for fiscal years beginning October 1, 2009. The Company does not expect the impact of the adoption of SFAS 160 to be material.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), included in the Codification as ASC 855, Subsequent Events. This topic establishes the period in which management of a reporting entity should evaluate events and transactions for recognition or disclosure in the financial statements. It also describes the circumstances under which an entity should recognize events or transactions that occur after the balance sheet date. This topic is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption of this topic to have a material effect on its financial statements and related disclosures.
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS No. 166”), expected to be included in the FASB Accounting Standards Codification (‘Codification’) as Accounting Standards Codification (‘ASC 860”), Transfers and Servicing. This topic improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that this topic will have on its financial statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), expected to be included in the Codification as ASC 810, Consolidation. This topic changes the consolidation guidance applicable to a variable interest entity. Among other things, it requires a qualitative analysis to be performed in determining whether an enterprise is the primary beneficiary of a variable interest entity. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that SFAS No. 167 will have on its financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”), included in the Codification as ASC 105, Generally Accepted Accounting Principles. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. This topic is effective for interim and annual reporting periods ending after September 15, 2009. On September 30, 2009, the Company adopted this topic, which has no effect on the Company’s f inancial statements as it is for disclosure purposes only.
FOR THE 12 MONTH PERIOD ENDED DECEMBER 31, 2009.
Results of Operations
Comparison of the Year Ended December 31, 2009 and 2008
Net Sales
In the fiscal year ended December 31, 2009, we had net sales of $26,708,285, an increase of 46.96% as compared with $18,174,003 sold in the same period ended on December 31, 2008. This increase was primarily due to our increased sales efforts and the roll-out of new products in 2009.
Gross Profit
Gross profit increased 29.02% to $14,300,250 for the fiscal year ended December 31, 2009, as compared to $11,083,576 for the fiscal year ended December 31, 2008. Our gross profit margin fell 7.45% from 60.99% as of the fiscal year ended December 31, 2008 to 53.54% as of the same period of 2009, mainly due to increase of sales cost resulting from an increase in raw material expenses. Our primary raw materials, such as Chinese medicinal herbs, experienced the greatest increase in cost.
Income from Operations
Operating income increased 21.26% to $10,913,289 for the fiscal year ended December 31, 2009, as compared with $8,999,550 for the fiscal year ended December 31, 2008. The increase was primarily a result of a consquent increase in cost of sales due to an increase in sales.
Cost of Sales
Cost of sales increased to $12,408,035 for the fiscal year ended December 31, 2009, representing a 75% increase as compared with $7,090,427 for the same period of 2008. This increase is due primarily to the increase in sales and costs of raw materials.
Operating Expenses
Operating expenses were $3,386,961 for the fiscal year ended December 31, 2009, an increase of 65.52% as compared to $2,084,026 for the same period of 2008. This increase was due primarily to an increase in cost of sales resulting from an overall sales increase.
Net Income
Net income was $8,907,379 for the fiscal year ended December 31, 2009, an increase of 21.38% from $7,338,138 for the same period of 2008. This increase is primarily attributable to sales increase. Our net profit margin dropped 7.03% from 33.35% as of the fiscal year ended December 31, 2009 to 40.38% as of the fiscal year ended December 31, 2008. This decrease was primarily attributable to a decrease of gross profit margin caused primarily by an increase in operating costs.
Accounts Receivable
Accounts Receivable decreased 32.26% to $3,525,544 as of December 31, 2009, compared with $5,204,418 as of December 31, 2008. This decrease in accounts receivable was primarily attributable to our efforts to debt collection.
Inventory
Inventory consists of raw materials and finished goods as of December 31, 2009. The recorded value of our inventory has increased 58.79% to $396,513 from $249,716 as of December 31, 2008. This increase is mainly due to the increase in production. In addition, direct raw materials increased from $185,052 as of December 31, 2008 to $370,111 as of December 31, 2009, an increase of 100%, which was due to increase of production.
Accounts payable
Accounts payable amounted to $744,880 as of December 31, 2009, a decrease of 58.46% from $1,793,187 as of December 31, 2008. This decrease is mainly due to increase of cash flow and prompt payment.
Liquidity and Capital Resources
Overview
We had net working capital surplus $9,243,121 at December 31, 2009, an increase of $4,488,495 over a net working capital deficit of $4,754,626 at December 31, 2008.
We incurred a gain from operations of $10,913,289 for the fiscal year ended December 31, 2009, an increase $1,913,739 compared to a gain from operations of $8,999,550 for the fiscal year ended December 31, 2008. We generated a net gain for the years ended December 31, 2009 and 2008 of $8,907,379 and $7,338,138, respectively.
Cash and Cash Equivalent
Our cash and cash equivalents were $5,049,188 at the beginning of the year ended December 31, 2009 and increased to $6,685,630 by the end of such period, an increase of $1,636,442 or 32.41%. The net change in cash and cash equivalents represented an increase of 32.41% or $1,636,442 from $5,049,188 for the comparable period in 2008. The increase was primarily attributable to the increase of sales and payment collection success rate.
Net cash provided by operating activities
Net cash provided by operating activities was $8,924,102 for the year ended December 31, 2009, an increase of $3,673,160 or 69.95% from $5,250,942 for the comparable period in 2008. The increase was primarily attributable to the increase in sales.
Net cash used in investing activities
Net cash used in investing activities was $5,729,259 for the year ended December 31, 2009, a decrease of $3,121,790 or 119.72% from $2,607,469 for the comparable period in 2008. The decrease was primarily attributable to the construction of a purification plan in progress at our Hanzhong production base.
Net cash used in financing activities
Net cash used in financing activities was 1,589,678 for the year ended December 31, 2009, compared to $358,527 for the same period in 2008. The difference was primarily attributable to an increase of short-term bank loans and decrease in stock offering proceeds.
Contractual Obligations and Off-Balance Sheet Arrangements.
We have certain fixed contractual obligations and commitments that may include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.
To date, our business has been dependent upon short- to mid-term bank loans. At December 31, 2009, we had total outstanding bank loans of $2,493,692, of which $2,493,692 represented short term debt. As of December 31, 2009, we had $1,760,253 outstanding under our loans from the Industrial & Commercial Bank of China and $733,439 outstanding under our loans from the Credit Cooperatives of Xixiang County. The following table sets forth Xi’an Pharmaceuticals’ bank loan obligations as of December 31, 2009:
| 12/31/2009 | ||||
| Agricultural Bank of China | ||||
| Terms of this loan call for interest from 9.3375% to 9.711% per annum, with principal due in 2009 (paid in full in October 2009) | $ | - | ||
| - | ||||
| Industrial and Commercial Bank of China -Xixiang Branch | 1,760,253 | |||
| Term of the loans call for interest at 5.31% per annum to a floating rate, with principal due in January and March 2010. These loans are secured by the property interests of Xian Pharmaceuticals. | - | |||
| Xixiang Rural Cooperative Bank | 733,439 | |||
| Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in April and July 2010. These loans are secured by the property interests of Xian Pharmaceuticals. | - | |||
| Total | $ | 2,493,692 | ||
Our anticipated needs for the future are to be negotiated in accordance with manufacturing and operation needs, and market conditions of next year.
Critical accounting policies and estimates
The financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us 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 periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates (See Note 2 in the Notes to Financial Statements).
Valuation of Intangibles
From time to time, we acquire intangible assets that are beneficial to our product development processes. Management periodically evaluates the carrying value of intangibles, including the related amortization periods. In evaluating acquired intangible assets, management determines whether there has been impairment by comparing the anticipated undiscounted cash flows from the operation and eventual disposition of the product line with its carrying value. If the undiscounted cash flows are less than the
carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each intangible asset with its fair value. Fair value is generally based on either a discounted cash flows analysis or market analysis. Future operating income is based on various assumptions, including regulatory approvals, patents being granted, and the type and nature of competing products. If regulatory approvals or patents are not obtained or are substantially delayed, or other competing technologies are developed and obtain general market acceptance or market conditions otherwise change, our intangibles may have a substantially reduced value, which could be material.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this new FSP did not have a material impact on the Company’s financial position, results of operations or cash flows.
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, FASB issued SFAS 159, ‘The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for uncertainty in Income Taxes." FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, "Accounting for Contingencies." FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of implementing FIN 48, there have been no adjustments to the Company's financial statements.
Statutory Reserve
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public welfare fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of December 31, 2009 and December 31, 2008, the Company had allocated $ 2,137,797 and $1,247,175, respectively, to these non-distributable reserve funds.
Inflation
Inflation in recent years has affected the business results of the Company. First of all, on the global economic expansion, supply has been restricted and coupled with the fact that USA has adopted a relaxed currency policy etc., these increase
inflation risks. Secondly, GNP increases in China also elevates consumption ability and production cost, prices increase as a natural tendency. Finally, as a result of the macro economic trends and price increases, the Company’s procurement prices are also affected resulting in increase in cost of sales.
The Company operates in China and as such, the Company’s business activities, financial position and operational results will be affected by PRC politics, economic and legal environments and also affected by the overall economic situation of China. The business of the Company may be affected by the relevant laws, regulations, anti-inflation measures, currency conversion and overseas remittance and exchange rates issues etc that are related to China politics.
New Financial Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), included in the Codification as ASC 810-10-65-1. This topic establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This topic also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncont rolling owners. This topic is effective for fiscal years beginning October 1, 2009. The Company does not expect the impact of the adoption of SFAS 160 to be material.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), included in the Codification as ASC 855, Subsequent Events. This topic establishes the period in which management of a reporting entity should evaluate events and transactions for recognition or disclosure in the financial statements. It also describes the circumstances under which an entity should recognize events or transactions that occur after the balance sheet date. This topic is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption of this topic to have a material effect on its financial statements and related disclosures.
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS No. 166”), expected to be included in the FASB Accounting Standards Codification (‘Codification’) as Accounting Standards Codification (‘ASC 860”), Transfers and Servicing. This topic improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that this topic will have on its financial statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), expected to be included in the Codification as ASC 810, Consolidation. This topic changes the consolidation guidance applicable to a variable interest entity. Among other things, it requires a qualitative analysis to be performed in determining whether an enterprise is the primary beneficiary of a variable interest entity. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that SFAS No. 167 will have on its financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”), included in the Codification as ASC 105, Generally Accepted Accounting Principles. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. This topic is effective for interim and annual reporting periods ending after September 15, 2009. On September 30, 2009, the Company adopted this topic, which has no effect on the Company’s financial statements as it is for disc losure purposes only.
Statutory Reserve
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public welfare fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of December 31, 2009 and December 31, 2008, the Company had allocated $810,540 and $721,553, respectively, to these non-distributable reserve funds.
OUR BUSINESS
Corporate History
China Pharmaceuticals, Inc. was incorporated in the State of Nevada on December 22, 2004, under the name “Nextar Properties, Inc.” On March 30, 2005, our name was changed to “Allstar Restaurants.”
The Company was originally established to pursue opportunities in the family style full-service casual dining segment of the restaurant industry. Allstar Restaurants, through a wholly-owned subsidiary called China Doll Foods Ltd. (f/k/a Fastserve Foods Inc.), acquired on July 1, 2005, owned and operated an established restaurant and licensed lounge called China Doll Restaurant and Lounge located in the city of Regina, in the province Saskatchewan, Canada. Prior to February 12, 2010, China Doll Foods Ltd. acted as the operating company for all business activities relating to the company’s restaurant business(s) in Western Canada.
Allstar Restaurants incorporated a wholly-owned subsidiary under the laws of the State the Delaware under the name Allstar Acquisitions Co. on February 3, 2010. Through the steps described in the section entitled “the Merger Transaction” below, on February 12, 2010, the Company acquired control of Xi’an Qinba Pharmaceuticals, Co., Ltd. (“Xi’an Pharmaceuticals”), a pharmaceuticals manufacturer in China, by way of the Company’s acquisition of China Qinba Pharmaceuticals, Inc., a Delaware corporation.
In connection with the Merger Transaction and in order to more accurately describe our business, the Company undertook a number of steps to change its name to China Pharmaceuticals, Inc. (the “Name Change Transaction”). On February 4, 2010, Allstar Restaurants incorporated a wholly-owned subsidiary under the laws of the State of Nevada under the name China Qinba Pharmaceuticals, Inc. Allstar Restaurants filed an amendment to the articles of China Qinba Pharmaceuticals Inc. with the State of Nevada to change its name to China Pharmaceuticals, Inc. on February 16, 2010. Effective March 3, 2010, the Company entered into a plan of merger and reorganization with its subsidiary China Pharmaceuticals, Inc., pursuant to which China Pharmaceuticals, Inc. merged into the Company, and the Company thereby changed its name from “Allstar Restaurants 221; to “China Pharmaceuticals, Inc.”
Corporate History of Xi’an Pharmaceuticals
China Qinba Pharmaceuticals, Inc. was incorporated on May 29, 2008 under the laws of Delaware. On August 18, 2008, China Qinba Pharmaceuticals formed Xi’an Development Co., Ltd. as a wholly foreign-owned enterprise (“WOFE”) organized under the laws of the People’s Republic of China (“PRC”) (“Xi’an Development”).
Xi’an Pharmaceuticals, our operating entity, was incorporated in the PRC on October 15, 1969. Xi’an Pharmaceuticals is in the business of manufacturing, marketing and sales of pharmaceuticals in China.
As described below, Xi’an Development entered into a series of agreements with Xi’an Pharmaceuticals which we believe give us effective control over the operations and business of Xi’an Pharmaceuticals, the entity through which we now operate our business.
On October 28, 2008, Xi’an Development entered into a Management Entrustment Agreement with Xi’an Pharmaceuticals and the shareholders of Xi’an Pharmaceuticals (the “Management Entrustment Agreement”), pursuant to which Xi’an Qinba and its shareholders agreed to transfer control, or entrust, the operations and management of its business to Xi’an Development. Under the agreement, Xi’an Development manages the operations and assets of Xi’an Pharmaceuticals, controls all of the cash flows of Xi’an Pharmaceuticals through a bank account controlled by Xi’an Development, is entitled to 100% of earnings before tax of Xi’an Pharmaceuticals, a management fee, and is
obligated to pay all payables and loan payments of Xi’an Pharmaceuticals. In addition, under the terms of the Management Entrustment Agreement, Xi’an Development has been granted certain rights which include, in part, the right to appoint and terminate members of Xi’an Pharmaceuticals’ Board of Directors, hire management and administrative personnel and control decisions relating to entering and performing customer contracts and other instruments. We anticipate that Xi’an Pharmaceuticals will continue to be the contracting party under its customer contracts, bank loans and certain other instruments unless Xi’an Development exercises its option. The agreement does not terminate unless the business of Xi’an Pharmaceuticals is terminated or Xi’an Development exercises its option to acquire all of the assets or equity of Xi ’an Pharmaceuticals under the terms of the Exclusive Option Agreement as more fully described below and completes the acquisition of Xi’an Pharmaceuticals.
As consideration for Xi’an Pharmaceuticals to enter into the Management Entrustment Agreement, Xi’an Development, through its parent company China Qinba, issued an aggregate of 25,000,000 shares of China Qinba’s common stock to the shareholders of Xi’an Pharmaceuticals which was allocated based on their respective pro rata ownership of Xi’an Pharmaceuticals.
In order to give Xi’an Development further control over Xi’an Pharmaceuticals, the Xi’an Pharmaceuticals’ shareholders and Xi’an Development, entered into a shareholders’ Voting Proxy Agreement (the “Voting Proxy Agreement”) whereby the Xi’an Pharmaceuticals shareholders irrevocably and exclusively appointed the members of Xi’an Development’s board of directors, as their proxies to vote on all matters that require shareholder approval from Xi’an Pharmaceuticals, including, without limitation, the right to appoint members of the board of directors of Xi’an Pharmaceuticals. The agreement further provides that Xi’an Pharmaceuticals will appoint all of the board of directors of Xi’an Development as its board of directors and must remove and appoi nt new members to its board to reflect any changes to the board of Xi’an Development. The agreement terminates upon the exercise of the option by Xi’an Development to purchase the shares of Xi’an Pharmaceuticals as described below.
In connection with the Entrustment Management Agreement and the Voting Proxy Agreement, Xi’an Pharmaceuticals and the Xi’an Pharmaceuticals shareholders entered into an exclusive option agreement (the “Exclusive Option Agreement”) whereby the Xi’an Pharmaceuticals shareholders granted Xi’an Development an irrevocable and exclusive purchase option (the “Option”) to acquire Xi’an Pharmaceuticals’ equity and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. Current PRC law does not specifically provide for the equity of a non-PRC entity to be used as consideration for the purchase of a PRC entity’s assets or equity unless the value of the shares are equal to or greater than the value of the enterprise acquired. In addition, there is a lengthy appraisal process which must be approved by the provincial PRC government entities. The consideration for the exercise of the Option is to be determined by the parties and memorialized in future definitive agreements setting forth the kind and value of such consideration. Accordingly, we will consider exercising the Option under such circumstances we believe will be in our best interests and our shareholders and the Exclusive Option Agreement has been drafted to give us such flexibility. In considering whether or not we will exercise the Option we may consider such factors as (1) if the exercise price can be lower than the appraised value under current PRC law (2) availability of funds, (3) any relevant tax considerations at the time, (4) any other relevant PRC laws that may exist at the time, (5) the value of our shares that were previously paid to shareholders of Xi’an Pharmaceuticals, and (6) whether or not the exercise of the Option will provide any other additional benefits to us or our shareholders. Upon exercise of the Option, the parties will prepare transfer documents to be submitted for governmental approval and work together to obtain all approvals and permits. The agreement may be terminated by agreement of all parties or by with 30 days notice.
In order to further solidify Xi`an Developments’ rights, benefits and control of Xi’an Pharmaceuticals under the Entrusted Management Agreement, Voting Proxy Agreement and Exclusive Option Agreement, Xi’an Development and the Xi’an Pharmaceuticals shareholders entered into a share pledge agreement (the “Share Pledge Agreement”) whereby the Xi’an Pharmaceuticals shareholders pledged all of their equity interests in Xi’an Pharmaceuticals, including the proceeds thereof, to guarantee the performance by the shareholders of all of the agreements they entered into with Xi’an Development. Upon breach by any of the shareholders of any of the Management Entrustment Agreement, Voting Proxy Agreement, the Exclusive Option Agreement or the Share Pledge Agreement, Xi’an Development is enti tled by operation of law to become the beneficial owner of the shares of Xi’an Pharmaceuticals. Prior to termination of the Share Pledge Agreement, the pledged equity interests of Xi’an Pharmaceuticals cannot be transferred without Xi’an Development’s prior written consent. The provisions of the Share Pledge Agreement and the Voting Proxy Agreement work together to give the board of directors of Xi’an Development control over transfers by the shareholders of Xi’an Pharmaceuticals. The agreement will not terminate until agreed to by all of the parties in writing.
As a result of the above-mentioned contractual agreements between Xi’an Development and Xi’an Pharmaceuticals, the Company treats Xi’an Pharmaceuticals as its variable interest entity (“VIE”), for which the Company is the primary beneficiary, and has consolidated its financial statements to include the accounts of the Company, Xi’an Development and Xi’an Pharmaceuticals. All inter-company accounts and transactions have been eliminated in
consolidation. The Company has adopted FIN 46R which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.
The following indicators, among others, contributed to the Company’s determination and classification of Xi’an Pharmaceuticals as its VIE:
| ● | Xi’an Development has the full right to control and administrate the financial affairs and daily operation of Xi’an Pharmaceuticals and has the right to manage and control all assets of Xi’an Pharmaceuticals. The equity holders of Xi’an Pharmaceuticals as a group have no right to make any decision about Xi’an Pharmaceuticals activities without the consent of Xi’an Development. |
| ● | Xi’an Development was assigned all voting rights of Xi’an Pharmaceuticals and has the right to appoint all directors and senior management personnel of Xi’an Pharmaceuticals. The equity holders of Xi’an Pharmaceuticals possess no substantive voting rights. |
| ● | Xi’an Development will provide financial support if Xi’an Pharmaceuticals requires additional funds to maintain its operations and to repay its debts. |
| ● | Xi’an Development should be paid a management fee equal to 100% of earnings before tax of Xi’an Pharmaceuticals and should assume all operation risks of Xi’an Pharmaceuticals and bear all losses of Xi’an Pharmaceuticals. Therefore, Xi’an Development is the primary beneficiary of Xi’an Pharmaceuticals. |
The Merger Transaction
On December 17, 2009, our subsidiary, China Qinba Pharmaceuticals, Inc. entered into an agreement with Dragon Link Investments, Inc. to obtain certain consulting services. As consideration for the services provided by Dragon Link Investments, Inc., (and in accordance with a warrant placement agreement dated February 12, 2010 between us and Dragon Link) China Qinba Pharmaceuticals agreed to issue to Dragon Link Investments, Inc., warrants to acquire 1,200,000 shares of our common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,000,000 shares post reverse split), with registration rights, and exercisable at a price of $1.00 per post-split share within three years after the control acquisition or merger by China Qinba with a public company identified by Dragon Link . ;The warrants will expire on February 11, 2013.
On January 5, 2010, our subsidiary, China Qinba Pharmaceuticals, Inc., entered into an agreement with IFG Investments Services, Inc. to obtain certain consulting services including advising on a merger/acquisition transaction and regulatory filings, and other services and support as requested. In consideration for the consulting services to be performed by IFG Investments (and in accordance with a warrant placement agreement dated February 12, 2010 between us and IFG Investments), China Qinba Pharmaceuticals agreed to issue to IFG Investments warrants to acquire 1,800,000 shares of our common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,500,000 shares post reverse split), with registration rights, exercisable at $1.00 per post-split share within three years after the closing of the control acquisition or merger by China Qinba with public company. The warrants will expire on February 11, 2013.
On January 27, 2010, our subsidiary, China Qinba Pharmaceuticals, Inc., entered into an investor relations agreement with HACG Investor Relations Services, Inc., to obtain certain public company sector services, including advising on and with respect to investor relations. The term of the contract expires January 31, 2011. As consideration for the services to be performed by HACG (and in accordance with a warrant placement agreement dated February 12, 2010 between us and HACG), China Qinba Pharmaceuticals agreed to issue to HACG warrants to acquire 1,200,000 common shares of the Company’s stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,000,000 shares post reverse split), with registration rights, exercisable at $1.00 per post-split share until January 31, 2013.
The above noted securities issued to our consultants, Dragon Link Investments, Inc., IFG Investments Services, Inc., and HACG Investor Relations Services, Inc. were not registered under the Securities Act of 1933. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act. We made this determination based on the representations of the consultants, which included, in pertinent part, that such consultants were
"accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act and that the consultants were acquiring our securities for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the consultants understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
On February 12, 2010, Allstar Restaurants (as we were then known) executed and consummated a Merger Agreement and Plan of Reorganization (the “Merger Agreement”) with Allstar Acquisitions Co., a wholly-owned subsidiary of Allstar Restaurants (the “Acquisition Subsidiary”), China Qinba Pharmaceuticals, Inc., a Delaware corporation (“China Qinba Pharmaceuticals”), Terry G. Bowering (the then controlling shareholder of Allstar Restaurants), and the majority shareholders of China Qinba (the “Majority Qinba Shareholders”). Guozhu Wang, Guiping Zhang, Xiu’e Xing, Yong Xu, Xiling Gao, Xianhong Xue, Congge Wei and Xiulan Kang comprised the Majority Qinba Shareholders.
Pursuant to the Merger Agreement, on February 12, 2010, we issued 33,600,000 shares of our Common Stock to the shareholders China Qinba Pharmaceuticals in exchange for 100% of the outstanding shares of China Qinba Pharmaceuticals. Such securities were not registered under the Securities Act of 1933. The 33,600,000 shares (which were subsequently reduced to 28,000,000 shares by reverse split) were exempt from registration, in part pursuant to Regulation S and Regulation D under the Securities Act of 1933 and in part pursuant to Section 4(2) of the Securities Act of 1933. We made this determination based on the representations of the shareholders of China Qinba Pharmaceuticals which included, in pertinent part, that such shareholders were either (a) "accredited investors" within the meaning of Rule 501 of Regul ation D promulgated under the Securities Act, or (b) not a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the Act, and that such shareholders were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that China Qinba Pharmaceuticals’ shareholders understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
Our board of directors (the “Board”) as well as the directors and the Majority Qinba Shareholders each approved the Merger Agreement. Following the Closing Date, Allstar Acquisitions Co. merged with and into China Qinba, which became the surviving entity and our wholly-owned subsidiary.
As a result of the above-mentioned merger transactions, (i) China Qinba became a wholly-owned subsidiary of the Company, (ii) the Company acquired the business of Xi’an Pharmaceuticals as its sole business, and (iii) China Doll Foods Ltd. was spun off from the Company.
The following diagram sets forth the current corporate structure of China Pharmaceuticals, Inc., giving effect to the Name Change Transaction consummated on March 3, 2010:
Subsidiaries
As a result of the Merger Transaction, China Qinba and Xi’an Development are our wholly-owned subsidiaries. Xi’an Pharmaceuticals, the entity through which we operate our business, currently has no subsidiaries, either wholly-owned or partially-owned.
Backgroun of Shaanxi Jiali
On February 12, 2010, Xi’an Qinba Pharmaceuticals, Co., Ltd. (“Xi’an Pharmaceuticals”) became our variable interest entity, making us the primary beneficiary of its business, and permitting us to consolidate its financial statements with our own. Xi’an Pharmaceuticals was formed in October 15, 1969 under the laws of the PRC and is engaged in the research, development, manufacture, packaging, marketing and distribution of pharmaceutical and medical products in China for human use for a variety of diseases and conditions. All of our operations are conducted in the People’s Republic of China where our two manufacturing facilities are located, one in Xixiang County in Hanzhong and one in Xi’an Jinghe Industrial Zone. We manufacture pharmaceutical products in the form of capsules, oral solution s, tablets, granules, syrups, medicinal teas, tincture and solutions for injection that are either small volume parenteral solutions that are freeze dried powders or large volume parenteral solutions. Certain of the pharmaceutical products we manufacture are used in the treatment of viral pneumonia, hypotonicity dehydration, viral influenza and many other diseases and indications.
We currently manufacture 85 pharmaceutical products which are sold to numerous distributors who distribute our products pursuant to distribution agreements to licensed healthcare providers such as hospitals, clinics and pharmacies. We currently have 35 active distribution agreements. The raw materials used to manufacture our products include various medicinal herbs such as tumeric and zedoary, which we obtain from specified and qualified suppliers with national qualifications, and sulfamethoxazole, an antibiotic, which is primarily used in the manufacture of Fufang Qiguanyan Pian, our product for the treatment of chronic cough and bronchitis. . We also enter into trading agreements for the supply of many of the materials used to manufacture and package our products including aluminum foil, which we use as the inner packing m aterials used in tablets production. Xi’an Pharmaceuticals has
written agreements with substantially all of its suppliers. The agreements with three of Xi’an Pharmaceuticals’ largest suppliers each commenced January 1, 2008 and expire December 31, 2010. These agreements typically provide that the suppliers are to supply product to Xi’an Pharmaceuticals within a specified period of time after Xi’an Pharmaceuticals’ placement of an order. Typically, Xi’an Pharmaceuticals is required to pay for the products within 60 days of their receipt. The price paid for the products shall be the market price publicized at the time of purchase.
Our focus has been on the development and sale of pharmaceutical products based on traditional Chinese medicines designed to address numerous diseases and indications, with an emphasis on sales to community hospitals and rural medical institutions.
Principal Products
In the fiscal year ended December 31, 2009 and during the three month period ended March 31, 2010, our revenues were principally derived from sales of products listed below. We have SFDA1 approval for all medicines and active pharmaceutical ingredients that we market. Detailed information is provided in the table of products below.
We market our pharmaceutical products under numerous brand names, including “Xiaonengren” for our pediatric series of drugs. The following is a list of some of our approved pharmaceutical products and their intended uses.
Table of Products Manufactured by Xi’an Pharmaceuticals
Product No. | Product Name | Indications | ||
| 1 | Metronidazole and Glucose Injection | Varieties of tract infections caused by Anaerobion, trichomoniasis and amebic dysentery. | ||
| 2 | Sodium Chloride Injection | Hypotonicity dehydration solvent or thinner for injection. | ||
| 3 | Glucose and Sodium Chloride Injection | Body fluid loss; supply body fluid, electrolyte, energy preoperation, intraoperation and postoperation. | ||
| 4 | Glucose Injection | Supply energy and body fluid, total, total parenteral nutrition, hypoglycemia, hypertonic solution for dehydrating agent. | ||
| 5 | Compound Sodium Chloride Injection | Hypotonicity dehydration solvent or thinner for injection. | ||
| 6 | Mannitol Injection | Hydrocephalus, glaucoma, edema caused by deep burning or scald, acute renal failure and ascites. | ||
| 7 | Heartleaf Houttuynia Herb Injection | Clear heat, detoxification, promote diuresis. Used for lung abscess, phlegm, cough, urinary tract infections. | ||
| 8 | Sterilized Water for Injection | Solvent of sterilized powder for injection, thinner of injection, or wash solution for operation endoscope in urology Surgery. | ||
| 9 | Zedoary Turmeric Oil and Glucose Injection | Viral pneumonia, viral influenza, encephalitis, myocarditis, viral enteritis, mumps, stomatitis. | ||
| 10 | Zedoary Turmeric Oil and Glucose Injection | Anti-viral drug for children’s viral pneumonia. | ||
| 11 | Citicoline Sodium and Glucose Injection | Irritable neurocranium trauma, disturbance of consciousness after brain operation. | ||
| 12 | Fluconazole Injection | Mycotic infections by candida, cryptococcosis, coccidioidomycosis. | ||
| 13 | Fructose Sodium Diphosphate Injection | Hypophosphataemia angina, acute myocardial infarction and arrhythmia of coronary heart disease and myocardial ischemia of cardiac failure. | ||
| 14 | Matrine and Sodium Chloride Injection | Chronic active hepatitis, chronic prolonged hepatitis. | ||
| 15 | Glycerin Sodium Chloride Injection | High osmosis dehydrant. Reduce high cranial pressure caused by intracerebral hemorrhage, cerebral infarction, trauma, meningitis and brain tumor. | ||
| 16 | Xylitol and Sodium Chloride Injection | Supply heat, improve glycometabolism and remove ketonemia, used as substitute of sugar for diabetics. | ||
| 17 | Ligustrazine Hydrochloride Glucose Injection | Insufficient blood supply, cerebral embolism, angiitis, coronary heart disease, angina. |
| 18 | Levofloxacin and Glucose Injection | Respiratory tract infections, urinary tract infections, genital tract infections, skin soft tissue infections, enteral infections, septicemia. | ||
| 19 | Dexamethasone Sodium Phosphate Injection | Hypoadrenocorticism, rheumatoid arthritis, cerebral edema, congenital adrenal cortical hyperplasia. | ||
| 20 | Atropine Sulfate Injection | Toxic shock caused by serious infection, internal organs angina, preanesthetic medication, antiarrhythmic. | ||
| 21 | Kanamycin Sulfate | Systemic infections caused by various gram negative bacteria. | ||
| 22 | Gentamycin Sulfate | Urinary tract infection, septicemia, skin soft tissue infection, enteral infection caused by ordinary pathogen and preoperative prophylactic medication. | ||
| 23 | Hydrocortisone Injection | Toxic symptom caused by various infections, hypocorticoidism caused by various infections, anaphylactic shock. | ||
| 24 | Lappaconitine Hydrobromide for Injection | Non-addictive analgesics, strong analgesic effect, have effect of local anaesthesia, temperature reduction, antifebrile and detumescence. | ||
| 25 | Vitamin B12 Injection | Pernicious anemia, megaloblastic anemia, anemia caused by antifolate drugs, stearrhea. | ||
| 26 | Procaine Hydrochloride Injection | Local anesthetics, used for infiltration anesthesia, mental conduction block. | ||
| 27 | Bupleurum injection | Clear heat, relieve exterior syndrome, for cold treatment. Fever of influenza and malaria. | ||
| 28 | Lidocaine hydrochloride Injection | Local anesthetics, antiarrhythmic. | ||
| 29 | Analgin Tablets | Clear heat and kill pain. | ||
| 30 | Compound Sulfamethoxazole Tablets | Sulfa antibacterial drug. | ||
| 31 | Inosine Tablets | Coenzyme drug, improve metabolism, for various liver and heart diseases, leukocytopenia, central retinitis, optic atrophy. | ||
| 32 | Metronidazole Tablet | Amebicide, antitrichomonal agent, Anti-anaerobic bacteria. | ||
| Vitamin C Tablets | Vitamin C, prevent and treat scurvy. | |||
| 34 | Occrycetin Tablets | Broad spectrum antibiotics. Used for rickettsiosis, brucellosis, mycoplasmalpneumonia, Chlamydia infection, sensitive Gram-positive cocci, subinfection caused by coccus-negative. | ||
| 35 | Lidan Paishi Pian | Clear heat and promote diuresis, cholagogue and remove calculi, biliary tract infection, cholecystitis. | ||
| 36 | Rhubarb Sodium Bicarbonate Tablets | Stomachic and acid making. Used for inappetence and hyperchlorhydria. | ||
| 37 | Dried Yeast Tablets | Vitamin medicine. | ||
| 38 | Berberine Hydrochloride Tablets | Antibacterial drug, used for intestinal infection of dysentery bacillus. | ||
| 39 | Compound Tablet of Fritillary Bulb | Clear lung heat, eliminate phlegm, and relieve cough and asthma. Used for wind cold cough and asthma, chest distress, acute and chronic bronchitis. | ||
| 40 | compound tablet of red sage root | Activate blood and dissolve stasis, regulate vital energy and alleviate pain, used for chest distress and angina. | ||
| 41 | Qinghuo Zhimai Pian | Clear heat, detoxification and purgation. | ||
| 42 | Xanthinol Nicotinate Tablets | Ischemic cerebrovascular diseases like cerebral infarction and thrombosis, brain damages like apoplectic sequela, cerebral trauma, brain surgery sequela, also used for thromboangitis obliterans and phlebitis. | ||
| 43 | Tolperisone Hydrochloride Injection | Central muscle relaxant, vasodilatation. Increase blood volume, used for atherosclerosis and apoplexy sequela. | ||
| 44 | Fufang Huzhang Anmin Pian | Clear heat and detoxification, used for fever, rhinorrhoea, headache, faucitis. | ||
| 45 | Berberine Hydrochloride and Trimethoprim Tablets | Gastroenteropathy caused by sensitive bacteria, intestinal infection like bacillary dysentery. |
| 46 | Fufang Qiguanyan Pian | Relieve inflammation, reduce phlegm, relieve asthma, for acute and chronic bronchitis. | ||
| 47 | Qinggan Pian | Clear heat and detoxification, cholagogue and remove calculi. Used for cold and fever, throat irritation, parotitis, muggy jaundice. | ||
| 48 | Paracetamol,Caffein,Atificial Cow-bezoar and chlorphenamine Maleate Tablets | Relieve fever, headache, blocked nose, sore throat and sneezing caused by common cold and influenza. |
| 49 | Sanhuang Pian | Clear heat and detoxification, purge pathogenic fire, purgation. Used for body heat, conjunctival congestion, ulcers in mouth and nose, throat irritation, bleeding gum, upset and thirsty, yellow urine, constipation, acute gastroenteritis, and dysentery. | ||
| 50 | Norfloxacin Capsules | Urinary tract infections, gonorrhoea, prostatitis, enteral infections, typhia, salmonella bacteria infections. | ||
| 51 | Paracetamol,Caffein,Atificial Cow-bezoar and chlorphenamine Maleate capsules | Relieve fever, headache, blocked nose and sore throat caused by common cold and influenza. | ||
| 52 | Compound Rifampicin Capsules | Various tuberculosis, improve tolerance with other anti-tuberculosis drugs, shorten treatment period, reduce adverse reaction, defer occurrence of antibiotic-resistant bacteria. Used for extrapulmonary tuberculosis, lepriasis, common bacterial infections. | ||
| 53 | Pediatric Paracetamol Atificial Cow-bezoar and Chlorphenamine Maleate Granules | Relieve headache, fever, sore throat and blocked nose caused by cold. | ||
| 54 | Isatis Root Granules | Clear heat and detoxification, cool blood, relieve sore throat, detumescence. Used for body heat, sore throat, tonsillitis and parotitis. | ||
| 55 | Yinhua Ganmao Chongji | Clear heat, relieve exterior syndrome, relieve sore throat, cold, fever, headache, throat irritation. | ||
| 56 | Ganmao Tuire Keli | Clear heat and detoxification. Used for respiratory tract infection, acute tonsillitis and faucitis. | ||
| 57 | Runhou Yaocha | Good for lung and can reduce internal heat, smooth throat, purge, engender saliva, relieve sore throat, clear throat, invigorate spleen, nourish kidney and revive energy. Used for dry throat, sore throat, foreign body sensation. | ||
| 58 | Inosine Oral Solution | Coenzyme drug, improve metabolism, for various liver and heart diseases, leukocytopenia, thrombocytopenia central retinitis, optic atrophy. | ||
| 59 | Compound Guaiacol Potassium Sulfonale Oral Solution | Relieve cough and phlegm. | ||
| 60 | Xiao’aiping Koufuye | Anticancer, relieve asthma, diminish inflammation. Used for esophageal cancer, gastric cancer, lung cancer, liver cancer, Lymphoma, colon cancer, Cervical cancer, septicemia. Also for radiation treatment, chemotherapy, post-operation treatment, chronic bronchitis, bronchial asthma. | ||
| 61 | Qiangli Pipa Lu | Nourish yin and clear lung heat, relieve cough, eliminate phlegm, repeated cough, bronchitis. | ||
| 62 | Xiao’er Zhike Tangjiang | Clear phlegm and relieve cough. Used for pediatric cough caused by cold. | ||
| 63 | Zhike Pipa Lu | Clear lung heat, relieve cough, eliminate phlegm. cough, phlegm, xerostomia caused by wind-heat. Used for bronchitis cough and pediatric cold. | ||
| 64 | Banxia Tangjiang | Clear cough and reduce phlegm, and bronchitis. | ||
| 65 | Fritillary and Loquat Syrup | Clear heat and ventilate lung, clear phlegm and relieve cough. Used for cough and phlegm, sore and swelling throat, chest distress, cold, chronic bronchitis caused by wind heat invading lung and internal heat. | ||
| 66 | Fei’er Tangjiang | Pediatric nutrient, hypofunction of spleen and stomach, do not feel like eating. | ||
| 67 | Sufei Ke Tangjiang | Cough and phlegm, bronchitis. |
| 68 | Zinc Sulfate Syrup | Anti zinc deficiency drug, used for pediatric slow growth, malnutrition, anorexia, oral ulcer, post-surgery wound healing caused by zinc deficiency. | ||
| 69 | Orange Tincture | Fragrant and promote digestion. | ||
| 70 | Weiling Heji | Nourish yin and blood, soothe nerves. Used for over fatigue, neurasthenia, amnesia and insomnia. | ||
| 71 | Methylrosanilinium Chloride Solution | Sterilization and antisepsis. Used for superficial injury, anabrosis, ulcer and skin infection. | ||
| 72 | Merbromin Solution | Skin mucosa ulcer and injury sterilization. | ||
| 73 | Iodine Tincture | Sterilization and antisepsis. | ||
| 74 | Zingiberis Tincture | Promote digestion and dispel cold. | ||
| 75 | Weiling Heji | Promote digestion, acid-making, kill pain. Used for gastritis, gastric ulcer and duodenal ulcer. | ||
| 76 | Baixuanxiatare Pian | Clear unusual mucilaginous substance, bile, sepsis, detumescence, antipruritics. Used for tinea manuum, tinea corporis, tinea pedis, tinea versicolor, psoriasis, allergic dermatitis, shingles and acne. | ||
| 77 | Isosor Bide Mononitrate Injection | Long term treatment of coronary heart disease, prevent angina, continuous angina treatment of post myocardial infarction, treat chronic congestive heart disease with digitalis or diuretics. | ||
| 78 | Azithromycin for Injection | Used for infection caused by sensitive strains, like intravenous drip of community-acquired pneumonia caused by Chlamydia pneumoniae, mycoplasma pneumoniae, staphylococcus aureus, streptococcus pneumoniae. | ||
| 79 | Clindamycin Phosphate Injection | Serious infection caused by staphyloccus aureus and anaerobic bacteria. Ideal effect of osteomyelitis caused by sensitive bacteria. | ||
| 80 | Fleroxacin | Mainly used for systematic infection treatment, like acute respiratory infection, urinary infection, gynecological infection, ordinary otolaryngology infection and skin soft tissue infection. | ||
| 81 | Naoxinqing Capsule | Increase pipe, vein and brain blood, improve blood and oxygen supply status of heart and brain tissue, and increase electrophoretic mobility of erythrocyte. Used for coronary heart disease, angina, cerebral arteriosclerosis, ischemic cerebrovascular disease. | ||
| 82 | Weili Capsule | Kill pain and promote circulation, digestion and gall. Used for improper diet, phlegm, vomit, stomachache, bad appetite, constipation, acute gastritis and cholecystitis. | ||
| 83 | Zhiyanxiao Capsule | Clear heat and detoxification, promote circulation, stop bleeding, kill pain and swelling. Used for old patients’ hemorrhoids symptom like dyschizia, hematochezia hemorrhoids inflammation and anal fissure. | ||
| 84 | Yinyangsuo Capsule | Treat renal and impotence, promote body fluid production. Used for impotence, ache and weak at waist and knee, body fluid deficiency, and dizziness. | ||
| 85 | Stanch Capsule | Clear heat and cool blood. Used for menorrhagia, nose bleed, hemoptysis, hematemesis and emptysis caused by blood heat. |
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1The Chinese government agency, SFDA, is analogous to the Food and Drug Administration (“FDA”) in the United States. Unlike the FDA, however, the SFDA provides intellectual property and competitive protection to certain classes of approved drugs.
Marketing and Sales
We have a trained marketing team and maintain sales offices or agents in approximately 30 provinces throughout China. The sales network covers approximately 146 cities and is staffed by approximately 168 sales representatives with more than a decade of pharmaceuticals selling experience.
In accordance with the Drug Control Law of the Peoples Republic of China, we use a distribution system comprised of independent regional distributors. In a typical distribution contract, a distributor will be provided with certain sales targets for a particular period according to a set retail price. If the distributor completes the sales task within the prescribed period, the agent distributor will be given greater economic incentives and future distribution opportunities. If the distributor fails to complete the sales task within the prescribed period, we will cancel our contract with the distributor and sign with other competent distributors. We also sell pharmaceutical products via the Internet and deliver product information on certain professional websites.
Our three largest customers in 2008 were Xi’an Ruihua Pharmaceutical Co., Ltd., Baoji Medical Station and Xinjiang Pharmaceutical Co., Ltd. They accounted for 9.34%, 9.3% and 8.57% of revenues in 2008. In 2009, our three largest customers were Shenyang Zhuying Pharmaceutical Co., Ltd., Baoji Medical Station, and Shaanxi Xinxing Medical Co., Ltd. They accounted for 6.95%, 6.89% and 6.38% of revenues in 2009, respectively.
In terms of our pharmaceutical products, during the year ended December 31, 2008, no sales of any product accounted for more than 10% of our revenues. During the year ended December 31, 2009, no sales of any product accounted for more than 10% of our revenues.
During the year ended December 31, 2008, we spent Yuan 3,610,000 (USD$601,666) on marketing. During the year ended December 31, 2009, we spent Yuan 5,980,000 (USD$876,832) on marketing. Marketing costs during the three months ended March 31, 2010 were Yuan 700,000 (USD$102,639).
Production
We manufacture and package our products at two factories, one located in Xixiang County in Hanzhong and one in Xi’an Jinghe Industrial Zone, China. Both facilities are in compliance with Good Manufacturing Practice (GMP) standards and have three GMP certificates dated March 9, 2006 (Certificate No. H0192 for Xi’an Production Base), January 8, 2007 (Certificate No. H4109 for Xi’an Production Base) and January 8, 2007 (Certificate No. H4119 for Hanzong Production Base), respectively. The certificates remain valid until March 8, 2011, January 7, 2012 and January 7, 2012, respectively. All of the complete production lines at each facility meet international food and drug safety guidelines.
The Hanzhong factory, which was built in 1970, is approximately 12,000 square meters with 800 square meters of sterilized area. This production facility has two production lines for high-volume injection and produces 38 pharmaceutical products with different specifications. This production facility primarily manufactures products of infusion kind. This production facility has 47 sets of machines and supporting parts for pharmaceutical production from domestic and foreign suppliers.
The Xi’an Jinghe factory, which was built in 2006, is approximately 21,000 square meters with 7,000 square meters sterilized area and 15,000 square meters verdurization area. This facility primarily produces low-volume injection, troches (lozenges), capsules, granules, species, syrups, oral solutions, tincture mixture and lyophilized (freeze dried) powder injections. This production facility has 219 sets of machines.
Each facility is an independent production base that can process all stages of production, from raw materials to finished goods, including packaging. We obtain our packing materials from Xi’an No. 1 Printing Factory and we obtain the aluminum foil used in tablet production from Xi’an Haoyu Packing Co., Ltd.
We purchase our raw materials from approximately 100 suppliers. We generally utilize more than three suppliers for each raw material.
Quality Control
Our production facilities are designed and maintained with a view towards conforming with good practice standards. To comply with GMP operational requirements, we have implemented a quality assurance plan setting forth our
quality assurance procedures. Our Quality Control department is responsible for maintaining quality standards throughout the production process. Quality Control executes the following functions:
| ● | setting internal controls and regulations for semi-finished and finished products; | |
| ● | implementing sampling systems and sample files; | |
| ● | maintaining quality of equipment, instruments, reagents, test solutions, volumetric solutions, culture media and laboratory animals; | |
| ● | auditing production records to ensure delivery of quality products; | |
| ● | monitoring the number of dust particles and microbes in the clean areas; | |
| ● | evaluating stability of raw materials, semi-finished products and finished products in order to generate accurate statistics on storage duration and shelf life; | |
| ● | articulating the responsibilities of Quality Control staff; and | |
| ● | on-site evaluation of supplier quality control systems. |
Competition
The pharmaceutical industry within China is intensely competitive and is characterized by rapid and significant technological progress, and our operating environment is increasingly competitive. Our competitors include large pharmaceutical companies, including Xi’an Jingxi Shuanghe Pharmaceuticals Co., Ltd., that currently engage in or may engage in efforts related to the discovery and development of new pharmaceuticals.
Western pharmaceutical products have more than half of the market share of medications used in China to treat the medical indications that our pharmaceutical products treat, with Chinese pharmaceutical products making up the next largest part of the market. Western medicine is all made from chemosynthesis products, while Chinese medicine is made from botanical, animal and mineral components.
There are certain opportunities for growth through the following growth strategies:
Rapidly growing Chinese pharmaceutical market. With approximately one-fifth of the world’s population and a fast-growing gross domestic product, China represents a significant potential market for the pharmaceutical industry. We believe the significant expected growth of the pharmaceutical market in China is due to factors such as robust economic growth and increased pharmaceutical expenditure, aging population and increased lifestyle-related diseases, government support of the pharmaceutical industry, the relatively low research and development and clinical trial costs in China as compared to developed countries, as well as the increased availability of funding for medical insurance and industry consolidation in China.
Currently China has about 3,500 drug companies, falling from more than 5,000 in 2004, according to government figures. The number is expected to drop further due to trends in the industry’s consolidation. The domestic companies compete in the $10 billion market without a dominant leader. Most often cited adverse factors include a lack of protection of intellectual property rights, a lack of visibility for drug approval procedures, a lack of effective governmental incentives, poor corporate support for drug research and differences in the treatment in China accorded to local and foreign firms. The profile of the pharmaceutical industry in China remains very low. China accounts for 20% of the world’s population but only 1.5% of the global drug market. As of 2008, China is the world's eighth largest drug market; and it is pred icted to become the world`s third largest drug market by 2011
New Product Development. We will continue to evaluate and develop additional product candidates, both through our in-house research and development department and working with our research and development partners, to expand our pipeline where we perceive an unmet need and commercial potential. We will face the risk that in developing new products we may spend substantial sums of money and the new products developed may not effectively meet the perceived need or may not be successfully commercialized.
Focus on brand development. With intense price competition among many similar or identical products in the industry, we believe that building brand equity is the primary means to generate and sustain profitable growth in the future. The company intends to focus its brand development efforts on building its existing brand names with the intent on it becoming a leading medicine brand in China.
Marketing and Sales Function. We intend to grow our internal marketing and sales function and increase our relationships with other distributors to expand the distribution and presence of our pharmaceutical products. In
expanding market share of our products, we intend to take advantage of our large manufacturing scale and reasonable cost control mechanisms, and our strong sales network. In addition, our goal is to establish our products as a preferred choice for medicines in local pharmacies. We hope to add other pharmaceutical products into this channel over the next few years. We may face risks in obtaining adequate quantities of raw materials at reasonable prices in order to meet increased demand for our products that result from any growth. In seeking additional employees, sales representatives, and distributors, we will compete with many other established pharmaceutical manufacturers that may have greater resources than we do.
Low cost producer. Our continuing success in optimizing our manufacturing processes and minimizing our production costs provides us with a competitive advantage.
Government sponsored industry consolidation presents opportunities for acquisitions. China’s thousands of domestic companies account for 70 percent of the pharmaceutical market. Anticipating the effects of WTO entry and in an effort to compete with foreign firms, the Chinese government has decided to nurture its own large pharmaceutical companies, by encouraging the consolidation of its government-owned companies which, even though the company is not government-owned, may also present the company with acquisition opportunities. To this end, the Chinese State Economic and Trade Commission (SETC) announced plans to consolidate the industry and support the development of 10 to 15 largest pharmaceutical firms. According to government statistics China currently has about 3,500 drug companies, down from over 5,000 in 2004. The number is expected to drop further. As the industry undergoes further consolidation, the Company may have the opportunity to grow by acquisition.
Raw Materials and Principal Suppliers
The raw materials used to manufacture our products include various medicinal herbs, which we obtain from numerous qualified suppliers with national qualifications. We also enter into trading agreements for the supply of many of the materials used to manufacture and package our products. Xi’an Pharmaceuticals Jinghe Branch has written agreements with substantially all of its suppliers.
The five largest suppliers of Xi’an Pharmaceuticals (Jinghe Branch) in 2009 were as follows:
| Supplier | Product | % | |||
| 1 | Shaanxi Daxin Plastics Co., Ltd. | Packaging Materials | 19 | ||
| 2 | Xi’an Acetar Bio-Tech Co. Ltd. | Raw Material and Supplementary | 14% | ||
| 3 | Kanghua Package Co. Ltd. | Packaging Materials | 6% | ||
| 4 | Jieli Carton Company in Chenchang District, Baoji City | Packaging Materials | 6% | ||
| 5 | Xi’an No. 1 Printing Factory | Packaging Materials | 6% |
The five largest suppliers of Xi’an Pharmaceuticals (Hanzhong Branch) in 2009 are as follows:
| Supplier | Product | % | |||
| 1 | Shaanxi Daxin Plastics Co., Ltd. | Raw Materials and Packaging Materials | 23 | ||
| 2 | Xi'an Xihu Glass Co., Ltd. | Raw Material and Packaging Materials | 16 | ||
| 3 | Chongqing Beibei General Glass Apparatus Factory | Raw Material and Packaging Materials | 12% | ||
| 4 | Shaanxi Dayang Label Co., Ltd. | Raw Material and Packaging Materials | 6% | ||
| 5 | Shandong Zibo Maosheng Pharmaceuticals Package Co. Ltd. | Raw Material and Packaging Materials | 6% |
Intellectual Property
We regard our service marks, trademarks, trade secrets, patents and similar intellectual property as critical factors to our success. We rely on patent, trademark and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our proprietary rights.
We have numerous trademarks evidenced by Trademark Registration Certificates for our pharmaceutical products, including all kinds of injections tablets, capsules, syrups, oral solutions, medicinal liquor and tincture. These trademarks distinguish our pharmaceutical products from those of our competitors. We regard our trademarks, copyrights domain names, trade dress, trade secrets, proprietary technologies and similar intellectual property as important to our success, and we rely on trademark and copyright law, trade-secret protection, and confidentiality and \or license agreements with our employees, customers, partners, suppliers and others to protect or proprietary rights. In an effort to protect our intellectual property, all of our employees are required to follow our confidentiality principles. We have received trademark registra tion certificates for the following marks: XiaoNengRen, ShuangTu, JiaYi, LuoYiShu, JunLiQing, Qinba DouJing and ZhuoQing.
Research and Development
We develop new products in-house as well as through arrangements with several research institutes to develop new pharmaceutical products. We only pay these institutes for their research expenses if the research goals are accomplished, including certification of drugs and approval of drug production, and these achievements are then transferred to us. During the fiscal year ended December 31, 2008, we obtained certificates and approvals of drug production for thirteen new drug batches, ten of which we have begun to sell. We expect to continue to develop additional new drugs under this method beyond this year. During the last two fiscal years, we spent $5,595,335 to purchase the exclusive rights to certain new products from several research institutes and for ongoing in-house research and development activities.
Compliance With Government Regulations
Environmental Laws
Xi’an Pharmaceuticals’ operations and facilities are subject to environmental laws and regulations stipulated by the national and the local environment protection bureaus in China. Relevant laws and regulations include provisions governing air emissions, water discharges and the management and disposal of hazardous substances and wastes. The PRC regulatory authorities require pharmaceutical companies to carry out environmental impact studies before engaging in new construction projects to ensure that their production processes meet the required environmental standards.
Xi’an Pharmaceuticals maintains controls at its production facilities to facilitate compliance with environmental rules and regulations. Xi’an Pharmaceuticals is not aware of any investigations, prosecutions, disputes, claims or other proceedings in respect of environmental protection, nor has it been subject to any action made by any environmental administration authorities of the PRC. To management’s knowledge, Xi’an Pharmaceuticals’ operations meet or exceed the existing requirements of the PRC.
During the last two fiscal years, Xi’an Pharmaceuticals spent $805 on environmental compliance.
Advertising Laws
Advertisement Law of the People’s Republic of China and Rules of Medicine Advertisements Management from State Admission for Industry and Commerce, Regulations on Control of Advertisements (tentative) from State Council provide guidelines for advertising prescription and OTC drugs and nutrients made by Xi’an Pharmaceuticals. The rules limit where advertisements may be place and govern the claims that may be made by the manufacturer.
Insurance Catalogue
Pursuant to the Decision of the State Council on the Establishment of the State Basic Medical Insurance System for Urban Employees and the Implementation Measures for the Administration of the Scope of Medical Insurance Coverage for Pharmaceuticals for Urban Employees, the Ministry of Labor and Social Security in China established the Insurance Catalogue. The Insurance Catalogue is divided into Parts A and B. The medicines included in Part A
are designated by the Chinese governmental authorities for general application. Local governmental authorities may not adjust the content of medicines in Part A. Although the medicines included in Part B are designated by Chinese governmental authorities in the first instance, provincial level authorities may make limited changes to the medicines included in Part B, resulting in some regional variations in the medicines included in Part B from region to region.
Patients purchasing medicines included in Part A are entitled to reimbursement of the costs of such medicines from the social medical fund in accordance with relevant regulations in China. Patients purchasing medicines included in Part B are required to pay a predetermined proportion of the costs of such medicines.
The medicines included in the Insurance Catalogue are selected by the Chinese government authorities based on various factors including treatment requirements, frequency of use, effectiveness and price. Medicines included in the Insurance Catalogue are subject to price control by the Chinese government. The Insurance Catalogue is revised every two years. In connection with each revision, the relevant provincial drug authority collects proposals from relevant enterprises before organizing a comprehensive appraisal. The SFDA then makes the final decision on any revisions based on the preliminary opinion suggested by the provincial drug administration. Approximately 40% of our revenues are derived from pharmaceutical products listed in the Insurance Catalogue so that purchasers can receive reimbursement on these products. Removal of a sig nificant portion of these products from the Insurance Catalogue would adversely affect our total revenue.
Price Controls
The prices of approximately 1,500 pharmaceuticals available in the PRC are presently set by the PRC government. These constitute approximately 10% of all distributed drugs. The prices for the other 90%, or approximately 12,000 pharmaceuticals, are established by the market (by the companies themselves). Corporations typically establish these prices based on operating costs, and market supply and demand. The Supervision Department of the PRC government will intervene only if there is a significant fluctuation in prices or a monopoly develops in a particular drug. We have not had any products subject to specific pricing control and production and trading of none of our pharmaceutical products constitutes a monopoly.
Employees
We have approximately 486 full-time, salaried employees who receive labor insurance. These employees are organized into a union under the labor laws of China and can bargain collectively with us. In addition, we employ over 168 sales representatives who are paid on a commission basis. These representatives are not part of the union. We maintain good relations with our employees.
Executive Offices
Our principal executive offices are located at 24th Floor, Building A, Zhengxin Mansion, No. 5 of 1st Gaoxin Road, Xi’an, the People’s Republic of China 710075. Our telephone number is 86-29-84067215. Our website is located at http://www.chinapharmaceuticalsinc.com.
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
In connection with the consummation of the Merger Agreement, Mr. Guozhu Wang was appointed to serve as Chief Executive Officer and director of the Company, Mr. Lei Tao was appointed to serve as Chief Financial Officer of the Company, and Mr. Guiping Zhang was appointed to serve as the President of the Company.
Additionally, in connection with the consummation of the Merger Agreement, Mr. Lei Tao, Mr. Zaizhi Cheng, Mr. Xiaogang Zhu, and Mr. Michael Segal were appointed as new directors of the Company.
As a result of the above-mentioned merger transactions, (i) China Qinba Pharmaceuticals became a wholly-owned subsidiary of the Company, (ii) the Company acquired the business of Xi’an Pharmaceuticals as its sole business, and (iii) China Doll was spun off from the Company.
Set forth below is certain information regarding the persons who have or will become directors and executive officers of the Company pursuant to the Merger Agreement:
Guozhu Wang - 47 - Chief Executive Officer and Director
Lei Tao - 39 - Chief Financial Officer
Guiping Zhang - 44 – President and Director
Zaizhi Cheng - 55 - Independent Director
Xiaogang Zhu - 56 - Independent Director
Michael Segal - 68 - Independent Director
To the best of the Company’s knowledge, the directors and executive officers are not currently directors of the Company, do not hold any position with the Company nor have been involved in any transactions with the Company or any of its directors, executive officers, affiliates or associates that are required to be disclosed pursuant to the rules and regulations of the SEC. To the best of the Company’s knowledge, none of the directors or executive officers of the Company have been the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time, been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other mi nor offenses), been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting such person’s involvement in any type of business, securities or banking activities or been found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Set forth below is certain information with respect to the above-named officers and directors:
GUOZHU WANG – Chief Executive Officer, Director. Mr. Wang was appointed Chief Executive Officer of AllstarRestaurants/China Qinba Pharmaceuticals on February 12, 2010. Mr. Wang has been China Qinba Pharmaceuticals’ CEO on November 5, 2008 and China Qinba Pharmaceuticals' Chairman since November 15, 2008. He was also Chairman of Xi’an Pharmaceuticals since August 2007. Mr. Wang served as Chairman of the Board at Shandong Cide Pharmaceuticals, Inc., where he was in charge of overall operations of the company from May 2004 until August 2007. Mr. Wang was also employed at Jilin Aodong Medicine Industry Group Co., Ltd., Shandeng Sales Company as General Manager in charge of sales from May 2003 until May 2004.
GUIPING ZHANG – President, Director. Mr. Zhang was appointed president of China Qinba Pharmaceuticals on February 12, 2010. Mr. Zhang has been the China Qinba Pharmaceuticals’ General Manager since November 5, 2008 and a Director of China Qinba Pharmaceuticals since November 15, 2008. From August 2007 to November 2008, Mr. Zhang was General Manager and Vice President with Xi’an Pharmaceuticals and responsible for the overall operations and management of the Xi’an Pharmaceuticals. He was Chairman of the Board of Xi’an Pharmaceuticals from 2001 through August 2007. Mr. Zhang attended Shandong University majoring in Micro-organism Engineering and graduated in July 1989.
TAO LEI – Chief Financial Officer. Mr. Lei was appointed Chief Financial Officer of China Qinba Pharmaceuticals on February 12, 2010. Prior to his appointment Mr. Lei was CFO of Xi’an Pharmaceuticals since May of 2009. Previous to Mr. Lei’s employment with Xi;an Pharmaceuticals, Mr. Lei was employed with Shaanxi Baifu Investment Company from April 2006 to May 2009 as CFO. Mr. Lei was the Finance Manager of Xi’an Zhonghui Shopping Mall from June 2000 to March 2006. After completing his Accounting degree in 1996 from Xi’an Union University, Mr. Lei obtained his Auditor designation in 1997and his Accountant designation in 1998.
ZAIZHI CHENG – Director. From January 2005 to December 2009, Mr. Cheng was employed with Shandong Tianyue Pharmaceuticals Co., Ltd., as Chief Financial Officer. From January 2003 to December 2004, Mr. Cheng was employed with Shandong Fangzhou Mi Co., Ltd., as Chief Financial Officer. From May 2001 to December 2002, Mr. Cheng was employed with Guangdong Zhongshan Xiaoya Jinglin Air Conditioner Factory, as Executive Vice President. From May 1997 to May 2001, Mr. Cheng was employed with Shandong Yinchu Industry Co., Ltd., as Chief Financial Officer. Mr. Cheng majored in accounting and received his diploma from Shandong University.
XIAOGANG ZHU – Director. Mr Zhu is currently employed with China Recycling Energy Corp as General Manager and is also employed with Xi’an TCH Energy Technology Co. Ltd. as Chief Financial Officer. Mr Zhu has held these positions since 2007. From 2005 to 2007, Mr. Zhu was employed with China Natural Gas, Inc. as Chief Financial Officer as well as the Chief Financial Officer of Xi’an Xilan Natural Gas Co., Ltd. From 2000 to 2005, Mr. Zhu was employed with Xi’an Dapeng Biological Technology Co., Ltd. as Vice General Manager. Mr. Zhu was graduated from Shaanxi Institute of Finance and Economics, whose major was Accounting, with a designation of Senior Accountant.
MICHAEL SEGAL – Director. Since 2001, Mr. Segal has been President of Segal Cirone Services Inc., a financial consulting company that advises institutions, banks and high net worth individuals. He was a Principal, Options Compliance Principal and Branch Office Manager of Whitaker Securities LLC, a member of the Financial Industry Regulatory Authority (FINRA) from October 23, 2006 until October 2009. Prior to that, Mr. Segal had served as President of Alexander Westcott & Co., Inc., a Broker/Dealer registered with NASD and Secretary of the board of directors of its parent company, the Financial Commerce Network Inc., a public company. He is also individually registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission (CFTC) and a member of the National Futures Association (NFA) and a founding member of the Managed Funds Association. Mr. Segal received a B.B.A. in marketing and economics from the University of Miami in Florida. Mr. Segal sits on the board of directors of China Agri Business Inc. (CHBU.BB) and China Power Equipment Inc. (CPQQ.BB) public traded companies on the US OTC Bulletin Board. Additionally Mr. Segal sits on the board of directors of the following privately held companies: Asia Nutracueticals Consulting Co. Ltd.; China America Holdings LLC; Asia Carbon Black Inc.; and SunGame Inc.
As of December 19, 2008, we have adopted our charters to the following committees of the Board of Directors with membership to be announced upon the appointment of independent Directors.
Audit Committee
Our audit committee will consist of our independent directors upon appointment. The Committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
| ● | selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors; | |
| ● | reviewing with our independent auditors any audit problems or difficulties and management’s response; | |
| ● | reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the Securities Act; | |
| ● | discussing the annual audited financial statements with management and our independent auditors; | |
| ● | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; | |
| ● | annually reviewing and reassessing the adequacy of our audit committee charter; | |
| ● | such other matters that are specifically delegated to our audit committee by our board of directors from time to time; | |
| ● | meeting separately and periodically with management and our internal and independent auditors; and | |
| ● | reporting regularly to the full board of directors. |
Compensation Committee
Our compensation committee will consist of our independent directors upon appointment.
Our compensation committee assists the board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Members of the compensation committee are not prohibited from direct involvement in determining their own compensation. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:
| ● | approving and overseeing the compensation package for our executive officers; | |
| ● | reviewing and making recommendations to the board with respect to the compensation of our directors; |
| ● | reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on this evaluation; and | |
| ● | reviewing periodically and making recommendations to the board regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee will consist of our independent directors upon appointment. The corporate governance and nominating committee assists the board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:
| ● | identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy; | |
| ● | reviewing annually with the board the current composition of the board in light of the characteristics of independence, age, skills, experience and availability of service to us; | |
| ● | identifying and recommending to the board the directors to serve as members of the board’s committees; | |
| ● | advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as | |
| ● | our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any corrective action to be taken; and | |
| ● | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. | |
| ● | To the best of our knowledge, none of the following ever occurred to any of our directors and officers. |
(1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
(4) Being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Code of Ethics
We currently have a code of ethics that applies to our officers, employees and directors, including our Chief Executive Officer and senior executives.
Conflicts of Interest
Certain potential conflicts of interest are inherent in the relationships between our officers and directors, and us.
From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with ours with respect to operations, including financing and marketing, management time and services and potential
customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither we nor our shareholders will have any right to require participation in such other activities.
Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.
With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
Legal Proceedings
None of our directors, executive officers, promoters or control persons has been involved in any of the following events during the last 10 years:
1. | A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; | ||||
2. | Convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); | ||||
3. | The subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: | ||||
| i. | Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; | ||||
ii. | Engaging in any type of business practice; or | ||||
iii. | Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws; | ||||
4. | The subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity; |
5. | Found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated; |
6. | Found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; |
7. | The subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: |
i. | Any Federal or State securities or commodities law or regulation; or | |
ii. | Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or | |
iii. | Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
8. | The subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS
On February 12, 2010, Allstar Restaurants (as we were then known) executed and consummated a Merger Agreement and Plan of Reorganization (the “Merger Agreement”) with Allstar Acquisitions Co., a wholly-owned subsidiary of Allstar Restaurants (the “Acquisition Subsidiary”), China Qinba Pharmaceuticals, Inc., a Delaware corporation (“China Qinba Pharmaceuticals”), Terry G. Bowering (the then controlling shareholder of Allstar Restaurants), and the majority shareholders of China Qinba (the “Majority Qinba Shareholders”). Guozhu Wang, Guiping Zhang, Xiu’e Xing, Yong Xu, Xiling Gao, Xianhong Xue, Congge Wei and Xiulan Kang comprised the Majority Qinba Shareholders.
Pursuant to the Merger Agreement, China Qinba Pharmaceuticals merged with and into the Acquisition Subsidiary, and all of the shareholders of China Qinba Pharmaceuticals exchanged their shares for an aggregate of 33,600,000 shares of newly issued common stock of the Company. Immediately after the Closing, the Company had a total of 38,450,000 shares of common stock outstanding, with all of the shareholders of China Qinba Pharmaceuticals (and their assignees) owning approximately 87.39 % of the Company’s outstanding common stock, and the balance held by those who held the Company’s common stock prior to the Closing. In addition, pursuant to a share exchange agreement dated February 12, 2010, Terry G. Bowering transferred 5,100,000 shares of the Company’s common stock for cancellation in exchange for 100% of the issued and outstanding shares of C hina Doll Foods Ltd., a wholly owned subsidiary of the Company.
Our board of directors (the “Board”) as well as the directors and the Majority Qinba Shareholders each approved the Merger Agreement. Following the Closing Date, Allstar Acquisitions Co. merged with and into China Qinba Pharmaceuticals, which became the surviving entity and our wholly-owned subsidiary.
As a result of the above-mentioned merger transactions, (i) China Qinba Pharmaceuticals became a wholly-owned subsidiary of the Company, (ii) the Company acquired the business of Xi’an Pharmaceuticals as its sole business, and (iii) China Doll Foods Ltd. was spun off from the Company.
On June 8, 2010, we effected a five-for six reverse split of our common stock reducing our number of outstanding common shares from 38,450,000 to 32,041,667 shares.
Subsidiaries
As a result of the Merger Transaction, China Qinba and Xi’an Development are our wholly-owned subsidiaries. Xi’an Pharmaceuticals, the entity through which we operate our business, currently has no subsidiaries, either wholly-owned or partially-owned.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Executive Compensation Chart highlights the compensation for our executive officers. No other executive officers received salary and bonus in excess of $100,000 for the prior three fiscal years.
Compensation of Directors and Executive Members
| Long Term Compensation | |||||||||||||||||||||||
| Annual Compensation | Awards | Payouts | |||||||||||||||||||||
Name and Principal Position | Year | Salary ($) | Bonus ($) | Other Annual Compensation ($) | Restricted Stock Award(s) ($) | Securities Underlying Options/ SARs (#) (#) | LTIP Payouts ($) | All Other Compensation ($) | |||||||||||||||
Guozhu Wang, Director and CEO(1) | 2009 2008 2007 | $ $ $ | 5,242 4,392 1,089 | $ $ $ | 0 0 0 | $ $ $ | 0 0 0 | N/A N/A N/A | N/A N/A N/A | N/A N/A N/A | N/A N/A N/A | ||||||||||||
| Guiping Zhang, President(1) | 2009 2008 2007 | $ $ $ | 5,769 5,710 5,069 | $ $ $ | 0 0 0 | $ $ $ | 0 0 0 | N/A N/A N/A | N/A N/A N/A | N/A N/A N/A | N/A N/A N/A | ||||||||||||
| Teo Lei CFO(1) | 2009 2008 2007 | $ $ $ | 1,581 0 0 | $ $ $ | 0 0 0 | $ $ $ | 0 0 0 | N/A N/A N/A | N/A N/A N/A | N/A N/A N/A | N/A N/A N/A | ||||||||||||
| (1) | These amounts represent compensation paid by China Qinba Pharmaceuticals and its subsidiaries. As of the February 12, 2010, we executed employment agreements with our CEO, President and CFO. The employment agreements are for a term of two years. The employment agreements will provide for annual salaries and annual bonuses in amounts not less than the amounts set forth in the table above. |
Option Grants
We do not maintain any equity incentive or stock option plan. Accordingly, we did not grant options to purchase any equity interests to any employees or officers, and no stock options are issued or outstanding to any officers.
Employment Agreements
As of February 12, 2010, we executed employment agreements with each of our executive officers, specifically, Guozhu Wang, our Chief Executive Officer; Guiping Zhang, our President and Teo Lei, our Chief Financial Officer. Each employment agreement has a term of two years.
On January 1, 2010, we entered into a two year Employment Agreement with Guozhu Wang to serve as our Chief Executive Officer. The Agreement provides for an annual salary of USD$5,095 and an annual bonus of up to 50% of the executive’s annual salary.
On January 1, 2010, we entered into a two year Employment Agreement with Guiping Zhang to serve as our President. The Agreement provides for an annual salary of USD$5,622 and an annual bonus of up to 50% of the executive’s annual salary.
On January 1, 2010, we entered into a two year Employment Agreement with Tao Lei to serve as our Chief Financial Officer. The Agreement provides for an annual salary of USD$4,392 and an annual bonus of up to 50% of the executive’s annual salary.
Compensation Discussion and Analysis
We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.
We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including, without limitation, short and long term compensation, cash and non-cash, and other equity-based compensation such as stock options. We expect that this compensation program will be comparable to the programs of our peer companies and aimed to retain and attract talented individuals.
Our compensation committee oversees the compensation of our named executive officers.
Compensation of Directors
As of the date of the registration statement of which this prospectus is a part, our directors have received no compensation for their service on the board of directors. We plan to implement a compensation program for our independent directors, which we anticipate will include such elements as an annual retainer, meeting attendance fees and stock options. The details of that compensation program will be negotiated with each independent director.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to the Merger Agreement, China Qinba Pharmaceuticals merged with and into the Acquisition Subsidiary, and the shareholders of China Qinba Pharmaceuticals exchanged their shares for an aggregate of 33,600,000 shares of newly issued common stock of the Company. In addition, pursuant to a share exchange agreement dated February 12, 2010, the Terry G. Bowering, the former controlling shareholder of Allstar Restaurants (as we were then known) transferred 5,100,000 shares of the Company’s common stock for cancellation in exchange for 100% of the issued and outstanding shares of China Doll Foods Ltd.
The table below sets forth our significant stockholders and their relationships with Xi’an Pharmaceuticals.
| Name | Position/Interrelationship | |
| Guozhu Wang | Chairman and Chief Executive Officer of Allstar Restaurants, China Qinba Pharmaceuticals, and Xi’an Pharmaceuticals, stockholder of Allstar with 15.38% of our common stock; Director of Xi’an Development with right to vote Xi’an Pharmaceuticals shares under the terms of the Voting Proxy Agreement. | |
| Guiping Zhang | President of China Qinba Pharmaceuticals and Xi’an Pharmaceuticals, stockholder of Allstar Restaurants with 13.59% of our common stock; Director and General Manager of Xi’an Development with right to vote Xi’an Pharmaceuticals shares under the terms of the Voting Proxy Agreement. |
Other than as disclosed above, there have been no other transactions since the beginning of our last fiscal year or any currently proposed transactions in which we are, or plan to be, a participant and the amount involved exceeds $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest.
Upon the consummation of the Merger Agreement on February 12, 2010, the following table sets forth certain information that would exist as of February 12, 2010 with respect to the beneficial ownership of the Company’s outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the named executive officers, directors and director nominees; and (iii) our directors, director nominees and named executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
Name of Beneficial Owner | Common Stock Beneficially Owned | Percentage of Common Stock | ||||||
Guozhu Wang Director and Chief Executive Officer | 4,928,000 | 15.38 | % | |||||
Lei Tao Chief Financial Officer | 0 | -- | ||||||
Guiping Zhang Director and President | 4,356,000 | 13.59 | % | |||||
Zaizhi Cheng Independent Director | 0 | -- | ||||||
Xiaogang Zhu Independent Director | 0 | -- | ||||||
Michael Segal Independent Director | 0 | -- | ||||||
| All officers and directors as a group (6 persons) | 9,284,000 | 28.97 | % | |||||
SELLING STOCKHOLDERS
The table below sets forth the name of each person who is offering for resale shares of common stock covered by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering, and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered. To the extent that any successor(s) to the named selling stockholders wishes to sell under this prospectus, we will file a prospectus supplement identifying such successor(s) as selling stockholders. None of the selling stockholders are affiliates of broker-dealers.
The shares of common stock being offered in this prospectus (including shares issuable upon the conversion of convertible promissory notes) were issued in private placement transactions by us, each of which was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Securities Act.
Because the selling stockholders may offer all, some, or none of their shares of our common stock, we cannot provide a definitive estimate of the number of shares that the selling stockholders will hold after this offering.
Except as set forth below or in the section “Recent Sales of Unregistered Securities,” none of the selling stockholders has at any time during the past three years acted as one of our employees, officers, or directors or otherwise had a material relationship with us.
On December 17, 2009, our subsidiary, China Qinba Pharmaceuticals, Inc. entered into an agreement with Dragon Link Investments, Inc. to obtain certain consulting services. As consideration for consulting services provided by Dragon Link Investments, Inc., (and in accordance with a warrant placement agreement dated February 12, 2010 between us and Dragon Link) China Qinba Pharmaceuticals agreed to issue to Dragon Link Investments, Inc., warrants to acquire 1,200,000 shares of our common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,000,000 shares post reverse split), with registration rights, and exercisable at a price of $1.00 per post-split share within three years after the control acquisition or merger by China Qinba with a public company identified by Dragon Link . The warrants will expire on F ebruary 11, 2013.
On January 5, 2010, our subsidiary, China Qinba Pharmaceuticals, Inc., entered into an agreement with IFG Investments Services, Inc. to obtain certain consulting services including advising on a merger/acquisition transaction and regulatory filings, and other services and support as requested. In consideration for the consulting services to be performed by IFG Investments (and in accordance with a warrant placement agreement dated February 12, 2010 between us and IFG Investments), China Qinba Pharmaceuticals agreed to issue to IFG Investments warrants to acquire 1,800,000 shares of our common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,500,000 shares post reverse split), with registration rights, exercisable at $1.00 per post-split share within three years after the closing of the control acquisition or merger by China Qinba with public company. The warrants will expire on February 11, 2013.
On January 27, 2010, our subsidiary, China Qinba Pharmaceuticals, Inc., entered into an investor relations agreement with HACG Investor Relations Services, Inc., to obtain certain public company sector services, including advising on and with respect to investor relations. The term of the contract expires January 31, 2011. As consideration for the services to be performed by HACG (and in accordance with a warrant placement agreement dated February 12, 2010 between us and HACG), China Qinba Pharmaceuticals agreed to issue to HACG warrants to acquire 1,200,000 common shares of the Company’s stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,000,000 shares post reverse split), with registration rights, exercisable at $1.00 per post-split share until January 31, 2013.
The above noted securities issued to our consultants, Dragon Link Investments, Inc., IFG Investments Services, Inc., and HACG Investor Relations Services, Inc. were not registered under the Securities Act of 1933. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act. We made this determination based on the representations of the consultants, which included, in pertinent part, that such consultants were "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act and that the consultants were acquiring our securities for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the consultants understood that the shares of our common stock may not be sold or otherwise dispose d of without registration under the Securities Act or an applicable exemption therefrom.
On February 12, 2010, pursuant to a merger agreement with China Qinba Pharmaceuticals dated of the same date (the “Merger Agreement”), we issued 33,600,000 shares of our Common Stock to the shareholders China Qinba Pharmaceuticals in exchange for 100% of the outstanding shares of China Qinba Pharmaceuticals. The selling shareholders offering shares in this prospectus received their shares via this issuance. The 33,600,000 shares (which were subsequently reduced to 28,000,000 shares post reverse split) were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration, in part pursuant to Regulation S and Regulation D under the Securities Act of 1933 and in part pursuant to Section 4(2) of the Securities Act of 1933. We made this determination based on the representations of China Qinba Pha rmaceuticals, which included, in pertinent part, that such shareholders were either (a) "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, or (b) not a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the Act, and that such shareholders were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that China Qinba Pharmaceuticals’ shareholders understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
Under applicable SEC rules, a person is deemed to beneficially own securities which the person as the right to acquire within 60 days through the exercise of any option or warrant or through the conversion of a convertible security. Also under applicable SEC rules, a person is deemed to be the “beneficial owner” of a security with regard to which the person directly or indirectly, has or shares (a) voting power, which includes the power to vote or direct the voting of the security, or (b) investment power, which includes the power to dispose, or direct the disposition, of the security, in each case, irrespective of the person’s economic interest in the security. Each listed selling stockholder has the sole investment and voting power with respect to all shares of common stock shown as beneficially owned by such selling stockholder, except as otherwi se indicated in the footnotes to the table.
As of July 14, 2010, there were 32,041,667 shares of our common stock issued and outstanding. In determining the percent of common stock beneficially owned by a selling stockholder as of July 14, 2010, (a) the numerator is the number of shares of common stock beneficially owned by such selling stockholder (including shares that he has the right to acquire within 60 days of July 14, 2010), and (b) the denominator is the sum of (i) the 32,041,667 shares outstanding on July 14, 2010 and (ii) the number of shares of common stock which such selling stockholders has the right to acquire within 60 days of July 14, 2010.
| Selling Stockholder | Shares beneficially owned prior to the offering | Number of common shares registered in this prospectus | Shares beneficially owned after the offering | |||||||
| Number | Percent(1) | Number | Percent (1) | |||||||
| Xining Chen | 730,000 | 2.05% | 730,000 | 0 | 0% | |||||
| Yaqing Dang | 740,000 | 2.08% | 740,000 | 0 | 0% | |||||
| Dragon Link Investments, Inc. (2) | 1,000,000(3) | 2.81% | 1,000,000 | 0 | 0% | |||||
| HACG Investor Relations Services, Inc. (4) | 1,000,000(5) | 2.81% | 1,000,000 | 0 | 0% | |||||
| IFG Investments Service, Inc. (6) | 1,500,000(7) | 4.22% | 1,500,000 | 0 | 0% | |||||
| Hong Li | 50,000 | 0.14% | 50,000 | 0% | ||||||
| Pangu Ltd. (8) | 1,090,000 | 3.06% | 1,090,000 | 0 | 0% | |||||
| Yanhua Shi | 50,000 | 0.14% | 50,000 | 0 | 0% | |||||
| Ji Wu | 1,000,000 | 2.81% | 1,000,000 | 0 | 0% | |||||
| Haifeng Xu | 640,000 | 1.80% | 640,000 | 0 | 0% | |||||
(1) Based on 35,541,667 common shares, which assumes the issuance of all 3,500,000 unissued shares underlying warrants being registered in this registration statement. (2) Xing Peilin, the beneficial owner of Dragon Link Investments, Inc., has sole power to vote and dispose of the securities held by Dragon Link Investments, Inc. (3) Assumes the exercise of warrants to purchase 1,000,000 unissued common shares being registered in this registration statement. |
| (4) Min Zhou, the beneficial owner of HACG Investor Relations Services, Inc. has sole power to vote and dispose of the securities held by HACG Investor Relations Services, Inc. |
| (5) Assumes the exercise of warrants to purchase 1,000,000 unissued common shares being registered in this registration statement. |
| (6) Daniel MacMullin, the President and beneficial owner of IFG Investments Services, Inc., has sole power to vote and dispose of the shares held by IFG Investments Services, Inc. |
| (7) Assumes the exercise of warrants to purchase 1,500,000 unissued common shares being registered in this registration statement. |
| (8) Gege Wu, the beneficial owner of Pangu Ltd., has sole power to vote and dispose of the shares held by Pangu Ltd. |
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees, and other successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions.
We have agreed, subject to certain limits, to bear all costs, expenses, and fees of registration of the shares of our common stock offered by the selling stockholders for resale. However, any brokerage commissions, discounts, concessions, or other fees, if any, payable to broker-dealers in connection with any sale of shares of common stock will be borne by the selling stockholders selling those shares or by the purchasers of those shares.
On our being notified by a selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares through a block trade, special offering, exchange distribution, or secondary distribution, or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing the following:
| ● | the name of each such selling stockholder and of any participating broker-dealer | |
| ● | the number of securities involved | |
| ● | the price at which such securities were sold | |
| ● | the commissions paid or discounts or concessions allowed to any broker-dealer, where applicable that any broker-dealer did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus | |
| ● | other facts material to the transaction. | |
| ● | the price at which such securities were sold | |
| ● | the commissions paid or discounts or concessions allowed to any broker-dealer, where applicable that any broker-dealer did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus | |
| ● | other facts material to the transaction. |
The selling stockholders may use any one or more of the following methods when selling shares:
| ● | directly as principals | |
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers | |
| ● | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; | |
| ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account | |
| ● | an exchange distribution in accordance with the rules of the applicable exchange | |
| ● | privately negotiated transactions | |
| ● | short sales that are in compliance with the applicable laws and regulations of any state or the United States | |
| ● | broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share | |
| ● | a combination of any such methods of sale | |
| ● | any other method permitted pursuant to applicable law |
The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Any sales of the shares may be effected through the OTC Bulletin Board, in private transactions or otherwise, and the shares may be sold at market prices prevailing at the time of sale, at prices related to prevailing market prices.
The selling stockholders may also engage in short sales against the box, puts and calls, and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades. The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. We believe that the selling stockholders have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding sale of their shares other than ordinary course brokerage arrangements, nor is there an underwriter or coordinating broker acting in connection with the proposed sale of shares by the selling stockholders.
Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. If the selling stockholders effect sales through underwriters, brokers, dealers or agents, such firms may receive compensation in the form of discounts, concessions or commissions from the selling stockholders or the purchasers of the shares for whom they may act as agent, principal or both in amounts to be negotiated. Those persons who act as broker-dealers or underwriters in connection with the sale of the shares may be selected by the selling stockholders and may have other business relationships with, and perform services for, us. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
Any selling stockholder or broker-dealer who participates in the sale of the shares may be deemed to be an “underwriter” within the meaning of section 2(11) of the Securities Act. Any commissions received by any underwriter or broker-dealer and any profit on any sale of the shares as principal may be deemed to be underwriting discounts and commissions under the Securities Act.
The anti-manipulation provisions of Rules 101 through 104 of Regulation M promulgated under the Exchange Act may apply to purchases and sales of shares of common stock by the selling stockholders. In addition, there are restrictions on market-making activities by persons engaged in the distribution of the common stock.
Under the securities laws of certain states, the shares may be sold in those states only through registered or licensed brokers or dealers. In addition, in certain states the shares may not be able to be sold unless our common stock has been registered or qualified for sale in that state or an exemption from registration or qualification is available and is complied with.
We are required to pay expenses incident to the registration, offering, and sale of the shares under this offering. We estimate that our expenses will total approximately $37,000. We have agreed to indemnify certain selling stockholders and certain other persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments to which those selling stockholders or their respective pledgees, donees, transferees or other successors in interest may be required to make in respect thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore, unenforceable.
DESCRIPTION OF SECURITIES
As of July 14, 2010, our authorized capital stock consists of 75,000,000 shares of common stock, par value $0.001 per share. As of July 14, 2010, an aggregate of 32,041,667 shares of common stock, and warrants to acquire an additional 3,500,000 shares of common stock were outstanding. There are no shares of preferred stock outstanding.
Common Stock
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefore at times and in amounts as our board of directors may determine. Each stockholder is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of the stockholders. Cumulative voting is not provided for in our amended articles of incorporation, which means that the majority of the shares voted can elect all of the directors then standing for election. The Common Stock is not entitled to pre-emptive rights and is not subject to conversion or redemption. Upon the occurrence of a liquidation, dissolution or winding-up, the holders of shares of Common Stock are entitled to share rateably in al l assets remaining after payment of liabilities and satisfaction of preferential rights of any outstanding preferred stock. There are no sinking fund provisions applicable to the Common Stock. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued upon conversion of the Warrants will be, fully paid and non-assessable.
Voting Rights
Holders of our common stock have the right to cast one vote for each share of stock in their name on the books of our company, whether represented in person or by proxy, on all matters submitted to a vote of holders of common stock, including election of directors. There is no right to cumulative voting in the election of directors. Except where a greater requirement is provided by statute or by the articles of incorporation, or in the by-laws, the presence, in person or by proxy duly authorized, of the one or more holders of a majority of the outstanding shares of our common stock constitutes a quorum for the transaction of business. The vote by the holders of a majority of outstanding shares is required to effect certain fundamental corporate changes such as liquidation, merger, or amendment of our articles of incorporation.
Dividends
Any future determination as to the declaration and payment of dividends on shares of our Common Stock will be made at the discretion of our board of directors out of funds legally available for such purpose. We are under no contractual obligations or restrictions to declare or pay dividends on our shares of Common Stock. In addition, we currently have no plans to pay such dividends. However, even if we wish to pay dividends, because our cash flow is dependent on dividend distributions from our affiliated entities in PRC, we may be restricted from distributing dividends to our holders of shares of our common stock in the future if at the time we are unable to obtain sufficient dividend distributions from China Children Pharmaceutical, Xi’an Coova and Shaanxi Jiali. Our board of directors currently intends to retain all earnin gs for use in the business for the foreseeable future. See “Risk Factors.”
Preemptive Rights
Holders of our common stock are not entitled to preemptive rights, and no redemption or sinking fund provisions are applicable to our common stock. All outstanding shares of our common stock are, and the shares of common stock sold in the offering will when issued be fully paid and non-assessable.
Warrants
As of July 14, 2010 there are warrants to acquire 3,500,000 shares of our common stock issued and outstanding. Each warrant carries an exercise price of $1.00 per share and a validity of 3 years. Further detail on the warrants is available elsewhere in this prospectus, including the “Selling Shareholders” section above.
The exercise price and number of shares of Common Stock to be received upon the exercise of warrants are subject to adjustment upon the occurrence of certain events, such as stock splits, stock dividends or our recapitalization. In the event of our liquidation, dissolution or winding up, the holders of warrants will not be entitled to participate in the distribution of our assets.
If we shall make any dividend or other distribution of assets to holders of its common stock (a “Distribution”), then the Exercise Price shall be reduced by multiplying such Exercise Price by a fraction of which (i) the numerator shall be the closing bid price of the shares of common stock on the trading day immediately preceding such record date minus the value of the Distribution applicable to one share of common stock, and (ii) the denominator shall be the closing bid price of the shares of common stock on the trading day immediately preceding such record date. Additionally, the number of shares underlying the Warrant shall be increased to a number of shares of common stock obtainable immediately prior to the close of business on the record date fixed for determining holders of shares entitled to receive the Distrib ution multiplied by the reciprocal of the fraction set forth above. Holders of Warrants will have no voting, pre-emptive, subscription or other rights of shareholders in respect of the Warrants, nor shall the Holders be entitled to receive dividends.
Registration Rights with Respect to Common Stock and Common Stock Underlying the Warrants
We have agreed to register an amount of stock equal to 100% of the shares of Common Stock issuable in connection with the warrants (“Underlying Common Stock”), on a registration statement to be filed by us. We shall pay the usual costs of such registration.
Other than as described above, no holder of any of our currently outstanding securities has any registration rights with respect to the securities held by them. We shall not file any other registration statement for any of our securities (other than the shares of Common Stock underlying the warrants) until such time as the Registration Statement has been filed and declared effective; provided, however, we may, subject to stockholder approval, establish an equity performance or stock option plan for the benefit of our employees and directors for up to 5% of the outstanding shares of our Common Stock and file a registration statement to register such shares on Form S-8 or a comparable form for such purpose.
Our Transfer Agent
TranShare Corporation, 5105 DTC Parkway, Suite 325, Greenwood Village, CO 80111-2608 Tel: 303-662-1112.
LEGAL MATTERS
William L. MacDonald of Macdonald Tuskey Corporate & Securities Lawyers located at Suite #1210, 777 Hornby Street, Vancouver, B.C., V6Z 1S4, Canada, is passing on the validity of the issuance of the common stock offered under this prospectus.
EXPERTS
Our financial statements as of and for the years ended December 31, 2009 and 2008, and for the period ended March 31, 2010, included in this prospectus, have been audited by Acquavella, Chiarelli, Shuster, Berkower & Co. LLP, Certified Public Accountants and Advisors, our independent registered public accountants, as stated in their report appearing herein and are so included herein in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
No expert or counsel named in this registration statement as having prepared or certified any part of this statement or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or will receive, in connection with the offering, a substantial interest, direct or indirect, in us. Nor was any such person connected with us as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
LEGAL PROCEEDINGS
On May 17, 2010, ValueRich, Inc., commenced litigation against us, at the 11th judicial circuit in Miami-Dade County, Florida, alleging breach of contract and other related claims. ValueRich alleges ownership of 20% of the outstanding shares of our common stock pursuant to a May 2008 consulting agreement between ValueRich and Xian Pharmaceuticals, our operating VIE. It is our opinion that the litigation has no merit and we will defend it with our full resources.
We know of no other material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any other material proceeding or pending litigation.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On February 12, 2010, we terminated HJ & Associates, LLC, the independent registered principal accountants of Allstar Restaurants (as we were then known).
During our two most recent fiscal years and subsequent interim period preceding the termination of HJ & Associates, LLC. there were no disagreements with HJ & Associates, LLC Certified Public Accountants, PC which were not resolved on any matter concerning accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of HJ & Associates, LLC., would have caused HJ & Associates, LLC to make reference to the subject matter of the disagreements in connection with its reports. HJ & Associates, LLC as our principal independent accountant, did not provide an adverse opinion or disclaimer of opinion to our financial statements, nor modify its opinion as to uncertainty, audit scope or accounting principles , except that the reports of HJ & Associates, Inc. for the fiscal years ended March 31, 2006, 2007, and 2008 indicated conditions which raised substantial doubt about our ability to continue as a going concern.
We provided HJ & Associates, Inc. with a copy of this disclosure before its filing with the SEC. We requested that HJ & Associates, Inc. provide us with a letter addressed to the SEC stating whether or not it agrees with the above statements, and we received a letter from HJ & Associates, Inc. stating that it agrees with the above statements.
On February 12, 2010 our board of directors approved and authorized the engagement of Acquavella, Chiarelli, Shuster, Berkower & Co., LLP Certified Public Accountants and Advisors, 518 Route One, Suite 4103, Iselin, NJ 08830 as our principal independent accountant. In addition, effective February 12, 2010, we selected Acquavella, Chiarelli, Shuster, Berkower & Co. LLP, Certified Public Accountants and Advisors as our independent public accountants for the fiscal year ending December 31, 2009.
Prior to engaging Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, Acquavella, Chiarelli, Shuster, Berkower & Co., LLP did not provide us with either written or oral advice that was an important factor considered by us in reaching a decision to change our independent registered public accounting firm from HJ & Associates, Inc. to Acquavella, Chiarelli, Shuster, Berkower & Co., LLP.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The General Corporation Law of Nevada provides that directors, officers, employees or agents of Nevada corporations are entitled, under certain circumstances, to be indemnified against expenses (including attorneys’ fees) and other liabilities actually and reasonably incurred by them in connection with any suit brought against them in their capacity as a director, officer, employee or agent, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. This statute provides that directors, officers, employees and agents may also be indemnified against expenses (including attorneys’ fees) actually and reasonably i ncurred by them in connection with a derivative suit brought against them in their capacity as a director, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made without court approval if such person was adjudged liable to the corporation.
Our Articles of Incorporation and By-Laws provide that we will indemnify our directors and officers from all liabilities incurred by them in connection with any action, suit or proceeding in which they are involved by reason of their acting as our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
In accordance with the Securities Act of 1933, we filed with the SEC a registration statement on Form S-1 covering the securities in this offering. As permitted by rules and regulations of the SEC, this prospectus does not contain all of the information in the registration statement. For further information regarding both our company and the securities in this offering, we refer you to the registration statement, including all exhibits and schedules, which you may inspect without charge at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and informati on statements, and other information regarding issuers that file electronically with the Commission. The address of this Internet site is (http://www.sec.gov). We expect to be subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and in accordance with the Securities Exchange Act of 1934, we expect to file annual, quarterly and special reports, and other information with the SEC. These periodic reports and other information will be available for inspection and copying at the public reference facilities and website of the SEC referred to above. You also may request a copy of the registration statement and these filings by writing or calling us at: 24th Floor, Building A, Zhengxin Mansion No. 5 of 1st Gaoxin Rd, Hi-Tech Development Zone, Xi’an City, People’s Republic of China, telephone: 86-29-84067215.
FINANCIAL STATEMENTS
Our audited financial statements for the three month period ended March 31, 2010, together with the report of the independent certified public accounting firm thereon and the notes thereto, are presented beginning at page F-1.
Our audited financial statements for the fiscal years ended December 31, 2009 and 2008, together with the report of the independent certified public accounting firm thereon and the notes thereto, are presented beginning at page F-18.
CHINA PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010, AND 2009
(Unaudited)
CHINA PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
ACSBAcquavella, Chiarelli, Shuster, Berkower & Co., LLP
| 517 Route One | 1 Penn Plaza |
| Iselin, New Jersey 08830 | 36th Floor |
| 732.855.9600 | New York, NY 10119 |
| Fax: 732.855.9559 | 212.786.7510 |
| www.acsbco.com |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
China Pharmaceuticals, Inc.
We have reviewed the accompanying balance sheet of China Phamaceuticals Inc. (the “Company”) as of March 31, 2010, and the related statements of income, stockholders’ equity and comprehensive income, and cash flows for the three-month period ended March 31, 2010. These financial statements are the responsibility of the company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009 and the related consolidated statements of income, retained earnings and comprehensive income, and consolidated statement of cash flows for the year then ended; and in our report dated March 30, 2010 we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Acquavella, Chiarelli, Shuster, Berkower & Co., LLP
Certified Public Accountants
New York, N.Y.
May 11, 2010
CHINA PHARMACEUTICALS, INC. | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| MARCH 31, 2010 | ||||||||
| 3/31/2010 | 12/31/2009 | |||||||
| Unaudited | Audited | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 5,518,587 | $ | 6,685,630 | ||||
| Accounts receivable | 5,538,987 | 3,525,544 | ||||||
| Due from officer | 5,420 | 5,427 | ||||||
| Inventories | 1,014 | 396,513 | ||||||
| Prepayments and other receivables | 652,327 | 708,761 | ||||||
| Trade deposit paid | 1,256,280 | 2,991,628 | ||||||
| Total Current Assets | 12,972,615 | 14,313,403 | ||||||
| Property and equipment, net | 7,584,281 | 7,686,245 | ||||||
| Construction in progress | 3,368,965 | 3,373,819 | ||||||
| Intangible assets, net | 8,194,203 | 8,321,329 | ||||||
| Total Assets | $ | 32,120,064 | $ | 33,694,796 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 515,229 | $ | 744,880 | ||||
| Accrued expenses and other payables | 351,827 | 778,290 | ||||||
| Trade deposit received | 12,092 | 83,879 | ||||||
| Short-term bank loans | - | 2,493,692 | ||||||
| Value-added tax payable | 545,329 | 318,142 | ||||||
| Income tax payable | 541,481 | 651,399 | ||||||
| Total Current Liabilities | 1,965,958 | 5,070,282 | ||||||
| Long-term Liabilities | - | - | ||||||
| Total Liabilities | 1,965,958 | 5,070,282 | ||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, par value, $0.0001 per share 20,000,000 shares authorized, none outstanding | ||||||||
| Common stock, par value, $0.0001 per share, 100,000,000 shares authorized, 31,675,000 and 31,450,000 shares issued and outstanding | 3,168 | 3,168 | ||||||
| Common stock subscribed, par value, $0.0001 per share, 25,000 and 250,000 shares issued | 2 | 2 | ||||||
| Paid-in capital | 6,580,780 | 6,580,780 | ||||||
| Subscriptions receivable | (1,000 | ) | (1,000 | ) | ||||
| Statutory reserves | 2,292,585 | 2,137,797 | ||||||
| Accumulated other comprehensive loss | 54,259 | 72,543 | ||||||
| Retained earnings | 21,224,312 | 19,831,224 | ||||||
| Total Stockholders’ Equity | 30,154,106 | 28,624,514 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 32,120,064 | $ | 33,694,796 | ||||
The accompanying notes are an integral part of these financial statements
CHINA PHARMACEUTICALS, INC. |
| CONSOLIDATED STATEMENTS OF INCOME |
| FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 |
| 2010 | 2009 | |||||||
| Sales, net | $ | 7,053,199 | $ | 4,693,433 | ||||
| Cost of sales | (2,820,178 | ) | (1,929,294 | )) | ||||
| Gross profit | 4,233,021 | $ | 2,764,139 | |||||
| Selling, general and administrative expenses | (2,114,086 | ) | (574,985 | ) | ||||
| Income from operations | 2,118,935 | 2,189,154 | ||||||
| Other Income (Expense) | ||||||||
| Interest income | 120 | 12,401 | ||||||
| Other income | - | 591 | ||||||
| Interest expense | (29,653 | ) | (81,241 | ) | ||||
| Total other Income (Expense) | (29,533 | ) | (68,249 | ) | ||||
| Income before income taxes | 2,089,402 | 2,120,905 | ||||||
| Provision for income taxes | (541,526 | ) | (318,136 | ) | ||||
| Net income | $ | 1,547,876 | $ | 1,802,769 | ||||
| Net income per common share | ||||||||
| Basic | 0.05 | $ | 0.06 | |||||
| Diluted | 0.05 | $ | 0.06 | |||||
| Weighted average common shares outstanding | ||||||||
| Basic | 31,675,000 | 31,662,637 | ||||||
| Diluted | 31,675,000 | 31,662,637 | ||||||
| Net income | $ | 1,547,876 | $ | 1,802,769 | ||||
| Other comprehensive income (loss) | (18,284 | ) | 6,401 | |||||
| Comprehensive income (loss) | $ | 1,529,592 | $ | 1,809,170 | ||||
The accompanying notes are an integral part of these financial statements.
CHINA PHARMACEUTICALS, INC. |
| CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY |
| FOR THREE MONTHS ENDED MARCH 31, 2010 |
Common Stock | Stock subscribed | Paid- in | Subscription | Statutory | Comprehensive Income | Retained | Total Shareholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | receivable | Reserves | (Loss) | Earnings | Equity | |||||||||||||||||||||||||||||||
| Balance 12/31/2008 | 31,450,000 | $ | 3,145 | 250,000 | 25 | $ | 6,580,780 | (10,000 | ) | $ | 1,247,175 | $ | 41,266 | $ | 11,814,467 | $ | 19,676,858 | |||||||||||||||||||||||
| Transfer Reserves | 890,622 | (890,622 | ) | - | ||||||||||||||||||||||||||||||||||||
| Capital Contribution | 225,000 | 23 | (225,000 | ) | (23 | ) | 9,000 | 9,000 | ||||||||||||||||||||||||||||||||
| Comprehensive income | 31,277 | 31,277 | ||||||||||||||||||||||||||||||||||||||
| Net Income | 8,907,379 | 8,907,379 | ||||||||||||||||||||||||||||||||||||||
| Balance 12/31/2009 | 31,675,000 | $ | 3,168 | 25,000 | $ | 2 | $ | 6,580,780 | $ | (1,000 | ) | $ | 2,137,797 | $ | 72,543 | $ | 19,831,224 | $ | 28,624,514 | |||||||||||||||||||||
| Transfer Reserves | 154,788 | (154,788 | ) | - | ||||||||||||||||||||||||||||||||||||
| Capital Contribution | - | |||||||||||||||||||||||||||||||||||||||
| Comprehensive income | (18,284 | ) | (18,284 | ) | ||||||||||||||||||||||||||||||||||||
| Net Income | 1,547,876 | 1,547,876 | ||||||||||||||||||||||||||||||||||||||
| Balance 3/31/2010 | 31,675,000 | $ | 3,168 | 25,000 | $ | 2 | $ | 6,580,780 | $ | (1,000 | ) | $ | 2,292,585 | $ | 54,259 | $ | 21,224,312 | $ | 30,154,106 | |||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
CHINA PHARMACEUTICALS, INC. | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 | ||||||||
| 2010 | 2009 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 1,547,876 | $ | 1,802,769 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | 230,072 | 201,427 | ||||||
| Provision for impairment loss on intangible assets | 1,630,846 | - | ||||||
| Loss on assets disposed | - | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Cash pledged | - | 193,770 | ||||||
| Accounts receivable | (3,644,289 | ) | (166,311 | ) | ||||
| Due from officer | 7 | (5,411 | ) | |||||
| Prepaid and other receivables | 56,434 | 27,613 | ||||||
| Trade deposit paid | (1,735,248 | ) | 3,176 | |||||
| Inventory | 395,499 | (86,573 | ) | |||||
| Accounts payable and accrued expenses | (656,114 | ) | (39,331 | ) | ||||
| Bank acceptance payable | - | (193,770 | ) | |||||
| Trade deposit received | (71,787 | ) | (18,826 | ) | ||||
| Due to shareholers | - | - | ||||||
| VAT tax payable | 227,187 | 16,622 | ||||||
| Income tax payable | (109,918 | ) | 3,504 | |||||
| Total adjustment | (206,815 | ) | (64,110 | ) | ||||
| Net cash provided by (used in) operating activities | 1,341,061 | 1,738,659 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property & equipment | (981 | ) | (22,222 | ) | ||||
| Construction in progress | 4,853 | - | ||||||
| Intangible assets | - | - | ||||||
Proceeds of assets disposed | - | - | ||||||
| Net cash used in Investing activities | 3,872 | (22,222 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Borrowings from short-term bank loan | - | 731,208 | ||||||
| Repayment of short-term bank loan | (2,493,692 | ) | (877,450 | ) | ||||
| Proceeds of issuance of stock | - | 9,000 | ||||||
| Net cash provided by (used in) financing activities | (2,493,692 | ) | (137,242 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (18,284 | ) | 25,821 | |||||
| Net Increase (Decrease) in cash and cash equivalents | (1,167,043 | ) | 1,605,016 | |||||
| Cash and cash equivalents, beginning balance | 6,685,630 | 5,049,188 | ||||||
| Cash and cash equivalents, ending balance | 5,518,587 | $ | 6,654,204 | |||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Interest payments | $ | 29,653 | $ | 81,241 | ||||
| Income tax payments | $ | 651,399 | $ | 314,632 | ||||
The accompanying notes are an integral part of these financial statements.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 1 – ORGANIZATION
China Pharmaceuticals, Inc. (“the Company”), formerly named Allstar Restaurants, was incorporated in the United States in Nevada on December 22, 2004. China Qinba Pharmaceuticals, Inc. (“China Qinba”), a wholly-owned subsidiary of the Company, was incorporated in the United States in Delaware on May 29, 2008. China Qinba formed and owned 100% of Xi’an Pharmaceuticals Development Co., Ltd. (“Xi’an Pharmaceuticals” or the “WOFE”) in the People’s Republic of China (“PRC”) on August 18, 2008.
On October 28, 2008, WOFE entered into a series of agreements including a Management Entrustment Agreement, a Shareholders’ Voting Proxy Agreement, an Exclusive Option Agreement and a Share Pledge Agreement (the “Agreements”) with Xi’an Qinba Pharmaceutical Co., Ltd ("Xi’an Qinba") and its shareholders (the “Transaction”). Xi’an Qinba is a corporation formed under the laws of the PRC. According to these Agreements, WOFE acquired management control of Xi’an Qinba whereby WOFE is entitled to all of the net profits of Xi’an Qinba as a management fee, and is obligated to fund Xi’an Qinba’s operations and pay all of the debts. In exchange for entering into the Agreements, on October 28, 2008, WOFE issued 25,000,000 shares of its common stock to Xi’ an Qinba owners, representing approximately 80% of the Company’s common stock outstanding after the Transaction. Consequently, the owners of Xi’an Qinba own a majority of WOFE's common stock immediately following the Transaction, therefore, the Transaction is being accounted for as a "reverse acquisition", and Xi’an Qinba is deemed to be the accounting acquirer in the reverse acquisition between Xi’an Qinba and WOFE.
These contractual arrangements completed on October 28, 2008 provide that WOFE has controlling interest in Xi’an Qinba as defined by FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), included in the FASB Accounting Standards Codification (“ASC”) 810, Consolidation, an Interpretation of Accounting Research Bulletin No. 51, included in in the Codification as ASC 810, Consolidation, which requires WOFE to consolidate the financial statements of Xi’an Qinba and ultimately consolidate with its parent company, China Qinba (see Note 2, “Principles of Consolidation”).
On February 12, 2010, the Company completed its merger with China Qinba in accordance with a Merger Agreement (the “Merger Transaction”). The Merger Transaction is being accounted for as a reverse acquisition. In accordance with the Accounting and Financial Reporting Interpretations and Guidance prepared by the staff of the U.S. Securities and Exchange Commission, the Company (the legal acquirer) is considered the accounting acquiree and China Qinba (the legal acquiree) is considered the accounting acquirer for accounting purposes. Subsequent to the Merger Transaction, the financial statements of the combined entity will in substance be those of China Qinba. The assets, liabilities and historical operations prior to the Merger Transaction will be those of China Qinba. Subsequent to the date of the Merger Transaction, C hina Qinba is deemed to be a continuation of the business of the Company. Therefore, post-merger financial statements will include the combined balance sheet of the Company and China Qinba, the historical operations of the Company and China Qinba from the closing date of the Merger Transaction forward.
Upon the closure of the Merger Transaction, the Company changed its name from Allstar Restaurants to China Pharmaceutical, Inc.
The Company, through its subsidiary and exclusive contractual arrangement with Xi’an Qinba Pharmaceutical Co., Ltd., is engaged in the business of manufacturing and marketing over-the-counter (“OTC”) and prescription pharmaceutical products which include capsules, granules and powder type medicines.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company's functional currency is the Chinese Yuan Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars. The accompanying financial statements present the historical financial condition, results of operations and cash flows of the operating companies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (“VIE”) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation. The Company has adopted FIN 46R, ASC 810, Consolidation, which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.
In determining Xi’an Qinba Pharmaceutical is the VIE of Xi’an Pharmaceuticals Development Co., Ltd., the Company considered the following indicators, among others:
| ● | Xi’an Pharmaceuticals has the full right to control and administrate the financial affairs and daily operation of Xi’an Qinba and has the right to manage and control all assets of Xi’an Qinba. The equity holders of Xi’an Qinba as a group have no right to make any decision about Xi’an Qinba’s activities without the consent of Xi’an Pharmaceuticals. |
| ● | Xi’an Pharmaceuticals was assigned all voting rights of Xi’an Qinba and has the right to appoint all directors and senior management personnel of Xi’an Qinba. The equity holders of Xi’an Qinba possess no substantive voting rights. |
| ● | Xi’an Pharmaceuticals will provide financial support if Xi’an Qinba requires additional funds to maintain its operations and to repay its debts. |
| ● | Xi’an Pharmaceuticals should be paid a management fee equal to 25% of Xi’an Qinba’s sales amount. If there are no earnings before taxes and other cash expenses, then no fee shall be paid. If Xi’an Qinba sustains losses, they will be carried over to the next period and deducted from the next management fee. Xi’an Pharmaceuticals should assume all operation risks of Xi’an Qinba and bear all losses of Xi’an Qinba. Therefore, Xi’an Pharmaceuticals is the primary beneficiary of Xi’an Qinba. |
Xi’an Qinba is wholly owned by the majority shareholders of the Company. The capital provided to Xi’an Qinba by the Company was recorded as interest-free loan to Xi’an Qinba. There was no written note to this loan and the loan is not interest bearing and was eliminated during consolidation. Under various contractual agreements, the shareholders of Xi’an Qinba are required to transfer their ownership to the Company’s subsidiary in China when permitted by PRC laws and regulations or to designees of the Company at any time when the Company considers it is necessary to acquire Xi’an Qinba. In addition, the shareholders of Xi’an Qinba have pledged their shares in Xi’an Qinba as collateral to secure these contractual arrangements.
Foreign Currency
The Company’s reporting currency is the U.S. dollar. The Company’s operation in China uses Chinese Yuan Renminbi (CNY) as its functional currency. The financial statements of the subsidiary are translated into U.S.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dollars (USD) in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation”, included in the Codification as ASC 830, Foreign Currency Matters. According to the Statement, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income,” as a component of shareholders’ equity, included in the Codification as ASC 220, Comprehensive Income. Foreign exchange transaction gains and losses are reflected in the income statem ent. For the year ended March 31, 2010 and 2009, the foreign currency translation adjustment to the Company’s comprehensive income (loss) was $(18,284) and $ 6,401.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis.
The standard credit period of the Company’s most of client is three months. Within the medical industry in China, the collection period is generally longer than for other industries. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of March 31, 2010. The allowance for doubtful account as of March 31, 2010 and December 31, 2009 are $2,138,887 and $ 508,041 respectively.
Inventories
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowances are made to reduce their inventories to market value, if lower. As of March 31, 2010 and December 31, 2009, inventories consist of the following:
| 3/31/2010 | 12/31/2009 | |||||||
| Raw materials | $ | 1,014 | 370,111 | |||||
| Finished goods | - | 26,260 | ||||||
| $ | 1,014 | 396,513 | ||||||
Property, Plant & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
| Building and improvements | 20-32 years |
| Machinery | 8-42 years |
| Fixture, furniture and equipment | 5-15 years |
| Motor vehicles | 5-7 years |
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant & Equipment consist of the following:
| 3/31/2010 | 12/31/2009 | |||||||
| Building and improvements | $ | 3,723,080 | $ | 3,723,080 | ||||
| Machinery | 5,839,694 | 5,839,130 | ||||||
| Fixture, furniture and equipment | 178,489 | 178,071 | ||||||
| Motor vehicles | 111,834 | 111,834 | ||||||
| 9,853,097 | 9,852,116 | |||||||
| Less: Accumulated depreciation | (2,268,816 | ) | (2,165,870 | ) | ||||
| $ | 7,584,281 | $ | 7,686,245 |
Depreciation expense for the year ended March 31, 2010 and 2009 was $102,946 and $ 107,090, respectively.
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from one to fifty years. Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented. The land rights purchased in 2003 will expire in 2053. All of the Company’s intangible assets are subject to amortization with estimated lives of:
| Land use right | 50 years |
| Proprietary technologies | 20 years |
As of March 31, 2010 and December 31, 2009, the components of finite-lived intangible assets are as follows:
| 3/31/2009 | 12/31/2009 | |||||||
| Land use right | $ | 1,058,965 | $ | 1,058,965 | ||||
| Proprietary technologies | 8,228,223 | 8,965,538 | ||||||
| 9,287,188 | 10,024,503 | |||||||
| Less: Accumulated amortization | (1,092,985 | ) | (965,859 | ) | ||||
| 8,194,203 | 9,058,644 | |||||||
| Less: Impairment provision | - | (737,315 | ) | |||||
| $ | 8,194,203 | $ | 8,321,329 | |||||
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amortization expense for the year ended March 31, 2010 and 2009 were $127,126 and $94,337, respectively. The estimated future amortization expenses related to intangible asset as of December 31, 2009 are as follows:
| 12/31 | ||||||
| 2010 | $ | 508,504 | ||||
| 2011 | 508,504 | |||||
| 2012 | 508,504 | |||||
| 2013 | 508,504 | |||||
| 2014 | 508,504 | |||||
| Thereafter | $ | 5,651,683 | ||||
Long-Lived Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), included in the Codification as ASC 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business”, included in the Codification as ASC 225, Income Statement. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with A SC 360. ASC 360requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2009, there were no significant impairments of its long-lived assets.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments”, included in the Codification as ASC 820, Fair Value Measurements and Disclosures, requires that the Company discloses estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Value Added Tax Payable
The Company is subject to a value added tax rate of 17% on product sales by the People’s Republic of China. Value added tax payable is computed net of value added tax paid on purchases for all sales in the People’s Republic of China.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104, “Revenue Recognition”, included in the Codification as ASC 605, Revenue Regognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
The Company does not allow its customers to return products. The Company’s customers can exchange products only if they are damaged in transportation.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based Compensation”, included in the Codification as ASC 718, Compensation-Stock Compensation. ASC 718 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights.
In December 2004, the FASB issued FASB Statement No. 123R ("ASC 718"), "Share-Based Payment, an Amendment of FASB Statement No. 123." SFAS 123R requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees. SFAS 123R is effective beginning in the Company's first quarter of fiscal 2006.
Advertising
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred.
Income Taxes
The Company utilizes SFAS No. 109, “Accounting for Income Taxes”, included in the Codification as ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable inc ome. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 2007 the Company adopted the provisions of FASB issued Interpretation No. 48 (FIN 48), “Accounting for uncertainty in Income Taxes”, included in the Codification as ASC 740, Income Taxes. The topic addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
Comprehensive Income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income, foreign currency translation adjustments.
Statement of Cash Flows
In accordance with SFAS No. 95, “Statement of Cash Flows”, included in the Codification as ASC 230, Statement of Cash Flows, cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Segment Reporting
Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information”, included in Codification ASC 280, Segment Reporting, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), included in the Codification as ASC 810. This topic establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This topic also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This topic is effective for fiscal years beginning October 1, 2009. The Company does not expect the impact of the adoption of SFAS 160 to be material.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), included in the Codification as ASC 855, Subsequent Events. This topic establishes the period in which management of a reporting entity should evaluate events and transactions for recognition or disclosure in the financial statements. It also describes the circumstances under which an entity should recognize events or transactions that occur after the balance sheet date. This topic is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption of this topic to have a material effect on its financial statements and related disclosures.
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS No. 166”), expected to be included in the FASB Accounting Standards Codification (‘Codification’) as Accounting Standards Codification (‘ASC 860”), Transfers and Servicing. This topic improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that this topic will have on its financial statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), expected to be included in the Codification as ASC 810, Consolidation. This topic changes the consolidation guidance applicable to a variable interest entity. Among other things, it requires a qualitative analysis to be performed in determining whether an enterprise is the primary beneficiary of a variable interest entity. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that SFAS No. 167 will have on its financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”), included in the Codification as ASC 105, Generally Accepted Accounting Principles. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. This topic is effective for interim and annual reporting periods ending after September 15, 2009. On DECEMBER 31, 2009, the Company adopted this topic, which has no effect on the Company’s financi al statements as it is for disclosure purposes only.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 3 – SHORT-TERM BANK LOAN
The following summarizes short-term bank loan as of March 31, 2010 and December 31, 2009:
| 3/31/2010 | 12/31/2009 | |||||||
| Agricultural Bank of China | $ | Agricultural Bank of China | $ | 2,484,653 | ||||
| Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009 | - | Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009 | ||||||
| - | ||||||||
| Industrial and Commercial Bank of China -Xixiang Branch | - | Industrial and Commercial Bank of China -Xixiang Branch | 1,760,253 | |||||
| Term of the loans call for interest at 5.31% per annum to a floating rate, with principal due in 2010 | - | Term of these loans called for interest from 7.956% to 8.541% per annum, with principal due in 2009 | - | |||||
| Xixiang rural cooperative bank | - | Xixiang rural cooperative bank | 733,439 | |||||
| Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010 | - | Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010 | - | |||||
| Total | - | $2,493,692 | ||||||
| Current Portion | - | 2,493,692 | ||||||
| Long term Portion | $ | - | $ | - |
Note 4 – COMPENSATED ABSENCES
Regulation 45 of local labor law entitles employees to annual vacation leave after 1 year of service. In general all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.
Note 5 – COMMITMENTS
The Company is committed to pay an additional $2,197,152 under an agreement of construction in process with Shaanxi Kai Da Air Purification Co., Ltd.
Note 6 – INCOME TAX
The Company’s subsidiary and VIE were incorporated in the PRC which is governed by the Income Tax Laws of the PRC and various local tax laws. Effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises).
The Company’s VIE is a high-tech enterprise and under PRC Income Tax Laws, it is entitled to a two-year tax exemption for 2006 through 2007. Starting from 2008, the Enterprise Income Tax (EIT) is at a statutory rate of 15%. The Company expensed $ 541,526 and $ 318,136 for income tax for the three months ended March 31, 2010 and 2009.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 7 – MAJOR CUSTOMERS AND CREDIT RISK
Thirteen and twelve customer represented 81.42% and 90.1% of sales for the three months ended March 31, 2010 and 2009 respectively. Eleven and twelve customer represented 89.71% and 95.27% of the Company’s accounts receivable for the three months ended March 31, 2010 and 2009 respectively. The Company had three and three vendors at March 31, 2010 and 2009 who accounted for 63.3% and 63.92% of the total purchases. Two and two vendors at March 31, 2010 and 2009 accounted for 47% and 46% of the Company’s accounts payable.
Note 8 - STATUTORY RESERVES
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public affair fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public affair fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006 there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or crease in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of March 31, 2010 and December 31, 2009, the Company had allocated $ 2,292,585 and $ 2,137,797 to these non-distributable reserve funds.
Note 9 – OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in stockholders’ equity at March 31, 2010 is as follows:
| Accumulated Other Comprehensive Income (loss) | ||||
| Balance at December 31, 2008 | 41,266 | |||
| Change for 2009 | 31,277 | |||
| Balance at December 31, 2009 | $ | 72,543 | ||
| Change for three months ended March 31, 2010 | (18,284 | ) | ||
| Balance at March 31, 2010 | $ | 54,259 | ||
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Note 10 – CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS
The Company’s major operations are carried out in the PRC, therefore the Company is subject to the risks not typically associated with entities operating in the United States of America. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. All of the following risks may impair the Company’s business operations. If any of the following risks actually occurs, the Company’s business, financial condition or results of operations could be materially adversely affected. In such case, investor may lose all or part of the investment. Additional risks include:
| ● | The Company may not be able to adequately protect and maintain its intellectual property. | |
| ● | The Company may not be able to obtain regulatory approvals for its products. | |
| ● | The Company may have difficulty competing with larger and better financed companies in the same sector. New legislative or regulatory requirements may adversely affect the Company’s business and operations. The Company is dependent on certain key existing and future personnel. | |
| ● | The Company’s growth is dependent on its ability to successfully develop, market, or acquire new drugs. The Company may be subject to product liability claims in the future. | |
| ● | Changes in the laws and regulations in the PRC may adversely affect the Company’s ability to conduct its business. | |
| ● | The Company may experience barriers to conducting business due to governmental policy. | |
| ● | Capital outflow policies in the PRC may hamper the Company’s ability to remit income to the United States. | |
| ● | Fluctuation of the Renminbi could materially affect the Company’s financial condition and results of operations. | |
| ● | The Company may face obstacles from the communist system in the PRC. | |
| ● | The Company may have difficulty establishing adequate management, legal and financial controls in the PRC. | |
| ● | Trade barriers and taxes may have an adverse affect on the Company’s business and operations. | |
| ● | There may not be sufficient liquidity in the market for the Company’s securities in order for investors to sell their securities. |
Note 11 – SUBSEQUENT EVENTS
For the three months ended March 31, 2010, the Company has evaluated subsequent events for potential recognition and disclosure through May 11, 2010, the date of the financial statement issuance.
ACSBAcquavella, Chiarelli, Shuster, Berkower & Co., LLP
517 Route One | 1 Penn Plaza |
Iselin, New Jersey 08830 | 36th Floor |
| 732.855.9600 | New York, NY 10119 |
| Fax: 732.855.9559 | 212.786.7510 |
| www.acsbco.com |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders of
China Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of China Pharmaceuticals, Inc. and subsidiaries as of December 31, 2009, and the related statements of income, stockholders’ equity and comprehensive income, and cash for the years ended December 31, 2009 and the financial statement schedule for each of the years in the two-year period ended December 31, 2009. China Pharmaceuticals, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Pharmaceuticals, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
/s/ Acquavella, Chiarelli, Shuster, Berkower & Co., LLP
Acquavella, Chiarelli, Shuster, Berkower & Co., LLP
Certified Public Accountants
New York, NY
April 15, 2010
CHINA PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2009 AND 2008 | ||||||||
| 12/31/2009 | 12/31/2008 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 6,685,630 | $ | 5,049,188 | ||||
| Cash pledged | - | 193,657 | ||||||
| Accounts receivable | 3,525,544 | 5,204,418 | ||||||
| Due from officer | 5,427 | - | ||||||
| Inventories | 396,513 | 249,716 | ||||||
| Prepayments and other receivables | 708,761 | 734,660 | ||||||
| Trade deposit paid | 2,991,628 | 320,780 | ||||||
| Total Current Assets | 14,313,403 | 11,752,419 | ||||||
| Property and equipment, net | 7,686,245 | 8,101,407 | ||||||
| Construction in progress | 3,373,819 | - | ||||||
| Intangible assets, net | 8,321,329 | 7,113,137 | ||||||
| Total Assets | $ | 33,694,796 | $ | 26,966,963 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 744,880 | $ | 1,793,187 | ||||
| Bank acceptance payable | - | 193,657 | ||||||
| Accrued expenses and other payables | 778,290 | 449,561 | ||||||
| Trade deposit received | 83,879 | 179,484 | ||||||
| Short-term bank loans | 2,493,692 | 3,800,058 | ||||||
| Amount due to a shareholder | - | 32,885 | ||||||
| Value-added tax payable | 318,142 | 234,513 | ||||||
| Income tax payable | 651,399 | 314,448 | ||||||
| Total Current Liabilities | 5,070,282 | 6,997,793 | ||||||
| Long-term Liabilities | ||||||||
| Long-term bank loan | - | 292,312 | ||||||
| Total Liabilities | 5,070,282 | 7,290,105 | ||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, par value, $0.0001 per share 20,000,000 shares authorized, none outstanding Common stock, par value, $0.0001 per share, 100,000,000 shares authorized, 31,675,000 and 31,450,000 shares issued and outstanding | 3,168 | 3,145 | ||||||
| Common stock subscribed, par value, $0.0001 per share, 25,000 and 250,000 shares issued | 2 | 25 | ||||||
| Paid-in capital | 6,580,780 | 6,580,780 | ||||||
| Subscriptions receivable | (1,000 | ) | (10,000 | ) | ||||
| Statutory reserves | 2,137,797 | 1,247,175 | ||||||
| Accumulated other comprehensive loss | 72,543 | 41,266 | ||||||
| Retained earnings | 19,831,224 | 11,814,467 | ||||||
| Total Stockholders’ Equity | 28,624,514 | 19,676,858 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 33,694,796 | $ | 26,966,963 | ||||
The accompanying notes are an integral part of these financial statements
CHINA PHARMACEUTICALS, INC. | ||||||||
| CONSOLIDATED STATEMENTS OF INCOME | ||||||||
| FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 | ||||||||
| 2009 | 2008 | |||||||
| Sales, net | $ | 26,708,285 | $ | 18,174,003 | ||||
| Cost of sales | (12,408,035 | ) | (7,090,427 | ) | ||||
| Gross profit | 14,300,250 | $ | 11,083,576 | |||||
| Selling, general and administrative expenses | (3,386,961 | ) | (2,084,026 | ) | ||||
| Income from operations | 10,913,289 | 8,999,550 | ||||||
| Other Income (Expense) | ||||||||
| Interest income | 12,531 | 32,635 | ||||||
| Other income | 145,382 | 13,014 | ||||||
| Interest expense | (350,211 | ) | (407,183 | ) | ||||
| Other expense | (14,900 | ) | (3,687 | ) | ||||
| Total other Income (Expense) | (207,198 | ) | (365,221 | ) | ||||
| Income before income taxes | 10,706,091 | 8,634,329 | ||||||
| Provision for income taxes | (1,798,712 | ) | (1,296,191 | ) | ||||
| Net income | $ | 8,907,379 | $ | 7,338,138 | ||||
| Net income per common share | ||||||||
| Basic | 0.28 | $ | 0.23 | |||||
| Diluted | 0.28 | $ | 0.23 | |||||
| Weighted average common shares outstanding | ||||||||
| Basic | 31,562,500 | 31,350,000 | ||||||
| Diluted | 31,562,500 | 31,350,000 | ||||||
| Net income | $ | 8,907,379 | $ | 7,338,138 | ||||
| Other comprehensive income | 31,277 | 260,635 | ||||||
| Comprehensive income (loss) | $ | 8,938,656 | $ | 7,598,773 | ||||
The accompanying notes are an integral part of these financial statements.
CHINA PHARMACEUTICALS, INC. |
| CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY |
| FOR YEARS ENDED DECEMBER 31, 2009 and 2008 |
| Common Stock | Stock subscribed | Paid- in | Subscription | Statutory | Comprehensive Income | Retained | Total Shareholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | receivable | Reserves | (Loss) | Earnings | Equity | |||||||||||||||||||||||||||||||
| Balance 12/31/2007 | 31,250,000 | $ | 3,125 | $ | 6,070,825 | $ | 576,078 | $ | (219,369 | ) | $ | 5,147,426 | $ | 11,578,085 | ||||||||||||||||||||||||||
| Transfer Reserves | 671,097 | (671,097 | ) | - | ||||||||||||||||||||||||||||||||||||
| Capital Contribution | 200,000 | 20 | 499,980 | 500,000 | ||||||||||||||||||||||||||||||||||||
| Common Subscribed | 250,000 | 25 | 9,975 | (10,000 | ) | - | ||||||||||||||||||||||||||||||||||
| Comprehensive income | 260,635 | 260,635 | ||||||||||||||||||||||||||||||||||||||
| Net Income | 7,338,138 | 7,338,138 | ||||||||||||||||||||||||||||||||||||||
| Balance 12/31/2008 | 31,450,000 | $ | 3,145 | 250,000 | 25 | $ | 6,580,780 | (10,000 | ) | $ | 1,247,175 | $ | 41,266 | $ | 11,814,467 | $ | 19,676,858 | |||||||||||||||||||||||
| Transfer Reserves | 890,622 | (890,622 | ) | - | ||||||||||||||||||||||||||||||||||||
| Capital Contribution | 225,000 | 23 | (225,000 | ) | (23 | ) | 9,000 | 9,000 | ||||||||||||||||||||||||||||||||
| Comprehensive income | 31,277 | 31,277 | ||||||||||||||||||||||||||||||||||||||
| Net Income | 8,907,379 | 8,907,379 | ||||||||||||||||||||||||||||||||||||||
| Balance 12/31/2009 | 31,675,000 | $ | 3,168 | 25,000 | $ | 2 | $ | 6,580,780 | $ | (1,000 | ) | $ | 2,137,797 | $ | 72,543 | $ | 19,831,224 | $ | 28,624,514 | |||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
CHINA PHARMACEUTICALS, INC. | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 | ||||||||
| 2009 | 2008 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 8,907,379 | $ | 7,338,138 | ||||
| Adjustments to reconcile net income to net cash | ||||||||
| provided by operating activities: | ||||||||
| Depreciation and amortization | 818,446 | 639,339 | ||||||
| Provision for impairment loss on intangible assets | 737,315 | |||||||
| Loss on assets disposed | 6,649 | 12,745 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Cash pledged | 193,657 | (193,657 | ) | |||||
| Accounts receivable | 1,678,874 | (2,866,193 | ) | |||||
| Due from officer | (5,427 | ) | - | |||||
| Prepaid and other receivables | 25,899 | (667,543 | ) | |||||
| Trade deposit paid | (2,670,748 | ) | (55,554 | ) | ||||
| Inventory | (146,797 | ) | 592,354 | |||||
| Accounts payable and accrued expenses | (719,578 | ) | (227,149 | ) | ||||
| Bank acceptance payable | (193,657 | ) | 187,451 | |||||
| Trade deposit received | (95,605 | ) | 100,357 | |||||
| Due to shareholers | (32,885 | ) | 3,537 | |||||
| VAT tax payable | 83,629 | 82,745 | ||||||
| Income tax payable | 336,951 | 304,372 | ||||||
| Total adjustment | 16,723 | (2,087,196 | ) | |||||
| Net cash provided by (used in) operating activities | 8,924,102 | 5,250,942 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property & equipment | (12,697 | ) | (10,041 | ) | ||||
| Construction in progress | (3,373,819 | ) | - | |||||
| Intangible assets | (2,342,743 | ) | (2,612,990 | ) | ||||
| Proceeds of assets disposed | - | 15,562 | ||||||
| Net cash used in Investing activities | (5,729,259 | ) | (2,607,469 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Borrowings from short-term bank loan | 2,903,036 | 3,536,818 | ||||||
| Repayment of short-term bank loan | (4,501,714 | ) | (3,678,291 | ) | ||||
| Proceeds of issuance of stock | 9,000 | 500,000 | ||||||
| Net cash provided by (used in) financing activities | (1,589,678 | ) | 358,527 | |||||
| Effect of exchange rate changes on cash and cash equivalents | 31,277 | 236,224 | ||||||
| Net Increase (Decrease) in cash and cash equivalents | 1,636,442 | 3,238,224 | ||||||
| Cash and cash equivalents, beginning balance | 5,049,188 | 1,810,964 | ||||||
| Cash and cash equivalents, ending balance | 6,685,630 | $ | 5,049,188 | |||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Interest payments | 345,490 | $ | 407,183 | |||||
| Income tax payments | 1,147,313 | $ | 991,820 | |||||
The accompanying notes are an integral part of these financial statements.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 1 – ORGANIZATION
China Pharmaceuticals, Inc. (“the Company”), formerly named Allstar Restaurants, was incorporated in the United States in Nevada on December 22, 2004. China Qinba Pharmaceuticals, Inc. (“China Qinba”), a wholly-owned subsidiary of the Company, was incorporated in the United States in Delaware on May 29, 2008. China Qinba formed and owned 100% of Xi’an Pharmaceuticals Development Co., Ltd. (“Xi’an Pharmaceuticals” or the “WOFE”) in the People’s Republic of China (“PRC”) on August 18, 2008.
On October 28, 2008, WOFE entered into a series of agreements including a Management Entrustment Agreement, a Shareholders’ Voting Proxy Agreement, an Exclusive Option Agreement and a Share Pledge Agreement (the “Agreements”) with Xi’an Qinba Pharmaceutical Co., Ltd ("Xi’an Qinba") and its shareholders (the “Transaction”). Xi’an Qinba is a corporation formed under the laws of the PRC. According to these Agreements, WOFE acquired management control of Xi’an Qinba whereby WOFE is entitled to all of the net profits of Xi’an Qinba as a management fee, and is obligated to fund Xi’an Qinba’s operations and pay all of the debts. In exchange for entering into the Agreements, on October 28, 2008, WOFE issued 25,000,000 shares of its common stock to Xi’ an Qinba owners, representing approximately 80% of the Company’s common stock outstanding after the Transaction. Consequently, the owners of Xi’an Qinba own a majority of WOFE's common stock immediately following the Transaction, therefore, the Transaction is being accounted for as a "reverse acquisition", and Xi’an Qinba is deemed to be the accounting acquirer in the reverse acquisition between Xi’an Qinba and WOFE.
These contractual arrangements completed on October 28, 2008 provide that WOFE has controlling interest in Xi’an Qinba as defined by FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), included in the FASB Accounting Standards Codification (“ASC”) 810, Consolidation, an Interpretation of Accounting Research Bulletin No. 51, included in in the Codification as ASC 810, Consolidation, which requires WOFE to consolidate the financial statements of Xi’an Qinba and ultimately consolidate with its parent company, China Qinba (see Note 2, “Principles of Consolidation”).
On February 12, 2010, the Company completed its merger with China Qinba in accordance with a Merger Agreement (the “Merger Transaction”). The Merger Transaction is being accounted for as a reverse acquisition. In accordance with the Accounting and Financial Reporting Interpretations and Guidance prepared by the staff of the U.S. Securities and Exchange Commission, the Company (the legal acquirer) is considered the accounting acquiree and China Qinba (the legal acquiree) is considered the accounting acquirer for accounting purposes. Subsequent to the Merger Transaction, the financial statements of the combined entity will in substance be those of China Qinba. The assets, liabilities and historical operations prior to the Merger Transaction will be those of China Qinba. Subsequent to the date of the Merger Transaction, C hina Qinba is deemed to be a continuation of the business of the Company. Therefore, post-merger financial statements will include the combined balance sheet of the Company and China Qinba, the historical operations of the Company and China Qinba from the closing date of the Merger Transaction forward.
Upon the closure of the Merger Transaction, the Company changed its name from Allstar Restaurants to China Pharmaceutical, Inc.
The Company, through its subsidiary and exclusive contractual arrangement with Xi’an Qinba Pharmaceutical Co., Ltd., is engaged in the business of manufacturing and marketing over-the-counter (“OTC”) and prescription pharmaceutical products which include capsules, granules and powder type medicines.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company's functional currency is the Chinese Yuan Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars. The accompanying financial statements present the historical financial condition, results of operations and cash flows of the operating companies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (“VIE”) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation. The Company has adopted FIN 46R, ASC 810, Consolidation, which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.
In determining Xi’an Qinba Pharmaceutical is the VIE of Xi’an Pharmaceuticals Development Co., Ltd., the Company considered the following indicators, among others:
| ● | Xi’an Pharmaceuticals has the full right to control and administrate the financial affairs and daily operation of Xi’an Qinba and has the right to manage and control all assets of Xi’an Qinba. The equity holders of Xi’an Qinba as a group have no right to make any decision about Xi’an Qinba’s activities without the consent of Xi’an Pharmaceuticals. |
| ● | Xi’an Pharmaceuticals was assigned all voting rights of Xi’an Qinba and has the right to appoint all directors and senior management personnel of Xi’an Qinba. The equity holders of Xi’an Qinba possess no substantive voting rights. |
| ● | Xi’an Pharmaceuticals will provide financial support if Xi’an Qinba requires additional funds to maintain its operations and to repay its debts. |
| ● | Xi’an Pharmaceuticals should be paid a management fee equal to 25% of Xi’an Qinba’s sales amount. If there are no earnings before taxes and other cash expenses, then no fee shall be paid. If Xi’an Qinba sustains losses, they will be carried over to the next period and deducted from the next management fee. Xi’an Pharmaceuticals should assume all operation risks of Xi’an Qinba and bear all losses of Xi’an Qinba. Therefore, Xi’an Pharmaceuticals is the primary beneficiary of Xi’an Qinba. |
Xi’an Qinba is wholly owned by the majority shareholders of the Company. The capital provided to Xi’an Qinba by the Company was recorded as interest-free loan to Xi’an Qinba. There was no written note to this loan and the loan is not interest bearing and was eliminated during consolidation. Under various contractual agreements, the shareholders of Xi’an Qinba are required to transfer their ownership to the Company’s subsidiary in China when permitted by PRC laws and regulations or to designees of the Company at any time when the Company considers it is necessary to acquire Xi’an Qinba. In addition, the shareholders of Xi’an Qinba have pledged their shares in Xi’an Qinba as collateral to secure these contractual arrangements.
Foreign Currency
The Company’s reporting currency is the U.S. dollar. The Company’s operation in China uses Chinese Yuan Renminbi (CNY) as its functional currency. The financial statements of the subsidiary are translated into U.S.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Dollars (USD) in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation”, included in the Codification as ASC 830, Foreign Currency Matters. According to the Statement, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income,” as a component of shareholders’ equity, included in the Codification as ASC 220, Comprehensive Income. Foreign exchange transaction gains and losses are reflected in the income statem ent. For the year ended December 31, 2009 and 2008, the foreign currency translation adjustment to the Company’s comprehensive income was $31,277 and $ 260,635.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis.
The standard credit period of the Company’s most of client is three months. Within the medical industry in China, the collection period is generally longer than for other industries. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of March 31, 2009. There was no allowance for doubtful account as of December 31, 2009 and December 31, 2008.
Inventories
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowances are made to reduce their inventories to market value, if lower. As of December 31, 2009 and December 31, 2008, inventories consist of the following:
| 12/31/2009 | 12/31/2008 | |||||||
| Raw materials | $ | 370,111 | $ | 185,052 | ||||
| Finished goods | 26,260 | 64,664 | ||||||
| $ | 396,513 | $ | 249,716 | |||||
Property, Plant & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
| Building and improvements | 20-32 years |
| Machinery | 8-42 years |
| Fixture, furniture and equipment | 5-15 years |
| Motor vehicles | 5-7 years |
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant & Equipment consist of the following:
| 12/31/2009 | 12/31/2008 | |||||||
| Building and improvements | $ | 3,723,080 | $ | 3,845,546 | ||||
| Machinery | 5,839,130 | 5,789,181 | ||||||
| Fixture, furniture and equipment | 178,071 | 109,227 | ||||||
| Motor vehicles | 111,834 | 111,834 | ||||||
| 9,852,116 | 9,855,788 | |||||||
| Less: Accumulated depreciation | (2,165,870 | ) | (1,754,381 | ) | ||||
| $ | 7,686,245 | $ | 8,101,407 | |||||
Depreciation expense for the year ended December 31, 2009 and 2008 was $421,210 and $ 405,630, respectively. During 2009 the company transferred $122,467 from Building improvement into Furniture, fixtures and equipment $67,758, and Machinery $54,709.
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from one to fifty years. Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented. The land rights purchased in 2003 will expire in 2053. All of the Company’s intangible assets are subject to amortization with estimated lives of:
| Land use right | 50 years |
| Proprietary technologies | 20 years |
As of December 31, 2009 and December 31, 2008, the components of finite-lived intangible assets are as follows:
| 12/31/2009 | 12/31/2008 | |||||||
| Land use right | $ | 1,058,965 | $ | 1,058,964 | ||||
| Proprietary technologies | 8,965,538 | 6,622,794 | ||||||
| 10,024,503 | 7,681,760 | |||||||
| Less: Accumulated amortization | (965,859 | ) | (568,623 | ) | ||||
| 9,058,644 | 7,113,137 | |||||||
| Less: Impairment provision | (737,315 | ) | - | |||||
| $ | 8,321,329 | $ | 7,113,137 | |||||
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amortization expense for the year ended December 31, 2009 and 2008 were $397,236 and $233,709, respectively. The estimated future amortization expenses related to intangible asset as of December 31, 2009 are as follows:
| 12/31 | ||||||
| 2010 | $ | 397,236 | ||||
| 2011 | 397,236 | |||||
| 2012 | 397,236 | |||||
| 2013 | 397,236 | |||||
| 2014 | 397,236 | |||||
| Thereafter | $ | 6,335,149 | ||||
Long-Lived Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), included in the Codification as ASC 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business”, included in the Codification as ASC 225, Income Statement. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with A SC 360. ASC 360requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2009, there were no significant impairments of its long-lived assets.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments”, included in the Codification as ASC 820, Fair Value Measurements and Disclosures, requires that the Company discloses estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Value Added Tax Payable
The Company is subject to a value added tax rate of 17% on product sales by the People’s Republic of China. Value added tax payable is computed net of value added tax paid on purchases for all sales in the People’s Republic of China.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104, “Revenue Recognition”, included in the Codification as ASC 605, Revenue Recognition. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
The Company does not allow its customers to return products. The Company’s customers can exchange products only if they are damaged in transportation.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based Compensation”, included in the Codification as ASC 718, Compensation-Stock Compensation. ASC 718 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights.
In December 2004, the FASB issued FASB Statement No. 123R ("ASC 718"), "Share-Based Payment, an Amendment of FASB Statement No. 123." SFAS 123R requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees. SFAS 123R is effective beginning in the Company's first quarter of fiscal 2006.
Advertising
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred.
Income Taxes
The Company utilizes SFAS No. 109, “Accounting for Income Taxes”, included in the Codification as ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 1, 2007 the Company adopted the provisions of FASB issued Interpretation No. 48 (FIN 48), “Accounting for uncertainty in Income Taxes”, included in the Codification as ASC 740, Income Taxes. The topic addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
Comprehensive Income
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income, foreign currency translation adjustments.
Statement of Cash Flows
In accordance with SFAS No. 95, “Statement of Cash Flows”, included in the Codification as ASC 230, Statement of Cash Flows, cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Segment Reporting
Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information”, included in Codification ASC 280, Segment Reporting, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), included in the Codification as ASC 810. This topic establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This topic also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This topic is effective for fiscal years beginning October 1, 2009. The Company does not expect the impact of the adoption of SFAS 160 to be material.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), included in the Codification as ASC 855, Subsequent Events. This topic establishes the period in which management of a reporting entity should evaluate events and transactions for recognition or disclosure in the financial statements. It also describes the circumstances under which an entity should recognize events or transactions that occur after the balance sheet date. This topic is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption of this topic to have a material effect on its financial statements and related disclosures.
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS No. 166”), expected to be included in the FASB Accounting Standards Codification (‘Codification’) as Accounting Standards Codification (‘ASC 860”), Transfers and Servicing. This topic improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that this topic will have on its financial statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), expected to be included in the Codification as ASC 810, Consolidation. This topic changes the consolidation guidance applicable to a variable interest entity. Among other things, it requires a qualitative analysis to be performed in determining whether an enterprise is the primary beneficiary of a variable interest entity. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that SFAS No. 167 will have on its financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”), included in the Codification as ASC 105, Generally Accepted Accounting Principles. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. This topic is effective for interim and annual reporting periods ending after September 15, 2009. On DECEMBER 31, 2009, the Company adopted this topic, which has no effect on the Company’s financi al statements as it is for disclosure purposes only.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 3 – SHORT-TERM BANK LOAN
The following summarizes short-term bank loan as of December 31, 2009 and December 31, 2008:
| 12/31/2009 | 12/31/2008 | ||||||||
| Agricultural Bank of China | $ | - | Agricultural Bank of China | $ | 2,484,653 | ||||
| Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009 | Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009 | ||||||||
| - | |||||||||
| Industrial and Commercial Bank of China -Xixiang Branch | 1,760,253 | Industrial and Commercial Bank of China -Xixiang Branch | 876,937 | ||||||
| Term of the loans call for interest at 5.31% per annum to a floating rate, with principal due in 2010 | - | Term of these loans called for interest from 7.956% to 8.541% per annum, with principal due in 2009 | |||||||
| Xixiang rural cooperative bank | 733,439 | Xixiang rural cooperative bank | 730,780 | ||||||
| Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010 | - | Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010 | |||||||
| Total | $ | 2,493,692 | $ | 4,092,370 | |||||
| Current Portion | 2,493,692 | 3,800,058 | |||||||
| Long term Portion | $ | - | $ | 292,312 | |||||
Note 4 – COMPENSATED ABSENCES
Regulation 45 of local labor law entitles employees to annual vacation leave after 1 year of service. In general all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.
Note 5 – COMMITMENTS
The Company is committed to pay an additional $1,258,414 under an agreement of acquiring a new proprietary technology with Xi’an Tian Ya Medicine Technology Co., Ltd. The Company paid $ 498,074 that was included in prepayments.
Note 6 – INCOME TAX
The Company’s subsidiary and VIE were incorporated in the PRC which is governed by the Income Tax Laws of the PRC and various local tax laws. Effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises).
The Company’s VIE is a high-tech enterprise and under PRC Income Tax Laws, it is entitled to a two-year tax exemption for 2006 through 2007. Starting from 2008, the Enterprise Income Tax (EIT) is at a statutory rate of 15%. The Company expensed $ 1,798,712 and $ 1,296,191 for income tax for the year ended December 31, 2009 and 2008.
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
December 31, 2009 | December 31, 2008 | |||||||
| Current | $ | 1,147,313 | $ | 991,820 | ||||
| Deferred | 651,339 | 304,371 | ||||||
| Total | $ | 1,798,712 | $ | 1,296,191 | ||||
Note 7 – MAJOR CUSTOMERS AND CREDIT RISK
No customer represented over 10% of sales for the year ended December 31, 2009. One customer who represented more than 10% of purchases for the year ended December 30, 2009. No Customer accounted for greater than 10% of accounts receivable at December 31, 2009 and one customer accounted for greater than 10% of accounts receivable at December 31 2008. The Company had six and three vendors at December 31,2009 and 2008 who accounted for 37% and 71% of the total purchases, respectively. Six and two vendors at December 31, 2009 and 2008 accounted for 54 % and 51% of the Company’s accounts payable.
Note 8 – STATUTORY RESERVES
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public affair fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public affair fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006 there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or crease in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of December 31, 2009 and December 31, 2008, the Company had allocated $ 2,137,797 and $ 1,247,175 to these non-distributable reserve funds.
Note 9 – OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in stockholders’ equity at DECEMBER 31, 2009 is as follows:
| Accumulated Other Comprehensive Income (loss) | ||||
| Balance at December 31, 2007 | $ | (219,269 | ) | |
| Change for 2008 | 260,635 | |||
| Balance at December 31, 2008 | 41,266 | |||
| Change for 2009 | 31,277 | |||
| Balance at December 31, 2009 | $ | 72,543 | ||
CHINA PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 10 – CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS
The Company’s major operations are carried out in the PRC, therefore the Company is subject to the risks not typically associated with entities operating in the United States of America. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. All of the following risks may impair the Company’s business operations. If any of the following risks actually occurs, the Company’s business, financial condition or results of operations could be materially adversely affected. In such case, investor may lose all or part of the investment. Additional risks include:
| ● | The Cony may not be able to adequately protect and maintain its intellectual property. | |
| ● | The Company may not be able to obtain regulatory approvals for its products. | |
| ● | The Company may have difficulty competing with larger and better financed companies in the same sector. New legislative or regulatory requirements may adversely affect the Company’s business and operations. The Company is dependant on certain key existing and future personnel. | |
| ● | The Company’s growth is dependent on its ability to successfully develop, market, or acquire new drugs. The Company may be subject to product liability claims in the future. | |
| ● | Changes in the laws and regulations in the PRC may adversely affect the Company’s ability to conduct its business. | |
| ● | The Company may experience barriers to conducting business due to governmental policy. | |
| ● | Capital outflow policies in the PRC may hamper the Company’s ability to remit income to the United States. | |
| ● | Fluctuation of the Renminbi could materially affect the Company’s financial condition and results of operations. | |
| ● | The Company may face obstacles from the communist system in the PRC. | |
| ● | The Company may have difficulty establishing adequate management, legal and financial controls in the PRC. | |
| ● | Trade barriers and taxes may have an adverse affect on the Company’s business and operations. | |
| ● | There may not be sufficient liquidity in the market for the Company’s securities in order for investors to sell their securities. |
Note 11 – SUBSEQUENT EVENTS
On March 29, 2010, Mr. Lei Tao resigned as director of the Company. On the same date, upon the Company’s Nominating Committee’s recommendation, the Company’s Board of Directors appointed Mr. Guiping Zhang as the director with immediate effect. Mr. Zhang is currently the president of the Company. Apart from the compensation for his service as the president of the Company, Mr. Zhang does not have any arrangement with the Company for additional compensation as the Company’s director.
For the year ended December 31, 2009, the Company has evaluated subsequent events for potential recognition and disclosure through April 15, 2010, the date of the financial statement issuance.
PART II
Information Not Required in Prospectus
Item 13. Other Expense of Issuance and Distribution
We will pay all expenses in connection with the registration and sale of the common stock by the selling stockholders. The estimated expenses of issuance and distribution are set forth below:
| Registration fees | $ | 1,000 | ||
| Legal fees | $ | 5,000 | ||
| Accounting fees | $ | 15,000 | ||
| Miscellaneous | $ | 1,000 | ||
| Total estimated costs of offering | $ | 22,000 | ||
Item 14. Indemnification of Directors and Officers
The General Corporation Law of Nevada provides that directors, officers, employees or agents of Nevada corporations are entitled, under certain circumstances, to be indemnified against expenses (including attorneys’ fees) and other liabilities actually and reasonably incurred by them in connection with any suit brought against them in their capacity as a director, officer, employee or agent, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. This statute provides that directors, officers, employees and agents may also be indemnified against expenses (including attorneys’ fees) actually and reasonably incurr ed by them in connection with a derivative suit brought against them in their capacity as a director, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made without court approval if such person was adjudged liable to the corporation.
Our Articles of Incorporation and By-Laws provide that we will indemnify our directors and officers from all liabilities incurred by them in connection with any action, suit or proceeding in which they are involved by reason of their acting as our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 15. Recent Sales of Unregistered Securities
On December 17, 2009, our subsidiary, China Qinba Pharmaceuticals, Inc. entered into an agreement with Dragon Link Investments, Inc. to obtain certain public shell referral services. As consideration for the referral services provided by Dragon Link Investments, Inc., (and in accordance with a warrant placement agreement dated February 12, 2010) China Qinba Pharmaceuticals agreed to issue to Dragon Link Investments, Inc., warrants to acquire 1,200,000 shares of our common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,000,000 shares post reverse split), with registration rights, and exercisable at a price of $0.83 within three years after the control acquisition or merger by China Qinba with a public company identified by Dragon Link . The warrants will expire on February 11, 2013.
On January 5, 2010, our subsidiary, China Qinba Pharmaceuticals, Inc., entered into an agreement with IFG Investments Services, Inc. to obtain certain consulting services including advising on a merger/acquisition transaction and regulatory filings, and other services and support as requested. In consideration for the consulting services to be performed by IFG Investments (and in accordance with a warrant placement agreement dated February 12, 2010), China Qinba Pharmaceuticals agreed to issue to IFG Investments warrants to acquire 1,800,000 shares of our common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,500,000 shares post reverse split), with registration rights, exercisable at $0.83 per share within three years after the closing of the control acquisition or merger by Chin a Qinba with public company. The warrants will expire on February 11, 2013.
On January 27, 2010, our subsidiary, China Qinba Pharmaceuticals, Inc., entered into an investor relations agreement with HACG Investor Relations Services, Inc., to obtain certain public company sector services, including advising on and with respect to investor relations. The term of the contract expires January 31, 2011. As consideration for the services to be performed by HACG (and in accordance with a warrant placement agreement dated February 12, 2010), China Qinba Pharmaceuticals agreed to issue to HACG warrants to acquire 1,200,000 common shares of the Company’s stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 1,000,000 shares post reverse split), with registration rights, exercisable at $0.83 per share until January 31, 2013.
The above noted securities issued to our consultants, Dragon Link Investments, Inc., IFG Investments Services, Inc., and HACG Investor Relations Services, Inc. were not registered under the Securities Act of 1933. The issuance of these securities was exempt from registration under Section 4(2) of the Securities Act. We made this determination based on the representations of the consultants, which included, in pertinent part, that such consultants were "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act and that the consultants were acquiring our securities for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the consultants understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
On February 12, 2010, pursuant to a merger agreement with China Qinba Pharmaceuticals, Inc., dated of the same date (the “Merger Agreement”), we issued 33,600,000 shares of our Common Stock to the shareholders China Qinba Pharmaceuticals in exchange for 100% of the outstanding shares of China Qinba Pharmaceuticals. The 33,600,000 shares (which were subsequently reduced to 28,000,000 shares post reverse split) were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration, in part pursuant to Regulation S and Regulation D under the Securities Act of 1933 and in part pursuant to Section 4(2) of the Securities Act of 1933. We made this determination based on the representations of China Qinba Pharmaceuticals, which included, in pertinent part, that suc h shareholders were either (a) "accredited investors" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, or (b) not a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the Act, and that such shareholders were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that China Qinba Pharmaceuticals’ shareholders understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
Item 16. Exhibits
| Exhibit Number | Description | |
| 2.1 | Merger Agreement and Plan of Reorganization by and among Allstar Restaurants, Allstar Acquisitions Co., Terry G. Bowering, and China Qinba Pharmaceuticals, Inc. and the Controlling Shareholders of China Quinba dated February 12, 2010. (incorporated by reference as Exhibit 2.1 of our Report on Form 8-K filed February 19, 2010)* | |
| 2.2 | Share Exchange Agreement between Allstar Restaurants and Terry G. Bowering dated February 12, 2010. (incorporated by reference as Exhibit 2.2 of our Report on Form 8-K filed February 19, 2010)* | |
| 3.1 | Charter and Articles of Incorporation of Allstar Restaurants, a Nevada corporation. (incorporated by reference as Exhibit 3.1 of our Report on Form 8-K filed February 19, 2010)* | |
| 3.2 | Amended Articles of Incorporation of Allstar Restaurants a Nevada Corporation. (incorporated by reference as Exhibit 3.2 of our Report on Form 8-K filed February 19, 2010)* | |
| 3.3 | Amended Articles of Incorporation of Allstar Restaurants a Nevada Coporation Name Change. (incorporated by reference as Exhibit 3.3 of our Report on Form 8-K filed February 19, 2010)* | |
| 4.1 | Specimen Stock Certificate | |
| 10.1 | Medical Materials Contract – Xi’an Tianyi Biotechnology Co. Ltd, (incorporated by reference as Exhibit 10.1 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.2 | Medicine Packaging Material Contract – Shaanxi Daxin Plastics Co. Ltd. (incorporated by reference as Exhibit 10.2 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.3 | Medicine Materials Contract – Shaanxi Qiangli Technology Co. Ltd. (incorporated by reference as Exhibit 10.3 of our Report on Form 8-K filed February 19, 2010)* |
| 10.4 | Employment Agreement with Tao Lei, Chief Financial Officer (incorporated by reference as Exhibit 10.4 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.5 | Employment Agreement with GouzhuWang Chief Executive Officer (incorporated by reference as Exhibit 10.5 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.6 | Employment Agreement with Guiping Zhang, President (incorporated by reference as Exhibit 10.6 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.7 | Warrant Placement Agreement – IFG Investments Services, Inc. (incorporated by reference as Exhibit 10.7 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.8 | Warrant Placement Agreement – HACG Investor Relations Services Inc. (incorporated by reference as Exhibit 10.8 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.9 | Warrant Placement Agreement – Dragon Link Investments Ltd. | |
| 10.10 | Consulting Agreement IFG Investment Services, Inc. January 5, 2010. (incorporated by reference as Exhibit 10.10 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.11 | Investor Relations Agreement HACG Investor Relations Services Inc. January 27, 2010. (incorporated by reference as Exhibit 10.11 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.12 | Referral Agreement Dragon Link Investments Ltd. December 17, 2009 (incorporated by reference as Exhibit 10.12 of our Report on Form 8-K filed February 19, 2010) | |
| 10.13 | Agreement on Entrustment for Operation and Management (incorporated by reference as Exhibit 10.13 of our Report on Form 8-K filed February 19, 2010) | |
| 10.14 | Agreement on Share Pledge (incorporated by reference as Exhibit 10.14 of our Report on Form 8-K filed February 19, 2010)* | |
| 10.15 | Exclusive Option Agreement (incorporated by reference as Exhibit 10.15 of our Report on Form 8-K filed February 19, 2010) | |
| 16.1 | Letter from H&J &Associates re Change of Auditor (incorporated by reference as Exhibit 16.2 of our Report on Form 8-K filed February 19, 2010) | |
| 23.2 | Consent of William L. MacDonald (incorporated in exhibit 5.1) |
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
i. To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" tabl e in the effective registration statement.
iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in t he opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(5) Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of t he registration statement or made in any such document immediately prior to such date of first use.
(6) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
iv. Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
Signatures
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and authorized this registration statement to be signed on its behalf by the undersigned, in Xi’an City, People’s Republic of China on July 20, 2010.
| CHINA PHARMACEUTICALS, INC. | |||||
| By: | /s/ Guozhu Wang | ||||
| Guozhu Wang | |||||
| Chairman, Chief Executive Officer | |||||
| (principal executive officer) | |||||
| By: | /s/ Tao Lei | ||||
| Tao Lei | |||||
| Chief Financial Officer | |||||
| (principal financial officer and principal accounting officer) | |||||
In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Date: | July 20, 2010 | By: | /s/ Guozhu Wang | ||
| Guozhu Wang | |||||
| Chairman | |||||
| (principal executive officer) | |||||
| Date: | July 20, 2010 | By: | /s/ Guiping Zhang | ||
| Guiping Zhang | |||||
| Director |
| Date: | July 20, 2010 | By: | /s/ Zaizhi Cheng | ||
| Zaizhi Cheng | |||||
| Director | |||||
| Date: | July 20, 2010 | By: | /s/ Xiaogang Zhu | ||
| Xiaogang Zhu | |||||
| Director | |||||
| Date: | July 20, 2010 | By: | /s/ Michael Segal | ||
| Michael Segal | |||||
| Director |
101