The accompanying notes are an integral part of this statement.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
China Biopharmaceuticals Holdings, Inc. (CBH), a Delaware corporation, was originally organized as a corporation under the laws of the state of New York on August 6, 1976 under the name of Globuscope, Inc. On August 7, 1984, its name was changed to Globus Growth Group, Inc., which was its name until it was merged into CBH, its wholly owned subsidiary in the state of Delaware on August 28, 2004 through an internal re-organizational merger. Effective August 28, 2004, CBH completed the acquisition of China Biopharmaceuticals Corp. ("CBC"), a British Virgin Islands corporation as the parent, the management company and holder of 90% of the ownership interest in its then only operating subsidiary and asset, Nanjing Keyuan Pharmaceutical R&D Co., Ltd., doing business in English a.k.a. Nanjing Chemsource Pharmaceutical R&D Co. Ltd, ("Keyuan" or "Chemsource"), a company established in China and engaged in the discovery, development and commercialization of innovative drugs and related bio-pharmaceutical products in China. Nanjing Keyuan Pharmaceutical R&D Co., Ltd. was established in March 2000 in Nanjing City of Jiangsu Province, China.
On September 29, 2004, we signed a purchase agreement which was amended on December 31, 2004 to acquire approximately 75.8% ownership interest of Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a Chinese company established in Suzhou, China for 1,200,000 of common shares and $1,600,000 to be used for working capital and/or expansion purposes. The cash contribution is to be made in installments.
On June 11, 2005, we signed a purchase agreement, which was amended on August 3, 2005 under which, we acquired 51% of the controlling ownership interest of Suzhou Erye Pharmaceutical Limited Company ("Erye"), a company established in Suzhou, China. Total consideration paid by us to acquire the 51% ownership interest in Erye was $3,000,000 cash to be paid in installments, and 3,300,000 of common shares valued at $1.00 per share or $3,300,000. Out of the $3,000,000 to be paid in cash, $2,200,000 would be contributed to Erye for working capital and/or expansion purposes. See Note 15 - Business Combinations.
On December 31, 2005, our wholly owned subsidiary, CBC, entered into an Agreement with four shareholders of Chengdu Tianyin Pharmaceutical Limited Company, a pharmaceutical company located in the city of Chengdu, Sichuan Province, China ("Tianyin") to immediately assume operational control of Tianyin in all aspects of its business operations and to acquire a 51% ownership interest in Tianyin. Pursuant to the Agreement, subject to certain conditions, we agreed to issue 3 million shares of common stock to existing shareholders of Tianyin or their designees and also agreed to invest US$2 million into Tianyin operations. An additional 300,000 shares of our common stock will be issued to the existing shareholders of Tianyin or their designees, if Tianyin's after tax audited profit for the year ended December 31, 2005 reaches US$3,000,000. The unaudited numbers are substantially lower than the agreed to targets. We are currently evaluating the viability of the implementation of the Tianyin purchase agreement and will make a final determination after consulting with management of Tianyin. Based on the pre-conditions in the purchase Agreement, the Company decided not to assume the operational control of Tianyin at this moment and is exploring options of changing the transaction terms or abandoning the acquisition of Tianyin should Tianyin’s shareholders not compromise and meet the company’s request for a reasonable purchase price. Appropriate disclosure will be announced upon the final determination by the board of the directors. Since this transaction is in the process of evaluation, the final determination of this merger transaction has not reasonably reached a conclusion; the financial statements of Tianyin have not been included in the consolidated financial statements for the nine months ended September 30, 2006.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 1 - ORGANIZATION AND OPERATIONS, (continued)
On May 16, 2006 we entered into a purchase agreement which became effective at June 5, 2006, under which we acquired 100% of the controlling ownership interest of RACP Pharmaceutical Holdings LTD. (“RACP”) which owns 100% ownership interest of Shengyang Enshi Pharmaceutical Limited Company (“Enshi”). Total consideration of $14,690,000 paid by us to acquire the 100% interest in both RACP and Enshi is $550,000 paid in cash, 12,000,000 of CBH warrants valued at $0.22 per warrant or $2,640,000 and to assume $11,500,000 debt of RACP. The detail information of accounting for this transaction is disclosed in Note 15 - Business Combinations.
The principal activities of the Company in Mainland China (“China” or “PRC”) is research, manufacture and sale of drug raw materials and intermediates as well as prescription and non-prescription chemical drugs and Traditional Chinese Medicines. The principal activities are in China only.
Note 2- SIGNIFICANT ACCOUNTING POLICIES
Economic and Political Risks
The Company faces a number of risks and challenges since its assets are located in China and its revenues are derived from its operations in China. China is a developing country with a young market economic system overshadowed by the state. Its political and economic systems are very different from the more developed countries and are still in the stage of change. China also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and its relationship with other countries, including but not limited to the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Company's performance.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and all its majority-owned subsidiaries which require consolidation. Material inter-company transactions have been eliminated in the consolidation.
Since the Tianyin’s transaction is in the evaluation process, the final determination of this merger transaction has not reasonably reached a conclusion; the financial statements of Tianyin were not included in the consolidated financial statements for the nine months ended September 30, 2006.
On August 4, 2004, the Company declared that the majority stockholders of Globus executed a written consent providing a merger (the “Merger”) of Globus with and into its wholly owned subsidiary, CBH. On July 3, 2004, an Agreement and Plan of Merger (the Merger Agreement) was signed by and between Globus and CBH. The Merger Agreement provided for a tax-free reorganization pursuant to the provisions of Section 368 of the Internal Revenue Code, whereby Globus would be merged with and into CBH. The separate corporate existence of Globus ceased and CBH continued as the surviving corporation of the merger. In the Merger, all issued and outstanding shares of Globus were converted into shares of common stock of CBH on the basis of seven for five (7 for 5).
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Land Use Rights
According to Chinese law, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 40 to 50 years.
Plant and Equipment
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over their respective estimated useful lives. Estimated useful lives are as follows.
| Equipment and machinery | 5 years |
| Motor vehicles | 5 years |
| Furniture and fixtures | 5 years |
| Buildings | 20 years |
| Land use right | 40-50 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of operations. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired, pursuant to the guidelines established in Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company also re-evaluated the periods of amortization to determine whether subsequent events and circumstances are warrant revised estimate of useful lives.
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid investment purchased with original maturity of three months or less to be cash equivalents. The Company maintains no bank accounts in the United States of America.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out basis.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Patent
The patent represent patented pharmaceutical formulas, on which we have obtained official registration certificate or official approval for clinical trials. No amortization is provided when the Company intends to and has the ability to sell the patent or formulas within not more than two months, otherwise the patent costs will be subject to amortization over its estimated useful life period. Such costs comprise purchase costs of patented pharmaceutical formulas and costs incurred for patent application. Patent costs are accounted for on an individual basis. The carrying value of patent costs is reviewed for impairment annually when events and changes in circumstances indicate that the carrying value may not be recoverable.
Research and Development Costs
Research and development (or “R&D) expenses include salaries, benefits, and other headcount related costs, clinical trial and related clinical manufacturing costs, contract and other outside service fees, and facilities and overhead costs. R&D costs are expensed when incurred.
Cash and concentration of risk
Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the People’s Republic of China and Hong Kong. Total cash in these banks at September 30, 2006 amounted to $2,438,966 of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
Fair Value of Financial Instruments
The Company's financial instruments primarily include cash and cash equivalents, accounts receivable, and accounts payable, accrued expenses, customer deposits and amounts due to related parties and shareholders. Management has estimated that the carrying amounts approximate their fair values due to their short-term nature. In addition, the Company has notes payable issued by the bank and special payables. Management estimates the carrying amount approximates fair values because a historical term of the notes approximates terms availability today.
Revenue and Revenue Recognition
We have three categories of revenue resources, revenue from sales of new drugs formulas, revenue from R&D service rendered by the Company and revenue from sales of medical product.
The Company recognizes revenue from product and drug formula sales when title has been transferred, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable, and the collection of the related receivable is probable which is generally at the time of shipment. Allowances are established for estimated rebates, wholesaler charge backs, prompt pay sales discounts, product returns, and bad debts.
For revenue from R&D service, revenue is recognized when milestone goals are achieved, milestone payments are no longer refundable, and continued performance of future R&D services related to the milestone are not required.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Income Taxes
Income taxes are provided on the liability method whereby deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and reported amounts of assets and liabilities. Deferred tax assets and liabilities are computed using enacted tax rates expected to apply to taxable income in the periods in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides a valuation allowance for certain deferred tax assets, if it is more likely than not
that the Company will not realize tax assets through future operations.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America 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 periods. Management makes these estimates using the best information available at the time the estimate are made; however actual results could differ materially from those estimates.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, established standard for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. SFAS No. 130 defines comprehensive income to include all changes in equity except those resulting form investments by owners and distributions to owners. Among other disclosures, SPAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in financial statement that is presented with the same prominence as other financial statements. The Company's only current component of comprehensive income is the foreign currency translation adjustment.
Foreign Currency Translation
The reporting currency of the Company is the US dollar. The Company’s Chinese subsidiaries’ financial records are maintained and the statutory financial statements are stated in its local currency, Renminbi (RMB), as their functional currency. Results of operations and cash flow are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate as quoted by the People's Bank of China at the end of each reporting period, and equity are stated at their historical rates.
This quotation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the People's Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People's Bank of China.
Approval of foreign currency payments by the Bank of China or other institutions requires submitting a payment application form together with invoices, shipping documents and signed contracts.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Foreign Currency Translation, (continued)
Translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders' equity and amounted to $826,894 and $156,089 for the nine months ended September 30, 2006 and 2005, respectively. The balance sheet amounts with the exception of equity at September 30, 2006 were translated at 7.90 RMB to 1.00 USD as compared to 8.26 RMB at September 30, 2005. The weighted average translation rate of 8.00 RMB to 1.00 USD for the nine months ended September 30, 2006 was applied to income statement accounts.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
These amounts are not material to the consolidated financial statements.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS128). SFAS 128 requires the presentation of earnings per share (EPS) as Basic and Diluted EPS.
As of September 30, 2006, the Company’s issued and outstanding shares of Series A convertible preferred stock was 930,000. We also took into account the warrants we issued for computation of earnings per share. We decided that all the warrants were anti-dilutive because the excise prices were higher than market price in the period presented. The number of shares used in computing diluted earnings per share for the nine months ended September 30, 2006 and 2005 amounted to 35,832,548, which included 930,000 weighted average number of convertible preferred stock, and 26,218,201, respectively. The number of shares used in computing basic earnings per share for the nine months ended September 30, 2006 and 2005 were 34,902,548 and 26,218,201 respectively. Basic and Diluted earnings per share for the nine months ended September 30, 2006 and 2005 amounted to 0.06 and 0.04, respectively.
Recent Accounting Pronouncements
In March 2005, the FASB published FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” which clarifies that the term, conditional asset retirement obligations, as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. The interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of the Company’s fiscal year 2006. The adoption of this Interpretation is not expected to have a material effect on the Company’s consolidated financial position or results of operations.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Recent Accounting Pronouncements, (continued)
In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS No. 154 replaces APB No. 20 (“APB 20”) and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change a cumulative effect of changing to the new accounting principle whereas SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, unless it is impracticable.
SFAS No. 154 enhances the consistency of financial information between periods. SFAS No. 154 become beginning with the Company’s first quarter of fiscal year 2006. SFAS No. 154 did not have a material impact on its results of operations, financial position or cash flows.
In June 2006, the Financial Accounting Standards Board (FASB) issued an FIN 48 “Accounting Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” Under the Interpretation, a company would recognize in its financial statements its best estimate of the benefit of a tax position, only if the tax position is considered probable of being sustained on audit based solely on the technical merits of the tax position. In evaluating whether the probable recognition threshold has been met, the proposed Interpretation would require the presumption that the tax position will be evaluated during an audit by taxing authorities. The Interpretation is effective fiscal years beginning after December 31, 2006, with a cumulative effect of a change in accounting principle to be recorded upon the initial adoption. The proposed Interpretation would apply to all tax positions and only benefits from tax positions that meet the probable recognition threshold at or after the effective date would be recognized. The Company is currently analyzing the proposed Interpretation and has not determined its potential impact on our Consolidated Financial Statements. While we cannot predict with certainty the rules in the final Interpretation, there is risk that the final Interpretation could result in a cumulative effect charge to earnings upon adoption, increases in future effective tax rates, and/or increases in future interperiod effective tax rate volatility.
In October 2005, FASB Staff Position (FSP) FAS 13-1, "Accounting for Rental Costs Incurred during a Construction Period" was issued. This FSP concluded that rental costs associated with ground or building operating leases that are incurred during a construction period be expensed. The guidance in the FSP is required to be applied to the first reporting period beginning. The adoption of this pronouncement did not have a material impact on the Company's financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“FAS 155”), which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”) and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). FAS 155 provides guidance to simplify the accounting for certain hybrid instruments by permitting fair value remeasurement for any hybrid financial instrument that contains an embedded derivative, as well as, clarifies that beneficial interests in securitized financial assets are subject to FAS 133. In addition, FAS 155 eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold under FAS 140. FAS 155 is effective for all financial instruments acquired, issued or subject to a new basis occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Recent Accounting Pronouncements, (continued)
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“FAS 156”), which amends SFAS No. 140. FAS 156 specifically provides guidance addressing the recognition and measurement of separately recognized servicing assets and liabilities, common with mortgage securitization activities, and provides an approach to simplify efforts to obtain hedge accounting treatment. FAS 156 is effective for all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, with early adoption being permitted.
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FAS 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The requirements of FIN 48 are effective for our fiscal year beginning January 1, 2007.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which addresses the measurement of fair value by companies when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS No. 157 provides a common definition of fair value to be used throughout GAAP which is intended to make the measurement of fair value more consistent and comparable and improve disclosures about those measures. SFAS No. 157 will be effective for an entity's financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect SFAS No. 157 will have on its consolidated financial position, liquidity, or results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans−−an amendment of FASB Statements No. 87, 88, 106, and 132(R)". One objective of this standard is to make it easier for investors, employees, retirees and other parties to understand and assess an employer's financial position and its ability to fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single−employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. SFAS No. 158 requires an employer to fully recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 requires an entity to recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87. This Statement requires an entity to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures for fiscal years ending after December 15, 2006.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Recent Accounting Pronouncements, (continued)
The implementation of the above pronouncements is not expected to have a material effect on the Company's financial statement presentation or disclosures.
Note 3 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest expense paid amounted to $463,563 and $237,830 for the nine months ended September 30, 2006 and 2005, respectively.
Income tax of $385,733 and $110,219 respectively were paid for the nine months ended September 30, 2006 and 2005.
During 2005, the Company issued 657,959 shares of common stock for services. The fair market value of the services received was $239,715.
On March 8, 2005, the Company issued 300,000 shares of common stock to China Pharmaceutical University for a lab use right.
Note 4 - ACCOUNTS RECEIVABLE
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management’s judgment and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivables balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentrations or payment terms, deterioration of customer credit-worthiness or weakening in economic trends could have a significant impact on the collectibility of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The reserve for bad debts increased $4,589 from $528,708 at December 31, 2005 to $533,297 at September 30, 2006, $4,589 mainly due to the acquisition of Enshi.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 4 - ACCOUNTS RECEIVABLE, (continued)
As of September 30, 3006 and December 31, 2005, accounts receivable consist of the following:
| | | September 30, 2006 | | December 31, 2005 | |
| Accounts receivable | | $ | 8,174,979 | | $ | 4,820,634 | |
| Allowance for doubtful accounts | | | (533,297 | ) | | (528,708 | ) |
| | | | | | | | |
| Accounts receivable - | | | | | | | |
| discontinued operation (net) | | | - | | | 637,733 | |
| | | | | | | | |
| Accounts receivable, net | | $ | 7,641,682 | | $ | 4,929,659 | |
Note 5 - INVENTORIES
Inventories consisted of the following at September 30, 2006 and December 31, 2005:
| | | September 30, 2006 | | December 31, 2005 | |
| Raw materials | | $ | 1,381,659 | | $ | 424,977 | |
| Packaging supplies | | | 293,719 | | | 140,373 | |
| Sundry supplies | | | 9,512 | | | 9,218 | |
| Work in process | | | 1,094,792 | | | 971,028 | |
| Finished goods | | | 2,666,140 | | | 1,669,354 | |
| | | | | | | | |
| Discontinued operation - | | | - | | | 1,567,910 | |
| Inventory | | | | | | | |
| | | $ | 5,445,822 | | $ | 4,782,860 | |
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 6- PLANT AND EQUIPMENT
Plant and equipment consist of the following as of September 30, 2006 and December 31, 2005:
| | | September 30, 2006 | | December 31, 2005 | |
| Plant | | $ | 6,191,537 | | $ | 2,709,509 | |
| Office equipment | | | 748,437 | | | 132,494 | |
| Machinery | | | 8,331,984 | | | 5,297,637 | |
| Automobiles | | | 715,397 | | | 156,191 | |
| Construction in progress | | | 317,480 | | | - | |
| | | | | | | | |
| Discontinued operation - | | | | | | | |
| Fixed assets (net) | | | - | | | 1,716,582 | |
| Total plant and equipment | | | 16,304,835 | | | 10,012,413 | |
| Less: accumulated depreciation | | | (5,110,313 | ) | | (4,313,202 | ) |
| Plant and equipment, net | | $ | 11,194,522 | | $ | 5,699,211 | |
Depreciation expense for the nine months ended September 30, 2006 and 2005 was $433,097 and $429,040 respectively.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 7- OTHER ASSETS
Intangible Assets
Intangible assets include land use rights and drug patents.
| | | September 30, 2006 | | December 31, 2005 | |
| | | | | | |
| Land use rights | | | | | | | |
| Erye | | $ | 5,789,381 | | $ | 5,73,354 | |
| Less: Accumulated amortization | | | (495,373 | ) | | (321,105 | ) |
| | | | 5,294,007 | | | 5,416,249 | |
| | | | | | | | |
| Enshi | | | 4,593,816 | | | - | |
| Less: Accumulated amortization | | | (340,976 | ) | | - | |
| | | | 4,252,840 | | | - | |
| | | | | | | | |
| Prepayment on land - Enshi | | | 633,000 | | | - | |
| | | | | | | | |
| Patents | | | | | | | |
| Approved drugs | | | 1,367,563 | | | - | |
| Less: Accumulated amortization | | | (370,582 | ) | | - | |
| | | | 996,981 | | | - | |
| | | | | | | | |
| Intangible assets in discontinued operations | | | - | | | 1,419,510 | |
| | | | | | | | |
| Total intangible assets, net | | $ | 11,176,828 | | $ | 6,835,759 | |
Amortization expense for the nine months ended September 30, 2006 and 2005 was $246,935 and $83,951, respectively.
Restricted Cash
Restricted cash represents cash required to be deposited to bank but subject to withdrawal with restrictions according to the agreement with bank. The following list the depositors, the amount and names of the bank as of September 30, 2006 and December 31, 2005:
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 7- OTHER ASSETS, (continued)
Restricted cash, (continued)
| Depositor | | Name of Bank | | | | December 31, 2005 | |
| | | | | | | | |
| Erye | | | Hua Xia Bank, Suzhou | | $ | 683,180 | | $ | 1,178,000 | |
| | | | | | | | | | | |
| Discontinued operation | | | Taichang Chengxiang Bank | | | - | | | 151,280 | |
| | | | | | | | | | | |
| Total | | | | | $ | 683,180 | | $ | 1,329,280 | |
Long Term Notes Receivable
Long term notes receivable represents loans made to third parties for cash flow needs for R&D projects on new drugs. The Company has first priority to purchase the new drug rights if the projects are successfully completed. If the Company gives up the right, the debtors required to repay the loans plus 3% interest per annum within one month after the drug rights are sold to another party. If on or before February 28, 2010, the R&D projects are not completed or failed, the debtors are required to repay the loans plus 6% interest per annum within ten days after such a conclusion was made. As of September 30, 2006, the total amount of the long term notes receivable was $806,400. 51% of ownership equity of the debtor was pledged for the loan. The management determined the likelihood of repayment to be collected the Company is high based on the above conditions and well financial conditions of the counter parties.
Note 8- RELATED PARTIES TRANSACTIONS
Accounts Receivables - Related Parties
| Subsidiary | | Amount | | Due from | | Term | | Manner of settlement | |
| | | | | | | | | | |
| Erye | | $ | 5,360 | | | Hainan Kaiye | | | Short term | | | To be received in cash | |
As of September 30, 2006, total accounts receivables due from related parties were $5,360.
Other Receivables - Related Parties
| Subsidiary | | Amount | | Due from | | Term | | Manner of settlement | |
| | | | | | | | | | |
| CBC | | $ | 42,461 | | | Advance to shareholders | | | Short term | | | To be received in cash | |
As of September 30, 2006, total receivables due from related parties were $42,461.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 8- RELATED PARTIES TRANSACTIONS, (continued)
Other Receivables - ENSHI’s former shareholder
On September 29, 2006, the Company’s subsidiary Enshi made a distribution of $2,518,461 to the former shareholder of Enshi in the form of 2005 profit distribution. However the Enshi purchase agreement did not provide specifically about such distribution. The management of the Company expects to recover this amount from the former Enshi shareholder. The Company holds various amounts in terms of purchase price withholding and working capital withholding against the former Enshi shareholder. The mananagement expects to resolve this matter shortly.
| Subsidiary | | Amount | | Due from | | Term | | Manner of settlement | |
| | | | | | | | | | |
| ENSHI | | $ | 2,518,461 | | | Former shareholder | | | Short term | | | To be received in cash | |
As of September 30, 2006, total receivables due from related parties were $2,518,461.
Accounts Payable - Related Parties
| Subsidiaries | | Amount | | Due to | | Term | | Manner of settlement | |
| | | | | | | | | | |
| Erye | | $ | 62,346 | | | Hainan Kaiye | | | Short term | | | To be paid in cash | |
As of September 30, 2006, total accounts payable due to related parties were $62,346.
Other Payables - Related Parties
| Subsidiaries | | Amount | | Due to | | Term | | Manner of settlement | |
| | | | | | | | | | |
| Erye | | $ | 371,203 | | | Hainan Kaiye | | | Short term | | | To be paid in cash | |
As of September 30, 2006, total other payables due to related parties were $371,203.
Long Term Other Receivables - Related Parties
| Subsidiary | | Amount | | Due from | | Term | | Manner of settlement | |
| | | | | | | | | | |
| CBH | | $ | 620,000 | | | Hengyi | | | Long term | | | To be received in cash | |
As of September 30, 2006, total other payables due to related parties were $620,000.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 8- RELATED PARTIES TRANSACTIONS, (continued)
Short Term Loans - Related Parties
| Subsidiary | | Amount | | Due from | | Term | | Manner of settlement | |
| | | | | | | | | | |
| ENSHI | | $ | 379,800 | | | Erye Trade Company | | | Long term | | | To be received in cash | |
As of September 30, 2006, total other payables due to related parties were $379,800.
Special payable - Related Parties
| Subsidiary | | Amount | | Due from | | Term | | Manner of settlement | |
| | | | | | | | | | |
| ERYE | | $ | 104,795 | | | Erye Trade Company | | | Long term | | | To be received in cash | |
As of September 30, 2006, total other payables due to related parties were $104,795.
Note 9 - NOTES PAYABLE
The Company’s subsidiary Erye has $2,304,522 notes payable to Erye’s vendors for the purchase of drug raw materials. Notes payable are interest free and usually mature after a six month period.
The Company had notes payable $425,000 and were converted to preferred stock in 2006.
Note 10 - MINORITY INTEREST
Minority interest consists of the interest of minority shareholders in the subsidiaries of the Company. The Company owns a 51% ownership interest in Erye. The Company’s wholly owned subsidiary China Biopharmaceuticals Corporation (BVI Company) owns 90% ownership interest in Keyuan. There is no minority interest in Enshi since the Company owns 100% of Enshi.
| | | Equity of the Subsidiaries as of | | Ownership in Subsidiaries | | Minority Interest in Subsidiaries | |
| Subsidiary | | September 30, 2006 | | Percentage | | Amount | | Percentage | | Amount | |
| Erye | | $ | 7,763,197 | | | 51.00 | % | $ | 3,959,230 | | | 49.00 | % | $ | 3,803,966 | |
| Keyuan | | | 1,327,273 | | | 90.00 | % | | 1,194,546 | | | 10.00 | % | | 132,727 | |
| Enshi | | | 16,798,800 | | | 100.00 | % | | 16,798,800 | | | 0.00 | % | | - | |
| Total | | $ | 25,889,270 | | | | | $ | 21,952,576 | | | | | $ | 3,936,694 | |
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 11- STATUTORY RESERVES
According to Chinese corporation law, a company incorporated in China is required to contribute an amount of no less then 15% of its yearly net income for its employees to a reserve account in the company. This statutory reserve fund is planned for future development of the company or use for employee’s benefits. The following list the provision of statutory reserves as of September 30, 2006.
| Year | | Amount | |
| | | | |
| 2004 | | $ | 1,135,001 | |
| 2005 | | | 1,152,036 | |
| 2006 | | | 693,110 | |
| Total | | $ | 2,980,147 | |
Note 12 - INCOME TAXES
Corporation Income Tax (CIT)
In accordance with the relevant tax laws and regulations of the People's Republic of China, a company is entitled to a full exemption from CIT for the first two years, and a 50% deduction in CIT for the next three years, commencing from the first profitable year. For 2005, of the Company’s subsidiaries, Keyuan and Enshi were exempt from CIT, while Erye was subject to a 33% income tax rate for the year of 2005. Erye was granted income tax exemption for two years commencing from January 1, 2006.
The Company’s income tax expense for the nine months ended September 30, 2006 and 2005 are $346,776 and $0, respectively.
According to China’s income tax law, company income tax is due to the State Tax Bureau monthly or quarterly. Subsidiaries of the Company paid its income tax by quarter. Before every 15th day of pay month, subsidiaries pay its income tax base on its quarterly net profit. Since income tax rate, with income tax preference or not, is a flat rate in China, that there is no need for income tax reconciliation to practice in China.
The Company’s operating subsidiaries operate in China. According to the Chinese Joint Venture Business Law, these subsidiaries have been registered and incorporated with the status of Sino-foreign joint venture companies and are subject to a two year tax exemption and a three year 50% reduction in income tax rates preference treatment, which generally commences from the first year of establishing a joint venture or the approval date of the income tax preference application.
The following list depicts the tax preference rate applicable to the subsidiaries and the applicable years:
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 12 - INCOME TAXES, (continued)
Corporation Income Tax (CIT), (continued)
| | | Full Exemption Period | | Half-Reduction Period | |
| Subsidiaries | | Period | | Tax Rate | | Period | | Tax Rate | |
| Nanjing Keyuan | | | 2005-2006 | | | 0.00% | | | 2007-2009 | | | 16.50 | % |
| Suzhou Erye | | | 2006-2007 | | | 0.00% | | | 2008-2010 | | | 16.50 | % |
| Shengyang Enshi | | | 2004-2005 | | | 0.00% | | | 2006-2008 | | | 15.00 | % |
After the income tax preference period expired, a 33% income tax rate is applicable.
The following table reconciles the U.S. statutory rates to the Company's effective tax rate:
| | | June 30, 2006 |
| | | 2006 | | 2005 |
| U.S. Statutory rate | | | 34.0% | | | |
| Foreign income not recognized in USA | | | (34.0) | | | |
| China income taxes | | | 33.0 | | | |
| Income tax exempted | | | (33.0) | | | |
| Total provision for income taxes | | | - % | | | - % |
The estimated tax savings due to the reduced tax rate for the nine months ended September 30, 2006 and 2005 amounted to $1,019,240 and $314,783, respectively. The net effect on earnings per share if the income tax had been applied would decrease earnings per share for June 30, 2006 and 2005 to $0.03 and $0.012, respectively.
Business Tax (“BT”)
The Company is subject to Business Tax, which is charged on the selling price of applicable product and service at a general rate of 5% in accordance with the tax law applicable. Keyuan is exempt from business tax according to local applicable favorable tax policy.
Value Added Tax (“VAT”)
In accordance with the relevant taxation laws in China, the VAT rate for domestic sales is 17% and 0% for export sales on the invoiced value of sales and is payable by the purchaser.
Note 13 - LOANS
Other Long Term Liabilities
The Company assumed a loan of $11,500,000 in connection with the acquisition of Enshi as presented in Notes 15-Business Combination. Interest on the loan will be paid semi-annually at an annual rate of 11%. The Company paid off $658,535 ahead of the payment schedule. As of September 30, 2006, the balance of the long-term debt was $10,841,465. The following lists the repayment schedule of the principal of the loan.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 13 - LOANS , (continued)
Other Long Term Liabilities, (continued)
| | | Amount | |
| 2007 | | $ | 2,875,000 | |
| 2008 | | | 5,750,000 | |
| 2009 | | | 2,216,465 | |
| Thereafter | | | - | |
| | | $ | 10,841,465 | |
Short Term Bank Loans
The Company has a total amount of $4,089,180 in short term loans from four different banks in China. These loans mature in one year or less and renew automatically. The average interest rate is approximately 5.2%
Interest expense for the nine months ended September 30, 2006 and 2005 was $394,435 and $366,678 respectively.
Notes Payable
The Company has notes payable to the bank in amount of $480,000 which bears no interest for the first six months at which time interest will accrue at the bank’s lending rate if still outstanding.
Note 14 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and dormitory facilities for its employees from a third party. Accordingly, for the nine months ended September 30, 2006 and 2005, the Company recognized rent expense of $13,476 and $7,030, respectively.
As of September 30, 2006, the Company has outstanding commitments in respect to non-cancelable operating leases, which fall due as follows:
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 14 - COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases , (continued)
| | | Amount | |
| 2006 | | $ | 13,475 | |
| 2007 | | | 29,650 | |
| 2008 | | | 32,610 | |
| 2009 | | | 35,870 | |
| Thereafter | | | 39,000 | |
| | | $ | 150,605 | |
Note 15 - BUSINESS COMBINATIONS
Erye Acquisition
On June 11, 2005, the Company signed a purchase agreement, which was amended on August 3, 2005 under which, the Company acquired a controlling ownership interest of approximately 51% in Erye, a company established in Suzhou City, Jiangsu Province, China.
Assets acquired and debts assumed of the transaction are listed as below:
| | | | | Acquired (Assumed) | |
| Item | | Fair Value | | by the Company | |
| Current assets | | $ | 8,601,786 | | $ | 4,386,911 | |
| Property, plant, and equipment | | | 4,305,631 | | | 2,195,872 | |
| Intangible assets | | | 7,755,221 | | | 3,955,162 | |
| Other assets | | | 1,178,000 | | | 600,780 | |
| Total assets | | | 21,840,637 | | | 11,138,725 | |
| | | | | | | | |
| Current liability | | | 11,465,031 | | | 5,847,166 | |
| Ling term liability | | | 1,257,959 | | | 641,559 | |
| Total liabilities | | | 12,722,990 | | | 6,488,725 | |
| | | | | | | | |
| Net assets | | $ | 9,117,647 | | $ | 4,650,000 | |
The original purchase price amounted to $80,000 in cash, 3,300,000 shares of common stock valued at $1.00 per share and $2,200,000 of additional cash to be contributed in installments. The original purchase price generated goodwill of approximately $4,893,113 that was reported on our September 30, 2005 financial statements and form 10QSB. The Board of Directors and management reevaluated the common stock value based upon the stock trading history in the past year and determined that the common stock should be valued at less than $1.00 per share for the
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 15 - BUSINESS COMBINATIONS, (continued)
Erye Acquisition, (continued)
purpose of determining the total purchase price of the acquisition. On April 12, 2006, the Board Directors decided to amend the purchase price for the 51% ownership interest in Erye to be $3,000,000 cash to be paid in installments, and 3,300,000 shares of common stock valued at $0.50 per share, which amounted to a total amount of $4,650,000, effective as of December 31, 2005. The amendment resulted in a write down of goodwill and equity. As of December 31, 2005, $2,200,000 of cash contribution has not been made. The Company contributed the $2,200,000 in full by the end
of April, 2006.
In determining the cost of the acquired equity, we considered all aspect of the acquisition and weighed the consideration we paid and the assets we received. Since we have an independent appraisal report on Erye’s assets and liabilities and according to our management’s understanding and judgment about Erye’s assets and liabilities, we believe that the net fair value of assets acquired and debt assumed was more determinable and evident. The value of our equity was recognized as a residual value of total net assets we received, deducting the $2,200,000 of cash we paid.
We accounted for the business acquisition in conformity with SFAB 141 Business Combination in accordance with paragraphs 20-24 in arriving at the fair of our equity. As there was no quoted price for our stock at that point of time, we believe the fair value of assets we acquired was a reliable base for determine the fair value of our equity.
Enshi Acquisition
On May 16, 2006 we entered into a purchase agreement which became effective at June 5, 2006, under which we acquired 100% of the controlling ownership interest of RACP Pharmaceutical Holdings LTD. (“RACP”) which owns 100% ownership interest of Shengyang Enshi Pharmaceutical Limited Company (“Enshi”). Total consideration of $14,690,000 paid by us to acquire 100% interest in both RACP and Enshi is $550,000 paid in cash, 12,000,000 of CBH warrants valued at $0.22 per warrant or $2,640,000 and to assume the $11,500,000 debt of RACP.
Assets acquired and debts assumed of the transaction are listed as below:
| | | | | Acquired (Assumed) | |
| Item | | Fair Value | | by the Company | |
| Current assets | | $ | 6,840,881 | | $ | 6,840,881 | |
| Property, plant, and equipment | | | 7,188,912 | | | 7,188,912 | |
| Intangible assets | | | 5,253,973 | | | 5,253,973 | |
| Total assets | | | 19,283,766 | | | 19,283,766 | |
| | | | | | | | |
| Total liabilities | | | 4,593,766 | | | 4,593,766 | |
| | | | | | | | |
| Net assets | | $ | 14,690,000 | | $ | 14,690,000 | |
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 15 - BUSINESS COMBINATIONS, (continued)
Enshi Acquisition, (continued)
The acquisition generated no goodwill since total consideration was equal to total net assets acquired. In determining the cost of the acquisition, we considered all aspect of the acquisition and weighted the consideration we paid and the assets we received. We applied the Black-Scholes model method to determine the value of the warrants, which was at $0.22 per unit. Thus we concluded the total consideration was $14,690,000. We determined the fair value of the acquired assets of Enshi based on an independent appraisal. The fair value of Enshi’s net assets was in accordance with the independent appraisal was $16,683,503.63, exceeding our total consideration by $1,993,504. Pursuant to SFAS 141, Business Combination, the excess of total fair value acquired over the acquisition cost should be allocated as pro rata deduction of the amount of Enshi’s fixed assets and intangible assets that would have been assigned to those assets. As a result, we arrived at the above list of amount of assets acquired and debt assumed.
Pro Forma
The following unaudited pro forma condensed income statement for six months ended June 30, 2006 and balance sheet were prepared under Generally Accepted Accounting Principles and as if the acquisition of Enshi had occurred on January 1, 2006. The pro forma information may not be indicative of the results that actually would have occurred if the acquisition had been in effect from and on the dates indicated or which may be obtained in the future.
| Sales | | $ | 20,269,829 | |
| Cost of Goods Sold | | | 13,548,650 | |
| | | | | |
| Gross Profit | | | 6,755,547 | |
| Operating Expenses | | | 2,953,483 | |
| Income Tax | | | 160,472 | |
| Minority Interest | | | 657,311 | |
| | | | | |
| Net Income | | $ | 2,984,281 | |
Divestiture of Suzhou Hengyi
As of August 29, 2006, the Company entered into an agreement with the minority shareholders of Suzhou Hengyi to divest the Hengyi and its 50% subsidiary, Suzhou Sintofarm. Pursuant to the agreement all consideration paid to the shareholders of Hengyi of 1,200,000 shares of the Company’s common stock and $620,000 in cash, and the proportionate earnings earned from the inception of the acquisition of Hengyi through July 1, 2006 will be returned to the Company. The Company will not have any other obligations to Hengyi or its shareholders. Simultaneously the 75.8% ownership interest of Hengyi will be returned to Hengyi's shareholders or its designated party. As a result, Hengyi will cease to be a subsidiary of the Company.
The Company believes that in view of the unsatisfactory performance of Hengyi, this recission of the agreement and the disposal of Hengyi’s operations will have a positive impact on the Company's performance and financial results. The Company will use the returned consideration for the acquisition of better prospective companies.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 15 - BUSINESS COMBINATIONS, (continued)
Divestiture of Suzhou Hengyi, (continued)
All the parties to the divestiture agreed that the transaction took effect as of July 1, 2006, considering the fact that there was a significant change in the financial condition and operating performance of the two divested companies. The Company recognized a gain, net of tax, on the divestiture of $96,869 during the quarter ended September 30, 2006. The following demonstrates the carrying value of the assets at July 1, 2006.
| Items | | Suzhou Hengyi | | Suzhou Sintofarm | |
| | | | | | |
| Current Assets | | $ | 2,171,080 | | | 1,819,444 | |
| Property, Plant and Equipment | | | 1,425,215 | | | 598,172 | |
| Intangible Assets and Other Assets | | | 4,877,130 | | | 12,194 | |
| Total Assets | | | 8,473,426 | | | 2,429,810 | |
| | | | | | | | |
| Current Liabilities | | | 3,882,815 | | | 667,428 | |
| Long-term Liabilities | | | 1,076,100 | | | | |
| Minority Interest | | | | | | | |
| Shareholders' Equity | | | 3,514,511 | | | 1,762,382 | |
| Total Liabilities and Shareholders' Equity | | $ | 8,473,426 | | | 2,429,810 | |
According to agreement, Hengyi agreed to return $620,000 in three installments before the end of year 2007. In addition, Hengyi agreed to pay back the Company one third of retained earnings after acquisition before the end of year 2008 and two third of retained earnings after acquisition before the end of year 2009. However, the Company did not record a receivable because management cannot reasonably estimate the amount if any that might be paid.
Note 16 - SHAREHOLDERS’ EQUITY
Private placement closed on December 31, 2004 (the “Notes Private Placement”)
In January, 2005, we raised gross proceeds of $500,000 through the sales of promissory notes, pursuant to a subscription agreement (referred to as the Notes Subscription Agreement), which we entered into with twenty (20) accredited investors (referred to as the Notes Subscribers. Pursuant to the Notes Subscription Agreement, the Notes Subscribers received convertible notes (“Notes” or “Convertible Notes”) for a total aggregate amount of $500,000 with a maturity date of 180 days from the Notes issuance (the “Maturity”), bearing an interest rate on the principal balance of the Notes of 7% per annum payable at Maturity or upon satisfaction or discharge of the Note. Holder of the Note has the right to convert all, but not less than all, of the Notes into shares of our common stock (each a "Share") at one dollar per share. In September, 2005, the Notes Subscribers have agreed to extend the maturity date of the Notes until December 31, 2005. As of March 31, 2006, all of the Notes have been either converted into shares or have been redeemed.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 16 - SHAREHOLDERS’ EQUITY, (continued)
In addition, as an inducement for the Notes Subscribers to extend the maturity date, the Company has issued 42,500 additional shares to these Notes Holders who agreed to grant the extension as described above. Management determined the warrants have no value.
Upon the execution of the Notes Subscription Agreement, we also issued to the Notes Subscribers one (1) warrant for every one (1) Share that the convertible notes can convert into under the Notes Subscription Agreement (the “Note Warrants”). The exercise price of the majority of Note
Warrants is $1.50 per share. Pursuant to the Note Warrants, the Notes Subscribers are entitled to purchase an aggregate amount of 341,657 shares. The Note Warrants may be exercised only in full. The Note Warrants will expire three (3) years from issuance date of the Note Warrants. See also “Selling Shareholders.” Management determined the warrants have no value.
WestPark Capital Inc. ("WestPark") acted as our placement agent in the private placement described above. In consideration of WestPark’s services, we issued to WestPark or its designees 65,000 shares in consideration of its service as our private placement agent and 26,666 warrants representing the right to purchase up to 26,666 shares under the same terms as described in the preceding paragraph. Management determined the warrants have no value.
Pursuant to the Notes Subscription Agreement, we are required to file with the Securities and Exchange Commission ("SEC") a registration statement within 120 days after the issuance date of the Notes and the Note Warrants, which registers all the shares to which the Notes may be converted and the shares underlying the Note Warrants issued or issuable to the Notes Subscribers and WestPark in the private placement. In addition, pursuant to the Notes Subscription Agreement, we are required to pay a penalty of 5% per month if the registration statement has not become effective before the required date. The related penalties prior to the SB-2 registration effective date were accrued for and recorded by the Company. The SB-2 registration was filed and effective on May 11, 2006.
Common stock issued for lab use right
On March 8, 2005, the Company issued 300,000 shares of common stock to China Pharmaceutical University located in Nanjing, China, pursuant to a joint laboratory agreement and agreed to invest $36,245 into the laboratory in the next five years. The value of the 300,000 shares has not been stated in the agreement. The management originally estimated the stock value as $1.00 share. However, the management reevaluated the value of the stock based upon the stock performance in the past year and decided to discount the value of the stock to $0.10 per share as of December 31, 2005.
Private placement closed in June, 2005 (the “Initial Preferred A Private Placement”)
In June, 2005, we entered into a June subscription agreement, to which we refer as the Initial Preferred A Subscription Agreement, with each of twenty eight (28) accredited investors, to which we collectively refer as the Initial Preferred A Subscribers. Pursuant to the Initial Preferred A Subscription Agreement, the Initial Preferred A Subscribers received shares of our Series A Convertible Preferred Stock ("Series A Convertible Preferred Stock"), face value $1.00 per share, purchase price $1.00 per share convertible at a ratio of 1:1 into shares. For more information on Series A Convertible Preferred Stock, see “Description of Securities.”
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 16 - SHAREHOLDERS’ EQUITY, (continued)
Upon the execution of the Initial Preferred A Subscription Agreements, we also issued to the Initial Preferred A Subscribers one (1) warrant for every one (1) share of Series A Convertible Preferred Stock subscribed under the Initial Preferred A Subscription Agreements (“Initial Preferred A Warrants”). The exercise price of the Initial Preferred A Warrants is $2.00 per Share. Pursuant to the Initial Preferred A Warrants, the Initial Preferred A Subscribers are entitled to purchase an aggregate amount of 1,090,000 shares. The Initial Preferred A Warrants may be exercised only in full. The Initial Preferred A Warrants will expire three (3) years from the issuance date of the Initial Preferred A Warrants. Management determined the warrants have no value.
WestPark acted as our placement agent in the private placement described above. In consideration of WestPark’s services, we issued to WestPark or its designees 76,500 shares of common stock in consideration of its service as our private placement agent and 76,500 Initial Preferred A Warrants representing the right to purchase up to 76,500 shares under the same terms as described in the preceding paragraph. Management determined the warrants have no value.
Private placement closed on October 19, 2005 (the “Subsequent Preferred A Private Placement”)
On October 19, 2005, we entered into a subscription agreement, to which we refer to as the Subsequent Preferred A Subscription Agreement (together with the Initial Preferred A Subscription Agreement, the “Preferred A Subscription Agreement”), with each of three (3) accredited investors, to which we collectively refer to as the Subsequent Preferred A Subscribers (together with the Initial Preferred A Subscribers, the “Preferred A Subscribers”). Pursuant to the Subsequent Preferred A Subscription Agreement, the Subsequent Preferred A Subscribers received 62,500 shares of our Series A Convertible Preferred Stock.
Upon the execution of the Subsequent Preferred A Subscription Agreement, we also issued to the Subsequent Preferred A Subscribers one (1) warrant for every one (1) share of Series A Convertible Preferred Stock subscribed under the Subsequent Preferred A Subscription Agreement (“Subsequent Preferred A Warrants”, and together with the Initial Preferred A Warrants, the “Preferred A Warrants”). The Subsequent Preferred A Warrants has the same terms as of those of the Initial Preferred A Warrants and the Subsequent Preferred A Subscribers are entitled to purchase an aggregate amount of 62,500 shares. Management determined the warrants have no value.
WestPark acted as our placement agent in the private placement described above. In consideration of WestPark’s services, we issued to WestPark or its designees 5,625 common stock in consideration of its service as our private placement agent and 5,625 warrants representing the right to purchase up to 5,625 shares of our common stock under the same terms as described in the preceding paragraph. Management determined the warrants have no value. Pursuant to the Preferred A Subscription Agreement, we are required to file with the SEC a registration statement within 120 days, which registers all the shares to which the Series A Preferred Convertible Stock may be converted and the shares underlying the Preferred A Warrants issued or issuable to the Preferred A Subscribers and WestPark in the private placements.
In addition, pursuant to Initial Preferred A Subscription Agreement and Subsequent Preferred A Subscription Agreement we are required to pay a penalty of 5% per month if the registration statement has not become effective before the required date. The related penalties prior to the SB-2 effective date were accrued by the Company. The SB-2 was filed and effective on May 11, 2006.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 16 - SHAREHOLDERS’ EQUITY, (continued)
Dividend Paid on the Preferred Stocks
Pursuant to the Initial Preferred A Subscription Agreement, the Initial Preferred A Subscribers were entitled to receive annual dividend of 7% of the amount invested. The total dividends paid was $8,400 in January 2006.
Issuance of Shares for Requisitions
On May 31, 2005, the Company issued 3,300,000 shares of common stock to 38 persons including and represented by Shi Ming Sheng or its assigned natural person or legal representative, all 38 persons are shareholders of Suzhou Erye Pharmaceutical Limited Co., pursuant to the acquisition of Erye effective June 11, 2005.
Issuance of Shares/Warrants for Services
During 2005, the Company engaged with Consulting For Strategic Growth 1, Ltd. for six months ending May 14, 2006. The terms of the agreement are for the consultant to receive cash payment of $4,000 plus value at $2,500 common stocks and 10,000 three year warrants to purchase common stock at $0.50 per share, each month during the agreement. In December 2005, the Company reengaged this company for a period of six months and the terms of the agreement are for the consultant to receive a cash payment of $4,000 plus common stock valued at $2,500 and 10,000 three year warrants to purchase common stock at $0.50 per share, each month during the agreement. The shares of common stock will be issued to the consultant in 2006.
On April 1, 2005, the Company entered into an advisory agreement with Robin Smith as the Chairman of the Company's Advisory Board for a period of one year. The terms of the agreement are for Ms. Smith to receive 60,000 shares of unregistered common stock plus three year warrants to purchase 35,000 shares of common stock of the Company at an exercise price equal to $2.00. The shares of common stock were issued to Ms. Smith in 2005.
On April 1, 2005, the Company engaged a consultant for a period of seven months ending October 31, 2005. The terms of the agreement are for the consultant to receive a cash payment of $50,000 plus 50,000 shares of common stock of the Company. On December 20, 2005, the Company reengaged this consultant for a period ending December 31, 2006 and the terms of the agreement are for the consultant to receive a cash payment of $50,000 plus 50,000 shares of common stock of the Company.
Private placement closed in February 2, 2006 (the “Initial Common Stock Private Placement”)
On February 2, 2006, we entered into a securities purchase agreement, to which we refer as the Initial Common Stock Securities Purchase Agreement, with GCE Property Holdings, Inc. ("GCE"), to which we refer as the Initial Common Stock Purchaser. Pursuant to the Initial Common Stock
Securities Purchase Agreement, we issued one million (1,000,000) shares of our common stock to the Initial Common Stock Purchaser at $1.00 per share.
Upon the execution of the Initial Common Stock Securities Purchase Agreement, we also issued to the Initial Common Stock Purchaser one million (1,000,000) warrant with an exercise price of $1.25 per share of common stock (“Initial Common Stock Warrants”). The Initial Common Stock Warrants will expire four (4) years from the date of the issuance.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
Note 16 - SHAREHOLDERS’ EQUITY, (continued)
Under the Initial Common Stock Securities Purchase Agreement, we have agreed not to issue shares
or securities convertible or exchangeable into shares at a price equal to or lower than $1.00 per share and not issue any warrants or securities that are exercisable into shares at a price lower than $1.25 per share.
Pursuant to the Initial Common Stock Securities Purchase Agreement, the Initial Common Stock Purchaser was granted a right to participate up to 100% in any of our subsequent financing by offering of common stock or common stock equivalents in the twelve (12) months the effective date of the registration statement..
Pursuant to a registration rights agreement entered between the Initial Common Stock Purchaser and us, we have agreed to file a registration statement with the SEC covering the shares and shares underlying the Warrants, within 65 days from this closing and obtain effectiveness of such registration statement within 170 days from closing. In case the Company does not meet the filing deadlines listed above we will pay a penalty of 1% of the aggregate investment made by Investors and on each monthly anniversary of such default an amount equal to 1.5% of the aggregate investment amount of Investors, respectively. The SB-2 registration statement was filed timely and beame effective on May 11, 2006. Therefore, no penalties were incurred.
Private placement closed on March 10, 2006 (the “Subsequent Common Stock Private Placement”)
On March 10, 2006, we entered into a securities purchase agreement, to which we refer as the Subsequent Common Stock Securities Purchase Agreement, with various investors, to which we refer as the Subsequent Common Stock Purchaser. Pursuant to the Subsequent Common Stock Securities Purchase Agreement, we issued 6,831,863 shares to the Subsequent Common Stock Purchaser at $1.01 per share.
Upon the execution of the Subsequent Common Stock Securities Purchase Agreement, we also issued to the Subsequent Common Stock Purchaser 6,831,684 warrants with an exercise price of $1.26 per share of common stock (“Subsequent Common Stock Warrants”). The Subsequent Common Stock Warrants will expire four (4) years from the date of the issuance.
Under the Subsequent Common Stock Securities Purchase Agreement, we have agreed not to issue shares or securities convertible or exchangeable into shares at a price equal to or lower than $1.01 per share and not to issue any warrants or securities that are exercisable into shares at a price lower than $1.26 per share.
Pursuant to the Subsequent Common Stock Securities Purchase Agreement, subject and subordinated to the participation rights of the Initial Common Stock Purchasers, the Subsequent Common Stock Purchaser was granted a right to participate up to 100% in any of our subsequent financing by offering of common stock or common stock equivalents in the twelve (12) months from the effective date of the registration statement of which this prospectus constitutes a part.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. China Biopharmaceuticals Holdings, Inc. is referred to herein as "we", "our,", "us", or "the Company". The words or phrases "would be," "will allow," "expect to", "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," or similar expressions are intended to identify forward-looking statements. Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities;(c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under "Liquidity and Capital Resources". Statements made herein are as of the date of the filing of this Form 10-QSB with the Securities and Exchange Commission ("SEC") and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
OUR BUSINESS
We are a vertically integrated bio-pharmaceutical company focused on developing, manufacturing and distributing innovative drugs in the People's Republic of China ("China" or PRC"). Our mission is to maximize investment returns for our shareholders by integrating our strong drug discovery and development strength with manufacturing and commercialization capabilities and by actively participating in the consolidation and privatization of the pharmaceutical industry in China to become a dominant player in the bio-pharmaceutical industry in China.
On May 16, 2006, we entered into a Conditional Stock Purchase Agreement with RACP Pharmaceutical Holdings Ltd., a British Virgin Islands company ("RACP") and certain other parties to ultimately acquire 100% ownership interest in Shenyang Enshi Pharmaceutical Co, Ltd. ("Enshi"), a pharmaceuticals manufacturer. On September 6, 2006, our management moved into Enshi's offices and acquired effective control of Enshi's operations. On September 30, 2006, all required paperwork and legal procedures and audit procedures have been completed and the title ownership of 100% of Enshi has been transferred to us.
On August 3, 2006, we filed an application with the American Stock Exchange ("AMEX") to list our shares of common stock on the AMEX.
On August 29, 2006, we entered into an agreement with the minority shareholders of our subsidiary, Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd. ("Suzhou Hengyi") to divest the subsidiary and another grand-subsidiary, Suzhou Sintofarm, in which Suzhou Hengyi has 50% controlling ownership interest from its subsidiary portfolio. Pursuant to the agreement all consideration paid to the shareholders of Suzhou Hengyi, namely, 1,200,000 shares of our common stock and $620,000 was to be returned to us and we no longer have any other obligations to Suzhou Hengyi or its shareholders. Simultaneously our 75.8% ownership interest of Suzhou Hengyi has been returned to Suhzou Hengyi's shareholders or its designated party. As a result, Suzhou Hengyi ceased to be a subsidiary of our company. We believe that in view of the unsatisfactory performance of Suzhou Hengyi, this recession and disposal will have a positive impact on our performance and financial results We will use the returned consideration for acquisitions of better candidates.
On December 31, 2005, our wholly owned subsidiary, CBC, entered into an Agreement with four shareholders of Chengdu Tianyin Pharmaceutical Limited Company, a pharmaceutical company located in the city of Chengdu, Sichuan Province, China ("Tianyin") to acquire a 51% ownership interest in Tianyin. We are currently evaluating the viability of the implementation of and may terminate the Tianyin purchase agreement in view of Tianyin's performance. Based on the pre-conditions in the purchase Agreement, the Company decided not to assume the operation control of Tianyin and is exploring options of changing the transaction terms or abandoning the acquisition of Tianyin should Tianyin's shareholders not compromise and meet the company's request for a reasonable purchased price. Appropriate disclosure will be made upon the final determination by the board of the directors.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to understanding of our financial statements. The application of these polices requires management to make estimates and assumptions that affect the valuation of assets and expenses during the reporting period. There can be no assurance that actual results will not differ from these estimates. The impact and any associated risks related to these policies on our business operations are discussed below.
REVENUE AND REVENUE RECOGNITION
We have three categories of revenue resources, revenue from sales of new drugs formulas, revenue from R&D service rendered by the Company and revenue from sales of medical product. The Company recognizes revenue from product and drug formula sales when title has been transferred, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable, and the collection of the related receivable is probable which is generally at the time of shipment. Allowances are established for estimated rebates, wholesaler charge backs, prompt pay sales discounts, product returns, and bad debts. For revenue from R&D service, revenue is recognized when milestone goals are achieved, milestone payments are no longer refundable, and continued performance of future R&D services related to the milestone are not required.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management judgment and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness or weakening in economic trends could have a significant impact on the collectibility of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Our accounts receivable are concentrated in numbers of pharmaceutical manufacturers. We believe that a significant change in the liquidity or financial position of few of our big customers would have a material adverse impact on the collectibility of the Company's accounts receivable. Based upon our historical experience, payment delays may materially influence our financial and operating results.
INCOME TAX
Significant judgment is required in determining our income tax provision. In the ordinary course of business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Although we believe that our estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made. We apply an asset and liability approach to accounting for income taxes. Deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The recoverability of deferred tax assets is dependent upon our assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax asset. In the event we determine that future taxable income will not be sufficient to utilize the deferred tax asset, a valuation allowance is recorded.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005
On June 11, 2005, the Company signed a purchase agreement which was amended on August 3, 2005 to acquire approximately 51% ownership interest of Suzhou Erye Pharmaceutical Limited Company ("Erye"). The operating results for the three months ended September 30, 2005 reported in our quarterly report on Form 10-QSB filed with the SEC on August 15, 2005 included Erye's results for the period of September 11, 2005 to September 30, 2005. We took actual control of Enshi on September 6, 2006. and the operating results for the three months ended September 30, 2006 reported in this quarterly report includes Enshi's results for the period of September 6, 2006 to September 30, 2006. On August 28, 2006, the Company entered into an agreement with the minority shareholders of Suzhou Hengyi to divest the subsidiary and another grand-subsidiary, Suzhou Sintofarm, in which Suzhou Hengyi has 50% controlling ownership interest from its subsidiary portfolio. All the parties to the divestiture agreement that the transaction took effect as of June 30, 2006. The operating results for the three months ended September 30, 2006 reported in this quarterly report does not include Suzhou Henyi's results for the period of July 1, 2006 to September 30, 2006.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
| | | Three months ended September 30, | |
| | | 2006 | | 2005 | |
| | | (Unaudited) | | (Unaudited) | |
| REVENUES | | $ | 7,962,641 | | $ | 7,498,008 | |
| | | | | | | | |
| COST OF GOODS SOLD | | | 4,885,800 | | | 5,512,480 | |
| | | | | | | | |
| GROSS PROFIT | | | 3,076,841 | | | 1,985,528 | |
| | | | | | | | |
| OPERATING EXPENSES | | | | | | | |
| Research and development expenses | | | 20,636 | | | | |
| Selling, general and administrative expenses | | | 1,108,674 | | | 1,078,393 | |
| Total Operating Expenses | | | 1,129,310 | | | 1,078,393 | |
| | | | | | | | |
| INCOME FROM OPERATIONS | | | 1,947,531 | | | 907,135 | |
| | | | | | |
| | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | |
| Interest income ( expense) | | | (383,537 | ) | | - | |
| Other income (expense) | | | (91,844 | ) | | (23,119 | ) |
| Total Other Income (expense) | | | (475,381 | ) | | (23,119 | ) |
| | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | 1,472,150 | | | 884,016 | |
| | | | | | | | |
| PROVISION FOR INCOME TAXES | | | 197,165 | | | - | |
| | | | | | | | |
| INCOME BEFORE MINORITY INTEREST | | | 1,274,985 | | | 884,016 | |
| | | | | | | | |
| MINORITY INTEREST | | | 295,384 | | | 367,764 | |
| | | | | | | | |
| INCOME FROM CONTINUING OPERATION | | | 979,601 | | | 516,252 | |
| | | | | | | | |
| GAIN FROM OPERATION OF DISCONTINUED | | | | | | | |
| Gain from operation of discontinued | | | 146,771 | | | - | |
| Income tax liability | | | 49,902 | | | - | |
| Net of Gain on Operation Discontinued | | | 96,869 | | | - | |
| | | | | | | | |
| NET INCOME | | | 1,076,470 | | | 516,252 | |
| | | | | | | | |
| OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | |
| Foreign currency translation adjustment | | | 151,701 | | | - | |
| | | | | | | | |
| COMPREHENSIVE INCOME (LOSS) | | $ | 1,228,171 | | $ | 516,252 | |
| | | | | | | | |
| INCOME PER SHARE OF COMMON STOCK | | | | | | | |
| BASIC | | | | | | | |
| CONTINUING OPERATIONS | | $ | 0.03 | | $ | 0.02 | |
| | | | | | | | |
| DISCONTINUED OPERATIONS | | | 0.00 | | | 0.00 | |
| | | | | | | | |
| NET INCOME | | $ | 0.03 | | $ | 0.02 | |
| DILUTED | | | | | | | |
| CONTINUING OPERATIONS | | $ | 0.03 | | $ | 0.02 | |
| | | | | | | | |
| DISCONTINUED OPERATIONS | | | 0.00 | | | 0.00 | |
| | | | | | | | |
| NET INCOME | | $ | 0.03 | | $ | 0.02 | |
| | | | | | | | |
| WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC | | | 34,902,548 | | | 28,133,757 | |
| | | | | | | | |
| WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED | | | 35,832,548 | | | 26,218,201 | |
REVENUE
Revenue for the three months ended on September 30, 2006 was $7,962,641, while the revenue for the three months ended September 30, 2005 was $7,498,008, representing an approximately 6.2% increase. The increase is attributable mainly to organic growth of revenue generated by Erye, as well as to revenue generated as a result of the acquisitions of Enshi and which was not reflected in the Company's financial statements for the three months ended September 30, 2005. In addition, due to the effect of divestiture of Hengyi, effective of July 1, 2006, revenue of Hengyi was not included in the period for the three months ended September 30, 2006 but was included in September 30, 2005. Otherwise, the increase in revenue for the three months ended September 20, 2006 would have been higher if revenue of Hengyi was included in comparison to revenue for the three months ended September 30, 2005.
COST OF GOODS SOLD
Cost of goods sold for the three months ended on September 30, 2006 was $4,885,800 as compared to $5,512,480 for the three months ended September 30, 2005. Cost of goods sold as a percentage of sales revenues was approximately 61% for the three months ended September 30, 2006 as compared to approximately 74% for the three months ended September 30, 2005. The decrease of cost of goods sold as a percentage of sales revenues is primarily attributable to the reduced manufactured cost on some products and the high gross profit margin of ENSHI’S products. Also, due to the effect of divestiture of Hengyi, its cost of goods sold was not included in the period for the three months ended September 30, 2006 but was included in September 30, 2005. Accordingly, cost of goods would have been higher if Hengyi’s cost of goods sold was included the period for the three months ended September 30, 2006 in comparison to cost of goods for the three months ended September 30, 2005.
GROSS PROFIT
Gross profit in the three months ended on September 30, 2006 amounted at $3,076,841, as compared to $1,985,528 for the three months ended September 30, 2005, representing approximately 55% increase. The gross profit margin for the three months ended September 30, 2006 was 39% as compared to approximately 26% for the three months ended September 30, 2005. The increase in gross profit margin is mainly due to Enshi's high gross profit margin.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2006 were $1,129,310 as compared to $1,078,393 for the three months ended September 30, 2005, representing 5% increase. The increase in operating expenses is primarily attributable to small increase in SG&A expense.
R&D
Research and Development cost for the three months ended September 30, 2006 was $20,636 as compared to $0 for the three months ended September 30, 2005. The increase is mainly due to the research and development activities conducted by Keyuan.
NET INCOME
Net Income for the three months ended September 30, 2006 was $1,076,470 as compared to net income of $516,252 for the three months ended September 30, 2005, representing 109% increase. The increase of the net income of the Company is mainly due to the strong organic growth of Erye as well as to net income generated as a result of the acquisitions of Enshi and which was not reflected in the Company's financial statements for the three months ended September 30, 2005.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005
On June 11, 2005, the Company signed a purchase agreement which was amended on August 3, 2005 to acquire approximately 51% ownership interest of Erye. The operating results for the nine months ended September 30, 2005 reported in our quarterly report on Form 10-QSB filed with the SEC on August 15, 2005 included Erye's results for the period of September 11, 2005 to September 30, 2005. We took actual control of Enshi on September 6, 2006 and the operating results for the nine months ended September 30, 2006 reported in this quarterly report includes Enshi's results for the period of September 6, 2006 to September 30, 2006. On August 29, 2006, the Company entered into an agreement with the minority shareholders of Suzhou Hengyi to divest the subsidiary and another grand-subsidiary, Suzhou Sintofarm, in which Suzhou Hengyi has 50% controlling ownership interest from its subsidiary portfolio. The operating results for the nine months ended September 30, 2006 reported in this quarterly report does not include Suzhou Hengyi's results for the period of July 1, 2006 to September 30, 2006.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
| | | Nine months ended September 30, | |
| | | 2006 | | 2005 | |
| | | (Unaudited) | | (Unaudited) | |
| REVENUES | | $ | 21,233,187 | | $ | 13,129,081 | |
| | | | | | | | |
| COST OF GOODS SOLD | | | 14,079,123 | | | 9,446,977 | |
| | | | | | | | |
| GROSS PROFIT | | | 7,154,064 | | | 3,682,104 | |
| | | | | | | | |
| OPERATING EXPENSES | | | | | | | |
| Research and development expenses | | | 504,401 | | | | |
| Selling, general and administrative expenses | | | 2,620,645 | | | 2,039,938 | |
| Total Operating Expenses | | | 3,125,046 | | | 2,039,938 | |
| | | | | | | | |
| INCOME FROM OPERATIONS | | | 4,029,019 | | | 1,642,166 | |
| | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | |
| Interest income ( expense) | | | (387,739 | ) | | - | |
| Other income (expense) | | | (336,007 | ) | | (35,694 | ) |
| Total Other Income (expense) | | | (723,746 | ) | | (35,694 | ) |
| | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | 3,305,272 | | | 1,606,472 | |
| | | | | | | | |
| PROVISION FOR INCOME TAXES | | | 346,776 | | | - | |
| | | | | | | | |
| INCOME BEFORE MINORITY INTEREST | | | 2,958,496 | | | 1,606,472 | |
| | | | | | | | |
| MINORITY INTEREST | | | 954,403 | | | 557,094 | |
| | | | | | | | |
| INCOME FROM CONTINUING OPERATIONS | | | 2,004,093 | | | 1,049,378 | |
| | | | | | | | |
| GAIIN FROM DISCONTINUED OPERATION | | | | | | | |
| Gain from operations of discontinued | | | 146,771 | | | - | |
| Income tax liability | | | 49,902 | | | - | |
| Net of Gain on Operation Discontinued | | | 96,869 | | | - | |
| | | | | | | | |
| NET INCOME | | | 2,100,962 | | | 1,049,378 | |
| | | | | | | | |
| OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | |
| Foreign currency translation adjustment | | | 670,805 | | | - | |
| | | | | | | | |
| COMPREHENSIVE INCOME (LOSS) | | $ | 2,771,767 | | $ | 1,049,378 | |
| | | | | | | | |
| INCOME PER SHARE OF COMMON STOCK | | | | | | | |
| BASIC | | | | | | | |
| CONTINUING OPERATIONS | | | 0.06 | | | 0.04 | |
| | | | | | | | |
| DISCONTINUED OPERATIONS | | | 0.00 | | | 0.00 | |
| | | | | | | | |
| NET INCOME | | | 0.06 | | | 0.04 | |
| | | | | | | | |
| DILUTED | | | | | | | |
| CONTINUING OPERATIONS | | | 0.06 | | | 0.04 | |
| | | | | | | | |
| DISCONTINUED OPERATIONS | | | 0.00 | | | 0.00 | |
| | | | | | | | |
| NET INCOME | | | 0.06 | | | 0.004 | |
| | | | | | | | |
| WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC | | | 34,902,548 | | | 26,218,201 | |
| | | | | | | | |
| WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED | | | 35,832,548 | | | 26,218,201 | |
REVENUE
Revenue for the nine months ended on September 30, 2006 was $21,233,188, while the revenue for the nine months ended September 30, 2005 was $13,129,081, representing an approximately 62% increase. The increase is attributable mainly to strong organic growth of revenue generated by Erye, as well as to revenue generated as a result of the acquisition of Enshi and which was not reflected in the Company's financial statements for the nine months ended September 30, 2005. In addition, due to divestiture effective as of July 1, 2006, Hengyi’s revenue was included for the six months ended June 30, 2006 but was not included for the three months ended September 30, 2006 in comparison with revenue for the nine months ended September 30, 2005 which Hengyi’s revenue was included. Therefore, the revenue would have been higher if revenue of Hengyi was included for the three months ended September 30, 2006.
COST OF GOODS SOLD
Cost of goods sold for the nine months ended on September 30, 2006 was $14,079,123 as compared to $9,446,977 for the nine months ended September 30, 2005. Cost of goods sold as a percentage of sales revenues was approximately 66% for the nine months ended September 30, 2006 as compared to approximately 72% for the nine months ended September 30, 2005. The increase of cost of goods sold as a percentage of sales revenues is primarily attributable to the acquisition of Enshi. In addition, due to divestiture effective as of June 30, 2006, Hengyi’s cost of goods sold was included for the six months ended June 30, 2006 but was not included for the three months ended September 30, 2006 in comparison with cost of goods sold for the nine months ended September 30, 2005 which Hengyi’s cost of goods sold was included for the nine months ended September 30, 2005. Therefore, the cost of goods sold would have been higher if cost of goods sold of Hengyi was included for the three months ended September 30, 2006.
GROSS PROFIT
Gross profit in the nine months ended on September 30, 2006 amounted at $7,154,064, as compared to $3,682,104 for the nine months ended September 30, 2005, representing approximately 94% increase. The gross profit margin for the nine months ended September 30, 2006 was 34% as compared to approximately 28% for the nine months ended September 30, 2005. The increase in gross profit margin is mainly due to Enshi's high gross profit margin. In addition, due to divestiture effective as of June 30, 2006, Hengyi’s revenue and cost of goods sold was included for the six months ended June 30, 2006 but was not included for the three months ended September 30, 2006 in comparison with revenue and cost of goods sold for the nine months ended September 30, 2005 which Hengyi’s revenue and cost of goods sold were included for the nine months ended September 30, 2005. Accordingly, gross profit would have been higher if revenue and cost of goods sold of Hengyi were included for the three months ended September 30, 2006.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2006 was $3,125,046 as compared to $2,039,938 for the nine months ended September 30, 2005, representing 53% increase. The increase in operating expenses is primarily attributable to increase in SG&A expense and R&D expenses incurred by Keyuan and acquisition of ENSHI.
R&D
Research and Development cost for the nine months ended September 30, 2006 was $504,401 as compared to $297,864 for the nine months ended September 30, 2005, representing a 69% increase. The increase is mainly due to the research and development activities conducted by Keyuan and Erye.
NET INCOME
Net Income for the nine months ended September 30, 2006 was $2,100,962 as compared to net income of $1,049,378 for the nine months ended September 30, 2005, representing 100% increase. The increase of the net income of the Company is mainly due to strong organic growth of Erye, as well as to net income generated as a result of the acquisitions of Enshi and which was not reflected in the Company's financial statements for the nine months ended September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2005, net cash provided by operating activities was $197,481, compared to an inflow of $1,117,294 for the nine months ended September 30, 2006. Net cash used by operating activities mainly results from large amount of account receivables. Net cash used in investing activities was $1,109,771 for the nine months ended September 30, 2005, compared to an outflow of $6,420,924 for the nine months ended September 30, 2006. Cash used by investing activities in the nine months ended September 30, 2006 mainly results from purchase of intangible assets, purchase of property and equipment, and dividend paid to shareholders. Net cash provided by financing activities was $2,453,073 for the nine months ended September 30, 2005, compared to an inflow of $6,710,647 for the nine months ended September 30, 2006. Cash provided by financing activities for the nine months ended September 30, 2006 results primarily from private placement offset by repayments of short term bank credit. Cash and cash equivalents as of nine month ended September 30, 2006 was $2,438,966.
For the nine months ended September 30, 2006, cash flow performance is below our management's expectation. This is mainly due to large amount of account receivables occurred during this period and extended aging of the account receivable. This has negative impact on the Company's working capital and weakened the Company's capital strength. During the nine month period of 2006, the pharmaceutical industry in China was significantly influenced by new government regulatory policies. For example, the government initialized an anti-corruption program prohibiting doctors to receive commissions and set price cap for drugs sold through hospitals. This has created significant negative impacts to all prescription drug manufacturers and drug distribution companies in the market. The Company's prescription drugs were mainly sold to hospitals through major drug distribution companies. During this period of time, such distribution companies have difficulties to sell the Company's prescription drugs to hospitals and collect money. It is still not clear how long the negative market environment will remain and how fast the market will recover from these regulatory impacts. Our management has been putting great efforts to strengthen the Company's cash flows by providing incentives to our distributors such as bonus discount on drug price, attracting these distributors to collect money from hospitals and shortening the age of account receivables. We believe that this government campaign shall gradually create a healthy and fair market for every player in the Chinese pharmaceutical industry and provide better opportunities for companies having clear competitive advantages. In addition, this is a unique period for merger and acquisition in China. To achieve our goal of continued acquisitions in the industry, we need to raise additional funding in the near future to fund such future acquisitions. In January of 2005, we raised gross proceeds of $500,000 through the sales of promissory note to accredited investors. In September of 2005, pursuant to an exemption under the Securities Act, we have conducted a private placement of approximately $1,090,000 with 28 accredited investors, through issuance of Series A Convertible Preferred Stock. In October of 2005, we conducted a private placement of additional Series A Convertible Preferred Stock worth $62,500. In February 2006, we conducted a private placement of our common stock with gross proceeds of $1,000,000. In March 2006, we sold additional shares of our common stock with gross proceeds of $6,900,000. We have filed a registration statement on form SB-2 covering the shares issued and issuable on March 24, 2006, which became effective on May 11, 2006. We have assumed a loan of $11,500,000 which was contracted on September 29, 2006("Grant Date") due to RimAsia Capital Partners, L.P. in connection with the acquisition of Enshi. The interest of the loan is to be paid semi-annually with an annual rate of 11%. We paid off $500,000 ahead of the down payment schedule. At September 30, 2006, the balance of the other long term liabilities $10,841,465.
On September 29, 2006, the Company's subsidiary Enshi made a distribution of $2,518,461 to the former shareholder of Enshi in the form of 2005 profit distribution. However the Enshi purchase agreement did not provide specificly about such distribution. The management of the Company expects to recover this amount from the former Enshi shareholder. The Company holds various amounts in terms of purchase price withholding and working capital withholding against the former Enshi shareholder. The management expects to resolve this matter shortly.
Going forward, our primary requirements for cash consist of: (1) acquisition of additional pharmaceutical manufacturing companies with GMP standard facilities in order to commercialize new drugs in our extensive new drug pipeline and further extend of product pipeline and expand the our sales network (2) Continued R&D for more selected new drug projects (3) build up sales network for new drug distribution (4) working capital requirements. We anticipate that our internal source of liquid assets may enable us to continue our operation activities other than acquisition activities for next three months. However, we anticipate that our current operating activities may not enable us to meet the anticipated cash requirements for future acquisition activities. External source of capital may be needed for our expansion. We are exploring bank loans and private equity financing to finance such expenditures and intend to raise equity through the capital market to allow us to accomplish our future acquisition goals.
MANAGEMENT ASSUMPTIONS
Management anticipates, based on internal forecasts and assumptions relating to our current operations, that existing cash and funds generated from operations may not be sufficient to meet capital requirements for future acquisition activities. We could therefore be required to seek additional financing. There can be no assurance that we will be able to obtain such additional financing at acceptable terms to us, or at all.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our operating subsidiaries are located in China. Their business activities are mainly in China using Chinese Renminbi as the functional currency. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions. As we rely entirely on revenues earned in China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues 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 our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations.
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. To date, however, we have not engaged in transactions of either type.
Since 1994 China has pegged the value of the Renminbi to the U.S.dollar. We do not believe that this policy has had a material effect on our business. However, there have been indications that the Chinese government may be reconsidering its monetary policy in light of the overall devaluation of the U.S. dollar against the Euro and other currencies during the last two years. In July 2005, the Chinese government revalued the Renminbi by 2.1% against the U.S. dollar, moving from Renminbi 8.28 to Renminbi 8.11 per dollar. The value of the Renminbi to the U.S. dollar was translated at 8.26 RMB to $1.00 USD at the end of September 30, 2005 and 7.90 RMB to $1.00 USD at the end of September 30, 2006. Because of the pegging of the Renminbi to the U.S. dollar is loosened, we anticipate that the value of the Renminbi appreciate against the dollar with the consequences discussed above.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued a revised Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation (SFAS No. 123(R)”, which supersedes APB opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This statement requires a public entity to recognize and measure the cost of employee services it receives in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). These costs will be recognized over the period during which an employee is required to provide service in exchange for the award-the requisite service period (usually the vesting period). This statement also establishes the standards for the accounting treatment of these share-based payment transactions in which an entity exchanges its equity instruments for goods or services. It addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. We implemented SFAS No. 123(R) effective January 1, 2006 which did not have a material impact on the Company’s results of operations, cash flow, or financial position.
In September 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20") and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change a cumulative effect of changing to the new accounting principle whereas SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle, unless it is impracticable.
SFAS No. 154 enhances the consistency of financial information between periods. We implemented SFAS No. 154 beginning with the Company's first quarter of fiscal year 2006. Currently SFAS No. 154 did not have a material impact on the Company's results of operations, financial position or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which addresses the measurement of fair value by companies when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS No. 157 provides a common definition of fair value to be used throughout GAAP which is intended to make the measurement of fair value more consistent and comparable and improve disclosures about those measures. SFAS No. 157 will be effective for an entity's financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect SFAS No. 157 will have on its consolidated financial position, liquidity, or results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans−−an amendment of FASB Statements No. 87, 88, 106, and 132(R)". One objective of this standard is to make it easier for investors, employees, retirees and other parties to understand and assess an employer's financial position and its ability to fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single−employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. SFAS No. 158 requires an employer to fully recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year−end statement of financial position, with limited exceptions. SFAS No. 158 requires an entity to recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87. This Statement requires an entity to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures for fiscal years ending after December 15, 2006.
ITEM 3. CONTROLS and PROCEDURES
