U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended: June 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from __________________ to _______________
Commission file number 0-28879
CHINA PHARMACEUTICALS INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)
BRITISH VIRGIN ISLANDS 98-0348508
(State or other jurisdiction of (IRS Employer incorporation
or organization) Identification No.)
14066 CATALINA STREET, SAN LEANDRO, CALIFORNIA 94577
(Address of principal executive offices)
(510) 483-2383
(Issuer's telephone number)
CHINA PHARMACEUCTICALS CORPORATION
3753 HOWARD HUGHES PARKWAY, #200, LAS VEGAS, NEVADA 89109
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
---- ----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date:
46,160,733 SHARES OF COMMON STOCK, $0.0001 PAR VALUE, AS OF
JUNE 30, 2004
Transitional Small Business Disclosure Format (check one); Yes No X
---- ----
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements 3
Consolidated Balance Sheet as of June 30, 2004 (unaudited) 3
Consolidated Statements of Operations and Comprehensive Loss
for the six months and three months ended June 30, 2004
and 2003 (unaudited) 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 2004 and 2003 (unaudited) 5
Notes to consolidated financial statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis or Plan of Operations 12
ITEM 3. Controls and Procedures 15
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Change in Securities 18
ITEM 3. Defaults upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURE
2
CHINA PHARMACEUTICIALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004 (UNAUDITED)
================================================================================
ASSETS
CURRENT ASSETS
Cash $ 853,127
Accounts Receivable 2,851,415
Inventory 490,798
Prepayment 2,936,139
Interest receivables 87,272
Loan receivables and other receivables 2,541,757
------------------
Total Current Assets 9,760,508
------------------
Property plant and equipment, net 1,819,725
Construction in progress 5,586,779
Long term investment 1,089,575
Advances due from related parties 77,007
Intangible assets, net of accumulated amortization
of $509,150 1,919,426
------------------
TOTAL ASSETS $ 20,253,020
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 828,377
Short term debt 3,025,902
Note payable 1,491,115
Accrued charges and other payables 1,231,390
Current portion of long term debt 74,892
Advance from related parties 217,561
------------------
Total current liabilities 6,869,237
------------------
LONG TERM DEBT 6,062,125
MINORITY INTEREST 350,544
STOCKHOLDERS' DEFICIT
Preferred stock, par value $0.0001 per share,
1,000,000 shares authorized, zero issued
and outstanding --
Common stock, par value $0.0001 per share,
50,000,000 shares authorized, 46,160,733 issued
and outstanding 10,702
Additional paid-in capital 9,637,325
Retained Deficit (2,676,914)
------------------
Total stockholders' deficit 6,971,113
------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 20,253,020
==================
See accompanying notes - unaudited
3
CHINA PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE SIX MONTH AND THREE MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
====================================================================================================================================
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30,2003
SALES $ 6,937,847 $ 786,885 $ 5,871,753 $ 421,096
COST OF SALES 6,205,920 689,306 5,156,571 332,709
-------------- -------------- -------------- -------------
GROSS MARGIN 731,926 97,579 715,182 88,387
-------------- -------------- -------------- -------------
OPERATING EXPENSES
General and administrative expenses 937,011 988,177 739,925 210,439
Research and development 53,606 - 7,192 -
Loss of Sale of Fixed Asset (Gain) - - (19,717) -
-------------- -------------- -------------- -------------
TOTAL OPERATING EXPENSES 990,617 988,177 727,400 210,439
-------------- -------------- -------------- -------------
OTHER INCOME
Interest income from loans receivables 105,995 - 43,673 -
Bank interest income 14,556 - 10,641 -
Interest expenses (118,127) - (80,820) -
Others, net 5,518 166,638 142 -
Foreign currency translation adjustment - (3,878) - 161
-------------- -------------- -------------- -------------
NET LOSS BEFORE TAX (250,749) (723,960) (38,582) (122,213)
Provision for income tax 2,009 - (2,243) -
NET LOSS AFTER TAX $ (252,758) $ (723,960) $ (36,339) $ (122,213)
============== ============== ============== =============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.33) $ (0.048) $ (0.05) $ (0.008)
============== ============== ============== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 759,802 15,196,035 759,802 15,196,035
============== ============== ============== =============
See accompanying notes - unaudited
4
CHINA PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
================================================================================
2004 2003
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (252,758) $ (258,082)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 874,353 49,891
Amortization of intangible assets 110,447 -
Increase in acquisition goodwill (353,905) -
Changes in operating assets and liabilities:
Accounts receivable (2,788,997) (106,867)
Inventory (386,795) 72,461
Prepaid expenses and other current assets (2,575,022) (66)
Accounts payable and accrued liabilities - 193,754
Interest receivable (50,961) -
Trade payables 698,907 -
Accrued charges and other payables 1,217,279 -
-------------- ---------------
Total adjustments (3,254,694) 209,173
-------------- ---------------
Net cash by (used in) operating activities (3,507,452) (48,909)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease/(Increase) in loans receivables 2,420,721 -
Loans to related parties - (182,767)
Purchase of property and equipment (1,495,080) (5,561)
Addition of construction in progress (498,905) -
Minority 350,544 -
Addition of intangible assets (1,107,333) -
-------------- ---------------
Net cash (used in) investing activities (330,053) (188,328)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Inception of short term loan 3,053,539 -
Repayment of long-term debt (42,916) -
Advance from an related party 217,561 -
Repayments to related parties (456,548) -
Proceeds from note payable - related party - 225,396
-------------- ---------------
Net cash provided by financing activities 2,771,636 225,396
-------------- ---------------
EFFECT OF EXCHANGE RATES ON CASH - (5,458)
NET INCREASE (DECREASE) IN CASH (1,065,869) (17,299)
CASH AT BEGINNING OF PERIOD 1,918,996 26,262
-------------- ---------------
CASH AT END OF PERIOD $ 853,127 $ 8,963
============== ===============
See accompanying notes - unaudited
5
CHINA PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-QSB for quarterly reports under section 13 or 15(d) of the Securities
Exchange Act of 1934. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and such adjustments are of a normal recurring nature. Operating
results for the six-month period ended June 30, 2004 are not necessarily
indicative of the results that may be expected for a full year of operations.
The Company at the completion of its recent reorganization and acquisition has
changed its fiscal year end from September 30 to December 31. Accordingly, the
quarter ended June 30, 2004 represents the Company's second fiscal quarter.
CONSOLIDATION
The accompanying pro forma consolidated balance sheet as of June 30, 2004 has
been prepared to give effect to the acquisition of Zheda Pharmacy by China
Pharma.
BUSINESS ACTIVITY
China Pharmaceuticals Corporation (China Pharma) was incorporated on June 17,
1996 under the laws of the State of Colorado and changed its domicile in
February 2001 to the State of Delaware. China Pharma recently changed its name
due to the acquisition of Zhejiang University Pharmaceutical Co., Ltd. ("Zheda
Pharmacy"), a company incorporated in China. China Pharmaceuticals Corporation
believes that it is positioned to become a leader in China's fast growing
pharmaceutical industry. E-Trend Networks, Inc (E-Trend) a former long time
subsidiary was recently spun off by way of a dividend distribution to the
shareholders of record on April 22, 2004 and now operates independent of China
Pharma.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Expenditures for major betterments
and additions are charged to the asset accounts, while replacements, maintenance
and repairs, which do not extend the lives of the respective assets, are charged
to expense currently.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
6
CHINA PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets. Amortization of leasehold
improvements and property under capital leases is computed on a straight-line
basis over the shorter of the estimated useful lives of the assets or the term
of the lease. The range of useful lives is between 3 and 10 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires that the Company disclose estimated
fair values for its financial instruments. The following methods and assumptions
were used by the Company in estimating the fair values of each class of
financial instruments disclosed herein:
Cash - The carrying amount approximates fair value because of the short maturity
of those instruments.
Notes payable - The fair value of notes payable are estimated using discounted
cash flows analyses based on the Company's incremental borrowing rates for
similar types of borrowing arrangements. At June 30, 2004, the fair value
approximates the carrying value.
Advances due from related parties - The fair value of advances due from related
parties are determined by calculating the present value of the instruments using
a current market rate of interest as compared to the stated rate of interest and
giving effect for the right to offset with the note payable to stockholder in
the event of non-performance. At June 30, 2004, the fair value approximates the
carrying value.
INCOME TAXES
The Company accounts for income taxes according to Statement of Financial
Accounting Standards No. 109, which requires a liability approach to calculating
deferred income taxes. Under this method, the Company records deferred taxes
based on temporary differences between the tax bases of the Company's assets and
liabilities and their financial reporting bases. A valuation allowance is
established when it is more likely than not that some or all of the deferred tax
assets will not be realized.
STOCK COMPENSATION
Options granted to employees under the Company's Stock Option Plan are accounted
for by using the intrinsic method under APB Opinion 25, Accounting for Stock
Issued to Employees (APB 25). In October 1995, the Financial Accounting
Standards Board issued Statement No. 123, Accounting for Stock-Based
Compensation (SFAS 123), which defines a fair value based method of accounting
for stock options. The accounting standards prescribed by SFAS 123 are optional
and the Company has continued to account for stock options under the intrinsic
value method specified in APB 25.
7
CHINA PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
The Company applies Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128) which requires dual presentation of net earnings
(loss) per share: Basic and Diluted. Basic earnings (loss) per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed using the weighted average number
of common shares outstanding during the period adjusted for the effect of
dilutive outstanding options and warrants. Outstanding stock options and
warrants were not considered in the calculation of diluted net loss per share as
their effect was anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted 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 respective reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142), which is effective for fiscal years beginning after December 15,
2002, except goodwill and intangible assets acquired after June 30, 2002 are
subject immediately to the non-amortization and amortization provisions of this
Statement. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives. The Company has not yet
determined what the effects of this Statement will be on its financial position
and results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations", effective for fiscal years beginning after June 15, 2002. This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. The adoption of this Statement did not have a material impact
on the financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-lived Assets", effective for fiscal years beginning after
December 15, 2001. This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The adoption of this
Statement did not have a material impact on the financial statements.
8
CHINA PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
This statement, among other things, eliminates an inconsistency between required
accounting for certain sale-leaseback transactions and provides other technical
corrections. The adoption of this Statement did not have a material impact on
the financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3. This statement is effective for exit
or disposal costs initiated after December 31, 2002, with early adoption
encouraged. The Company has not yet determined what the effects of this
Statement will be on its financial position and results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No. 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company has not yet determined what the effects of this Statement will be on its
financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of this
Statement did not have a material impact on the financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ended
after December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. The Company has not yet
determined what the effects of this Statement will be on its financial position
and results of operations.
9
CHINA PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company has not yet
determined what the effects of this Statement will be on its financial position
and results of operations.
NOTE 2. LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern.
Going concern assumes that the Company will continue in operations for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of operations.
The Company has incurred substantial operating losses and negative cash flows
from operations from inception through March 31, 2004. However, it has
effectively completed a full restructure whereby its money losing subsidiary,
E-Trend Networks, Inc., has been spun out to the shareholders and will continue
operations as an independent company and the new acquisition of Zheda Pharmacy
has been completed. Management believes that the Company will now become cash
flow positive from operations by the end of its new fiscal year ending December
31, 2004. However, there can be no assurance that this will occur. In the
absence of achieving positive cash flows from operations or obtaining additional
debt or equity financing, the Company may have difficulty meeting obligations as
they become due, and may be forced to discontinue a business segment or overall
operations.
Management believes that actions presently being taken, as described in the
preceding paragraph, provide the opportunity for the Company to continue as a
going concern, however, there is no assurance this will occur.
NOTE 3. RELATED PARTY TRANSACTIONS
NOTES PAYABLE STOCKHOLDER
At June 30, 2004, E-Trend Networks, Inc. has borrowed a total of $209,636 from
eAngels EquiDebt Partners V, a related party. These loans are all part of
E-Trend Networks, Inc. and will not be part of the debts of China Pharma going
forward. The notes bear and are due on June 30, 2004.
10
CHINA PHARMACEUTICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3. RELATED PARTY TRANSACTIONS (CONTINUED)
NOTES PAYABLE STOCKHOLDER (CONTINUED)
On February 26th, 2004, the Company borrowed $225,000 from China Merchants
Di-Chain Investments Holdings Limited in order to complete the reorganization
and transaction. This loan has been booked as a short-term loan with no interest
for 6 months.
ADVANCES DUE FROM RELATED PARTIES
At June 30, 2004, the Company has advanced a total of $77,007 to an entity
controlled by the majority shareholder of the Company. These advances bear no
interest. Again these notes were part of E-Trend Networks, Inc. and are no
longer assets of China Pharma. During the six months period, DFCT paid various
Company secretary fees, filling fees and Accountancy fees on behalf of CPCL. The
outstanding amount of $217,561 was recorded under the item Advance from related
party.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Management Discussion and Analysis (MD&A) focuses on key statistics from
the consolidated financial statements of China Pharmaceuticals Corporation for
the six months ended June 30, 2004, and pertains to known risks and
uncertainties relating to its businesses. This MD&A should not be considered
all-inclusive, as it excludes changes that may occur in general economic,
political, and environmental conditions. This MD&A of the financial condition
and results of operations for the three and six months ended June 30, 2004,
should be read in conjunction with the consolidated financial statements and
related notes of China Pharmaceuticals Corporation.
RECENT EVENTS
In the first quarter of fiscal 2004 (January 2004 through March 2004), China
Pharma (formerly Wilmington Rexford) underwent significant financial
restructuring to help stop the cash burn due to continued money losing
operations. On February 13, 2004, China Pharma (formerly Wilmington Rexford)
entered into a complete reorganization plan and agreement for the acquisition of
a Chinese-based company. The terms of this new plan provided for full payment of
all outstanding China Pharma (formerly Wilmington Rexford) debts and allowed
E-Trend Networks, Inc. to spin off and continue as a separate public company.
ACQUISITION OR DISPOSITION OF ASSETS
On May 24, 2004, the registrant closed its acquisition of 87.475% of Zhejiang
University Pharmaceutical Co., Ltd., a Sino-foreign equity joint venture ("Zheda
Pharmacy"), pursuant to the terms of an agreement dated as of May 24, 2004 with
the owners of Sheung Tai Investments Limited. The registrant issued 13,848,220
shares of its common stock to the owners of Sheung Tai Investments Limited for
100% ownership of that entity. Sheung Tai Investments Limited owns 87.475% of
Zheda Pharmacy.
Also on May 24, 2004, the registrant issued 31,151,780 shares to China Merchant
DiChain Investment Holdings Limited and its designees for approximately $290,000
in debt conversion and assumption of costs of the transaction.
Following the acquisition the former shareholders of Sheung Tai Investments
Limited and China Merchants DiChain Investment Holdings Limited held a majority
of our total issued and outstanding common shares. Accordingly, the transaction
has been accounted for as a reverse takeover using the purchase method whereby
the assets and liabilities of the registrant have been recorded at their fair
market values and operating results have been included in our financial
statements from the effective date of purchase. The fair value of the net assets
acquired is equal to their book values. Also on May 24, 2004, the registrant
issued 31,151,780 shares to China Merchant DiChain Investment Holdings Limited
and its designees for approximately $290,000 in debt conversion and assumption
of costs of the transaction.
There are now 46,160,733 shares of common stock of the registrant issued and
outstanding.
12
For financial reporting purposes, the business combination was accounted for as
an additional capitalization of China Pharma (a reverse acquisition with Zheda
Pharmacy as the acquirer). The operations of Zheda Pharmacy are the continuing
operations of China Pharmaceuticals Corporation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to impairment of long-lived assets. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, we believe that
our estimates, including those for the above-described items, are reasonable.
IMPAIRMENT OF LONG-LIVED ASSETS. Our long-lived assets include property,
equipment, and goodwill. We assess impairment of long-lived assets whenever
changes or events indicate that the carrying value may not be recoverable. In
performing our assessment, we must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates change, in the future we may be required to record
impairment charges against these respective assets.
STOCK BASED COMPENSATION. Options granted to employees under the Company's Stock
Option Plan are accounted for by using the intrinsic method under APB Opinion
25, Accounting for Stock Issued to Employees (APB 25). In October 1995, the
Financial Accounting Standards Board issued Statement No. 123, Accounting for
Stock-Based Compensation (SFAS123), which defines a fair value based method of
accounting for stock options. The accounting standards prescribed by SFAS 123
are optional and the Company has continued to account for stock options under
the intrinsic value method specified in APB 25.
RESULTS OF OPERATIONS
NET SALES. Net sales were $6,937,847 and for the six months ended June 30, 2004,
as compared to $786,885 for the six months ended June 30, 2003, an increase of
$6,150,962 (782%). For the three months ended June 30, 2004, net sales were
$5,871,753, as compared to $421,096 for the three months ended June 30, 2003 an
increase of $ 5,450,657 (1,294%) over the three months ended June 30, 2003. The
increase compared with the corresponding period of the previous year was due to
inclusion of results from Zhejiang University Pharmaceutical Co., Ltd and its
subsidiaries after the completion of the merger.
GROSS MARGIN. Gross margin was $731,926 for the six months ended June 30, 2004
as compared to $97,579 for the 2003 period, and $715,182 for the three months
ended June 30,
13
2004, as compared to $88,387 for the 2003 period. The increase
was due to the change of product mix after the merger. Zhejiang University
Pharmaceutical Co., Ltd is principally engaged in the development and
manufacturing of medicine and health products for domestic sale to customers in
the PRC.
OPERATING EXPENSES. Operating expenses were $937,011 for the six months ended
June 30, 2004, as compared to $988,177 for the six months ended June 30, 2003,
and $739,925 for the three months ended June 30, 2004, and $210,439 for the 2003
period. The increases in operating expenses compared with the previous
corresponding periods were in line with the increase in sales.
NET LOSS. Net loss for the six months ended June 30, 2004 was $252,758, as
compared to $723,960 for the comparable 2003 period. Net loss for the three
months ended June 30, 2004 was $36,339, as compared to $122,213 in 2003.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2004, the Company had current assets of $9,760,508 and current
liabilities of $6,869,237, resulting in working capital of $2,891,271. Our
consolidated cash balance was $853,127 at June 30, 2004.
For the six months ended June 30, 2004, our operations used cash of $3,507,452.
Cash of $2,771,636 was provided by short-term loans. In addition to using cash
for operations, we used $330,053 for investing activities, which consisted
primarily of items for our expansion.
PLAN OF OPERATION
In July 2004, our shareholders approved a merger of our company with a
wholly-owned British Virgin Islands subsidiary. As a result, effective in August
2004, we have changed our name to China Pharmaceuticals International
Corporation and changed our domicile to the British Virgin Islands.
In the third and fourth quarters, our company, by establishing new factories and
developing new products, aims at building up its brand name of medicine and
health products in China.
Our company will focus on research and development of two kinds of products. The
first kind is the medicines of all-nature eye-drops for curing beneath the
eyeball diseases and Thymosin-alpha 1 medicines for enhancing human immunity
system. The second kind is all-natural health food and health products namely
Fruit-Queen Multi-Vitamin and Cha Duo Wei, extracts from vegetables and tea
leaves. Our company also develops dtoxic and anti-hepatize medicines.
Our company plans to actively promote the sale of its products by a series of
marketing activities around September 2004, aiming at launching 10 medicines and
health products for a projected turnover of RMB 100 to 120 million (US$12
to14.45 million).
14
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB, as well as
statements made by the company in periodic press releases, oral statements made
by the company's officials to analysts and shareholders in the course of
presentations about the company, constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance or achievements of
the company to be materially different from any future results, performance or
achievements expressed or implied by the forward looking statements.
ITEM 3. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF CONTROLS
As of the end of the period covered by this quarterly report on Form 10-QSB, we
evaluated the effectiveness of the design and operation of (i) our disclosure
controls and procedures ("Disclosure Controls"), and (ii) our internal control
over financial reporting ("Internal Controls"). This evaluation ("Evaluation")
was performed by our Chief Executive Officer ("CEO"), Di Fan, and Aaron Zhu, our
interim Chief Financial Officer ("CFO"). In this section, we present the
conclusions of our CEO and CFO based on and as of the date of the Evaluation,
(i) with respect to the effectiveness of our Disclosure Controls, and (ii) with
respect to any change in our Internal Controls that occurred during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect our Internal Controls.
CEO AND CFO CERTIFICATIONS
Attached to this annual report, as Exhibits 31.1 and 31.2, are certain
certifications of the CEO and CFO, which are required in accordance with the
Exchange Act and the Commission's rules implementing such section (the "Rule
13a-14(a)/15d-14(a) Certifications"). This section of the annual report contains
the information concerning the Evaluation referred to in the Rule
13a-14(a)/15d-14(a) Certifications. This information should be read in
conjunction with the Rule 13a-14(a)/15d-14(a) Certifications for a more complete
understanding of the topic presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS
Disclosure Controls are procedures designed with the objective of ensuring that
information required to be disclosed in our reports filed with the Commission
under the Exchange Act, such as this annual report, is recorded, processed,
summarized and reported within the time period specified in the Commission's
rules and forms. Disclosure Controls are also designed with the objective of
ensuring that material information relating to the Company is made known to the
CEO and the CFO by others, particularly during the period in which the
applicable report is being prepared. Internal Controls, on the other hand, are
procedures which are designed with the objective of providing reasonable
assurance that (i) our transactions are properly authorized, (ii) the Company's
assets are safeguarded against unauthorized or improper use, and (iii) our
15
transactions are properly recorded and reported, all to permit the preparation
of complete and accurate financial statements in conformity with accounting
principals generally accepted in the United States.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management does not expect that our Disclosure Controls or our Internal
Controls will prevent all error and all fraud. A control system, no matter how
well developed and operated, can provide only reasonable, but not absolute
assurance that the objectives of the control system are met. Further, the design
of the control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances so of
fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision -making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of a system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated objectives under all potential future conditions. Over
time, control may become inadequate because of changes in conditions, or because
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
SCOPE OF THE EVALUATION
The CEO and CFO's evaluation of our Disclosure Controls and Internal Controls
included a review of the controls' (i) objectives, (ii) design, (iii)
implementation, and (iv) the effect of the controls on the information generated
for use in this quarterly report. In the course of the Evaluation, the CEO and
CFO sought to identify data errors, control problems, acts of fraud, and they
sought to confirm that appropriate corrective action, including process
improvements, was being undertaken. This type of evaluation is done on a
quarterly basis so that the conclusions concerning the effectiveness of our
controls can be reported in our quarterly reports on Form 10-QSB and annual
reports on Form 10-KSB. The overall goals of these various evaluation activities
are to monitor our Disclosure Controls and our Internal Controls, and to make
modifications if and as necessary. Our external auditors also review Internal
Controls in connection with their audit and review activities. Our intent in
this regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including improvements and
corrections) as conditions warrant.
Among other matters, we sought in our Evaluation to determine whether there were
any significant deficiencies or material weaknesses in our Internal Controls,
which are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, or whether we had identified any
acts of fraud, whether or not material, involving management or other employees
who have a significant role in our Internal Controls. This information was
important for both the Evaluation, generally, and because the Rule
13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and CFO
disclose that information to
16
our Board (audit committee), and to our independent auditors, and to report on
related matters in this section of the quarterly report. In the professional
auditing literature, "significant deficiencies" are referred to as "reportable
conditions". These are control issues that could have significant adverse affect
on the ability to record, process, summarize and report financial data in the
financial statements. A "material weakness" is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce, to a relatively low level, the risk that misstatement
cause by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employee in the normal course of performing their assigned functions. We also
sought to deal with other controls matters in the Evaluation, and in each case,
if a problem was identified; we considered what revisions, improvements and/or
corrections to make in accordance with our ongoing procedures.
CONCLUSIONS
Based upon the Evaluation, the Company's CEO and CFO have concluded that,
subject to the limitations noted above, our Disclosure Controls are effective to
ensure that material information relating to the Company is made known to
management, including the CEO and CFO, particularly during the period when our
periodic reports are being prepared, and that our Internal Controls are
effective to provide reasonable assurance that our financial statements are
fairly presented inconformity with accounting principals generally accepted in
the United States. Additionally, there has been no change in our Internal
Controls that occurred during our most recent fiscal quarter that has materially
affected, or is reasonably likely to affect, our Internal Controls.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 2004, the registrant issued 13,848,220
shares in exchange for the outstanding shares of Sheung Tai Investments Limited
to that entity's 5 shareholders, pursuant to the exemption from registration
contained in Section 4(2) of the Securities Act of 1933. No underwriters were
used.
In addition, during the three months ended June 30, 2004, the registrant issued
31,151,780 shares to China Merchant DiChain Investment Holdings Limited and its
14 designees for approximately $290,000 in debt conversion and assumption of
costs of the transaction. The registrant relied upon the exemption from
registration contained in Section 4(2) of the Securities Act of 1933. No
underwriters were used.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In July 2004, the holders of a majority of the registrant's outstanding common
stock, owning approximately 51.5% of the outstanding shares, executed a written
consent in favor of a merger of the registrant into a wholly-owned British
Virgin Islands subsidiary. As a result of the merger, the registrant has changed
its jurisdiction of domicile to the British Virgin Islands and changed its name
to China Pharmaceuticals International Corporation.
ITEM 5. OTHER INFORMATION
Not Applicable.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
- --------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
- --------------------------------------------------------------------------------
2.1 Share Exchange Agreement with China Merchants DiChain Investment
Holdings Limited (1)
- --------------------------------------------------------------------------------
2.2 Sale and Purchase Agreement in relation to the entire issued
share capital of Sheung Tai Investments Limited dated May 24,
2004 (2)
- --------------------------------------------------------------------------------
2.3 Plan of Merger between China Pharmaceuticals Corporation and
China Pharmaceuticals International Corporation (3)
- --------------------------------------------------------------------------------
3.1 Memorandum and Articles of Association of China Pharmaceuticals
International Corporation (3)
- --------------------------------------------------------------------------------
10.1 Promissory Note from GEMS Canada, Inc. to E-Trend Networks, Inc.
(1)
- --------------------------------------------------------------------------------
10.2 Share Exchange Agreement with Langara Group, Inc. (1)
- --------------------------------------------------------------------------------
10.3 Share Exchange Agreement with Fly.com, Inc. for EntertainMe.com
e-Commerce portal (1)
- --------------------------------------------------------------------------------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
- --------------------------------------------------------------------------------
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
- --------------------------------------------------------------------------------
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
- -------------------
(1) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the fiscal year ended September 30, 2003, filed February
17, 2004, file number 0-28879.
(2) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated May 24, 2004, filed May 27, 2004, file number
0-28879.
(3) Incorporated by reference to the exhibits to the registrant's definitive
information statement dated July 19, 2004, filed July 20, 2004.
Reports on Form 8-K:
o A Form 8-K for May 24, 2004 was filed May 27, 2004, disclosing under Items
1 and 2 the change in control of the registrant and the acquisition of
Zhejiang University Pharmaceutical Co., Ltd. Audited financial statements
of Zhejiang University Pharmaceuticals Co., Ltd. were filed.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA PHARMACEUTICALS
INTERNATIONAL CORPORATION
Date: August 19, 2004 By: /s/ DI FAN
------------------- ----------------------------------------
Di Fan, Chief Executive Officer
Date: August 19, 2004 By: /s/ AARON XIAOJUN ZHU
------------------- ----------------------------------------
Aaron Xiaojun Zhu
Interim Chief Financial Officer
20