U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2004
/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO_____
COMMISSION FILE NUMBER: 814-00063
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
----------------------------------------------------
(Exact name of small business issuer in its charter)
DELAWARE 34-20198 9
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Nanjiang Keyuan
139 Ma Tai Street
Nanjing
China
210009
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (86) 25 360 8605
----------------
(Former Name and Address)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 /X/ NO / /
There were 23,158,757 shares of the Company's common stock outstanding on
November 15, 2004.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION.................................................2
ITEM 1. FINANCIAL STATEMENTS.................................................2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................19
PART II - OTHER INFORMATION...................................................26
ITEM 1. LEGAL PROCEEDINGS...................................................26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.........26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................27
ITEM 5. OTHER INFORMATION...................................................27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
CONTENTS
PAGE 3 CONDENSED CONSOLIDATED BALANCE SHEET
PAGE 4 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
PAGE 5 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
PAGE 6 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PAGE 7-18 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004
------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 321,140
Accounts receivable, net 385,889
Inventories 2,196
Patent and development costs 13,290
Advance to suppliers 193,626
Other receivable and prepaid expenses 68,237
-----------
Total Current Assets 984,378
Property, plant and equipment, net 53,481
-----------
TOTAL ASSETS $ 1,037,859
- ------------ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 14,498
Other payables 61,228
Customer deposits 6,041
Deferred tax liability 71,763
Other tax payable 99,014
Due to related parties 21,600
Due to shareholders 321,472
-----------
Total Current Liabilities 595,616
-----------
COMMITMENTS AND CONTINGENCIES
Minority interest 40,546
-----------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, 200,000,000 shares
authorized;
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; 23,158,757 shares issued and outstanding
as of September 30, 2004 231,588
Additional paid in capital 316,496
Accumulated deficit (146,377)
Accumulated other comprehensive loss (10)
-----------
Total Shareholders' Equity 401,697
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,037,859
- ------------------------------------------ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSICE (LOSS) INCOME
FOR THE FOUR AND NINE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------
(UNAUDITED)
For the four For the nine For the three For the nine
months ended months ended months ended months ended
Sept 30, 2004 Sept 30, 2004 Sept 30, 2003 Sept 30, 2003
------------- ------------- ------------- -------------
(Transition period)
REVENUE $ 335,944 $ 519,663 $ 34,233 $ 348,040
RESEARCH AND DEVELOPMENT COSTS 9,480 60,015 107,228 269,255
------------- ------------- ------------- -------------
GROSS PROFIT/(LOSS) 326,464 459,648 (72,995 78,785)
General And Administrative Expenses 95,628 121,780 11,740 37,355
Bad Debt 538,843 538,843 -- --
------------- ------------- ------------- -------------
Profit/(Loss) From Operations (308,007) (200,975) (84,735) 41,430
OTHER INCOME
Interest income/(expense) 123 214 (25) 40
Other income, net -- 61 -- 12
------------- ------------- ------------- -------------
Profit/(Loss) Before Income Taxes (307,884) (200,700) (84,760) 41,482
Income Taxes 80,526 45,155 27,971 (13,689)
------------- ------------- ------------- -------------
Net Profit/(Loss) (227,358) (155,545) (56,789) 27,793
Minority Interest 16,349 9,168 -- --
Foreign Currency Translation Gain -- -- -- --
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME/(LOSS) $ (211,009) $ (146,377) $ (56,789) $ 27,793
============= ============= ============= =============
Weighted average shares outstanding 21,125,843 21,479,673 20,842,779 20,842,779
Basic and diluted
Earning/(loss) per share
Basic and diluted $ (0.007) $ (0.010) $ (0.002) $ 0.001
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED SEPTEMBER 30, 2004
Accumulated
Additional Accumulated other
Common Stock paid-in earnings comprehensive
Shares Amount capital (Deficit) Income Total
------------- ------------- ------------- ------------- ------------- -------------
BALANCE AS OF
JANUARY 1, 2004 20,842,779 $ 208,428 $ 89,656 $ -- $ -- $ 298,084
REVERSE MERGER
ADJUSTMENT 2,315,978 23,160 226,840 -- -- 250,000
NET LOSS -- -- -- (146,377) -- (146,377)
FOREIGN CURRENCY
TRANSLATION LOSS -- -- -- -- (10) (10)
------------- ------------- ------------- ------------- ------------- -------------
BALANCE AS OF
SEPTEMBER 30, 2004 23,158,757 $ 231,588 $ 316,496 $ (146,377) $ (10) $ 401,697
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOUR AND NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
For the four For the nine For the three For the nine
months ended months ended months ended months ended
Sept 30, 2004 Sept 30, 2004 Sept 30, 2003 Sept 30, 2003
------------- ------------- ------------- -------------
(Transition period)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ (227,358) $ (155,545) $ (56,789) $ 27,793
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 5,344 11,332 995 8,957
Bad debt allowance 538,843 538,843 -- --
Changes in operating assets and liabilities :
(Increase)/decrease in:
Accounts receivable (203,456) (138,186) -- (120,817)
Inventories -- (175) -- 347
Patent and development cost -- -- (13,290) (13,290)
Other receivable and prepaid expenses (72,207) (214,380) 171,655 (34,515)
Increase/(decrease) in:
Accounts payable -- (43,496) (483) 57,992
Other payable 136,749 90,953 (172,126) (78,665)
Deferred tax liability (80,526) (45,160) (27,971) 13,689
Amount due to related party 21,200 21,600 75,724 98,767
Customer deposit (128,071) (128,071) 55,576 38,666
------------- ------------- ------------- -------------
Net cash provided by
operating activities (9,482) (62,285) 33,291 (1,076)
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (1,873) (4,841) (8,346) (10,007)
Proceeds from capital contribution 250,000 300,000 --
------------- ------------- ------------- -------------
Net cash used in investing activities 248,127 295,159 (8,346) (10,007)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES -- -- -- --
------------- ------------- ------------- -------------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 238,646 232,874 24,945 (11,083)
Effect of exchange rate changes on cash 5 (11) -- (9)
Cash and cash equivalents,
at beginning of period 82,489 88,277 12,369 48,406
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
AT END OF PERIOD $ 321,140 $ 321,140 $ 37,314 $ 37,314
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of China
Biopharmaceuticals Holdings, Inc. (the "Company" or "CBH") (formerly Globus
Growth Group Inc. ("Globus") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and pursuant to the requirements for reporting on Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all the
information and footnotes required by accounting principles generally
accepted in United States of America for complete financial statements.
However, such information reflects all adjustments (consisting solely of
normal recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. Results
shown for interim periods are not necessarily indicative of the results to
be obtained for a full fiscal year.
In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the consolidated
financial position of the Company as of September 30, 2004, the results of
operations for the four (transition period) and nine months ended September
30, 2004.
No comparative figures have been presented as the current operating
subsidiary, 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 only operating subsidiary, Nanjing
Chemsource Pharmaceuticals R&D Co., Ltd. ("Chemsource") was acquired on
august 28 2004.
7
2. NATURE OF COMPANY
CBH was incorporated under the laws of the State of Delaware in the United
States. The condensed consolidated financial statements of CBH and
subsidiary reflect the activities and financial transactions of its
subsidiary, CBC, a British Virgin Islands corporation as the parent, the
management company and holder of 90% of the ownership interest in its only
operating subsidiary and asset, Chemsource, a company established in the
People's Republic of China.
CBC was a new subsidiary currently acquired by CBH during the current
quarter. On August 28, 2004, the Company completed a share exchange (the
"Exchange") with the stockholders of CBC pursuant to the terms of an
Agreement for Share Exchange, dated August 28, 2004. In the Exchange, the
Company acquired all of the issued and outstanding stock of CBC in exchange
for the issuance of 20,842,779 shares of its restricted common stock, par
value at $0.01 per share. The Exchange resulted in a change of voting
control of the Company.
CBC owned 90% interest of Chemsource, a company established in the People's
Republic of China. From 2001 to 2004, Chemsource engaged in the discovery,
development and commercialization of innovative drugs and related
bio-pharmaceutical products in China.
On September 29, 2004, the Company signed a Purchase Agreement under which,
the Company acquired 51% ownership interest in Suzhou Hengyi
Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a Chinese company
specialized in research and development, production and sales of
pharmaceutical products as well as chemicals used in pharmaceutical
products. Total consideration paid by CBH to acquire 51% ownership interest
in Hengyi is $1,600,000 cash and 1.2 million shares of the common stock of
the Company.
8
3. SUMMARY OF ACCOUNTING POLICIES
(a) 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 in 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.
(b) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation on property, plant and equipment is calculated
on the straight-line basis to write off the costs of assets over their
respective estimated useful lives. Estimated useful lives of the property,
plant and equipment are as follows:
Equipment and machinery 6 years
Motor vehicles 8 years
Furniture and fixtures 5 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 income. 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-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful
lives.
9
(c) Accounts and Other Receivables
Accounts receivables are recognized and carried at original invoice amount
less an allowance for any uncollectible amounts. An estimate for doubtful
accounts is made when collection of the full amount is no longer probable.
Bad debts are written off as incurred.
There was no reserve for doubtful accounts during 3 months and 9 months
ended September 30, 2003 and due to the disputes arising from its
customers, an allowance on bad debt amounting to $ 538,843 was recognized
for the 4 months ended September 30, 2004.
(d) 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.
(e) Patent and Development Costs
The patent and development costs represent patented pharmaceutical
formulas, which have obtained official registration certificate or official
approval for clinical trials, held for sale. Such costs comprise purchase
costs of patented pharmaceutical formulas, development costs on direct
labors, raw materials and other related expenses of pharmaceutical
formulas. Patent and development costs are accounted for on an individual
basis. The carrying value of patent and development costs is reviewed for
impairment annually when the assets is not yet in use, and otherwise when
events changes in circumstances indicate that the carrying value may not be
recoverable.
(f) Research and Development Costs
Research and development costs of pharmaceutical formulas for contracted
projects are expensed when incurred.
Research costs of pharmaceutical formulas held for sale are expensed
whereas the development costs are expensed until the project attained
technical feasibility, i.e. obtained official approval for clinical trials,
which such development costs are capitalized.
10
(g) Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, customer deposits
and amounts due to related parties. Management has estimated that the
carrying amount approximate their fair values due to their short-term
nature.
(h) Revenue and Revenue Recognition
For fixed-price refundable contracts, the Company recognizes revenue on a
milestone basis. Progress payments received/ receivables are recognized as
revenue only if the specified milestone is achieved, accepted by the
customer, confirmed not refundable and continued performance of future
research and development services related to the milestone are not
required.
For sale of patented pharmaceutical formulas, the Company recognizes
revenue upon delivery of the patented formulas.
(i) Retirement Benefits
Retirement benefits in the form of contributions under defined contribution
retirement plans to the relevant authorities are charged to the income
statement as incurred.
(j) Income Taxes
Income taxes are provided on Chemsource in accordance with taxation
principles currently effective in the People's Republic of China as it
related to the Company.
(k) 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
estimates are made; however actual results could differ materially from
those estimates.
(l) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, established standards for the
reporting and display of comprehensive income, its components and
accumulated balances in a full set of general purpose financial statements.
11
SFAS No. 130 defines comprehensive income to include all changes in equity
except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that
are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements.
The Company's only current component of comprehensive income is foreign
currency translation adjustment.
(m) Foreign Currency Translation
The Company's financial information is presented in US dollars. People's
Republic of China currency (Renminbi dollars) has been converted into US
dollars at the exchange rate of 8.277 to 1.
The RMB is not freely convertible into foreign currency and all foreign
exchange transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
(n) Recent Accounting Pronouncements
In January 2003, (as revised in December 2003) The Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an interpretation of Accounting Research
Bulletin ("ARB") No. 51, "Consolidated Financial Statements".
Interpretation No. 46 addresses consolidation by business enterprises of
variable interest entities, which have one or both of the following
characteristics: (i) the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
support from other parties, which is provided through other interest that
will absorb some or all of the expected losses of the entity; (ii) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest: the direct or indirect
ability to make decisions about the entities activities through voting
rights or similar rights; or the obligation to absorb the expected losses
of the entity if they occur, which makes it possible for the entity to
finance its activities; the right to receive the expected residual returns
of the entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
12
Interpretation No. 46, as revised, also requires expanded disclosures by
the primary beneficiary (as defined) of a variable interest entity and by
an enterprise that holds a significant variable interest in a variable
interest entity but is not the primary beneficiary. Interpretation No. 46,
as revised, applies to small business issuers no later than the end of the
first reporting period that ends after December 15, 2004. This effective
date includes those entities to which Interpretation 46 had previously been
applied. However, prior to the required application of Interpretation No.
46, a public entity that is a small business issuer shall apply
Interpretation 46 or this Interpretation to those entities that are
considered to be special-purpose entities no later than as of the end of
the first reporting period that ends after December 15, 2003.
Interpretation No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The changes in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. This statement is effective for contracts entered into or
modified after June 30, 2003 and all of its provisions should be applied
prospectively.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting
For Certain Financial Instruments with Characteristics of both Liabilities
and Equity". SFAS No. 150 changes the accounting for certain financial
instruments with characteristics of both liabilities and equity that, under
previous pronouncements, issuers could account for as equity. The new
accounting guidance contained in SFAS No. 150 requires that those
instruments be classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange for
cash or other assets. A second type includes put options and forward
13
purchase contracts, which involves instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets.
The third type of instruments that are liabilities under this Statement is
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index,
or varies inversely with the value of the issuers' shares. SFAS No. 150
does not apply to features embedded in a financial instrument that is not a
derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are
consistent with the FASB's proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing
its own shares. This Statement shall be effective for financial instruments
entered into or modified after May 31, 2003 and otherwise shall be
effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatorily redeemable financial instruments of a
non-public entity, as to which the effective date is for fiscal periods
beginning after December 15, 2004.
In March 2004, the U.S. Securities and Exchange Commission's Office of the
Chief Accountant and the Division of Corporate Finance released Staff
Accounting Bulletin ("SAB") No. 105, "Loan Commitments Accounted for as
Derivative Instruments". This bulletin contains specific guidance on the
inputs to a valuation-recognition model to measure loan commitments
accounted for at fair value, and requires that fair-value measurement
include only differences between the guaranteed interest rate in the loan
commitment and market interest rate, excluding any expected future cash
flows related to the customer relationship or loan servicing. In addition,
SAB105 requires the disclosure of the accounting policy for loan
commitments, including methods and assumptions used to estimate the fair
value of loan commitments, and any associated hedging strategies. SAB105 is
effective for derivative instruments, entered into subsequent to March 31,
2004 and should also be applied to existing instruments as appropriate.
The implementation of the above pronouncements is not expected to have a
material effect on the Company's financial statement presentation or
disclosures.
14
4. EARNING PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares
were dilutive.
Basic and diluted earnings per share are calculated as follows:
Nine month ended
September 30, 2004
------------------
Earnings:
Net loss (146,377)
Dividend None
Income applicable to common shareholders None
Basic and dilute:
Loss applicable to common shareholders (146,377)
Weighted average shares outstanding
during the period 21,125,843
Basic and dilute loss per share (0.007)
------------------
5. INCOME TAXES
(a) Corporation Income Tax ("CIT")
In accordance with the relevant tax laws and regulations, the corporation
income tax rate is 33%. Income tax expense for the period ended September
30, 2004 and 2003 is summarized as follows:
2004 2003
Current:
CIT $ -- $ --
Deferred:
CIT (45,156) 13,689
Income tax expense $(45,156) $ 13,689
15
The Company's tax expense differs from the "expected" tax expense for the
nine months ended September 30, 2004 and 2003 (computed by applying the CIT
rate of 33 percent to net profit) as follows:
2004 2003
----------- -----------
Computed "expected" expense $ (66,231) $ 13,689
Non-taxable income net of
non-deductible expenses 83,503 12,932
Unused net operating loss carried
forward (83,503) (12,932)
CIT exemption 21,075 --
----------- -----------
Income tax expense $ (45,156) $ 13,689
=========== ===========
The tax effects of temporary differences that give rise to significant
portions of deferred tax liabilities/(assets) are as follows at September
30, 2004:
2004
-----------
Deferred tax assets:
Depreciation $ 10,439
Research and development costs not
yet deducted for tax purpose 205,405
Others costs not yet deducted for
tax purpose 39,693
Bad debt expense 177,818
Net operating loss carry forward 83,503
-----------
516,858
-----------
Deferred tax liabilities:
Revenue not yet taxable (588,620)
-----------
Net deferred tax liability $ (71,762)
===========
(b) Business Tax ("BT")
The Company is subject to Business Tax, which is charged on the selling
price at a general rate of 5% in accordance with the tax law applicable.
16
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of September 30,
2004:
2004
-----------
At cost:-
Equipment and machinery $ 62,251
Motor vehicles 15,749
Furniture and fixtures 13,831
-----------
91,831
Less: Accumulated depreciation
Equipment and machinery 28,946
Motor vehicles 1,968
Furniture and fixtures 7,436
-----------
38,350
Net book value $ 53,481
===========
Depreciation expense for nine months ended September 30, 2004 and 2003 was
$11,332 and $16,858, respectively.
7. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of September 30, 2004:
Accounts receivable $ 924,732
Allowance on bad debt (538,843)
-----------
$ 385,889
===========
There was no reserve for doubtful accounts during 3 months and 9 months
ended September 30, 2003 and due to the disputes arising from its
customers, an allowance on bad debt amounting to $ 538,843 was recognized
for the 4 months ended September 30, 2004.
17
8. AMOUNTS DUE TO SHAREHOLDERS
Amounts due to shareholders consist of the following as of September 30,
2004:
Name of shareholder 2004
-----------
Lufan An $ 272,076
Xiahao Liu 37,314
Xinzhong Shi 12,082
-----------
$ 321,472
===========
The amounts due to shareholders are unsecured, interest-free and have no
fixed repayment terms.
9. COMMITMENTS AND CONTINGENCIES
(a) Operating leases
The Company occupied office space and dormitory for the staffs from a third
party. Accordingly, for nine months ended September 30, 2004 and 2003 the
Company recognized rental expense for these spaces in amount of $8,004 and
$10,506, respectively.
As of September 30, 2004, the Company has outstanding commitments in
respect of non-cancellable operating leases, which fall due as follows:
2004
-----------
Within one year $ 9,061
After one year but within five years --
-----------
$ 9,061
===========
10. BUSINESS COMBINATION
Effective August 28, 2004, the Company completed the acquisition of CBC, a
British Virgin Islands corporation as the parent, the management company
and holder of 90% of the ownership interest in its only operating
subsidiary and asset, Chemsource, a company established in the People's
Republic of China and engaged in the discovery, development and
commercialization of innovative drugs and related bio-pharmaceutical
products in China. The Company exchanged 20,842,779 shares of its
restricted common stock, par value $0.01 per share, for that number of
shares of CBC that constitutes 100% of the equity interest of CBC, valued
at $447,431 which represented the net asset of CBC at the acquisition date.
There are currently 23,158,757 issued and outstanding shares of common
stock of the Company.
The following summarizes the acquisition:
Net asset of CBC at the acquisition date $ 447,431
Assets acquired (1,077,242)
Liability assumed 629,811
-----------
--
===========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements:
The following discussion of the financial condition and results of operations
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" or "our." 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 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.
19
OVERVIEW
Effective August 28, 2004, China Biopharmaceuticals Holdings, Inc. (the
"Registrant" or the "Company") 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 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 the People's Republic
of China ("China") and engaged in the discovery, development and
commercialization of innovative drugs and related bio-pharmaceutical products in
China.
The Registrant, 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 China
Biopharmaceuticals Holdings, Inc., its wholly owned subsidiary in the state of
Delaware on August 28, 2004 through an internal re-organizational merger.
On February 27, 1986, the stockholders of the Registrant approved the
divestiture and sale of those assets of the Registrant as pertained to its then
camera manufacturing and photography operations as well as the sale of certain
shares of stock in a photographic related company owned by it and its interest
in the Registrant's then owned premises. The sale was consummated as of February
28, 1986. After such divestiture, the Registrant's activities consisted of the
holding of interests in various companies and the seeking out of acquisition and
joint-venture opportunities in various fields of business endeavor. On May 27
1988, the Registrant filed with the Securities and Exchange Commission a
notification of election to be treated as a "Business Development Company"
("BDC") as that term is defined in the Investment Company Act of 1940 (the "1940
Act"). The decision to become a BDC was made primarily to better reflect the
Registrant's anticipated future business and development relationships. A BDC is
an investment company designed to assist eligible portfolio companies with
capital formation. As a result of the reorganization the acquisition of CBC
pursuant to the Exchange Agreement, the Registrant will no longer be a BDC and
will continue as an operating company.
On August 4, 2004, the Registrant filed Definitive Information Statement
("Information Statement") pursuant to Section 14(c) of the Securities Exchange
Act of 1934, as amended, notifying its shareholders the execution and pending
implementation of an Agreement and Plan of Merger was signed by and between
Globus Growth Group, Inc., a New York corporation ("Globus") and the predecessor
of the Registrant and its wholly owned subsidiary in the State of Delaware under
20
the name of China Biopharmaceuticals Holdings, Inc.("CBH") The Agreement and
Plan of Merger Agreement provided for a tax-free reorganization pursuant to the
provisions of Section 368 of the Internal Revenue Code, according to which
Globus, Inc. merged with and into the Registrant, ceasing its corporate
existence and having the Registrant as the surviving corporation of the merger
(the "Merger"). In the Merger, all issued and outstanding shares of the common
stock of Globus have been converted into shares of common stock of the
Registrant. On August 28, 2004, the internal reorganizational Merger was
completed with Globus merging into CBH with CBH as the surviving entity and the
Registrant. Pursuant to a share exchange agreement ("Exchange Agreement")
between the Registrant, CBC, Keyuan, and MAO Peng as the sole shareholder of
CBC, and which was filed as Exhibit 2 to the Form 10K 2004, on June 14, 2004,
the Registrant received all of the issued and outstanding common stock of CBC in
exchange for 20,842,779 shares of restricted (as defined in Rule 144 of the
Securities Act of 1993, as amended) common stock of the Registrant, par value
$0.01 per share, representing approximately 90% of the issued and outstanding
common capital stock of the Registrant following the time of the issuance. There
are currently 23,158,757 issued and outstanding shares of common stock of the
reorganized Registrant.
On September 29, 2004, the Registrant signed a Purchase Agreement under which,
the Registrant acquired 51% ownership interest in Suzhou Hengyi Pharmaceuticals
of Feedstock Co., Ltd ("Hengyi"), a Chinese company specialized in research and
development, production and sales of pharmaceutical products as well as
chemicals used in pharmaceutical products.
Brief Description of CBC and Its Subsidiaries
CBC is a bio-pharmaceutical company focused on research and discovery,
development and commercialization of innovative drugs in China. CBC was
incorporated in the British Virgin Islands (BVI) as a holding company of
pharmaceutical assets in China. It entered into a merger agreement with the
predecessor of the Registrant. CBC currently owns approximately 90% of the
ownership interest in Chemsource, its drug discovery arm and only asset. CBC's
mission is to maximize investment returns for its shareholders by integrating
its 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.
Pursuant to the acquisition, a new management team has been put into place. One
of former management team member, Stephen E. Globus, the former Chief Executive
Officer and a director of Company remained as a member of the board of directors
21
of the Registrant. CBC is lead by a dynamic and experienced management with
extensive experience and track record in the pharmaceuticals business and a
history of success in innovative drug development and commercialization. The
management of CBC consists of experts in the fields of medical technology,
biotechnology, and pharmaceuticals with over 10-years of market place experience
and a proven record of success in the management of pharmaceutical businesses in
China. The management works as a very tight group with one clear goal, to be the
best-integrated bio-pharmaceuticals company in China.
CBC has a robust research and development ("R&D") team focused on discovering
new small and large molecule drugs as well as developing generic and improved
drugs based on existing products already on the market and traditional Chinese
medicine products. CBC has developed a solid discovery and development platform
with advanced R&D capabilities based on post genome era technological advances
to enable rapid drug discovery and development. CBC also has a rich existing
product pipeline. The technological backbone of the CBC's advanced R&D
capabilities is a Drug Screening and Testing System--an advanced drug screening
and testing system based on certain bio-technologies that has only recently been
made possible by rapid technological advances in the Post-Genomics Era. This
proprietary gene-level technology platform enables CBC to deliver the next
generation of drugs--which are more effective and have fewer side effects in a
much shorter period than by traditional pharmaceutical developmental routes. The
technology team is lead by some of the best drug research scientists and
development experts in the country. CBC has a product pipeline containing
approximately twenty-five major products, including sixteen new drugs that are
ready for commercialization in China, and nine other drugs undergoing various
phases of clinical trials toward approval by the SFDA. CBC also offers
contractual research and development products by licensing the access to its
proprietary screening and testing platforms to other pharmaceutical companies.
CBC has built a Library of Targeted Drug Candidates ("LTDC") with 20,000
chemical compounds. Drug candidates undergo screening to reveal their potential
to become new drugs. CBC collaborates with China Pharmaceutical University in
enhancing the resources of chemical compounds in the library. CBC builds LTDC to
both accelerate its own drug discovery and to generate revenue in the form of
access fees paid by other pharmaceutical companies.
RESULTS OF OPERATIONS
General Results of Operations for the nine months ending September 30, 2004
22
On August 28, 2004, the Registrant, CBC, as the parent, the management company
and holder of 90% of the ownership interest in Keyuan , its only operating
subsidiary and asset, consummated the transactions contemplated by an Exchange
Agreement signed on June 8, 2004 by and between the Registrant, CBC, Keyuan and
Peng MAO as sole shareholder of CBC, filed as Exhibit 2 to the Form 10K 2004,
filed June 14, 2004. As per the Exchange Agreement, the Registrant acquired 100%
of the capital stock of CBC in exchange for approximately 90% of the
Registrant's outstanding common stock.
On September 29, 2004, the Registrant signed a Purchase Agreement under which,
the Registrant acquired 51% ownership interest in Hengyi. Total consideration
paid by the Registrant to acquire 51% ownership interest in Hengyi was
$1,600,000 cash and 1.2 million shares of the common stock of the Registrant.
Pursuant to the relevant rules, the financial performance of Hengyi shall be
disclosed subsequently within the relevant required timeframe. For this
quarterly report, we will only discuss the financial performance of the Company
reflecting the operation of Chemsource.
1) SALES. Sales for the nine months ended on September 30, 2004 were $519,663,
while Keyuan's sales for the nine months ended September 30, 2003 were $348,040.
During the reporting period Keyuan significantly increased R&D services to other
domestic pharmaceutical companies. Keyuan offered contractual research and
development products by licensing the access to its proprietary screening and
testing platforms to other pharmaceutical companies.
2) R&D. R&D cost for the nine months ended September 30, 2004 was $60,015 as
compared to $269,255 for the nine months ended September 30, 2003. R&D cost as a
percentage of sales was 12% for the nine months ended September 30, 2004, as
compared to 77% for the nine months ended September 30, 2003. In the first nine
months of 2004, Keyuan reduced its investment in R&D of new drug project and
simultaneously increased its activities of providing contractual R&D service to
other pharmaceutical companies. In the first nine months of, 2004, Keyuan
focused on preparing the commercialization of new drugs.
(3) GROSS PROFIT.
Consolidated gross profit in the first nine months of 2004 amounted at $459,648,
as compared to $78,785 for the nine months ended September 30, 2003. Gross
profit as a percentage of sales was 88% for the nine months ended September 30,
2004 as compared to 23% for the nine months ended September 30, 2003. In 2004,
Keyuan increased sales and significantly decreased its R&D cost.
(4) Bad Debt
The amount of bad debt for the nine months ended September 30, 2004 was $538,843
This was mainly due to large amount of account receivables created by Keyuan in
2003 and due to the lack of efficient project monitoring from the management of
23
Keyuan and unpredictable licensing procedures in China. Large part of those
account receivables was realized as bad debts in this reporting period. Due to
the long procedures of licensing new drug projects in China, it is usual that
the contractual period for new drug licensing is over one year. According to
GAAP, account receivables that exist for a period longer than one year are
realized as bad debt. The management of the Registrant will strive to improve
project monitoring and account receivable recovery.
(5) NET INCOME.
Consolidated net loss for the nine months ended September 30, 2004 was $146,377.
This is mainly due to the large amount of account receivable incurred by Keyuan
in 2003, which were realized as bad debt in this reporting period. Projects
related to those bad debts are still going forward for future income.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2004, net cash used in operating
activities was $62,285, and net cash provided by investment activities was
$295,159.
Going forward, our primary requirements for cash consist of: (1) acquisition of
pharmaceutical manufacturing companies with GMP standard facilities in order to
commercialize new drugs in our extensive new drug pipeline. (2) Continued R&D
for more selected new drug projects (3) Build up sales network for new drug
distribution. We anticipate that our internal source of liquid assets may enable
us to continue our operation activities other than acquisition activities for
next twelve 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 may need for company's expansion. We are
exploring bank loans to finance such expenditures and intend to raise equity
once our shares are traded.
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 requirements capital for future acquisition
activities. We could be required to seek additional financing. There can be no
assurance that we will be able to obtain additional financing on terms
acceptable to it, or at all.
24
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. Based on
China government regulation, all foreign currencies under the category of
current accounts are allowed to be freely exchanged with hard currencies. During
the current operation, there is no significant change in exchange rates;
however, unforeseen developments may cause a significant change in exchange
rates.
25
ITEM 3. CONTROL AND PROCEDURES.
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective. There have been no
significant changes in the Company's internal controls or in other factors,
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
The Company is in the process of outsourcing to an accredited accounting firm to
re-design Internal Control system as well as Risk Management system for the
Company to be in compliance with rules and regulations set forth in
Sarbanes-Oxley Act.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to the Exchange Agreement, the Registrant received all of the issued
and outstanding common stock of CBC in exchange for 20,842,779 shares of
restricted (as defined in Rule 144 of the Securities Act of 1993, as amended)
common stock of the Registrant, par value $0.01 per share, which were issued to
the CBC Stockholders, representing approximately 90% of the issued and
outstanding common capital stock of the Registrant.
26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Acting Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
A report on From 8-K was filed on September 1, 2004, announcing the completion
of acquisition of CBC by the Registrant, the change in control in the Registrant
and the change of the Registrant's fiscal year end to December 31. The 8-K also
released the audited financial statements of Chemsource for the years 2002 and
2003.
27
Subsequently, on September 20, 2004 the Registrant filed a form 8-K report to
announce that Eisner LLP was dismissed as the independent accountant engaged to
audit the financial statements of the Registrant and that effective on September
15, 2004 the Registrant has engaged Weinberg & Company, P.A. ("Weinberg") with
address at Town Executive Center, 6100 Glades Road, Suite 314 Boca Raton,
Florida 33434, as the new principal accountant to audit its financial
statements. The decision to engage Weinberg was approved by the Registrant's
Board of Directors. During the three years ended February 29, 2004 and the
subsequent interim period prior to their dismissal, there were no disagreements
with Eisner LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements if not
resolved to Eisner LLP's satisfaction would have caused Eisner LLP to make
reference to this subject matter of the disagreements in connection with Eisner
LLP 's report, nor were there any "reportable events" as such term is defined in
Item 304(a)(1)(iv) of Regulation S-K, promulgated under the Securities Exchange
Act of 1934, as amended.
On October 5, 2004, the Registrant filed a form 8-K announcing the completion of
the acquisition of 51% of the equity interest of Hengyi.
28
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
Date: November 22, 2004
By: /s/ Peng Mao
---------------------------------------
Name: Peng Mao
Title: Chairman and
Chief Executive Officer
Date: November 22, 2004
By: /s/ HUNAG Chentai
---------------------------------------
Name: HUANG Chentai
Title: Chief Financial Officer
29