U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
/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.)
Suite 1601, Buliding A, Jinshan Tower
No. 8, Shan Xi Road
Nanjing, Jiangsu
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...............................................22
ITEM 3. CONTROL AND PROCEDURES..............................................35
PART II - OTHER INFORMATION...................................................35
ITEM 1. LEGAL PROCEEDINGS...................................................35
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.........35
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................35
ITEM 5. OTHER INFORMATION...................................................35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................36
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 STATEMENT OF CHANGES IN SHAREHOLDERS'
EQUITY
PAGE 6 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PAGE 7-20 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
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 held for sale 13,290
Advance to suppliers 193,626
Other receivables and prepaid expenses 68,237
-----------
Total Current Assets 984,378
Fixed assets, 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 411,613
Other tax payable 99,014
Due to related parties 21,600
Due to shareholders 321,472
-----------
Total Current Liabilities 935,466
Minority interest 6,562
-----------
Total Liabilities 942,028
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
none issued
Common stock, $0.01 par value, 200,000,000 shares authorized;
23,158,757 shares issued and outstanding
as of September 30, 2004 231,588
Additional paid-in capital 123,204
Accumulated deficit (258,951)
Accumulated other comprehensive loss (10)
-----------
Total Shareholders' Equity 95,831
-----------
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.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS)
------------------------------------------------------------------------------
(UNAUDITED)
For the Three For the Nine For the Three For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2004 2004 2003 2003
------------- ------------- ------------- -------------
Revenue $ 480,131 $ 663,850 $ 34,233 $ 348,040
Research and development costs 7,048 60,015 107,228 269,255
------------- ------------- ------------- -------------
Gross profit(loss) 473,083 603,835 (72,995) 78,785
General and administrative expenses 247,732 279,228 11,740 37,355
Bad debt 538,843 538,843 -- --
------------- ------------- ------------- -------------
Income(Loss) From Operations (313,492) (214,236) (84,735) 41,430
Other Income(Expense)
Interest income(expense) (7,002) (6,916) (25) 40
Other income, net 40 101 -- 12
------------- ------------- ------------- -------------
Income(Loss) Before Income Taxes (320,454) (221,051) (84,760) 41,482
Income taxes 234,492 294,695 -- --
------------- ------------- ------------- -------------
Income(Loss) Before Minority Interest (554,946) (515,746) (84,760) 41,482
Minority interest 47,073 43,153 -- --
------------- ------------- ------------- -------------
Net income(loss) (507,873) (472,593) (84,760) 41,482
Foreign currency translation
gain(loss) -- (10) -- 8
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME(LOSS) $ (507,873) $ (472,603) $ (84,760) $ 41,490
- -------------------------- ============= ============= ============= =============
Weighted average shares outstanding 21,125,843 21,691,971 20,842,779 20,842,779
Basic and diluted
Income(loss) per share
Basic and diluted $ (0.02) $ (0.02) $ (0.00) $ 0.00
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------------
(UNAUDITED)
Preferred Additional Accumulated Other
Common Stock Stock Paid-In Earnings Comprehensive
Shares Amount Shares Capital (Deficit) Loss Total
----------------------------- ------------- ------------- ------------- ------------- -------------
Balance as of
January 1, 2004 20,842,779 $ 208,428 -- $ 146,364 $ 213,642 $ -- $ 568,434
Reverse merger
adjustment 2,315,978 23,160 -- (23,160) -- -- --
Net loss -- -- -- -- (472,593) -- (472,593)
Foreign currency
translation loss -- -- -- -- -- (10) (10)
Balance as of
September 30, 2004 23,158,757 $ 231,588 -- $ 123,204 $ (258,951) $ (10) $ 95,831
============= ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
For the Nine For the Nine
Months Ended Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) $ (472,593) $ 41,482
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 11,332 8,957
Bad debt 538,843 --
Loss shared by minority interest (43,153) --
Changes in operating assets and liabilities:
(Increase)decrease in:
Accounts receivable (138,186) (120,817)
Inventories (175) 347
Patent and development cost -- (13,290)
Advance to suppliers (193,626) (9,467)
Other receivables and prepaid expenses (402) (25,048)
Increase(decrease) in:
Accounts payable (43,496) 57,992
Other payable 90,953 (78,665)
Deferred tax liability 294,690 --
Amount due to related party 21,600 98,767
Customer deposit (128,071) 38,666
------------------ ------------------
Net cash used in operating activities (62,284) (1,076)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (4,842) (10,007)
------------------ ------------------
Net cash provided by (used in)
investing activities (4,842) (10,007)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES --
Due to shareholders 300,000 --
------------------ ------------------
Net cash provided by financing activities 300,000 --
------------------ ------------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 232,874 (11,083)
Effect of exchange rate changes on cash (11) (9)
Cash and cash equivalents,
at beginning of period 88,277 48,406
------------------ ------------------
CASH AND CASH EQUIVALENTS,AT END OF PERIOD $ 321,140 $ 37,314
================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
------------------------
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of China
Biopharmaceuticals Holdings, Inc. (formerly Globus Growth Group Inc.
("Globus") and subsidiaries (the "Company" or "CBH") 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 and the results
of operations for the three and nine months ended September 30, 2004.
On August 4, 2004, the Company declared that the majority stockholders of
Globus executed a written consent providing a merger (the "Merger") of
Globus with and into its wholly owned subsidiary, CBH. On July 3, 2004, an
Agreement and Plan of Merger (the "Merger Agreement") was signed by and
between Globus and CBH. The Merger Agreement provided for a tax-free
reorganization pursuant to the provisions of Section 368 of the Internal
Revenue Code, whereby Globus would be merged with and into CBH. The
separate corporate existence of Globus ceased and CBH continued as the
surviving corporation of the merger. In the Merger, all issued and
outstanding shares of Globus were converted into shares of common stock of
CBH on the basis of seven for five (7 for 5).
The current operation subsidiary, China Biopharmaceuticals Corp. ("CBC"), a
British Virgin Islands corporation is the parent, management company and
holder of a 90% ownership interest in its only operating subsidiary,
Nanjing Chemsource Pharmaceuticals R&D Co., Ltd. ("Chemsource") which was
acquired on August 28 2004. The comparative figures in 2003 that have been
presented are those of Chemsource.
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
subsidiaries reflect the activities and financial transactions of its
subsidiary, CBC, a British Virgin Islands corporation which is the parent,
management company and holder of a 90% ownership interest in its only
operating subsidiary, Chemsource, a company established in the People's
Republic of China. On September 29, 2004, the Company signed a purchase
agreement to acquire a 51% ownership interest of Suzhou Hengyi
Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a Chinese company
established in Suzhou Province, China. Also see below.
CBC is 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 100% 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. After the Exchange, the previous
shareholders of CBC owned 90% of outstanding common shares of CBH.
7
CBC owns 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 October 5, 2004, the Company filed a Form 8-K disclosing the purchase
agreement to acquire a 51% ownership interest in Hengyi, a company
specializing in research and development and the production and sales of
pharmaceutical products as well as chemicals used in pharmaceutical
products. CBH's total consideration to acquire the 51% ownership interest
in Hengyi will be $1,600,000 cash and 1.2 million shares of the common
stock of the Company. The closing of the transaction is waiting for the
final approval and issuing of the business certificate from the local
government. Since the transaction did not close prior to the end of the
reporting period, the accounts of Hengyi are not included in the
consolidated financial statements of the Company.
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) Consolidation Policy
The consolidated financial statements include the accounts of the
Company and all its majority-owned subsidiaries which require
consolidation. Inter-company transactions have been eliminated in
consolidation.
(c) Fixed Assets
Fixed assets are stated at cost less accumulated depreciation.
Depreciation on fixed assets is provided on the straight-line basis
over their respective estimated useful lives. Estimated useful lives
are as follows:
8
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 operations. The cost of
maintenance and repairs is charged to income as incurred, whereas
significant renewals and betterments are capitalized.
Long-term assets of the Company are reviewed annually as to whether
their carrying value has become impaired, pursuant to the guidelines
established in Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised
estimates of useful lives.
(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. No amortization is provided as
it is held for sale. Such costs comprise purchase costs of patented
pharmaceutical formulas, development costs, 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, 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.
9
Research costs of pharmaceutical formulas held for sale are expensed
whereas the development costs are expensed until the project attains
technical feasibility (i.e. obtained official approval for clinical
trials), and then such development costs are capitalized.
(g) Fair Value of Financial Instruments
The Company's financial instruments primarily include cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses,
customer deposits and amounts due to related parties and shareholders.
Management has estimated that the carrying amounts approximate their
fair values due to their short-term nature.
(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 and
accepted by the customer, the payment is not refundable, and continued
performance of future research and development services related to the
milestone are not required.
For sales of patented pharmaceutical formulas, the Company recognizes
revenue upon the 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. The retirement benefits expenses
for nine months ended September 30, 2004 and 2003 was $2,233 and
$1,835, respectively.
(j) Income Taxes
Income taxes are provided on the liability method whereby deferred tax
assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases and
reported amounts of assets and liabilities. Deferred tax assets and
liabilities are computed using enacted tax rates expected to apply to
taxable income in the periods in which temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities from a change in tax rates is recognized in income in
the period that includes the enactment date. The Company provides a
valuation allowance for certain deferred tax assets, if it is more
likely than not that the Company will not realize tax assets through
future operations.
(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.
10
(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. 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 the 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) Earnings(Loss) Per Share
Basic earnings(loss) per share is computed by dividing income(loss)
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.
There were no dilutive securities outstanding for the reporting
periods presented.
(o) 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
11
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.
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 FASB issued 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.
12
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 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.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-Monetary Assets, an Amendment of APB No. 29". This statement
amends APB Opinion No.29, "Accounting for Nonmonetary Transactions".
Earlier guidance had been based on the principle that exchanges of
nonmonetary assets should be based on the fair value of the assets
exchanged and APB No. 29 included certain exception to this principle.
13
However, FASB 153 eliminated the specific exceptions for nonmonetary
exchanges with a general exception rule for all exchanges of
nonmonetaruy assets that do not have commercial and economic
substance. A nonmonetary exchange has commercial substance only if the
future cash flows of the entity is expected to change significantly as
a result of the exchange. This statement is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005.
In December 2004, the FASB issued a revised SFAS No. 123, Accounting
for Stock-Based Compensation, which supersedes APB opinion No. 25,
Accounting for Stock Issued to Employees, and its related
implementation guidance. This statement requires a public entity to
recognize and measure the cost of employee services it receives in
exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). These costs will be
recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service
period (usually the vesting period). This statement also establishes
the standards for the accounting treatment of these share-based
payment transactions in which an entity exchanges its equity
instruments for goods or services. It addresses transactions in which
an entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entity's equity instruments or that
may be settled by the issuance of those equity instruments. This
statement shall be effective the first interim or annual reporting
period that begins after December 15, 2005. Implementation of the
revised SFAS No. 123 is not expected to have a significant effect on
the Company's financial statement presentation or its disclosures.
The implementation of the above pronouncements is not expected to have
a material effect on the Company's financial statement presentation or
disclosures.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of September 30, 2004:
Accounts receivable $ 924,732
Allowance for bad debt (538,843)
---------
Accounts receivable, net $ 385,889
=========
The Company's only operating subsidiary, Chemsource, accounted for
100% of the accounts receivable of the Company at September 30, 2004.
For the nine months ended September 30, 2004 the Company recognized
bad debt expense of $538,843 relating to sales recorded in 2003. In
2003, the Company believed that all of the criteria for revenue
recognition existed. However, during 2004 certain customers
experienced deteriorating financial condition which resulted in
non-payment of accounts receivable. While, the Company continues to
pursue payment, due to the uncertainty of collection, the Company
recorded a bad debt allowance for the accounts.
14
5. FIXED ASSETS
Fixed assets 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
Fixed assets, net $ 53,481
=========
Depreciation expense for nine months ended September 30, 2004 and 2003 was
$11,332 and $8,957, respectively.
6. AMOUNTS DUE TO SHAREHOLDERS
Amounts due to shareholders consist of the following as of September 30,
2004:
Name of Shareholder Amount
------------------- ---------
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.
7. INCOME TAXES
(a) Corporation Income Tax ("CIT")
In accordance with the relevant tax laws and regulations of the People's
Republic of China, a company is entitled to a full exemption from CIT for
the first two years, and a 50% deduction in CIT for the next three years,
commencing from the first profitable year. For 2003, the Company was exempt
from CIT.
Income tax expense for nine months ended September 30, 2004 and 2003 are
summarized as follows:
2004 2003
--------- ---------
Current:
CIT $ -- $ --
--------- ---------
Deferred:
CIT $(294,694) $ --
--------- ---------
Income tax expense $(294,694) --
========= =========
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(benefit) $ (72,947) $ 13,689
Valuation allowance 339,850 --
CIT exemption 27,791 (13,689)
--------- ---------
Income tax expense $ 294,694 $ --
========= =========
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 40,503
Foreign net operating loss carry forwards 83,503
Valuation allowance (339,850)
---------
Total deferred tax assets --
---------
Deferred tax liabilities:
Revenue not yet taxable (411,613)
---------
Net deferred tax liability $(411,613)
=========
The foreign net operating loss carry forwards expire five years from the
year of the loss. The loss carry forwards expire as follows:
Year of Expiration Amount
------------------ ---------
2005 $ 34,371
2006 43,696
2007 48,559
2008 58,045
2009 83,503
---------
Total $ 268,174
=========
The tax effects of temporary differences that give rise to deferred tax
assets were reduced by a valuation allowance because of the uncertainty as
to whether the deferred tax assets will be realized.
(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
8. COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases office space and dormitory facilities for its employees
from a third party. Accordingly, for nine months ended September 30, 2004
and 2003 the Company recognized rental expense 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
=========
9. BUSINESS COMBINATION
Effective August 28, 2004, the Company completed the acquisition of CBC, a
British Virgin Islands corporation which is the parent, management company
and holder of a 90% of the ownership interest in its only operating
subsidiary, 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:
Assets acquired 1,077,242
Liability assumed (629,811)
---------
Net asset of CBC at the acquisition date $ 447,431
=========
10. PRO FORMA RESULTS OF OPERATIONS
On October 5, 2004, the Company filed a Form 8-K disclosing the purchase
agreement to acquire a 51% ownership interest in Hengyi. For financial
reporting purposes, the Hengyi transaction will be treated as an
acquisition pursuant to the purchase method of accounting. Also see note 2.
The pro forma information below, while helpful in illustrating the
financial characteristics of the acquisition under one set of assumptions,
does not reflect the impact of possible revenue enhancements, expense
efficiencies and other factors that may result as a consequence of the
acquisition and, accordingly, does not attempt to predict or suggest future
results. It also does not necessarily reflect what the historical results
of the combined business would have been had our companies been combined
during the period presented.
17
The following unaudited pro forma information is presented as if the
acquisition of Hengyi occurred at the beginning of the 2004 period
presented:
Nine Months Ended
September 30, 2004
Revenue $ 5,639,912
Net loss $ (296,150)
Basic and diluted loss per share $ (0.01)
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
18
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.
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 which is
the parent, the management company and holder of a 90% 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
the name of China Biopharmaceuticals Holdings, Inc.("CBH") The Agreement and
19
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. The closing of the transaction is
waiting for the final approval and issuing of the business certificate from the
local government.
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
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
20
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 have 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.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to understanding of our
financial statements. The application of these polices requires management to
make estimates and assumptions that affect the valuation of assets and expenses
during the reporting period. There can be no assurance that actual results will
not differ from these estimates. The impact and any associated risks related to
these policies on our business operations are discussed below.
(1) 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 and accepted by the
customer. Confirmed revenue is 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.
21
(2) ACCOUNTS RECEIVABLE.
The Company's accounts receivable are concentrated in numbers of pharmaceutical
manufacturers. The Company believes that a significant change in the liquidity
or financial position of any customer would have a material adverse impact on
the collectability of the Company's accounts receivable. Based upon the
Company's historical experience, the delaying of payment caused by customer's
unpredicted management or financial trouble is influencing the Company's
financial and future operating results.
(3) BAD DEBT.
The Company's accounting policy is to recognize as bad debt any accounts
receivable that the Company is unable to collect within a significant period of
time. The Company strives to improve project monitoring and account receivable
recovery.
(4) INCOME TAX.
Significant judgment is required in determining our income tax provision. In the
ordinary course of business, there are many transactions and calculations where
the ultimate tax outcome is uncertain. Although we believe that our estimates
are reasonable, no assurance can be given that the final outcome of these
matters will not be different than that which is reflected in our historical
income tax provisions and accruals. Such differences could have a material
effect on our income tax provision and net income in the period in which such
determination is made. We apply an asset and liability approach to accounting
for income taxes. Deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
recoverability of deferred tax assets is dependent upon our assessment of
whether it is more likely than not that sufficient future taxable income will be
generated to utilize the deferred tax asset. In the event we determine that
future taxable income will not be sufficient to utilize the deferred tax asset,
a valuation allowance is recorded.
RESULTS OF OPERATIONS
On August 28, 2004, the Registrant and CBC which is the parent, management
company and holder of a 90% 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.
Due to the time consuming of the government for registration and licensing
processes, the transaction is not completed yet.
22
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.
GENREAL RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AS
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(1) REVENUE.
Revenue for the nine months ended on September 30, 2004 was $663,850, while the
Company's revenue for the nine months ended September 30, 2003 was $348,040.
During the reporting period the Company significantly increased R&D services to
other domestic pharmaceutical companies. The Company 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 9% 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,
the Company 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, the Company focused
on preparing the commercialization of new drugs.
(3) GROSS PROFIT.
Gross profit in the first nine months of 2004 amounted at $603,835, as compared
to $78,785 for the nine months ended September 30, 2003. In 2004, the Company
increased sales and significantly decreased its R&D cost.
(4) GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September 30, 2004
was $279,228 as compared to $37,355 for the nine months ended September 30,
2003. General and administrative expenses increased significantly in 2004 due to
the Exchange and reorganization of the Company.
(5) 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
Chemsource in 2003 and due to the lack of efficient project monitoring from the
management of Chemsource and unpredictable licensing procedures in China. A
large part of those accounts receivable were recorded 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. The Company strives to improve project monitoring and account
receivable recovery.
23
(6) INCOME TAXES.
Income tax expense for the nine months ended September 30, 2004 increased
$294,694 from $-0- tax expense for the nine months ended September 30, 2003. The
increase resulted from deferred tax assets in 2004 that were reserved completely
through a valuation allowance due to the uncertainty of their realization in
future periods. In 2003, the company was exempt from taxation under the PRC tax
regulations.
(7) NET INCOME
Net loss for the nine months ended September 30, 2004 was $472,593 as compared
to net income of $41,482 for the nine months ended September 30, 2003. This is
mainly due to the large amount of account receivable incurred by Chemsource in
2003, which were recorded as bad debts in this reporting period. Projects
related to those bad debts are still going forward for future income.
GENREAL RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,2004 AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003
(1) REVENUE.
Revenue for the three months ended on September 30, 2004 was $480,131, while the
Company's revenue for the three months ended September 30, 2003 was $34,233.
During the three months ended September 30, 2004, the Company significantly
increased R&D services to other domestic pharmaceutical companies. The Company
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 three months ended September 30, 2004 was $7,048 as compared to
$107,228 for the three months ended September 30, 2003. R&D cost as a percentage
of sales was about 1.5% for the three months ended September 30, 2004, as
compared to about 313% for the three months ended September 30, 2003. In the
three months ended September 30, 2004, the Company 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 three months
ended September 30, 2004, the Company focused on preparing the commercialization
of new drugs.
(3) GROSS PROFIT.
Gross profit in the three months ended September 30, 2004 amounted at $473,083,
as compared to a gross loss of $72,995 for the three months ended September 30,
2003. In 2004, the Company increased sales and significantly decreased its R&D
cost.
(4) GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended September 30,
2004 was $247,732 as compared to $11,740 for the three months ended September
30, 2003. General and administrative expenses increased significantly in 2004
due to the Exchange and reorganization of the Company.
24
(5) BAD DEBT.
The amount of bad debt for the three months ended September 30, 2004 was
$538,843. This was mainly due to large amount of account receivables created by
Chemsource in 2003 and due to the lack of efficient project monitoring from the
management of Chemsource and unpredictable licensing procedures in China. A
large part of those accounts receivable were recorded 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. The Company strives to improve project monitoring and account
receivable recovery.
(6) INCOME TAXES.
Income tax expense for the three months ended September 30, 2004 increased
$234,492 from $-0- tax expense for the three months ended September 30, 2003.
The increase resulted from deferred tax assets in 2004 that were reserved
completely through a valuation allowance due to the uncertainty of their
realization in future periods. In 2003, the company was exempt from taxation
under the PRC tax regulations.
(7) NET INCOME
Net loss for the three months ended September 30, 2004 was $507,873 as compared
to $84,760 for the three months ended September 30, 2003. This is mainly due to
the large amount of accounts receivable incurred by Chemsource in 2003, which
were recorded as bad debts 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 $62,284, net cash used in investing activities was $4,842 and net
cash provided by financing activities was $300,000. Cash and cash equivalents
for the nine months ended September 30, 2004 was $321,140. This has brought
concern to the Company's management because Chemsource desires to strengthen
their leading position in new drug R&D and the Company is planning to proceed
with further acquisitions that require that sound sources of cash be secured in
the near future.
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.
25
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.
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.
NEW 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.
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.
26
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 FASB issued 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 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,
27
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.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets, an Amendment of APB No. 29". This statement amends APB Opinion No.29,
"Accounting for Nonmonetary Transactions". Earlier guidance had been based on
the principle that exchanges of nonmonetary assets should be based on the fair
value of the assets exchanged and APB No. 29 included certain exception to this
principle. However, FASB 153 eliminated the specific exceptions for nonmonetary
exchanges with a general exception rule for all exchanges of nonmonetaruy assets
that do not have commercial and economic substance. A nonmonetary exchange has
commercial substance only if the future cash flows of the entity is expected to
change significantly as a result of the exchange. This statement is effective
for nonmonetary exchanges occurring in fiscal periods beginning after June 15,
2005.
In December 2004, the FASB issued a revised SFAS No. 123, Accounting for
Stock-Based Compensation, which supersedes APB opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. This
statement requires a public entity to recognize and measure the cost of employee
services it receives in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). These costs will
be recognized over the period during which an employee is required to provide
service in exchange for the award - the requisite service period (usually the
vesting period). This statement also establishes the standards for the
accounting treatment of these share-based payment transactions in which an
entity exchanges its equity instruments for goods or services. It addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This statement
shall be effective the first interim or annual reporting period that begins
after December 15, 2005. Implementation of the revised SFAS No. 123 is not
expected to have a significant effect on the Company's financial statement
presentation or its disclosures.
The implementation of the above pronouncements is not expected to have a
material effect on the Company's financial statement presentation or
disclosures.
28
ITEM 3. CONTROL AND PROCEDURES.
As of the end of the period covered by this Quarterly Report on Form 10-QSB, we
carried out an evaluation, with the participation of our management, including
our Chief Executive Officer and Acting Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures pursuant to Securities
Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive
Officer and Acting Chief Financial Officer concluded that our disclosure
controls and procedures are unsatisfied in ensuring that information required to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms.
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.
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:
29
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.
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 purchase agreement been signed with the acquisition of 51% of the equity
interest of Hengyi. The closing of the transaction is waiting for the final
approval and issuing of the business certificate from the local government. As a
result, those financial statements are in the process of being prepared and will
be filed as soon as practicable following the closing of the transaction
described in the Form 8-K filed on October 5, 2004.
30
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: February 4, 2005
By: /s/ MAO Peng
------------------------------------
Name: MAO Peng
Title: Chairman and
Chief Executive Officer
Date: February 4, 2005
By: /s/ HUNAG Chentai
------------------------------------
Name: HUANG Chentai
Title: Chief Financial Officer
31