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 MARCH 31, 2005
/ /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 13-2949462
- ------------------------------- -------------------
(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 8320 5758
------------------
(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 24,723,757 shares of the Company's common stock outstanding on March
31, 2005.
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...............................................14
ITEM 3. CONTROL AND PROCEDURES..............................................20
PART II - OTHER INFORMATION...................................................20
ITEM 1. LEGAL PROCEEDINGS...................................................20
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.........20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................21
ITEM 5. OTHER INFORMATION...................................................21
ITEM 6. EXHIBITS ...........................................................22
1
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of China Biopharmaceuticals Holdings, Inc.
and subsidiaries (collectively, the "Company"), included herein were prepared,
without audit, pursuant to rules and regulations of the Securities and Exchange
Commission. Because certain information and notes normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America were condensed or omitted pursuant to such rules
and regulations, these financial statements should be read in conjunction with
the financial statements and notes thereto included in the audited financial
statements of the Company as included in the Company's Form 10-KSB for the year
ended December 31, 2004.
2
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
March 31,
ASSETS 2005
------------
Current Assets:
Cash $ 1,044,699
Accounts receivable-net (Note 3) 3,227,920
Prepaid expenses 1,022,646
Inventory Note 4) 1,544,359
------------
Total current assets 6,839,623
Fixed Assets, net (Note 5) 1,676,357
Other Assets (Note 6) 2,121,612
------------
Total Assets $ 10,637,593
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank loans $ 1,812,251
Accounts payable and accrued expenses 642,850
Other payable 1,815,180
Income taxes payable 415,438
Deferred revenue 748,763
Due to shareholders (Note 7) 361,794
Bond Payable 500,000
------------
Total Current Liabilities 6,296,275
Commitments and contingencies --
Minority interests 1,341,190
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;
24,723,757 shares issued and outstanding as of March 31, 2005 247,238
Paid-in capital 1,756,951
Retained earnings 999,278
Accumulated comprehensive (loss) (3,339)
------------
Shareholders' Equity 3,000,128
------------
Total Liabilities and Shareholders' Equity $ 10,637,593
============
See Notes to Financial Statements
3
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended
March 31,
2005 2004
------------ ------------
(unaudited) (unaudited)
Revenues
Sales $ 1,988,508 $ 457,607
Cost of sales 1,099,067 126,577
Business tax
------------ ------------
Gross Profit 889,441 331,030
Operating Expenses
General and administrative 357,368 187,603
------------ ------------
Income from operations 532,074 143,427
Other income:
Interest income
Interest expense (37,277) 20
Other revenues and gains
Other income, net 178 123
------------ ------------
Income before income taxes 494,974 143,550
Income taxes
Minority interest 87,307 13,507
------------ ------------
Net income 407,667 130,043
Foreign currency translation gain(loss)
------------ ------------
Comprehensive income $ 407,667 $ 130,043
============ ============
Basic and fully diluted earnings per share $ 0.02 $ 0.01
============ ============
Weighted average shares outstanding $ 24,523,757 $ 23,158,757
============ ============
See Notes to Financial Statements
4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
For the Three Months Ended
March 31,
2005 2004
----------- -----------
(unaudited) (unaudited)
Operating Activities
Net income $ 407,667 $ 120,043
Adjustments to reconcile net income to net cash provided(used)
by operating activities:
Depreciation 34,471 4,516
Minority interest 290,345 27,617
Changes in operating assets and liabilities:
Accounts receivable 1,860,389 65,077
Inventories (70,338) 6,534
Prepaid expense and other rec (1,022,646) (3,588)
Other assets (315,298) 768
Accounts payable and accrued expenses (2,564,952) 80,130
Other payable 875,241 7,823
Due to shareholder (22) --
Customer deposit 53,601 67,832
Taxes payable (1,477) (809)
----------- -----------
Net cash provided(used) by operating activities (453,020) 375,943
Investing Activities
Purchase of fixed assets (23,279) --
----------- -----------
Net cash provided(used) by investing activities (23,279) --
Financing Activities
Processes from issuance of common stock 397,000 --
Processes from notes payable 500,000 --
Bank loan 156,962 --
----------- -----------
Net cash provided by financing activities 1,053,962 --
----------- -----------
Net increase in cash and cash equivalents 577,663 375,943
Cash at beginning of period 467,036 --
----------- -----------
Cash at end of period $ 1,044,699 $ 375,943
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during year for:
Interest $ 37,277 $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
See Notes to Financial Statements
5
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1- ORGANIZATION AND OPERATIONS
CBH was incorporated under the laws of the State of Delaware in the
United States. The 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
Chemsource, a company established in the People's Republic of China.
Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a
Chinese company established in Suzhou Province, China, which the Company
acquired a 75.76% ownership on September 30, 2004.
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 CBH in
exchange of 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.
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.
The principal activities of Hengyi are sales and manufacturing of
pharmaceutical intermediates, such as carbamazephine, flumequine and
iminostilbene carbonyl chloride in Mainland China.
Note 2- SIGNIFICANT ACCOUNTING POLICIES
Economic and Political Risks
The Company faces a number of risks and challenges since its assets are
located in China and its revenues are derived from its operations in
China. China is a developing country with a young market economic system
overshadowed by the state. Its political and economic systems are very
different from the more developed countries and are still in the stage
of change. China also faces many social, economic and political
challenges that may produce major shocks and instabilities and even
crises, in both its domestic arena and its relationship with other
countries, including but not limited to the United States. Such shocks,
instabilities and crises may in turn significantly and negatively affect
the Company's performance.
6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of Presentation
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory accounts of the Company, which are prepared in accordance with
the "Accounting Standards for Business Enterprises" and "Accounting
system for Business Enterprises" in the PRC ("PRC GAAP").
Certain accounting principles, which are stipulated by US GAAP, are not
applicable in the PRC. The difference between PRC GAAP accounts of the
Company and its US GAAP financial statements was immaterial.
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.
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 Agreegment 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).
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.
Equipment and machinery 6 years
Motor vehicles 8 years
Furniture and fixtures 5 years
Land use right 48 years
The cost and related accumulated depreciation of assets sold or
otherwise retired are eliminated from the accounts and any gain or loss
is included in the statement of operations. The cost of maintenance and
repairs is charged to income as incurred, whereas significant renewals
and betterments are capitalized.
Long-term assets of the Company are reviewed annually as to whether
their carrying value has become impaired, pursuant to the guidelines
established in Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
The Company also re-evaluated the periods of amortization to determine
whether subsequent events and circumstances are warrant revised estimate
of useful lives.
7
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
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 cost are expensed until the project attains
technical feasibility (i.e. obtained official approval for clinical
trials), and then such development costs are capitalized.
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.
Inventory
Inventory, which consists primarily of finished goods, are stated at the
lowere of average cost or market, with average cost being determined by
the fist-in, first-out (FIFO) method.
8
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue and Revenue Recognition
For fixed-price refundable new drugs 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.
For sales of goods, revenue is recognized at the time of shipment.
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 include the
enactment date. The Company provides a valuation allowance for certain
deferred tax assets, if it is more likely than not that the Company will
not realize tax assets through future operations.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at
the time the estimate are made; however actual results could differ
materially form those estimates.
9
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income(Loss)
SFAS No. 130, Reporting Comprehensive Income, established standard for
the reporting and display of comprehensive income, its components and
accumulated balances in a full set of general purpose financial
statements. SFAS No. 130 defines comprehensive income to include all
changes in equity excepts those resulting form investments by owners and
distributions to owners. Among other disclosures, SPAS No. 130 requires
that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported
in financial statement that is presented with the same prominence as
other financial statements. The Company's only current component of
comprehensive income is the foreign currency translation adjustment.
Foreign Currency Translation
The 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.
Earnings (Loss) Per Share
Basic earning(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.
Interim Financial Information
The unaudited balance sheet, the unaudited statements of income and cash
flows have been prepared in accordance with United States generally
accepted accounting principles for interim financial information. In our
opinion, all adjustments ( consisting solely of normal recurring
accruals ) considered necessary for a fair presentation of the financial
position, results of operations and cash flows as at March 31, 2005,
have been included. Readers of these financial statements should note
that the interim results from three months period ended March 31, 2005,
is not necessarily indicative of the results that may be expected for
the fiscal year as a whole.
Note 3- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
March 31,
2005
-----------
Accounts receivable $ 3,397,810
less: Allowance for bad debt (169,890)
-----------
Accounts receivable, net $ 3,227,920
===========
10
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4- INVENTORY
Inventory consists of following: March 31
2005
----------
Finished goods $1,389,044
Packing materials and supplies 129,891
Work in progress 25,424
----------
$1,544,359
==========
Note 5- FIXED ASSETS
March 31
Fixed assets consists of the following: 2005
----------
Plant, Equipment $2,105,120
Less: Accumulated depreciation 547,606
----------
1,557,514
Construction in progress 118,843
----------
$1,676,357
==========
Note 6- OTHER ASSETS
Other assets consists of the following: March 31
2005
----------
Cost of land use right $1,473,964
Less: Accumulated amortization 68,785
----------
1,405,179
Goodwell 305,774
Less: Accumulated amortization 15,289
----------
290,485
Deferred bond issuance expenses 108,200
Less: Accumulated amortization 54,100
----------
54,100
Laboratory use right 300,000
Less: Accumulated amortization 15,000
----------
285,000
Computer software 6,343
Less: Accumulated amortization 3,524
----------
2,819
Deferred taxes 84,029
----------
$2,121,612
==========
11
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7- AMOUNT DUE TO SHAREHOLDERS
Amounts due to shareholders consist of the following:
March 31
2005
-----------
Lufan An $ 313,123
Xiahao Liu 36,589
Xinzhong Shi 12,082
-----------
$ 361,794
===========
The amounts due to shareholders are unsecured, interest-free and have no
fixed repayment terms.
Note 8- BUSINESS COMBINATIONS
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.
The following summarizes the acquisition:
Assets acquired $ 1,077,242
Liability assumed (629,811)
-----------
Net assets of CBC at the acquisition date $ 447,431
===========
On September 29, 2004, we signed a purchase agreement which was amended
and restated on December 31, 2004 to acquire a 75.7606% ownership
interest of Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd
("Hengyi"), a Chinese company established in Suzhou, China for 1,200,000
of common shares valued at $1.00 per share or $1,200,000 and additional
$1,600,000 as an additional contribution into the acquired Hengyi for
working capital and/or expansion purposes. The cash contribution is to
be made in installments beginning in 2005.
12
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9- COMMON STOCK
On December 17, 2004, the Company issued 600,000 shares of common stock
to Gang Zhu and another 600,000 shares of common stock to Fu Ying Chou,
both are shareholders of Suzhou Hengyi Pharmaceutical Feedstock Co.,
Ltd. pursuant to the acquisition of Hengyi effective October 1, 2004.
During October 2004 the Company engaged a consultant for six months
ending March 31, 2005. The terms of the agreement are for the consultant
to receive cash payment of $4,000 plus value at $2,500 common stocks and
10,000 three year warrants to purchase common stock at $0.50 per share,
each month during the agreement. The common shares are being valued at
$1.00 per share and the warrants are valued at $0.58 per warrant for a
total monthly cost to the Company of $10,917 for the consulting
services. The common stock and warrants will be physically issued in
2005.
During January 2005, the Company issued $500,000 face value convertible
notes payable 180 days from the date of issue with interest at 7% per
annum. The notes are convertible into common stock of the Company at
$1.00 per share. Attached to the notes are three year warrants that
allow the holder to purchase shares of common stock at $1.50 per share.
Relating to the convertible notes issuing, the Company paid Wellfleet
$40,000 in cash and issued 65,000 shares valued at $65,000 and 26,666
three year warrants to purchase the Company's common stock at $1.50 per
share valued at $3,200 using the Black-Schole pricing model for a total
of $108,200 of note issuance expense to be amortized over the life of
the note.
On March 8, 2005, the Company issued 300,000 shares of common stock to
China Pharmaceutical University located in Nanjing, China, pursuant to a
joint laboratory agreement and agreed to invest $36,245 into the
laboratory in the next five years. The value of the 300,000 shares has
not been stated in the agreement. However, the management estimated the
stock as $1.00 per share.
13
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.
OVERVIEW
China Biopharmaceuticals Holdings, Inc. ("CBH", "the Company" or "the
Registrant") is a bio-pharmaceutical company focused on research discovery,
development and commercialization of innovative drugs in People's Republic of
China ("China" or "PRC").
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. (CBH), its wholly owned subsidiary in the
state of Delaware on August 28, 2004 through an internal re-organizational
merger. Effective August 28, 2004, CBH completed the acquisition of China
Biopharmaceuticals Corp. ("CBC"), a British Virgin Islands corporation as the
parent, the management company and holder of 90% of the ownership interest in
its then only operating subsidiary and asset, NanJing Keyuan Pharmaceutical R&D
14
Co., Ltd., doing business in English a.k.a. Nanjing Chemsource Pharmaceutical
R&D Co. Ltd, ("Keyuan" or "Chemsource"), a company established in China and
engaged in the discovery, development and commercialization of innovative drugs
and related bio-pharmaceutical products in China. Nanjing Keyuan Pharmaceutical
R&D Co., Ltd. was established in March 2000 in Nanjing City of Jiangsu Province,
China. It was founded and spear-headed by graduates from China Pharmaceutical
University to engage in new drug research and discovery and in the development
of new drug screening technologies.
On February 27, 1986, the stockholders of the Company approved the divestiture
and sale of those assets of the Company 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
Company's then owned premises. The sale was consummated as of February 28, 1986.
After such divestiture, the Company'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 Company 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
Company'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 Company is no longer a BDC and will continue as an
operating company.
On August 4, 2004, the Company 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 our company and its wholly owned subsidiary in the State of Delaware under
the current name of the Registrant, 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 Company, ceasing
its corporate existence and having the Company 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 Company. On August 28, 2004, the internal reorganizational Merger was
completed with Globus merging into the Company as the surviving entity.
Pursuant to a share exchange agreement ("Exchange Agreement") between the
Company, CBC, Keyuan, and MAO Peng as the sole shareholder of CBC, our company
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
1933, as amended) common stock of our company, par value $0.01 per share,
representing approximately 90% of the issued and outstanding common capital
stock of our company following the time of the issuance. There are currently
24,723,757 issued and outstanding shares of common stock of the reorganized
Company.
On September 29, 2004, the Registrant signed a purchase agreement which was
amended and restated on December 31, 2004 to acquire a 75.7606% ownership
interest of Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a
Chinese company established in Suzhou, China for 1,200,000 of common shares and
15
additional $1,600,000 as additional contribution into the acquired Hengyi for
working capital and/or expansion purposes. The cash contribution is to be made
in installments.
The shares of common stock of the Company are currently not quoted on any stock
exchange but we have applied for trading with the Over the Counter Bulletin
Board ("OTC Bulletin Board") under the symbol CBIO.OB and our listing
application has been accepted. We are being considered for approval of such
listing application although no assurance can be given in this regard.
Although to date we have been successful in developing our business and
products, we face many challenges typically faced by a growing company,
including limited access to capital, competition, research and development
risks, among many other risks. Our inability to overcome these risks could have
an adverse effect on our operations, financial condition and prospects.
Brief Description of the Registrant's Subsidiaries and Business
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. 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.
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.
The Registrant's subsidiary Hengyi specializes in research and development,
production and sales of pharmaceutical products as well as chemicals and
intermediaries used in pharmaceutical products. Hengyi has extensive product
pipeline containing twenty six major products that are raw material and
16
intermediaries for making pharmaceutical products. More than 90% of Hengyi's
products are exported to North America, South America and European countries.
Among the end user customers of Hengyi are companies such as: TEVA
Pharmaceutical Industries Ltd., TARO Pharmaceutical Industries Ltd. Euticals
SPA, ARASTO Pharmaceutical Chemical Inc., Globe Chemicals, Biesterfeld
Siemsgluess International and Beckman Coulter Inc. Hengyi can manufacture and
provide most of the raw materials for when the Company starts commercializing
its new drugs, enabling the Company to lower its production cost and gain
competitive advantages over its competitors.
GENERAL RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AS
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004
On September 29, 2004, the Registrant signed a purchase agreement which was
amended and restated on December 31, 2004 to acquire a 75.7606% ownership
interest of Hengyi. The current financial statement of the Company reflects
Hengyi's revenue and profit for the three months from January 1, 2005 to March
31, 2005.
(1) REVENUE.
Revenue for the three months ended on March 31, 2005 was $1,988,508, while the
Company's revenue for the three months ended March 31, 2004 was $457,607,
representing a 335% increase. The increase is attributable primarily to revenues
generated by Hengyi as well as to an increase in the R&D services, licensing of
access to Keyuan's proprietary screening and testing platforms and licensing of
two new drugs by Keyuan to other pharmaceutical companies during the three
months ended March 31, 2005.
(2) R&D.
R&D cost for the three months ended March 31, 2005 was $23,074 as compared to
$65,453 for the three months ended March 31, 2004, representing a 65% decrease.
The decrease is mainly attributable to the fact that Keyuan significantly
reduced its investment in R&D of new drug project, by concentrating on the
preparation of the commercialization of new drugs and therefore, most of the R&D
cost during three months ended March 31, 2005 is attributable to R&D costs of
Hengyi.
(3) GROSS PROFIT.
Gross profit in the three months ended March 31, 2005 amounted at $889,441, as
compared to a gross profit of $331,030 for the three months ended March 31,
2004, representing a 169% increase. The gross profit margin for the three months
ended March 31, 2005 was 45% as compared to 72% for the three months ended March
31, 2004. In the first quarter of 2005, the Company significantly increased
sales. The decrease in Gross profit margin is mainly due to Hengyi's low gross
profit margin.
(4) GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended March 31, 2005
was $357,368 as compared to $187,603 for the three months ended March 31, 2004.
General and administrative expenses increased significantly for the three months
ended March 31, 2005 due to the reverse merger, reorganization of the Company
and the acquisition related transaction costs for Hengyi as well as the
financing activities of the Company. Auditing expense, legal expenses,
commissions and other professional expenses are the main reason for the
significant increase in general and administrative expenses. Some of these
expenses are one time transactional expenses.
17
(7) NET INCOME
Net income for the three months ended March 31, 2005 was $407,667 as compared to
$130,043 for the three months ended March 31, 2004, representing a 213%
increase. The increase is attributable to the fact that during the three months
ended March 31, 2005, the Company significantly increased sales, which also
included sales by Hengyi and decreased its R&D expenses.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2005, net cash used in operating activities
was $453,020, net cash used in investing activities was $23,279 and net cash
provided by financing activities was $1,053,962. Cash and cash equivalents for
the period ended March 31, 2005 was $1,044,699. Net increase in Cash and cash
equivalents for the period ended March 31, 2005 was $577,663. This has brought
concern to the Company's management because Keyuan desires to strengthen its
leading position in new drug R&D and the Company is planning to proceed with
further acquisitions for which the Company requires external sources of capital.
In January of 2005, the Registrant raised gross proceeds of $500,000 through the
sales of promissory note to accredited investors. The Convertible loan is 7%
interest rate per annually and payable with interest. The principle shall be
paid upon maturity, which is 180 days from the date of the sales of the Note.
The Registrant granted to holders of the Note the right to convert all, but not
less than all, of the Note into common stock by electing to convert the face
value of the Note at or prior to maturity at one dollar per share. The
Registrant further granted to holders of the Note with warrant right to purchase
at a price of $1.50 for a period of three years from the date of sales of the
Note. The purchase price shall be $1.50 per share with the underlying shares to
be registered within 120 days after the date of sales of the Note. The
Registrant agreed to prepare and file with the SEC a registration statement
covering the resale of the common stock on or before April 30, 2005 for certain
investors. If such registration statement covering the shares of common stock to
which the promissory note can be converted was not declared effective on or
before April 30, 2005, then the conversion price will be reduced by 5% or $0.05
per share and the warrant amount will be increased by 5% per month for every
month. However, to such date there is no effective registration statement for
the underlying securities.
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 of capital may be needed for Company's
expansion. We are exploring bank loans and private equity financing to finance
such expenditures and intend to raise equity through the capital market once our
shares are traded.
18
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.
19
ITEM 3. CONTROL AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures - We maintain a system of
disclosure controls and procedures that are designed for the purposes of
ensuring that information required to be disclosed in our Securities and
Exchange Commission ("SEC") reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
as appropriate to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our CEO and CFO,
of the effectiveness of our disclosure controls and procedures as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on that
evaluation, our CEO and CFO concluded that our disclosure controls and
procedures are effective.
Changes in Internal Control Over Financial Reporting - There has been no change
in our internal control over financial reporting during the first quarter of
2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 8, 2005, the Company issued 300,000 shares of common stock to China
Pharmaceutical University located in Nanjing, China, pursuant to a joint
laboratory agreement. The value of the 300,000 shares has not been stated in the
agreement. However, the management estimated the stock as $1.00 per share.
During January 2005, the Company issued $500,000 face value convertible notes
payable 180 days from the date of issue with interest at 7% per annum. The notes
are convertible into common stock of the Company at $1.00 per share. Attached to
the notes are three year warrants that allow the holder to purchase shares of
common stock at $1.50 per share. Relating to the convertible notes issuing, the
Company issued Wellfleet Partners, Inc. and its designated brokerage affiliate
WestPark Capital, Inc, and its chosen brokerage co-managers 65,000 shares valued
at $65,000 and 26,666 three year warrants to purchase the Company's common stock
at $1.50 per share valued at $3,200 using the Black-Schole pricing model for a
total of $108,200 of note issuance expense to be amortized over the life of the
note.
All of the above issuances and sales were deemed to be exempt under Regulation
S, Regulation D Rule 701 and Section 4(2) of the Securities Act. No advertising
or general solicitation was employed in offering the securities. The offerings
and sales were made to a limited number of persons, all of whom were accredited
investors, business associates of ours or our executive officers, and transfer
was restricted by us in accordance with the requirements of the Securities Act.
20
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
21
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: May 15, 2005
By: /s/ MAO Peng
------------------------------------
Name: MAO Peng
Title: Chairman and
Chief Executive Officer
Date: May 15, 2005
By: /s/ HUNAG Chentai
------------------------------------
Name: HUANG Chentai
Title: Chief Financial Officer
22