U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 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 / /
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) YES / / NO /X/
There were 28,210,257 shares of the registrant's common stock outstanding on
November 3, 2005.
TABLE OF CONTENTS
Page
----
PAGE NUMBERS TO BE UPDATED
PART I - FINANCIAL INFORMATION.................................................2
ITEM 1. FINANCIAL STATEMENTS.................................................2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................19
ITEM 3. CONTROL AND PROCEDURES..............................................27
PART II - OTHER INFORMATION...................................................27
ITEM 1. LEGAL PROCEEDINGS...................................................27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.........27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................27
ITEM 5. OTHER INFORMATION...................................................27
ITEM 6. EXHIBITS ...........................................................28
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2005
And for three and nine months ended September 30, 2005
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.
3
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
September 30,
2005
-------------
Current Assets:
Cash $ 2,007,819
Accounts receivable-net (Note 3) 8,882,052
Prepaid expenses 108,704
Inventory (Note 4) 5,714,727
Loan to Shareholders 0
-------------
Total current assets 16,713,302
Fixed Assets, net (Note 5) 5,358,394
Other Assets (Note 6) 10,197,678
-------------
Total Assets $ 32,269,375
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Loan $ 4,506,464
Accounts Payable 8,328,970
Other Payable 815,822
Income taxes payable 793,103
Deferred revenue 888,234
Due to RPT 1,855,574
Due to Shareholders 1,512,534
Due to Erye's Shareholders 600,000
Bond Payable 450,000
-------------
Total Current Liabilities 19,750,701
Long-term Liabilities
Long-term Loan 544,046
-------------
Total Long-term Loan 544,046
Minority interests 3,906,024
Shareholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 10,900
1,090,000 shares issued and outstanding as of September 30, 2005
Common stock, $0.01 par value, 200,000,000 shares authorized;
28,210,257 shares issued and outstanding as of September 30, 2005 282,103
Common stock to be issued 125
Additional Paid-in capital 6,137,828
Retained earnings 1,640,988
Accumulated comprehensive (loss) (3,339)
-------------
Shareholders' Equity 8,068,605
-------------
Total Liabilities and Shareholders' Equity $ 32,269,375
=============
See Notes to Financial Statements
4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
FOR NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
For Nine Month Ended For 3 Months Ended
September 30 September 30
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues
Sales $ 13,129,081 663,850 $ 7,498,008 480,131
Cost of sales 9,430,835 60,015 5,498,940 7,048
Business tax 16,142 -- 13,540 --
------------ ------------ ------------ ------------
Gross Profit 3,682,103 603,835 1,985,527 473,083
Operating Expenses
General and administrative 2,039,938 818,071 1,078,393 786,575
------------ ------------ ------------ ------------
Income from operations 1,642,165 (214,236) 907,134 (313,492)
Other income:
Other income, net (35,694) (6,815) (23,119) (6,962)
------------ ------------ ------------ ------------
Income before income taxes 1,606,471 (221,051) 884,015 (320,454)
Income taxes -- 294,695 -- 234,492
Minority interest 557,094 (43,153) 367,764 (47,073)
------------ ------------ ------------ ------------
Net income 1,049,378 (472,593) 516,252 (507,873)
Foreign currency translation gain(loss) -- (10) -- --
------------ ------------ ------------ ------------
Comprehensive Income $ 1,049,378 (472,603) $ 516,252 (507,873)
============ ============ ============ ============
Basic and Fully Diluted Earnings per Share $ 0.04 (0.02) $ 0.02 (0.02)
============ ============ ============ ============
Weighted average shares outstanding 26,218,201 21,691,971 28,133,757 21,125,843
============ ============ ============ ============
See Notes to Financial Statements
5
CHINA BIOPHARMACEUTICAL HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
For the 9 Months Ended
September 30,
2005 2004
----------- -----------
Operating Activities
- --------------------
Net income $ 1,049,377 $ (472,593)
Adjustments to reconcile net income to net cash
provided(used) by operating activities:
Depreciation 429,040 11,332
Minority interest 851,123 (43,153)
Changes in operating assets and liabilities: -- --
Accounts receivable 3,916,849 400,657
Inventories (1,702,024) (175)
Prepaid expense and other receivables (203,757) (193,626)
Other assets 428,862 (402)
Payable and accrued expenses (4,606,424) 47,457
Due to Shareholders (115,332) 21,600
Customer deposit 185,450 (128,071)
Taxes payable (35,684) 294,690
----------- -----------
Net cash provided(used) by operating activities 197,481 (62,284)
Investing Activities
- --------------------
Business acquisitions-cash acquired (200,000) --
Acquisition or Disposal of fixed assets (909,771) (4,842)
----------- -----------
Net cash provided(used) by investing activities (1,109,771) (4,842)
Financing Activities
- --------------------
Processes from issuance of common stock 397,000 300,000
Processes from issuance of preferred stock 1,090,000 --
Process from convertible notes 450,000 --
Bank loan 516,073 --
----------- -----------
Net cash provided by financing activities 2,453,073 300,000
Net increase in cash and cash equivalents 1,540,783 232,874
Effects of exchange rates on cash -- (11)
Cash at beginning of period 467,036 88,277
----------- -----------
Cash at end of period $ 2,007,819 $ 321,140
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during year for:
Interest $ 237,830 $ --
=========== ===========
Income taxes $ 110,219 $ 356,840
=========== ===========
See Notes to Financial Statements
6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. Suzhou Erye
Pharmaceutical Limited Company ("Erye"), a Chinese company established
in Suzhou Province, China, which the Company acquired a 51% ownership
on June 11, 2005.
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% 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.
The principal activities of Hengyi are sales and manufacturing of
pharmaceutical intermediates, such as carbamazephine, flumequine and
iminostilbene carbonyl chloride in Mainland China.
The principal activities of Erye are sales and manufacturing of
pharmaceutics approved for sale 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.
7
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of Presentation
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.
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.
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 50 years
The cost and related accumulated depreciation of assets sold or
otherwise retired are eliminated from the accounts and any gain or loss
is included in the statement of operations. The cost of maintenance and
repairs is charged to income as incurred, whereas significant renewals
and betterments are capitalized.
Long-term assets of the Company are reviewed annually as to whether
their carrying value has become impaired, pursuant to the guidelines
established in Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
The Company also re-evaluated the periods of amortization to determine
whether subsequent events and circumstances are warrant revised
estimate of useful lives.
8
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Allowance for Doubtful Accounts
The Company determines the allowance for doubtful accounts based on bad
debt rate in prior year and other factors. The Company also provides
specific provisions for bad debt if factors and circumstance indicate
the receivables are unlikely to be collected.
9
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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.
10
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 maintains its books and accounting records in Renminb
("RMB"), thePRC's currency. Translation of dmcontracts. RMB in United
States dollars ("US$") has been made at the single rate of exchange of
US$1.00:RMB8.277. No representation is made that RMB amounts could have
been or could be, converted into US dollar at that rate. On January 1,
1994, the PRC government introduced a single rate of exchange as quoted
daily by the People's Bank of China (the "Unified Exchange Rate"). The
quotation of the exchange rates does not imply free convertibility of
RMB to other foreign currencies. All foreign exchange transactions
continue to take place either through the Bank of China or other banks
authorized to buy and sell foreign currencies at the exchange rates
quoted by the People's Bank of China. Approval of foreign currency
payments by the Bank of China or other institutions requires submitting
a payment application form together with supplier's invoices, shipping
documents and signed contracts.
One July 21, 2005, the People's Bank of China, China's central bank,
announced that, beginning from July 21, 2005, China will implement a
regulated, managed floating exchange rate system based on market supply
and demand and in reference to a package of currencies. RMB will no
longer be pegged to the US dollar and the RMB exchange rate regime will
be improved with greater flexibility.
The People's Bank of China will announce the closing price of a foreign
currency such as the US dollar traded against the RMB in the inter-bank
foreign exchange market after the closing of the market on each working
day, and will make it the central parity for the trading against the
RMB on the following working day.
The exchange rate of the US dollar against the RMB will be adjusted to
8.11 yuan per US dollar on July 21, 2005.
The daily trading price of the US dollar against the RMB in the
inter-bank foreign exchange market will continue to be allowed to float
within a band of 0.3 percent around the central parity published by the
People's Bank of China, while the trading prices of the non-US dollar
currencies against the RMB will be allowed to move within a certain
band announced by the People's Bank of China.
The People's Bank of China will make adjustment of the RMB exchange
rate band when necessary according to market development as well as the
economic and financial situation. The People's Bank of China is
responsible for maintaining the RMB exchange rate basically stable at
an adaptive and equilibrium level.
11
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Business Combination
The Company accounts for its business combination using purchase method
of accounting. This method requires that the acquisition cost be
allocated to the assets acquired and liabilities assumed based on their
fair value. The Company makes judgments and and estimate in determining
the fair value of the assets and liabilities acquired.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over fair value of the
identifiable assets and liabilities acquired as a result of business
acquisition. The Company adopts the Statement of Financial Accounting
Board 142 Goodwill and Intangible Asset. Under SFAS 142, Goodwill is no
longer amortized, but tested for impairment upon first adoption and
annually thereafter, or more frequently when events or changes in
circumstance indicate that it might be impaired. The Company assess its
goodwill in accordance with SFAS 142.
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
September 30, 2005, and 2004, have been included. Readers of these
financial statements should note that the interim results for the nine
month periods ended September 30, 2005, and September 30, 2004, are not
necessarily indicative of the results that may be expected for the
fiscal year as a whole.
12
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Since the Company's common stock currently does not trade, the dilutive
effect of any warrants or convertible notes outstanding can not be
determined.
Note 3- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following: September 30 2005
Accounts receivable $ 9,654,965
less: Allowance for bad debt 772,913
------------
Accounts receivable, net $ 8,882,052
============
During 2004, the Company recognized bad debt expenses of $538,843
relating to sales record 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.
Note 4- INVENTORY
Inventory consists of following:
September 30
2005
------------
Finished goods $ 2,223,705
Packing materials and supplies 1,889,985
Work in progress 1,601,037
------------
$ 5,714,727
============
Note 5- FIXED ASSETS
Fixed assets consists of the following:
September 30
2005
------------
Plant, Equipment $ 9,241,505
Less: Accumulated depreciation (4,193,591)
------------
5,047,913
Construction in progress 310,481
------------
$ 5,358,394
============
13
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6- OTHER ASSETS
Other assets consists of the following:
September 30
2005
------------
Cost of land use right $ 4,670,389
Less: Accumulated amortization 85,164
------------
4,585,225
Deferred consultant expenses 179,250
Less: Accumulated amortization 125,339
------------
53,911
Laboratory use right 344,750
Less: Accumulated amortization 69,824
------------
274,926
Computer software 6,343
Less: Accumulated amortization 5,638
------------
705
Goodwill 5,198,887
Deferred taxes 84,024
------------
$ 10,197,678
============
Note 7- AMOUNT DUE TO SHAREHOLDERS
Amounts due to shareholders consist of the following:
September 30
2005
------------
Due to shareholders $ 1,512,534
The amounts due to shareholders are unsecured, interest-free and have
no fixed repayment terms.
14
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, the Company acquired 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.
On June 11, 2005, the Company acquired a 51% ownership interest of
Suzhou Erye Pharmaceutical Limited Company ("Erye"), a Chinese company
established in Suzhou, China for $80,000 in cash and 3,300,000 of
common shares valued at $1.00 per share or $3,300,000. Also, the
Company will contribute an additional $2,200,000 to Erye for working
capital and/or expansion purposes. The cash contribution is to be made
in installments. The current shareholders will be entitled all profits
made from June 11, 2005 to the date Government approval is granted for
the change in ownership. On June 30, 2005, the Company owes Eyre's
shareholders $600,000 of the purchase price.
15
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 10- 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 a cash payment of $4,000 plus 2,500 shares of
common stock valued at $2,500 and 10,000 three year warrants to
purchase common stock at $0.50 per share, each month during the
agreement with the first month free. 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 $10,205 for the consulting
services.
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 issuance, the Company paid investment
banking fees of $40,000 in cash and issued 65,000 shares common stock
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.
During April 2005 the Company engaged a consultant for seven months
ending October 31, 2005. The terms of the agreement are for the
consultant to receive a cash payment of $50,000 plus 50,000 shares of
common stock valued at $50,000. The Company also engaged another
consultant for one year ended March 31, 2006. The term of this
agreement is for the consultant to receive 60,000 shares of common
stock valued at $60,000 and 35,000 three year warrants to purchase
common stock at $2.00 per share valued at $19,250.
During June 2005, the Company issued $1,090,000 face value convertible
preferred with interest at 7% per annum to the investor. The Company
issued to the investors shares of Series A Convertible Preferred Stock,
face value $1.00 per share, purchase price US$1.00 per share,
convertible at a ratio of 1:1 into shares of the common stock of the
Company. The Company also issued to the investors one warrant for every
one share of Series A Convertible Preferred Stock subscribed under the
subscription agreement. The exercise price of these Warrants is $2.00
per share of common stock. Pursuant to these Warrants, the investors
are entitled to purchase an aggregate amount of 1,090,000 shares of the
Company's common stock. Relating to the convertible preferred shares
issuing, the Company paid fees of $80,750 in cash, and issued 76,500
shares of common stock valued at $76,500, and 76,500 three year
warrants to purchase the Company's common stock at $2.00 per share.
During September 2005, the convertible notes due on September 30, 2005
were extended 90 days. Additionally, since the Company did not register
the underlying stock for the conversion of the notes and warrants by
July 30, a penalty provision was trigged, whereby the conversion price
of the convertible notes drops $0.05 per month (at October 1, the
conversion price was $0.70 per share) and the number of warrants the
note holders was to receive increases 5% per month.
16
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 11- WARRANT OUTSTANDING
The following list the warrants outstanding as of September 30, 2005
which call for the common stock of the Company.
HOLDERS NUMBER EXCISE PRICE EXCISE PERIOD
CFSG1 10,000 $0.50 2004-10-1 through
October 2007
Wellfleet Capital, LLP 26,667 $1.50 January 2005 through
January 2008
Holders of Notes 450,000 $1.25 January 2005 through
January 2008
Holders of Preferred
Convertible 1,090,000 $2.00 3 years from the
effectiveness of the
company's registration
statement
Wellfleet Capital, LLP 76,500 $2.00 3 years from the
effectiveness of the
company's registration
statement
------------
Total 1,653,167
============
In October of 2004, the Company granted to CGF1 of the warrant right to
purchase at 0.50 for a period of 3 years for its work as the Company's
consultant. Total warrant amount to be purchase is 10,000.
In January of 2005, the Company raised gross proceeds of $500,000
through the sales of promissory note to accredited investors ("Note").
The Company 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 Company 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. To such date there is no effective registration
statement for the underlying securities. As of the September 30, 2005,
the Note of amounting of $450,000 has been agreed extend until December
31, 2005. Total warrant amount, including compensation for late
registration, to be purchased is 450,000. The price is reduced to
$1.25.
In January of 2005, the Company granted to Wellfleet Capital, LLP of
the warrant right to purchase at a price of $1.50 for a period of three
years for its work of $500,000 proceeds raised through the sale of the
promissory note. Total warrant amount to be purchase is 26,667.
17
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE11- WARRANT OUTSTANDING (CONTINUED)
In June of 2005, the Company has conducted a private placement of
$1,090,000 through issuance of Series A Convertible Preferred Stock
with face value of $1.00 per share, purchase price US$1.00 per share
convertible at a ratio of 1:1 into shares of the common stock of the
Company. The Company also issued to the Investors one (1) warrant for
every one (1) share of Series A Convertible Preferred Stock subscribed
under the subscription agreement. The exercise price of these Warrants
is $2.00 per share of common stock. Pursuant to these Warrants, the
Investors are entitled to purchase an aggregate amount of 1,090,000
shares of the Company's common stock. These Warrants will expire three
(3) years from the effectiveness of the registration statement that the
Company is required to file with the SEC. The Company is required to
file with the Securities and Exchange Commission a registration
statement, covering the resale of all the shares of common stock to
which the Series A Preferred Convertible Stock may be converted and the
shares underlying the Warrants issued or issuable to investors before
October 15, 2005 If such registration statement is not declared
effective on or before October 15, 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. To such date there is no
effective registration statement for the underlying securities.
In June of 2005, the Company granted to Wellfleet Capital, LLP of the
warrant right to purchase at a price of $2.00 for a period of three
years for its work of $1,090,000 proceeds raised through the sale of
Series A Convertible Preferred Stock. Total warrant amount to be
purchase is 76,500.
NOTE12- PRO FORMA
On June 11, 2005, the Company entered into an agreement with Suzhou
Erye Pharmaceutical Manufacturing Ltd. To purchase 51% of the ownership
controlling interest the manufacturer. The Company determined the
acquisition date was June 11, 2005 and consolidated the revenue, cost,
expenses and income subsequent to the acquisition date. The following
unaudited pro forma information is prepared as if the acquisition of
Erye were consummated at the beginning of the fiscal year presented.
Twelve Months Ended Nine Months Ended
December 31 2004 September 30, 2005
Revenue 21,185,949 21,751,150
Net Income 831,713 1,165,339
Basic and diluted EPS 0.03 0.04
Weighted Average Shares Outstanding 24,358,757 26,218,201
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements:
The following discussion of the financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. China Biopharmaceuticals Holdings, Inc. is referred to herein as
"we" or "our." The words or phrases "would be," "will allow," "expect to",
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," or similar expressions are intended to identify
"forward-looking statements. Such statements include those concerning our
expected financial performance, our corporate strategy and operational plans.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities;(c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; and (d) whether
we are able to successfully fulfill our primary requirements for cash which are
explained below under "Liquidity and Capital Resources. Statements made herein
are as of the date of the filing of this Form 10-QSB with the Securities and
Exchange Commission and should not be relied upon as of any subsequent date.
Unless otherwise required by applicable law, we do not undertake, and we
specifically disclaim any obligation, to update any forward-looking statements
to reflect occurrences, developments, unanticipated events or circumstances
after the date of such statement.
OVERVIEW
China Biopharmaceuticals Holdings, Inc. ("we", "us", "our" or "the Company") 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 Company, 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 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.
19
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 Company, China Biopharmaceuticals Holdings, Inc. 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 "the Securities Act") 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 28,210,257 issued and outstanding shares of common stock of the
reorganized Company.
On September 29, 2004, the Company signed a purchase agreement which was amended
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 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.
On June 11, 2005, the Company signed a purchase agreement which was amended on
August 3, 2005 under which, the Company acquired controlling ownership interest
(approximately 51%) in Suzhou Erye Pharmaceutical Limited Company ("Erye"), a
Chinese company established in Suzhou, China. Total consideration paid by the
Company to acquire 51% ownership interest in Erye is $3,000,000 cash to be paid
in installments, and 3,300,000 of common shares valued at $1.00 per share or
20
$3,300,000. Out of the $3,000,000 to be paid in cash, $2,200,000 will be
contributed to the acquired Erye for working capital and/or expansion purposes.
The acquisition is pending on the Company's listing on the NASD Over The Counter
Bulletin Board Market in a reasonable time.
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.
Investments in our company may also be materially and adversely affected by the
fluctuation of the Renminbi.
Brief Description of the Company'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 Company. 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.
21
The Company'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
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.
The Company's subsidiary, Erye, specializes in research and development,
production and sales of pharmaceutical products as well as chemicals used in
pharmaceutical products. The acquisition of 51% of the ownership interest of
Erye, adds new drug products to the Company's pipeline, manufacturing
capabilities that comply with China Good Manufacturing Practices (GMP) standard
and marketing network that covers 25 provinces in China. Erye has obtained
production certificates for 68 drug items, among which 27 are in production,
mainly antibiotics drugs such as Cefotaxime Sodium for injection, Ceftriaxone
Sodium for injection, Amoxicillin for injection, and Compound Amoxicillin for
injection. Erye's sales exceeded $20 million in 2004, with raw material
Acetylspiramycin per oral taking 15% of domestic market share, and Cloxacillin
Sodium taking 80% of domestic market share.
GENERAL RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004
On September 29, 2004, the Company signed a purchase agreement which was amended
on December 31, 2004 to acquire a 75.7606% ownership interest of Hengyi. On June
11, 2005, the Company signed a purchase agreement which was amended on August 3,
2005 to acquire approximately 51% ownership interest of Erye. The current
financial statements of the Company reflect the revenue and profit of both
Hengyi and Erye for the three months ended Septemebr 30, 2005.
(1) REVENUE.
Revenue for the three months ended September 30, 2005 was $7,498,008, while the
Company's revenue for the three months ended September 30, 2004 was $480,131,
representing a 1,462% increase. The increase is attributable primarily to
revenues generated by Erye and Hengyi which were not part of the Company's
revenue in the three months ended September 30, 2004 as well as to an increase
in the R&D services, licensing of access to Keyuan's proprietary screening and
testing platforms during the three months ended September 30, 2005.
(2) R&D.
R&D cost for the three months ended September 30, 2005 was $144,558 as compared
to $51,657 for the three months ended September 30, 2004, representing a 179.84%
increase. The increase is mainly attributable to R&D costs of Erye and Hengyi
which were not part of the Company's R&D costs during the three months ended
September 30, 2004.
(3) GROSS PROFIT.
Gross profit in the three months ended September 30, 2005 amounted at
$1,985,527, as compared to a gross profit of $473,083 for the three months ended
September 30, 2004, representing a 319.7% increase. The gross profit margin for
the three months ended September 30 was 26.48% as compared to 98.53% for the
22
three months ended September 30, 2004. In the third quarter of 2005, the
Company's sales increased significantly. The decrease in gross profit margin is
mainly due to Hengyi's and Erye's low gross profit margins which were not
reflected in the Company's financial statements for the three months ended
September 30, 2004.
(4) GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended September 30,
2005 was $1,078,393 as compared to $786,575 for the three months ended September
30, 2004 representing a 37.1% increase. General and administrative expenses
increased significantly for the three months ended September 30, 2005 due to
general and administrative expenses incurred by Hengyi and Erye for that period
and which were not reflected in the Company's financial statements for the three
months ended September 30, 2004.
(7) NET INCOME
Net income for the three months ended September 30, 2005 was $516,252 as
compared to net loss of$507,873 for the three months ended September 30, 2004.
The net income significantly increased for the three months ended September 30,
2005 and the increase is mainly attributable to the performance of Keyuan as
well as to net income of Erye and Hengyi which was not reflected in the
Company's financial statements for the three months ended September 30, 2004.
GENERAL RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AS
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004
On September 29, 2004, the Company signed a purchase agreement which was amended
on December 31, 2004 to acquire a 75.7606% ownership interest of Hengyi. On June
11, 2005, the Company signed a purchase agreement which was amended on August 3,
2005 to acquire approximately 51% ownership interest of Erye. The current
financial statements of the Company reflects Hengyi's revenue and profit for the
nine months ended September 30, 2005 and the revenue of Erye for the period from
June 11, 2005 to September 30, 2005.
(1) REVENUE.
Revenue for the nine months ended on September 30, 2005 was $13,129,081 compared
to $663,850 for the nine months ended September 30, 2004, representing a
1877.28% increase. The increase is attributable primarily to revenues generated
by Erye and Hengyi which were not part of the Company's revenues in the nine
months ended September 30, 2004, as well as to an increase in the R&D services,
licensing of access to Keyuan's proprietary screening and testing platforms
during the nine months ended September 30, 2005.
(2) R&D.
R&D cost for the nine months ended September 30, 2005 was $297,864 as compared
to $154,971 for the nine months ended September 30, 2004, representing a 92.21%
increase. The increase is mainly attributable to the R&D costs of Hengyi and
Erye which were not part of the Company's R&D costs during the nine months ended
September 30, 2004.
(3) GROSS PROFIT.
Gross profit in the nine months ended September 30, 2005 amounted at $3,682,103,
as compared to a gross profit of $603,835 for the nine months ended September
30, 2004, representing a 509.78% increase. The gross profit margin for the nine
months ended September 30, 2005 was 28.05% as compared to 90.96% for the nine
23
months ended September 30, 2004. In the first three quarters of 2005, the
Company's sales increased significantly. The decrease in gross profit margin is
mainly due to the low gross profit margins of Hengyi and Erye which were not
reflected in the Company's financial statements for the nine months ended
September 30, 2004.
(4) GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September 30, 2005
was $2,039,938 as compared to $818,071 for the nine months ended September 30,
2004 representing a 149.36% increase. General and administrative expenses
increased significantly for the nine months ended September 30, 2005 due to
general and administrative expenses incurred by Hengyi and Erye for that period
and which were not reflected in the Company's financial statements for the nine
months ended September 30, 2004.
(7) NET INCOME
Net income for the nine months ended September 30, 2005 was $1,049,378 as
compared to a net loss of $472,603 for the nine months ended September 30, 2004.
The net income of the Company has increased significantly for the nine months
ended September 30, 2005 and the increase is attributable to the performance of
Keyuan as well as to net income of Erye and Hengyi which was not reflected in
the Company's financial statements for the nine months ended September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 2005, net cash used by operating
activities was $106,507, net cash used in investing activities was $502,389 and
net cash provided by financing activities was $334.111. Cash and cash
equivalents as of September 30, 2005 was $2,007,819. Net decrease in Cash and
cash equivalents for the three months ended September 30, 2005 was $274,785. For
the nine months ended September 30, 2005, net cash provided by operating
activities was $197,481, net cash used in investing activities was $1,109,771
and net cash provided by financing activities was $2,453,073. Net increase in
Cash and cash equivalents for the nine months ended September 30, 2005 was
$1,540,783.
In January of 2005, the Company raised gross proceeds of $500,000 through the
sales of promissory note to accredited investors ("Note"). The Convertible loan
is 7% interest rate per annually and payable with interest. The principle is to
be paid upon maturity, which is 180 days from the date of the sales of the Note.
The Company 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 Company
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 Company
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. To such
date there is no effective registration statement for the underlying securities.
In June of 2005, pursuant to an exemption under the Securities Act, the Company
has conducted a private placement of approximately $1,090,000 with 28 accredited
investors, one of which is a director of the Company ("Investors"), through
issuance of Series A Convertible Preferred Stock. The Company issued to the
24
Investors shares of Series A Convertible Preferred Stock, ("Series A Convertible
Preferred Stock") face value $1.00 per share, purchase price US$1.00 per share
("Purchase Price") convertible at a ratio of 1:1 ("Conversion Ratio") into
shares of the common stock ("Common Stock") of the Company. The Company also
issued to the Investors one (1) warrant for every one (1) share of Series A
Convertible Preferred Stock subscribed under the subscription agreement. The
exercise price of these Warrants is $2.00 per share of common stock. Pursuant to
these Warrants, the Investors are entitled to purchase an aggregate amount of
1,090,000 shares of the Company's common stock. These Warrants will expire three
(3) years from the effectiveness of the registration statement that the Company
is required to file with the SEC. The Company is required to file with the
Securities and Exchange Commission a registration statement, covering the resale
of all the shares of common stock to which the Series A Preferred Convertible
Stock may be converted and the shares underlying the Warrants issued or issuable
to Investors before October 15, 2005 If such registration statement is not
declared effective on or before October 15, 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. 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
additional pharmaceutical manufacturing companies with GMP standard facilities
in order to commercialize new drugs in our extensive new drug pipeline and
further extend of product pipeline and expand the Company's sales network (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.
MANAGEMENT ASSUMPTIONS
Management anticipates, based on internal forecasts and assumptions relating to
our current operations, that existing cash and funds generated from operations
may not be sufficient to meet capital requirements for future acquisition
activities. We could therefore be required to seek additional financing. There
can be no assurance that we will be able to obtain such additional financing at
acceptable terms to us, or at all.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our operating subsidiaries are located in China. Their business activities are
mainly in China using Chinese Renminbi as the functional currency. The value of
the Renminbi against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in the PRC's political and economic
conditions. As we rely entirely on revenues earned in the PRC, any significant
revaluation of the Renminbi may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into Renminbi
for our operations, appreciation of the Renminbi against the U.S. dollar could
have a material adverse effect on our business, financial condition and results
of operations.
25
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our common shares or for other
business purposes and the U.S. dollar appreciates against the Renminbi, the U.S.
dollar equivalent of the Renminbi we convert would be reduced. To date, however,
we have not engaged in transactions of either type.
Since 1994 the PRC has pegged the value of the Renminbi to the U.S. dollar. We
do not believe that this policy has had a material effect on our business.
However, there have been indications that the PRC government may be
reconsidering its monetary policy in light of the overall devaluation of the
U.S. dollar against the Euro and other currencies during the last two years. In
September 2005, the PRC government revalued the Renminbi by 2.3% against the
U.S. dollar, moving from Renminbi 8.28 to Renminbi 8.09 per dollar. Because of
the pegging of the Renminbi to the U.S. dollar is loosened, we anticipate that
the value of the Renminbi appreciate against the dollar with the consequences
discussed above.
26
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 third 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None
27
ITEM 6. EXHIBITS
(a) Exhibits
The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------
10.1 Amendment to Purchase Agreement dated August 3, 2005 by and
between 38 persons including and represented by Shi Mingsheng
and China Biopharmaceuticals Holdings, Inc. (incorporated by
reference to exhibit 10.2 of the Company's quarterly report on
form 10QSB filed with the Securities and Exchange Commission
on August 15, 2005).
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
28
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
Date: November 14, 2005
By: /s/ MAO Peng
---------------------------------
Name: MAO Peng
Title: Chairman and
Chief Executive Officer
Date: November 14, 2005
By: /s/ HUNAG Chentai
---------------------------------
Name: HUANG Chentai
Title: Chief Financial Officer
29