UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
/x/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the Period ended March 31, 2006
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ___________ to __________
Commission File No. 814-00063
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(Name of small business issuer in its charter)
Delaware 13-2949462
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 1601, Building A, Jinshan Tower
No. 8, Shan Xi Road
Nanjing, Jiangsu
China 210009
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (86) 25 8320 5758
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.01
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes: |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|
State the number of shares outstanding of each of the issuer's classes of common
equity , as of the latest practicable date:
Title of Each Class of Number of Shares Outstanding
Equity Securities as of March 31, 2006
- ----------------------------- ----------------------------
Common Stock, $0.01 par value 36,848, 399
Transitional Small Business Disclosure Format: Yes: [ ] No: |X|
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION.................................................2
ITEM 1. FINANCIAL STATEMENTS.................................................2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
iiiiAND RESULTS OF OPERATIONS.......................................26
ITEM 3. CONTROL AND PROCEDURES..............................................34
PART II - OTHER INFORMATION...................................................34
ITEM 6. EXHIBITS............................................................34
References in this Quarterly Report on Form 10-QSB to the "Company",
"we", "us" or "our" include China Biopharmaceuticals Holdings, Inc. and its
subsidiaries, unless the context requires otherwise.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENT
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2006
ASSETS
March 31,
2006
------------
(Unaudited)
------------
CURRENT ASSETS:
Cash $ 6,985,765
Accounts receivable, trade, net of allowance for doubtful
accounts of $528,708 March 31, 2006
and December 31, 2005, respectively 6,109,708
Other receivables 334,461
Other receivables - related parties 492,438
Advances to suppliers 554,933
Prepaid expenses 52,710
Inventories 5,736,748
------------
Total current assets 20,266,763
------------
PLANT AND EQUIPMENT, net 5,644,073
------------
OTHER ASSETS:
Intangible asset, net 7,463,958
Long term notes receivable 799,200
Long term other receivables - related parties 1,251,792
Restricted cash 1,165,632
Other assets 12,021
------------
Total other assets 10,692,603
------------
Total assets $ 36,603,439
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,482,616
Accounts payable - related parties 2,011,103
Short-term loans 3,981,120
Other payables 990,457
Other payables - related parties 1,184,209
Investment payable to Erye's original shareholders 430,000
Customer deposits 998,725
Notes payable 2,046,720
Short-term convertible notes payable --
Taxes payable 664,632
Dividends payable 187,200
Other accrued liabilities 142,466
------------
Total current liabilities 18,119,248
------------
LONG TERM LIABILITIES:
Long term debt 605,249
Long term debt - related parties 288,930
------------
Total long term liabilities 894,179
------------
Total liabilities 19,013,427
------------
MINORITY INTEREST 4,609,273
------------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
1,152,500 shares Issued and outstanding as of March 31, 2006 11,525
Common stock, $0.01 par value, 200,000,000 shares authorized;
36,848,399 shares issued and outstanding as of March 31,2006 368,484
Paid-in capital 10,898,299
Capital receivable (252,471)
Deferred compensation (24,000)
Statutory reserves 548,894
Retained earnings 1,155,952
Accumulated other comprehensive income 274,056
------------
Total shareholders' equity 12,980,739
------------
Total liabilities and shareholders' equity $ 36,603,439
============
The accompanying notes are an integral part of this statement.
See report of independent registered public accounting firm
2
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
2006 2005
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
REVENUES $ 7,140,509 $ 1,988,508
COST OF GOODS SOLD 5,558,683 1,099,067
------------ ------------
GROSS PROFIT 1,581,826 889,441
------------ ------------
OPERATING EXPENSES
Research and development expenses 258,075 --
Selling, general and administrative expenses 785,834 357,368
------------ ------------
Total Operating Expenses 1,043,909 357,368
------------ ------------
INCOME FROM OPERATIONS 537,917 532,073
------------ ------------
OTHER INCOME (EXPENSE)
Interest income ( expenses) (77,789) (37,277)
Other income (expenses) (19,573) 178
------------ ------------
Total Other Income (expenses) (97,362) (37,099)
------------ ------------
INCOME BEFORE INCOME TAXES 440,555 494,974
PROVISION FOR INCOME TAXES -- --
------------ ------------
INCOME BEFORE MINORITY INTEREST 440,555 494,974
MINORITY INTEREST 246,563 87,307
------------ ------------
NET INCOME 193,992 407,667
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 117,967 --
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 311,959 $ 407,667
============ ============
NET INCOME PER SHARE - BASIC AND DILUTED $ 0.01 $ 0.02
============ ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC 30,267,875 24,523,757
============ ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED 31,420,375 24,523,757
============ ============
The accompanying notes are an integral part of this statement.
See report of independent registered public accounting firm
3
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
Number of Common Preferred Paid-in Capital
Shares Stock Stock Capital Receivable
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2004, Audited $ 24,358,757 $ 243,588 $ -- $ 1,363,601 $ --
Shares issued for services 65,043 650 -- 96,350 --
Common shares issued for lab use right 300,000 3,000 -- 297,000 --
Net income -- -- -- -- --
Statutory reserves -- -- -- -- --
Foreign currency translation adjustments -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 2005, Unaudited 24,723,800 247,238 -- 1,756,951 --
Shares issued for Erye acquisition 3,300,000 33,000 -- 1,617,000 --
Adjustment for shares issued for Hengyi acquisition -- -- -- (667,974) --
adjustment for shares issued for lab use right -- -- -- (270,000) --
Common shares issued for services 592,916 5,929 -- 136,786 --
Capital receivable -- -- -- -- (252,471)
Deferred compensation -- -- -- -- --
Preferred shares issued 1,152,500 -- 11,525 999,444 --
Net income -- -- -- -- --
Statutory reserves -- -- -- -- --
Foreign currency translation adjustments -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2005, Audited 29,769,216 286,167 11,525 3,572,207 (252,471)
Common shares issued for cash 7,831,863 78,319 -- 6,905,090 --
Common shares issued for note conversion 399,820 3,998 -- 421,002 --
Net income -- -- -- -- --
Statutory reserves -- -- -- -- --
Dividends paid to preferred stock shareholders -- -- -- -- --
Foreign currency translation adjustments -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 2006, Unaudited $ 38,000,899 $ 368,484 $ 11,525 $ 10,898,299 $ (252,471)
============ ============ ============ ============ ============
Accumulated
Unappropriated Other
Deferred Retained Statutory Comprehensive
Compensation Earnings Reserves Income (Loss) Totals
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2004, Audited $ -- $ 530,861 $ 60,750 $ (3,339) $ 2,195,461
Shares issued for services -- -- -- -- 97,000
Common shares issued for lab use right -- -- -- -- 300,000
Net income -- 407,667 -- -- 407,667
Statutory reserves -- -- -- -- --
Foreign currency translation adjustments -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 2005, Unaudited -- 938,528 60,750 (3,339) 3,000,128
Shares issued for Erye acquisition -- -- -- -- 1,650,000
Adjustment for shares issued for Hengyi acquisition -- -- -- -- (667,974)
adjustment for shares issued for lab use right -- -- -- -- (270,000)
Common shares issued for services -- -- -- -- 142,715
Capital receivable -- -- -- -- (252,471)
Deferred compensation (24,000) -- -- -- (24,000)
Preferred shares issued -- -- -- -- 1,010,969
Net income -- 519,929 -- -- 519,929
Statutory reserves -- (383,873) 383,873 -- --
Foreign currency translation adjustments -- -- -- 159,428 159,428
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2005, Audited (24,000) 1,074,584 444,623 156,089 5,268,724
Common shares issued for cash -- -- -- -- 6,983,409
Common shares issued for note conversion -- -- -- -- 425,000
Net income -- 193,992 -- -- 193,992
Statutory reserves -- (104,584) 104,271 -- (313)
Dividends paid to preferred stock shareholders -- (8,040) -- -- (8,040)
Foreign currency translation adjustments -- -- -- 117,967 117,967
------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 2006, Unaudited $ (24,000) $ 1,155,952 $ 548,894 $ 274,056 $ 12,980,739
============ ============ ============ ============ ============
The accompanying notes are an integral part of this statement.
See report of independent registered public accounting firm
4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
2006 2005
----------- -----------
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 193,992 $ 407,667
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 236,265 34,471
Minority interest 246,563 290,345
Change in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,143,389) 1,860,389
Other receivables and prepayments (142,532) (1,022,646)
Other receivables - related parties 415,341 --
Long term other receivables - related parties (1,246,576) --
Advances to suppliers 314,276 --
Other assets -- (315,298)
Inventories (919,185) (70,338)
Restricted cash 171,506 --
Increase (decrease) in liabilities:
Accounts payable 39,505 (2,564,952)
Accounts payable - related parties 1,761,322 --
Other payables and accrued liabilities 175,743 875,219
Other payables - related parties 980,671 --
Customer deposits 249,679 53,601
Taxes payable (323,464) (1,477)
----------- -----------
Net cash provided by (used in) operating activities 1,009,717 (453,019)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible asset (347,984) --
Purchase of property and equipment (489,430) (23,279)
Payments for long-term loans receivable (797,120) --
----------- -----------
Net cash used in investing activities (1,634,534) (23,279)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 397,000
Proceeds from issuance of common stock 7,408,409 --
Proceeds (payments) on loans payable (323,128) 156,962
Proceeds (payments) from short-term convertible notes (425,000) 500,000
Proceeds from long-term debts - related parties (128,945) --
----------- -----------
Net cash provided by financing activities 6,531,336 1,053,962
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH 52,640 --
----------- -----------
INCREASE IN CASH 5,959,159 577,664
CASH, beginning of period 1,026,606 467,036
----------- -----------
CASH, end of period $ 6,985,765 $ 1,044,700
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ --
=========== ===========
Cash paid for interest expense $ 77,789 $ 37,277
=========== ===========
The accompanying notes are an integral part of this statement.
See report of independent registered public accounting firm
5
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1- ORGANIZATION AND OPERATIONS
China Biopharmaceuticals Holdings, Inc. (CBH), 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 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.
On September 29, 2004, we signed a purchase agreement which was amended on
December 31, 2004 to acquire approximately 75.8% 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. The detail information of accounting for this transaction is
disclosed on Note 11 - Business Combinations.
On June 11, 2005, we signed a purchase agreement, which was amended on August 3,
2005 under which, we acquired approximately 51% of the controlling ownership
interest of Suzhou Erye Pharmaceutical Limited Company ("Erye"), a company
established in Suzhou, China. Total consideration paid by us 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 $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 detail information of
accounting for this transaction is disclosed on Note 11 - Business Combinations.
On December 31, 2005, our wholly owned subsidiary, CBC, entered into an
Agreement with four shareholders of Chengdu Tianyin Pharmaceutical Limited
Company, a pharmaceutical company located in the city of Chengdu, Sichuan
Province, China ("Tianyin") to immediately assume operation control of Tianyin
in all aspects of its business operations and to acquire a 51% ownership
interest in Tianyin. Pursuant to the Agreement, subject to certain conditions,
we agreed to issue 3 million shares of its common stock to existing shareholders
of Tianyin or their designees and also agreed to invest an amount of US$2
million into Tianyin operations. Additional 300,000 shares of our common stock
will be issued to the existing shareholders of Tianyin or their designees, if
Tianyin's after tax audited profit for the year ended December 31, 2005 reaches
at least US$3,000,000. Our auditors are currently engaged to audit the financial
statements of Tianyin. The unaudited numbers are substantially lower than the
agreed to targets. We are currently evaluating the viability of the
implementation of the Tianyin purchase agreement and will make final
determination after consulting with management of Tianyin. Based on the
pre-conditions in the purchase Agreement, the Company decided not to assume the
operation control of Tianyin at the moment and is exploring options of changing
the transaction terms or abandoning the acquisition of Tianyin should Tianyin's
shareholders not compromise and meet the company's request for a reasonable
purchased price. Appropriate disclosure will be announced upon the final
determination by the board of the directors. Since this transaction has been in
the process of evaluation, the final determination of this merger
See report of independent registered public accounting firm
6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1- ORGANIZATION AND OPERATIONS , (continued)
transaction has not reasonably reached a conclusion; the financial statements of
Tianyin were not included in the consolidated financial statements for the three
months ended March 31, 2006.
The principle activities of the Company in Mainland China ("China" or "PRC") are
research, manufacture and sale of drug raw materials and intermediates as well
as prescription and non-prescription chemical drugs and Traditional Chinese
Medicines. The principle activities are in China only.
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. 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.
Since the Tianyin's transaction is in the evaluation process, the final
determination of this merger transaction has not reasonably reached a
conclusion; the financial statements of Tianyin were not included in the
consolidated financial statements for the three months ended March 31, 2006.
On August 4, 2004, the Company declared that the majority stockholders of Globus
executed a written consent providing a merger (the "Merger") of Globus with and
into its wholly owned subsidiary, CBH. On July 3, 2004, an Agreement and Plan of
Merger (the Merger Agreement) was signed by and between Globus and CBH. The
Merger Agreement provided for a tax-free reorganization pursuant to the
provisions of Section 368 of the Internal Revenue Code, whereby Globus would be
merged with and into CBH. The separate corporate existence of Globus ceased and
CBH continued as the surviving corporation of the merger. In the Merger, all
issued and outstanding shares of Globus were converted into shares of common
stock of CBH on the basis of seven for five (7 for 5).
Land Use Rights
According to Chinese law, the government owns all the land in China. Companies
or individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. Land use rights are being amortized
using the straight-line method over the lease term of 40 to 50 years.
See report of independent registered public accounting firm
7
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Plant and Equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line basis over their respective
estimated useful lives. Estimated useful lives are as follows.
Equipment and machinery 5 years
Motor vehicles 5 years
Furniture and fixtures 5 years
Buildings 20 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.
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.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out basis.
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.
See report of independent registered public accounting firm
8
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Research and Development Costs, (continued)
Research costs of pharmaceutical formulas held for sale are capitalized 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.
Cash and concentration of risk
Cash includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People's Republic of China and Hong Kong. Total cash in
these banks at March 31, 2006 amounted to $6,985,765 of which no deposits are
covered by insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts.
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.
Revenue and Revenue Recognition
For fixed-price refundable new drug 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 basis and reported amounts of assets and
liabilities. Deferred tax assets and liabilities are computed using enacted tax
rates expected to apply to taxable income in the periods in which temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date. The Company provides a valuation
allowance for certain deferred tax assets, if it is more likely than not that
the Company will not realize tax assets through future operations.
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
See report of independent registered public accounting firm
9
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Use of Estimates, (continued)
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 from those estimates.
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 except 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 reporting currency of the Company is the US dollar. The Company's Chinese
subsidiaries' financial records are maintained and the statutory financial
statements are stated in its local currency, Renminbi (RMB), as their functional
currency. Results of operations and cash flow are translated at average exchange
rates during the period, and assets and liabilities are translated at the
unified exchange rate as quoted by the People's Bank of China at the end of each
reporting period.
This 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 People's Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate 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 invoices, shipping
documents and signed contracts.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders' equity
and amounted to $117,967 and $0 for the three months ended March 31, 2006 and
2005, respectively. The balance sheet amounts with the exception of equity at
March 31, 2006 were translated at 8.01 RMB to $1.00 USD as compared to 8.26 RMB
at March 31, 2005. The equity accounts were stated at their historical rates.
The average translation rate of 8.05 RMB for the three months ended March 31,
2006 was applied to income statement accounts.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. These amounts are not
material to the consolidated financial statements.
See report of independent registered public accounting firm
10
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"earnings Per Share" (SFAS128). SFAS 128 requires the presentation of earnings
per share (EPS) as Basic EPS and Diluted EPS.
As of March 31, 2006, the Company's issued and outstanding shares of Series A
convertible preferred stock was 1,152,500. The Company computed the Diluted EPS
by taking into account the dilutive effect of the preferred stock issued and
determined that there was no material differences between Basic and Diluted EPS
for the three months ended March 31, 2006 and 2005. The number of shares used in
computing diluted earnings per share for the three months ended March 31, 2006
and 2005 amounted to 31,420,375, which included 1,152,500 weighted average
number of convertible preferred stock, and 24,523,757, respectively. The number
of shares used in computing basic earnings per share for the three months ended
March 31, 2006 and 2005 were 30,267,875 and 24,523,757, respectively. Basic and
Diluted earnings per share for the three months ended March 31, 2006 and 2005
amounted to 0.01 and 0.02, respectively.
Recent Accounting Pronouncements
In March 2005, the FASB published FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," which clarifies that the term,
conditional asset retirement obligations, as used in SFAS No. 143, "Accounting
for Asset Retirement Obligations," refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The uncertainty about the timing and (or) method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. The interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. This interpretation
is effective no later than the end of the Company's fiscal year 2006. The
adoption of this Interpretation is not expected to have a material effect on the
Company's consolidated financial position or results of operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20") and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change a
cumulative effect of changing to the new accounting principle whereas SFAS No.
154 requires retrospective application to prior periods' financial statements of
a voluntary change in accounting principle, unless it is impracticable.
SFAS No. 154 enhances the consistency of financial information between periods.
SFAS No. 154 will be effective beginning with the Company's first quarter of
fiscal year 2006. The Company does not expect that the adoption of SFAS No. 154
will have a material impact on its results of operations, financial position or
cash flows.
See report of independent registered public accounting firm
11
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2- SIGNIFICANT ACCOUNTING POLICIES, (continued)
Recent Accounting Pronouncements, (continued)
In June 2005, the FASB's Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 05-06, "Determining the Amortization Period for Leasehold
Improvements" (EITF 05-06). EITF 05-06 provides guidance for determining the
amortization period used for leasehold improvements acquired in a business
combination or purchased after the inception of a lease, collectively referred
to as subsequently acquired leasehold improvements. EITF 05-06 provides that the
amortization period used for the subsequently acquired leasehold improvements be
the lesser of (a) the subsequently acquired leasehold improvements' useful
lives, or (b) a period that reflects renewals that are reasonably assured upon
the acquisition or the purchase. EITF 05-06 is effective on a prospective basis
for subsequently acquired leasehold improvements purchased or acquired in
periods beginning after the date of the FASB's ratification, which was on June
29, 2005. The Company does not anticipate that EITF 05-06 will have a material
impact on its consolidated results of operations.
In July 2005, the Financial Accounting Standards Board (FASB) issued an Exposure
Draft of a proposed Interpretation "Accounting for Uncertain Tax Positions--an
interpretation of FASB Statement No. 109." Under the proposed Interpretation, a
company would recognize in its financial statements its best estimate of the
benefit of a tax position, only if the tax position is considered probable of
being sustained on audit based solely on the technical merits of the tax
position. In evaluating whether the probable recognition threshold has been met,
the proposed Interpretation would require the presumption that the tax position
will be evaluated during an audit by taxing authorities. The proposed
Interpretation would be effective as of the end of the first fiscal year ending
after December 15, 2005, with a cumulative effect of a change in accounting
principle to be recorded upon the initial adoption.
The proposed Interpretation would apply to all tax positions and only benefits
from tax positions that meet the probable recognition threshold at or after the
effective date would be recognized. The Company is currently analyzing the
proposed Interpretation and has not determined its potential impact on our
Consolidated Financial Statements. While we cannot predict with certainty the
rules in the final Interpretation, there is risk that the final Interpretation
could result in a cumulative effect charge to earnings upon adoption, increases
in future effective tax rates, and/or increases in future interperiod effective
tax rate volatility.
In October 2005, FASB Staff Position (FSP) FAS 13-1, "Accounting for Rental
Costs Incurred during a Construction Period" was issued. This FSP concluded that
rental costs associated with ground or building operating leases that are
incurred during a construction period be expensed. The guidance in the FSP is
required to be applied to the first reporting period beginning after December
15, 2005. The adoption of this pronouncement is not expected to have a material
impact on the Company's financial position or results of operations.
The implementation of the above pronouncements is not expected to have a
material effect on the Company's financial statement presentation or
disclosures.
See report of independent registered public accounting firm
12
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest expense paid amounted to $77,789 and $37,277 for the three months ended
March 31, 2006 and 2005, respectively.
No income tax payments were paid for the three months ended March 31, 2006 and
2005.
During 2005, the Company issued 657,959 shares of common stock for services. The
fair market value of the services received was $239,715.
On March 8, 2005, the Company issued 300,000 shares of common stock to China
Pharmaceutical University for a lab use right.
Note 4- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of March 31, 2006:
Accounts receivable $6,638,416
Allowance for doubtful accounts (528,708)
----------
Accounts receivable, net $6,109,708
==========
For the three months ended March 31, 2006 , the Company recognized doubtful
accounts receivable of $528,708 relating to sales. The Company continues to
pursue payment, due to the uncertainty of collection, the Company recorded a bad
debt allowance for the accounts.
Note 5- INVENTORIES
Inventories consisted of the following at March 31, 2006:
2006
----------
Raw Materials $1,363,809
Packaging Suppliers 126,533
Sundry Suppliers 7,167
Work in Process 527,133
Finished Goods 3,712,106
----------
$5,736,748
==========
See report of independent registered public accounting firm
13
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6- PLANT AND EQUIPMENT
Plant and equipment consist of the following as of March 31, 2006:
March 31, 2006
--------------
Plant $ 3,467,801
Office Equipment 126,893
Machinery 6,648,019
Automobiles 157,525
Construction in Progress 294,143
--------------
Total Plant & Equipment 10,694,381
Less: Accumulated Depreciation 5,050,308
--------------
$ 5,644,073
==============
Depreciation expense for the three months ended March 31, 2006 and 2005 was
$211,835 and $34,471, respectively.
Note 7- OTHER ASSETS
Intangible Assets - Land use rights
March 31,2006
-------------
Hengyi Cost of land use right 1,522,560
Less: Accumulated amortization
(93,891)
-------------
1,428,669
-------------
Erye Cost of land use right 6,359,764
Less: Accumulated amortization (324,475)
-------------
6,035,289
-------------
Total intangible assets, net 7,463,958
=============
Amortization expense for the three months ended March 31, 2006 and 2005 was
$24,430 and $0, respectively.
Restricted Cash
Restricted cash represents cash required to be deposited to bank but subject to
withdrawal with restrictions according to the agreement with bank. The following
list the depositors, the amount and names of the bank as of March 31, 2006:
Depositor Name of Bank Amount
- --------- ----------------------- ----------
Hengyi Taicang Chengxiang Bank $ 129,792
Erye Hua Xia Bank, Suzhou 1,035,840
----------
Total $1,165,632
==========
See report of independent registered public accounting firm
14
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7- OTHER ASSETS, (continued)
Long Term Notes Receivable
Long term notes receivable represents loans made to third parties for cash flow
needs for R&D projects on new drugs. According to loan agreements, the Company
has first priority to purchase the new drug rights if the projects were
successfully completed. If the company gave up the right, the debtors need to
repayment the loans plus 3% interest per annum within one month after the drug
rights were sold. If on or before February 28, 2010, the R&D projects were not
able to complete or failed , the debtors need to repay the loans plus 6%
interest per annum within ten days after such a conclusion was made. As of March
31, 2006, the total amount of the long term notes receivable was 799,200.
Note 8- RELATED PARTIES TRANSACTIONS
Other Receivables - Related Parties
Subsidiary Amount Due From
- ----------------- -------------- ----------------------------------
Erye $ 202,176 Erye Jingmao
Keyuan 41,184 Shareholder of Keyuan
Sintofarm 86,618 Shareholder of Sintofarm
CBC 162,460 Advance to Shareholders
--------------
Total $ 492,438
==============
As of March 31, 2006, total receivables due from related parties were
$1,744,230.
Accounts Payable - Related Parties
Subsidiary Amount Due to
- ----------------- -------------- ----------------------------------
Erye Jingmao, Hainan Kaiye, and
Erye $ 1,767,621 Suzhou Wanqing
Hengyi 25,420 Suzhou Wanqing
Sintofarm 218,062 Wujiang Hengyi
--------------
Total $ 2,011,103
==============
As of March 31, 2006, total accounts payable due to related parties was
$2,011,103.
Other Payable - Related Parties
Subsidiary Amount Due to Nature
- --------------- ---------- ---------------------------- ------------------
Erye and Hengyi $1,184,209 Erye Jingmao, Suzhou Wanqing Purchase and sales
See report of independent registered public accounting firm
15
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8- RELATED PARTIES TRANSACTIONS, (continued)
Long Term Other Receivables - Related Parties
Subsidiary Amount Due From
- ----------------- ------------- ----------------------
Hengyi 1,251,792 Shareholders of Hengyi
As of March 31, 2006, total long term receivables due from related parties were
$1,251,792.
Long Term Debt - Related Parties
Subsidiary Amount Due to Nature
- ------------------ ----------- ------------------ ------------------
Erye $ 288,930 Erye Jingmao Merger transaction
===========
As of March 31, 2006, the Company's subsidiary Erye had a remaining outstanding
payable to Erye Jingmao Limited ("Jingmao") in the amount of $288,930. Jingmao
acquired Erye's assets of $1,810,958 and assumed Erye's debt of $2,226,690.
Note 9- PAYABLES
Notes Payable - $ 2,046,720
The Company's subsidiary Erye has $2,046,720 notes payable to Erye's vendors for
the purchase of drug raw materials. Notes payable are interest free and usually
mature after a six month period.
Investment Payable to Erye's original shareholders
The amount of $430,000 was due to shareholders of Erye which represents the
remaining amount due for the acquisition of Erye. The total amount of $430,000
investment payable was interest free and has been paid in April 2006.
Dividends Payable
Subsidiary Amount Due to Nature
- ------------------ ----------- ------------------ ------------------
Erye $ 187,200 Erye shareholders Dividends
In December 2005, the Board of Erye announced to pay dividends for a total
amount of $187,200 which has been approved by the Company's Board of Directors.
Note 10- MINORITY INTEREST
Minority interest consists of the interest of minority shareholders in the
subsidiaries of the Company. The Company owns a 51% ownership interest in Erye
and approximately 76% ownership interest in Hengyi; while Hengyi controls a 50%
ownership interest of Sintofarm. The Company's wholly owned subsidiary China
Biopharmaceuticals Corporation (BVI Company) owns 90% ownership interest in
Keyuan.
See report of independent registered public accounting firm
16
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10- MINORITY INTEREST, (continued)
Ownership Minority
Equity of the in Interest in
Subsidiaries Subsidiaries Subsidiaries
as of ------------------------ ------------------------
Subsidiary March 31, 2006 Percentage Amount Percentage Amount
- ---------- -------------- ---------- ----------- ---------- -----------
Erye $ 3,741,389 51.00% $ 998,440 49.00% $ 2,742,949
Keyuan 1,397,515 90.00% 1,257,764 10.00% 139,752
Hengyi 3,524,378 75.76% 2,670,069 24.24% 854,309
Sintofarm 1,744,527 50.00% 872,264 50.00% 872,264
-------------- ----------- -----------
Total $ 10,407,809 $ 5,798,536 $ 4,609,273
============== =========== ===========
Note 11- STATUTORY RESERVES
According to Chinese Corporation Law, a company incorporated in China is
requested to contribute an amount of no less then 15% of its yearly net income
for its employees to a reserve account in the company. This statutory reserve
fund is planned for future development of the company or use for employee's
benefits. The following list the provision of statutory reserves as of March 31,
2006.
Year Amount
---- --------
2004 $ 60,750
2005 383,873
2006 104,271
--------
Total $548,894
========
Note 12- INCOME TAXES
Corporation Income Tax (CIT)
In accordance with the relevant tax laws and regulations of the People's
Republic of China, a company is entitled to a full exemption from CIT for the
first two years, and a 50% deduction in CIT for the next three years, commencing
from the first profitable year. For 2005, of the Company's subsidiaries, Hengyi,
Keyuan, Sintofarm were exempt from CIT, while Erye was subject to a 33% income
tax rate for the year of 2005. Erye was granted income tax exemption for two
years commencing from January 1, 2006.
The Company did not incur income tax expense for the three months ended March
31, 2006 and 2005.
According to China's income tax law, company income tax is due to the State Tax
Bureau monthly or quarterly. Subsidiaries of the Company paid its income tax by
quarter. Before every 15th day of pay month, subsidiaries pay its income tax
base on its quarterly net profit. Since income tax rate, with income tax
preference or not, is a flat rate in China, that there is no need for income tax
reconciliation to practice in China.
See report of independent registered public accounting firm
17
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12- INCOME TAXES, (continued)
Corporation Income Tax (CIT) , (continued)
The Company's controlling operating subsidiaries are all operated in China.
According to the Chinese Joint Venture Business Law, those subsidiaries, been
registered and incorporated with the status of Sino-foreign joint venture
companies, are subject to a two-year-exemption-and-three-year-halve income tax
preference treatment, which generally commences from the first year of
establishing a joint venture or the approval date of the income tax preference
application.
The following list depicts the tax preference rate applicable to the
subsidiaries and the applicable years:
Income Tax 5 year preference Period and Tax Rate
Full Exemption Period Half-Reduction Period
----------------------------- ------------------------------
Subsidiaries Period Tax Rate Period Tax Rate
- -------------- ----------- -------------- ----------- ---------------
Nanjing Keyuan 2005-2006 0.00% 2007-2009 16.50%
Suzhou Hengyi 2005-2006 0.00% 2007-2009 16.50%
Suzhou Erye 2006-2007 0.00% 2008-2010 16.50%
After the income tax preference period expired, a 33% income tax rate is
applicable.
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
March 31,
2006 2005
------------ ------------
U.S. Statutory rate 34.0% 34.0%
Foreign income not recognized in USA (34.0) (34.0)
China income taxes 33.0 33.0
Income tax exempted (33.0) (33.0)
------------ ------------
Total provision for income taxes -- % -- %
============ ============
The estimated tax savings due to the reduced tax rate for the three months ended
March 31, 2006 and 2005 amounted to $64,017 and $134,530, respectively. The net
effect on earnings per share if the income tax had been applied would decrease
earnings per share for March 31, 2006 and 2005 to $0.008 and $0.01,
respectively.
Business Tax ("BT")
The Company is subject to Business Tax, which is charged on the selling price of
applicable product and service at a general rate of 5% in accordance with the
tax law applicable. Keyuan is exempt from business tax according to local
applicable favorable tax policy.
Value Added Tax ("VAT")
In accordance with the relevant taxation laws in China, the VAT rate for
domestic sales is 17% and 0% for export sales on the invoiced value of sales and
is payable by the purchaser.
See report of independent registered public accounting firm
18
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13- LOANS
Long Term Bank Loans
The Company's subsidiary Erye has a loan of $605,249 from Communication Bank of
China. It is a long term roll-over loan with an annual interest rate of 5.742%.
This is a government guaranteed loan as an incentive policy to help local
manufacturers to locate in their area. Erye has no plans to pay back the loan in
the near future.
Total interest expense for this loan for the three months ended March 31, 2006
and 2005 was $8,688 and $8,688, respectively.
Short Term Bank Loans
The Company has a total amount of US$3,981,120 in short term loans from two
different banks in China. These loans mature in one year or less and renew
automatically. The average interest rate is approximately 6.75%.
Interest expense for the three months ended March 31, 2006 and 2005 was $67,181
and $28,589, respectively.
Note 14- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and dormitory facilities for its employees from
a third party. Accordingly, for the three months ended March 31, 2006 and 2005
the Company recognized rent expense of $6,738 and $3,515, respectively.
As of March 31, 2006, the Company has outstanding commitments in respect of
non-cancelable operating leases, which fall due as follows:
2006 $ 20,213
2007 29,650
2008 32,610
2009 35,870
Thereafter 39,000
See report of independent registered public accounting firm
19
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15- BUSINESS COMBINATIONS
Hengyi acquisition
On September 29, 2004, the Company signed a purchase agreement which was amended
on December 31, 2004 to acquire approximately 76% ownership interest of Hengyi,
a Chinese company established in Kunshan City, Jiangsu Province, China.
Assets acquired and debts assumed of the transaction are listed as below:
Acquired (Assumed)
Item Fair Value by the Company
- ----------------- ------------------ ------------------
Total Assets $ 6,652,372 $ 5,570,201
Total Liabilities 4,538,210 3,438,175
------------------ ------------------
Net Assets $ 2,114,162 $ 2,132,026
================== ==================
The Board of Directors and management have evaluated Hengyi's assets acquired in
this transaction; and total consideration originally paid by the Company to
acquire approximately 76% ownership interest of Hengyi. The Company originally
valued this acquisition at $1,600,000 in cash and 1,200,000 shares of common
stock valued at $1.00 per share and recorded goodwill of $305,774 at December
31, 2004. However, the Company has reevaluated the common stock value based upon
the stock trading history in past year and determined that the common stock
should be valued less than $1.00 per share for the purpose of determining the
total purchase price of the acquisition. On April 2, 2006, the board director
decided to amend the purchase agreement terms to be $1,600,000 in cash to be
paid in installments, and 1,200,000 shares of common stock valued at $0.44 per
share, which was in total amount of $2,128,000 effective as December 31, 2005.
This amendment resulted in a write down of goodwill and equity. As of December
31, 2005, the Company has contributed $620,000 into additional registered
capital. The remaining balance of $300,000 will be made by the end of April,
2006 and the balance of $680,000 will be paid in May, 2006.
Erye acquisition
On June 11, 2005, the Company signed a purchase agreement, which was amended on
August 3, 2005 under which, the Company acquired a controlling ownership
interest of approximately 51% in Erye, a company established in Suzhou City,
Jiangsu Province, China.
Assets acquired and debts assumed of the transaction are listed as below:
Acquired (Assumed)
Item Fair Value by the Company
- ----------------- ------------------ ------------------
Total Assets $ 21,840,638 $ 11,138,725
Total Liabilities 12,722,990 6,488,725
------------------ ------------------
Net Assets $ 9,117,648 $ 4,650,000
================== ==================
The original purchase price amounted to $80,000 in cash, 3,300,000 shares of
common stock valued at $1.00 per share and $2,200,000 of additional cash to be
contributed in installments. The original purchase price generated goodwill of
approximately $4,893,113 that was reported on our September 30, 2005 financial
statements and form 10QSB. The Board of Directors and management reevaluated the
common stock value based upon the stock trading history in past year and
determined that the common stock should be valued less than $1.00 per share for
See report of independent registered public accounting firm
20
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15- BUSINESS COMBINATIONS, (continued)
Erye acquisition, (continued)
the purpose of determining the total purchase price of the acquisition. On April
12, 2006, the board director decided to amend the purchase price for 51% of
ownership interest in Erye to be $3,000,000 cash to be paid in installments, and
3,300,000 shares of common stock valued at $0.50 per share, which amounted to a
total amount of $4,650,000, effective as of December 31, 2005. The amendment
resulted in a write down of goodwill and equity. As of December 31, 2005,
$2,200,000 of cash contribution has not been made. The Company contributed
$2,200,000 in full by end of April, 2006.
Note 16- SHAREHOLDERS' EQUITY
Private placement closed on December 31, 2004 (the "Notes Private Placement")
In January, 2005, we raised gross proceeds of $500,000 through the sales of
promissory notes, pursuant to a subscription agreement, to which we refer as the
Notes Subscription Agreement, which we entered into with twenty (20) accredited
investors, to which we collectively refer as the Notes Subscribers. Pursuant to
the Notes Subscription Agreement, the Notes Subscribers received convertible
notes ("Notes" or "Convertible Notes") for a total aggregate amount of $500,000
with a maturity date of 180 days from the Notes issuance (the "Maturity"),
bearing an interest rate on the principal balance of the Notes of 7% per annum
payable at Maturity or upon satisfaction or discharge of the Note. Holder of the
Note has a right to convert all, but not less than all, of the Notes into shares
of our common stock (each a "Share") at one dollar per share. In September,
2005, the Notes Subscribers have agreed to extend the maturity date of the Notes
until December 31, 2005. As of March 31, 2006, all of the Notes have been either
converted into shares or have been redeemed.
In addition, as an inducement for the Notes Subscribers to extend the maturity
date, the Company has issued 42,500 additional shares to these Notes Holders who
agreed to grant it the extension as described above.
Upon the execution of the Notes Subscription Agreement, we also issued to the
Notes Subscribers one (1) warrant for every one (1) Share that the convertible
notes can convert into under the Notes Subscription Agreement (the "Notes
Warrants"). The exercise price of the majority of Notes Warrants is $1.50 per
share. Pursuant to the Notes Warrants, the Notes Subscribers are entitled to
purchase an aggregate amount of 341,657 shares. The Notes Warrants may be
exercised only in full. The Notes Warrants will expire three (3) years from
issuance date of the Notes Warrants. See also "Selling Shareholders."
WestPark Capital Inc. ("WestPark") acted as our placement agent in the private
placement described above. In consideration of WestPark's services, we issued to
WestPark or its designees 65,000 shares in consideration of its service as our
private placement agent and 26,666 warrants representing the right to purchase
up to 26,666 shares under the same terms as described in the preceding
paragraph.
See report of independent registered public accounting firm
21
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16- SHAREHOLDERS' EQUITY, (continued)
Pursuant to the Notes Subscription Agreement, we are required to file with the
Securities and Exchange Commission ("SEC") a registration statement within 120
days after the issuance date of the Notes and the Notes Warrants, which
registers all the shares to which the Notes may be converted and the shares
underlying the Notes Warrants issued or issuable to the Notes Subscribers and
WestPark in the private placement. In addition, pursuant to the Notes
Subscription Agreement, we are required to pay a penalty of 5% per month if the
registration statement has not become effective before required date.
Common stock issued for lab use right
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. The management originally estimated the stock value as $1.00 share.
However, the management reevaluated the value of the stock based upon the stock
performance in the past year and decided to discount the value of the stock as
$0.10 per share as of December 31, 2005.
Private placement closed in June, 2005 (the "Initial Preferred A Private
Placement")
In June, 2005, we entered into a June subscription agreement, to which we refer
as the Initial Preferred A Subscription Agreement, with each of twenty eight
(28) accredited investors, to which we collectively refer as the Initial
Preferred A Subscribers. Pursuant to the Initial Preferred A Subscription
Agreement, the Initial Preferred A Subscribers received shares of our Series A
Convertible Preferred Stock ("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. For more information on Series A Convertible Preferred Stock, see
"Description of Securities."
Upon the execution of the Initial Preferred A Subscription Agreements, we also
issued to the Initial Preferred A Subscribers one (1) warrant for every one (1)
share of Series A Convertible Preferred Stock subscribed under the Initial
Preferred A Subscription Agreements ("Initial Preferred A Warrants"). The
exercise price of the Initial Preferred A Warrants is $2.00 per Share. Pursuant
to the Initial Preferred A Warrants, the Initial Preferred A Subscribers are
entitled to purchase an aggregate amount of 1,090,000 shares. The Initial
Preferred A Warrants may be exercised only in full. The Initial Preferred A
Warrants will expire three (3) years from the issuance date of the Initial
Preferred A Warrants.
WestPark acted as our placement agent in the private placement described above.
In consideration of WestPark's services, we issued to WestPark or its designees
76,500 shares of common stock in consideration of its service as our private
placement agent and 76,500 Initial Preferred A Warrants representing the right
to purchase up to 76,500 shares under the same terms as described in the
preceding paragraph.
See report of independent registered public accounting firm
22
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16- SHAREHOLDERS' EQUITY, (continued)
Private placement closed on October 19, 2005 (the "Subsequent Preferred A
Private Placement")
On October 19, 2005, we entered into a subscription agreement, to which we refer
as the Subsequent Preferred A Subscription Agreement (together with the Initial
Preferred A Subscription Agreement, the "Preferred A Subscription Agreement"),
with each of three (3) accredited investors, to which we collectively refer as
the Subsequent Preferred A Subscribers (together with the Initial Preferred A
Subscribers, the "Preferred A Subscribers"). Pursuant to the Subsequent
Preferred A Subscription Agreement, the Subsequent Preferred A Subscribers
received 62,500 shares of our Series A Convertible Preferred Stock.
Upon the execution of the Subsequent Preferred A Subscription Agreement, we also
issued to the Subsequent Preferred A Subscribers one (1) warrant for every one
(1) share of Series A Convertible Preferred Stock subscribed under the
Subsequent Preferred A Subscription Agreement ("Subsequent Preferred A
Warrants", and together with the Initial Preferred A Warrants, the "Preferred A
Warrants"). The Subsequent Preferred A Warrants has the same terms as of those
of the Initial Preferred A Warrants and the Subsequent Preferred A Subscribers
are entitled to purchase an aggregate amount of 62,500 shares.
WestPark acted as our placement agent in the private placement described above.
In consideration of WestPark's services, we issued to WestPark or its designees
5,625 common stock in consideration of its service as our private placement
agent and 5,625 warrants representing the right to purchase up to 5,625 shares
of our common stock under the same terms as described in the preceding
paragraph. Pursuant to the Preferred A Subscription Agreement, we are required
to file with the SEC a registration statement within 120 days, which registers
all the shares to which the Series A Preferred Convertible Stock may be
converted and the shares underlying the Preferred A Warrants issued or issuable
to the Preferred A Subscribers and WestPark in the private placements.
In addition, pursuant to Initial Preferred A Subscription Agreement and
Subsequent Preferred A Subscription Agreement we are required to pay a penalty
of 5% per month if the registration statement has not become effective before
required date. Please refer to SB-2/A filed on May 3, 2006 for the selling
shareholder listing of the amount invested and number of shares of Series A
Preferred stock owned by investors.
Dividend Paid on the Preferred Stocks
Pursuant to the Initial Preferred A Subscription Agreement, the Initial
Preferred A Subscribers were entitled to receive annual dividend of 7% of the
amount invested. The total dividends paid was $8,400 in January 2006.
Issuance of Shares for Requisitions
On May 31, 2005, the Company issued 3,300,000 shares of common stock to 38
persons including and represented by Shi Ming Sheng or its assigned natural
person or legal representative, all 38 persons are shareholders of Suzhou Erye
Pharmaceutical Limited Co., pursuant to the acquisition of Erye effective June
11, 2005.
See report of independent registered public accounting firm
23
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16- SHAREHOLDERS' EQUITY, (continued)
Issuance of Shares/Warrants for Services
During 2005, the Company engaged with Consulting For Strategic Growth 1, Ltd.
for six months ending May 14, 2006. 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. In December 2005, the Company reengaged this company
for a period of six month and 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 shares of common stock will be issued to the
consultant in 2006.
On April 1, 2005, the company entered into an advisory agreement with Robin
Smith as the Chairman of Company's Advisory Board for a period of one year. The
terms of the agreement are for Ms. Smith to receive 60,000 shares of
unregistered plus three year warrants to purchase 35,000 shares of common stock
of the Company at an exercise price equal to $2.00. The shares of common stock
will be issued to Ms. Smith in 2006.
On April 1, 2005, the Company engaged a consultant for a period of seven months
ending October 31, 2005. The terms of the agreement are for the consultant to
receive cash payment of $50,000 plus 50,000 shares of common stock of the
Company. On December 20, 2005, the Company reengaged this consultant for a
period ending December 31, 2006 and the terms of the agreement are for the
consultant to receive cash payment of $50,000 plus 50,000 shares of common stock
of the Company.
Private placement closed in February 2, 2006 (the "Initial Common Stock Private
Placement")
On February 2, 2006, we entered into a securities purchase agreement, to which
we refer as the Initial Common Stock Securities Purchase Agreement, with GCE
Property Holdings, Inc. ("GCE"), to which we refer as the Initial Common Stock
Purchaser. Pursuant to the Initial Common Stock Securities Purchase Agreement,
we issued one million (1,000,000) shares of our common stock to the Initial
Common Stock Purchaser at $1.00 per share.
Upon the execution of the Initial Common Stock Securities Purchase Agreement, we
also issued to the Initial Common Stock Purchaser one million (1,000,000)
warrant with an exercise price of $1.25 per share of common stock ("Initial
Common Stock Warrants"). The Initial Common Stock Warrants will expire four (4)
years from the date of the issuance.
Under the Initial Common Stock Securities Purchase Agreement, we have agreed not
to issue shares or securities convertible or exchangeable into shares at a price
equal to or lower than $1.00 per share and not issue any warrants or securities
that are exercisable into shares at a price lower than $1.25 per share.
Pursuant to the Initial Common Stock Securities Purchase Agreement, the Initial
Common Stock Purchaser was granted a right to participate up to 100% in any of
our subsequent financing by offering of common stock or common stock equivalents
in the twelve (12) months the effective date of the registration statement of
which this prospectus constitutes a part.
See report of independent registered public accounting firm
24
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16- SHAREHOLDERS' EQUITY, (continued)
Pursuant to a registration rights agreement entered between the Initial Common
Stock Purchaser and us, we have agreed to file a registration statement with the
SEC covering the shares and shares underlying the Warrants, within 65 days from
this closing and obtain effectiveness of such registration statement within 170
days from closing. In case the registrant does not meet the filing deadlines
listed above we will pay a penalty of 1% of the aggregate investment made by
Investors and on each monthly anniversary of such default an amount equal to
1.5% of the aggregate investment amount of Investors, respectively.
Private placement closed on March 10, 2006 (the "Subsequent Common Stock Private
Placement")
On March 10, 2006, we entered into a securities purchase agreement, to which we
refer as the Subsequent Common Stock Securities Purchase Agreement, with various
investors, to which we refer as the Subsequent Common Stock Purchaser. Pursuant
to the Subsequent Common Stock Securities Purchase Agreement, we issued
6,831,863 shares to the Subsequent Common Stock Purchaser at $1.01 per share.
Upon the execution of the Subsequent Common Stock Securities Purchase Agreement,
we also issued to the Subsequent Common Stock Purchaser 6,831,684 warrants with
an exercise price of $1.26 per share of common stock ("Subsequent Common Stock
Warrants"). The Subsequent Common Stock Warrants will expire four (4) years from
the date of the issuance.
Under the Subsequent Common Stock Securities Purchase Agreement, we have agreed
not to issue shares or securities convertible or exchangeable into shares at a
price equal to or lower than $1.01 per share and not to issue any warrants or
securities that are exercisable into shares at a price lower than $1.26 per
share.
Pursuant to the Subsequent Common Stock Securities Purchase Agreement, subject
and subordinated to the participation rights of the Initial Common Stock
Purchasers, the Subsequent Common Stock Purchaser was granted a right to
participate up to 100% in any of our subsequent financing by offering of common
stock or common stock equivalents in the twelve (12) months from the effective
date of the registration statement of which this prospectus constitutes a part.
Note 17- SUBSEQUENT EVENTS
On May 3, 2006, the Company filed Form SB-2/A, a pre-effective amendment to a
SB-2 filed on March 24, 2006, with the Securities and Exchange Commission.
On May 16, 2006, the Company has entered into a Conditional Stock Purchase
Agreement ("Agreement") with RACP Pharmaceutical Holdings Ltd., a British Virgin
Islands company ("RACP") and certain other parties to ultimately acquire 100%
ownership interest in Shenyang Enshi Pharmaceutical Co, Ltd. ("Enshi"), a
pharmaceuticals manufacturer. Pursuant to the terms of the Agreement, the total
acquisition consideration plus liability assumptions by the Company is
approximately $16 million. As of December 31, 2005, according to unaudited
estimates, the net income of Enshi was approximately $5.1 million with total
assets of approximately $15 million and net assets at approximately $10.3
million.
25
ITEM 2. MANAGEMENT'S DISCUSSION and ANALYSIS and of FINANCIAL CONDITION AND
RESULTS of OPERATIONS
The following discussion and analysis 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", "our,", "us",
or "the Company". 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.
OUR BUSINESS
We are a vertically integrated bio-pharmaceutical company focused on
developing, manufacturing and distributing innovative drugs in the People's
Republic of China ("China" or PRC"). Our mission is to maximize investment
returns for our shareholders by integrating our 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.
On December 31, 2005, our wholly owned subsidiary, CBC, entered into an
Agreement with four shareholders of Chengdu Tianyin Pharmaceutical Limited
Company, a pharmaceutical company located in the city of Chengdu, Sichuan
Province, China ("Tianyin") to immediately assume operation control of Tianyin
in all aspects of its business operations and to acquire a 51% ownership
interest in Tianyin. Pursuant to the Agreement, subject to certain conditions,
we agreed to issue 3 million shares of its common stock to existing shareholders
of Tianyin or their designees and also agreed to invest an amount of US$2
million into Tianyin operations. Additional 300,000 shares of our common stock
will be issued to the existing shareholders of Tianyin or their designees, if
Tianyin's after tax audited profit for the year ended December 31, 2005 reaches
at least US$3,000,000. Our auditors are currently engaged to audit the financial
statements of Tianyin. The unaudited numbers are substantially lower than the
agreed to targets. We are currently evaluating the viability of the
implementation of the Tianyin purchase agreement and will make final
determination after consulting with management of Tianyin. Based on the
pre-conditions in the purchase Agreement, the Company decided not to assume the
operation control of Tianyin at the moment and is exploring options of changing
the transaction terms or abandoning the acquisition of Tianyin should Tianyin's
shareholders not compromise and meet the company's request for a reasonable
purchased price. Appropriate disclosure will be announced upon the final
determination by the board of the directors.
Prior to the filing of this quarterly report, the Company has announced
the entering into a Conditional Purchase Agreement to acquire 100% of the
operation of Shenyang Enshi Pharmaceuticals Company. For detailed description of
the planned transaction, please refer to the current report filed on Form 8K
dated May 18, 2006.
26
CRITICAL ACCOUNTING POLICIES
- ----------------------------
We have identified the policies below as critical to understanding of
our financial statements. The application of these polices requires management
to make estimates and assumptions that affect the valuation of assets and
expenses during the reporting period. There can be no assurance that actual
results will not differ from these estimates. The impact and any associated
risks related to these policies on our business operations are discussed below.
REVENUE AND REVENUE RECOGNITION
- -------------------------------
For fixed-price refundable contracts, we recognize revenue on a
milestone basis. Progress payments received/receivables are recognized as
revenue only if the specified milestone is achieved and accepted by the
customer. Confirmed revenue is not refundable and continued performance of
future research and development services related to the milestone are not
required. For sale of patented pharmaceutical formulas, the Company recognizes
revenue upon delivery of the patented formulas. For sales of final medicines and
processed materials, we recognize revenue upon delivery of the goods. The
company usually does not offer sales returns or refunds on the products except
for some specific circumstances, such as quality problems, which is rare and is
difficult to have an accurate estimate.
ACCOUNTS RECEIVABLE
- -------------------
Our accounts receivable are concentrated in numbers of pharmaceutical
manufacturers. We believe that a significant change in the liquidity or
financial position of few of our big customers would have a material adverse
impact on the collectibility of the Company's accounts receivable. Based upon
our historical experience, the delaying of payment caused by customer's
unpredicted management or financial trouble is influencing our financial and
future operating results.
INCOME TAX
- ----------
Significant judgment is required in determining our income tax
provision. In the ordinary course of business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Although we believe
that our estimates are reasonable, no assurance can be given that the final
outcome of these matters will not be different than that which is reflected in
our historical income tax provisions and accruals. Such differences could have a
material effect on our income tax provision and net income in the period in
which such determination is made. We apply an asset and liability approach to
accounting for income taxes. Deferred tax liabilities and assets are recognized
for the expected future tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The recoverability of deferred tax assets is dependent upon our assessment of
whether it is more likely than not that sufficient future taxable income will be
generated to utilize the deferred tax asset. In the event we determine that
future taxable income will not be sufficient to utilize the deferred tax asset,
a valuation allowance is recorded.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2006 AS COMPARED TO THREE
MONTHS ENDED MARCH 31, 2005
We acquired Suzhou Erye Pharmaceutical Co., Ltd. ("Erye") on June 11,
2005 and the operating result for the three months ended March 31, 2005 were not
included in our 10QSB filed on May 15, 2005. For management discussion and
comparison purposes, in addition to the discussion of the actual performance
results using the actual figures reported in the 10QSB filed on May 15, 2005 for
the first quarter of 2005, a separate proforma consolidated statements of income
and other comprehensive income for the period ended March 31, 2005 was prepared
as if the acquisition was effective January 1, 2005.
The following is our discussion comparing the current actual results with the
actual results reported for the first quarter of 2005 before the acquisition of
Erye:
27
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE PERIOD ENDED MARCH 31, 2006 and 2005
Unaudited 2005
2006 10QSB
------------ ------------
REVENUES $ 7,140,509 $ 1,988,508
COST OF GOOD SOLD 5,558,683 1,099,067
------------ ------------
GROSS PROFIT 1,581,826 889,441
------------ ------------
OPERATING EXPENSES
Research and development expenses 258,075 23,074
Selling, general and administrative expenses 785,834 334,294
------------ ------------
Total Operating Expenses 1,043,909 357,368
------------ ------------
INCOME FROM OPERATIONS 537,917 532,074
------------ ------------
OTHER INCOME (EXPENSE)
Interest income (expenses) (77,789) (37,277)
Other income (expenses) (119,573) 178
------------ ------------
Total Other Income (expenses) (97,362) (37,099)
------------ ------------
INCOME BEFORE INCOME TAXES 440,555 494,974
PROVISION FOR INCOME TAXES -- --
------------ ------------
INCOME BEFORE MINORITY INTEREST 440,555 494,974
MINORITY INTEREST 246,563 87,307
------------ ------------
28
NET INCOME 193,992 407,667
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 117,967 --
------------ ------------
COMPREHENSIVE INCOME (LOSS): $ 311,959 $ 407,667
============ ============
Net income per share - basic and diluted $ 0.01 $ 0.02
============ ============
Weighted average number of shares outstanding - basic 30,267,875 24,523,757
============ ============
Weighted average number of shares outstanding - diluted 31,420,375 24,523,757
============ ============
REVENUE.
Revenue for the three months ended on March 31, 2006 was $7,140,509,
while the revenue for the three months ended March 31, 2005 was $1,988,508,
representing an approximately 259% increase. The increase is attributable mainly
to revenue generated by Erye, whose revenue was not included in the amount for
the reporting period of 2005.
COST OF GOODS SOLD
Cost of goods sold for the three months ended on March 31, 2006 was
$5,558,683 as compared to $1,099,067 for the three months ended March 31, 2005.
Cost of goods sold as a percentage of sales revenues was approximately 78% for
the three months ended March 31, 2006 as compared to approximately 55% for the
three months ended March 31, 2005. The increase of cost of goods sold is
primarily attributable to the cost of goods sold by Erye..
GROSS PROFIT.
Gross profit in the three months ended on March 31, 2006 amounted at
$1,581,826, as compared to $889,441 for the three months ended March 31, 2005,
representing approximately 78% increase. The gross profit margin for the three
months ended March 31, 2006 was 22% as compared to approximately 44% for the
three months ended March 31, 2005. The decrease in gross profit margin is mainly
due to Erye's low gross profit margin.
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2006 was
$1,043,909 as compared to $357,368 for the three months ended March 31, 2005,
representing 192% increase. One reason for the increase is the expenses incurred
by Erye. Financing expenses, auditing expense, legal expenses, are also reason
29
for the significant increase in operating expenses due to the private
placements, and auditing activities., some of which are one time transactional
expenses.
R&D.
Research and Development cost for the three months ended March 31, 2006
was $258,075 as compared to $23,074 for the three months ended March 31, 2005,
representing a 1018% increase. The increase is mainly due to the research and
development activities conducted by Erye.
NET INCOME
Net Income for the three months ended March 31, 2006 was $193,992 as
compared to net income of $407,667 for the three months ended March 31, 2005,
representing 52.41% decrease. The decrease of the net income of the Company is
mainly due to the significant increase of operating expenses.
The following is the unaudited consolidated statements of income and
other comprehensive income for the period ended March 31, 2006 and the proforma
consolidated statements of income and other comprehensive income for the period
ended March 31, 2005, assuming the acquisition of Erye had been effective on
January 1, 2005, for our discussion and comparison purposes:
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE PERIOD ENDED MARCH 31, 2006 and 2005
Unaudited Proforma
2006 2005
------------ ------------
REVENUES $ 7,140,509 7,172,626
------------ ------------
COST OF GOOD SOLD 5,558,683 5,477,661
------------ ------------
GROSS PROFIT 1,581,826 1,694,965
------------ ------------
OPERATING EXPENSES
Research and development expenses 258,075 260,161
Selling, general and administrative expenses 785,834 612,582
------------ ------------
Total Operating Expenses 1,043,909 872,743
------------ ------------
INCOME FROM OPERATIONS 537,917 822,222
------------ ------------
OTHER INCOME (EXPENSE)
Interest income ( expenses) (77,789) (37,277)
30
Other income (expenses) (19,573) 178
------------ ------------
Total Other Income (expenses) (97,362) (37,099)
------------ ------------
INCOME BEFORE INCOME TAXES 440,555 785,123
PROVISION FOR INCOME TAXES -- 103,530
------------ ------------
INCOME BEFORE MINORITY INTEREST 440,555 681,593
MINORITY INTEREST 246,563 178,750
------------ ------------
NET INCOME 193,992 502,843
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 117,967 --
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 311,959 502,843
============ ============
Net income per share - basic and diluted $ 0.01 $ 0.02
============ ============
Weighted average number of shares outstanding - basic 30,267,875 24,523,757
============ ============
Weighted average number of shares outstanding - diluted 31,790,652 24,523,757
============ ============
REVENUE.
Revenue for the three months ended on March 31, 2006 was $7,140,509,
while the revenue for the three months ended March 31, 2005 was $7,172,626,
representing approximately 0.45% decrease. During the reporting period, the
Company introduced and promoted a new product into the Chinese market. For the
new product promotion, the Company sold the new product at lower price. Thus,
the increase sales volume was offset by the decrease in sale price. As the main
result, the net sales amount is still in constant with the same period of last
year.
31
COST OF GOODS SOLD
Cost of goods sold for the three months ended on March 31, 2006 was
$5,558,683 as compared to $5,477,661 for the three months ended March 31, 2005.
Cost of goods sold as a percentage of sales revenues was approximately 78% for
the three months ended March 31, 2006 as compared to approximately 76% for the
three months ended March 31, 2005. During the reporting period, the Company took
measures to eliminate the effect of price rise of raw material due to ascending
oil price. Cost of goods sold maintained relatively constant during the period.
GROSS PROFIT.
Gross profit in the three months ended on March 31, 2006 amounted at
$1,581,826, as compared to $1,694,965 for the three months ended March 31, 2005,
representing approximately 7% decrease. The gross profit margin for the three
months ended March 31, 2006 was 22% as compared to approximately 24% for the
three months ended March 31, 2005. Stable revenue and cost of good sold for the
reporting period generated a relatively constant gross profit margin.
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2006 was
$1,043,909 as compared to $872,743 for the three months ended March 31, 2005,
representing 20% increase. Financing expenses, auditing expense, legal expenses,
and other professional expenses are the main reason for the significant increase
in operating expenses due to the private placements and auditing activities.
Some of these expenses are one time transactional expenses.
R&D.
Research and Development cost for the three months ended March 31, 2006
was $258,075 as compared to $260,161 for the three months ended March 31, 2005.
R&D cost as a percentage of revenues was 3.61% for the three months ended March
31, 2006, as compared to 3.63% for the three months ended March 31, 2005. The
Company spent relatively larger portion of revenue on its R&D activities
compared with the standard of Chinese pharmaceutical industry, which was 2.8%
for the same period to achieve its strategic competitive advantage.
NET INCOME
Net Income for the three months ended March 31, 2006 was $193,992 as
compared to net income of $502,843 for the three months ended March 31, 2005,
representing 61.42% decrease. The decrease of the net income of the Company is
mainly due to the significant increase of operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2006, net cash provided by
operating activities was $1,009,717, net cash used in investing activities was
$1,634,534, and net cash provided by financing activities was $6,531,336. Cash
and cash equivalents as of March 31, 2006 was $6,985,765. This is a unique
period for merger and acquisition in China. To achieve our goal of continued
acquisitions in the industry, we need to raise additional funding in the near
future to fund such future acquisitions. In January of 2005, we raised gross
proceeds of $500,000 through the sales of promissory note to accredited
investors. In June of 2005, pursuant to an exemption under the Securities Act,
we have conducted a private placement of approximately $1,090,000 with 28
accredited investors, through issuance of Series A Convertible Preferred Stock.
In October of 2005, we conducted a private placement of additional Series A
Convertible Preferred Stock worth $62,500. In February 2006, we conducted a
private placement of our common stock with gross proceeds of $1,000,000. In
March 2006, we sold additional shares of our common stock with gross proceeds of
$6,900,000. Pursuant to various agreements entered by us in connection with the
private placement mentioned above, we are required to file with the SEC a
registration statement, which registers all the shares of common stock issued
under these placements, including the shares to which the Series A Preferred
32
Convertible Stock may be converted and the shares underlying the warrants issued
or issuable pursuant to these placements. In addition, pursuant to the
agreements, we are required to pay a penalty of 5% per month if the registration
statement has not become effective before required date. We have filed a
registration statement on form SB-2 covering the shares issued and issuable on
April 30, 2006 and this registration statment has became effective on May 11,
2006.
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 our 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 three 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 our expansion. We are exploring bank loans and private equity
financing to finance such expenditures and intend to raise equity through the
capital market to allow us to accomplish our future acquisition goals.
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 China's
political and economic conditions. As we rely entirely on revenues earned in
China, 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.
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 China 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 Chinese 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
July 2005, the Chinese government revalued the Renminbi by 2.1% against the U.S.
dollar, moving from Renminbi 8.28 to Renminbi 8.11 per dollar. At the end of
March 31, 2005, the value of the Renminbi to the U.S. dollar was translated at
8.06 RMB to $1.00 USD. 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.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In December 2004, the Financial Accounting Standards Board ("FASB")
issued a revised SFAS No. 123, Accounting for Stock-Based Compensation, which
supersedes APB opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. This statement requires a public entity to
recognize and measure the cost of employee services it receives in exchange for
33
an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). These costs will be recognized over the period during
which an employee is required to provide service in exchange for the award-the
requisite service period (usually the vesting period). This statement also
establishes the standards for the accounting treatment of these share-based
payment transactions in which an entity exchanges its equity instruments for
goods or services. It addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. We have implemented SFAS 123R effective January 2006.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20")
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change a
cumulative effect of changing to the new accounting principle whereas SFAS No.
154 requires retrospective application to prior periods' financial statements of
a voluntary change in accounting principle, unless it is impracticable.
SFAS No. 154 enhances the consistency of financial information between
periods. We have implemented SFAS No. 154 beginning with the Company's first
quarter of fiscal year 2006. Currently SFAS No. 154 does not have a material
impact on the Company's results of operations, financial position or cash flows.
The implementation of the above pronouncements is does not currently
have a material effect on the Company's financial statement presentation or
disclosures.
ITEM 3. CONTROLS 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 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed as part of this quarterly report on Form
10-QSB:
34
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------
10.1 Form of Securities Purchase Agreement between the Company and
the Purchasers relating to the sales and purchases of $1.0
million of the Company's common stock (incorporated by
reference to Exhibit 4.1 to the Form 8-K/A filed with the SEC
on February 8, 2006)
10.2 Form of Registration Rights Agreement in connection with the
private placement of $1.0 million of the Company's common
stock (incorporated by reference to Exhibit 4.2 to the Form
8-K/A filed with the SEC on February 8, 2006)
10.3 Form of common stock purchase warrant issued in the private
placement of $1.0 million of the Company's common stock
(incorporated by reference to Exhibit 4.3 to form 8-K/A filed
with the SEC on February 8, 2006)
10.4 Form of Securities Purchase Agreement between the Company and
the Purchasers relating to the sales and purchases of $6.9
million of the Company's common stock (incorporated by
reference to Exhibit 4.1to Form 8-K filed with the SEC on
March 14, 2006)
10.5 Form of Registration Rights Agreement in connection with the
private placement of $6.9 million of the Company's common
stock (incorporated by reference to Exhibit 4.2 to the Form
8-K filed with the SEC on March 14, 2006)
10.6 Form of common stock purchase warrant issued on March 10, 2006
(incorporated by reference to Exhibit 4.3 to the Form 8-K
filed with the SEC on March 14, 2006)
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
35
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.
By: /s/ MAO Peng
-------------------------------------------
Name: MAO Peng
Title: Chairman and Chief Executive Officer
Date: May 18, 2006
By: /s/ HUNAG Chentai
-------------------------------------------
Name: HUANG Chentai
Title: Chief Financial Officer
Date: May 18, 2006