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 June 30, 2007 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)
No. 859, Pan Xu Road
Suzhou, Jiangsu Province
China 215000
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (86) 512 6855 0568
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 August 14, 2007
- ----------------------------- ----------------------------
Common Stock, $0.01 par value 36,340,312
Transitional Small Business Disclosure Format: Yes: |_| No: |X|
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 33
ITEM 3. CONTROL AND PROCEDURES 40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 41
ITEM 5. OTHER INFORMATION 41
ITEM 6. EXHIBITS 42
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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENT
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2007
ASSETS
June 30,
2007
------------
CURRENT ASSETS: Unaudited
------------
Cash $ 1,230,258
Accounts receivable, trade, net of allowance for doubtful accounts of $934,516 6,860,309
Accounts receivable, related parties 259,347
Other receivables 2,614,674
Other receivables - related parties 3,123,894
Advances to suppliers 244,161
Prepaid expenses 48,257
Inventories 7,605,936
Loan to shareholders 42,794
------------
Total current assets 22,029,630
------------
PLANT AND EQUIPMENT, net 12,278,966
------------
OTHER ASSETS:
Intangible asset, net 12,702,943
Long term notes receivable 657,797
Long term other receivables - related parties 554,344
Restricted cash 840,285
Other assets 989,624
------------
Total other assets 15,744,993
------------
Total assets $ 50,053,589
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,427,225
Short-term loans 5,588,750
Long term debt - current maturities 11,500,000
Other payables 104,896
Other payables - related parties 1,514,292
Customer deposits 1,845,349
Notes payable 2,406,450
Taxes payable 1,308,375
Other accrued liabilities 1,403,995
------------
Total current liabilities 31,099,332
------------
LONG TERM LIABILITIES:
Other long term liabilities 164,848
------------
Total liabilities 31,264,180
------------
COMMITMENTS AND CONTINGENCIES --
------------
MINORITY INTEREST 5,420,442
------------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
417,500 shares Issued and outstanding 4,175
Common stock, $0.01 par value, 200,000,000 shares authorized;
36,465,312 shares issued and outstanding 364,654
Paid-in capital 13,093,750
Capital receivable (252,471)
Deferred compensation (46,125)
Statutory reserves 2,754,547
Retained earnings (deficit) (3,771,410)
Accumulated other comprehensive income 1,221,847
------------
Total shareholders' equity 13,368,967
------------
Total liabilities and shareholders' equity $ 50,053,589
============
The accompanying notes are an integral part of this statement.
-1-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
Three months ended June 30, Six months ended June 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
Restated Restated
------------ ------------
REVENUES $ 8,891,559 $ 6,965,818 $ 16,423,681 $ 12,515,741
COST OF GOODS SOLD 6,656,183 5,077,169 12,179,463 9,193,323
------------ ------------ ------------ ------------
GROSS PROFIT 2,235,376 1,888,649 4,244,218 3,322,418
------------ ------------ ------------ ------------
OPERATING EXPENSES
Research and development 66,748 240,747 109,911 498,822
Selling, general and administrative 1,519,246 788,133 2,844,561 1,502,105
------------ ------------ ------------ ------------
Total Operating Expenses 1,585,994 1,028,880 2,954,472 2,000,927
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 649,382 859,769 1,289,746 1,321,491
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income (expense), net (314,481) (138,091) (677,838) (184,833)
Other income (expense),net 217,597 195,139 214,923 177,733
------------ ------------ ------------ ------------
Total Other Income (expense), net (96,884) 57,048 (462,915) (7,100)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 552,498 916,817 826,831 1,314,391
PROVISION FOR INCOME TAXES 16,015 59,530 25,621 59,530
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 536,483 857,287 801,210 1,254,861
MINORITY INTEREST 565,772 412,970 918,767 659,268
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (29,289) 444,317 (117,557) 595,593
LOSS FROM DISCONTINUED OPERATIONS, net of tax -- (53,717) -- (11,001)
------------ ------------ ------------ ------------
NET (LOSS) INCOME (29,289) 390,600 (117,557) 584,592
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 319,364 394,168 354,318 512,135
------------ ------------ ------------ ------------
COMPREHENSIVE (LOSS) INCOME $ 290,075 $ 784,768 $ 236,761 $ 1,096,727
============ ============ ============ ============
INCOME (LOSS) PER SHARE OF COMMON STOCK
BASIC
CONTINUING OPERATIONS $ (0.001) $ 0.013 $ (0.003) $ 0.018
DISCONTINUED OPERATIONS -- (0.002) -- --
------------ ------------ ------------ ------------
Total-Basic $ (0.001) $ 0.011 $ (0.003) $ 0.018
============ ============ ============ ============
DILUTED
CONTINUING OPERATIONS $ (0.001) $ 0.013 $ (0.003) $ 0.017
DISCONTINUED OPERATIONS -- (0.002) -- --
------------ ------------ ------------ ------------
Total-diluted $ (0.001) $ 0.011 $ (0.003) $ 0.017
============ ============ ============ ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC 36,402,125 33,662,770 36,217,286 33,662,770
============ ============ ============ ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED 36,819,625 34,592,770 36,743,626 34,592,770
============ ============ ============ ============
The accompanying notes are an integral part of this statement.
-2-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
Preferred Stock Common Stock
--------------------------- --------------------------- Paid-in
Shares Par Value Shares Par Value Capital
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2005 1,152,500 $ 11,525 28,616,716 $ 286,167 $ 3,572,207
Common shares issued for cash 7,831,863 78,319 6,845,090
Common shares issued for services 50,000 500 4,500
Common shares issued for note conversion 399,820 3,998 421,002
Common shares issued for preferred stock conversion (312,500) (3,125) 443,277 4,433 (1,308)
Preferred shares issued 90,000 900 89,100
Assumed warrants to issue common stock 2,640,000
Net income
Statutory reserves
Foreign currency translation adjustments
------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2006, Unaudited, restated 930,000 $ 9,300 37,341,676 $ 373,417 $ 13,570,591
Common shares issued for service 49,805 498 52,002
Common shares returned from Hengyi due to divestiture (1,200,000) (12,000) (520,026
Deferred compensation
Common shares cancelled (604,741) (6,047) 6,047
Preferred stock dividends (48,703
Net loss
Statutory reserves
Foreign currency translation adjustments
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2006 930,000 $ 9,300 35,586,740 $ 355,868 $ 13,059,911
Common shares issued for preferred stock conversion (512,500) (5,125) 753,572 7,536 (2,411)
Common shares issued for service 125,000 1,250 36,250
Net loss
Statutory reserves
Foreign currency translation adjustments
------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2007,Unaudited 417,500 $ 4,175 36,465,312 $ 364,654 $ 13,093,750
============ ============ ============ ============ ============
Retained Earnings
----------------------------
Capital Deferred Statutory
Receivable Compensation Unrestricted Reserves
----------- ------------ ------------ ------------
BALANCE, December 31, 2005 $ (252,471) $ (24,000) $ 1,074,584 $ 444,623
Common shares issued for cash
Common shares issued for services
Common shares issued for note conversion
Common shares issued for preferred stock conversion
Preferred shares issued
Assumed warrants to issue common stock
Net income 584,592
Statutory reserves (2,028,121) 2,028,121
Foreign currency translation adjustments
---------- --------- ------------ ------------
BALANCE, June 30, 2006, Unaudited, restated $ (252,471) $ (24,000) $ (368,945) $ 2,472,744
Common shares issued for service
Common shares returned from Hengyi due to divestiture
Deferred compensation 6,000
Common shares cancelled
Preferred stock dividends
Net loss (3,003,105)
Statutory reserves (51,911) 51,911
Foreign currency translation adjustments
---------- --------- ------------ ------------
BALANCE, December 31, 2006 $ (252,471) $ (18,000) $ (3,423,961) $ 2,524,655
Common shares issued for preferred stock conversion
Common shares issued for service (28,125)
Net loss (117,557)
Statutory reserves (229,892) 229,892
Foreign currency translation adjustments
---------- --------- ------------ ------------
BALANCE, June 30, 2007,Unaudited $ (252,471) $ (46,125) $ (3,771,410) $ 2,754,547
========== ========= ============ ============
Other
Comprehensive
Income (Loss) Totals
------------- ------------
BALANCE, December 31, 2005 $ 156,089 $ 5,268,724
Common shares issued for cash 6,923,409
Common shares issued for services 5,000
Common shares issued for note conversion 425,000
Common shares issued for preferred stock conversion --
Preferred shares issued 90,000
Assumed warrants to issue common stock 2,640,000
Net income 584,592
Statutory reserves --
Foreign currency translation adjustments 512,135 512,135
------------ ------------
BALANCE, June 30, 2006, Unaudited, restated $ 668,224 $ 16,448,860
Common shares issued for service 52,500
Common shares returned from Hengyi due to divestiture (532,026)
Deferred compensation 6,000
Common shares cancelled --
Preferred stock dividends (48,703)
Net loss (3,003,105)
Statutory reserves --
Foreign currency translation adjustments 199,775 199,775
------------ ------------
BALANCE, December 31, 2006 $ 867,999 $ 13,123,301
Common shares issued for preferred stock conversion --
Common shares issued for service 9,375
Net loss (117,557)
Statutory reserves --
Foreign currency translation adjustments 353,848 353,848
------------ ------------
BALANCE, June 30, 2007,Unaudited $ 1,221,847 $ 13,368,967
============ ============
The accompanying notes are an integral part of this statement.
-3-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
2007 2006
----------- -----------
Unaudited Unaudited
----------- -----------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Restated
-----------
Net (loss) income $ (117,557) $ 584,592
Net income from discontinued operations -- (11,001)
----------- -----------
Net income (loss) from continuing operations (117,557) 595,593
Adjustments to reconcile net income (loss) from continuing
operations to cash provided by (used in) continuing operating activities:
Depreciation and amortization 662,048 421,966
Issuance of common stock for service 9,375 --
Minority interest 1,284,090 657,311
Change in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable, trade (1,828,364) (749,226)
Accounts receivable, related parties (201,967) (69,787)
Note receivable -- 47,434
Other receivables and prepayments 104,752 (1,558,357)
Other receivables - related parties (1,178,997) (2,021,518)
Advances to suppliers 120,791 80,415
Other assets 78,456 --
Inventories (459,250) (768,199)
Increase (decrease) in liabilities:
Accounts payable 709,157 10,051
Accounts payable - related parties -- (242,061)
Other payables and accrued liabilities 472,051 88,067
Other payables - related parties (1,290,480) 2,082,352
Customer deposits 839,636 (183,762)
Taxes payable 31,178 (51,095)
----------- -----------
Net cash used in continuing operating activities (765,081) (1,660,816)
----------- -----------
CASH FLOWS FROM CONTINUING OPERATIONS INVESTING ACTIVITIES:
Business acquisition-cash paid -- (500,000)
Cash acquired from business acquisition -- 415,361
Purchase of intangible asset -- (348,936)
Purchase of equipment (103,070) (106,246)
Payment to purchsae land use right (512,095) --
Payment paid to ENSHI former shareholder -- (430,000)
Dividend paid to ENSHI former shareholder -- (186,930)
Payment paid to receivables from related party 80,504 --
Payment to long term loans receivables 173,531 626,326
Long term other receivables - related parties -- (1,424,806)
----------- -----------
Net cash used in continuing operations investing activities (361,130) (1,955,231)
----------- -----------
CASH FLOWS FROM CONTINUING OPERATIONS FINANCING ACTIVITIES:
Restricted cash 76,122 402,352
Proceeds from issuance of perferred stock -- 90,000
Proceeds from issuance of common stock -- 7,348,409
Payments on loans payable (64,855) (1,170,860)
Payments on short-term convertible notes -- (425,000)
Payments on long-term debts -- (604,376)
Proceeds from long term debts-related party -- 40,097
Payments on long term debts - related parties (390,252) --
----------- -----------
Net cash (used in) provided by continuing operations financing activities (378,985) 5,680,622
----------- -----------
Net (decrease) increase in cash from continuing operations (1,505,196) 2,064,575
----------- -----------
Cash provided by discontinued operating activities -- 1,230,065
Cash used in discontinued operations investing activities -- (1,824,183)
Cash provided by discontinued operations financing activities -- 578,237
----------- -----------
Net cash used in discontinued operations -- (15,881)
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH (223,102) 92,139
----------- -----------
(DECREASE) INCREASE IN CASH (1,728,298) 2,140,833
CASH, beginning of period 2,958,556 1,026,606
----------- -----------
CASH, end of period $ 1,230,258 $ 3,167,439
=========== ===========
The accompanying notes are an integral part of this statement.
-4-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
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 $1,600,000 to be
used for working capital and/or expansion purposes. The cash contribution is to
be made in installments. On August 28, 2006, the Company entered to an agreement
with the minority shareholders of Suzhou Hengyi to rescind and terminate the
purchase of Hengyi and its 50% subsidiary, Suzhou Sintofarm. Pursuant to the
agreement all consideration paid to the shareholders of Hengyi including
1,200,000 shares of the Company's common stock and $620,000 in cash, will be
returned to the Company. As of June 30, 2007, Hengyi had already fully returned
all 1,200,000 shares of the Company's common stock to the Company. Furthermore,
the Company anticipates Hengyi will return the $620,000 in cash by March 31,
2008. The Company will not have any other obligations to Hengyi or its
shareholders. Simultaneously the 75.8% ownership interest of Hengyi will be
returned to Hengyi's shareholders or its designated party. As a result, Hengyi
ceased to be a subsidiary of the Company. All the parties to the rescission
agreed that the transaction took effect as of July 1, 2006. The detail
information of accounting for this transaction is disclosed in Note 16 -
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.
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 operational 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 common stock to existing shareholders of
Tianyin or their designees and also agreed to invest $2 million into Tianyin
operations. An 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 $3,000,000. 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 a final determination after consulting with management
of Tianyin. Based on the pre-conditions in the purchase Agreement, the Company
decided not to assume the operational control of Tianyin at this time 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 purchase price. Appropriate disclosure will
be announced upon the final determination by the board of the directors. Since
this transaction is in the process of evaluation, the final determination of
this merger transaction has not reasonably reached a conclusion; the financial
statements of Tianyin have not been included in the consolidated financial
statements for the period ended June 30, 2007.
-5-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
On May 16, 2006 we entered into a purchase agreement which became effective at
June 5, 2006, under which we acquired 100% of the controlling ownership interest
of RACP Pharmaceutical Holdings LTD. ("RACP") which owns 100% ownership interest
of Shengyang Enshi Pharmaceutical Limited Company ("Enshi"). Total consideration
of $14,690,000 paid by us to acquire the 100% interest in both RACP and Enshi is
$550,000 paid in cash, 12,000,000 of CBH warrants valued at $0.22 per warrant or
$2,640,000 and to assume $11,500,000 debt of RACP. The detail information of
accounting for this transaction is disclosed in Note 16 - Business Combinations.
The principal activities of the Company, located 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.
Note 2- RESTATEMENT OF FINANCIAL STATEMENT
In March 2007, management determined that approximately $2.6 million of trade
receivables purchased in connection with acquisition of Enshi were non-existent
and therefore had no fair value on the date of acquisition. Consistent with SFAS
No. 141, the Company is allowed an allocation period not to exceed one year to
re-allocate its purchase price to the "fair value of the net assets acquired on
the purchase date" based on facts available today. Accordingly, $2.6 million of
the purchase price originally allocated to receivables have been re-allocated to
buildings and land use rights. In addition, the Company increased $625,000
receivable from the escrow funds due to existence of certain contingencies in
related to Enshi acquisition. Certain disclosures in notes15 and 16 to the
consolidated financial statements are being restated to reflect the correction.
As a result, the Company restated it's June and September 2006 interim financial
statements. The effects of this restatement are as follows:
In addition, in late 2006 the Company rescinded its acquisition of Suzhou
Hengyi. Due to the rescission, Suzhou Hengyi and its 50% owned subsidiary
Sintofarm ceased to be subsidiaries of the Company. In accordance with FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company reclassified the financial statements for all periods
presented to reflect Suzhou Hengyi and Sintofarm business as discontinued
operations.
-6-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Consolidated Balance Sheet
June 30, Reclassifications June 30,
2006 and 2006
Previously reported Adjustments Restated
------------------- ----------------- ------------
Account receivables, net $ 11,132,994 $ (3,305,280) $ 7,827,714
============ ============ ============
Other receivables $ 2,690,617 $ 625,000 $ 3,315,617
============ ============ ============
Other receivables, related party $ 164,894 $ 500,000 $ 664,894
============ ============ ============
Total current asset $ 24,785,269 $ (2,180,280) $ 22,604,989
============ ============ ============
Plant and equipment, net $ 12,772,244 $ 1,155,444 $ 13,927,688
============ ============ ============
Intangible asset,net $ 12,696,792 $ 844,449 $ 13,541,241
============ ============ ============
Total Asset $ 53,516,649 $ (180,387) $ 53,336,262
============ ============ ============
Tax payable $ 1,312,964 $ (101,412) $ 1,211,552
============ ============ ============
Long term debt $ 11,000,000 $ 500,000 $ 11,500,000
============ ============ ============
Total liabilities $ 31,183,406 $ 398,588 $ 31,581,994
============ ============ ============
Statutory reserve $ 2,529,945 $ (57,201) $ 2,472,744
============ ============ ============
Retained earning $ 137,820 $ (514,805) $ (376,985)
============ ============ ============
Accumulated other comprehensive $ 675,193 $ (6,969) $ 668,224
============ ============ ============
Total liabilities and shareholder s ' equity $ 53,516,649 $ (180,387) $ 53,336,262
============ ============ ============
-7-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
For the six months ended June 30, 2006
Efffects of
----------------------------
Previously Disc
reported Error Ops Restated
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenues $ 16,916,873 $ (672,948) $ (3,728,184) $ 12,515,741
COGS 12,680,884 -- (3,487,561) 9,193,323
------------ ------------ ------------ ------------
Cross profit 4,235,989 (672,948) (240,623) 3,322,418
Operating expense 2,176,675 -- (175,748) 2,000,927
------------ ------------ ------------ ------------
Income from operations 2,059,314 (672,948) (64,875) 1,321,491
Other income(expense) (84,933) -- 77,833 (7,100)
------------ ------------ ------------ ------------
Income before income tax 1,974,381 (672,948) 12,958 1,314,391
Provision for income tax 160,472 (100,942) -- 59,530
------------ ------------ ------------ ------------
Income before minortiy interest 1,813,909 (572,006) 12,958 1,254,861
Minority interest 657,311 -- 1,957 659,268
------------ ------------ ------------ ------------
Income(loss) from continuing operations 1,156,598 (572,006) 11,001 595,593
Loss from discountined operations, net of tax -- -- (11,001) (11,001)
------------ ------------ ------------ ------------
Net(Loss)Income 1,156,598 (572,006) -- 584,592
Foreign currency translation adjustment 519,104 (6,969) -- 512,135
------------ ------------ ------------ ------------
Comprehensive income(loss) $ 1,675,702 $ (578,975) $ -- $ 1,096,727
============ ============ ============ ============
Income(loss)per share of common stock
Basic
Continuing operations $ 0.05 $ (0.0323) $ 0.0003 $ 0.018
Discontinued operations -- -- $ (0.0003) (0.000)
------------ ------------ ------------ ------------
$ 0.05 $ (0.0323) $ -- $ 0.018
============ ============ ============ ============
Diluted
Continuing operations $ 0.05 $ (0.0333) $ 0.0003 $ 0.017
Discontinued operations -- -- $ (0.0003) (0.000)
------------ ------------ ------------ ------------
$ 0.05 $ (0.0333) $ -- $ 0.017
============ ============ ============ ============
-8-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
For the three months ended June 30, 2006
Efffects of
-----------------------------
Previously Disc
reported Error Ops Restated
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenues $ 9,776,364 $ (672,948) $ (2,137,598) $ 6,965,818
COGS 7,122,201 -- (2,045,032) 5,077,169
------------ ------------ ------------ ------------
Cross profit 2,654,163 (672,948) (92,566) 1,888,649
Operating expense 1,132,766 -- (103,886) 1,028,880
------------ ------------ ------------ ------------
Income from operations 1,521,397 (672,948) 11,320 859,769
Other income(expense) 12,429 -- 44,619 57,048
------------ ------------ ------------ ------------
Income before income tax 1,533,826 (672,948) 55,939 916,817
Provision for income tax 160,472 (100,942) -- 59,530
------------ ------------ ------------ ------------
Income before minortiy interest 1,373,354 (572,006) 55,939 857,287
Minority interest 410,748 -- 2,222 412,970
------------ ------------ ------------ ------------
Income(loss) from continuing operations 962,606 (572,006) 53,717 444,317
Loss from discountined operations, net of tax -- -- (53,717) (53,717)
------------ ------------ ------------ ------------
Net(Loss)Income 962,606 (572,006) -- 390,600
Foreign currency translation adjustment 401,137 (2,622) (4,347) 394,168
------------ ------------ ------------ ------------
Comprehensive income(loss) $ 1,363,743 $ (574,628) $ (4,347) $ 784,768
============ ============ ============ ============
Income(loss)per share of common stock
Basic
Continuing operations $ 0.040 $ (0.029) $ 0.002 $ 0.013
Discontinued operations -- -- $ (0.002) (0.002)
------------ ------------ ------------ ------------
$ 0.040 $ (0.029) $ -- $ 0.011
============ ============ ============ ============
Diluted
Continuing operations $ 0.040 $ (0.029) $ 0.002 $ 0.013
Discontinued operations -- -- $ (0.002) (0.002)
------------ ------------ ------------ ------------
$ 0.040 $ (0.029) $ -- $ 0.011
============ ============ ============ ============
-9-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
For the six months ended June 30, 2006
-------------------------------------------------------------
Previously
reported Effects of Restated
------------ ---------------------------- ------------
Discontinued
Reclass Operations
------------ ------------
Net income $ 1,156,598 $ (572,006) $ -- $ 584,592
Net income from discontinued operations -- -- (11,001) (11,001)
------------ ------------ ------------ ------------
Net income (loss) from continuing operations $ 1,156,598 $ (572,006) $ (11,001) $ 595,593
------------ ------------ ------------ ------------
Cash used in continuing operating activities (1,501,200) (159,616) -- (1,660,816)
Cash used in continuing operations investing activities (2,354,608) 399,377 -- (1,955,231)
Cash provided by continuing operations financing activities 5,901,370 (220,748) -- 5,680,622
------------ ------------ ------------ ------------
Net increase in cash from continuing operations $ 2,045,562 $ 19,013 $ -- $ 2,064,575
------------ ------------ ------------ ------------
Cash provided by discontinued operating activities -- -- 1,230,065 1,230,065
Cash used in discontinued operations investing activities -- -- (1,824,183) (1,824,183)
Cash provided by discontinued operations financing activities -- -- 578,237 578,237
------------ ------------ ------------ ------------
Net cash used in discontinued operations $ -- $ -- $ (15,881) $ (15,881)
------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE ON CASH 95,271 (3,132) -- 92,139
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH 2,140,833 -- -- 2,140,833
CASH, beginning of period 1,026,606 -- -- 1,026,606
------------ ------------ ------------ ------------
CASH, end of period $ 3,167,439 -- $ -- $ 3,167,439
============ ============ ============ ============
Note 3 - 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. Material
inter-company transactions have been eliminated in the consolidation.
The consolidated financial statements of China biopharmaceuticals holdings, Inc.
and subsidiaries reflect the activities of the following subsidiaries:
-10-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Entity Percentage of Ownership Location
- --------------------------------------------------------------------------------
CBH Parent Company United States of America
Enshi 100% owned by CBH P.R.C
Erye 51% owned by CBH P.R.C
CBC 100% owned by CBH British Virgin Inland
Keyuan 90% owned by CBC P.R.C
Reclassifications
Certain prior period amounts have been reclassified to conform to current
period's presentation. This reclassification had no material effect on
operations or cash flows
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.
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 40-50 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. The Company will be
assessing the realizability of the carrying value of all long term assets
associated with Enshi operations prior to year end, given the deterioration of
revenues generated this year as the Company pursues litigation with the prior
owners. See Note 14 for legal proceedings with the prior owner.
-11-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
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
The patents represent patented pharmaceutical formulas, on which we have
obtained official registration certificate or official approval for clinical
trials. No amortization is provided when the Company intends to and has the
ability to sell the patent or formulas within not more than two months,
otherwise the patent costs will be subject to amortization over its estimated
useful life period. Such costs comprise purchase costs of patented
pharmaceutical formulas and costs incurred for patent application. Patent costs
are accounted for on an individual basis. The carrying value of patent costs is
reviewed for impairment annually when events and changes in circumstances
indicate that the carrying value may not be recoverable.
Research and Development Costs
Research and development (or "R&D") expenses include salaries, benefits, and
other headcount related costs, clinical trial and related clinical manufacturing
costs, contract and other outside service fees, and facilities and overhead
costs. R&D costs are expensed when incurred.
Under the guidance of paragraphs 8 to 11 of SFAS 2, the Company expenses the
costs associated with the research and development activities when incurred.
None of the intangible assets of the Company and its subsidiaries was recorded
based on R&D costs.
Concentration of risks
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 June 30, 2007 amounted to $1,072,458 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.
The Company has five major customers which represent approximately 18.5% and
26.6% of the Company's total sales for the six months ended June 30, 2007 and
2006, respectively. For the three months ended June 30, 2007 and 2006, five
major customers represent approximately14.6% and 23.6%, respectively. Five
customers accounted for 42% of total accounts receivable as of June 30, 2007.
For the six months ended June 30, 2007 and 2006, the Company purchases
approximately 62.6% and 40.5%, respectively, of their raw materials from five
major suppliers. For the three months ended June 30, 2007 and 2006, five major
customers represent approximately 57.5% and 46.4%, respectively. Five suppliers
accounted for 70.5% of total accounts payables at June 30, 2007.
-12-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments
The Company's financial instruments primarily include cash and cash equivalents,
accounts receivable, and 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. In addition, the Company has notes payable issued by the bank and
special payables. Management estimates the carrying amount approximates fair
values because the historical terms of the notes approximate terms available
today.
Revenue Recognition
The Company has three categories of revenue resources, sales of new drug
formulas, R&D services and revenue from sales of medical product.
The Company recognizes revenue from product and drug formula sales when title
has passed, the risks and rewards of ownership have been transferred to the
customer, the fee is fixed and determinable, and the collection of the related
receivable is probable which is generally at the time of shipment. Allowances
are established for estimated rebates, wholesaler charge backs, prompt pay sales
discounts, product returns, and bad debts.
For the six months ended June 30, 2007 and 2006, revenue from sale of product
was $16,423,681 and $15,992,564, respectively, made up of the following product
categories.
2007 2006
----------- -----------
(Unaudited) (Unaudited)
----------- -----------
Revenue from continued operations: Restated
-----------
Intermediary pharmaceutical products $ 4,344,660 $ 3,822,593
Prescription drugs 10,911,906 6,830,299
Over-the-counter drugs 1,167,115 1,613,111
Service -- 249,738
----------- -----------
Total revenue from continuing operations $16,423,681 $12,515,741
=========== ===========
Revenue from discontinued operations:
Intermediary pharmaceutical products $ -- $ 3,726,561
=========== ===========
For the three months ended June 30, 2007 and 2006, revenue from sale of product
was $8,891,559 and $8,853,659, respectively, made up of the following product
categories.
-13-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
2007 2006
---------- ----------
(Unaudited) (Unaudited)
---------- ----------
Revenue from continued operations: Restated
----------
Intermediary pharmaceutical products $2,421,660 $3,348,575
Prescription drugs 6,285,227 2,700,817
Over-the-counter drugs 184,672 666,688
Service -- 249,738
---------- ----------
Total revenue from continuing operations $8,891,559 $6,965,818
========== ==========
Revenue from discontinued operations:
Intermediary pharmaceutical products $ -- $2,137,579
========== ==========
For revenue from R&D service, revenue is recognized based on fixed-price
refundable new drug contracts. The fixed-price refundable new drug contract is
also called as milestone contract, which establishes the phase goals of the R&D
service provided by the Company and the corresponding milestone payments by the
customers. Milestone payments become payable and are recognized as revenue when
milestone goals, as defined in the contract, are achieved. Milestones are
substantive and not derived solely from arriving at a specific date. Revenue is
recognized when milestone goals are achieved at the amount of the corresponding
milestone payment. To determine when milestones are achieved, typically, the
milestone goals require one or more of the following: (1) a certificate from a
licensed authoritative agency, (2) approval/acknowledgement by a governmental
agency, such as agency like Food and Drug Administration of the United States,
(3) an authoritative professional appraisal report, or (4) an independent
technological feasibility report, testing analysis and other form of valuation
on the result and value of products and service. After receipt of the
certificate, and/or approval and/or report, continued service is not required
thus the respective milestone goals are achieved. Therefore, the milestone
payment is no longer refundable and revenue is recognized.
For the six months ended June 30, 2007, revenue from sales of product, sales of
new drug formulas, and R&D service amounted to $16,423,681, $0, and $0,
respectively. For the six months ended June 30, 2006, revenue from sales of
product, sales of new drug formulas, and R&D service was $15,992,564, $0, and $
249,738 respectively.
For the three months ended June 30, 2007, revenue from sales of product, sales
of new drug formulas, and R&D service amounted to $8,891,559, $0, and $0,
respectively. For the three months ended June 30, 2006, revenue from sales of
product, sales of new drug formulas, and R&D service was $8,853,659, $0, and $
249,738 respectively.
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.
-14-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
The Company adopted FASB Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"), as of January 1, 2007. A tax position is recognized as
a benefit only if it is "more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption had no
effect on the Company's financial statements.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. For example, the Company estimates the
collectibility of its receivables which affects the carry value of the related
asset. 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.
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for the
reporting and display of comprehensive income, its components and accumulated
balances in a full set of general purpose financial statements. SFAS No. 130
defines comprehensive income to include all changes in equity except those
resulting 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 are translated at average exchange rates during
the period, 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, and
equity are stated at their historical rates. Cash flows are also translated at
average translation rates for the period, therefore, amounts reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
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.
-15-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
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 $353,848 and $511,655 the six months ended June 30, 2007 and
2006, respectively. Assets and liabilities at June 30, 2007 and December 31,
2006 were translated at 7.60 and 7.80 RMB to $1.00 USD. The average translation
rates applied to income statement accounts and statement of cash flows for the
six months ended June 30, 2007 and 2006 were 7.71 and 8.05 RMB to $1.00 USD, and
for the three months ended June 30, 2007 and 2006 were 7.69 and 8.02,
respectively.. Cash flows are also translated at average translation rates for
the period, therefore, amounts reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
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 immaterial
to the consolidated financial statements.
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 and Diluted EPS. Basic earnings per share are
calculated by taking net income divided by the weighted average shares of common
stock outstanding during the period. Diluted earnings per share is calculated by
taking basic weighted average shares of common stock and increasing it for
dilutive common stock equivalents such as preferred stock, as well as warrants
and options that are in the money.
The Company determined that all the warrants were anti-dilutive because the
exercise prices were higher than average market price in the period presented.
The number of shares used in computing diluted earnings per share for the six
months ended June 30, 2007 and 2006 was 36,743,626, which included 526,340
weighted average number of convertible preferred stock, and 34,592,770, which
included 930,000 weighted average number of convertible preferred stock,
respectively. The number of shares used in computing basic earnings per share
for the six months ended June 30, 2007 and 2006 was 36,217,286 and 33,662,770,
respectively. Basic and Diluted (loss) earning per share for the six months
ended June 30, 2007 were ($0.003). Basic and Diluted earnings per share for the
six months ended June 30, 2006 amounted to $0.018 and $0.017, respectively.
The number of shares used in computing diluted earnings per share for the three
months ended June 30, 2007 and 2006 was 36,819,625 which included 417,500
weighted average number of convertible preferred stock, and 34,592,770, which
included 930,000 weighted average number of convertible preferred stock,
respectively. The number of shares used in computing basic earnings per share
for the three months ended June 30, 2007 and 2006 was 36,402,125 and 33,662,770,
respectively. Basic and Diluted (loss) earning per share for the three months
ended June 30, 2007 were ($0.001). Basic and Diluted earnings per share for the
three months ended June 30, 2006 amounted to $0.011 and $0.011, respectively.
-16-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements
In June 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF
No. 06-3, How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (EITF No. 06-3). EITF
No. 06-3 permits that such taxes may be presented on either a gross basis or a
net basis as long as that presentation is used consistently. The adoption of
EITF No. 06-3 on January 1, 2007 did not impact our consolidated financial
statements. We present the taxes within the scope of EITF No. 06-3 on a net
basis.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("SFAS 157"), which provides enhanced
guidance for using fair value to measure assets and liabilities. This standard
also responds to investors' requests for expanded information about the extent
to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on
earnings. The standard applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. The standard does not expand
the use of fair value in any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 12, 2007,
and interim periods within those fiscal years. Early adoption is permitted. We
are currently evaluating whether the adoption of SFAS157 will have a material
effect on our consolidated results of operations and financial condition.
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities--Including
an Amendment of SFAS 115 (SFAS No. 159), which allows for the option to measure
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. The objective of SFAS 159 is to provide opportunities to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply hedge accounting provisions.
SFAS 159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of SFAS No.
159 on our consolidated financial statements.
In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, "Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities" ("FSP EITF 07-3"), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on financial
statements.
-17-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Note 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and income taxes paid
o Interest expense paid amounted to $797,452 and $154,348 for the six
months ended June 30, 2007 and 2006.
o Income taxes paid amounted to $15,974 and $0 for the six months
ended June 30, 2007 and 2006, respectively.
Non-cash investing and financing activities
o During the first quarter of 2007, the Company converted 512,500
shares of preferred stock to 753,572 shares of common stock.
o During the second quarter of 2007, the Company issued 125,000 shares
of restricted common stock in exchange of consulting service.
Note 5 - ACCOUNTS RECEIVABLE
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management's judgment and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, we analyze the
aging of accounts receivables balances, historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and changes
in our customer payment terms. Significant changes in customer concentrations or
payment terms, deterioration of customer credit-worthiness or weakening in
economic trends could have a significant impact on the collectibility of
receivables and our operating results. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. The reserve for bad debts
was $934,516 at June 30, 2007.
As of June 30, 2007, accounts receivable consisted of the following:
Accounts receivable $ 7,794,825
Allowance for doubtful accounts (934,516)
-----------
Accounts receivable, net $ 6,860,309
===========
Note 6 - INVENTORIES
Inventories consisted of the following at June 30, 2007:
-18-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Raw materials $2,462,248
Refinery material 1,706,504
Packaging supplies 351,723
Sundry supplies 11,932
Work in process 697,877
Finished goods 2,375,652
----------
Total inventories $7,605,936
==========
Note 7 - PLANT AND EQUIPMENT
Plant and equipment consisted of the following as of June 30, 2007:
Plant $ 9,689,685
Office equipment 233,018
Machinery 9,197,661
Automobiles 372,844
Construction inprogress 40,742
Total plant and equipment 19,533,950
Less: accumulated depreciation 7,254,984
-----------
Plant and equipment, net $12,278,966
===========
Depreciation expense for the six months ended June 30, 2007 and 2006 were
$425,636 and $491,459 , and for the three months were $201,218 and $211,835,
respectively.
Note 8- OTHER ASSETS
Intangible Assets
Intangible assets at June 30, 2007 included land use rights and drug patents,
and consist of the following:
-19-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Land use rights:
Erye $ 5,837,976
Less: Accumulated amortization (413,613)
------------
5,424,363
Enshi 5,658,559
Less: Accumulated amortization (471,804)
------------
5,186,755
Prepayment on land - Erye 1,183,500
Patents:
Approved drugs 1,549,978
Less: Accumulated amortization (641,653)
------------
908,325
------------
Total intangible assets, net $ 12,702,943
============
Amortization expense for the six months ended June 30, 2007 and 2006 was
$236,412 and $78,511, and for the three months ended June 30, 2007 and 2006
amounted to $191,010, and $54,081, respectively.
Restricted Cash
Restricted cash represents cash required to be deposited with banks for the
balance of bank notes payable but are subject to withdrawal with restrictions
according to the agreement with the bank. The required deposit rate is
approximately 30-50% of the notes payable. Given the nature of the restricted
cash, it is reclassified as a financing activity in Statement of Cash Flows. The
following lists the depositors, the amount and names of the banks as of June 30,
2007:
Depositor Name of Bank Amount
- --------- ------------ ------
Erye Hua Xia Bank, Suzhou $449,730
Industrial and Commercial Bank, Suzhou 390,555
--------
Total $840,285
========
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. The Company has first priority to purchase
the new drug rights if the projects are successfully completed. If the Company
gives up the right, the debtors required to repay the loans plus 3% interest per
annum within one month after the drug rights are sold to another party. If on or
before February 28, 2010, the R&D projects are not completed or failed, the
debtors are required to repay the loans plus 6% interest per annum within ten
days after such a conclusion was made. As of June 30, 2007, the total amount of
the long term notes receivable was $657,797. 51% of ownership equity of the
debtor was pledged for the loan. Management believes the likelihood of repayment
to be collected is high based on the above conditions and well financial
conditions of the counter parties.
-20-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Note 9- RELATED PARTIES TRANSACTIONS
Accounts Receivables - Related Parties
Subsidiary Amount Due from Term Manner of settlement
- -------------------------- -------- -------------- ---------- ------------------------
Erye $244,269 Hainan Kaiye Short term To be received in cash
Enshi 15,078 Liaoning xiehe Short term To be received in cash
--------
Total - June 30, 2007 $259,347
========
Other Receivables - Related Parties
Subsidiary Amount Due from Term Manner of settlement
- ------------------------ ---------- -------------- ---------- --------------------------
Erye $1,175,610 Hainan Kaiye Short term To be received in cash
Erye 1,315,000 Erye Trading Short term To be received in cash
Enshi 133,284 Li Xiao Bo Short term To be received in cash
CBH 500,000 Li Xiao Bo Short term To be received in cash
----------
Total - June 30,2007 $3,123,894
==========
Loan to Shareholder
Subsidiary Amount Due from Term Manner of settlement
- ------------------------ ---------- -------------- ---------- --------------------------
Keyuan $ 42,794 Keyuan's Short term To be received in cash
shareholder
Other Payables - Related Parties
Subsidiaries Amount Due to Term Manner of settlement
- ----------------------- ----------- -------------- ---------- -------------------------
Erye $ 618,413 Erye Trading Short term To be paid in cash
Erye 551,661 Hainan Kaiye Short term To be paid in cash
CBH 344,218 Shareholders Short term To be paid in cash
-----------
Total-June 30,2007 $ 1,514,292
===========
At December 31, 2006, Enshi had payables to LiangNing Xie He and its owner, Mr.
Li, Xiao Bo, who is also the prior owner of Enshi, amounted to $555,106 and
$85,894, respectively. In April 2007, Enshi returned the full amount of $641,000
to LiangNing Xie He and Mr. Li, Xiaobo.
-21-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Long Term Other Receivables - Related Parties
Subsidiary Amount Due from Term Manner of settlement
- ------------ --------- --------------- ---------- -----------------------
CBH $554,344 Hengyi Long term To be received in cash
Note 10 - NOTES PAYABLE
The Company's subsidiary Erye has $2,406,450 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.
Note 11 - 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.
The Company's wholly owned subsidiary China Biopharmaceuticals Corporation (BVI
Company) owns 90% ownership interest in Keyuan. There is no minority interest in
Enshi since the Company owns 100% of Enshi.
Ownership Minority
Equity of the in Interest in
Subsidiaries Subsidiaries Subsidiaries
as of ------------------------- --------------------------
Subsidary June 30, 2007 Percentage Amount Percentage Amount
- ---------- ------------- ---------- ----------- ---------- -----------
Erye $10,920,758 51% $ 5,569,586 49% $ 5,351,173
Keyuan 692,692 90% 623,422 10% 69,269
Enshi 14,687,222 100% 14,687,222 0% --
----------- ----------- -----------
Total $26,300,672 $20,880,230 $ 5,420,442
=========== =========== ===========
Note 12- STATUTORY RESERVES
According to Chinese corporation law, a company incorporated in China is
required to contribute an amount of no less than 10% 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. These reserves represent restricted retained earnings. The following
list the provision of statutory reserves contributed as of June 30, 2007.
Year Amount
- ------------ -----------
2004 $ 60,750
2005 383,873
2006 2,080,032
2007 229,892
-----------
Total $ 2,754,547
===========
-22-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Note 13 - 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, Keyuan
and Enshi 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's income tax expense for the six months ended June 30, 2007 and 2006
were $25,621 and $59,530, respectively. Income tax expense for the three months
ended June 30, 2007 and 2006 were $16,015 and $59,530, respectively.
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.
The Company's subsidiaries operate in China. According to the Chinese Joint
Venture Business Law, these subsidiaries have been registered and incorporated
with the status of Sino-foreign joint venture companies and are subject to a two
year tax exemption and a three year 50% reduction in income tax rates 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 16.50%
Suzhou Erye 2006-2007 0.00% 2008-2010 12.00%
Shengyang Enshi 2004-2005 0.00% 2006-2007 15.00%
After the income tax preference period expires, a 25% income tax rate is
applicable.
Beginning January 1, 2008, the new Enterprise Income Tax ("EIT") law will
replace the existing laws for Domestic Enterprises ("DES") and Foreign Invested
Enterprises ("FIEs"). The new standard EIT rate of 25% will replace the 33% rate
currently applicable to both DES and FIEs. The two years tax exemption, three
years 50% tax reduction tax holiday for production-oriented FIEs will be
eliminated. The Company is currently evaluating the effect of the new EIT law
will have on its financial position.
-23-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
June 30,
-----------------
2007 2006
------ ------
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 six months ended
June 30, 2007 and 2006 amounted to $758,633 and $491,071, respectively. The net
effect on earnings (loss) per share if the income tax had been applied would
decrease (increase) earnings (loss) per share for June 30, 2007 and 2006 by
($0.02) and $0.01, respectively.
Business Tax
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. A credit is available whereby VAT paid on the
purchases of semi-finished products or raw materials used in the production of
the Company's finished products can be used to offset the VAT due on sales of
the finished product.
VAT on sales and VAT on purchases amounted to $2,428,668 and $1,830,447 for the
six months ended June 30, 2007 and $2,209,113 and $1,737,811 for the six months
ended June 30, 2006, respectively. Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent for the government. VAT taxes
are not impacted by the income tax holiday.
Note 14 - LOANS
Loan from RimAsia
The Company assumed a loan of $11,500,000 in connection with the acquisition of
Enshi as presented in Note 15 Business Combination. Interest on the loan will be
paid semi-annually at an annual rate of 11%. As of June 30, 2007, the balance of
the debt was $11,500,000.
After a review of the Company's loan covenants in connection with the above
loan, the Company determined that it is in violation of certain of the
covenants, and the Company has not been granted a waiver from RimAsia.
Therefore, In accordance with GAAP, the $11.5 million loan is fully classified
as a current liability at June 30, 2007.
-24-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
In connection with the Enshi acquisition described in Note 15 - Business
acquisition, 12,000,000 warrants were issued to RimAsia in June 2006. The
warrants have an exercise price of $1.375 and an expiration date of June 30,
2009, three years from the issuance date.
On August 2, 2007, the Company and entered into a letter of intent with RimAsia.
Pursuit to the agreement, the principal of the $11.5 million RACP acquisition
loan will be converted into shares of senior redeemable convertible preferred
stock "Preferred Stock" with a conversion price of $1.02, see Note 18 for more
details.
Short Term Bank Loans
The Company has a total amount of $5,588,750 in short term loans from five
different banks in China. These loans mature in one year or less and renew
automatically. The average interest rate is approximately 6.3%. Among those
short term bank loans, $1,643,750 was collateralized by the land use right of
Erye, $1,078,300 was collateralized by the land use right and buildings of
Enshi, $1,315,000 was collateralized by Enshi's prior shareholder, Li Xiaobo's
personal assets, and $920,500 was collateralized by buildings of a third party.
Interest expense for the six months ended June 30, 2007 and 2006 were $712,661
and $259,765, respectively. Interest expense for the three months ended June 30,
2007 and 2006 were $344,548 and $192,584, respectively.
Note 15 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and dormitory facilities for its employees from
a third party. Accordingly, for the six months ended June 30, 2007 and 2006, the
Company recognized rent expense of $32,111 and $13,476, respectively. For the
three months ended June 30, 2007 and 2006, the Company recognized rent expense
of $15,046 and $6,738, respectively.
As of June 30, 2007, the Company has outstanding commitments in respect to
non-cancelable operating leases, which fall due as follows:
Amount
---------
2007 $ 81,596
2008 56,783
2009 35,870
2010 39,000
Thereafter --
---------
$ 213,249
=========
-25-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Legal Proceedings
The Company has commenced action to freeze up to $10 million assets of Mr. Li
Xiaobo, the former shareholder and management of Enshi, for breach of
representations and warranties as contained in the acquisition agreements.
Additionally, the Company reserves the right to seek further damages from the
former shareholder.
Note 16 - BUSINESS COMBINATIONS
Enshi Acquisition
On May 16, 2006, we entered into a purchase agreement which became effective at
June 5, 2006, under which we acquired 100% of the controlling ownership interest
of RACP Pharmaceutical Holdings LTD. ("RACP") which owns 100% ownership interest
of Shengyang Enshi Pharmaceutical Limited Company ("Enshi"). The Company paid
$14.7 million to acquire 100% interest in both RACP and Enshi. Consideration
included $12 million cash and $2.7 million in warrants. We applied the
Black-Scholes model method to determine the value of the warrants.
We determined the fair value of the acquired assets of Enshi based on an
independent appraisal. The fair value of Enshi's net assets was in accordance
with the independent appraisal of $16.7 million. Pursuant to SFAS 141, Business
Combination, the excess of total fair value acquired over the acquisition cost
should be allocated as pro rata deduction of the amount of Enshi's fixed assets
and intangible assets that would have been assigned to those assets.
Under the terms of the purchase agreement, the Company placed $625 thousand of
the purchase price in escrow to cover certain contingencies including collection
of receivables on the date of purchase. In October 2006, because those
conditions were not met, the escrowed funds are being returned to the Company,
and therefore the purchase price was reduced, pursuant to FAS 141, Business
Combinations, paragraph 27. As of June 30, 2007, the Company was still in the
process collecting escrowed funds through legal action.
In March 2007, management determined that approximately $2.6 million of trade
receivables purchased are likely non-existent and therefore had no fair value on
the date of acquisition. (See Note 17 for discussion of legal action pursued
against the former owner and manager of Enshi.) Consistent with SFAS No. 141,
the Company is allowed an allocation period not to exceed one year to
re-allocate its purchase price to the "fair value of the net assets acquired on
the purchase date" based on facts available today. Accordingly, $2.6 million of
the purchase price originally allocated to receivables have been re-allocated to
buildings and land use rights.
-26-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Assets acquired and debts assumed are listed below:
Original
Allocated Re-allocated
Item Fair Value Fair Value
- ------------------------------- ----------- -----------
Current assets $ 6,840,881 $ 4,220,081
Property, plant, and equipment 7,188,912 8,340,664
Intangible assets 5,253,973 6,098,021
----------- -----------
Total assets 19,283,766 18,658,766
----------- -----------
Total liabilities 4,593,766 4,593,766
----------- -----------
Net assets $14,690,000 $14,065,000
=========== ===========
Discontinued Operation - Suzhou Hengyi
On August 28, 2006, the Company entered to an agreement with the minority
shareholders of Suzhou Hengyi to rescind and terminate the purchase of Hengyi
and its 50% subsidiary, Suzhou Sintofarm. Pursuant to the agreement all
consideration paid to the shareholders of Hengyi of 1,200,000 shares of the
Company's common stock and $620,000 in cash, which will be returned to the
Company in three installments by March 2008.
As of June 30, 2007, the 1,200,000 shares of common stock were returned and
cancelled. The Company will not have any other obligations to Hengyi or its
shareholders. Simultaneously the 75.8% ownership interest of Hengyi will be
returned to Hengyi's shareholders or its designated party. As a result, Hengyi
will cease to be a subsidiary of the Company.
All the parties to the rescission agreed that the transaction took effect as of
July 1, 2006, considering the fact that there was a significant change in the
financial condition and operating performance of the two companies. The Company
recognized loss on discontinued operation, net of tax effect, of $108,182, for
the six months ended June 30, 2006. The prior period results of operations and
cash flows for Hengyi have been reported within discontinued operations in the
accompanying statements.
Note 17 - 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 (referred to as the Notes
Subscription Agreement), which we entered into with twenty (20) accredited
investors (referred to 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.
Each note holder has the 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 extended the maturity date of the Notes
until December 31, 2005. All of the Notes were either converted into shares or
redeemed.
-27-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
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 the extension as described above. Management determined the
warrants had no value.
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 "Note
Warrants"). The exercise price of the majority of Note Warrants is $1.50 per
share. Pursuant to the Note Warrants, the Notes Subscribers are entitled to
purchase an aggregate amount of 341,657 shares. The Note Warrants may be
exercised only in full. The Note Warrants will expire three (3) years from
issuance date of the Note Warrants. Management determined the warrants had no
value.
WestPark Capital Inc. ("WestPark") acted as our placement agent in the private
placement described above. In consideration of WestPark's services, the Company
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.
Management determined the warrants had no value.
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 Note Warrants, which registers
all the shares to which the Notes may be converted and the shares underlying the
Note 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 the required date. The related penalties prior to
the SB-2 registration effective date were accrued for and recorded by the
Company. The SB-2 registration was filed and effective on May 11, 2006.
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 was estimated at $0.10 per
share as of December 31, 2005.
Private placement closed in June, 2005 (the "Initial Preferred A Private
Placement")
In June 2005, the Company entered into a June subscription agreement, referred
to 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 $1.00 per share convertible at a ratio of 1:1
into shares.
-28-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Upon the execution of the Initial Preferred A Subscription Agreements, the
Company 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. Management determined the warrants had no value.
WestPark acted as placement agent in the private placement described above. In
consideration of WestPark's services, the Company 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. Management determined the warrants had no value.
Private placement closed on October 19, 2005 (the "Subsequent Preferred A
Private Placement")
On October 19, 2005, the Company entered into a subscription agreement, referred
to 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 the Company
collectively refers to 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. Management
determined the warrants had no value.
WestPark acted as placement agent in the private placement described above. In
consideration of WestPark's services, the Company 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.
Management determined the warrants have no value. 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.
-29-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
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
the required date. The related penalties prior to the SB-2 effective date were
accrued by the Company. The SB-2 was filed and effective on May 11, 2006.
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.
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.
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 were 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 months and the terms of the agreement are for the consultant
to receive a cash payment of $4,000 plus common stock valued at $2,500 and
10,000 three year warrants to purchase common stock at $0.50 per share, each
month during the agreement. The shares of common stock were issued to the
consultant in 2006.
On April 1, 2005, the Company entered into an advisory agreement with Robin
Smith as the Chairman of the Company's Advisory Board for a period of one year.
The terms of the agreement were for Ms. Smith to receive 60,000 shares of
unregistered common stock 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 were issued to Ms. Smith in 2005.
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 a 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 were for the
consultant to receive a cash payment of $50,000 plus 50,000 shares of common
stock of the Company. During the year of 2006, total number of shares issued for
services was 99,805, valued at a total amount of $57,500.
On April 1, 2007, the Company engaged a consulting firm for a period of one year
ending March 31, 2008. The terms of the agreement are for the consulting firm to
receive a cash payment of $17,000 plus 125,000 shares of common stock of the
Company.
-30-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
Private placement closed in February 2, 2006 (the "Initial Common Stock Private
Placement")
On February 2, 2006, the Company entered into a securities purchase agreement,
referred to as the Initial Common Stock Securities Purchase Agreement, with GCE
Property Holdings, Inc. ("GCE"), referred to as the Initial Common Stock
Purchaser. Pursuant to the Initial Common Stock Securities Purchase Agreement,
the Company 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, The Company has
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..
The Company 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. The SB-2 registration statement was filed timely and became effective
on May 11, 2006. Therefore, no penalties were incurred.
Private placement closed on March 10, 2006 (the "Subsequent Common Stock Private
Placement")
On March 10, 2006, the Company entered into a securities purchase agreement,
referred to as the Subsequent Common Stock Securities Purchase Agreement, with
various investors, referred to 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,
the Company 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, The Company
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.
-31-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
Unaudited
- --------------------------------------------------------------------------------
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 18 - Subsequent Event
On August 2, 2007, the Company and the RimAsia Capital Partnes L.P ("RACP")
entered into a letter of intent to restructure the $11.5 million financing loan
discussed in Note 14.
If executed as drafted, the Company must first acquire the 49% minority interest
in Erye, so that Erye becomes wholly owed by the Company. Then, the Company must
authorize a new class of preferred stock. Then, Rim Asia will convert the $11.5
million loan into senior redeemable convertible preferred stock with a
conversion price of $1.02. Additionally, the Company will reduce the exercise
price on the warrants issued with the original $11.5 million loan, from $1.375
to $1.26 and the term of the warrants is extended from 3 years to 4.5 years from
the date of the conversion of the principal of the loan into preferred stock.
The preferred stock has 9% cumulative compounding dividends is not redeemable
for the first two years and may be redeemable with a scheduled early redemption
penalty.
The parties also worked out arrangement to continue the cooperation in the
litigation against Mr. Li Xiaobo and related parties ("Defendants"). To date,
approximately $10 million of assets of the Defendants have been seized per the
court order in Hong Kong and the Defendants lost their opposition actions
against the seizure order.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 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.
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.
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ACCOUNTS RECEIVABLE
Accounts receivable are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all outstanding
amounts on a monthly basis. Management judgment and estimates are made in
connection with establishing the allowance for doubtful accounts. Specifically,
we analyze the aging of accounts receivable balances, historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms. Significant changes in customer
concentration or payment terms, deterioration of customer credit-worthiness or
weakening in economic trends could have a significant impact on the
collectibility of receivables and our operating results. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
reserve for bad debts increased to $934,516 at June 30, 2007 from $911,064 at
December 31, 2006. This increase represents 0.1% of total revenues and is mainly
resulted from increase in the aged balances due to the slower collection during
the Chinese holiday season in February and March. As of June 30, 2007, accounts
receivable, net of allowance for doubtful accounts, amounted to $6,860,309. The
days sales outstanding were 75 days for three months ended June 30, 2007,
compared to 71 days for the same period in 2006. The increase in the collection
period was mainly resulted from the slow collection of AR from Keyuan's
customers due to the enhanced government regulations on R&D activities. Also, in
2007, we approved to extend payment term for several major customers, which
slightly slowed down the collection of accounts receivable.
The following table provides the roll forward of the allowance of doubtful
accounts:
Allowance for doubtful accounts
As of December 31, 2006 $911,064
Provision for the six month period ended
June, 2007 23,452
--------
As of June 30, 2007 $934,516
========
The following list the aging of our accounts receivable as of June 30, 2007:
3 months 6 months 9 months Over 9 months Over 1 year
Total Amount % Amount % Amount % Amount % Amount %
- ---------------- --------- ------ --------- ------ -------- ----- --------- ------ -------- ------
$7,794,825 4,195,832 53.83% 854,290 10.96% 946,471 12.14% 1,798,232 23.07%
We prepare the above consolidated aging based on the aging for each subsidiary
in above format. As each subsidiary of the Company conducts business with
different customers with different size and creditworthiness, and each
subsidiary has different impact on and different relationship with their
customers, we determine the allowance on an individual basis. Basically, we
assign various rates to each of the aging group of AR and add up the products
for respective aging group to the total allowance for doubtful accounts.
Different subsidiaries have different rates for even the same aging category. In
addition to that, we also consider the changes in specific financial condition
of their customers if situation or events indicate that some accounts may pose
unusual risk compared to others, additional allowance may be provided for those
accounts.
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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 JUNE 30, 2007 AS COMPARED TO THREE
MONTHS ENDED JUNE 30, 2006
We acquired Shenyang Enshi Pharmaceutical Limited Company ("Enshi") on
June 6, 2006; therefore, operating results of Enshi for the three months ended
June 30, 2006 are only partially reflected in our results for the three months
ended June 30, 2006. On August 29, 2006, the Company entered to an agreement
with the minority shareholders of Hengyi to divest Hengyi and its subsidiary,
Suzhou Sintofarm, in which Hengyi has 50% controlling ownership interest from
its subsidiary portfolio. Therefore, the results of Hengyi's operations and cash
flows for the three months ended June 30, 2006 were reported as discontinued
operations in the consolidated financial statements.
REVENUE.
Revenue for the three months ended June 30, 2007 was $8,891,559 while the
revenue for the three months ended June 30, 2006 was $6,965,818 representing an
approximately 28% increase. The increase is mainly attributed to the Company's
subsidiary, Suzhou Erye Pharmaceutical Limited Company ("Erye") significant
revenue growth. Erye's revenue increased approximately 31% in the second quarter
of 2007 comparing with its revenue in second quarter of 2006. The current
industry environment provides a great opportunity for Erye to grow its core
business. The government issued a new medical insurance policy called
"Cooperative Medicare" which tries to cover all the farmers in the countryside
in China. The government has been putting in billions of dollars to implement
this new policy. Erye's products are mainly focused on middle end to low end
markets and therefore, fit the new government policy. The management believes
that the high growth of Erye's core business will continue in the future. In
addition, revenue of Enshi which was acquired on June 6, 2006 was only partially
reflected in our results for the three months ended June 30, 2006.
COST OF GOODS SOLD
Cost of goods sold for the three months ended June 30, 2007 was $6,656,183
as compared to $5,077,169 for the three months ended June 30, 2006. Cost of
goods sold as a percentage of sales revenues was approximately 75% for the three
months ended June 30, 2007 as compared to approximately 74% for the three months
ended June 30, 2006. The increase in cost of goods sold is mainly attributed to
the cost of good sold of Erye which had a high growth in its sales in second
quarter. In addition, the cost of goods of Enshi which was acquired on June 6,
2006 and therefore was only partially reflected in our results for the three
months ended June 30, 2006. Cost of goods sold as percentage of sales revenues
remains consistent.
GROSS PROFIT.
Gross profit in the three months ended June 30, 2007 amounted at
$2,235,376, as compared to $1,888,649 for the three months ended June 30, 2006,
representing approximately 18% increase. The gross profit margin for the three
months ended June 30, 2007 was 25% as compared to approximately 27% for the
three months ended June 30, 2006. Erye's lower gross margin contributed mainly
to the company's decrease in gross margin.
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OPERATING EXPENSES
Operating expenses for the three months ended June 30, 2007 was $1,585,994
as compared to $1,028,880 for the three months ended June 30, 2006, representing
54% increase. The increase is attributed mainly to high operational expenses of
Enshi which financials were only partially reflected for the three months ended
June 30, 2006
RESEARCH AND DEVELOPMENT
Research and development costs for the three months ended June 30 ,2007
were $66,748 as compared to $240,747 for the three months ended June 30, 2006,
This decrease was primarily attributable to a slowing of research and
development activity as the Chinese SFDA drastically reduced its level of
regulatory approval activity. This change at the Chinese SFDA occurred because
of wide-ranging scandals leading to the departure of many high and mid-level
SFDA officials.
INCOME FROM OPERATIONS
Income from operations in the three months ended June 30, 2007 amounted at
$649,382, as compared to $859,769 for the three months ended June 30, 2006,
representing approximately 25% decrease. The decrease is mainly attributable to
high operational expenses and poor operational performance of Enshi which
financials were only partially reflected for the three months ended June 30,
2006.
NET INCOME
Net loss for the three months ended June 30, 2007 was $29,289 as compared
to net income of $390,600 for the three months ended June 30, 2006, representing
108% decrease. The decrease is attributable to higher payment and accrued
interest expenses as a result of the acquisition financing loan due to RimAsia
Capital Partners L.P. ("RimAsia") for the Enshi acquisition. In addition, Enshi
had a poor performance in generating profit and suffered a net loss of
approximately $94,100 in the three months ended June 30, 2007. A detailed
description of the factual circumstances surrounding the operation of Enshi
since its acquisition and the related litigation against its former shareholder
is provided further in this discussion under Liquidity and Capital Resources and
also in part II of this quarterly report.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2007 was $344,548 as
compared to $192,584 for the three months ended June 30, 2006, representing 128%
increase. This significant increase is mainly attributed to the large interest
payment on the RimAsia's acquisition loan for the Enshi acquisition.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2007 AS COMPARED TO SIX MONTHS
ENDED JUNE 30, 2006
We acquired Enshi on June 6, 2006; therefore, operating results of Enshi
for the three months ended June 30, 2007 are only partially reflected in our
financial results for the six months ended June 30, 2006 On August 29, 2006, the
Company entered to an agreement with the minority shareholders of Hengyi to
divest Hengyi and its subsidiary, Suzhou Sintofarm, in which Hengyi has 50%
controlling ownership interest from its subsidiary portfolio. Therefore, the
results of Hengyi's operations and cash flows for the three months ended June
30, 2006 were reported as discontinued operations in the consolidated financial
statements.
-36-
REVENUE.
Revenue for the six months ended June 30, 2007 was $16,423,681 while the
revenue for the six months ended June 30, 2006 was $12,515,741, representing an
approximately 31% increase. The increase is mainly attributed to Erye's
significant revenue growth. Erye's revenue increase approximately 19% in the
first half year of 2007 comparing with its revenue in the first half year of
2006. The current industry environment provides a great opportunity for Erye to
grow its core business. The government issued a new medical insurance policy
called "Cooperative Medicare" which try to cover all the farmers in the
countryside in China. The government has been putting in billions of dollars
into this new policy. Erye's products are mainly focused on middle to low end
markets and therefore, fit the new government policy. The management believe
that the high growth of Erye's core business will continue in the future. In
addition, revenue of Enshi which was acquired on June 6, 2006 was only partially
reflected in our results for the six months ended June 30, 2006.
COST OF GOODS SOLD
Cost of goods sold for the six months ended June 30, 2007 was $12,179,463
as compared to $9,193,323 for the six months ended June 30, 2006. Cost of goods
sold as a percentage of sales revenues was approximately 74% for the six months
ended June 30, 2007 as compared to approximately 73% for the six months ended
June 30, 2006. The increase in cost of goods sold is mainly attributed to the
cost of good sold of Erye which had a high growth in its sales in the first half
year of 2007. In addition, the cost of goods of Enshi which was acquired on June
6, 2006 and therefore was only partially reflected in our results for the three
months ended June 30, 2006. Cost of goods sold as percentage of sales revenues
remains consistently.
GROSS PROFIT.
Gross profit in the six months ended June 30, 2007 amounted at $4,244,218,
as compared to $3,322,418 for the six months ended June 30, 2006, representing
approximately 40% increase. The gross profit margin for the six months ended
June 30, 2007 was 26% as compared to approximately 27% for the six months ended
June 30, 2006. Erye is mainly focusing on the middle and its lower end markets
with slightly lower selling prices in response to the newly issued medical
insurance policy "Cooperative Medicare". Therefore Erye's lower gross margin
mainly contributed to the slight decrease in gross profits.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2007 was $2,954,472
as compared to $2,000,927 for the six months ended June 30, 2006, representing
48% increase. The increase is attributed mainly to higher operational expenses
of Enshi which financials were only partially reflected for the three months
ended June 30, 2006, as well as higher professional service fees incurred at the
parent company level, many of which were one time transactional expenses and
litigation expense against Mr. Li Xiaobo, former shareholders of Enshi, and
related parties of him.
RESEARCH AND DEVELOPMENT
Research and development costs for the six months ended June 30 ,2007 was
$109,911 as compared to $498,822 for the six months ended June 30, 2006,
representing a 78% decrease. This decrease was primarily attributable to a
slowing of research and development activity as the Chinese SFDA drastically
reduced its level of regulatory approval activity. This change at the Chinese
SFDA occurred because of wide-ranging scandals leading to the departure of many
high and mid-level SFDA officials.
INCOME FROM OPERATIONS
Income from operations in the six months ended June 30, 2007 amounted at
$1,289,746, as compared to $1,321,491 for the six months ended June 30, 2006,
representing approximately 2% decrease. The decrease is mainly attributable to
high operational expenses and poor operational performance of Enshi which
financials were only partially reflected for the three months ended June 30,
2006.
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NET INCOME
Net loss for the six months ended June 30, 2007 was $117,557 as compared
to net income of $584,592 for the six months ended June 30, 2006,representing
120% decrease. The decrease is attributable to higher payment and accrued
interest expenses as a result of the acquisition financing loan due to RimAsia
for the Enshi acquisition. In addition, Enshi had a poor performance in
generating profit and suffered a net loss of approximately $45,970 in the six
months ended June 30, 2007. A detailed description of the factual circumstances
surrounding the operation of Enshi since its acquisition and the related
litigation against its former shareholder is provided further in this discussion
under Liquidity and Capital Resources and also in part II of this quarterly
report
INTEREST EXPENSE
Interest expense for the six months ended June 30, 2007 was $712,661 as
compared to $259,765 for the six months ended June 30, 2006, representing 174%
increase. This significant increase is mainly attributed to the large interest
payment on RimAsia's acquisition loan for the Enshi acquisition.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2007, total current assets were $22,029,630 and total
current liabilities were $31,099,332. Cash and cash equivalents on June 30, 2007
were $1,230,258, a decrease of $1,886,098 from the $2,958,556 reported on
December 31, 2006.
For the six months ended June 30, 2007, net cash used in operating activities
was $765,081, net cash used in investing activities was $361,130 net cash used
in financing activities was $378,985. For the six months ended June 30, 2006,
net cash used in operating activities was $1,660,816, net cash used in investing
activities was $1,955,231, net cash provided in financing activities was
$5,680,622. Cash used by operating activities in the six months ended June 30,
2007 results primarily from account receivables and other receivables due from
Enshi. Cash provided by investing activities during the six months ended June 30
2007 results mainly from purchase of property, plant and equipment and payments
to long term loans receivable. Cash used by financing activities in the six
months ended June 30, 2007 results primarily from payments on long term debts.
The Enshi acquisition has created a drag on the Company's overall operational
results and expansion plan due to Enshi below-expectation results and the
associated large acquisition financing loan. The Company has been investing
significant time and significant efforts in order to stabilize the operations of
Enshi. Upon the acquisition of Enshi the Company has identified major breaches
and fraud by the previous owner and controlling shareholders of Enshi, Mr. Li
Xiaobo and his related parties ("Defendants") in the representations and
warranties provided by them to the Company and the Defendants' refusal to honor
their indemnification obligations to the Company. The Company's subsidiary RACP
filed a lawsuit against the Defendants alleging fraud and for rescission and
damages. Currently, RimAsia, which provided the Company with the Enshi
acquisition related financing loan has taken custody of RACP, the holding
company of Enshi with expectation to return Enshi to the Defendants.
Other than Enshi, the other main manufacturing unit, Erye, demonstrated an
impressive growth of more than 38% in net income in the first half year of 2007,
along the line of our expectation. The Enshi acquisition may slow down our
original expansion plan in terms of management resources devoted to its
operations and integration but we are still actively looking for growth and
expansion opportunities and still believe in the overall strategy of internal
growth and acquisitions. We expect that the recent changes in our management,
whereas Erye's top management, Ms. ZHANG Jian and Mr. SHI Mingsheng joined our
board of directors and are now playing an active role in our management, will
improve our overall operations, giving play to their industrial and
manufacturing and marketing expertise.
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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 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 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 filed a
registration statement on form SB-2 covering the shares issued and issuable on
April 30, 2006 and this registration statement has became effective on May 11,
2006 and therefore no penalty needed to be paid.
Due to the Enshi acquisition financing, the Company is servicing a loan of
$11,500,000 in connection with the acquisition of RACP Pharmaceuticals as
presented in Note 14 of our notes to consolidated financial statements, Business
Combination. Interest on the loan will be paid semi-annually at an annual rate
of 11%. As of June 30, 2007, the balance of the debt was $11,500,000.
After a review of the covenants in connection with the above-mentioned loan, the
Company determined that it may be in violation of certain of the covenants due
to the situation at Enshi. Therefore, the $11.5 million loan is fully classified
as a current liability.
The Company has entered into a letter of intent with RimAsia and a certain
representative of the shareholders of Erye, on August 2, 2007 as a follow-up to
the letter of intent signed on July 14, 2007, to provide for more detailed terms
for reorganizing the outstanding acquisition financing loan. Detailed
description of the letter of intent can be found under Part II, Item 5 of this
quarterly report.
In addition, the board of directors has approved a loan of RMB4,000,000 from
Erye and Erye affiliate to finance the operations of Enshi using the Company's
51% ownership interest as collateral. Erye's assistance and expertise are
instrumental in improving the performance of Enshi.
Going forward, our primary requirements for cash consist of: (1) Stabilize and
streamline the Enshi operation;(2) 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 (3) Continued R&D for more selected
new drug projects (4) 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.
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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. As of June 30,
2007, the value of the Renminbi to the U.S. dollar was translated at 7.73 RMB to
$1.00 USD.
ITEM 3. CONTROL AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - We maintain a system of
disclosure controls and procedures that are designed for the purposes of
ensuring that information required to be disclosed in our 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 second
quarter of 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has commenced legal proceeding for damages of $10,000,000
against Mr. Li Xiaobo ("Mr. Li") the previous owner and controlling shareholder
of Enshi and his related parties ("Defendants") for breach of representations
and warranties and fraud and frozen approximately $10,000,000 worth of assets
per the court order in Hong Kong and the Defendants lost their opposition
actions against the seizure order. The Company reasonably expects to prevail in
the lawsuit against the Defendants. The Company reserves the right to take
further actions if necessary to seek additional damages and compensation for
such serious breach of representations and warranties and fraud and will make
appropriate disclosures pending the legal proceedings. In April 2007, the
Company lost an action in a court in Shenyang, China to offset claims against
Mr. Li against Mr. Li's working capital loan to Enshi. The court decided to view
each action separately on its own merit. The Company paid the amount of $560,735
due to Liao Ning Xie He and $86,765 due to Mr. Li. The Company reserves the
right to take additional actions against Mr. Li and will continue its
proceedings in other courts outside as well as in China.
ITEM 5. OTHER INFORMATION
The Company entered into a letter of intent on August 2, 2007 (the "Second LOI")
with RimAsia and its currently 51% owned subsidiary Erye, as a follow-up to a
preliminary letter of intent signed on July 14, 2007 (the "Initial LOI"), to
reflect, a) the more detailed terms for restructuring the outstanding
acquisition loan (the "Loan") from RimAsia to RACP Pharmaceutical Holdings
Limited ("RACP"), the borrower under the Loan and previously an indirect wholly
owned subsidiary of the Company, which Loan was used for funding the original
acquisition by RACP of Enshi in June of 2006 and was later assumed by the
Company, and b) the proposed acquisition of a 49% ownership interest of Erye not
already owned by the Company (the "Restructuring").
In the Second LOI, the parties also agreed (the terms of which are subject to
final negotiation and agreement) to continue the cooperation in the litigation
("Litigation") by RACP as the plaintiff against the Defendants, as well as how
to apply the Litigation judgment proceeds (the "Judgment Proceeds") in the event
the Litigation is successful against the Defendants.
Prior to the execution of the initial LOI, RimAsia served a notice of
acceleration against the Company on July 10, 2007 in relation to the Loan when
the Company failed to make an interest payment due on June 29, 2007. Such
acceleration notice became effective as of July 12, 2007, and was subsequently
suspended pursuant to a suspension agreement signed on July 16, 2007 based on
the Initial LOI, reflecting the mutual willingness of the parties to enter into
negotiation regarding the Restructuring.
On August 10, 1007, the Company acknowledged and consented to the prior seizure
by RimAsia of all the outstanding shares of RACP previously pledged as
collateral for the Loan and the registration of such shares in the name of RACP
Consol Holdings Limited ("RACPCH"), a wholly owned special purpose vehicle of
RimAsia, as part of the initial Loan acceleration action (subsequently stayed),
to hold such pledged shares of RACP in custody pending the final outcome of the
Restructuring and the Litigation.
The Litigation is based on a main claim for breach of representations and
warranties and fraud in the previous Enshi acquisition transaction, the refund
of the original purchase price of Enshi paid by the Company, the payment of
RACP's costs incurred in connection with the Litigation, and the payment of
certain damages and rescission.
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The parties agreed in the Second LOI in principle regarding the allocation of
the Judgment Proceeds arising from the Litigation, subject to final negotiation
and agreement on the terms of such allocation under certain circumstances. RACP
as the plaintiff in the Litigation thus far has been successful in seizing and
freezing certain real estate holdings, bank and securities accounts of Mr. Li
and the other Defendants in Canada, the US and Hong Kong pursuant to injunctions
issued in such jurisdictions, and it is currently expected that such efforts
will be continued. The Defendants to date have not been successful in their
oppositions against the seizure orders. The main rescission action and claim
against Mr. Li and the other claims against the Defendants, in the absence of
any out of court settlements, are expected to go to trial in the latter part of
2007 or the early part of 2008. On the basis of the progress achieved to date
against the Defendants, both the Company and RACP intend to vigorously continue
the Litigation against the Defendants.
In the proposed Restructuring, in addition to some of the principal terms
referred to above, it is currently envisaged that the other major elements
thereof will comprise the following:
a) The principal amount of the $11.5 million Loan is anticipated to be
converted in full into shares of senior redeemable convertible
preferred shares of the Company ("Preferred Shares") at an effective
conversion price between US$1.01 and US$1.02 per Preferred Share.
b) It is anticipated that the exercise price of US$1.375 for the 12
million existing warrants exercisable into the Company's common
stock previously issued to and currently held by RimAsia in
connection with the extension of the Loan financing ("Existing
Warrants") will be lowered and the exercise period extended. Under
certain circumstances, it is anticipated that RimAsia may also be
issued additional warrants.
c) The shareholders of Erye have agreed in principle to sell their
remaining 49% equity stake of Erye not already owned by the Company
into the Company to enable Erye to become a wholly-owned subsidiary
of the Company. The acquisition by the Company of such additional
Erye shares ("Erye Injection") is expected to be effected by the
issuance of 40 million new common shares, each at an issuance price
of US$0.50 per share, to the Erye shareholders.
d) It is anticipated that the Erye Injection will include the issuance
of a special preferred share of the Company to the selling Erye
shareholders that would confer on such shareholders a super voting
right of 30% on all matters subject to a vote of the shareholders of
the Company. The terms and conditions of such super voting preferred
share are to be further discussed and agreed by the parties.
The parties have agreed to target the execution of final definitive agreements
with respect to the Restructuring by August 31, 2007 (or such later date as may
be mutually agreed).
ITEM 6. EXHIBITS
The following exhibits are filed as part of this quarterly report on Form
10-QSB:
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Acting Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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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/ Chris Peng Mao
-------------------------------------------
Name: Chris Peng Mao
Title: Chief Executive Officer
Date: August 14, 2007
By: /s/ HUNAG Chentai
-------------------------------------------
Name: HUANG Chentai
Title: Chief Financial Officer
Date: August 14, 2007
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