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 September 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 September 30, 2007
- ----------------------------- ----------------------------
Common Stock, $0.01 par value 36,465,312
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 30
ITEM 3. CONTROL AND PROCEDURES 36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 37
ITEM 5. OTHER INFORMATION 37
ITEM 6. EXHIBITS 40
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 SEPTEMBER 30, 2007
ASSETS
------
SEPTEMBER 30,
2007
------------
CURRENT ASSETS: Unaudited
Cash $ 1,568,613
Accounts receivable, trade, net of allowance for
doubtful accounts of $693,460 5,363,179
Accounts receivable, related parties 43,562
Other receivables 2,379,974
Other receivables - related parties 1,732,616
Advances to suppliers 731,831
Prepaid expenses 38,433
Inventories 9,120,983
Loan to shareholders 44,022
------------
Total current assets 21,023,213
------------
PLANT AND EQUIPMENT, net 4,196,782
------------
OTHER ASSETS:
Intangible asset, net 7,141,808
Long term notes receivable 664,533
Long term other receivables - related parties 554,344
Restricted cash 836,760
------------
Total other assets 9,197,445
------------
Total assets $ 34,417,440
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 6,464,318
Short-term loans 2,307,820
Long term debt - current maturities 11,500,000
Other payables - related parties 950,896
Customer deposits 3,666,876
Notes payable 2,121,060
Taxes payable 1,310,355
Other accrued liabilities 2,400,745
------------
Total current liabilities 30,722,070
LONG TERM LIABILITIES:
Other long term liabilities 63,356
Total liabilities 30,785,426
------------
COMMITMENTS AND CONTINGENCIES --
MINORITY INTEREST 5,322,534
------------
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 (36,750)
Retained earnings (deficit) (18,057,172)
Statutory reserves 2,793,402
Accumulated other comprehensive income 399,892
------------
Total shareholders' equity (1,690,520)
------------
Total liabilities and shareholders' equity $ 34,417,440
============
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 NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
---------------------------- --------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
Restated Restated
------------ ------------ ------------ ------------
REVENUES $ 8,586,051 $ 5,207,169 $ 22,502,081 $ 16,810,519
COST OF GOODS SOLD 5,968,079 3,913,156 16,532,703 12,631,766
------------ ------------ ------------ ------------
GROSS PROFIT 2,617,972 1,294,013 5,969,378 4,178,753
------------ ------------ ------------ ------------
OPERATING EXPENSES
Research and development 315,335 5,579 329,603 504,401
Selling, general and administrative 2,167,721 802,050 4,217,023 2,229,367
------------ ------------ ------------ ------------
Total Operating Expenses 2,483,056 807,629 4,546,626 2,733,768
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 134,916 486,384 1,422,752 1,444,985
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income (expense), net (410,518) (202,906) (1,042,904) (411,259)
Other income (expense),net (158,562) (529,837) 10,389 37,465
------------ ------------ ------------ ------------
Total Other Income (expense), net (569,080) (732,743) (1,032,515) (373,794)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST (434,164) (246,359) 390,237 1,071,191
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST (434,164) (246,359) 390,237 1,071,191
MINORITY INTEREST 387,374 295,384 1,307,259 954,403
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (821,538) (541,743) (917,022) 116,788
LOSS FROM DISCONTINUED OPERATIONS, net of tax
Income (loss) from discountinued operations,
net of tax effect -- 1,030,004 (22,074) (1,419,897)
Loss on disposal of discountined operation,
net of tax effect (10,788,868) (595,439) (10,788,868) (595,439)
------------ ------------ ------------ ------------
Net income (loss) on discountined operations (10,788,868) 434,565 (10,810,942) (2,015,336)
------------ ------------ ------------ ------------
NET LOSS (11,610,406) (107,178) (11,727,964) (1,898,548)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment (821,955) (145,322) (467,637) 628,037
------------ ------------ ------------ ------------
COMPREHENSIVE (LOSS) INCOME $(12,432,361) $ (252,500) $(12,195,601) $ (1,270,511)
============ ============ ============ ============
INCOME (LOSS) PER SHARE OF COMMON STOCK
BASIC AND DILUTED
CONTINUING OPERATIONS $ (0.02) $ (0.02) $ (0.03) $ --
DISCONTINUED OPERATIONS (0.30) 0.01 (0.30) (0.06)
------------ ------------ ------------ ------------
Total $ (0.32) $ (0.01) $ (0.33) $ (0.06)
============ ============ ============ ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING -
BASIC AND DILUTED 36,465,312 34,902,548 36,300,869 34,902,548
============ ============ ============ ============
The accompanying notes are an integral part of this statement.
2
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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
Common shares returned from Henyi due to diverstiture (1,200,000) (12,000) (520,026)
Assumed warrants to issue common stock 2,640,000
Net loss, restated
Statutory reserves
Foreign currency translation adjustments
------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 2006, Unaudited, restated 930,000 $ 9,300 36,141,676 $ 361,417 $ 13,050,565
Common shares issued for service 49,805 498 52,002
Deferred compensation
Common shares cancelled (604,741) (6,047) 6,047
Preferred stock dividends (48,703)
Net loss, restated
Statutory reserves
Foreign currency translation adjustments
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2006, restated 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, September 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) $ 1,074,583 $ 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
Common shares returned from Henyi due to diverstiture
Assumed warrants to issue common stock
Net loss, restated (1,898,548)
Statutory reserves (2,535,524) 2,535,524
Foreign currency translation adjustments
---------- --------- ------------ ------------
BALANCE, September 30, 2006, Unaudited, restated $ (252,471) $ (24,000) $ (3,359,489) $ 2,980,147
Common shares issued for service
Deferred compensation 6,000
Common shares cancelled
Preferred stock dividends
Net loss, restated (3,156,464)
Statutory reserves 455,492 (455,492)
Foreign currency translation adjustments
---------- --------- ------------ ------------
BALANCE, December 31, 2006, restated $ (252,471) $ (18,000) $ (6,060,461) $ 2,524,655
Common shares issued for preferred stock conversion
Common shares issued for service (18,750)
Net loss (11,727,964)
Statutory reserves (268,747) 268,747
Foreign currency translation adjustments
---------- --------- ------------ ------------
BALANCE, September 30, 2007, Unaudited $ (252,471) $ (36,750) $(18,057,172) $ 2,793,402
========== ========= ============ ============
Other
Comprehensive
Income (Loss) Totals
------------- ------------
BALANCE, December 31, 2005 $ 156,089 $ 5,268,723
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
Common shares returned from Henyi due to diverstiture (532,026)
Assumed warrants to issue common stock 2,640,000
Net loss, restated (1,898,548)
Statutory reserves --
Foreign currency translation adjustments 628,037 628,037
------------ ------------
BALANCE, September 30, 2006, Unaudited, restated $ 784,126 $ 13,549,595
Common shares issued for service 52,500
Deferred compensation 6,000
Common shares cancelled --
Preferred stock dividends (48,703)
Net loss, restated (3,156,464)
Statutory reserves --
Foreign currency translation adjustments 47,560 47,560
------------ ------------
BALANCE, December 31, 2006, restated $ 831,686 $ 10,450,488
Common shares issued for preferred stock conversion --
Common shares issued for service 18,750
Net loss (11,727,964)
Statutory reserves --
Foreign currency translation adjustments (431,794) (431,794)
------------ ------------
BALANCE, September 30, 2007, Unaudited $ 399,892 $ (1,690,520)
============ ============
The accompanying notes are an integral part of this statement.
3
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
2007 2006
------------ ------------
Unaudited Unaudited
------------ ------------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: Restated
Net income (loss) $(11,727,964) $ (1,898,548)
Net loss (income) from discontinued operations 10,810,942 2,015,336
------------ ------------
Net income (loss) from continuing operations (917,022) 116,788
Adjustments to reconcile net income (loss) from continuing
operations to cash provided by (used in) continuing
operating activities:
Shares issued for service 18,750 5,000
Depreciation and amortization 440,688 562,081
Bad debt expense 522,560 4,589
Minority interest 1,120,717 954,403
Change in operating assets and liabilities:
Accounts receivable, trade (1,742,677) (703,903)
Accounts receivable, related parties (42,661) (5,291)
Notes receivable -- (12,407)
Other receivables and prepayments (766,004) 2,601,691
Advances to suppliers (536,774) 743,692
Other assets -- 98,072
Inventories (2,764,315) (212,639)
Accounts payable 2,337,325 (141,411)
Accounts payable - related parties -- (181,213)
Other payables and accrued liabilities 1,367,241 (529,468)
Other payables - related parties (1,217,880) 1,204,960
Customer deposits 2,603,385 (108,957)
Taxes payable 79,693 (879,291)
------------ ------------
Net cash provided by continuing operating activities 503,026 3,516,696
------------ ------------
CASH FLOWS FROM CONTINUING OPERATIONS INVESTING ACTIVITIES:
Business acquisition - cash paid -- (930,000)
Cash acquired from business acquisition -- 415,361
Purchase of intangible asset -- (1,176,980)
Prepayment to purchase land use right (515,767) --
Other receivables - related parties 198,787 --
Purchase of equipment (209,265) (1,920,070)
Payment collected from long term loans receivables 169,067 --
Long term other receivables -- (799,920)
Payment collected from/advances to related parties 65,656 (1,950,189)
------------ ------------
Net cash used in continuing operations investing activities (291,522) (6,361,798)
------------ ------------
CASH FLOWS FROM CONTINUING OPERATIONS FINANCING ACTIVITIES:
Restricted cash 92,010 512,874
Dividend paid to Erye's former shareholder -- (187,470)
Proceeds from issuance of preferred stock -- 90,000
Proceeds from issuance of common stock -- 7,351,534
Payments on notes payable (378,856) --
Payment on short term convertible notes -- (425,000)
Payments on long term debts (102,855) (2,325,351)
Payment on short term debts- related parties -- (1,016,151)
------------ ------------
Net cash (used in) provided by continuing operations
financing activities (389,701) 4,000,436
Net (decrease) increase in cash from continuing operations (178,197) 1,155,334
------------ ------------
Cash provided by (used in) discontinued operating activities 2,218,568 (927,347)
Cash provided by discontinued operations investing activities 17,036,316 3,160,878
Cash used in discontinued operations financing activities (20,382,480) (2,268,872)
------------ ------------
Net cash (used in) discontinued operations (1,127,596) (35,341)
------------ ------------
EFFECT OF EXCHANGE RATE ON CASH (84,150) 292,367
------------ ------------
(DECREASE) INCREASE IN CASH (1,389,943) 1,412,360
CASH, beginning of period 2,958,556 1,026,606
------------ ------------
CASH, end of period $ 1,568,613 $ 2,438,966
============ ============
The accompanying notes are an integral part of this statement.
4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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, the Company 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 was 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, the Company signed a purchase agreement, which was amended on
August 3, 2005 under which, the Company 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 was $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 was to be
contributed to the acquired Erye for working capital and/or expansion purposes.
5
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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,
the Company 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. The Company is 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 September 30, 2007.
On May 16, 2006 the Company entered into a purchase agreement which became
effective at June 5, 2006, under which the Company 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.
In March 2007, management determined that approximately $2.6 million of Enshi's
trade receivables purchased are likely non-existent and therefore had no fair
value on the date of acquisition. (See Note 15 for discussion of legal action
pursued against the former owner and manager of Enshi.) In addition, due to the
violation of certain covenants of the $11.5 million debt assumed in connection
with the Enshi Acquisition, the debtor, RimAsia has taken over Enshi as
collateral to the debt. The Company wrote off the entire amount of the
investment in Enshi as a loss on discontinued operations in the third quarter of
2007. See Note 16 for more detail.
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 STATEMENTS
Due to the discovery of the non-existent trade accounts receivable of
approximately $2.6 million acquired in connection with the acquisition of Enshi,
the $2.6 million of the purchase price originally allocated to receivables was
re-allocated to buildings and land use rights in the December 31, 2006 financial
statements. However, the Company has determined that under SFAS 141, Business
Combinations, the subsequent discovery of the non-existent accounts receivable
should not have resulted in a reallocation of the purchase price. Therefore the
Company is restating the consolidated financial statements as of and for the
year ended December 31, 2006 to appropriately reflect these adjustments,
reducing the carrying value of acquired assets and recording $2.6 million in bad
debt expense.
6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
The effects of the restatement are as follows:
Consolidated Balance Sheet as of December 31, 2006
Previously
reported Adjustments Restated
----------- ----------- -----------
Total current asset $20,281,714 $ (625,000) $19,656,714
Plant and equipment, net 12,289,636 (1,183,130) 11,106,506
Intangible asset, net 12,617,822 (864,683) 11,753,139
----------- ----------- -----------
Total Asset 47,603,904 (2,672,813) 44,931,091
=========== =========== ===========
Total liabilities 30,465,329 -- 30,465,329
Minority interest 4,015,274 -- 4,015,274
Total shareholders' equity 13,123,301 (2,672,813) 10,450,488
----------- ----------- -----------
Total liabilities and shareholders'
equity $47,603,904 $(2,672,813) $44,931,091
=========== =========== ===========
Consolidated Statement of Operations and Other Comprehensive Income for year
ended December 31, 2006:
Previously
reported Adjustments Restated
------------ ------------ ------------
Total Revenue $ 25,980,820 $ -- $ 25,980,820
Cost of goods sold 18,834,077 -- 18,834,077
Operating expenses 7,003,566 2,636,970 9,640,536
Income taxes 122,967 -- 122,967
------------ ------------ ------------
Net loss from continuing operations (1,814,874) (2,636,970) (4,451,844)
Net loss from discontinued operation, net of tax (603,169) -- (603,169)
------------ ------------ ------------
Net loss $ (2,418,043) $ (2,636,970) $ (5,055,013)
============ ============ ============
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.
7
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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:
Entity Percentage of Ownership Location
- ---------------- ----------------------- ------------------------
CBH Parent Company United States of America
CBC 100% owned by CBH British Virgin Inland
Erye 51% owned by CBH P.R.C
Keyuan 90% owned by CBC P.R.C
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.
8
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 the Company
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.
Advertising costs
The Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the nine months
ended September 30, 2007 and 2006 were $61,918 and $11,802, respectively. For
the three months ended September 30, 2007 and 2006, advertising costs amounted
to $37,587 and $2,338, respectively.
Shipping and handling costs
Shipping and handling costs related to costs of goods sold are included in
selling, general and administrative costs which totaled $218,867 and $168,311
for the nine months ended September 30, 2007 and 2006, and $79,582 and $57,450
for the three months ended September 30, 2007 and 2006, respectively.
9
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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 September 30, 2007 amounted to $1,566,926 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 12.6 % and
31.9% of the Company's total sales for the nine months ended September 30, 2007
and 2006, respectively. For the three months ended September 30, 2007 and , five
major customers represent approximately 15.0% and 53.4%, respectively. Five
customers accounted for 18.0% of total accounts receivable as of September 30,
2007.
For the nine months ended September 30, 2007 and 2006, the Company purchases
approximately 52.9% and 53.4%, respectively, of their raw materials from five
major suppliers. For the three months ended September 30, 2007 and 2006, five
major customers represent approximately 54% and 26.1%, respectively. Five
suppliers accounted for 59.3% of total accounts payables at September 30, 2007.
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 nine months ended September 30, 2007 and , revenue from sale of product
was $22,502,081 and $20,297,538, respectively, made up of the following product
categories:
10
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
2007 2006
----------- -----------
(Unaudited) (Unaudited)
----------- -----------
Restated
- -----------
Revenue from continuing operations:
Intermediary pharmaceuticals products $ 6,568,968 $ 5,840,382
Prescription drugs 15,933,113 10,700,930
Services -- 269,207
----------- -----------
Total revenue from continuing operations $22,502,081 $16,810,519
=========== ===========
Revenue from discontinued operations
Over the counter drugs $ -- $ 3,487,019
=========== ===========
For the three months ended September 30, 2007 and 2006, revenue from sale of
product was $8,586,051 and $7,714,820, respectively, made up of the following
product categories.
2007 2006
---------- ----------
(Unaudited) (Unaudited)
---------- ----------
Restated
----------
Revenue from continuing operations:
Intermediary pharmaceuticals products $2,442,040 $1,808,583
Prescription drugs 6,144,011 3,398,586
---------- ----------
Total revenue from continuing operations $8,586,051 $5,207,169
========== ==========
Revenue from discontinued operations
Over the counter drugs $ -- $2,507,651
========== ==========
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 nine months ended September 30, 2007, revenue from sales of product,
sales of new drug formulas, and R&D service amounted to $22,502,081, $0, and $0,
respectively. For the nine months ended September 30, 2006 revenue from sales of
product, sales of new drug formulas, and R&D service was $20,028,331, $0, and $
269,207 respectively.
11
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
For the three months ended September 30, 2007 and 2006, revenue from sales of
product amounted to $8,586,051 and $7,714,820, respectively, and there was no
revenue from sales of new drug formulas and R&D service.
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.
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.
12
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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.
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 $399,892 and $831,686 at September 30, 2007 and December 31,
2006 respectively. Assets and liabilities at September 30, 2007 and were
translated at 7.50 and 7.80 RMB to $1.00 USD. The average translation rates
applied to income statement accounts and statement of cash flows for the nine
months ended September 30, 2007 and 2006 the were 7.66 and 8.01 RMB to $1.00
USD, and for the three months ended September 30, 2007 and 2006 were 7.55 and
7.96, 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.
13
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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 convertible preferred stock was also anti-dilutive because the Company
recorded net loss for the periods presented. The basic and diluted EPS were the
same. The number of shares used in computing earnings per share for the nine
months ended September 30, 2007 and 2006 was 36,300,869 and 34,902,548,
respectively. Basic and Diluted loss per share for the nine months ended
September 30, 2007 were $0.33. Basic and Diluted loss per share for the nine
months ended September 30, 2006 amounted to $0.06.
The number of shares used in computing earnings per share for the three months
ended September 30, 2007 and 2006 was 36,465,312 and 34,902,548, respectively.
Basic and Diluted loss per share for the three months ended September 30, 2007
were $0.32. Basic and Diluted loss per share for the three months ended
September 30, 2006 was $0.01.
Reclassifications
Certain prior period amounts have been reclassified to conform to current
period's presentation.
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. The Company presents 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 company's 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. The
Company 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.
14
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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.
Note 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and income taxes paid
o Interest expense paid amounted to $109,656 and $120,849 for the nine
months ended September 30, 2007 and 2006. For the three months ended
September 30, 2007 and 2006, amounts of interest expense payment were
$46,694 and $28,909, respectively.
o No amount was paid for income tax for the nine month and three month
periods ended September 30, 2007 and 2006.
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, the Company
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 $693,460 at September 30, 2007.
15
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
As of September 30, 2007, accounts receivable consisted of the following:
Accounts receivable $ 6,056,639
Allowance for doubtful accounts (693,460)
-----------
Accounts receivable, net $ 5,363,179
===========
Note 6 - INVENTORIES
Inventories consisted of the following at September 30, 2007:
Raw materials $3,083,949
Refinery materials 2,539,409
Packaging supplies 264,216
Sundry supplies 10,020
Work in process 410,954
Finished goods 2,812,435
----------
Total inventories $9,120,983
==========
Note 7 - PLANT AND EQUIPMENT
Plant and equipment consisted of the following as of September 30, 2007:
Plant $ 2,974,373
Office equipment 49,546
Machinery 6,171,162
Automobile 235,679
Construction in progress 77,292
-----------
Total plant and equipment 9,508,052
Less: accumulated depreciation (5,311,270)
-----------
Plant and equipment, net $ 4,196,782
===========
Depreciation expense for the nine months ended September 30, 2007 and were
$363,647 and $367,534, and for the three months were $121,216 and $137,109,
respectively.
Note 8- OTHER ASSETS
Intangible Assets
Intangible assets at September 30, 2007 included land use rights and drug
patents, and consist of the following: Land use rights:
Erye $ 5,824,718
Less: accumulated amortization (410,173)
-----------
5,414,545
-----------
Prepayment on land - Erye 1,727,263
Patent:
Approved drugs 140,470
Less: accumulated amortization (140,470)
-----------
--
-----------
Total intangible assets, net $ 7,141,808
===========
16
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
Amortization expense for the nine months ended September 30, 2007 and 2006 was
$77,041 and $194,547, and for the three months ended September 30, 2007 and
amounted to $49,247 and $145,325, 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
September 30, 2007:
Depositor Name of Bank Amount
- --------- ------------ ------
Erye Hua Xia Bank, Suzhou $ 476,580
Industrial and commercial bank, Suzhou 360,180
----------
Total $ 836,760
==========
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 September 30, 2007, the total
amount of the long term notes receivable was $664,533. 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 the well
financial conditions of the counter parties.
Note 9- RELATED PARTIES TRANSACTIONS
Accounts Receivables - Related Parties
Subsidiary Amount Due from Term Manner of settlement
- -------------------------- -------- -------------- ---------- ------------------------
Erye $ 43,562 Hainan Kaiye Short term To be received in cash
========
17
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
Other Receivables - Related Parties
Subsidiary Amount Due from Term Manner of settlement
- -------------------------- ----------- -------------- ---------- ------------------------
Erye $ 1,232,616 Hainan Kaiye Short term To be received in cash
CBH 500,000 Li Xiaobo Short term To be received in cash
-----------
$ 1,732,616
===========
Long Term Other Receivables - Related Parties
Subsidiary Amount Due from Term Manner of settlement
- -------------------------- ----------- -------------- ---------- ------------------------
CBH $ 554,344 Heng yi Short term To be received in cash
===========
Loan to Shareholder and officer
Subsidiary Amount Due from Term Manner of settlement
- -------------------------- ----------- -------------- ---------- ------------------------
Keyuan $ 44,022 Keyuan's Short term To be received in cash
=========== shareholder
Other Payables - Related Parties
Subsidiary Amount Due from Term Manner of settlement
- -------------------------- ----------- -------------- ---------- ------------------------
Erye 627,349 Erye Trading Short term To be paid in cash
Erye 235,015 Hainan Kaiye Short term To be paid in cash
CBH 87,922 Shareholders Short term To be paid in cash
Keyuan 610 Shareholder Short term To be paid in cash
-----------
Total $ 950,896
===========
Note 10 - NOTES PAYABLE
The Company's subsidiary Erye has $2,121,060 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.
18
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
Note 11- 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 September 30, 2007.
Year Amount
- ------------ -------------
2004 $ 60,750
2005 383,873
2006 2,080,032
2007 268,747
-------------
Total $ 2,793,402
=============
Note 12 - INCOME TAXES
Corporation Income Tax (CIT)
In accordance with the relevant tax laws and regulations of the People's
Republic of China, a company is entitled to a full exemption from CIT for the
first two years, and a 50% deduction in CIT for the next three years, commencing
from the first profitable year. Erye was granted income tax exemption for two
years commencing from January 1, 2006. The Company's income tax expense for the
nine months and the three months ended September 30, 2007 and 2006 was zero.
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.
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. Companies established before March
16, 2007 will continue to enjoy tax holiday treatment approved by local
government for a grace period of the next 5 years or until the tax holiday term
is completed, whichever is sooner.
19
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
The Company's Subsidiaries, Suzhou Erye and Nanjing Keyuan, were established
before March 16, 2007 and therefore is qualified to continue enjoying the
reduced tax rate as described above. Since the detailed guidelines of the new
tax law is not publicized yet, the Company has not determined what the new tax
rate will be applicable to the Company after the end of their respective tax
holiday terms.
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
September 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 nine months ended
September 30, 2007 and amounted to $913,740 and $650,592, respectively. The net
effect on earnings (loss) per share if the income tax had been applied would
increase loss per share for September 30, 2007 and 2006 by $0.03 and $0.02,
respectively.
The estimated tax savings due to the reduced tax rate for the three months ended
September 30, 2007 and 2006 amounted to $128,266 and $204,979, respectively. The
net effect on earnings (loss) per share if the income tax had been applied would
increase loss per share for and 2006 by $0.004 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 $3,591,543 and $2,949,533 for the
nine months ended and $2,865,957 and $2,269,420 for the nine months ended
September 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.
VAT on sales and VAT on purchases amounted to $1,280,388 and $1,157,650 for the
three months ended and $705,700 and $997,553 for the three months ended
September 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.
20
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
Note 13 - 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 September 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, , the $11.5 million loan is classified as a current liability at
September 30, 2007. In July 2007, Enshi had been taken over by RimAsia as
collateral for the loan.
The Company entered into an agreement on November 19, 2007 (the "Agreement")
with RimAsia and its currently 51% owned subsidiary Erye, under which the
principal amount of the $11.5 million Loan owed to RimAsia in connection with
the Enshi acquisitions plus unpaid interest of $1,008,534 (total of
$12,508,534)will be converted in full into 6,185,607 shares of senior redeemable
convertible preferred shares of the Company ("Preferred Shares") at an effective
conversion price between $1.01 and $1.02 per Preferred Share. Additionally, the
exercise price of $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 to $1.26 per share and the term of the Existing Warrants extended to
4.5 years from the closing date. This is conditioned on the Company signing a
letter of intent for acquisition of a new company (or for the injection of the
remaining 49% equity stake of Erye not already owned by the Company) before
January 15, 2008, having such acquisition closed before June 30, 2008.
Short Term Bank Loans
The Company has a total amount of $2,307,820 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 7.75%. Bank loans were
collateralized by the land use right and buildings of Erye.
Interest expense for the nine months ended September 30, 2007 and 2006 were
$1,058,005 and $529,075, respectively. Interest expense for the three months
ended September 30, 2007 and 2006 were $371,511 and $438,092, respectively.
21
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
Note 14 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space from third parties. Accordingly, for the nine
months ended September 30, 2007 and 2006, the Company recognized rent expense of
$42,124 and $32,741, respectively. For the three months ended September 30, 2007
and 2006, the Company recognized rent expense of $4,621 and $24,269,
respectively.
As of September 30, 2007, the Company has outstanding commitments in respect to
non-cancelable operating leases, which fall due as follows:
Amount
For the three months ended December 31, 2007 $ 2,743
For the year ended December 31, 2008 5,486
-----------
Total $ 8,229
===========
Legal Proceedings
In March 2007, the Company identified non-existent trade accounts receivable
acquired in the acquisition of Enshi. 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. The Hong Kong courts 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 these serious breaches 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 and 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.
Note 15 - BUSINESS COMBINATIONS
Enshi Acquisition
On May 16, 2006, the Company entered into a purchase agreement which became
effective at June 5, 2006, under which the Company 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 $12.55 million cash and $2.7 million
in warrants. The Company applied the Black-Scholes model method to determine the
value of the warrants.
22
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
The Company 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.
In March 2007, management determined that approximately $2.6 million of trade
receivables purchased were non-existent and therefore had no fair value on the
date of acquisition. (See Note 15 for discussion of legal action pursued against
the former owner and manager of Enshi.) Accordingly, $2.6 million of the
purchase price originally allocated to receivables was re-allocated to buildings
and land use rights on the financial statements as of and for the year ended
December 31, 2006. Subsequently, the Company has determined that under SFAS 141,
Business Combinations, the subsequent discovery of the non-existent accounts
receivable should not have resulted in a reallocation of the purchase price.
Therefore the Company is restating the consolidated financial statements as of
and for the year ended December 31, 2006 to appropriately reflect these
adjustments, reducing the carrying value of acquired assets and recording $2.6
million in bad debt expense. See effect of the restatement in Note 2.
Accordingly, assets acquired and debts assumed as of the acquisition date are
listed below:
Allocated
Item Fair Value
- ------------------------------- -----------
Current assets $ 6,840,881
Property, plant, and equipment 7,188,912
Intangible assets 5,253,973
-----------
Total assets 19,283,766
-----------
Total liabilities 4,593,766
-----------
Net assets $14,690,000
===========
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 Hengyi shareholders including 1,200,000 shares of the
Company's common stock and $620,000 in cash, will be returned to the Company in
three installments by March 2008. The 1,200,000 shares of common stock were
returned and cancelled in the third quarter of 2006. The Company does not have
any other obligations to Hengyi or its shareholders. Simultaneously the 75.8%
ownership interest of Hengyi was returned to Hengyi's shareholders or its
designated party. As a result, Hengyi ceased to be a subsidiary of the Company
23
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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 $603,169, for
the nine months ended September 30, 2006. The prior period results of operations
and cash flows for Hengyi have been reported within discontinued operations in
the accompanying statements.
Discontinued Operation - Shenyang Enshi
We acquired Shenyang Enshi Pharmaceutical Limited Company ("Enshi") on June 6,
2006; Subsequent to the acquisition of Enshi, the Company identified fraud by
the previous owner and controlling shareholder of Enshi, Mr. Li Xiaobo and his
related parties ("Defendants") and breaches in the representations and
warranties provided by him to the Company and the Defendants' including their
refusal to honor their indemnification obligations to the Company. The Company's
subsidiary RACP filed a lawsuit against the Defendants alleging fraud and had
requested rescission of the agreement and damages. Enshi's operations have been
interfered with and as a result the Company decided to suspend its operations in
the third quarter of 2007. In addition, Enshi has been taken over by RimAsia in
July 2007 since Enshi was pledged as collateral for the $11.5 million loan owed
to RimAsia in connection with the Enshi Acquisition,. As a result, Enshi is no
longer a subsidiary of the Company. Due to the uncertainty on the amount to be
recovered from the lawsuit, management has decided to write off the entire
carrying value of Enshi in third quarter of 2007 and has reported a loss on
discontinued operations in the consolidated financial statements. The recovered
value of Enshi after the completion of the litigation against Li Xiaobo, if any,
will be recognized as income.
24
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
Note 16 - SHAREHOLDERS' EQUITY
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 the Company 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.
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.
25
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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, the
Company 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, the Company are required to file with the SEC a
registration statement within 120 days, which registers all the shares to which
the Series A Preferred Convertible Stock may be converted and the shares
underlying the Preferred A Warrants issued or issuable to the Preferred A
Subscribers and WestPark in the private placements.
In addition, pursuant to Initial Preferred A Subscription Agreement and
Subsequent Preferred A Subscription Agreement the Company 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.
26
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
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/Warrants for Services
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.
27
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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,
the Company 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 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, the
Company 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.
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.
28
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
- --------------------------------------------------------------------------------
Unaudited
Note 17 - Subsequent Event
Research and Development Contract
On November 5, 2007, the Company entered into a new drug development contract
with a third party ("the Developer"). Pursuant to the contract, the Developer
will transfer a drug patent to the Company, and also is responsible for
obtaining the New Drug Certificate and the Drug Manufacturing Approval from the
PRC Drug Administration Authority no later than July 1, 2009. In exchange, the
Company will pay up to RMB12 million (approximately $1.6 million) to the
Developer. Of the total $1.6 million, approximately $933,800 and $266,800 will
need to be paid before December 31, 2007 and February 25, 2008, respectively,
and the final payment ranging from $0 to $400,200 (depending on the date of the
Manufacturing Approval) needs to be paid no later than 10 days after the grant
date of the Manufacturing Approval. Further, the two parties agreed that the
Company will pay sales commission to the Developer based on the sales volume of
the contracted new drug during a 10 year period after this drug is put into
production. If the PRC Drug Administration Authority denies the application of
the Drug Manufacturing, all payments made by the Company would be fully returned
to the Company by the Developer.
The Company entered into an agreement on November 19, 2007 (the
"Agreement") with RimAsia, as a follow-up to letters of intent signed on July
14, 2007 and August 2, 2007, under which the principal amount of the $11.5
million Loan owed to RimAsia in connection with the Enshi acquisitions plus
unpaid interest of $1,008,534 (total of $12,508,534)will be converted in full
into 6,185,607 shares of senior redeemable convertible preferred shares of the
Company ("Preferred Shares") at an conversion price of $2.0222 per Preferred
Share. Each Preferred Share may be converted into two shares of common stock,
Additionally, 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 to $1.26 per share and the term of the
Existing Warrants extended to 4.5 years from the closing date. This is
conditioned on the Company signing a letter of intent for acquisition of a new
company (or for the injection of the remaining 49% equity stake of Erye not
already owned by the Company) before January 15, 2008, having such acquisition
closed before June 30, 2008. The Company shall make further disclosure on the
Agreement within 4 business days from the date of this quarterly report on Form
10QSB. Amendment regarding this matter to related prior period financial
statements will also be filed in the near future.
29
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.
30
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
decreased to $693,460 at September 30, 2007 from $911,064 at December 31, 2006.
This decrease of $228,619 mainly resulted from the discontinuation of Enshi
operation. As of September 30, 2007, accounts receivable, net of allowance for
doubtful accounts, amounted to $5,363,179. The days sales outstanding were 73
days for three months ended September 30, 2007, compared to 66 days for the same
period in 2006. The increase in the collection period resulted mainly from the
slow collection of account receivables from our subsidiary Nanjing 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
slowed the collection of accounts receivable.
The following table provides the roll forward of the allowance of doubtful
accounts of the continuing operations:
As of December 31, 2006 $682,445
Translation difference for the Nine month period ended
September, 2007 11,015
--------
As of September 30, 2007 $693,460
========
The following list the aging of our accounts receivable as of September 30,
2007:
3 months 6 months 9 months Over 9 months Over 1 year
Total Amount % Amount % Amount % Amount % Amount %
- ----------- --------- ------- -------- ----- ---------- ------- ----------- ------- ----------- ---------
$6,056,639 4,246,841 70.12% 461,855 7.63% 208,748 3.44% 49,429 0.82% 1,089,766 17.99%
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.
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.
31
We acquired Shenyang Enshi Pharmaceutical Limited Company ("Enshi") on June
6, 2006; Upon the acquisition of Enshi the Company 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 him 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.
Enshi's operations have been interfered and as a result we decided to suspend
its operations. In addition, since Enshi was pledged as collateral for the $11.5
million debt owed to RimAsia Capital Partners, L.P. ("RimAsia") in connection
with the Enshi Acquisition, Enshi was taken over by RimAsia in July 2007. As a
result, Enshi is no longer a subsidiary of the Company. Due to the uncertainty
on the amount to be recovered from the lawsuit, our management decided to write
off the total carrying value of Enshi in the third quarter of 2007 and report it
as discontinued operations in the consolidated financial statements.
Accordingly, assets, liabilities and operating results that were attributed to
Enshi are presented as discontinued operations. The recovered value of Enshi, if
any, after the completion of the litigation against the Defendants will be
recognized as income. Under Statement of Financial Accounting Standards No. 144
("SFAS 144"), when a component of an entity, as defined in SFAS 144, has been
disposed of or is classified as held for sale, the results of its operations,
including the gain or loss on its disposal should be classified as discontinued
operations and the assets and liabilities of such component should be classified
as assets and liabilities attributed to discontinued operations, that is
provided that the operations, assets and liabilities and cash flows of the
component have been eliminated from the company's consolidated operations and
the Company will no longer have any significant continuing involvement in the
operations of the component. Therefore, operating results of Enshi are not
reflected in our results for the three and nine months ended September 30, 2007.
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 and nine months ended September 30, 2006 were reported as discontinued
operations in our consolidated financial statements.
The following discussion is based on results of operation from continuing
operations:
RESULTS OF OPERATIONS - THREE MONTHS ENDED September 30, 2007 AS COMPARED TO
THREE MONTHS ENDED September 30, 2006
REVENUE.
Revenue for the three months ended September 30, 2007 was $8,586,051 while
the revenue for the three months ended September 30, 2006 was $5,207,169
representing an approximately 65% increase. The increase is mainly attributed to
a significant increase of the Company's subsidiary, Suzhou Erye Pharmaceutical
Limited Company ("Erye"). Erye's revenue increased approximately 65% in the
third quarter of 2007 compared with its revenue in the third 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" in an effort to cover all the farmers in the countryside
in China. The government has been spending 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.
COST OF GOODS SOLD
Cost of goods sold for the three months ended September 30, 2007 was
$5,968,079 as compared to $3,913,156 for the three months ended September 30,
2006. Cost of goods sold as a percentage of sales revenues was approximately 69%
for the three months ended September 30, 2007 as compared to approximately 75%
for the three months ended September 30, 2006. The increase in amount of cost of
goods sold is mainly attributed to the cost of good sold of Erye which had a
high growth in its sales in third quarter.
32
GROSS PROFIT.
Gross profit in the three months ended September 30, 2007 amounted at
$2,617,972, as compared to $1,294,013 for the three months ended September 30,
2006, representing approximately 101% increase. The gross profit margin for the
three months ended September 30, 2007 was 30% as compared to approximately 25%
for the three months ended September 30, 2006. Erye's high gross margin
contributed mainly to the company's increase in gross margin.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2007 was
$2,483,056 as compared to $796,769 for the three months ended September 30,
2006, representing 212% increase. The increase is attributed mainly to high
operational expenses of Erye related to R&D.
RESEARCH AND DEVELOPMENT
Research and development costs for the three months ended September 30,
2007 were $315,335 as compared to $5,579 for the three months ended September
30, 2006, This increase was primarily attributable to Erye's research and
development activity in the third quarter of 2007.
INCOME FROM CONTINUING OPERATIONS
Loss from continuing operations in the three months ended September 30,
2007 amounted at $821,538, as compared to $541,743 for the three months ended
September 30, 2006, representing approximately 52% increase in loss. The
increase is mainly attributable to increase in Erye's R&D activities and
a write off of a receivable of $533,600 due from Enshi.
DISCONTINUED OPERATIONS
Net loss from discontinued operations for the three months ended September
30, 2007 was $10,788,868. This net loss is attributable to the total value of
Enshi's write off. Enshi's operations have been suspended and Enshi no longer a
subsidiary of the Company. Due to the uncertainty on the amount to be recovered
from the lawsuit, our management decided to write off the total carrying value
of Enshi in the third quarter of 2007 and report it as discontinued operations
in the consolidated financial statements. Accordingly, assets, liabilities and
operating results that were attributed to Enshi were presented as discontinued
operations. The recovered value of Enshi, if any, after the completion of the
litigation against the Defendants will be recognized as income. This is one time
write off. 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.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2007 AS COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2006
REVENUE.
Revenue for the nine months ended September 30, 2007 was $22,502,081 while
the revenue for the nine months ended September 30, 2006 was $16,810,519,
representing an approximately 34% increase. The increase is mainly attributed to
Erye's significant revenue growth. Erye's revenue increase approximately 19% in
the nine month period ended September 30,2007 compared with its revenue in the
same period 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" in an effort to cover all
the farmers in the countryside in China. The government has been spending
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.
33
COST OF GOODS SOLD
Cost of goods sold for the nine months ended September 30, 2007 was
$16,532,703 as compared to $12,631,766 for the nine months ended September 30,
2006. Cost of goods sold as a percentage of sales revenues was approximately 74%
for the nine months ended September 30, 2007 as compared to approximately 75%
for the nine months ended September 30, 2006. The increase in the amount of 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 nine months of 2007. Cost of goods sold as
percentage of sales revenues remains consistent.
GROSS PROFIT.
Gross profit in the nine months ended September 30, 2007 amounted to
$5,969,378, as compared to $4,178,753 for the nine months ended September 30,
2006, representing approximately 43% increase. The gross profit margin for the
nine months ended September 30, 2007 was 26% as compared to approximately 25%
for the nine months ended September 30, 2006. The increase in gross profit is
attributed primarily to Erye's high revenue growth.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2007 was
$4,546,626 as compared to $2,733,768 for the nine months ended September 30,
2006, representing 66% increase. The increase is attributed mainly to high
operational expenses of Erye and CBH related to R&D, consulting, legal, and
accounting fee.
RESEARCH AND DEVELOPMENT
Research and development costs for the nine months ended September 30 ,2007
was $329,603 as compared to $504,401 for the nine months ended September 30,
2006, representing a 35% 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 CONTINUING OPERATIONS
Loss from continuing operations in the nine months ended September 30, 2007
amounted at $917,022, as compared to an income of $116,788 for the nine months
ended September 30, 2006, representing approximately 885% decrease. The decrease
is mainly attributable to the interest expenses on the $11.5 million debt in
connection to the acquisition of Enshi.
DISCONTINUED OPERATIONS
Net loss from discontinued operations for the nine months ended September
30, 2007 was $10,810,942. This net loss is attributable to the total value of
Enshi's write off. Enshi's operations have been suspended and Enshi is no longer
a subsidiary of the Company. Due to the uncertainty on the amount to be
recovered from the lawsuit, our management decided to write off the total
carrying value of Enshi in third quarter of 2007 and report it as discontinued
operations in the consolidated financial statements. Accordingly, assets,
liabilities and operating results that were attributed to Enshi were presented
as discontinued operations. The recovered value of Enshi, if any, after the
completion of the litigation against the Defendants will be recognized as
income. This is one time write off. 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2007, total current assets were $21,023,213 and total
current liabilities were $30,722,070. Cash and cash equivalents on September 30,
2007 were $1,568,613, a decrease of $1,389,943 from the $2,958,556 reported on
December 31, 2006.
34
For the nine months ended September 30, 2007, net cash provided by operating
activities was $503,026, net cash used in investing activities was $291,522, and
net cash used in financing activities was $389,701. For the nine months ended
September 30, 2006, net cash provided by operating activities was $3,516,696,
net cash used in investing activities was $6,361,798, and net cash provided by
financing activities was $4,000,436. Cash used in investing activities during
the nine months ended September 30, 2007 resulted mainly from purchase of land
use right and property, plant and equipment. Cash used by financing activities
in the nine months ended September 30, 2007 results primarily from payments on
short term and 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. 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 him 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 ownership of RACP, the holding company of Enshi with expectation to return
Enshi to the Defendants. Enshi's operations have been interfered with and as a
result we have decided to suspend its operations. Enshi's operations have been
suspended and Enshi no longer a subsidiary of the Company. Due to the
uncertainty on the amount to be recovered from the lawsuit, our management
decided to write off the total carrying value of Enshi in the third quarter of
2007 and report it as discontinued operations in the consolidated financial
statements. Accordingly, assets, liabilities and operating results that were
attributed to Enshi were written off and presented as discontinued operations.
The recovered value of Enshi, if any, after the completion of the litigation
against the Defendants will be recognized as income.
Other than Enshi, the other main manufacturing unit, Erye, demonstrated
impressive growth of more than 68% in net income in the first nine months of
year 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.
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 13 of our notes to consolidated financial statements. Interest
on the loan will be paid semi-annually at an annual rate of 11%. As of September
30, 2007, the balance of the long-term 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 classified as a
current liability.
The Company has entered into a conditional loan conversion agreement with
RimAsia on November 19, 2007 as a follow-up to the letters of intent signed on
July 14, 2007 and August 2, 2007., Detailed description of the agreement can be
found under Part II, Item 5 of this quarterly report.
35
Going forward, our primary requirements for cash consist of: (1) Stabilize and
streamline the Erye operation;(2) acquire 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) continue 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 operating activities other than acquisition activities for next three
months. However, we anticipate that our current operating activities may not
enable us to meet the anticipated cash requirements for future acquisition
activities. External source of capital may be needed for our expansion. We are
exploring bank loans and private equity financing to finance such expenditures
and intend to raise equity through the capital market to allow us to accomplish
our future acquisition goals.
MANAGEMENT ASSUMPTIONS
Management anticipates, based on internal forecasts and assumptions
relating to our current operations, that existing cash and funds generated from
operations may not be sufficient to meet capital requirements for future
acquisition activities. We could therefore be required to seek additional
financing. There can be no assurance that we will be able to obtain such
additional financing at acceptable terms to us, or at all.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our operating subsidiaries are located in China. Their business activities
are mainly in China using Chinese Renminbi as the functional currency. The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in China's political and economic
conditions. As we rely entirely on revenues earned in China, any significant
revaluation of the Renminbi may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into Renminbi
for our operations, appreciation of the Renminbi against the U.S. dollar could
have a material adverse effect on our business, financial condition and results
of operations.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our common shares or for other
business purposes and the U.S. dollar appreciates against the Renminbi, the U.S.
dollar equivalent of the Renminbi we convert would be reduced. To date, however,
we have not engaged in transactions of either type.
Since 1994 China has pegged the value of the Renminbi to the U.S. dollar.
We do not believe that this policy has had a material effect on our business.
However, there have been indications that the Chinese government may be
reconsidering its monetary policy in light of the overall devaluation of the
U.S. dollar against the Euro and other currencies during the last two years. In
July 2005, the Chinese government revalued the Renminbi by 2.1% against the U.S.
dollar, moving from Renminbi 8.28 to Renminbi 8.11 per dollar. As of September
30, 2007, the value of the Renminbi to the U.S. dollar was translated at 7.50
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.
36
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our CEO and CFO,
of the effectiveness of our disclosure controls and procedures as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on that
evaluation, our CEO and CFO concluded that our disclosure controls and
procedures are effective.
Changes in Internal Control Over Financial Reporting - There has been no
change in our internal control over financial reporting during the third quarter
of 2007 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
37
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 an agreement on November 19, 2007 (the
"Agreement") with RimAsia and its currently 51% owned subsidiary Erye, under
which the principal amount of the $11.5 million Loan owed to RimAsia in
connection with the Enshi acquisitions plus unpaid interest of $1,008,534 (total
of $12,508,534)will be converted in full into 6,185,607 shares of senior
redeemable convertible preferred shares of the Company ("Preferred Shares") at
an effective conversion price Of $2.0222 per Preferred Share. Each preferred
Share may be converted into two shares of common stock. Additionally, the
exercise price of $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 to $1.26 per share and the term of the Existing Warrants extended to
4.5 years from the closing date. This is conditioned on the Company signing a
letter of intent for acquisition of a new company (or for the injection of the
remaining 49% equity stake of Erye not already owned by the Company) before
January 15, 2008, having such acquisition closed before June 30, 2008. The
Company shall make further disclosure on the Agreement within 4 business days
from the date of this quarterly report on Form 10QSB. Amendment regarding this
matter to related prior period financial statements will also be filed in the
near future.
38
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
39
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: November 19, 2007
By: /s/ HUNAG Chentai
-------------------------------------------
Name: HUANG Chentai
Title: Chief Financial Officer
Date: November 19, 2007
40