UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2008
OR
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 814-00063
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
---------------------------------------
(Exact Name of registrant as specified 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)
(86) 512 6855 0568
------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
of changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer|_| Smaller Reporting Company|X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of June 30, 2008, 36,490,312 shares of Common Stock, par value $0.01 per
share, were outstanding.
Table of Contents
Item No. Description Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 30
Item 4T. Controls and Procedures. 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 30
Item 1A Risk Factors. 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 31
Item 3. Defaults Upon Senior Securities. 31
Item 4. Submission of Matters to a Vote of Security Holders. 31
Item 5. Other Information. 31
Item 6. Exhibits. 31
SIGNATURES 32
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2008 AND DECEMBER 31, 2007
June 30, December 31,
2008 2007
------------ ------------
Unaudited
ASSETS
CURRENT ASSETS:
Cash $ 3,512,836 $ 669,699
Short term investment -- 1,096,800
Accounts receivable, trade, net of allowance for doubtful accounts of
$1,341,685 and $1,260,760 at June 30, 2008 and December 31, 2007,
respectively 5,459,455 3,551,483
Accounts receivable, related parties 146,303 41,932
Other receivables 115,730 863,627
Other receivables - related parties 1,064,360 819,621
Advances to suppliers 432,559 797,302
Prepaid expenses 417,383 363,819
Inventories 10,944,195 8,962,055
Loan to shareholders 48,147 45,243
------------ ------------
Total current assets 22,140,968 17,211,581
------------ ------------
PLANT AND EQUIPMENT, net 8,829,057 4,122,169
------------ ------------
OTHER ASSETS:
Intangible asset, net 7,617,664 7,398,189
Long term notes receivable 583,600 640,518
Long term other receivables - related parties 224,928 267,768
Restricted cash 1,187,883 518,589
Advance on patent and right purchase 1,021,300 959,700
Other assets 21,905 81,484
------------ ------------
Other assets 10,657,280 9,866,248
------------ ------------
Total assets $ 41,627,305 $ 31,199,998
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,250,074 $ 5,988,289
Short-term loans 2,159,320 2,371,830
Other payables 298,586 1,381,462
Other payables - related parties 704,383 689,338
Customer deposits 3,678,467 2,129,318
Notes payable 3,957,538 1,727,460
Taxes payable 2,523,126 1,488,964
Redeemable series B preferred stock 13,209,353 12,585,641
Other accrued liabilities 857,715 281,390
------------ ------------
Total current liabilities 34,638,562 28,643,692
LONG TERM LIABILITIES: 64,658 65,114
------------ ------------
Total liabilities 34,703,220 28,708,806
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
MINORITY INTEREST 7,718,079 5,508,061
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 50,000
and 50,000 shares Issued and outstanding at June 30, 2008 and December
31, 2007, respectively 500 500
Common stock, $0.01 par value, 200,000,000 shares authorized; 36,490,312
shares issued and outstanding at June 30, 2008 and December 31, 2007,
respectively 364,903 364,903
Paid-in capital 13,199,476 13,199,476
Capital receivable (252,471) (252,471)
Deferred compensation (2,625) (21,375)
Statutory reserves 1,417,795 976,439
Accumulated deficit (17,196,959) (18,059,232)
Accumulated other comprehensive income 1,675,387 774,891
------------ ------------
Total shareholders' equity (793,994) (3,016,869)
------------ ------------
Total liabilities and shareholders' equity $ 41,627,305 $ 31,199,998
============ ============
The accompanying notes are an integral part of this statement.
- 1 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND DECEMBER 31, 2007
UNAUDITED
Three months ended June 30, Six months ended June 30,
2008 2007 2008 2007
------------ ------------ ---------- ------------
Restated Restated
REVENUES $ 13,340,544 $ 7,754,670 24,313,785 $ 13,910,230
COST OF GOODS SOLD 9,215,170 5,850,627 16,926,332 10,535,729
------------ ------------ ---------- ------------
GROSS PROFIT 4,125,374 1,904,043 7,387,453 3,374,501
------------ ------------ ---------- ------------
OPERATING EXPENSES
Research and development 241,400 -- 259,347 43,163
Selling, general and administrative 1,224,364 1,145,801 2,299,161 2,049,301
------------ ------------ ---------- ------------
Total Operating Expenses 1,465,764 1,145,801 2,558,508 2,092,464
------------ ------------ ---------- ------------
INCOME FROM OPERATIONS 2,659,610 758,242 4,828,945 1,282,037
------------ ------------ ---------- ------------
OTHER INCOME (EXPENSE)
Interest income (expense), net (346,650) (338,587) (703,234) (686,072)
Other income (expense), net (29,727) 228,433 (29,727) 228,433
------------ ------------ ---------- ------------
Total other expense, net (376,377) (110,154) (732,961) (457,639)
------------ ------------ ---------- ------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 2,283,233 648,088 4,095,984 824,398
PROVISION FOR INCOME TAXES 331,204 5 630,613 1,113
------------ ------------ ---------- ------------
INCOME BEFORE MINORITY INTEREST 1,952,029 648,083 3,465,371 823,285
MINORITY INTEREST 1,140,476 565,772 2,161,742 918,767
------------ ------------ ---------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 811,553 82,311 1,303,629 (95,482)
LOSS ON DISCONTINUED OPERATIONS
loss from discontinued operations, net of tax effect -- (111,600) -- (22,075)
------------ ------------ ---------- ------------
NET INCOME (LOSS) 811,553 (29,289) 1,303,629 (117,557)
Foreign currency translation adjustment 218,359 319,364 900,496 354,318
------------ ------------ ---------- ------------
COMPREHENSIVE INCOME (LOSS) $ 1,029,912 $ 290,075 2,204,125 $ 236,761
============ ============ ========== ============
EARNING (LOSS) PER SHARE OF COMMON STOCK
Continuing operations
Basic $ 0.022 $ 0.002 0.036 $ (0.003)
Diluted 0.022 0.002 0.036 (0.003)
============ ============ ========== ============
Discontinued operations
Basic -- (0.003) -- (0.001)
Diluted -- (0.003) -- (0.001)
============ ============ ========== ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC 36,490,312 36,027,615 36,490,312 36,027,615
============ ============ ========== ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED 36,540,312 36,027,615 36,540,312 36,027,615
============ ============ ========== ============
The accompanying notes are an integral part of this statement.
- 2 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred stock (series A) Common stock
-------------------------- ----------------------- Paid-in Capital
Shares Par value Shares Par value capital receivable
------------- ---------- ----------- --------- ------------ ----------
BALANCE, December 31, 2006, Restated 930,000 $ 9,300 35,586,740 $ 355,868 $ 13,059,911 $ (252,471)
Common shares issued for service 125,000 1,250 36,250
Common shares issued for preferred
stock conversion (512,500) (5,125) 753,572 7,535 (2,410)
Net loss
Staturoty reserves
Foreign currency translation adjustments
------------- ---------- ----------- --------- ------------ ----------
BALANCE, June 30, 2007, Restated (Unaudited) 417,500 4,175 36,465,312 364,653 13,093,751 (252,471)
Common shares issued for preferred
stock conversion (25,000) (250) 25,000 250 --
Cancellation of preferred shares (342,500) (3,425) 3,425
Amortization of deferred compensation
Disposal of Enshi
Change in value of warrants issued for
Enshi acquisition 102,300
Net loss
Statutory reserves
Foreign currency translation adjustments
------------- ---------- ----------- --------- ------------ ----------
BALANCE, December 31, 2007 50,000 $ 500 36,490,312 $ 364,903 $ 13,199,476 $ (252,471)
Amortization of deferred compensation
Net income
Statutory reserves
Foreign currency translation adjustments
------------- ---------- ----------- --------- ------------ ----------
BALANCE, June 30, 2008 (Unaudited) 50,000 $ 500 36,490,312 $ 364,903 $ 13,199,476 $ (252,471)
============= ========== =========== ========= ============ ==========
Other
Deferred Accumulated Statutory comprehensive
compensation deficit reserves income (loss) Total
------------ ------------- ----------- ------------- -------------
BALANCE, December 31, 2006, Restated $ (18,000) $ (6,060,461) $ 2,524,655 $ 885,998 $ 10,504,800
Common shares issued for service (28,125) 9,375
Common shares issued for preferred stock conversion --
Net loss (117,557) (117,557)
Staturoty reserves (229,802) 229,802 --
Foreign currency translation adjustments 34,954 34,954
------------ ------------- ----------- ------------- -------------
BALANCE, June 30, 2007, Restated (Unaudited) (46,125) (6,407,820) 2,754,457 920,952 10,431,572
Common shares issued for preferred stock conversion --
Cancellation of preferred shares (9,375) (9,375)
Amortization of deferred compensation 34,125 34,125
Disposal of Enshi 1,862,414 (1,862,414) (837,320) (837,320)
Change in value of warrants issued for
Enshi acquisition 102,300
Net loss (13,429,430) (13,429,430)
Statutory reserves (84,396) 84,396 --
Foreign currency translation adjustments 691,259 691,259
------------ ------------- ----------- ------------- -------------
BALANCE, December 31, 2007 $ (21,375) $ (18,059,232) $ 976,439 $ 774,891 $ (3,016,869)
Amortization of deferred compensation 18,750 18,750
Net income 1,303,629 1,303,629
Statutory reserves (441,356) 441,356 --
Foreign currency translation adjustments 900,496 900,496
------------ ------------- ----------- ------------- -------------
BALANCE, June 30, 2008 (Unaudited) $ (2,625) $ (17,196,959) $ 1,417,795 $ 1,675,387 $ (793,994)
============ ============= =========== ============= =============
The accompanying notes are an integral part of this statement.
- 3 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
UNAUDITED
2008 2007
------------- -----------
Restated
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Net income (loss) $ 1,303,629 $ (117,557)
Net loss from discontinued operations -- (22,075)
------------- ------------
Net loss from continuing operations 1,303,629 (95,482)
Adjustments to reconcile net loss from continuing
operations to cash provided by (used in) continuing operating activities:
Common stock issued for services -- 9,375
Amortization of stock based compensation 18,750 --
Depreciation 605,571 354,693
Amortization 140,277 818,906
Minority interest 2,473,598 1,284,090
Change in operating assets and liabilities:
Accounts receivable, trade (1,988,897) (1,246,004)
Accounts receivable, related parties (28,806) (255,526)
Other receivables and prepayments 694,333 271,949
Other receivables-related party -- (1,178,997)
Notes receivables -- (73,030)
Advances to suppliers 364,742 (89,780)
Other assets 59,579 88,628
Inventories (1,982,140) (453,906)
Accounts payable 1,261,784 611,488
Accounts payable - related parties (75,565) (645,430)
Other payables and accrued liabilities 116,705 523,106
Customer deposits 1,549,149 839,636
Taxes payable 1,034,162 49,130
------------- ------------
Net cash provided by continuing operating activities 5,546,871 812,846
------------- ------------
CASH FLOWS FROM CONTINUING OPERATION INVESTING ACTIVITIES:
Purchase of intangible assets -- (1,299,940)
Payment received from long term notes receivables -- 173,531
Purchase of equipment (557,094) (102,274)
Additions to construction in progress (4,607,455) --
(Increase) in other receivables - related parties (417,840) --
Decrease in other receivables - related parties -- 80,504
Proceed on selling short term investment 1,096,800 --
Proceeds on loan from related party 99,758 --
------------- ------------
Net cash used in continuing operation investing activities (4,385,831) (1,148,179)
------------- ------------
CASH FLOWS FROM CONTINUING OPERATION FINANCING ACTIVITIES:
(Increase) decrease in restricted cash (669,294) 76,122
Proceeds from short term bank loan -- (50,209)
Payments on bank loan (212,510) (64,855)
Payment on long term debts - related parties -- (390,252)
Increase in notes payable 2,230,078 --
Proceeds (payments) on long term debts - related parties 185,242 --
------------- ------------
Net cash provided by (used in) continuing operation financing
activities 1,533,516 (429,194)
------------- ------------
Net increase (decrease) in cash from continuing operations 2,694,556 (764,527)
------------- ------------
Cash used in discontinued operating activities -- (1,577,929)
Cash provided by discontinued operations investing activities -- 787,049
Cash provided by discontinued operations financing activities -- 50,209
------------- ------------
Net cash provided by discontinued operations -- (740,671)
------------- ------------
Effect of exchange rate on cash 148,581 (223,100)
------------- ------------
INCREASE (DECREASE) IN CASH 2,843,137 (1,728,298)
Cash, beginning of period 669,699 2,958,556
------------- ------------
Cash, end of period $ 3,512,836 $ 1,230,258
============= ============
The accompanying notes are an integral part of this statement.
- 4 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(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. Since August 2004, the Company acquired various subsidiaries
located in mainland China. The principal activities of the Company, through its
subsidiaries 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 drugs and traditional Chinese medicines. Also,
the Company is engaged in the discovery, development and commercialization of
innovative drugs and related bio-pharmaceutical products in China.
Note 2 - RESTATEMENT OF FINANCIAL STATEMENTS
As discussed in Note 16, Enshi had been taken over by RimAisa as collateral of
the $11.5 million debt since the third quarter of 2007. Therefore, the financial
statements as of and for the three and six months ended June 30, 2007 have been
restated to reflect Enshi as a discontinued operation for comparison purposes.
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.
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.
Management has included all normal recurring adjustments considered necessary to
give a fair presentation of operating results for the periods presented. Interim
results are not necessarily indicative of results for a full year. The
information included in this Form 10-Q should be read in conjunction with
information included in the 2007 annual report filed on Form 10-K.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
all its majority-owned subsidiaries that 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.
- 7 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
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.
Construction in progress represents the costs incurred in connection with the
construction of buildings or new additions to the Company's plant facilities. No
depreciation is provided for construction in progress until the assets are
completed and are placed into service.
Long-term assets of the Company are reviewed periodically to determine 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. As of June 30, 2008, management
concluded long term assets are not impaired.
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of three months or less to be cash
equivalents.
Short Term Investment
In 2007, the Company opened an account with an investment broker to invest in
short term investments in initial public offering securities. The Company
classified the account balance as trading securities, which should be carried at
fair value with unrealized gains and losses reported in income. Total amount in
this account was $0 as of June 30, 2008 and $1,096,800 as of December 31, 2007.
For the six months ended June 30, 2008, the Company did not record any realized
or unrealized gain or loss since the account didn't have activities in 2008 and
was closed as of June 30, 2008.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful accounts 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
analyzes 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
concentrations or payment terms, deterioration of customer credit-worthiness or
weakening economic trends could have a significant impact on the collectibility
of the accounts receivable 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 allowance may be required.
- 8 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out basis.
Patents
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, generally ten to fifteen years. Such costs comprise of
purchase costs for 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 and more
often 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 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 three months
ended June 30, 2008 and 2007 amounted $ 55,502 and $45,540, and for the six
months ended June 30, 2008 and 2007 amounted $73,118 and $51,686.
Shipping and Handling Costs
Shipping and handling costs related to costs of goods sold are included in
selling, general and administrative costs which were $93,524 and $198,071 for
the three months and six months ended June 30, 2008; For the three months and
six months ended 2007 amounted $57,452 and $121,613, respectively.
Concentration of Risks
Cash includes cash on hand and demand deposits in accounts maintained with state
owned banks within the People's Republic of China and Hong Kong. Total cash in
these banks at June 30, 2008 and December 31, 2007 amounted to $3,410,806 and
$731,956 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.
- 9 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
The Company sells intermediary pharmaceutical products to general consumers.
Five major customers accounted for approximately 50% of the net revenue for the
six months ended June 30, 2008 with each customer individually accounting for
14%, 12%, 9%, 8% and 7%, respectively. Five major customers accounted for
approximately 11.2% of the net revenue for the 3 months ended June 30, 2008 with
each customer individually accounting for 2.5%, 2.3%, 2.4%, 2.2% and 1.8%,
respectively. At June 30, 2008, the total receivable balance due from these
customers was $928,110, representing 14% of total accounts receivable. For the
six months ended June 30, 2007, five major customers accounted for 17% of the
net revenue with each customer individually accounting for 5%, 4%, 3%, 2.8%, and
2.5%, respectively. For the three months ended June 30, 2007, five major
customers accounted for 18.4% of the net revenue with each customer individually
accounting for 4.2%, 3.6%, 2.8%, 2.7% and 5.1%, respectively
For the six months ended June 30, 2008, five major suppliers provided
approximately 40% of the Company's purchases of raw materials with each supplier
individually accounting for 16%, 14.2%, 4.3%, 3.4% and 1.9%, respectively. For
the three months ended June 2008, five major suppliers provided approximately
31.7% of the Company's purchases of raw materials with each supplier
individually accounted for 7.3%, 7.2%, 6.6%, 5.7% and 4.9%, respectively. Five
suppliers provided 64.2% of the Company's purchase of raw materials for the six
months ended June 30, 2007, with each suppliers individually accounting for
22.4%, 19.1%, 12.8%, 5.5% and 4.4%, respectively. Five suppliers provided 63.4%
of the Company's purchase of raw materials for the three months ended June 30,
2007, with each suppliers individually accounted for 21.7%, 18.5%, 13.2%, 5.9%
and 4.1%, respectively.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted SFAS No. 157. SFAS No. 157, Fair Value
Measurements, defines fair value, establishes a three-level valuation hierarchy
for disclosures of fair value measurement and enhances disclosures requirements
for fair value measures. The carrying amounts reported in the balance sheets for
current assets and current liabilities qualify as financial instruments are a
reasonable estimate of fair value because of the short period of time between
the origination of such instruments and their expected realization and their
current market rate of interest. The three levels are defined as follow:
o Level 1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
o Level 2 inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or
indirectly, for substantially the full term of the financial
instruments.
o Level 3 inputs to the valuation methodology are unobservable and
significant to the fair value.
Revenue Recognition
The Company has various categories of revenue resources, sales of new drug
formulas, R&D services and revenue from sales of medical product.
- 10 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
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 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 six months ended June 30, 2008 and 2007, revenue was $24,313,785 and
$13,910,230, respectively, made up of the following product categories.
2008 2007
--------------- --------------
Unaudited Unaudited
--------------
Restated
--------------
Revenue:
Intermediary pharmaceuticals products $ 7,517,331 $ 4,133,763
Prescription drugs 16,687,128 9,776,467
Other sales 52,590 --
R&D service 56,736 --
--------------- --------------
Total revenue $ 24,313,785 $ 13,910,230
=============== ==============
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.
- 11 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
The Company adopted FASB Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"), as of January 1, 2007. A tax position is recognized as
a benefit only if it is "more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption had no
effect on the Company's financial statements.
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 from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in financial statement that is presented with the same
prominence as other financial statements.
The Company's only current component of comprehensive income is the foreign
currency translation adjustment.
Foreign Currency Translation
The reporting currency of the Company is the US dollar. The Company's Chinese
subsidiaries' financial records are maintained and the statutory financial
statements are stated in its local currency, Renminbi (RMB), as their functional
currency. Results of operations are translated at average exchange rates during
the period, assets and liabilities are translated at the unified exchange rate
as quoted by the People's Bank of China at the end of each reporting period, and
equity are stated at their historical rates. Cash flows are also translated at
average translation rates for the period, therefore, amounts reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
This quotation of the exchange rates does not imply free convertibility of RMB
to other foreign currencies. All foreign exchange transactions continue to take
place either through the People's Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People's Bank of
China.
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 $1,675,387 and $774,891 at June 30, 2008 and December 31, 2007,
respectively. Assets and liabilities at June 30, 2008 and December 31, 2007 were
translated at 6.85 and 7.29 RMB to 1.00 USD. The average translation rates
applied to income statement accounts, statement of cash flows for the six months
ended June 30, 2008 and 2007 were 7.05 and 7.75 RMB to 1.00 USD, 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.
- 12 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
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.
Under SFAS 150 "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity", entities that have issued
mandatory redeemable shares of common stock or entered into forward contracts
that require physical settlement by repurchase of a fixed number of the issuer's
equity shares of common stock in exchange for cash shall exclude the common
shares that are to be redeemed or repurchased in calculating basic and diluted
earnings per share. Thus, the redeemable shares described in Note 14 have been
excluded from the June 30, 2008 earnings per share calculations.
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 anti-dilutive for the six months and three
months ended June 30, 2007 because the Company recorded net loss for the periods
presented. For the six months and three months ended June 30, 2008, the
convertible preferred stock of 50,000 was considered to have diluted effect. The
number of shares used in computing basic earnings per share for the six months
and three months ended June 30, 2008 and 2007 were 36,490,312 and 36,027,615,
respectively. The number of shares used in computing diluted earnings per share
for the six months and three months ended June 30, 2008 and 2007 were 36,540,312
and 36,027,615, respectively. Basic and diluted earnings per share for the six
months and three months ended June 30, 2008 were $0.036 and $0.022. Basic and
diluted losses per share for the six months and three months ended June 30, 2007
was amount to $0.003 and 0.002.
Shares Subject to Mandatory Redemption
The Company adopted Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". FAS 150 established classification and measurement
standards for three types of freestanding financial instruments that have
characteristics of both liabilities and equity. Instruments within the scope of
FAS 150 must be classified as liabilities within the Company's Consolidated
Financial Statements and be reported at settlement date value. The Company
issued redeemable stock in November 2007 related to the settlement of notes
payables owed to RimAisa. The amount of redeemable stock was presented as a
liability on the balance sheet at the fair market value plus the accrued
interest expense at the balance sheet date.
- 13 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115 ("FAS 159"). FAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of FAS 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. FAS 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. The Company chose not to elect the option to measure the fair value
of eligible financial assets and liabilities.
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. The
Company adapted EITF 07-3 on January 1, 2008 and there is no material effect on
financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51" ("SFAS 160"), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
non-controlling interest, changes in a parent's ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on its
consolidated financial statements.
In December 2007, Statement of Financial Accounting Standards No. 141(R),
Business Combinations, was issued. SFAS No. 141R replaces SFAS No. 141, Business
Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that
the acquisition method of accounting (which SFAS 141 called the purchase method)
be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions. This replaces SFAS 141's cost-allocation process,
which required the cost of an acquisition to be allocated to the individual
assets acquired and liabilities assumed based on their estimated fair values.
SFAS 141R also requires the acquirer in a business combination achieved in
stages (sometimes referred to as a step acquisition) to recognize the
identifiable assets and liabilities, as well as the non-controlling interest in
the acquiree, at the full amounts of their fair values (or other amounts
determined in accordance with SFAS 141R). SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. An entity may not apply it before that date. The Company believes
adopting SFAS No. 141R might materially impact the accounting treatment for any
future merger or acquisition consummated January 1, 2009.
- 14 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
In March 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 161, "Disclosures about
Derivative Instruments and Hedging Activities - An Amendment of SFAS No. 133"
("SFAS 161"). SFAS 161 seeks to improve financial reporting for derivative
instruments and hedging activities by requiring enhanced disclosures regarding
the impact on financial position, financial performance, and cash flows. To
achieve this increased transparency, SFAS 161 requires (1) the disclosure of the
fair value of derivative instruments and gains and losses in a tabular format;
(2) the disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. SFAS 161 is effective on January 1,
2009. The Company is in the process of evaluating the new disclosure
requirements under SFAS 161.
In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 "Determining
whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock"
("EITF No. 07-5"). This Issue is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Early application is not permitted. Paragraph 11(a) of Statement
of Financial Accounting Standard No 133 "Accounting for Derivatives and Hedging
Activities" ("SFAS 133") specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company's own stock
and (b) classified in stockholders' equity in the statement of financial
position would not be considered a derivative financial instrument. EITF No.07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer's own stock and thus
able to qualify for the SFAS 133 paragraph 11(a) scope exception. The Company
believes adopting this statement will have a material impact on the financial
statements because among other things, any option or warrant previously issued
and all new issuances denominated is US dollars will be required to be carried
as a liability and marked to market each reporting period.
In June 2008, FASB issued EITF Issue No. 08-4, "Transition Guidance for
Conforming Changes to Issue No. 98-5 ("EITF No. 08-4")". The objective of EITF
No.08-4 is to provide transition guidance for conforming changes made to EITF
No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios", that result from EITF
No. 00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments",
and SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". This Issue is effective for
financial statements issued for fiscal years ending after December 15, 2008.
Early application is permitted. Management is currently evaluating the impact
the adoption of EITF No. 08-4 will have on its consolidated financial
statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to current
period's presentation. Those reclassifications had no material effect on
operations or cash flows. Further, the financial statements as of and for the
six months and three months ended June 30, 2007 have been restated to reflect
Enshi as a discontinued operation for comparison purpose.
Note 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and Income Taxes Paid
o Interest expense paid amounted to $81,073 and $779,789 for the six
months ended June 30, 2008 and 2007, respectively.
o Income tax was paid $112,150 and $0 for the six months ended June
30, 2008 and 2007, respectively.
- 15 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
Note 5 - ACCOUNTS RECEIVABLE
The reserve for bad debts was $1,341,685 and $1,260,760 at June 30, 2008 and
December 31, 2007, respectively.
As of June 30, 2008 and December 31, 2007 accounts receivable consisted of the
following:
June 30, December 31,
2008 2007
(Unaudited)
------------ ------------
Accounts receivable $ 6,801,140 $ 4,812,243
Allowance for doubtful accounts (1,341,685) (1,260,760)
------------ ------------
Accounts receivable, net $ 5,459,455 $ 3,551,483
============ ============
Note 6 - INVENTORIES
Inventories consisted of the following at June 30, 2008 and December 31, 2007
June 30, December 31,
2008 2007
(Unaudited)
------------ ------------
Raw materials $ 2,518,706 $ 1,858,866
Refinery materials 3,607,395 3,139,200
Packaging supplies 274,666 239,624
Sundry supplies 8,471 11,984
Work in process 734,055 351,611
Finished goods 3,800,902 3,360,770
------------ ------------
Total inventories $ 10,944,195 $ 8,962,055
============ ============
Note 7 - PLANT AND EQUIPMENT
Plant and equipment consisted of the following as of June 30, 2008 and December
31, 2007:
June 30, December 31,
2008 2007
(Unaudited)
------------ ------------
Plant $ 2,432,785 $ 2,286,051
Office equipment 26,654 25,478
Machinery 6,919,129 6,368,927
Automobile 234,935 228,043
Construction in progress 4,793,418 185,963
------------ ------------
Total plant and equipment 14,406,921 9,094,462
Less: accumulated depreciation (5,577,864) (4,972,293)
------------ ------------
Plant and equipment, net $ 8,829,057 $ 4,122,169
============ ============
- 16 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
Depreciation expense for the six months ended June 30, 2008 and 2007 amounted to
$280,837 and $244,175; For the three months ended June 30, 2008 and 2007
amounted to $137,032 and $123,019, respectively. As of June 30, 2008 and 2007,
capitalized interest amounted to $85,320 and $0, respectively.
Note 8 - OTHER ASSETS
Intangible Assets
Intangible assets at June 30, 2008 and December 31, 2007 included land use
rights and drug patents, and consist of the following:
June 30,
2008 December 31,
(Unaudited) 2007
----------- ------------
Land use rights:
Erye $ 5,621,218 $ 5,282,173
CBH 2,406,464 2,406,464
----------- ------------
Total land use rights 8,027,682 7,688,637
Less: accumulated amortization (580,260) (459,333)
----------- ------------
Land use rights, net 7,447,422 7,229,304
----------- ------------
Patent:
Approved drugs 343,303 322,596
Less: accumulated amortization (173,061) (153,711)
----------- ------------
Subtotal: 170,242 168,885
----------- ------------
Total intangible assets, net $ 7,617,664 $ 7,398,189
=========== ============
Land use rights are pledged as collateral for bank loans. Amortization expenses
for the six months ended June 30, 2008 and 2007 were $156,393 and $33,203; for
the three months ended June 30, 2008 and 2007 amounted $94,796 and $7,843,
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 and saving accounts. 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:
June 30,
2008 December 31.
Name of Bank (Unaudited) 2007
- ----------------------------------------------- ----------- ------------
Hua Xia Bank, Suzhou $ 374 $ 164,871
Industrial and commercial bank, Suzhou 61,278 353,718
China CITIC Bank 1,126,231
- ----------------------------------------------- ----------- ------------
Total $ 1,187,883 $ 518,589
=========== ============
- 17 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
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 are required to repay the loans plus 3% interest
per annum within one month after the drug rights are sold to another party. If
on or before February 28, 2010, the R&D projects are not completed or failed,
the debtors are required to repay the loans plus 6% interest per annum within
ten days after such a conclusion was made. As of June 30, 2008 and December 31,
2007, the total amount of the long term notes receivable was $583,600 and
$640,518, respectively, where 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
As of June 30, 2008 and December 31, 2007, accounts receivable included the
following:
June 30, December 31, Manner of
2008 2007 Due From Term Settlement
- ------------ --------- -----------------------------------------------------
Erye $ 146,303 41,932 Hainan Kaiye Short Term Cash
Hainan Kaiye is company owned by minority shareholders of Suzhou Erye
Pharmaceutical Limited Company.
Other Receivables - Related Parties
As of June 30, 2008 and December 31, 2007, other receivable contained the
following related party balances where Hainan Kaiye and Erye Trading are
companies owned by minority shareholders of Suzhou Erye Pharmaceutical Limited
Company and Hengyi is the discontinued subsidiary since August 28, 2006.
June 30, December 31, Manner of
2008 2007 Due From Term Settlement
- ---------- ----------- -----------------------------------------------------
Erye $ 959,069 $ 819,621 Hainan Kaiye Short Term Cash
CBH 105,291 -- Enshi Short Term Cash
- ---------- ----------- ------------
Total $ 1,064,360 $ 819,621
=========== ============
- 18 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
Loan to Shareholder and Officer
June 30, December 31, Manner of
2008 2007 Due From Term Settlement
- ---------- ----------- ---------------------------------------------------------------
Keyuan $ 48,147 $ 45,243 Keyuan's shareholder Short Term Cash
Other Payables - Related Parties
June 30, December 31, Manner of
2008 2007 Due To Term Settlement
- ---------- ----------- ---------------------------------------------------------------
Erye 686,134 644,750 Erye Trading Short Term Cash
Erye Trading is company owned by minority shareholders of Suzhou Erye
Pharmaceutical Limited Company.
Other Payables- Related Parties, Shareholders
June 30, December 31, Manner of
2008 2007 Due To Term Settlement
- ---------- ----------- ---------------------------------------------------------------
CBH $ 17,582 $ 43,961 Chris Peng Mao Short Term Cash
Keyuan 667 627 Lufan An & Xiaohao Liu Short Term Cash
----------- ------------
Total $ 18,249 $ 44,588
=========== ============
Chris Peng Mao is the CEO of the Company. Lufan An & Xiaohao Liu are both
shareholder of the Company.
Long Term Other Receivables - Related Parties
June 30, December 31, Manner of
2008 2007 Due From Term Settlement
- ---------- ----------- ---------------------------------------------------------------
CBH $ 224,928 $ 267,768 Suzhou Heng yi Long Term Cash
Note 10 - NOTES PAYABLE
The Company's subsidiary Erye has $3,957,538 and $1,727,460 notes payable to
Erye's vendors for the purchase of drug raw materials as of June 30, 2008 and
2007. Notes payable are interest free and usually mature after a six month
period.
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 table list the provision of statutory reserves
contributed as of June 30, 2008.
Year Amount Description
- ---------- -------------- --------------------------------------------------
2004 $ 60,750
2005 383,873 15% of China Subsidiaries' net income
2006 2,080,032 10% of China Subsidiaries' net income
2007 (1,548,216) 10% of Erye's net income, deducted Enshi's
Statutory reserve balance at December 12/31/2006
2008 441,356 10% of China Subsidiaries' net income
- ---------- ==============
Total $ 1,417,795
==============
- 19 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
Note 12 - INCOME TAXES
Corporation Income Tax (CIT)
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.
Erye was granted income tax exemption for two years commencing from January 1,
2006. Keyuan's total revenue is subject to 1.7% to 3.3% income tax rates depends
on the range of the taxable income. Provision for CIT amounted to $630,613 and
$1,114 for the six months ended June 30, 2008 and 2007,and $331,204 and $5 for
three months ended June 30, 2008 and 2007, respectively.
Effective January 1, 2008, the New Enterprise Income Tax ("EIT") law replaced
the existing laws for Domestic Enterprises ("DES") and Foreign Invested
Enterprises ("FIEs"). The new standard EIT rate of 25% has replaced the 33% rate
previously 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.
The Company's subsidiaries, Suzhou Erye was established before March 16, 2007
and therefore is qualified to continue enjoying the reduced tax rate as
described above. The company is subject to 50% of the 25% EIT tax rate, or 12.5%
from January 1, 2008 through December 31, 2010.
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
June 30,
--------------
2008 2007
----- ------
U.S. Statutory rate 34.0% 34.0%
Foreign income not recognized in USA (34.0) (34.0)
China income taxes 25.0 33.0
Income tax exempted (12.5) (32.4)
----- ------
Total provision for income taxes 12.5% 0.6%
===== ======
- 20 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
The estimated tax savings due to the reduced tax rate for the three months and
six months ended June 30, 2008 are $54,293 and $208,072; for the three months
and six months ended June 30, 2007 were $518,493 and $758,644, respectively. The
net effect on income per share if the income tax had been applied would decrease
income per share by $0.001 and $0.06 for the three months and six months ended
June 30, 2008. The net effect on loss per share if the income tax had been
applied would increase net loss per share for the three months and six months
ended June, 2007 by $0.014 and 0.021, 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 $3,957,487and $3,228,400 for six
months ended, 2008, and $2,340,711 and $1,503,064 respectively for the same
period in 2007. Sales and purchases are recorded net of VAT collected and paid
as the Company acts as an agent for the government. VAT taxes are not impacted
by the income tax holiday.
Note 13 - LOANS
Short Term Bank Loans
The Company has a total of $2,159,320 and $2,371,830 in short term loans from
different banks in China at June 30, 2008 and December 31, 2007, respectively.
These loans mature in one year or less and renew automatically. The average
interest rates were approximately 7.95% and 7.33% respectively. Bank loans were
collateralized by the land use right and buildings of Erye.
Interest expense for the six months ended June 30, 2008 and 2007 were $703,234
and $54,139; for the three months ended June 30, 2008 and 2007 amounted $346,639
and $19,788, respectively. Interest capitalized as of June 30, 2008 and 2007
amounted to $85,320 and $0, respectively.
Note 14 - Redeemable Preferred Stock
On November 16, 2007, the Company entered a conditional loan conversion
agreement (the "Agreement") with RimAsia, 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 (combined total of $12,508,534) was converted
in full into 6,185,607 shares of Series B redeemable convertible preferred
shares of the Company ("Series B Preferred Shares") at an effective conversion
price at $2.0222 per preferred share. Each Series B Preferred Shares 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") was lowered to
$1.26 per share and the term of the Existing Warrants extended to 4.5 years from
the closing date. This Agreement is conditioned on the subsequent completion of
at least one of sizeable acquisition by the end of June 2008 and then extended
to the end of 2008. The Company is currently in serious discussions with three
companies for a possible business merger opportunity. Management believes that
this merger transaction will happen soon. If the merger transaction does not
happen, RimAsia has right to convert the preferred back to debt.
- 21 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
According to the Agreement, the Series B preferred stock are subject to optional
redemption at the Company's option before the 4th anniversary of issuance date
and mandatory redemption at the investors of the Company's option thereafter.
The Company maybe required to repurchase the remaining Series B preferred stock
four years after the closing date at a per share price of the sum of (1) the
original Series B issue price $2.0222 per share; (2) all accrued but unpaid
annual dividends; (3) 5% of the original Series B issue price per annum accrued
from the occurrence of certain triggering events, such as the Company's failure
to pay annual dividends, mandatory redemption price or any other amount due. The
Company adopted Statement of Financial Accounting Standards No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity" and the 6,185,607 shares of Series B preferred stock was counted as
liability due to the mandatory redemption feature. The shares were recorded at
fair value on the date of issuance and any accrued interest expense at the
reporting dates. As of June 30, 2008, balance of redeemable preferred stock
amounted to $13,209,353, in which $634,284 was the accrued interest expense for
the period of November 16, 2007 through June 30, 2008.
The holders of the Series B Preferred Shares shall be entitled to receive an
annual dividend of 5% of the original issue price ($2.0222 per share) and
dividend is payable annually on January 1st in either cash or in kind determined
by the Board of directors. Accrued dividend payable at June 30, 2008 amounted to
$623,712. Further, since the Company did not make a dividend payment to the
shareholders on time pursuant to the Agreement, the Company has to accrue an
additional 5% of the original issue price of Series B Preferred Shares per
annum, effective January 1, 2008, as an addition to the redemption price. As of
June 30, 2008, $311,856 of penalty was included in the accrued dividend payable.
Note 15 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space from third parties. Accordingly, for the six
months and three months ended June 30, 2008 and 2007, the Company recognized
rent expense of $7,730 and $32,111; for the three months ended June 30, 2008 and
2007, rent expenses amounted $3,865 and $15,046 respectively.
As of June 30, 2008, the Company has outstanding commitments in respect to
non-cancelable operating leases as follows:
Amount
----------
For the year ended December 31, 2008 $ 6,565
Thereafter 6,566
----------
Total $ 13,131
==========
- 22 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
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 had paid $1,459,000, or RMB
10,000,000 by June 30, 2008.
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("LXB Litigation"). 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 has been waiting for the court hearing in HK court.
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.
On November 16, 2007 and amended on January 22, 2008, the Company and RimAisa
entered into a litigation agreement ("Litigation Agreement"). Pursuant to this
Litigation Agreement, if RimAisa or RACP (as the plaintiff) prevail in the LXB
Litigation or the settlement is reached, any judgment awards, settlement amount
and salvage value realized from Enshi, would be firstly used to reimburse all
the legal and related expenses incurred by RimAsia in the LXB Litigation, up to
$4,000,000, and the remaining amounts of the judgment proceeds would be entitled
to the Company. If RimAisa and the Company do not prevail in the LXB Litigation,
RACP should be returned to CBH and all the proceeds of any sale of liquidation
of Enshi or any assets of or interest in Enshi shall be distributed as agreed by
both parties. In addition, all the costs and expenses (including attorneys'
fees) incurred by or on behalf of the plaintiffs shall be borne 55% by RimAsia
and 45% by the Company.
- 23 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
- --------------------------------------------------------------------------------
Note 16 - BUSINESS COMBINATIONS
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 -
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-Q 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.
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 is pursuing rescission and
damages. Enshi's operations have been severely hindered 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, the results of Enshi's operations and cash flows for the three months
and six months ended June 30, 2007 were reported as discontinued operations in
our consolidated financial statements.
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.
- 25 -
ACCOUNTS RECEIVABLE
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management judgment and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, we analyze the
aging of accounts receivable balances, historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and changes
in our customer payment terms. Significant changes in customer concentration or
payment terms, deterioration of customer credit-worthiness or weakening in
economic trends could have a significant impact on the collectibility of
receivables and our operating results. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. The reserve for bad debts
increased to $1,341,685 at June 30, 2008 from $1,260,760 at December 31, 2007.
This increase is mainly resulted from change in the exchange rate of RMB to USD.
As of June 30, 2008, accounts receivable, net of allowance for doubtful
accounts, amounted to $5,459,455.
The following table provides the roll forward of the allowance of doubtful
accounts:
Allowance for doubtful accounts
As of December 31, 2007 $1,260,760
Foreign currency translation adjustment 80,925
----------
As of June 30, 2008 $1,341,685
==========
The following list the aging of our accounts receivable as of June 30, 2008:
3 months 6 months 9 months Over 9 months Over 1 year
Total Amount % Amount % Amount % Amount % Amount %
6,801,140 5,236,558 77.0 191,715 2.8 59,569 0.8 24,384 0.4 1,288,914 19.0
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.
- 26 -
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2008 AS COMPARED TO THREE
MONTHS ENDED JUNE 30, 2007
REVENUE
Revenue for the three months ended June 30, 2008 was $13,340,544 while the
revenue for the three months ended June 30, 2007 was $7,754,670, representing an
approximately 72% increase. The increase is mainly attributed to three reasons:
First is the rise in selling price and sales volume of Erye's raw material
drugs. Second, the reform of medical insurance system in rural areas of China
helps to promote the sales of Erye's drugs. Third, the selling price of the
freeze-dried drugs has increased.
COST OF GOODS SOLD
Cost of goods sold for the three months ended June 30, 2008 was $9,215,170 as
compared to $5,850,627 for the three months ended June 30, 2007. Cost of goods
sold as a percentage of sales revenues was approximately 69.1% for the three
months ended June 30, 2008 as compared to approximately 75.4% for the three
months ended June 30, 2007. The increase in cost of goods sold in terms of
dollar amount is mainly attributed to the increase of sales.
GROSS PROFIT
Gross profit in the three months ended June 30, 2008 amounted at $4,125,374, as
compared to $1,904,043 for the three months ended June 30, 2007, representing
approximately 117% increase. The gross profit margin for the three months ended
June 30, 2008 was 30.9% as compared to approximately 24.6% for the three months
ended June 30, 2007. The increase is attributed primarily to the increase of the
gross profit of the freeze-dried drugs and raw material drugs.
OPERATING EXPENSES
Operating expenses for the three months ended June 30, 2008 was $1,465,764 as
compared to $1,145,801 for the three months ended June 30, 2007, representing
27.9% increase. The increase is attributed mainly to higher sales expenses of
Suzhou Erye, such as promotional meeting, commission etc.
RESEARCH AND DEVELOPMENT
Research and development costs for the three months ended June 30, 2008 were
$241,400 as compared to $0 for the three months ended June 30, 2007. This
increase was primarily attributed to new R&D project in year 2008.
INCOME FROM OPERATIONS
Income from operations in the three months ended June 30, 2008 amounted at
$2,659,610, as compared to $758,242 for the three months ended June 30, 2007,
representing approximately 250.8% increase. The increase is mainly attributable
to Erye's strong performance in sales and increased gross margin.
NET INCOME
Net income for the three months ended June 30, 2008 was $811,553 as compared to
net loss of $29,289 for the three months ended June 30, 2007. The increase is
attributed to Erye's strong operating performance and increased profit margin.
- 27 -
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2008 AS COMPARED TO SIX MONTHS
ENDED JUNE 30, 2007
REVENUE
Revenue for the six months ended June 30, 2008 was $24,313,785 while the revenue
for the six months ended June 30, 2007 was $13,910,230, representing an
approximately 74.8% increase. The increase is mainly attributed to Erye's
significant revenue growth. Erye's revenue increase approximately 74.8% in the
first half year of 2008 comparing with its revenue in the first half year of
2007. The current industry environment provides a great opportunity for Erye to
grow its core business. Erye consistently expands its market share in rural area
in China.
COST OF GOODS SOLD
Cost of goods sold for the six months ended June 30, 2008 was $16,926,332 as
compared to $10,535,729 for the six months ended June 30, 2007. Cost of goods
sold as a percentage of sales revenues was approximately 69.6% for the six
months ended June 30, 2008 as compared to approximately 75.7% for the six months
ended June 30, 2007. The increase in cost of goods sold in terms of dollar
amount is mainly attributed to the cost of good sold of Erye which had a high
growth in its sales in the first half year of 2008.
GROSS PROFIT.
Gross profit in the six months ended June 30, 2008 amounted at $7,387,453, as
compared to $3,374,501 for the six months ended June 30, 2007, representing
approximately 120% increase. The gross profit margin for the six months ended
June 30, 2008 was 30.4% as compared to approximately 24.3% for the six months
ended June 30, 2007. The increase in gross profit as percentage to sales is
mainly due to the Company has adjusted its product mixture and increased the
sales volume of products with higher GP%.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2008 was $2,558,508 as
compared to $2,092,464 for the six months ended June 30, 2007, representing 22%
increase. The increase is attributed mainly to higher sales expenses of Suzhou
Erye such as promotional meeting and commission etc.
RESEARCH AND DEVELOPMENT
Research and development costs for the six months ended June 30, 2008 were
$259,347 as compared to $43,163 for the six months ended June 30, 2007,
representing approximately 501% increase. This inrease was primarily attributed
to new R&D project in year 2008.
- 28 -
INCOME FROM OPERATIONS
Income from operations in the six months ended June 30, 2008 amounted at
$4,828,945, as compared to $1,282,037 for the six months ended June 30, 2007,
representing approximately 276.7% increase. The increase is mainly attributable
to Erye's strong performance in sales and increased gross margin.
NET INCOME
Net income for the six months ended June 30, 2008 was $1,303,629 as compared to
net loss of $117,557 for the six months ended June 30, 2007. The increase is
attributed to Erye's strong operating performance and increased profit margin.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, total current assets were $22,140,968 and total current
liabilities were $34,638,562. Cash and cash equivalents on June 30, 2008 was
$3,512,836, an increase of $2,843,137 from the $669,699 reported on December 31,
2007.
For the six months ended June 30, 2008, net cash provided by continuing
operating activities was $5,546,871, net cash used in continuing investing
activities was $4,385,831, and net cash used in continuing financing activities
was $1,533,516. Cash provided by operating activites results primarily from the
Company's strong performance in sales and increase in its profit margin. Cash
used for investing activities during the six months ended June 30, 2008 results
mainly from the construction of the new plant and purchase of equipments.
On November 19, 2007, we entered into an agreement (the "Agreement") 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 acquisition of Enshi plus unpaid interest of $1,008,534
(total of $12,508,534) was converted in full into 6,185,607 shares of senior
redeemable convertible preferred shares of the Company ("Preferred Shares") at a
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") was 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 registrant 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 registrant) before January 15,
2008, having such acquisition closed before June 30, 2008 and then extended to
January 1, 2009. In connection therewith, the parties also entered into a
registration rights agreement and certain other agreements, and the registrant
issued additional common stock purchase warrant and a modified common stock
purchase warrant.
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.
Our main manufacturing unit, Erye, recorded a significant growth of 69% in sales
revenue for the six months ended June 30, 2008, 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. Indeed, we returned to profitability during the three and six months
period ended June 30, 2008.
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 twelve
months. However, we anticipate that our current operating activities may not
enable us to meet the anticipated cash requirements for future acquisition
activities. External source of capital may be needed for 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.
- 29 -
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. As of June 30, 2008,
the value of the Renminbi to the U.S. dollar was translated at 6.85 RMB to $1.00
USD.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4T. Controls and Procedures
Disclosure Controls and Procedures. As of June 30, 2008, we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and our chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) were not effective.
During our assessment of the effectiveness of internal control over financial
reporting as of December 31, 2007, our management identified significant
deficiencies related to the following:
1. Accounting and Finance Personnel Weaknesses - The current staff in the
accounting department is relatively inexperienced, and needs substantial
training so as to meet with the higher demands of being a U.S. public company.
The accounting skills and understanding necessary to fulfill the requirements of
U.S. GAAP-based reporting, including the skills of subsidiary financial
statement consolidation, are not at par, which resulted in a less than optimal
segregation of duties relative to key financial reporting functions.
2. Lack of Internal Audit Function - The Company lacks qualified resources to
perform the internal audit functions properly. In addition, the scope and
effectiveness of internal audit function are yet been fully developed.
3. Lack of Internal Audit System - The Company lacked internal audit department,
which was ineffective in preventing and detecting control lapses and errors in
the accounting of certain key areas like revenue recognition, purchase
approvals, inter-company transactions, cash receipt and cash disbursement
authorizations, inventory safeguard and proper accumulation for cost of
products, in accordance with the appropriate costing method used by the Company.
As disclosed in our Management's Annual Report on Internal Control over
Financial Reporting filed with the 2007 Form 10KSB, the Company's management has
identified the steps necessary to address the material weaknesses described
above and we are in the process to have the remediation procedures implemented.
Changes in Internal Control over Financial Reporting. During the fiscal quarter
ended June 30, 2008, there have been no changes in the Company's internal
control over financial reporting, identified in connection with our evaluation
thereof, that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None of our directors, officers or affiliates is involved in a proceeding
adverse to our business or has a material interest adverse to our business.
In March 2007, The Company has commenced legal proceeding for recession 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 has been waiting for the court hearing
date in HK court. 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.
- 30 -
Item 1A. RISK FACTORS.
Not applicable
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no matter submitted to a vote of security holders during the fiscal
quarter ended June 30, 2008.
Item 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this quarterly report on Form 10-Q:
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
- 31 -
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
By: /s/ Chris Peng Mao
-------------------------------------------
Name: Chris Peng Mao
Title: Chief Executive Officer
Date: August 14, 2008
By: /s/ ZHANG Jian
-------------------------------------------
Name: ZHANG Jian
Title: Chief Financial Officer
Date: August 14, 2008
- 32-