UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 814-00063
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(Exact Name of 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,
if changed since last report)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.01
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]
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 preceding 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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
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 Act). Yes [_] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price was last sold, or the
average bid and asked prices of such common equity, as of the last business day
of the registrant's most recently completed second fiscal quarter: $6,075,193
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
36,590,312 shares of Common Stock as of May 11, 2009
Explanatory Note
This Amendment No. 1 on Form 10-K/A (this "Amendment No. 1") to the Annual
Report on Form 10-K for the year ended December 31, 2008 (the "Annual Report")
of China Biopharmaceuticals Holdings, Inc. (the "Company") is being filed to
revise the Note 17 to Consolidated Financial Statements to reflect the correct
remaining duration of the outstanding warrants, and Note 16 Item Legal
Proceedings to reflect it is RACP Pharmacentical Holdings Limited, ("RACP"), a
former subsidiary of the Company, instead of the Company, that entered into the
legal proceeding for damages of $10,000,000 against Mr. Li Xiaobo and his
related parties for breach of representations and warranties and fraud ("LXB
Litigation").
The Note 17 has been revised as the following:
Note 17 - SHAREHOLDERS' EQUITY
Issuance of Shares for Services
In December 2008, the Company issued 100,000 shares of common stock to a
consultant for the services provided during the period from January 2007 to
February 2009. Shares were valued at $27,000 based on the market price at the
service contract signing dates.
Warrants
Following is a summary of the status of warrants outstanding at December 31,
2008:
Outstanding Warrants Exercisable Warrants
------------------------- ------------------------------------
Exercise Number Average Average Number Intrinsic
Price Remaining Exercise Value
Contractual Price
Life
1.26 12,000,000 3.4 $ 1.26 12,000,000 --
2.00 84,607 0.2 $ 2.00 84,607 --
1.25 1,000,000 1.1 $ 1.25 1,000,000 --
1.26 7,165,535 1.2 $ 1.26 7,165,535 --
---------- ----------- ---------
20,250,142 20,250,142 --
========== ===========
Following is a summary of the Warrant activity:
Outstanding as of January 01, 2007 10,400,396
Granted 12,000,000
Forfeited 510,421
Exercised --
----------
Outstanding as of December 31, 2007 21,889,975
Granted --
Forfeited 1,639,833
Exercised --
----------
Outstanding as of December 31, 2008 20,250,142
==========
The Note 16 has been revised as the following:
Legal Proceedings
In March 2007, the Company identified non-existent trade accounts receivable
acquired in the acquisition of Enshi. RACP Pharmacentical Holdings Limited,
("RACP"), a former subsidiary of CBH 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 froze 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.
In July 2007, Enshi was foreclosed on by RimAsia and ceased to be part of the
Company. RimAsia assumed the litigation activities against Mr. Li Xiaobo and
certain other defendants in connection with the acquisition of shares of Enshi
("LXB") and on October 17, 2008_reached a settlement with LXB pursuant to which
Enshi was returned to LXB against a payment of certain sum of funds of which the
residual sum post litigation costs were to be eventually transferred to the
Company. The expected residual is not expected to be meaningful to the Company.
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.
On September 1, 2008, the Company and RimAisa entered into an Understanding on
Litigation Residual Payment (the "Understanding"). Pursuant to this
Understanding, if there is no consummation of the Merger, the gross residual
(the "Gross Residual") from the LXB Litigation receivable by CBH (being the
gross settlement proceeds of the LXB litigation paid by Li Xiao Bo less the
litigation and related expenses incurred by and reimbursed to RACP pursuant to
the Litigation Agreement shall be paid to CBH in cash or shares of common stock
and warrants to purchase common stock of NBS (collectively, "NBS Securities"),
such NBS Securities being valued at their original purchase price but in no case
to be more than (a) US$1,250,000 or (b) the value of the Gross Residual,
whichever is less, and only to the extent there is any such residual from the
LXB litigation. Any amount of the Gross Residual remaining after deducting the
value of NBS Securities under the immediately preceding sentence shall be
immediately paid to CBH in cash. In case of a closing of the Merger, RACP may no
longer deliver such NBS Securities to CBH, but shall be able to deliver to Erye
Economy & Trade Ltd ("EET") NBS Securities, valued at their purchase price and
up to an amount equal to 50% of the "Net Residual" (to be defined below), in
exchange for the withholding of an equal amount of cash from the Gross Residual,
pursuant to the terms of an agreement with EET that will be documented and
signed prior to or at the closing of the Merger. The "Net Residual" means the
Gross Residual minus the sum of (a) US$1.3 million representing the legal fees
and costs and the un-reimbursed advances and expenses made by Erye to Shenyang
Enshi Pharmaceutical Ltd. and CBH, and (b) US$300,000 for operating expenses of
CBH over the next 12 months.
Except as described above, no other changes have been made to the Annual Report,
and this Amendment No. 1 does not amend or update any other information
contained in the Annual Report.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
The following exhibits are filed with, and as a part of, this Amendment No. 1 to
Annual Report on Form 10-K/A.
a) Index to Financial Statements and Financial Statement Schedules
The following audited consolidated financial statements are included on the
pages indicated:
Page
- ----
F-1 Report of Moore Stephens Wurth Frazer and Torbet, LLP, Independent
Registered Public Accounting Firm
F-2 Consolidated Balance Sheet as of December 31, 2008 and 2007
F-3 Consolidated Statements of Income and Other Comprehensive Income for the
years ended December 31, 2008 and 2007
F-4 Consolidated Statements of Changes in Shareholders' Equity
F-5 Consolidated Statements of Cash Flows for the years ended December 31,
2008 and 2007
F-6 Notes to Consolidated Financial Statements
b) Exhibits
The exhibits which are filed with this report or which are incorporated herein
by reference are set forth in the Exhibit Index hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 1 to the Form
10-K to be signed on our behalf by the undersigned, thereunto duly authorized.
China Biopharmaceuticals Holdings, Inc.
May 14, 2009 By: /s/ Chris Peng Mao
--------------------
Name: Chris Peng Mao
Title: Chief Executive Officer
May 14, 2009 By: /s/ ZHANG Jian
----------------
Name: ZHANG Jian
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the Form 10-K has been signed by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
/s/ Chris Peng Mao Director and Chief Executive Officer May 14, 2009
- ------------------
Chris Peng Mao
/s/ ZHANG Jian Chairwoman and Chief Financial Officer May 14, 2009
- ---------------
ZHANG Jian
/s/ AN Lufan Director and President May 14, 2009
- -------------
AN Lufan
/s/ LIU Xiaohao Director and Vice President May 14, 2009
- ----------------
LIU Xiaohao
/s/ Stephen E. Globus Director May 14, 2009
- ----------------------
Stephen E. Globus
/s/ DING Weihua Director May 14, 2009
- ----------------
DING Weihua
/s/ SHI, Mingsheng Director May 14, 2009
- ------------------
SHI Mingsheng
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
23.1 Consent of Moore Stephens Wurth Frazer and Torbet, LLP.
31.1 Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities
Exchange Act of 1934, as Amended
31.2 Certification Pursuant to Rule 13a-14 and 15d-14 under the Securities
Exchange Act of 1934, as Amended
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of China Biopharmaceuticals Holdings, Inc
We have audited the accompanying consolidated balance sheets of China
Biopharmaceuticals Holdings, Inc and Subsidiaries as of December 31, 2008 and
2007, and the related consolidated statements of operations and comprehensive
income, shareholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2008. China Biopharmaceuticals Holdings,
Inc.'s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Biopharmaceuticals Holdings,
Inc and Subsidiaries as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2008 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Moore Stephens Wurth Frazer & Torbet, LLP
- ---------------------------------------------
Walnut, California
March 30, 2009
F-1
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2007
2008 2007
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 581,727 $ 669,699
Short term investment 4,432,657 1,096,800
Accounts receivable, trade, net of allowance for doubtful accounts of
$1,200,983 and $1,260,760 at December 31, 2008 and 2007, respectively 3,371,225 3,551,483
Accounts receivable, related parties -- 41,932
Other receivables, net of allowance for doubtful accounts of $300,068 and $0
at December 31, 2008 and 2007, respectively 494,307 1,131,395
Other receivables - related parties 275,442 819,621
Advances to suppliers 126,418 797,302
Prepaid expenses 11,680 363,819
Inventories, net of $26,250 allowance 9,033,655 8,962,055
Loan to shareholder and officer 74,518 45,243
------------ ------------
Total current assets 18,401,629 17,479,349
------------ ------------
PLANT AND EQUIPMENT, NET 11,655,180 4,122,169
------------ ------------
OTHER ASSETS:
Intangible asset, net 7,587,057 7,398,189
Long term notes receivable -- 640,518
Restricted cash 1,373,228 518,589
Advance on patent and right purchase 1,321,561 959,700
Other assets 40,678 81,484
------------ ------------
Total other assets 10,322,524 9,598,480
------------ ------------
Total assets $ 40,379,333 $ 31,199,998
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 4,563,837 $ 1,727,460
Accounts payable 4,728,544 5,988,289
Other payables 1,064,019 1,381,462
Other payables - related parties 666,024 644,750
Other payables - shareholder and officer 670 44,588
Customer deposits 1,288,179 2,129,318
Taxes payable 2,215,667 1,488,964
Dividend payables 1,110,346 77,107
Short-term loans 2,611,260 2,371,830
Other accrued liabilities 259,675 281,390
------------ ------------
Total current liabilities 18,508,221 16,135,158
LONG TERM LIABILITIES:
Other long term liabilities 65,012 65,114
------------ ------------
Total liabilities 18,573,233 16,200,272
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK - series B, $0.01 par value, 6,185,607 shares issued
and outstanding at December 31, 2008 and 2007. 12,508,534 12,508,534
------------ ------------
MINORITY INTEREST 9,478,384 5,508,061
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock - $0.01 par value, 10,000,000 shares authorized;
Series A, 50,000 shares issued and outstanding at December 31, 2008 and 2007; 500 500
Series B, 6,185,607 shares issued and outstanding at December 31, 2008 and
2007, classified above outside shareholders' equity. -- --
Common stock, $0.01 par value, 200,000,000 shares authorized; 36,590,312
and 36,490,312 shares issued and outstanding as of December 31, 2008 and
2007, respectively. 365,903 364,903
Paid-in capital 13,222,851 13,178,101
Capital receivable (252,471) (252,471)
Statutory reserves 1,508,798 976,439
Accumulated deficit (16,797,813) (18,059,232)
Accumulated other comprehensive income 1,771,414 774,891
------------ ------------
Total shareholders' equity (180,818) (3,016,869)
------------ ------------
Total liabilities and shareholders' equity $ 40,379,333 $ 31,199,998
============ ============
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
------------ ------------
REVENUES $ 49,841,158 $ 31,927,378
COST OF GOODS SOLD 34,461,263 23,633,700
------------ ------------
GROSS PROFIT 15,379,895 8,293,678
------------ ------------
OPERATING EXPENSES:
Research and development 388,848 271,030
Selling, general and administrative 6,938,601 6,960,779
------------ ------------
Total Operating Expenses 7,327,449 7,231,809
------------ ------------
INCOME FROM OPERATIONS 8,052,446 1,061,869
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net (43,095) (1,213,369)
Other income (expense), net 158,048 (410,283)
------------ ------------
Total other income (expense) 114,953 (1,623,652)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 8,167,399 (561,783)
PROVISION FOR INCOME TAXES 1,418,334 1,245
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST 6,749,065 (563,028)
MINORITY INTEREST 3,922,048 1,492,787
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2,827,017 (2,055,815)
LOSS ON DISCONTINUED OPERATIONS:
Loss on discontinued operations, net of tax effect -- (11,469,098)
Loss on disposal of discontinued operation, net of tax effect -- (22,074)
------------ ------------
Net of Loss on Discontinued Operations -- (11,491,172)
------------ ------------
NET INCOME (LOSS) 2,827,017 (13,546,987)
DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED STOCK (1,033,239) --
------------ ------------
NET INCOME (LOSS) AVILABLE TO COMMON SHAREHOLDERS 1,793,778 (13,546,987)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 996,523 (111,107)
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 2,790,301 $(13,658,094)
============ ============
INCOME (LOSS) AVAILABLE TO COMMON STOCK SHAREHOLDERS - BASIC AND DILUTED
Continuing operations $ 0.05 $ (0.06)
Discontinued operations -- (0.31)
------------ ------------
Total $ 0.05 $ (0.37)
============ ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
-Basic 36,348,531 36,340,860
============ ============
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred stock (series A) Common Stock
-------------------------- ----------------------- Paid-in
Shares Par value Shares Par Value Capital
----------- ----------- ----------- --------- -----------
BALANCE, December 31, 2006, Restated 930,000 $ 9,300 35,586,740 $ 355,868 $13,041,911
Common shares issued for service 125,000 1,250 (1,250)
Common shares issued for preferred stock conversion (537,500) (5,375) 778,572 7,785 (2,410)
Cancellation of preferred shares (342,500) (3,425) 3,425
Stock based compensation 34,125
Disposal of Enshi
Change in value of warrants issued for Enshi acquisition 102,300
Dividends and accretion on redeemable preferred stock
Net loss
Statutory reserves
Foreign currency translation adjustments
----------- ----------- ----------- --------- -----------
BALANCE, December 31, 2007 50,000 $ 500 36,490,312 $ 364,903 $13,178,101
----------- ----------- ----------- --------- -----------
Common shares issued for service 100,000 1,000 26,000
Stock based compensation 18,750
Dividends and accretion on redeemable preferred stock
Net income
Statutory reserves
Foreign currency translation adjustments
----------- ----------- ----------- --------- -----------
BALANCE, December 31, 2008 50,000 $ 500 36,590,312 $ 365,903 $13,222,851
=========== =========== =========== ========= ===========
Other
Capital Statutory Accumulated Comprehensive
Receivable Reserves Income (Deficit) Income (Loss) Totals
---------- ----------- ---------------- ------------- ------------
BALANCE, December 31, 2006, Restated $ (252,471) $ 2,524,655 $ (6,060,461) $ 885,998 $ 10,504,800
Common shares issued for service --
Common shares issued for preferred stock
conversion --
Cancellation of preferred shares --
Stock based compensation 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
Dividends and accretion on redeemable preferred
stock --
Net loss (13,546,987) (13,546,987)
Statutory reserves 314,198 (314,198) --
Foreign currency translation adjustments 726,213 726,213
---------- ----------- ---------------- ------------- ------------
BALANCE, December 31, 2007 $ (252,471) $ 976,439 $ (18,059,232) $ 774,891 $ (3,016,869)
---------- ----------- ---------------- ------------- ------------
Common shares issued for service 27,000
Stock based compensation 18,750
Dividends and accretion on redeemable preferred
stock (1,033,239) (1,033,239)
Net income 2,827,017 2,827,017
Statutory reserves 532,359 (532,359) --
Foreign currency translation adjustments 996,523 996,523
---------- ----------- ---------------- ------------- ------------
BALANCE, December 31, 2008 $ (252,471) $ 1,508,798 $ (16,797,813) $ 1,771,414 $ (180,818)
========== =========== ================ ============= ============
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
------------- -------------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Net income (loss) $ 2,827,017 $ (13,546,987)
Net loss from discontinued operations -- 11,491,172
------------- -------------
Net income (loss) from continuing operations 2,827,017 (2,055,815)
Adjustments to reconcile net income (loss) from continuing
operations to cash provided by (used in) continuing operating activities:
Stock based compensation 45,750 34,125
Depreciation 517,469 482,708
Amortization 166,984 166,470
Bad debt expense 37,838 1,009,910
Minority interest 3,922,047 1,492,787
Change in fair value of warrants issued in Enshi acquisition -- 102,300
Conversion of interest expense to redeemable stock -- 1,085,178
Loss on disposal of equipment -- 191,276
Change in operating assets and liabilities:
Accounts receivable, trade 421,484 (883,522)
Accounts receivable, related parties -- (40,271)
Other receivables 1,794,823 (217,306)
Advances to suppliers 706,196 (584,390)
Inventories 546,277 (2,390,515)
Other assets 41,766 (78,257)
Accounts payable (1,649,873) 1,726,383
Other payables and other current liabilities 258,773 670,843
Customer deposits (973,024) 1,143,886
Taxes payable 611,624 216,952
------------- -------------
Net cash provided by continuing operating activities 9,275,151 2,072,742
------------- -------------
CASH FLOWS FROM CONTINUING OPERATION INVESTING ACTIVITIES:
Purchase of intangible assets -- (724,914)
Repayment received from long term notes receivables 576,600 207,882
Decrease in long term other receivables - related parties -- 352,232
Purchase of equipment (1,813,274) (330,778)
Purchase of construction in progress (5,828,749) --
(Increase) decrease in other receivables - related parties (1,035,960) 1,110,625
Increase in short term Investment (3,202,407) (1,053,360)
Repayment of loan to related party -- 42,849
Advance on patent purchase (289,539) (921,690)
------------- -------------
Net cash used in continuing operation investing activities (11,593,329) (1,317,154)
------------- -------------
CASH FLOWS FROM CONTINUING OPERATION FINANCING ACTIVITIES:
(Increase) decrease in restricted cash (804,102) 420,594
Proceeds from loan payables 431,961 --
Decrease in other payables - related parties (143,972) (1,504,103)
Proceeds from (payment on) notes payables 2,668,217 (816,354)
Repayments on long term liabilities (4,580) (103,665)
------------- -------------
Net cash provided by (used in) continuing operation financing activities 2,147,524 (2,003,528)
------------- -------------
Effect of exchange rate on cash - Continuing operations 82,682 86,679
------------- -------------
Decrease in cash from continuing operation (87,972) (1,161,261)
Cash, beginning - Continuing operation 669,699 1,830,960
------------- -------------
Cash, ending - Continuing operation $ 581,727 $ 669,699
============= =============
Cash provided by discontinued operating activities -- 3,004,582
Cash provided by discontinued operations investing activities -- 12,432,432
Cash used in discontinued operations financing activities -- (16,349,977)
Effect of exchange rate on cash -discontinued operations -- (214,633)
------------- -------------
Net (decrease) increase in cash from discontinued operation -- (1,127,596)
Cash, beginning of year - Discontinued operation -- 1,127,596
------------- -------------
Cash, end of year - Discontinued operation $ -- $ --
============= =============
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
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 (also referred to as "PRC"). The principal activities
of the Company, through its subsidiaries, are research, manufacture, and the
sale of drug raw materials and intermediates as well as prescription and
non-prescription drugs and traditional Chinese medicines. The Company is also
engaged in the discovery, development and commercialization of innovative drugs
and related bio-pharmaceutical products in China.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
Economic and Political Risks
The Company faces a number of risks and challenges since its assets are located
in China and its revenues are derived from its operations in China. China is a
developing country with a young economic market system overshadowed by the
state. Its political and economic systems are very different from the more
developed countries and are still in the stage of change. China also faces many
social, economic and political challenges that may produce major shocks and
instabilities and even crises, in both its domestic arena and its relationship
with other countries, including but not limited to the United States. Such
shocks, instabilities and crises may in turn significantly and negatively affect
the Company's performance.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
all its majority-owned subsidiaries 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
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 and estimates the fair value of share based compensation which affects the
amount of compensation recognized in earnings. 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.
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. The
Company reviews the carrying value of land use rights at least annually, more
often if necessary, to determine whether their carrying value has become
impaired. Impairment charges are recorded when the carrying value
F-6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
of the asset exceeds future benefits to be derived from the asset.
Plant and Equipment, Net
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
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.
Interest incurred during the period of construction, if material, is
capitalized. 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 at least annually, more often if
necessary, 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 December 31, 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 $4,432,657 as of December 31, 2008 and $1,096,800 as of
December 31, 2007. For the years ended December 31, 2008 and 2007, the Company
recorded $27,648 and $0 as realized gain on short-term investment.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management's judgment and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, the Company
analyzes the aging of accounts receivables balances, historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms. Significant changes in customer
concentrations or payment terms, deterioration of customer credit-worthiness or
weakening economic trends could have a significant impact on the collectibility
of the 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 allowance may be required. The ultimate collection of
the Company's accounts receivables may take over one year and accounts
receivables outstanding more than one year is considered to be written-off.
F-7
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out basis. The Company reviews its inventory periodically for possible
obsolescence or to determine if any reserves are necessary.
Patents
The Company obtained various official registration certificates or official
approvals for clinical trials representing patented pharmaceutical formulas. 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 fifteen years. Such costs comprise purchase costs of patented
pharmaceutical formulas and costs incurred for patent application. Patent costs
are accounted for on an individual basis. The carrying value of patent costs is
reviewed for impairment annually 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 years ended
December 31, 2008 and 2007 amounted $23,021 and $90,804.
Shipping and Handling Costs
Shipping and handling costs related to costs of goods sold are included in
selling, general and administrative costs were $385,532 and $340,659 for the
years ended December 31, 2008 and 2007, respectively.
Concentration of Risks
Cash includes cash on hand and demand deposits in accounts maintained with banks
within the People's Republic of China, Hong Kong and the Untied States. Total
cash in these banks at December 31, 2008 and 2007 amounted to $580,492 and
$669,699 of which $0 and $65,490 deposits are covered by FDIC insurance,
respectively. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank accounts.
The Company sells pharmaceutical products to pharmacies and hospitals. Five
major customers accounted for approximately 11.2% 13.8% of the net revenue for
the years ended December 31, 2008 and 2007, respectively. No sales revenue from
any single customer was above 5% of total sales revenue. As of December 31, 2008
and 2007, the total receivable balances due from these customers were $1,014,498
and $403,018, respectively, representing 22.2% and 8.7% of total accounts
receivables.
For the year ended December 31, 2008, five major suppliers provided
approximately 49.5% of the Company's purchases of raw materials with each
supplier individually accounting for 13.6% 11.9%, 9.1%, 9.1% and 5.7%,
respectively. Five suppliers provided 45.4% of the Company's purchase of raw
materials for the year ended
F-8
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
December 31, 2008, with each suppliers individually accounted for 17.9%, 12.0%,
6.5%, 4.7% and 4.3%, respectively.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements, which
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.
Short-term loans amounted to $2,611,260 at December 31, 2008. In accordance with
SFAS 157, the Company determined that the carrying value of this loan
approximated the fair value using the level 2 inputs by comparing the stated
loan interest rates to the rates charged by the Industrial and Commercial Bank
of China to similar loans.
As of December 31, 2008, the carrying value of the redeemable convertible
preferred stock amounted to $12,508,534. The redeemable shares are carried at
redemption value which the management believes to be representative of the fair
value.
Fair Value Measurements
Carrying Value Using Fair Value Hierarchy
-------------- --------------------------------
Level 1 Level 2 Level 3
Short-term loan $ 2,611,260 $ 2,611,260
============== ======= ============ =======
Redeemable convertible preferred stock $ 12,508,534 $ 12,508,534
============== ======= ============ =======
The Company did not identify any assets or liabilities that are required to be
presented on the balance sheet at fair value in accordance with SFAS 157.
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.
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
F-9
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
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.
Revenue was made up of the following product categories.
For the years ended
December 31, 2008 December 31, 2007
----------------- -----------------
Revenue:
Intermediary pharmaceuticals products $ 13,647,392 $ 9,269,591
Prescription drugs 35,948,342 22,380,572
R&D service 245,424 277,215
----------------- -----------------
Total revenue $ 49,841,158 $ 31,927,378
================= =================
Income Taxes
Income taxes are provided on the liability method whereby deferred tax assets
and liabilities are recognized for the expected tax consequences of temporary
differences between the tax basis and reported amounts of assets and
liabilities. Deferred tax assets and liabilities are computed using enacted tax
rates expected to apply to taxable income in the periods in which temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities from a change in tax rates is recognized in income in the
period that includes the enactment date. The Company provides a valuation
allowance for certain deferred tax assets, if it is more likely than not that
the Company will not realize tax assets through future operations.
The Company adopted FASB Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"), as of January 1, 2007. A tax position is recognized as
a benefit only if it is "more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption had no
effect on the Company's financial statements.
Comprehensive Income
SFAS 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 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 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
F-10
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
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 $1,771,414 and
774,891 at December 31, 2008 and 2007, respectively. Assets and liabilities at
December 31, 2008 and December 31, 2007 were translated at 6.82 and 7.29 RMB to
$1.00. The average translation rates applied to income statement accounts,
statement of cash flows for years ended of 2008 and 2007 were 6.94 and 7.59 RMB
to $1.00. Cash flows are also translated at average translation rates for the
period, therefore, amounts reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. These amounts are immaterial
to the consolidated financial statements.
Earnings per Share
The Company adopted SFAS 128, "Earnings per Share" ("EPS"), which requires the
presentation of earnings per share 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.
Shares Subject to Mandatory Redemption
The Company adopted SFAS 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS 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 SFAS 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. Under the terms of the redeemable stock, the
issuer has the right to redeem and the holder has the right to convert any time
up to and including the fourth anniversary of the issuance. Therefore, liability
accounting is not triggered under SFAS 150, because the stock is not mandatorily
redeemable until after the fourth anniversary. However, pursuant to EITF Topic
D-98, "Classification and Measurement of Redeemable Securities," the redeemable
stock is classified outside of shareholders' equity. If the redeemable stock is
not converted by the fourth anniversary, then the shares the mandatory
redemption is triggered, and pursuant to SFAS 150, the shares will be
reclassified to liabilities.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities--including an amendment of FASB Statement No.
115. SFAS 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 SFAS 159 is to provide opportunities to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply hedge
F-11
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
accounting provisions. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
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 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 adopted FSP EITF 07-3 on January 1, 2008 and there is no material effect
on financial statements.
In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51", 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, SFAS 141R, "Business Combinations," was issued. SFAS 141R
replaces SFAS 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 141R might materially impact the accounting
treatment for any future merger or acquisition consummated January 1, 2009.
In March 2008, the FASB issued SFAS 161, "Disclosures about Derivative
Instruments and Hedging Activities - An Amendment of SFAS No. 133." 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 EITF 07-5, "Determining whether an Instrument (or
Embedded Feature) is indexed to an Entity's Own Stock." 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 SFAS 133 "Accounting for Derivatives and Hedging
Activities" 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 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
F-12
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
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 08-4, Transition Guidance for Conforming Changes
to Issue No. 98-5. The objective of EITF 08-4 is to provide transition guidance
for conforming changes made to EITF 98-5, Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios, that result from EITF 00-27 "Application of Issue No. 98-5 to Certain
Convertible Instruments", and SFAS 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. This issue had no material impact on
the Company's financial statements as of December 31, 2008 and for the year then
ended.
On October 10, 2008, the FASB issued FSP.157-3, "Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active," which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption had no material
impact on the Company's financial statements as of December 31, 2008 and for the
year then ended..
In January 2009, the FASB issued FSP EITF 99-20-1, "Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets" ("FSP EITF 99-20-1"). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on "market
participant" estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
"market participant" view to a holder's estimate of whether there has been a
"probable" adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our
consolidated financial statements because all of our investments in debt
securities are classified as trading securities.
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.
Note 3 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and income taxes paid
o Interest expense paid amounted to $159,182 and $148,825 for years
ended December 31, 2008 and 2007, respectively.
o Income tax was paid $972,642 and $1,131 for the years ended December
31, 2008 and 2007, respectively.
Non-cash investing and financing activities
o On November 16, 2007, the principal of loans payables for
$11,500,000 related to Enshi acquisition and the unpaid interest in
total of $12,508,534 had been converted into the Company's Series B
redeemable preferred stock.
F-13
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
o In addition, $1,110,346 and $0 were transferred from net income to
dividends payable for the year ended December 31, 2008 and 2007.
o The Company written-off $1,988,180 and $576,600 receivables from
other receivables and long-term notes receivables, respectively, as
of December 31, 2008 and increased bad debt expense in the amount of
$2,564,780 at the same time.
o $1,866,454 advance on land use right has being transferred to
intangible assets during the year ended December 31, 2008.
o The Company reduced cost of expired patent under intangible assets
and the related accumulated amortization in the amount of $151, 790,
respectively, during the year ended December 31, 2008.
Note 4 - ACCOUNTS RECEIVABLE, NET
The reserve for bad debts was $1,200,983 and $1,260,760 at December 31, 2008
and, 2007.
Accounts receivable consisted of the following:
December 31, December 31,
2008 2007
------------ ------------
Accounts receivable $ 4,572,208 $ 4,812,243
Allowance for doubtful accounts (1,200,983) (1,260,760)
------------ ------------
Accounts receivable, net $ 3,371,225 $ 3,551,483
============ ============
Management regularly reviews aging of receivables and changes in payment trends
by its customers, and records a reserve when they believe collection of amounts
due are at risk. Accounts considered uncollectible are written off. As of
December 31, 2008 and 2007, management concluded its allowance for bad debts
were sufficient.
The following table consists of allowance for doubtful accounts.
Allowance for doubtful accounts, December 31, 2006 $ 682,445
Addition 530,938
Recovery
Translation adjustment 47,377
-----------
Allowance for doubtful accounts, December 31, 2007 $ 1,260,760
Addition
Recovery (140,058)
Translation adjustment 80,281
-----------
Allowance for doubtful accounts, December 31, 2008 $ 1,200,983
===========
Note 5 - INVENTORIES
Inventories consisted of the following:
December 31, December 31,
2008 2007
------------ ------------
Raw materials $ 2,043,597 $ 1,858,866
Refinery materials 2,231,623 3,139,200
Packaging supplies 274,282 239,624
Sundry supplies 13,736 11,984
Work in process 637,021 351,611
F-14
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
Finished goods 3,859,646 3,360,770
------------ ------------
Total inventory 9,059,905 8,962,055
Inventory allowance (26,250) --
------------ ------------
Total inventories $ 9,033,655 $ 8,962,055
============ ============
The Company periodically reviews its reserves for slow moving and obsolete
inventories. As of December 31, 2008 and 2007, the Company reserved $26,250 and
$0 as inventory allowance, respectively.
Note 6 - PLANT AND EQUIPMENT, NET
Plant and equipment consisted of the following:
December 31, December 31,
2008 2007
------------ ------------
Plant $ 2,446,124 $ 2,286,051
Office equipment 28,420 25,478
Machinery 7,386,881 6,368,927
Vehicles 258,300 228,043
Construction in progress 7,379,805 185,963
------------ ------------
Total plant and equipment 17,499,530 9,094,462
Less: accumulated depreciation (5,844,350) (4,972,293)
------------ ------------
Plant and equipment, net $ 11,655,180 $ 4,122,169
============ ============
Depreciation expense for the years ended December 31, 2008 and 2007 amounted to
$517,469 and $482,708, respectively. For the year ended December 31, 2008, the
Company capitalized interest expense as part of construction-in-progress
amounting of $160,375 and $0 with 7.12% and 6.59% effective weighted average
interest rate as of December 31, 2008 and 2007, respectively.
Note 7- OTHER ASSETS
Intangible Assets
Intangible assets consist of the following:
December 31, December 31,
2008 2007
------------ ------------
Land use rights: $ 8,058,504 $ 7,688,637
Less: accumulated amortization (641,074) (459,333)
------------ ------------
Land use rights, net 7,417,430 7,229,304
------------ ------------
Patent - Approved drugs 190,710 322,596
Less: accumulated amortization (21,083) (153,711)
------------ ------------
Patent, net 169,627 168,885
------------ ------------
Total intangible assets, net $ 7,587,057 $ 7,398,189
============ ============
Land use rights are pledged as collateral for bank loans. Amortization expenses
for the years ended December 31, 2008 and 2007 amounted $166,984 and $166,470,
respectively.
One of the Company's patent of approved drug was fully amortized during 2008,
$151,790 of costs and accumulated amortization were deducted from intangible
asset account.
The following table consists of the expected amortization expense for the next
five years:
F-15
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
Years ended December 31, Amount
------------
2009 $ 170,050
2010 170,050
2011 170,050
2012 170,050
2013 170,050
Thereafter 6,736,807
------------
Total $ 7,587,057
============
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:
December 31, December 31,
Name of Bank 2008 2007
- --------------------------------------------- ------------ ------------
Hua Xia Bank, Suzhou $ 3,863 $ 164,871
Industrial and commercial bank, Suzhou -- 353,718
China CITIC Bank 1,369,365 --
- --------------------------------------------- ------------ ------------
Total $ 1,373,228 $ 518,589
============ ============
Long Term Notes Receivable
Long term notes receivable represents loans made to third party 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 December 31, 2007, the total
amount of the long term notes receivable was $640,518 for the aforesaid
projects. However, the Company determined that the long-term notes receivable
was deemed no longer collectable and has written off the balance amounted to
$586,800 (RMB 4,000,000) as of December 31, 2008.
Note 8 - RELATED PARTIES TRANSACTIONS
Accounts Receivables - Related Parties
Accounts receivable included the following:
December 31, December 31, Manner of
2008 2007 Due From Term Settlement
- ------------- ------------ -----------------------------------------------------
Erye $ -- $ 41,932 Hainan Kaiye Short Term Cash
Hainan Kaiye was a company owned by minority shareholders of Suzhou Erye
Pharmaceutical Limited Company. Hainan Kaiye was disposed to two unrelated
parties during the year and the transaction was consummated on Oct 29, 2008. As
of December 31, 2008, Hainan Kaiye was not qualified as a related party.
Other Receivables - Related Parties
Other receivable contained the following related party balances where Hainan
Kaiye was a company owned
F-16
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
by minority shareholders of Suzhou Erye Pharmaceutical Limited Company before
Oct 29, 2008 and Enshi was the discontinued subsidiary since July 2007.
December 31, December 31, Manner of
2008 2007 Due From Term Settlement
- ------------- ------------ ---------------------------------------------------------------
Erye $ -- $ 819,621 Hainan Kaiye Short Term Cash
Keyuan 10,000 -- An Lu Fang Short term Cash
CBH 265,442 -- Enshi Short Term Cash
- ------------- ------------ ------------
Total $ 275,442 $ 819,621
============ ============
Loan to Shareholder and Officer
December 31, December 31, Manner of
2008 2007 Due From Term Settlement
- ------------- ------------ ---------------------------------------------------------------
CBH $ 46,058 $ -- Chris Peng Mao Short Term Cash
Keyuan 28,460 45,243 Keyuan's shareholder Short Term Cash
- ------------- ------------ ------------
Total $ 74,518 $ 45,243
============ ============
Other Payables - Related Parties
December 31, December 31, Manner of
2008 2007 Due To Term Settlement
- ------------- ------------ ---------------------------------------------------------------
Erye $ 499,186 $ 644,750 Erye Trading Short Term Cash
CBH 166,838 -- Erye Trading Short Term Cash
- ------------- ------------ ---------------------------------------------------------------
Total $ 666,024 $ 644,750
============ ============
Erye Trading was a company owned by minority shareholders of Suzhou Erye
Pharmaceutical Limited Company. The 38 minority shareholders of Erye transferred
their shares of Erye to Erye Trading in 2008 and the transactions was
consummated on June 24, 2008. Erye Trading is the 49% shareholder of Erye as of
December 31, 2008.
Other Payables- Shareholders
December 31, December 31, Manner of
2008 2007 Due To Term Settlement
- ------------- ------------ ---------------------------------------------------------------
CBH $ -- $ 43,961 Chris Peng Mao Short Term Cash
Keyuan 670 627 Lufan An & Xiaohao Liu Short Term Cash
- ------------- ------------ ------------
Total $ 670 $ 44,588
============ ============
Chris Peng Mao is the CEO of the Company. Lufan An & Xiaohao Liu are both
shareholder of the Company.
Note 9 - SHORT TERM LOANS
The Company has a total of $2,611,260 and $2,371,830 in short term loans from
different banks in China at December 31, 2008 and 2007, respectively. These
loans mature in one year or less. The average interest rates were approximately
7.12% and 7.33% for the year ended December 31, 2008 and 2007, respectively.
Bank loans were collateralized by plant owned by Erye in the amount of $127,749
as of December 31, 2008.
Interest expense of the short term bank loans for the years ended December 31,
2008 and 2007 amounted to $1,595 and $206,450 respectively. The Company
capitalized interest expense for construction in progress amounting of $160,375
for the year ended December 31, 2008.
F-17
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
Note 10 - NOTES PAYABLE
The Company's subsidiary Erye has $4,563,837 and $1,727,460 notes payable to
Erye's vendors for the purchase of drug raw materials as of December 31, 2008
and 2007. Notes payable are interest free and usually mature after a six-month
period.
In order to issue noted payable on behalf of the Company, the banks requested
collaterals, such as cash deposit which was approximately 30-50% of notes to be
issued, or properties owned by companies or etc. As of December 31, 2008,
$1,369,365 restricted cash was collateral for the $1,369,365 notes payable,
which was approximately 30.0% of the notes payable (See notes 7) the Company
issued, and the rest of notes payable is pledged by the land use right the
Company owned amounted to $1,880,477.
Note 11 - TAXES PAYABLE
Taxes payable was comprised as follows:
December 31, 2008 December 31, 2007
----------------- -----------------
Income tax payable $ 1,551,754 $ 1,028,507
VAT payable 657,978 455,043
Other taxes payable 5,935 5,414
----------------- -----------------
Total $ 2,215,667 $ 1,488,964
================= =================
Note 12 - 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
into 6,185,607 shares of Series B redeemable convertible preferred shares of the
Company at an effective conversion price at $2.0222 per share. Each series B
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
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 extended to 4.5 years from the closing date. This
Agreement was conditional subsequent to the completion of at least one of
sizeable acquisitions by the end of June 2008. RimAsia extended the wavier to
not to convert the Series B preferred stock to debt to earlier of (a) October
31, 2009 or (b) abandonment of the merger with NeoStem which is disclosed in
Note 18.
The Company adopted SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. Under the terms of the
redeemable stock, the issuer has the right to redeem and the holder has the
right to convert any time up to and including the fourth anniversary of the
issuance. Therefore, liability accounting is not triggered under SFAS 150
because the stock is not mandatorily redeemable until after the fourth
anniversary. However, pursuant to EITF Topic D-98, "Classification and
Measurement of Redeemable Securities," the redeemable stock is classified
outside of shareholders' equity.
According to the Agreement, the series B preferred stock is 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,
either in cash or in kind. (4)The four-percent suspendible premium which shall
be deemed to have begun to accrue from the Series B Issuance date and shall
continue to accrue until the date when the average closing price of the common
stock over 30 consecutive trading days each with a daily treading volume of no
fewer than 100,000 shares exceeds the following price thresholds: during the 2nd
year from the Series B Issuance date, $1.4, during the 3rd year, $1.58, and
during the 4th year, $1.72.
F-18
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
The Series B redeemable stock was recorded at fair value on the date of
issuance. As of December 31, 2008 and 2007, balances of redeemable preferred
stock amounted to $12,508,534. Dividend payables amounted to $1,110,346 and
$77,107 as of December 31, 2008 and 2007, respectively. As of December 31, 2008,
pursuant to the optional redemption clause, the holders of the series B shares
shall be entitled to receive an annual dividend of 5% amounted to $651,129; and,
the four-percent suspendible premium was accrued in the amount of $459,217,
which were included in dividend payable.
On November 2, 2008, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Neostem, Inc., a Delaware corporation, and CBH
Acquisition LLC ("Merger Sub"), a Delaware "NBS" limited liability company and
wholly-owned subsidiary of Neostem. Pursuant to the Merger Agreement, CBH will
merge into Merger Sub, with Merger Sub as the surviving entity. All of the
shares of the Company's series B shares issued and outstanding immediately prior
to the effective time of the Merger will be converted into (i) 5,383,009 shares
of NeoStem Common Stock, (ii) 6,977,512 shares of Series C Convertible Preferred
Stock, without par value, of NeoStem, each with a liquidation preference of
$1.125 per share and convertible into shares of NeoStem Common Stock at a
conversion price of $0.90 per share, and (iii) warrants to purchase 2,400,000
shares of NeoStem Common Stock at an exercise price of $0.80 per share.
Note 13 - STATUTORY RESERVES
The laws and regulations of the PRC require that before foreign invested
enterprise can legally distribute profits, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the board of directors, after the
statutory reserves. The statutory reserves include the surplus reserve fund and
the common welfare fund.
The Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company's registered
capital. 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 transfer to this reserve must be made before distribution of any dividends
to shareholders. The surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years' losses, if any, and may be
utilized for business expansion or converted into share capital by issuing new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital. The Chinese government restricts distributions of registered
capital and the additional investment amounts required by a foreign invested
enterprise. Approval by the Chinese government must be obtained before
distributions of these amounts can be returned to the shareholders.
During the years ended December 31, 2008 and 2007, the Company made total
appropriations to these statutory reserves of $532,359 and $314,198,
respectively. The component of statutory reserves and the future contribution
required pursuant to Chinese Corporation Regulation are as follows at December
31, 2008 and 2007:
2008 2007
----------- -----------
Statutory surplus reserve $ 1,448,100 $ 915,741
Common welfare reserve 60,698 60,698
----------- -----------
Total $ 1,508,798 $ 976,439
----------- -----------
50% of registered share capital of Erye 1,508,798 1,508,798
----------- -----------
Extra contribution required $ -- $ 532,359
=========== ===========
F-19
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
Note 14 - 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.
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. Erye was granted income tax exemption for two years commencing
from January 1, 2006, and is subject to 50% of the 25% EIT tax rate, or 12.5%
from January 1, 2008 through December 31, 2010. 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 $1,418,334 and $1,245 for the years ended
December 31, 2008 and 2007, respectively.
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
For the years ended
December 31,
--------------------------
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 (7.6) (33.2)
----------- -----------
Total provision for income taxes 17.4% (0.2)%
=========== ===========
The estimated tax savings due to the reduced tax rate for the years ended
December 31, 2008 are $1,418,334 and $1,036,854, respectively. The net effect on
income per share if the income tax had been applied would decrease income per
share by $0.04 and $0.03 for the years ended December 31, 2008 and 2007,
respectively.
The Company was incorporated in the United States and incurred a net operating
loss for income tax purposes for 2008 and 2007. The net operating loss carry
forwards for United States income tax purposes amounted to $5,239,906 and
$4,740,785 for the years ended December 31, 2008 and 2007, respectively, which
may be available to reduce future years' taxable income. These carry forwards
will expire, if not utilized, beginning in 2027 through 2028. Management
believes that the realization of the benefits arising from this loss appear to
be uncertain due to Company's limited operating history and continuing losses
for United States income tax purposes. Accordingly, the Company has provided a
100% valuation allowance at December 31, 2008 and 2007. Management reviews this
valuation allowance periodically and makes adjustments as warranted
The valuation allowance for the years ended December 31, 2008 and 2007 were as
follow:
F-20
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
Years ended December 31,
2008 2007
- -----------------------------------------------------------------------------
Balance of January 01, $ 1,611,867 $ 1,066,972
Increase 169,701 544,895
----------- -----------
Balance of December 31, $ 1,781,568 $ 1,611,867
=========== ===========
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 $8,647,372 and $5,888,088 for the
years ended December 31, 2008, and $5,614,462 and $4,235,377 for the same period
in 2007, respectively. Sales and purchases are recorded net of VAT collected and
paid as the Company acts as an agent for the government. VAT taxes are not
impacted by the income tax holiday.
Note 15 - Earnings Per Share
The Company determined that all the warrants were anti-dilutive because the
exercise prices were higher than average market price in the period presented as
of December 31, 2008. The redeemable convertible preferred stock is mandatorily
redeemable for cash at the fourth anniversary if not yet converted. As of
December 31, 2008, none of the preferred stock had been converted. Dividends and
accretion on the preferred stock were subtracted from net income to determine
net income available to common shareholders for the purposes of computing basic
earnings per share. In calculating diluted earnings per share, the convertible
preferred stock is treated as common stock equivalents on an as-converted basis.
Dividends and accretion on the preferred stock are added back to the net income
available to common shareholders for calculating diluted earnings per share, as
if the preferred stock were converted at the beginning of the period. The
convertible preferred stock - series A of 50,000 and redeemable convertible
preferred stock - series B of 6,185,607 were anti-dilutive for the year ended
December 31, 2008 based on the calculation method above used.
The Company determined that all the warrants, the convertible preferred stock -
series A of 50,000 and redeemable convertible preferred stock - series B of
6,185,607 were anti-dilutive for the year ended December 31, 2007 because the
Company recorded net loss for the periods presented.
The number of shares used in computing basic earnings per share for the years
ended December 31, 2008 and 2007 were 36,348,531 and 36,340,860, respectively.
Basic and diluted earnings per share for the years ended December 31, 2008 and
2007 were $0.05 and $(0.37), respectively.
Note 16 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space from third parties. Accordingly, for the years
ended December 31, 2008 and 2007, the Company recognized rent expenses of
$11,892 and $39,074, respectively.
As of December 31, 2008, the Company has outstanding commitments in respect to
non-cancelable operating
F-21
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
leases as follows:
Amount
-----------
For the year ended December 31 2009 $ 6,486
Thereafter --
-----------
Total $ 6,486
===========
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 approximately $1,600,000 (RMB12,000,000) to the
Developer. Of the total $1,600,000, 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 $1,321,561 (RMB9,008,596)
and $959,700 (RMB7,000,000) as of December 31, 2008 and 2007, respectively.
Legal Proceedings
In March 2007, the Company identified non-existent trade accounts receivable
acquired in the acquisition of Enshi. RACP Pharmacentical Holdings Limited,
("RACP"), a former subsidiary of CBH 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 froze 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.
In July 2007, Enshi was foreclosed on by RimAsia and ceased to be part of the
Company. RimAsia assumed the litigation activities against Mr. Li Xiaobo and
certain other defendants in connection with the acquisition of shares of Enshi
("LXB") and on October 17, 2008_reached a settlement with LXB pursuant to which
Enshi was returned to LXB against a payment of certain sum of funds of which the
residual sum post litigation costs were to be eventually transferred to the
Company. The expected residual is not expected to be meaningful to the Company.
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.
F-22
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
On September 1, 2008, the Company and RimAisa entered into an Understanding on
Litigation Residual Payment (the "Understanding"). Pursuant to this
Understanding, if there is no consummation of the Merger, the gross residual
(the "Gross Residual") from the LXB Litigation receivable by CBH (being the
gross settlement proceeds of the LXB litigation paid by Li Xiao Bo less the
litigation and related expenses incurred by and reimbursed to RACP pursuant to
the Litigation Agreement shall be paid to CBH in cash or shares of common stock
and warrants to purchase common stock of NBS (collectively, "NBS Securities"),
such NBS Securities being valued at their original purchase price but in no case
to be more than (a) US$1,250,000 or (b) the value of the Gross Residual,
whichever is less, and only to the extent there is any such residual from the
LXB litigation. Any amount of the Gross Residual remaining after deducting the
value of NBS Securities under the immediately preceding sentence shall be
immediately paid to CBH in cash. In case of a closing of the Merger, RACP may no
longer deliver such NBS Securities to CBH, but shall be able to deliver to Erye
Economy & Trade Ltd ("EET") NBS Securities, valued at their purchase price and
up to an amount equal to 50% of the "Net Residual" (to be defined below), in
exchange for the withholding of an equal amount of cash from the Gross Residual,
pursuant to the terms of an agreement with EET that will be documented and
signed prior to or at the closing of the Merger. The "Net Residual" means the
Gross Residual minus the sum of (a) US$1.3 million representing the legal fees
and costs and the un-reimbursed advances and expenses made by Erye to Shenyang
Enshi Pharmaceutical Ltd. and CBH, and (b) US$300,000 for operating expenses of
CBH over the next 12 months.
Note 17 - SHAREHOLDERS' EQUITY
Issuance of Shares for Services
In December 2008, the Company issued 100,000 shares of common stock to a
consultant for the services provided during the period from January 2007 to
February 2009. Shares were valued at $27,000 based on the market price at the
service contract signing dates.
Warrants
Following is a summary of the status of warrants outstanding at December 31,
2008:
Outstanding Warrants Exercisable Warrants
------------------------ ------------------------------------
Exercise Number Average Average Number Intrinsic
Price Remaining Exercise Value
Contractual Price
Life
-------- ---------- ----------- --------- ----------- ---------
1.26 12,000,000 3.4 $ 1.26 12,000,000 --
2.00 84,607 0.2 $ 2.00 84,607 --
1.25 1,000,000 1.1 $ 1.25 1,000,000 --
1.26 7,165,535 1.2 $ 1.26 7,165,535 --
---------- ----------- ---------
20,250,142 20,250,142 --
========== ===========
Following is a summary of the Warrant activity:
Outstanding as of January 01, 2007 10,400,396
Granted 12,000,000
Forfeited 510,421
Exercised --
----------
Outstanding as of December 31, 2007 21,889,975
Granted --
Forfeited 1,639,833
Exercised --
----------
Outstanding as of December 31, 2008 20,250,142
==========
Except as described above, no other changes have been made to the Annual Report,
and this Amendment No. 1 does not amend or update any other information
contained in the Annual Report.
F-23
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
Note 18 - 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.
Merger with NeoStem, Inc.
As previously mentioned in Note 12, on November 2, 2008, CBH entered into an
Agreement and Plan of Merger (the "Merger agreement") with CBC, NeoStem, Inc.,
and CBH Acquisition LLC ("Merger Sub"). The Merger Agreement contemplates the
merger of CBH with and into Merger Sub, with Merger Sub as the surviving entity
(the "Merger"). Prior to the consummation of the Merger, CBH will spin off all
of its shares of capital stock of CBC to CBH's stockholders in a liquidating
distribution so that the only material assets of CBH following such spin-off
will be CBH's 51% ownership interest in Erye, plus net cash which shall not be
less than $550,000.
Pursuant to the terms and subject to the conditions set forth in the Merger
Agreement, all of CBH's common stock, par value $.01 per share, issued and
outstanding immediately prior to the effective time of the Merger (the
"Effective Time") will be converted into the right to receive, in the aggregate,
7,500,000 shares of NeoStem's common stock at par value of $.001 per share (of
which 150,000 shares will be held in escrow pursuant to the terms of an escrow
agreement to be entered into between CBH and NeoStem).
Subject to the cancellation of outstanding warrants to purchase shares of CBH
Common Stock held by RimAsia, all of the shares of CBH series B preferred stock
solely held by RimAsia, issued and outstanding immediately prior to the
Effective Time will be converted into NeoStem's common stock, series C
convertible preferred stock and warrants to purchase NeoStem's common stock. See
details in Note 13.
At the Effective Time, in exchange for cancellation of all of the outstanding
shares of CBH series A convertible preferred stock which is held by Stephen
Globus, a director of CBH, and/or related persons, NeoStem will issue to Mr.
Globus and/or related persons 50,000 shares of NeoStem common stock at $1.00 per
share. NeoStem also will issue 60,000 shares of NeoStem Common Stock to Mr.
Globus and 40,000 shares of NeoStem common stock to Chris Peng Mao, the Chief
Executive Officer of CBH, in exchange for the cancellation and the satisfaction
in full of indebtedness in the aggregate principal amount of $90,000, plus any
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
- --------------------------------------------------------------------------------
and all accrued but unpaid interest thereon, and other obligations of CBH to
Globus and Mao. NeoStem will bear 50% of up to $450,000 of CBH's expenses
post-merger, and satisfaction of the liabilities of Messrs. Globus and Mao will
count toward that obligation. NeoStem also will issue 200,000 shares to CBC to
be held in escrow, payable if NeoStem successfully consummates its previously
announced acquisition of control of Shandong New Medicine Research Institute of
Integrated Traditional and Western Medicine Limited Liability Company.
Also at the Effective Time, subject to acceptance by the holders of all of the
outstanding warrants to purchase shares of CBH common stock (other than warrants
held by RimAsia), such warrants shall be canceled and the holders thereof shall
receive warrants to purchase up to an aggregate of up to 2,012,097 shares of
NeoStem common stock at an exercise price of $2.50 per share.
Upon consummation of the transactions contemplated by the Merger, Merger Sub
will own 51% of the ownership interests in Erye, and Suzhou Erye Economy and
Trading Co. Ltd., a company incorporated in the PRC ("EET"), will own the
remaining 49% ownership interest. In connection with the execution of the Merger
Agreement, NeoStem, Merger Sub and EET have negotiated a revised joint venture
agreement (the "Joint Venture Agreement"), which, subject to finalization and
approval by the requisite PRC governmental authorities, will become effective
and will govern the rights and obligations with respect to their respective
ownership interests in Erye. Pursuant to the terms and conditions of the Joint
Venture Agreement, dividend distributions to EET and Merger Sub will be made in
proportion to their respective ownership interests in Erye; provided, however,
that for the three-year period commencing on the first day of the first fiscal
quarter after the Joint Venture Agreement becomes effective, (i) 49% of
undistributed profits (after tax) will be distributed to EET and lent back to
Erye by EET for use by Erye in connection with the construction of a new plant
for Erye; (ii) 45% of the net profit (after tax) will be provided to Erye as
part of the new plant construction fund, which will be characterized as paid-in
capital for Merger Sub's 51% interest in Erye; and (iii) 6% of the net profit
will be distributed to Merger Sub directly for NeoStem's operating expenses. In
the event of the sale of all of the assets of Erye or liquidation of Erye,
Merger Sub will be entitled to receive the return of such additional paid-in
capital before distribution of Eyre's assets is made based upon the ownership
percentages of NeoStem and EET, and upon an initial public offering of Erye
which raises at least $7,300,000 (RMB 50,000,000), Merger Sub will be entitled
to receive the return of such additional paid-in capital. CBC will receive
$300,000 from the settlement proceeds from the settlement of the litigation in
Hong Kong and Canada by RACP Pharmaceutical Holdings Limited, a wholly-owned
subsidiary of CBC, against Li Xiaobo and certain other defendants in connection
with the acquisition of shares of Enshi (the "LXB Litigation") and use it as
working capital.
Change of minority shareholders
On June 24, 2008, the original 38 individual shareholders of Erye transferred
their ownership interest (in total 49%) in Erye to Erye Ecornomic and Trade
company limited ("Erye Trading"). Erye Trading is 49% shareholder of Erye as of
December 31, 2008. The transaction was approved by CBH and Erye's board, and
consummated before December 31, 2008.
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