UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2009
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 814-00063
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
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(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
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(Address of principal executive offices)(Zip Code)
(86) 512 6855 0568
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
of changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section.232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller Reporting Company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date: 36,590,312 shares of Common Stock, par
value $0.01 per share, as of May 11, 2009.
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK. 31
ITEM 4T. CONTROLS AND PROCEDURES. 31
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS. 31
SIGNATURES 32
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 AND DECEMBER 31, 2008
ITEM 1. FINANCIAL STATEMENTS INSERT FINANCIALS HERE
March 31, December 31,
2009 2008
-------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 2,226,777 $ 581,727
Short term investment 42,360 4,432,657
Restricted cash 1,433,950 1,373,228
Accounts receivable, net of allowance for doubtful accounts of 2,916,364 3,371,225
$1,280,099 and $1,200,983 at March 31, 2009 and December 31, 2008,
respectively
Other receivables and prepayments, net of allowance for doubtful 195,230 505,987
accounts of $299,965 and $300,068 at March 31, 2009 and December 31,
2008, respectively
Other receivables - related parties 349,921 349,960
Advances to suppliers 290,561 45,877
Inventories, net of $26,214 and $26,250 allowance at March 31, 2009and 12,614,701 9,033,655
December 31, 2008, respectively.
Loan receivable 1,860,550 -
-------------- -------------
Total current assets 21,930,414 19,694,316
-------------- -------------
PLANT AND EQUIPMENT, NET 12,616,528 11,655,180
-------------- -------------
OTHER ASSETS:
Intangible asset, net 7,539,511 7,587,057
Long term prepayments 127,455 80,541
Advance on patent and right purchase 1,319,759 1,321,561
Other assets 37,345 40,678
-------------- -------------
Total other assets 9,024,070 9,029,837
-------------- -------------
Total assets $ 43,571,012 $ 40,379,333
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 4,189,900 $ 4,563,837
Accounts payable and accrued 7,924,647 4,988,219
liabilities
Other payables 855,399 1,129,031
Other payables - related parties 716,554 666,694
Customer deposits 1,519,475 1,288,179
Taxes payable 1,823,943 2,215,667
Dividend payables 1,110,346 1,110,346
Short-term loans 1,435,700 2,611,260
-------------- -------------
Total current liabilities 19,575,964 18,573,233
LONG TERM LIABILITIES:
Warrants liabilities 1,171,769 -
-------------- -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK - Series B, $0.01 par value, 6,185,607 shares
issued and outstanding at March 31, 2009 and December 31, 2008. 12,508,534 12,508,534
-------------- -------------
EQUITY
Preferred stock - $0.01 par value, 10,000,000 shares authorized;
Series A, 50,000 shares issued and outstanding at March 31, 2009 and
December 31, 2008; 500 500
Series B, 6,185,607 shares issued and outstanding at March 31, 2009
and December 31, 2008, classified above outside permanent
shareholders' equity.
Common stock, $0.01 par value, 200,000,000 shares authorized;
36,590,312 shares issued and outstanding at March 31, 2009 and
December 31, 2008, respectively. 365,903 365,903
Paid-in capital 3,741,916 13,222,851
Capital receivable (252,471) (252,471)
Statutory reserves 1,508,798 1,508,798
Accumulated deficit (7,396,816) (16,797,813)
Accumulated comprehensive income 889,837 904,970
-------------- -------------
Total shareholders' deficit (1,142,333) (1,047,262)
Non-controlling interest 11,457,078 10,344,828
-------------- -------------
Total equity 10,314,745 9,297,566
-------------- -------------
Total liabilities and shareholders' equity $ 43,571,012 $ 40,379,333
============== =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
-1-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
For the three month ended March 31,
2009 2008
----------------- ---------------
REVENUE $ 12,648,007 $ 10,973,241
COST OF REVENUE 8,601,218 7,711,162
----------------- ---------------
GROSS PROFIT 4,046,789 3,262,079
----------------- ---------------
OPERATING EXPENSES:
Research and development 13,933 17,947
Selling, general and administrative 1,413,537 1,074,797
----------------- ---------------
Total operating expenses 1,427,470 1,092,744
----------------- ---------------
INCOME FROM OPERATIONS 2,619,319 2,169,335
----------------- ---------------
OTHER INCOME (EXPENSE):
Interest income (expense), net 2,290 (44,727)
Gain on trading securities 10,646 -
Changes in fair value of warrants (116,316) -
Other expenses, net (64,793) -
----------------- ---------------
Total other income (expense), net (168,173) (44,727)
----------------- ---------------
INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTEREST 2,451,146 2,124,608
PROVISION FOR INCOME TAXES 349,060 299,409
----------------- ---------------
NET INCOME BEFORE NON-CONTROLLING INTEREST 2,102,086 1,825,199
Less - Net income attributable to the noncontrolling interest 1,126,571 1,021,266
----------------- ---------------
NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST 975,515 803,933
Dividends and accretion on redeemable preferred stock - 311,857
----------------- ---------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 975,515 492,076
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment (15,134) 347,173
Comprehensive income (loss) attributable to the noncontrolling interest (14,321) 334,964
----------------- ---------------
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST $ 946,060 $ 1,174,213
================= ===============
EARNINGS PER SHARE:
Basic $ 0.03 $ 0.01
================= ===============
Diluted $ 0.02 $ 0.01
================= ===============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING:
Basic 36,590,312 36,490,312
================= ===============
Diluted 49,011,526 48,911,526
================= ===============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
-2-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. Shareholders
-----------------------------------------------------------------------------------
Preferred stock (series A) Common Stock
-------------------------- ------------------------ Paid-in Capital
Shares Par value Shares Par Value Capital Receivable
------ ----------------- ---------- ----------- ------------ -----------
BALANCE, December 31, 2007 50,000 $ 500 36,490,312 $ 364,903 $ 13,178,101 $ (252,471)
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 $ (252,471)
Cumulative effect of
reclassification of
warrants (9,480,935)
------ ----------------- ---------- ----------- ------------ -----------
BALANCE, January 1, 2009, as
adjusted 50,000 500 36,590,312 365,903 3,741,916 (252,471)
Net income
Foreign currency
translation adjustments
------ ----------------- ---------- ----------- ------------ -----------
BALANCE, March 31, 2009
(Unaudited) 50,000 $ 500 36,590,312 $ 365,903 $ 3,741,916 $ (252,471)
====== ================= ========== =========== ============ ===========
CHINA BIOPHARMACEUTICALS
HOLDINGS, INC. Shareholders
------------------------------ Accumulated
Statutory Accumulated Comprehensive Non-controlling
Reserves Income (Deficit) Income (Loss) Interest Totals
----------- ---------------- ------------- --------------- ------------
BALANCE, December 31, 2007 $ 976,439 $ (18,059,232) $ 389,084 $ 5,942,144 $ 2,539,468
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 3,922,048 6,749,065
Statutory reserves 532,359 (532,359) -
Foreign currency
translation adjustments 515,887 480,636 996,523
----------- ---------------- ------------- --------------- ------------
BALANCE, December 31, 2008 $ 1,508,798 $ (16,797,813) $ 904,971 10,344,828 $ 9,297,566
Cumulative effect of
reclassification of
warrants 8,425,482 (1,055,453)
----------- ---------------- ------------- --------------- ------------
BALANCE, January 1, 2009, as
adjusted 1,508,798 (8,372,331) 904,971 10,344,828 8,242,114
Net income 975,515 1,126,571 2,102,086
Foreign currency
translation adjustments (15,134) (14,321) (29,454)
----------- ---------------- ------------- --------------- ------------
BALANCE, March 31, 2009
(Unaudited) $ 1,508,798 $ (7,396,816) $ 889,837 $ 11,457,078 $ 10,314,745
=========== ================ ============= =============== ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
-3-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2009 AND 2008
(UNAUDITED)
For the three month ended March 31,
-----------------------------------
2009 2008
--------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to controlling interest $ 975,515 $ 803,933
Net income attributable to non-controlling interest 1,126,571 1,021,266
--------------- -----------------
Net income 2,102,086 1,825,199
Adjustments to reconcile net income from operations to cash
provided by operating activities:
Amortization of shares issued for service - 9,375
Depreciation 131,326 143,805
Amortization 43,417 61,597
Bad debt expense 80,759 -
Change in fair value of warrants 116,316 -
Change in operating assets and liabilities:
Notes receivable - (69,885)
Accounts receivable 369,536 (648,188)
Accounts receivable - related parties - 110
Other receivable and prepayments 310,092 509,400
Advance to suppliers (164,327) 395,790
Advance to suppliers - related parties - (232,107)
Inventories (3,593,607) (241,671)
Other assets 3,334 38,908
Accounts payable 2,811,329 54,273
Accounts payable - related parties - (77,037)
Other payable and other current liabilities (123,250) (647,743)
Customer deposits 233,068 968,007
Taxes payable (388,729) 188,855
--------------- -----------------
Net cash provided by operating activities 1,931,350 2,278,688
--------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets (3,162) -
Purchase of equipment (104,823) (43,066)
Purchase of construction-in-progress (1,003,714) (2,000,563)
Increase in other receivables - related parties - (316,866)
Decrease in short term Investment 4,384,553 419,310
Repayment of loan to related party - 134,958
Loan to third party (1,860,677) -
--------------- -----------------
Net cash provided by (used in) investing activities 1,412,177 (1,806,227)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted cash (62,599) (210,704)
Principal payment on bank loans (1,172,080) (279,540)
Proceed from related parties, long-term 50,543 202,275
(Increase) decrease on notes payable (367,740) 702,344
Payments on long-term prepayments (127,464) -
Repayments on long term liabilities (17,581) -
--------------- -----------------
Net cash (used in) provided by financing activities (1,696,921) 414,375
--------------- -----------------
EFFECT OF EXCHANGE RATE ON CASH (1,556) 208,026
--------------- -----------------
INCREASE IN CASH 1,645,050 1,094,862
CASH, beginning of period 581,727 669,699
--------------- -----------------
CASH, ending of period $ 2,226,777 $ 1,764,561
=============== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 36,421 $ -
=============== =================
Income taxes paid $ 293,220 $ -
=============== =================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
-4-
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
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NOTE 1- ORGANIZATION AND OPERATIONS
China Biopharmaceuticals Holdings, Inc. ("CBH", "We" and "the Company"), 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 ("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.
Management has included all adjustments, consisting only of normal recurring
adjustments, considered necessary to give a fair presentation of operating
results for the periods presented. Interim results are not necessarily
indicative of results for a full year. The information included in this Form
10-Q should be read in conjunction with information included in the 2008 annual
report filed on Form 10-K.
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 of the asset
exceeds future benefits to be derived from the asset.
-5-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
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) 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." As of March 31, 2009, 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 as other comprehensive
income. Total amount in this account was $42,360 as of March 31, 2009 and
$4,432,657 as of December 31, 2008. For the three month ended March 31, 2009 and
2008, the Company recorded $10,646 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 monthly review of all outstanding amounts.
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 concentration and
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.
-6-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
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 ("R&D") expenses include salaries, benefits, and other
headcount related costs, clinical trial and related clinical manufacturing
costs, contract and other outside service fees, and facilities and overhead
costs. R&D costs are expensed when incurred.
Under the guidance of paragraphs 8 to 11 of SFAS 2, the Company expenses the
costs associated with the research and development activities when incurred.
None of the intangible assets of the Company was recorded based on R&D costs.
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the three month
periods ended March 31, 2009 and 2008 amounted $50,294 and $17,616.
SHIPPING AND HANDLING COSTS
Shipping and handling costs related to costs of goods sold are included in
selling, general and administrative costs were $119,754 and $104,547 for the
three month periods ended March 31, 2009 and 2008, 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 March 31, 2009 and December 31, 2008 amounted to
$2,204,042 and $580,492 of which $31,573 and $0 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 16.8% and 36.0% of the net revenue
for the three month periods ended March 31, 2009 and 2008, respectively. No
sales revenue from single customer was above 10% of total sales revenue for the
three month ended March 31, 2009 and 2008. As of March 31, 2009 and 2008, the
total receivable balances due from these customers were $1,548,783 and
$1,213,581, respectively, representing 47.1% and 21.0% of total accounts
receivables.
For the three month periods ended March 31, 2009, five major suppliers provided
approximately 44.6% of the Company's purchases of raw materials with each
supplier individually accounting for 20.9% 13.3%, and 10.4%, respectively. For
the three months ended March 31, 2008, two major suppliers provided
approximately 30% of the Company's purchases of raw materials with each supplier
individually accounting for 20% and 10%, respectively.
-7-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, Disclosures About Fair Value of Financial Instruments, defines
financial instruments and requires fair value disclosures of those financial
instruments. SFAS 157, Fair Value Measurements, adopted January 1, 2008, 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 accompanying consolidated balance
sheets for receivables, payables and short term loans qualify as financial
instruments are a reasonable estimate of fair value because of the short period
of time between the origination of such instruments, their expected realization
and, if applicable, the stated rate of interest is equivalent to rates currently
available. The three levels of valuation hierarchy are defined as follows:
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.
As of March 31, 2009, the carrying value of the warrant liabilities in the
amount of $1,171,769. The input to the valuation of the underlying warrants is
adjusted on each financial statement date based on the Company's quoted prices
on the active stock market.
Balance of short term investment represented the quoted price of the securities
in active markets.
Fair Value Measurements Using Fair Value
Carrying Value Hierarchy
Level 1 Level 2 Level 3
Short term investment $ 42,360 $ 42,360 - -
Warrants payables 1,171,769 - 1,171,769 -
----------------- ----------------------------------------
Total $ 1,214,129 $ - 1,214,129 -
================= ========================================
WARRANTS LIABILITIES
Effective January 1, 2009, the Company adopted the provisions of EITF 07-5,
"Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity's Own Stock," which is effective for financial statements for fiscal
years beginning after December 15, 2008 and which replaced the previous guidance
on this topic in EITF 01-6. Paragraph 11(a) of FAS 133 specifies that a contract
that would otherwise meet the definition of a derivative but is both (a) indexed
to the Company's own stock and (b) classified in stockholders' equity in the
statement of financial position would not be considered a derivative financial
instrument. EITF 07-5 provides a new two-step model to be applied in determining
whether a financial instrument or an embedded feature is indexed to an issuer's
own stock and thus able to qualify for the FAS 133 paragraph 11(a) scope
exception.
As a result of adopting EITF 07-5, 19,831,684 of our issued and outstanding
warrants previously treated as equity pursuant to the derivative treatment
exemption were no longer afforded equity treatment because the strike price of
the warrants is denominated in US dollar, a currency other than the Company's
functional currency, the Chinese Renminbi. As a result, the warrants are not
considered indexed to the Company's own stock, and as such, all future changes
in the fair value of these warrants will be recognized currently in earnings
until such time as the warrants are exercised or expired.
As such, effective January 1, 2009, we reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their corresponding issuance dates. On January 1,
2009, we reclassified from additional paid-in capital, as a gain of cumulative
effect adjustment of $8,425,482 to beginning retained earnings and $1,055,453 to
long-term derivative instruments to recognize the fair value of such warrants on
such date. The fair value of these warrants increased to $1,171,769 as of March
31, 2009. As such, we recognized a $116,316 loss from the change in fair value
of these warrants for the three months ended March 31, 2009.
-8-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
These warrants do not trade in an active securities market, and as such, we
estimate the fair value of these warrants using the Black-Scholes option pricing
model using the following assumptions:
March 31, 2009 December 31, 2008
#A #B #C #A #B #C
Number of warrants 1,000,000 6,831,684 12,000,000 1,000,000 6,831,684 12,000,000
Annual dividend yield - - - - - -
Expected life (years) 0.8 0.9 3.1 1.1 1.2 3.4
Risk-free interest rate 0.5% 0.5% 1.4% 0.4% 0.4% 1.1%
Expected volatility 120.0% 124.5% 200.5% 137.5% 147.0% 200.7%
Expected volatility is based primarily on historical volatility. Historical
volatility was computed using daily pricing observations for recent periods that
correspond to the term of the warrants. We believe this method produces an
estimate that is representative of our expectations of future volatility over
the expected term of these warrants. We currently have no reason to believe
future volatility over the expected remaining life of these warrants is likely
to differ materially from historical volatility. The expected life is based on
the remaining term of the warrants. The risk-free interest rate is based on the
U.S. Treasury securities with compatible life terms.
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.
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. The Company reserved 20%, 50% and 100% for AR balances with
aging more than six-month, nine-month and more than one year, respectively,
based on the nature of the business and AR collection history
For revenue from R&D service, revenue is recognized based on fixed-price
refundable new drug contracts. The fixed-price refundable new drug contract is
also called as milestone contract, which establishes the phase goals of the R&D
service provided by the Company and the corresponding milestone payments by the
customers. Milestone payments become payable and are recognized as revenue when
milestone goals, as defined in the contract, are achieved. Milestones are
substantive and not derived solely from arriving at a specific date. Revenue is
recognized when milestone goals are achieved at the amount of the corresponding
milestone payment. To determine when milestones are achieved, typically, the
milestone goals require one or more of the following: (1) a certificate from a
licensed authoritative agency, (2) approval/acknowledgement by a governmental
agency, such as agency like Food and Drug Administration of the United States,
(3) an authoritative professional appraisal report, or (4) an independent
technological feasibility report, testing analysis and other form of valuation
on the result and value of products and service. After receipt of the
certificate, and/or approval and/or report, continued service is not required
thus the respective milestone goals are achieved. Therefore, the milestone
payment is no longer refundable and revenue is recognized.
-9-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
Revenue was made up of the following product categories.
For the three month periods
ended March 31,
------------------- ------------------
2009 2008
------------------ -----------------
(Unaudited)
--------------------------------------
Revenue:
Intermediary pharmaceuticals products $ 2,510,908 $ 3,966,283
Prescription drugs 10,137,099 7,006,958
------------------ -----------------
Total revenue $ 12,648,007 $ 10,973,241
================== =================
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.
FASB Interpretation 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"),
adopted January 1, 2007, indicates 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 operating
subsidiaries' financial records are maintained in its local currency, Renminbi
(RMB); therefore, the Company's functional currency is the RMB.. Results of
operations are translated at average exchange rates during the period, assets
and liabilities are translated at the unified exchange rate as quoted by the
People's Bank of China at the end of each reporting period, and equity are
stated at their historical rates. Cash flows are also translated at average
translation rates for the period, therefore, amounts reported on the statement
of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet.
This quotation of the exchange rates does not imply free convertibility of RMB
to other foreign currencies. All foreign exchange transactions continue to take
place either through the People's Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People's Bank of
China.
Approval of foreign currency payments by the Bank of China or other institutions
requires submitting a payment application form together with invoices, shipping
documents and signed contracts. Translation adjustments resulting from this
process are included in accumulated other comprehensive income in the
consolidated statement of shareholders' equity and amounted to $889,837 and
$904,970, as of March 31, 2009 and December 31, 2008, respectively. Assets and
liabilities at March 31, 2009 and December 31, 2008 were translated at 6.83 and
6.82 RMB to $1.00. The average translation rates applied to income statement
accounts, statement of cash flows for the three month period ended March 31,
2009 and the year ended of 2008 were 6.83 and 6.94 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.
-10-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
The Company adjusted 385,807 from accumulated other comprehensive income to
non-controlling interest which was presented as component of equity section as
of December 31, 2007 as a result of application of FAS 160 since January 1,
2009.
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
SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" establishes 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. EITF Topic D-98,
"Classification and Measurement of Redeemable Securities," requires contingently
redeemable securities to be classified outside of permanent equity until the
contingency occurs, and then the instrument will need to be analyzed for proper
classification as a liability or permanent equity.
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, the redeemable stock is classified outside of shareholders' equity,
because pursuant to the terms of the preferred stock, if the redeemable stock is
not converted by the fourth anniversary, then mandatory redemption is triggered,
and pursuant to SFAS 150, the shares will be reclassified to liabilities.
NON-CONTROLLING INTEREST
Effective January 1, 2009, the Company adopted SFAS 160, "Non-controlling
Interests in Consolidated Financial Statements - an amendment of Accounting
Research Bulletin No. 51." ("FAS 160") Certain provisions of this statement are
required to be adopted retrospectively for all periods presented. Such
provisions include a requirement that the carrying value of non-controlling
interests (previously referred to as minority interests) be removed from the
mezzanine section of the balance sheet and reclassified as equity.
Further, as a result of adoption on SFAS 160, net income attributable to
non-controlling interests is now excluded from the determination of consolidated
net income. In addition, foreign currency translation adjustment is allocated
between controlling and non-controlling interests.
As a result of adoption of SFAS 160, the Company reclassified non-controlling
interests in the amounts of $11,457,078 and $10,344,828 from the mezzanine
section to equity in the March 31, 2009 and December 31, 2008 balance sheets,
respectively.
-11-
- --------------------------------------------------------------------------------
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
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 became effective on January 1,
2009 and has no impact of the Company's financial statements.
In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted
Accounting Principles". FAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles." SFAS 162 has no impact on the
company's financial statements.
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 not permitted. The new accounting pronouncement
has no impact of the Company's financial statement.
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 did not have a
material impact on our financial position or results.
In January 2009, the FASB issued FSP EITF 99-20-1, "Amendments to the Impairment
Guidance of 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 changes the impairment model included within EITF 99-20 to be
more consistent with the impairment model of SFAS 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.
In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly". FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. An entity early adopting this FSP must also early
adopt FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments". Additionally, if an entity elects to early
adopt either FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value
of Financial Instruments" or FSP FAS 115-2 and FAS 124-2, it must also elect to
early adopt this FSP. We are currently evaluating this new FSP but do not
believe that it will have a significant impact on the determination or reporting
of our financial results.
-12-
- --------------------------------------------------------------------------------
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS
115, "Accounting for Certain Investments in Debt and Equity Securities," SFAS
124, "Accounting for Certain Investments Held by Not-for-Profit Organizations,"
and EITF 99-20, "Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets," to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entity's management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased disclosure about
the credit and noncredit components of impaired debt securities that are not
expected to be sold and also requires increased and more frequent disclosures
regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. Although this FSP does not result in a change in the carrying
amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early adopt
this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an entity
elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1, the
entity also is required to early adopt this FSP. We are currently evaluating
this new FSP but do not believe that it will have a significant impact on the
determination or reporting of our financial results.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
107 to require disclosures about fair value of financial instruments not
measured on the balance sheet at fair value in interim financial statements as
well as in annual financial statements. Prior to this FSP, fair values for these
assets and liabilities were only disclosed annually. This FSP applies to all
financial instruments within the scope of SFAS 107 and requires all entities to
disclose the method(s) and significant assumptions used to estimate the fair
value of financial instruments. This FSP shall be effective for interim periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. We are
currently evaluating the disclosure requirements of this new FSP.
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.
We made certain reclassifications of prior period amounts in the consolidated
financial statements to conform to the 2009 presentation. The reclassifications
were to reflect the retrospective adoption of SFAS 160, "Non-controlling
Interests in Consolidated Financial Statements, an amendment to ARB 51". The
reclassifications had no impact on previously reported net income.
NOTE 3 - 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:
March 31, 2009
Name of Bank (Unaudited) December 31, 2008
- ---------------------------------- -------------- -----------------
Hua Xia Bank, Suzhou $ 2,618 $ 3,863
China CITIC Bank 1,431,332 1,369,365
- ---------------------------------- -------------- -----------------
Total $ 1,433,950 $ 1,373,228
============== =================
-13-
- --------------------------------------------------------------------------------
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - ACCOUNTS RECEIVABLE, NET
The reserve for bad debts was $1,280,099 and $1,200,983 at March 31, 2009 and
December 31, 2008.
Accounts receivable consisted of the following:
March 31, 2009
(Unaudited) December 31, 2008
-------------- -----------------
Accounts receivable $ 4,196,463 $ 4,572,208
Allowance for doubtful accounts (1,280,099) (1,200,983)
-------------- -----------------
Accounts receivable, net $ 2,916,364 $ 3,371,225
============== =================
As of March 31, 2009 and December 31, 2008, management concluded its allowance
for bad debts were sufficient.
The following table consists of allowance for doubtful accounts.
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
Addition 126,538
Written-off (1,189)
Recovery -
Translation adjustment (46,233)
----------------
Allowance for doubtful accounts, March 31, 2009 $ 1,280,099
================
NOTE 5 - INVENTORIES, NET
Inventories consisted of the following:
March 31, 2009
(Unaudited) December 31, 2008
-------------- -----------------
Raw materials $ 3,752,521 $ 2,043,597
Refinery materials 2,793,240 2,231,623
Packaging supplies 327,254 274,282
Finished goods 5,141,182 3,859,646
Work in process 614,954 637,021
Sundry supplies 11,764 13,736
-------------- -----------------
Total inventory 12,640,915 9,059,905
Minus: Inventory allowance (26,214) (26,250)
-------------- -----------------
Total inventories, net $ 12,614,701 $ 9,033,655
============== =================
As of March 31, 2009 and December 31, 2008, the Company reserved $26,214 and
$26,250 as inventory allowance, respectively.
-14-
- --------------------------------------------------------------------------------
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - PLANT AND EQUIPMENT, NET
Plant and equipment consisted of the following:
March 31, 2009
(Unaudited) December 31, 2008
-------------- -----------------
Plant $ 2,479,526 $ 2,446,124
Office equipment 28,391 28,420
Machinery 7,444,889 7,386,881
Vehicles 258,112 258,300
Construction in progress 8,373,389 7,379,805
-------------- -----------------
Total plant and equipment 18,584,307 17,499,530
Less: accumulated depreciation (5,967,779) (5,844,350)
-------------- -----------------
Plant and equipment, net $ 12,616,528 $ 11,655,180
============== =================
Depreciation expense for the three month periods ended March 31, 2009 and 2008
amounted to $131,326 and $143,805, respectively. For the three month periods
ended March 31, 2009 and 2008, the Company capitalized interest as part of
construction-in-progress amounting of $36,423 and $1,799 with 6.1% and 7.1%
effective weighted average interest rate, respectively.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, 2009
(Unaudited) December 31, 2008
-------------- -----------------
Land use rights: $ 8,053,960 $ 8,058,504
Less: accumulated amortization (683,845) (641,074)
-------------- -----------------
Land use rights, net 7,370,115 7,417,430
-------------- -----------------
Patent - Approved drugs 190,450 190,710
Less: accumulated amortization (21,054) (21,083)
-------------- -----------------
Patent, net 169,396 169,627
-------------- -----------------
Total intangible assets, net $ 7,539,511 $ 7,587,057
============== =================
Land use rights are pledged as collateral for bank loans and notes payable as of
March 31, 2009. Amortization expenses for the three month periods ended March
31, 2009 and 2008 amounted $43,417 and $61,597, 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:
Years ended March 31, Amount
-----------------
2010 $ 173,668
2011 173,668
2012 173,668
2013 173,668
2014 173,668
Thereafter 6,671,171
-----------------
Total $ 7,539,511
=================
-15-
- --------------------------------------------------------------------------------
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - RELATED PARTIES TRANSACTIONS
OTHER RECEIVABLES - RELATED PARTIES
Other receivable contained the following related party balances where Enshi was
the discontinued subsidiary since July 2007. Chris Peng Mao is the CEO of the
Company. Lufan An & Xiaohao Liu are both shareholders of the Company.
Manner of
March 31, 2009 December 31, 2008 Due From Term Settlement
---------------- ----------------- -------------- ----------- ----------
(Unaudited)
CBH $ 46,058 $ 46,058 Chris Peng Mao Short Term Cash
Keyuan 38,421 38,460 Lufan An Short term Cash
CBH 265,442 265,442 Enshi Short Term Cash
- ------------ ---------------- -----------------
Total $ 349,921 $ 349,960
================ =================
OTHER PAYABLES - RELATED PARTIES
Manner of
March 31, 2009 December 31, 2008 Due To Term Settlement
---------------- ----------------- ---------------------- ---------- ----------
(Unaudited)
----------------
Erye $ 542,456 $ 499,186 Erye Trading Short Term Cash
CBH 173,428 166,838 Erye Trading Short Term Cash
Keyuan 670 670 Lufan An & Xiaohao Liu Short Term Cash
- ------------ ---------------- -----------------
Total $ 716,554 $ 666,694
================ =================
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.
NOTE 9 - SHORT TERM LOANS
The Company has a total of $1,435,700 and $2,611,260 in short term loans from
different banks in China at March 31, 2009 and December 31, 2008, respectively.
These loans mature in one year or less. The average interest rates were
approximately 6.1% and 7.1% for the three month period ended March 31, 2009 and
the year ended December 31, 2008, respectively. Bank loans were collateralized
by certain buildings owned by Erye with historical value of $127,749 as of March
31, 2009.
Interest expense of the short term bank loans for the three month periods ended
March 31, 2009 and 2008 amounted to $36,423 and $36,295 respectively, in which
$36,423 and $1,799 were capitalized for construction in progress, respectively.
NOTE 10 - NOTES PAYABLE
The Company's subsidiary Erye has $4,189,900 and $4,563,837 notes payable as of
March 31, 2009 and December 31, 2008, respectively. Notes are payables to the
banks who issue bank notes to Erye's suppliers. Notes payable are interest free
and usually mature after a six-month period.
In order to issue notes payable on behalf of the Company, the banks required
collateral, such as cash deposit which was approximately 30%-50% of notes to be
issued, or properties owned by companies or etc. As of March 31, 2009 and
December 31, 2008, $1,433,950 and $1,373,228 of restricted cash was put up for
collateral for the balance of notes payable, respectively, which was
approximately 30% of the notes payable (See notes 3) the Company issued, and the
remaining of the notes payable is collateralized by a pledge the land use right
the Company owned amounted to $1,843,137 and $1,880,477, respectively.
-16-
- --------------------------------------------------------------------------------
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - 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 acquisition 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.
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. Pursuant to EITF Topic D-98, the redeemable stock
is classified outside of permanent 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.
On March 31, 2009, RimAsia waived the dividend of 5% of the original Series B
issue price and 4% suspendible premium for the period from September 15, 2008
through the earlier of (a) October 31, 2009 and (b) abandonment of the Merger
Agreement. However, RimAsia reserves the right to reinstate all the waived
dividends and premiums if the Merger announced on November 2008 is not
consummated by October 31, 2009.
The series B redeemable stock was recorded at fair value on the date of
issuance. As of March 31, 2009 and December 31, 2008, balance stock amounted to
$12,508,534. Dividend payables amounted to $1,110,346 as of March 31, 2009 and
December 31, 2008. As of March 31, 2009, pursuant to the optional redemption
clause, the holders of the series B are 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.
For the three month periods ended March 31, 2009 and 2008, the Company recorded
$0 and $311,857 dividends and accretion on the redeemable preferred stock,
respectively.
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.
-17-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 12 - 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.
The Company had fully contributed its required surplus reserve as of December
31, 2008. As of March 31, 2009, the Company has statutory surplus reserve and
common welfare reserve amounted to $1,448,100 and $60,698, respectively.
NOTE 13 - 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 $349,060 and $299,409 for the three month
periods ended March 31, 2009 and 2008, respectively.
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
For the three month periods ended March 31,
2009 2008
-------------------- -------------------
U.S. Statutory rate 34.0% 34.0%
Foreign income not recognized in USA (34.0) (34.0)
China income taxes rate 25.0 25.0
China income tax exemption (12.5) (12.5)
Other items (1) 1.7 1.6
-------------------- -------------------
Total provision for income taxes 14.2% 14.1%
==================== ===================
(1) The 1.7% represents the $208,108 expenses incurred by CBH and Keyuan that
are not deductible in PRC for the three months ended March 31, 2009. The 1.6%
represents $270,664 expenses incurred by CBH and Keyuan that are not counted as
part of taxable income and expenses in PRC for the three months ended March 31,
2008.
-18-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
The estimated tax savings due to the reduced tax rate for the years ended March
31, 2009 and 2008 are $349,060 and $299,409, respectively. The net effect on
income per basic outstanding share if the income tax had been applied would
decrease income per share by $0.01 and $0.01 for the years ended March 31, 2009
and 2008, 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 $5,290,658 and
$5,239,906 as of March 31, 2009 and December 31, 2008, respectively, which may
be available to reduce future years' taxable income. These carry forwards will
expire, if not utilized, in 2029. 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
March 31, 2009 and December 31, 2008. Management reviews this valuation
allowance periodically and makes adjustments as warranted
The valuation allowance for the three month periods ended March 31, 2009 and
2008 were as follow:
Amount
---------------------
Balance of December 31, 2008 $ 1,781,568
Increase 17,256
---------------------
Balance of March 31, 2009 (unaudited) $ 1,798,824
=====================
BUSINESS TAX
The Company is subject to business tax, which is charged on the selling price of
applicable product and service at a general rate of 5% in accordance with the
tax law applicable. Keyuan is exempt from business tax according to local
applicable favorable tax policy.
VALUE ADDED TAX ("VAT")
In accordance with the relevant taxation laws in China, the VAT rate for
domestic sales is 17% and 0% for export sales on the invoiced value of sales and
is payable by the purchaser. A credit is available whereby VAT paid on the
purchases of semi-finished products or raw materials used in the production of
the Company's finished products can be used to offset the VAT due on sales of
the finished product.
VAT on sales and VAT on purchases amounted to $2,295,172 and $2,038,302 for the
three month period ended March 31, 2009, and $1,863,365 and $1,574,092 for the
same period in 2008, 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.
TAX PAYABLE
Taxes payable was comprised as follows:
March 31, 2009
(Unaudited) December 31, 2008
-------------- -----------------
Income tax payable $ 1,606,626 $ 1,551,754
VAT payable 216,419 657,978
Other taxes payable 898 5,935
-------------- -----------------
Total $ 1,823,943 $ 2,215,667
============== =================
NOTE 14 - EARNINGS PER SHARE
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
The Company determined that all the warrants were anti-dilutive because the
exercise prices were higher than average market price in the period presented as
of March 31, 2009 and 2008. The redeemable convertible preferred stock is
mandatorily redeemable for cash at the fourth anniversary if not yet converted.
As of March 31, 2009 and 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 dilutive for the three
month period ended March 31, 2009, which were anti-dilutive for the three month
ended March 31, 2008 based on the calculation used method above.
The number of shares used in computing basic earnings per share for the three
month periods ended March 31, 2009 and 2008 were 36,590,312 and 36,490,312,
respectively. Basic earnings per share for the three month periods ended March
31, 2009 and 2008 were $0.03 and $0.01, respectively.
The number of shares used in computing diluted earnings per share for the three
month periods ended March 31, 2009 and 2008 were 49,011,526 and 48,911,526,
respectively. Diluted earnings per share for the three month periods ended March
31, 2009 and 2008 were $0.02 and $0.01, respectively.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space from third parties. Accordingly, for the three
month periods ended March 31, 2009 and 2008, the Company recognized rent
expenses of $6,592 and $33,443, respectively.
As of March 31, 2009, the Company has no outstanding commitments in respect to
non-cancelable operating leases.
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. As of March 31, 2009, the new drug has been in
the trial stage. The Company expected the developing contract to delay one more
year to complete.
The Company had advanced $1,319,759 (RMB9,008,596) and $1,321,561 (RMB9,008,596)
for the aforesaid contract as of March 31, 2009 and December 31, 2008,
respectively.
PURCHASE COMMITMENT
The Company entered a Long-term purchase contract with one of its major
suppliers ("Supplier A") for the period of May 1, 2006 to April 30, 2009 and
later extended to November 30, 2009. Pursuant to the contract, Erye committed to
purchase certain quantity for some raw materials from Supplier A in a fixed
price with VAT invoice and pay the purchase price with bank notes or bank
remittance within 30 days after raw materials are delivered. Should supplier A
could not provide the raw materials on time for which the contract was default
by Supplier A, Supplier A should pay penalty to the Company amounted to $146,500
(RMB1,000,000) and other related loss. The fixed purchase price was adjusted one
time on November 18, 2008 in an amendment on which the two parties agreed that
no more price increase allowed during the rest period of the contract.
-20-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
For the three month ended March 31, 2009, the Company purchased raw materials
from the aforesaid supplier amounted to $965,794 to which the Company had notes
payable in the amount of $219,750 as of March 31, 2009.
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.
-21-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 16 - 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
- --------------------------------------------------------------------------------
Average
Remaining Average
Exercise Contractual Exercise Intrinsic
Price Number Life Price Number Value
- ------------ ----------- ----------- ---------- ---------- ----------
1.26 12,000,000 3.14 1.26 12,000,000 -
1.25 1,000,000 0.8 1.25 1,000,000 -
1.26 7,165,535 0.9 1.26 7,165,535 -
----------- ----------- ---------- ---------- ----------
20, 165,535 20,165,535 -
=========== ==========
Following is a summary of the Warrant activity:
Warrants
Outstanding as of January 01, 2008 21,889,975
Granted -
Forfeited 1,639,833
Exercised -
---------------
Outstanding as of December 31, 2008 20,250,142
Granted -
Forfeited 84,607
Exercised -
---------------
Outstanding as of March 31, 2009 20,165,535
===============
NOTE 17 - BUSINESS COMBINATIONS
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.
-22-
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
- --------------------------------------------------------------------------------
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
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.
NOTE 18 - SUBSEQUENT EVENT
On April 9 and April 29, 2009, the Company paid bank loans off in the total
amount of $1,465,000. The pledged fixed assets were in the process of releasing
by the banks.
-23-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes thereto. The following
discussion contains forward-looking statements. China Biopharmaceuticals
Holdings, Inc. is referred to herein as "we", "our,", "us", or "the Company".
The words or phrases "would be," "will allow," "expect to", "intends to," "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," or similar expressions are intended to identify forward-looking
statements. Such statements include those concerning the Merger agreement we
signed with Neostem Inc., our expected financial performance, our corporate
strategy and operational plans. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including: (a) those risks and uncertainties related to
general economic conditions in China, including regulatory factors that may
affect such economic conditions; (b) whether we are able to manage our planned
growth efficiently and operate profitable operations, including whether our
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to successfully manage and
exploit existing and potential market opportunities;(c) whether we are able to
generate sufficient revenues or obtain financing to sustain and grow our
operations; and (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under "Liquidity and Capital
Resources". Statements made herein are as of the date of the filing of this Form
10-Q with the Securities and Exchange Commission and should not be relied upon
as of any subsequent date. Unless otherwise required by applicable law, we do
not undertake, and we specifically disclaim any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement. Further information on
potential factors that could affect our business is described under the heading
"Risks Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008. Readers are also urged to carefully review
and consider the various disclosures we have made in that report.
OUR BUSINESS
We are a vertically integrated bio-pharmaceutical company focused on developing,
manufacturing and distributing innovative drugs in the People's Republic of
China ("China" or PRC"). Our mission is to maximize investment returns for our
shareholders by integrating our strong drug discovery and development strength
with manufacturing and commercialization capabilities and by actively
participating in the consolidation and privatization of the pharmaceutical
industry in China to become a dominant player in the bio-pharmaceutical industry
in China.
As reported on our Current Report on Form 8-K dated November 6, 2008, On
November 2, 2008, we entered into an Agreement and Plan of Merger (the "Merger
Agreement") with NeoStem, Inc., a Delaware corporation ("NeoStem"), China
Biopharmaceuticals Corp., a British Virgin Islands corporation and our
wholly-owned subsidiary ("CBC"), and CBH Acquisition LLC, a Delaware limited
liability company and wholly-owned subsidiary of NeoStem ("Merger Sub"). The
Merger Agreement contemplates our merger with and into Merger Sub, with Merger
Sub as the surviving entity (the "Merger"); provided, that prior to the
consummation of the Merger, we will spin off all of our shares of capital stock
of CBC to our stockholders in a liquidating distribution so that the only
material assets of us following such spin-off will be our 51% ownership interest
in Suzhou Erye Pharmaceuticals Company Ltd. ("Erye"), a Sino-foreign joint
venture with limited liability organized under the laws of the People's Republic
of China (the "PRC"), 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 our shares of common stock, par value $.01 per share ("CBH
Common Stock"), 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 common stock, par value $.001 per
share, of NeoStem (the "NeoStem Common Stock") (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 Capital Partners, L.P.
("RimAsia"), a current holder of approximately 14% of the outstanding shares of
NeoStem Common Stock and the sole holder of shares of Series B Convertible
Preferred Stock, par value $0.01 per share, of CBH (the "CBH Series B Preferred
Stock"), all of the shares of CBH Series B Preferred Stock issued and
outstanding immediately prior to the Effective Time 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 $.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. At the Effective Time, in exchange for cancellation of all of
the outstanding shares of CBH Series A Convertible Preferred Stock, par value
$.01 per share, of CBH (the "CBH Series A Preferred Stock") held by Stephen
Globus, a director of CBH, and/or related persons, NeoStem will issue to Mr.
Globus and/or related persons an aggregate of 50,000 shares of NeoStem Common
Stock. 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
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.
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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.
The transactions contemplated by the Merger Agreement are subject to the
authorization for listing on the American Stock Exchange (or any other stock
exchange on which shares of NeoStem Common Stock are listed) of the shares to be
issued in connection with the Merger, shareholder approval, approval of
NeoStem's acquisition of 51% ownership interest in Erye by relevant PRC
governmental authorities, receipt of a fairness opinion and other customary
closing conditions set forth in the Merger Agreement. If the necessary approvals
for the Merger are not obtained and the Merger is not consummated, we will fail
to comply with our agreement with RimAsia which may cause irreparable damage to
our business and operations.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to understanding of our
financial statements. The application of these polices requires management to
make estimates and assumptions that affect the valuation of assets and expenses
during the reporting period. There can be no assurance that actual results will
not differ from these estimates. The impact and any associated risks related to
these policies on our business operations are discussed below.
REVENUE AND REVENUE RECOGNITION
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
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.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Management judgment and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, we analyze the
aging of accounts receivable balances, historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and changes
in our customer payment terms. Significant changes in customer concentration or
payment terms, deterioration of customer credit-worthiness or weakening in
economic trends could have a significant impact on the collectibility of
receivables and our operating results. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. The ultimate collection of
the Company's accounts receivables may take over one year and the Company
reserved bad debt expense for accounts receivables outstanding more than 6
month. The reserve for bad debts increased to $1, 280,099 as of March 31, 2009
from $1,200,983 as of December 31, 2008. This increase is mainly resulted from
additional allowance reserved for accounts receivable balance outstanding for
over six months, and change in the exchange rate of RMB to USD. As of March 31,
2009, accounts receivable, net of allowance for doubtful accounts, amounted to
$2,916,364.
The following table provides the roll forward of the allowance of doubtful
accounts:
Allowance for doubtful accounts
As of December 31, 2008 $ 1,200,983
Current period bad debt allowance 126,538
Written-off (1,189)
Foreign currency translation adjustment (46,233)
-----------
As of March 31, 2009 (unaudited) $ 1,280,099
===========
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The following list the aging of our accounts receivable excluding bad debt
allowance, as of March 31, 2009:
3 months 6 months 9 months Over 9 months Over 1 year
Total Amount % Amount % Amount % Amount % Amount %
- ---------- ---------------- ------------ ----------- ------------- --------------
$4,196,463 3,187,942 76.0 17,692 0.4 -- -- -- -- 990,829 23.6
We prepare the above consolidated aging based on the aging for each subsidiary
in above format. As each subsidiary of the Company conducts business with
different customers with different size and creditworthiness, and each
subsidiary has different impact on and different relationship with their
customers, we determine the allowance on an individual basis. Basically, we
assign various rates to each of the aging group of accounts receivable and add
up the products for respective aging group to the total allowance for doubtful
accounts. Different subsidiaries have different rates for even the same aging
category. In addition to that, we also consider the changes in specific
financial condition of their customers if situation or events indicate that some
accounts may pose unusual risk compared to others, additional allowance may be
provided for those accounts.
INCOME TAX
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 Financial Accounting Standards Board ("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..
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, Disclosures About Fair Value of Financial Instruments, defines
financial instruments and requires fair value disclosures of those financial
instruments. SFAS 157, Fair Value Measurements, adopted January 1, 2008, 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 accompanying consolidated balance
sheets for receivables, payables and short term loans qualify as financial
instruments are a reasonable estimate of fair value because of the short period
of time between the origination of such instruments, their expected realization
and, if applicable, the stated rate of interest is equivalent to rates currently
available. The three levels of valuation hierarchy are defined as follows:
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.
Effective January 1, 2009, the Company adopted the provisions of Emerging Issues
Task Force ("EITF") 07-5, "Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"), which is effective
for financial statements for fiscal years beginning after December 15, 2008 and
which replaced the previous guidance on this topic in EITF 01-6. Paragraph 11(a)
of FAS 133 specifies that a contract that would otherwise meet the definition of
a derivative but is both (a) indexed to the Company's own stock and (b)
classified in stockholders' equity in the statement of financial position would
not be considered a derivative financial instrument. EITF 07-5 provides a new
two-step model to be applied in determining whether a financial instrument or an
embedded feature is indexed to an issuer's own stock and thus able to qualify
for the FAS 133 paragraph 11(a) scope exception.
As a result of adopting EITF 07-5, 19,831,684 of our issued and outstanding
warrants previously treated as equity pursuant to the derivative treatment
exemption were no longer afforded equity treatment because the strike price of
the warrants is denominated in US dollar, a currency other than the Company's
functional currency, the Chinese Renminbi. As a result, the warrants are not
considered indexed to the Company's own stock, and as such, all future changes
in the fair value of these warrants will be recognized currently in earnings
until such time as the warrants are exercised or expired.
NONCONTROLLING INTERESTS
Effective January 1, 2009, the Company adopted SFAS 160, "Noncontrolling
Interests in Consolidated Financial Statements - an amendment of Accounting
Research Bulletin No. 51" ("SFAS 160"). Certain provisions of this statement are
required to be adopted retrospectively for all periods presented. Such
provisions include a requirement that the carrying value of noncontrolling
interests (previously referred to as minority interests) be removed from the
mezzanine section of the balance sheet and reclassified as equity.
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Further, as a result of adoption on SFAS 160, net income attributable to
noncontrolling interests is now excluded from the determination of consolidated
net income. In addition, foreign currency translation adjustment is allocated
between controlling and noncontrolling interests.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - An Amendment of SFAS No. 133 ("SFAS 161").
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. SFAS 161 became effective on January 1,
2009 and has no impact of the Company's financial statements.
In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted
Accounting Principles". FAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles." SFAS 162 has no impact on the
company's financial statements.
In June 2008, FASB issued EITF 08-4, Transition Guidance for Conforming Changes
to Issue No. 98-5 ("EITF 08-4"). 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. EITF 08-4 has no
impact of the Company's financial statement..
On October 10, 2008, the FASB issued FASB Staff Position ("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 did not have a material impact on the Company's financial
position or results for the quarter ended March 31, 2009.
In January 2009, the FASB issued FSP EITF 99-20-1, "Amendments to the Impairment
Guidance of 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 changes the impairment model included within EITF 99-20 to be
more consistent with the impairment model of SFAS 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.
In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly". FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. An entity early adopting this FSP must also early
adopt FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments". Additionally, if an entity elects to early
adopt either FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value
of Financial Instruments" or FSP FAS 115-2 and FAS 124-2, it must also elect to
early adopt this FSP. We are currently evaluating this new FSP but do not
believe that it will have a significant impact on the determination or reporting
of our financial results.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS
115, "Accounting for Certain Investments in Debt and Equity Securities," SFAS
124, "Accounting for Certain Investments Held by Not-for-Profit Organizations,"
and EITF 99-20, "Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets," to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entity's management assert it has both
the intent and ability to hold an impaired debt security until recovery with a
requirement that management assert it does not have the intent to sell the
security, and it is more likely than not it will not have to sell the security
before recovery of its cost basis. This FSP provides increased disclosure about
the credit and noncredit components of impaired debt securities that are not
expected to be sold and also
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requires increased and more frequent disclosures regarding expected cash flows,
credit losses, and an aging of securities with unrealized losses. Although this
FSP does not result in a change in the carrying amount of debt securities, it
does require that the portion of an other-than-temporary impairment not related
to a credit loss for a held-to-maturity security be recognized in a new category
of other comprehensive income and be amortized over the remaining life of the
debt security as an increase in the carrying value of the security. This FSP
shall be effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. An entity
may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4.
Also, if an entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1
and APB 28-1, the entity also is required to early adopt this FSP. We are
currently evaluating this new FSP but do not believe that it will have a
significant impact on the determination or reporting of our financial results.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS
107 to require disclosures about fair value of financial instruments not
measured on the balance sheet at fair value in interim financial statements as
well as in annual financial statements. Prior to this FSP, fair values for these
assets and liabilities were only disclosed annually. This FSP applies to all
financial instruments within the scope of SFAS 107 and requires all entities to
disclose the method(s) and significant assumptions used to estimate the fair
value of financial instruments. This FSP shall be effective for interim periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption. We are
currently evaluating the disclosure requirements of this new FSP.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2009 AS COMPARED TO THREE
MONTHS ENDED MARCH 31, 2008
REVENUE
Revenue for the three months ended March 31, 2009 was $12,648,007 while the
revenue for the three months ended March 31, 2008 was $10,973,241, representing
an approximately 15.3% increase. The increase is mainly attributed by the
increase of prescription drugs, which has increased 44.7% compared with the same
period of 2008. The Company has improved its sales structure, and expanded the
market of products with profits with higher gross profit and sales volume. The
sales of the major products have increased 55.7% compared with the same period
of 2008. Taking advantage of the governmental new policy, especially the
provincial online purchase system, the Company has made significant progress in
expanding the sales market. Sales volume has leaped in pace with the deepening
of the reform of medical insurance system in rural areas of China. More than 60%
drug categories of the Company have been allowed to enter the New Rural
Cooperative Medical Insurance System, through which the Company realized stable
growth.
COST OF GOODS SOLD
Cost of goods sold for the three months ended March 31, 2009 was $8,601,218 as
compared to $7,711,162 for the three months ended March 31, 2008. Cost of goods
sold as a percentage of sales revenues was approximately 68.0% for the three
months ended March 31, 2008 compared to approximately 70.3% for the three months
ended March 31, 2008. The increase in cost of goods sold in terms of dollar
amount is accompanying with the increase of sales.
GROSS PROFIT
Gross profit in the three months ended March 31, 2009 amounted to $4,046,789, as
compared to $3,262,079 for the three months ended March 31, 2008, representing
approximately 24.1% increase. The gross profit margin for the three months ended
March 31, 2009 was 32.0% compared to approximately 29.7% for the three months
ended March 31, 2008. The increase is attributed primarily by selling products
of higher gross margin instead of the ones with lower gross margin, the sales of
powders for injection (Cephems) and of Penicillin still plays a dominant role.
The sales volume has increased 24.8% compared with the same period of 2008,
which has lower the fixed cost per product unit and the entire product cost
decreased and improved the profit margin as a result.
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2009 was $1,427,470 as
compared to $1,092,744 for the three months ended March 31, 2008,
representing 30.6% increase. The increase of operation expenses is accompanying
with the increase of sales. Especially, selling expense increased significantly
for three months ended March 31, 2009 compared with the same period of 2008,
among which the travel expense increased 107.0% and meals & entertainment
expense increased 55.3%, which were related to visiting customers in wider sales
markets more frequently as well as advertising costs increased 185.5% due to
tighter market competition. The Company also incurred bad debt expense amounted
to $82,000 in the three months ended March 31, 2009.
RESEARCH AND DEVELOPMENT
Research and development costs for the three months ended March 31, 2009 were
$13,933 as compared to $17,947 for the three months ended March 31, 2008. This
decrease was primarily attributed by R&D expense of Erye. Erye kept working on
its research and development projects and one major project has reached the
clinical trial stage as of March 31, 2009. As a result the research and
development expenses associated with such projects decreased.
INCOME FROM OPERATIONS
Income from operations in the three months ended March 31, 2009 amounted to
$2,619,319, as compared to $2,169,335 for the three months ended March 31, 2008,
representing approximately 20.7% increase. The increase is mainly attributable
by Erye's strong performance in sales revenue.
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
Net income available to common shareholders for the three months ended March 31,
2009 was $975,515 compared to $492,076 for the three months ended March 31,
2008, representing 98.2% increase. The net income increase is mainly attributed
by sales increase and gross profit rate improved through Erye's strong
performance for the three months ended March 31, 2009. The Company has improved
its sales structure, reorganized their sales teams and sales direction based on
the National Medical Reform Proposal, the Company also integrated its customer's
resource and purchasing power, which are the main factors to achieve the
significant progress in sales.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2009, total current assets were $21,930,414 and total current
liabilities were $19,575,964. Cash and cash equivalents on March 31, 2009 was
$2,226,777, an increase of $1,645,050 from the $581,727 reported on March 31,
2008. The increase is mainly attributed through the increase in sales revenue.
For the three months ended March 31, 2009, net cash provided by continuing
operating activities was $1,931,350. Cash provided by operating activities
results primarily from the Erye's strong performance in sales and increase in
its profit margin. Erye has paid $3,593,607 more for its inventories in order to
produce sufficient products for the busy sales season started in next quarter.
Net cash provided by investing activities and used in financing activities were
$1,412,177 and $1,696,921, respectively, for the three month ended March 31,
2009. Cash provided by investing activities during the period was mainly
contributed by the withdrawal $4,384,553 from the short-term investment account
of Erye. The Company also used $1,108,537 for the construction of the new plant,
and purchase of equipments. During the quarter, Net cash used in financing
activities was mainly due to Erye repayment of $1,172,080 short-term bank loans
back.
Relocation of Erye
The new plant of Erye is currently under construction. To date, all the
buildings in the manufacturing area have been completed, and the Purification
plant is under construction and the equipments are delivered and in the process
of assembling. The Company expects that the Penicillin and Cephems sterile
injection powder workshops will be completed by the end of 2009. In early 2010,
the company plans to apply for GMP approval with China Food and Drug
Administration (SFDA) for these two workshops.
The total expenditure of the new factory project and the relocation of Erye is
estimated up to $29,340,000 (RMB200,000,000), of which $7,539,511 has been spent
to date.
OUTLOOK
Our Company has entered into a Merger Agreement with Neostem and expects to
complete the Merger on the second or third quarter of 2009, subject to receipt
of all necessary approvals.
MANAGEMENT ASSUMPTIONS
Management anticipates, based on internal forecasts and assumptions relating to
our current operations, that existing cash and funds generated from operations
may not be sufficient to meet capital requirements for future acquisition
activities. If the Merger is not consummated, we could therefore be required to
seek additional financing. There can be no assurance that we will be able to
obtain such additional financing at acceptable terms to us, or at all.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our operating subsidiaries are located in China. Their business activities are
mainly in China using Chinese Renminbi as the functional currency. The value of
the Renminbi against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in China's political and economic
conditions. As we rely entirely on revenues earned in China, any significant
revaluation of the Renminbi may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into Renminbi
for our operations, appreciation of the Renminbi against the U.S. dollar could
have a material adverse effect on our business, financial condition and results
of operations.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our common shares or for other
business purposes and the U.S. dollar appreciates against the Renminbi, the U.S.
dollar equivalent of the Renminbi we convert would be reduced. To date, however,
we have not engaged in transactions of either type.
Since 1994 China has pegged the value of the Renminbi to the U.S. dollar. We do
not believe that this policy has had a material effect on our business. However,
there have been indications that the Chinese government may be reconsidering its
monetary policy in light of the overall devaluation of the U.S. dollar against
the Euro and other currencies during the last two years. As of March 31, 2009,
the value of the Renminbi to the U.S. dollar was translated at 6.83 RMB to $1.00
USD.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of March 31, 2009, we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive officer and our chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) were not effective.
During our assessment of the effectiveness of internal control over financial
reporting as of December 31, 2008, our management identified significant
deficiencies related to the following:
1. Insufficient U.S.GAAP qualified accounting and finance personnel.
As U.S. GAAP closing process relates to non-routine transactions and estimates,
we didn't have sufficient and skilled accounting and finance personnel necessary
to close our books under U.S.GAAP at our subsidiaries in China because of the
differences between two accounting policies, and on the other hand, the
accounting person aren't familiar with U.S.GAAP and lack of training. This
material weakness resulted in adjustments to several significant accounts and
disclosures and contributed to other material weakness described above.
2. Lack of Internal Audit System.
The Company does not have the internal audit department, which was ineffective
in preventing and detecting control lapses and errors in the accounting of
certain key areas like revenue recognition, purchase approvals, inter-company
transactions, cash receipt and cash disbursement authorizations, inventory
safeguard and proper accumulation for cost of products, in accordance with the
appropriate costing method used by the Company.
3. Financial Statement closing process.
We found that controls over the financial statement close process related to
account reconciliation and analyses, including bank accounts, certain long-lived
assets and accrued liabilities, were not effective. As a result, a large volume
of adjustments were necessary to completely and accurately present the financial
statements close process to the preparation of reliable financial statements,
there is reasonable possibility that a material misstatement of the interim and
annual financial statements would not have been prevented or detected on a
timely basis.
As disclosed in our Management's Annual Report on Internal Control over
Financial Reporting filed with the 2008 Form 10K, the Company's management has
identified the steps necessary to address the material weaknesses described
above and we are in the process to have the remediation procedures implemented.
Changes in Internal Control over Financial Reporting. During the fiscal quarter
ended March 31, 2009, there have been no changes in the Company's internal
control over financial reporting, identified in connection with our evaluation
thereof, that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
We are continuing to build our account resources in response to the weaknesses.
While we continue to develop and implement new control processes and procedures
to address these weaknesses, we have determined that further improvements are
required in our accounting processes before we can consider the material
weakness remediated.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed as part of this quarterly report on Form 10-Q:
EXHIBIT
NUMBER DESCRIPTION
------- -------------------------------------------------------------------
31.1* Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2** Certification of Acting Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith
** Furnished herewith
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
By: /s/ Chris Peng Mao
-------------------------------------------
Name: Chris Peng Mao
Title: Chief Executive Officer
Date: May 15, 2009
By: /s/ ZHANG Jian
-------------------------------------------
Name: ZHANG Jian
Title: Chief Financial Officer
Date: May 15, 2009
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