UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT Of
1934
For the Quarterly Period Ended September 30, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Transition Period from _________ to _________
Commission file number: 000-29523
China Pharma Holdings, Inc.
(Exact name of registrant as specified on its charter)
Delaware 73-1564807
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2nd Floor, No. 17, Jinpan Road, Haikou, Hainan Province, China
(Address of principle executive offices)
0086-898-66811730 (China)
(Registrant's telephone number, including area code)
Copies to:
Charles Law
King and Wood LLP
650 Page Mill Road,
Palo Alto, CA 94304
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X ]
As of the November 3, 2006, 34,723,056 shares of China Pharma Holdings, Inc.
common stock, par value $0.001 per share, were outstanding.
Transitional Small Business disclosure format: Yes [ ] No [ X ]
China Pharma Holdings, Inc.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements F-1 thru F-6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 1-11
ITEM 3 Controls and Procedures 11
PART II OTHER INFORMATION
ITEM 1 Legal proceedings 11
ITEM 2 Unregistered Sales of Equity Securities and use of proceeds 11
ITEM 3 Defaults upon senior securities 11
ITEM 4 Submission of matters to a vote of security holders 11
ITEM 5 Other information 11
ITEM 6 Exhibits 12
SIGNATURES 13
EXHIBITS
================================================================================
TABLE OF CONTENTS
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Page
----
Condensed Consolidated Balance Sheets, September 30, 2006 (unaudited),
and December 31, 2005 F-1
Condensed Consolidated Statements of Operations (unaudited), for the
three months ended September 30, 2006 and 2005, and for nine months
ended September 30, 2006 and from January 12, 2005 (Date of Inception)
through September 30, 2005 F-2
Condensed Consolidated Statements of Cash Flows (unaudited), for the
nine months ended September 30, 2006 and from January 12, 2005 (Date
of Inception) through September 30, 2005 F-3
Notes to the Condensed Consolidated Financial Statements (unaudited) F-4
Item 1. Financial Statements
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2006 2005
------------- -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 193,390 $ 461,220
Trade accounts receivable, less allowance for doubtful
accounts of $988,511 and $1,412,353, respectively 11,297,389 5,709,762
Non-trade receivables, less allowance for doubtful
accounts of $38,116 and $111,029, respectively 494,473 385,957
Advances to suppliers 2,011,603 2,123,729
Inventory 8,552,037 5,785,196
------------- -------------
Total Current Assets 22,548,892 14,465,864
------------- -------------
Non-current Assets:
Property and equipment, net 2,771,944 2,808,342
Intangible assets, net 70,104 96,406
Deferred tax assets 124,908 130,458
------------- -------------
Total Non-current Assets 2,966,956 3,035,206
------------- -------------
TOTAL ASSETS $ 25,515,848 $17,501,070
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 1,051,080 $ 679,104
Accrued expenses 347,371 15,625
Taxes payable 376,174 565,236
Other payables 69,158 250,317
Advances from customers 83,749 50,755
Short-term notes payable 2,147,335 --
Short-term notes payable to former shareholders 4,304,371 --
Dividends payable -- 4,209,889
------------- -------------
Total Current Liabilities 8,379,238 5,770,926
------------- -------------
Research and development commitments 31,578 30,966
------------- -------------
Total Liabilities 8,410,816 5,801,892
------------- -------------
Shareholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 34,723,056 shares issued and outstanding 34,722 34,723
Additional paid-in capital 7,764,979 7,764,979
Accumulated other comprehensive income 397,124 99,926
Retained earnings 8,908,207 3,799,550
------------- -------------
Total Shareholders' Equity 17,105,032 11,699,178
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,515,848 $17,501,070
------------- -------------
See the accompanying notes to the unaudited condensed
consolidated financial statements.
F-1
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the period
from January 12,
2005 (Date of
For the nine Inception)
For the three months months ended through
ended September 30, September 30, September 30,
---------------- ---------------- ---------------- ----------------
2006 2005 2006 2005
---------------- ---------------- ---------------- ----------------
Revenue $ 5,015,272 $ 2,601,294 $ 13,721,587 $ 3,093,824
Cost of revenue 2,521,205 1,617,399 7,151,898 1,942,393
---------------- ---------------- ---------------- ----------------
Gross profit 2,494,067 983,895 6,569,689 1,151,431
---------------- ---------------- ---------------- ----------------
Operating expenses:
Selling expenses 42,966 43,098 213,350 47,588
Research and development 125,359 -- 124,715 --
General and administrative 100,650 77,346 333,654 35,772
Bad debt expense (recovery) 152,142 169,229 (28,349) 230,881
---------------- ---------------- ---------------- ----------------
Total operating expenses 421,117 289,673 643,370 314,241
---------------- ---------------- ---------------- ----------------
Income from operations 2,072,950 694,222 5,926,319 837,190
---------------- ---------------- ---------------- ----------------
Non-operating income (expenses):
Interest income 408 266 588 266
Interest expense (39,872) (124,734) (87,690) (153,629)
---------------- ---------------- ---------------- ----------------
Total non-operating income
(expense) (39,464) (124,468) (87,102) (153,363)
---------------- ---------------- ---------------- ----------------
Income before taxes 2,033,486 569,754 5,839,217 683,827
Income tax expense (326,621) (54,726) (730,560) (64,247)
---------------- ---------------- ---------------- ----------------
Net income $ 1,706,865 $ 515,028 $ 5,108,657 $ 619,580
---------------- ---------------- ---------------- ----------------
Comprehensive income - foreign
currency translation adjustments 25,307 -- 137,964 --
---------------- ---------------- ---------------- ----------------
Comprehensive income $ 1,732,172 $ 515,028 $ 5,246,621 $ 619,580
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings per
common share $ 0.05 $ 0.11 $ 0.15 $ 0.07
---------------- ---------------- ---------------- ----------------
Weighted-average common shares
outstanding 34,723,056 4,731,413 34,723,056 9,377,713
---------------- ---------------- ---------------- ----------------
See the accompanying notes to the unaudited condensed
consolidated financial statements.
F-2
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the period
from January 12,
2005 (Date of
For the nine Inception)
months ended through
September 30, September 30,
2006 2005
---------------- ----------------
Cash Flows from Operating Activities:
Net income $ 5,108,657 $ 619,580
Depreciation and amortization 288,142 77,841
Loss on disposal of property and equipment -- --
Accretion of discount on notes payable -- 86,505
Deferred tax assets 8,029 (12,721)
Changes in assets and liabilities:
Trade accounts receivable (5,405,382) (1,523,777)
Non-trade receivables (99,868) (433,383)
Advances to suppliers 152,181 1,148,183
Inventory (2,618,835) (1,433,501)
Trade accounts payable 354,002 1,725,177
Accounts payable related parties -- 109,959
Accrued expenses 11,071 55,912
Taxes payable (197,707) 28,751
Other payables 144,450 (475,013)
Advances from customers 31,586 14,933
---------------- ----------------
Net Cash Used in Operating Activities (2,223,674) (11,554)
---------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures (169,508) (14,597)
Net cash received in purchase of Subsidiary -- 132,016
Proceeds from note receivable -- 11,336
---------------- ----------------
Net Cash (Used) Provided by Investing Activities (169,508) 128,755
---------------- ----------------
Cash Flows from Financing Activities:
Payment of dividend payable -- (65,818)
Proceeds from notes payable 2,120,150 --
Proceeds from issuance of common stock -- 3,509,698
---------------- ----------------
Net Cash Proceeds from Financing Activities 2,120,150 3,443,880
---------------- ----------------
Effect of Exchange Rate Changes in Cash 5,199 --
---------------- ----------------
Net Change in Cash (267,833) 3,561,081
---------------- ----------------
Cash and Cash Equivalents at Beginning of Period 461,220 1
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 193,387 $ 3,561,082
---------------- ----------------
Supplemental Cash Flow Disclosures:
Cash paid for interest $ 87,690 $ --
Cash paid for income taxes $ 851,335 $ --
Non-cash Financing Activities:
Interest accrued on dividends payable $ 11,212 $ --
See the accompanying notes to the unaudited condensed
consolidated financial statements.
F-3
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of China
Pharma Holdings, Inc. (the "Company") and its subsidiaries were prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Management of the
Company ("Management") believes that the following disclosures are adequate to
make the information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Form 10-KSB
report for the year ended December 31, 2005.
These unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) that, in the
opinion of Management, are necessary to present fairly the consolidated
financial position and results of operations of the Company for the periods
presented. Operating results for the nine months ended September 30, 2006, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2006.
Organization - Onny Investment Limited ("Onny") was incorporated in the British
Virgin Islands on January 12, 2005. Through June 15, 2005, Onny was a
development stage enterprise with no activities except for the acquisition of
Hainan Helpson Medical & Biotechnology Co., Ltd ("Helpson"), as discussed below.
Upon the acquisition of Helpson and its operations, Onny emerged from the
development stage. On June 16, 2005, Onny acquired all of the outstanding shares
of Helpson.
On October 19, 2005, Onny was reorganized as a wholly-owned subsidiary of the
Company. The reorganization was accomplished through the exchange of 29,700
shares of Onny common stock for 20,555,329 shares of the Company's common stock
and for the commitment of the Company to issue an additional 4,723,056 shares
upon amending its articles of incorporation. The exchange of shares was a
851-for-1 exchange ratio. In addition, the prior Onny preferred shareholders
exchanged their 10,000 shares of Onny common stock for 6,944,611 shares of the
Company's common stock for a 694-for-1 exchange ratio. Additionally, the prior
Onny preferred shareholders converted their preferred stock into Onny common
shares. The reorganization of Onny into the Company was recognized as a stock
split of the common stock of Onny and the effective issuance by Onny of
2,500,060 shares of common stock to the Company's pre-reorganization
shareholders and the assumption of $4,473 of liabilities. The reverse
acquisition of the Company was recognized as a non-monetary exchange.
Pursuant to a written consent from stockholders received on March 15, 2006, the
Company amended its articles of incorporation on May 1, 2006 to increase its
authorized shares from 30,000,000 shares to 60,000,000 shares.
Nature of Operations - Helpson manufactures and markets several Western and
Chinese medicines sold mainly to hospitals and private retailers in The People's
Republic of China (PRC). The marketing department is in Hainan Province and
there are also nine offices with sales representatives in other provinces and
cities throughout the PRC. Helpson's other operating activities include
biochemical products, health products, and cosmetics.
Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
F-4
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Basic and Diluted Earnings per Common Share - Basic and diluted earnings per
common share are computed by dividing net income by the weighted-average number
of common shares outstanding. There were no dilutive common shares outstanding
at September 30, 2006.
NOTE 2 - ACQUISITION
On May 25, 2005, Onny entered into an agreement with the shareholders of
Helpson, a privately held PRC joint venture, in which Onny agreed to acquire and
the shareholders of Helpson agreed to sell, all of the outstanding common shares
of Helpson in exchange for the assumption of obligations to make cash payments
to the Helpson shareholders in the form of common stock dividends from Helpson
of $4,154,041, the assumption of $4,646,409 of other liabilities and the
issuance of non-interest bearing promissory notes totaling $3,413,265 payable
three months after Helpson obtains a business license in the PRC as a wholly
foreign owned entity. Helpson obtained such license on June 16, 2005 and the
shares of Helpson were transferred to Onny on that date. Since June 16, 2005 was
recognized as the date of the acquisition, the promissory notes became due
September 16, 2005.
Since Helpson is an operating company and control of Helpson changed upon the
closing of the acquisition agreement, Onny is the accounting acquirer and has
recognized the acquisition of Helpson as a business combination in accordance
with Statements of Financial Accounting Standards No. 141, Business
Combinations. On April 25, 2005, Helpson declared a dividend to the selling
shareholders of $4,154,041 which equaled Helpson's retained earnings at March
31, 2005 less deferred income tax assets of $86,985 that are not considered part
of distributable profits under PRC law. The fair value of the net assets of
Helpson was determined by appraisal. The cost of the net assets exceeded the
fair value. That excess was allocated as a pro-rata reduction of the amounts
that otherwise would have been assigned to the non-current assets acquired.
NOTE 3 - INVENTORY
Inventory consisted of the following:
September 30, 2006 December 31, 2005
------------------ ------------------
Raw materials $ 5,897,875 $ 4,673,352
Work in process 189,740 819,146
Finished goods 2,464,422 292,698
Total Inventory $ 8,552,037 $ 5,785,196
NOTE 4 - INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and any tax credit carry forwards
available. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Helpson is receiving the tax benefits
resulting from a reduced tax rate from 30% to 15%, and through the end of 2005,
received a reduced tax of 7.5% as a result of operating in a developing economic
area in the PRC.
F-5
NOTE 5 - NOTES PAYABLE
Short Term Notes Payable During the third quarter of 2006, the Company borrowed
a total of $2,147,335 from a bank. The loans bear interest with a range of 6.14%
to 6.45%, principal and accrued interest are due July 2007 and are
collateralized by land use rights, machinery and equipment.
Short Term Notes Payable to Former Shareholders In January 2006, the Company
converted its dividend payable of $4,304,371 into short-term notes bearing
interest at a rate of 2.25% per annum. As of September 30, 2006 these notes and
accrued interest remain outstanding.
NOTE 6 - STOCKHOLDERS' EQUITY
On October 19, 2005, the Company acquired all of the issued and outstanding
common stock of Onny; thus, Onny became a wholly owned subsidiary of the
Company. The reorganization of Onny into the Company was recognized as a stock
split of the common stock of Onny and the effective issuance by Onny of
2,500,060 shares of common stock to the Company's pre-reorganization
shareholders. The number of common shares issued and outstanding has been
restated in the accompanying condensed consolidated financial statements on a
retroactive basis for the effects of the stock split.
NOTE 7 - CONTINGENCIES
Economic environment - Significantly all of the Company's operations are
conducted in the PRC, and therefore the Company is subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and fluctuations in the foreign
currency exchange rate. The Company's results may be adversely affected by
changes in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
In addition, all of the Company's revenue is denominated in the PRC's currency
of Renminbi ("CNY" or "(Y)"), which must be converted into other currencies
before remittance out of the PRC. Both the conversion of CNY into foreign
currencies and the remittance of foreign currencies abroad require approval of
the PRC government.
F-6
Item 2 - Management's Discussion and Analysis or Plan of Operation
The following discussion of China Pharma Holdings, Inc.'s ("China Pharma")
financial condition and results of operations should be read in conjunction with
its financial statements and the related notes, and the other financial
information included in this information statement.
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with China Pharma's
consolidated financial statements and related notes included elsewhere in this
Current Report on Form 10-QSB.
This filing contains forward-looking statements. The words "anticipated,"
"believe," "expect", "plan," "intend," "seek," "estimate," "project," "could,"
"may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect China Pharma management's current views with respect to
future events and financial performance and involve risks and uncertainties,
including, without limitation, general economic and business conditions, changes
in foreign, political, social, and economic conditions, regulatory initiatives
and compliance with governmental regulations, the ability to achieve further
market penetration and additional customers, and various other matters, many of
which are beyond China Pharma's control. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove to be incorrect,
actual results may vary materially and adversely from those anticipated,
believed, estimated or otherwise indicated. Consequently, all of the
forward-looking statements made in this filing are qualified by these cautionary
statements and there can be no assurance of the actual results or developments.
OVERVIEW
On June 16, 2005, Onny acquired all of the outstanding common shares of Helpson,
a privately held Chinese joint venture, in exchange for the assumption of
obligations to make cash payments to the Helpson shareholders in the form of
common stock dividends from Helpson of $4,154,041, the assumption of $4,646,409
of other liabilities and the issuance of non-interest bearing promissory notes
totaling $3,413,265 payable three months after Helpson obtained a business
license in the PRC as a wholly foreign owned entity. The acquisition of Helpson
was recognized as a business combination.
On October 19, 2005, Onny issued 10,000 preferred shares in exchange for
$4,313,000 in cash, net of offering costs and estimated registration costs, and
on that same date, those preferred shares were converted into 10,000 Onny common
shares. Also on October 19, 2005, Onny was reorganized as a wholly-owned
subsidiary of the Company. The reorganization was accomplished by the original
Onny common shareholder exchanging her 29,700 Onny common shares for 20,555,329
common shares of China Pharma and for the commitment by China Pharma to issue
the original Onny common shareholder 4,723,056 common shares following an
amendment of the China Pharma articles of incorporation increasing the number of
1
common shares authorized to 60,000,000 shares. In addition, the prior Onny
preferred shareholders exchanged their 10,000 Onny common shares for 6,944,611
common shares of China Pharma.
China Pharma is primarily engaged in the research, development, manufacture, and
marketing of pharmaceutical and nutritional supplements. We launched an anti-flu
product named PuSenOK, which is the only anti flu medicine in the market mixed
with pseudo ephedrine hydrochloride, that has a non-drowsy formula and a runny
nose suppressant. We plan to expand our biotechnology product series. Based on
the foundation established by some of Helpson's widely recognized medicine
labels such as Neurotrophicpeptide, we will also launch a variety of biological
medicines, including the brain peptide injection, injected hepatocyte
growth-promoting factors, as well as new genetic medicines, rh-CNTF and rh-aFGF,
which will give us a new growth following that of Neurotrophicpeptide.
Our products have been sold in more than 20 provinces, sovereignties, and
autonomous regions around China. Our sales network covers approximately 16 sales
offices and approximately 550 proxy agents. The main channels we use to deliver
our products include: (1) Distribution system (Proxy Agency); (2) Direct sale
system to hospitals; (3) Direct representation in clinic hospitals through
medical representatives; and (4) Distribution of products to local medical
companies through logistics companies.
Our recent business activities include:
Year 2005: Helpson launched a new anti-flu medicine: PusenOK.
Year 2003: Helpson gained GMP authentication.
Year 2003: Helpson named "the best enterprise for storing SARS medicine" by
Hainan Food and Drug Administration.
Year 2000: Helpson awarded as one of 50 best enterprises in Hainan by Hainan
Economic and Trade Bureau and Hainan Statistical Bureau.
Product Buflomedil Hydrochloride (Raw material; injection; & troche)
- Received the best technology commercialization award in Hainan in 2004 by
Hainan Scientific and Technological Result Examination Committee.
- Received the national key new products certificate in 2003 by the State
Science and Technology Department, State Taxation Bureau, Ministry of
Commerce, State Bureau of Quality Supervision, Inspection and Quarantine,
and State Environmental Protection Bureau.
- Designated as the key technology project in Hainan in 2003 by Hai'kou
Municipality
2
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with generally accepted accounting principles in the United
States. We believe the following are the critical accounting policies that
impact the financial statements, some of which are based on management's best
estimates available at the time of preparation. Actual experience may differ
from these estimates.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Accounts Receivable - During the normal course of business, we keep unsecured
credit to our customers and review our accounts receivable on a regular basis to
determine if the bad debt allowance is adequate at the end of the period. We
record an allowance for bad debts approximately 8% of our outstanding accounts
receivable at the end of the period in accordance with generally accepted
accounting principles in the PRC.
Intangibles - Under the Statement of Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," all goodwill and certain intangible
assets determined to have indefinite lives are not amortized, but are tested for
impairment at least annually. Other intangible assets are amortized over their
useful lives and reviewed for impairment in accordance with SFAS No. 144
"Accounting for Impairment or Disposal of Long-Lived Assets."
Revenue Recognition - We recognize revenue when all four of the following
criteria are met: (i) persuasive evidence has been received that there is an
enforceable agreement; (ii) the products have been delivered or the services
have been performed; (iii) the selling price is fixed or determinable; and
(iv) collectibility is reasonably assured.
Concentrations and Credit Risks - As all of the Company's operations are
conducted in the PRC, and therefore our operations may be adversely affected by
significant political, economic and social uncertainties in the PRC. Although
the Chinese government has pursued economic reform policies in the past, we
cannot assure you that the Chinese government will continue to pursue such
policies or that such policies will not be significantly altered, especially in
the event of a change in leadership, social or political disruption or
unforeseen circumstances affect China's political, economic and social
conditions.
The Company's revenue are denominated in the PRC's currency of Renminbi ("CNY"
or "(Y)"), which must be converted into other currencies before remittance out
of the PRC. Both the conversion of CNY into foreign currencies and the
remittance of foreign currencies abroad require approval of the PRC government.
We could give no assurance that the Chinese government's pursuit of economic
reforms will be consistent or effective.
Research and Development Costs - Research and development costs are expensed as
3
incurred. The costs of material and equipment acquired or constructed for
research and development and having alternative future uses are classified as
property and equipment and depreciated over their estimated useful lives.
Foreign Currency Translation - Our functional currency is the Chinese Yuan. Our
financial statements are translated into United States dollars, using the
exchange rates at the end of the period as to assets and liabilities and average
exchange rates as to revenue and expenses. Capital accounts are translated at
their historical exchange rates when the transaction occurred. Net gains and
losses resulting from foreign exchange translations are included in the
statements of operations and stockholders' equity as other comprehensive income.
The quotation of the exchange rates does not imply free convertibility. 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 by the People's
Bank of China or other institutions requires us to submit a payment application
form together with invoices, shipping documents and signed contracts.
Results of Operations
The following table sets forth our statements of operations for the nine months
ended September 30, 2006, for the period from January 12, 2005 (date of
inception) through September 30, 2005 and for the three months ended September
30, 2006 and 2005 in U.S. dollars.
4
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the period
from January 12,
2005 (Date of
For the nine Inception)
For the three months months ended through
ended September 30, September 30, September 30,
---------------- ---------------- ---------------- ----------------
2006 2005 2006 2005
---------------- ---------------- ---------------- ----------------
Revenue $ 5,015,272 $ 2,601,294 $ 13,721,587 $ 3,093,824
Cost of revenue 2,521,205 1,617,399 7,151,898 1,942,393
---------------- ---------------- ---------------- ----------------
Gross profit 2,494,067 983,895 6,569,689 1,151,431
---------------- ---------------- ---------------- ----------------
Operating expenses:
Selling expenses 42,966 43,098 213,350 47,588
Research and development 125,359 -- 124,715 --
General and administrative 100,650 77,346 333,654 35,772
Bad debt expense (recovery) 152,142 169,229 (28,349) 230,881
---------------- ---------------- ---------------- ----------------
Total operating expenses 421,117 289,673 643,370 314,241
---------------- ---------------- ---------------- ----------------
Income from operations 2,072,950 694,222 5,926,319 837,190
---------------- ---------------- ---------------- ----------------
Non-operating income (expenses):
Interest income 408 266 588 266
Interest expense (39,872) (124,734) (87,690) (153,629)
---------------- ---------------- ---------------- ----------------
Total non-operating income
(expense) (39,464) (124,468) (87,102) (153,363)
---------------- ---------------- ---------------- ----------------
Income before taxes 2,033,486 569,754 5,839,217 683,827
Income tax expense (326,621) (54,726) (730,560) (64,247)
---------------- ---------------- ---------------- ----------------
Net income $ 1,706,865 $ 515,028 $ 5,108,657 $ 619,580
---------------- ---------------- ---------------- ----------------
Comprehensive income - foreign
currency translation adjustments 25,307 -- 137,964 --
---------------- ---------------- ---------------- ----------------
Comprehensive income $ 1,732,172 $ 515,028 $ 5,246,621 $ 619,580
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings per
common share $ 0.05 $ 0.11 $ 0.15 $ 0.07
---------------- ---------------- ---------------- ----------------
Weighted-average common shares
outstanding 34,723,056 4,731,413 34,723,056 9,377,713
---------------- ---------------- ---------------- ----------------
See the accompanying notes to the unaudited condensed
consolidated financial statements.
5
Three Months Ended September 30, 2006 and 2005
Revenues for the three months ended September 30, 2006 were $5,015,272, an
increase of $2,413,978, or 92.80%, from the revenue of $ 2,601,294 for the
comparable period in 2005. The increase was primarily because a continuing
market demand in featured products and a relative favorable pricing for the
well-developed products compared to other ordinary medicines. Additionally,
parts of products also present a rewarding performance in sales for a
competitive price in the market.
Meanwhile, as the increase in sales, corresponding costs, both direct and
indirect costs have also been growing. Cost of revenue for the three months
ended September 30, 2006 was $2,521,205, an increase of $903,806, or 55.88%,
from $1,617,399 for the comparable period in 2005. Gross profit for the three
months ended September 30, 2006 was $2,494,067, an increase of $1,510,172, or
153%, from $983,895 for the comparable period in 2005. In general, with the
increase of marketability for most of products, including new products
introduced in the Company, gross margin has also been increasing accordingly.
With the increase in revenue, the Company makes effort to realize a better
budget of all related expenses. The selling expenses were $ 42,966 for the three
months ended September 30, 2006, a slight decrease of $132 from $ 43,098 for the
comparable period in 2005. Research and development (R&D) expenses were $125,359
for the three months ended September 30, 2006 which was mainly for the payment
of clinical trial achievement by other R&D institutes. General and
administrative expenses were $252,792 for the three months ended September 30,
2006, an increase of $6,217 from $246,575 for the comparable period in 2005.
Income tax expenses were $326,621 for the three month ended September 30, 2006
compared with $54,726 for corresponding period in 2005. The Company accounts for
its income taxes in accordance with Statement of Financial Accounting Standards
No. 109, which requires recognition of deferred tax assets and liabilities for
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and any tax credit carry forwards available. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Because Helpson is in its first five years of operations, it
received tax benefits resulting from a reduced tax rate from 30% to 15% as a
result of operating in a developing economic area in the PRC.
Generally, as the growth of sales and a satisfactory control of costs and
related expenses, net income for the three months ended September 30, 2006 was
$1,706,865, an increase of $1,191,837 from $515,028 for the comparable period in
2005.
6
China Pharma Holdings Inc.
Unaudited Condensed Consolidated Pro-forma Income Statements
For the Nine Months Ended September 30, 2005
Revenues $ 8,539,578
Cost of revenues 5,272,156
--------------------------------------------------------------------------------
Gross profit 3,267,422
--------------------------------------------------------------------------------
Operating expenses
Selling expenses 86,894
General and administrative 618,695
--------------------------------------------------------------------------------
Total operating expenses 705,589
--------------------------------------------------------------------------------
Income from operations 2,561,833
--------------------------------------------------------------------------------
Non-operating income (expense)
Interest income 671
Interest expense (313,482)
Other income 220,763
--------------------------------------------------------------------------------
Non-operating income (expense) (92,048)
--------------------------------------------------------------------------------
Income before taxes 2,469,785
Income tax expense (166,635)
--------------------------------------------------------------------------------
Net income $ 2,303,150
--------------------------------------------------------------------------------
For the nine months ended September 30, 2006 and Pro Forma September 30, 2005
With large increase of sales in some classical medicines, particularly, the
products of AFGF, Roxithromycin dispersible tablets and Gastrodin Injection have
predominantly accounted over 10% in total. Revenues for the nine months ended
September 30, 2006 were $13,721,587, an increase of $5,182,009, or 60.68 %, from
the revenue of approximately $8,539,578 the comparable period in 2005. This is
because new products have entered into market quickly this year. The above new
products primarily include Gastrodin injection and Pesudophedrine Hydrochloride
(or PuSenOK (TM)). Secondly, the distribution network has spread over the
majority of provinces in China. Finally, increased output of products ensured a
significant improvement in sales since the manufacturing capacity in Company has
expanded.
Meanwhile, as the increase of sales, the cost of revenue for the nine months
ended September 30, 2006 was approximately $7,151,898, an increase of
approximately $1,879,742, or 35.65%, from $ 5,272,156 for the nine months ended
September 30, 2005. Our gross margin for the nine months ended September 30,
2006 was 47.88% as compared with 38.26% for the nine months ended September 30,
2005, mostly for the distribution of new products to market. Those new products
are of high gross margin comparatively.
7
Research and development expenses were approximately $125,359 for the nine
months ended September 30, 2006; comparatively, there was no R&D expenses for
the nine months ended September 30, 2005. The increase in the R&D expenditure
for new products was due to the Company's gradual strengthened ability in
self-production of new products in additional to the purchase of outside R&D
technology.
Selling expenses were approximately $213,350 for the nine months ended September
30, 2006, an increase of $126,456, or 145.52%, from $86,894 for the nine months
ended September 30, 2005. General and administrative expenses were $ 333,654 for
the nine months ended September 30, 2006, a decrease of $285,041, or 46.07%,
from $ 618,695 for the nine months ended September 30, 2005. Since major
customers of the Company are hospitals and most of the products of the Company
are distributed through agents, the selling expenses were lower than the
industry average level against the revenue realized in total. The reason for the
decrease of general and administrative expenses is mainly because the Company
expects to better manage their ordinary operating outlays while expanding
business scale.
Non-operating incomes/expenses include interest income and interest expense and
other income/expenses of $(87,102) for the nine months ended September 30, 2006.
It was $(92,048) for the nine months ended September 30, 2005. The major reason
for the increase was partially as the increase in the interest expense for the
nine months ended September 30, 2006.
In the nine months ended September 30, 2006 we had a credit for income taxes of
$730,560, which resulted from income tax after benefiting from preferential
income tax rate.
As the foregoing analysis, our net income increase from $ 2,303,150 for the nine
months ended September 30, 2005 to $ 5,108,657 for the nine months ended
September 30, 2006. In the nine months ended September 30, 2006 we also had a
foreign currency translation adjustment of $137,964 which resulted in
comprehensive income of $5,246,621 as a consequence.
Liquidity and Capital Resources
As of September 30, 2006, we had cash and cash equivalents of $193,390, which
decreased by 58.06% compared to the ending balance as of December 31, 2005 of
$461,220. We have historically financed our business operations through equity
financing. During the nine months ended September 30, 2006, the Company borrowed
$2,120,150.
Net cash used for operating activities for the nine months ended September 30,
2006 totaled $2,223,674 as compared to $449,095 for the period ended December
31, 2005. The large increase in net cash used for operating activities was
primarily the result of the significant increase in inventory and trade account
receivables during the first nine months and the three months as of September
30, 2006. The relatively higher storage was for prudential purpose due to a
specific location of the Company, where is in Hainan Province. Meanwhile, as for
pharmaceutical industry, there is normally a credit period for collection, so
8
the trade account receivables have increased with the increase in sales. But the
Company is timely to make payment on purchase of raw material and accordingly,
the net cash used for operating activities increased.
Net cash utilized for investing activities for the nine months ended September
30, 2006 amounted to $169,508 compared to $341,522 net cash outflow for the
period ended December 31, 2005. The net cash used was primarily as the result of
capital expenditures for the nine months ended September 30, 2006.
Net cash used for financing activities during the nine months of 2006 was
$2,120,150, which was on proceeds from notes payable in total, compared to
$1,248,727 for the period ended December 31, 2005. The major cash used for
financing activities for the period ended December 31, 2005 was as a result of
the proceeds from issuance of common stock, amounting to $7,804,175. For the
nine month ended September 30, 2006, there were no proceeds from issuance of
common stock, but the Company has the proceeds from notes payable of $
2,120,150.
As of September 30, 2006, we had no material commitments for capital
expenditures other than for those expenditures incurred in an ordinary course of
business.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements.
Commitments
In January 2006, the Company converted its dividend payable of $4,304,371 into
short-term notes bearing interest at the rate of 2.25% per annum.
Business Risk Analysis
1. External Risk.
In recent years, Chinese medical system reform has been occurring, resulting in
the State Department establishment of a basic medical insurance system for the
workers in cities and towns. Considering the social environment and the
governmental policy in pharmaceutical industry in PRC, a higher speed in growth
of sales can be expected due to a kind of regional protectionism in the
industry, somehow. However, competition would also be intensive across the
industry overall. Currently, company's existing products are competitive in
market and possess potential growth power in its existing products and topic
selection, however, from a long-term perspective, some major western medicine
9
producers are also dedicating into the Chinese market share. These will make the
company face intensive competition in this natural herb product market.
2. Operation Risk
One of the major uncertainties in the Company is the purchase of raw materials.
Raw material is primarily affected by the geographical environment in Hainan
Province. As it takes quite a long way for transportation, in order for the need
of production, the Company has to store appropriate amount of inventory upon
according inventory budget. In addition, partial raw material needs to be
specifically ordered, so relatively higher storage for prudential purpose.
Meanwhile, since the increasing volume in sales, the Company needs to store
large volume of packaging material, so as to meet the needs of production and
sales.
3. Foreign Currency Risk
Substantially all of our operations are conducted in the PRC. Our sales and
purchases are conducted within the PRC in Chinese Renminbi. As a result, the
effect of exchange rate fluctuation would inevitably to be considered to be
material to our business operations.
All of our revenues and expenses are denominated in Renminbi. But we use the
United States dollar for financial reporting purposes. Conversion of Renminbi
into foreign currencies is regulated by the People's Bank of China through a
unified floating exchange rate system. Although the PRC government has stated
its intention to support the value of the Renminbi, there could be no assurance
that such exchange rate will not again become volatile or that the Renminbi will
not devalue significantly against the U.S. dollar. Exchange rate fluctuations
may adversely affect the value, in U.S. dollar terms, of our net assets and
income derived from its operations in the PRC.
New Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS
154"). This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting principle. SFAS 154 requires retrospective application to prior
period financial statements of a voluntary change in accounting principle unless
it is impractical to determine period specific changes. This statement is
effective for fiscal periods beginning after December 15, 2005 and is not
expected to have a significant impact on the Company's financial statements.
In November 2004, the Financial Accounting Standards Board, or FASB, issued FASB
Statement No. 151 "Inventory Costs, an Amendment of ARB No. 43 Chapter 4" ("FAS
151"). FAS 151 is applicable for Inventory costs incurred during fiscal years
beginning after June 15, 2005. FAS 151 requires that items such as idle facility
expense, excessive spoilage, double freight, and rehandling be recognized as
current-period charges rather than being included in inventory regardless of
whether the costs meet the criterion of abnormal as defined in ARB 43. The
Company does not believe the adoption of the standard will have a material
impact on the Company upon adoption in 2006 as the Company has historically
expensed such costs as incurred.
10
Management's Objective
Generally, the Company is dedicating to achieve sustainable profits growth. Our
management operates the business orientated by relevant strategic principles
which have been proven successful over periods. Sufficiently exploring the
potential in pharmaceutical field is the key to success. Our Company also takes
concerns on corporate governance as a modern enterprise improvement. Our Company
will establish a more systematic and ever-lasting process on internal control
for our prospective development and to create benefits for our shareholders.
Item 3 - Control and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure.
Currently, we are in the process of revising the internal control and
procedures.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 - Defaults upon Senior Securities
Not Applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
11
Item 6 - Exhibits
(a) Exhibits
10.1* - Employment Agreement between Helpson and Zhilin Li
10.2* - Employment Agreement between Helpson and Xinhua Wu
10.3* - Employment Agreement between Helpson and Jian Yang
31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a) of the Exchange Act.
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14 and
Rule 15d-14(a) of the Exchange Act.
32.1 - Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 - Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* which have been incorporated by reference to the exhibits to the
SB-2/A filed on December 23, 2005, however, typo errors regarding the
annual salary were inadvertently made on that employment agreements.
Therefore, the correct versions are filed here within.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Pharma Holdings, Inc.
Dated: November 8, 2006 By: /s/ Zhilin Li
------------------------
Zhilin Li
Chief Executive Officer,
President and Director
Dated: November 8, 2006 By: /s/ Xinhua Wu
------------------------
Xinhua Wu
Chief Financial Officer,
and Director
13