UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
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(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For the fiscal year ended December 31, 2007
[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
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Commission file number: 000-29523
China Pharma Holdings, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 73-1564807
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(State or other jurisdiction (I.R.S. Employer I.D. No.)
incorporation or organization)
2nd Floor, No. 17, Jinpan Road,
Haikou, Hainan Province, China 570216
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 0086-898-66811730 (China)
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i
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, $0.001 par value
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Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenue for the fiscal year ended December 31, 2007 was
$33,186,324.
14,187,472 shares held by non-affiliates had an aggregate market value of
$31,212,438.4 as of March 26, 2008. Shares of common stock held by any executive
officer or director of the issuer and any person who beneficially owns 5% or
more of the outstanding common stock have been excluded from this computation
because such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purpose.
As of March 26, 2008, there were 37,278,938 shares of Common Stock issued and
outstanding.
DOCUMENT INCORPORATED BY REFERENCE
EXHIBITS incorporated by reference certain information which has been filed with
the Securities and Exchange Commission.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
ii
China Pharma Holdings, Inc.
Table of Contents
Page Number
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Part I
Item 1 Description of Business 1
Item 2 Description of Property 29
Item 3 Legal Proceedings 29
Item 4 Submission of Matters to a Vote of Security Holders 30
Part II
Item 5 Market for Company's Common Stock and Related
Stockholders Matters 30
Item 6 Management's Discussion and Analysis or Plan of Operation 31
Item 7 Index to Financial Statements 43
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 43
Item 8A Controls and Procedures 43
Item 8B Other Information 46
Part III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 46
Item 10 Executive Compensation 49
Item 11 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 51
Item 12 Certain Relationships and Related Transactions 52
Item 13 Exhibits 52
Item 14 Principal Accountant Fees and Services Signatures 53
FINANCIAL STATEMENTS F-1
EXHIBITS
iii
PART I
Certain statements in this Form 10-KSB constitute "forward-looking statements."
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. The forward-looking
statements in this Form 10-KSB are identified by words such as "believes",
"anticipates", "expects", "intends", "may", "will", "estimate", "continue" and
other similar expressions regarding our intent, belief and current expectations.
However, these words are not the exclusive means of identifying such statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances and statements made in the
future tense are forward-looking statements. Actual results may differ
materially from those projected in the forward-looking statements as a result of
various factors, many of which are beyond our control. We undertake no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
occurring subsequent to the filing of this Form 10-KSB with the Securities and
Exchange Commission. Readers are urged to carefully review and consider the
various disclosures made by us in this Form 10-KSB, including those set forth
under "Risk Factors".
Item 1 - Description of Business
Overview
China Pharma Holdings, Inc. (formerly, TS Electronics, Inc. and prior thereto,
Softstone, Inc.) was incorporated on January 28, 1999, pursuant to the
provisions of the General Corporation Act of the State of Delaware. On May 31,
1999, we merged with Soft Stone Building Products, Inc., an Oklahoma corporation
that was a predecessor to our Company's business. Our initial business
operations were conducted at 620 Dallas Drive, Denton TX, 76205. On February 1,
2000, we moved our offices and facilities to Ardmore, OK. In June 2002, we moved
our office facilities to Pottsboro, TX. On August 13, 2003, we changed our name
to TS Electronics, Inc. On March 15, 2006, we changed our name from TS
Electronics, Inc. to China Pharma Holdings, Inc.
Our focus initially was solely on realizing the commercial benefits of a process
developed and patented by our first president, Frederick Parker. This process
converted waste tires into useful products. We were not successful in promoting
this business, wrote off all assets associated with the business and shifted our
attention to the commercial possibilities of a then, newly discovered
devulcanization process to which we acquired a 5.5 year exclusive license for
the Western Hemisphere. In addition, we entered into the business of importing
1
hard-to-find and specialty crumb rubber. We were also not successful in these
endeavors and have abandoned all efforts regarding these pursuits.
Effective August 11, 2004, the Company entered into a Stock Exchange Agreement
with Hou Xiao, the sole stockholder of China ESCO Holdings Limited (China ESCO),
a company organized in the Hong Kong Special Administration Region in the
People's Republic of China (PRC) and its wholly-owned operating subsidiary,
AsiaNet PE Systems Limited. China ESCO was engaged in the development and
manufacturing of electrical energy saving systems and products in the PRC.
The consummation of the transaction with China ESCO was subject to a number of
conditions, including receipt by us of financial statements of China ESCO as
required under applicable regulations, and satisfaction of all applicable
regulatory requirements. In January 2005, we declared China ESCO to be in
material breach of the agreement and rescinded the agreement.
Effective February 8, 2005, we executed a Letter of Intent with Osage Energy
Company, LLC (Osage) whereby Osage would acquire 90% of the equity interests of
the Company. This transaction was never consummated by the parties. The Company
had no operations or significant assets from the quarter ended December 31, 2004
until May 2005.
On May 11, 2005, we sold to Halter Financial Group, Inc., in a private
placement, 1,875,045 shares of common stock at a purchase price of $0.1066641
per share, pursuant to the terms of a Stock Purchase Agreement ( Purchase
Agreement). The private placement was exempt from the registration requirements
of the Securities Act, in reliance upon Section 4(2) thereunder. As a result of
the purchase, Halter Financial Group, Inc. became our controlling stockholder,
owning approximately 75% of our issued and outstanding shares of common stock.
Immediately subsequent to, and as a result of, the closing of the transactions
contemplated by the Purchase Agreement, Gene F. Boyd, Keith P. Boyd, Fredrick W.
Parker and Leo G. Templer resigned as officers and directors, as applicable, of
the Company. Timothy P. Halter was concurrently appointed as a member of the
Board of Directors, and Mr. Halter was elected as President, Chief Accounting
Officer and Secretary of the Company.
On October 19, 2005 we entered into a Securities Exchange Agreement (Exchange
Agreement) with Onny Investment Limited (Onny), a British Virgin Islands company
(BVI), and its original stockholders pursuant to which we acquired all of the
issued and outstanding shares of Onny from said stockholders in exchange for
27,499,940 shares of our common stock. Upon the closing of the exchange
transaction (Exchange Transaction), Onny became the wholly-owned
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subsidiary of our Company. The Exchange Agreement also provides that, upon the
effectiveness of an amendment to the Company's Certificate of Incorporation to
increase its authorized capital stock, the Company shall issue to Heung Mei
Tsui, the principal stockholder of Onny, an additional 4,723,056 shares of
common stock (Post Closing Shares) to which she would otherwise have been
entitled if the Company had enough authorized shares as of the closing of the
Exchange Transaction.
Immediately prior to the closing of the Exchange Transaction, Onny completed a
private placement (Onny Offering) of its convertible preferred stock to 46
accredited investors. The Onny Offering raised gross proceeds of $5,000,000.
Additionally, immediately prior to the Exchange Transaction, participants in the
Onny Offering exchanged their preferred shares for an aggregate of 10,000 shares
of Onny's common stock. Participants in the Onny Offering then participated in
the Exchange Transaction by exchanging such 10,000 shares of common stock for
6,944,619 shares of our common stock.
On March 15, 2006, the Company amended its Certificate of Incorporation to
increase its authorized capital stock from 30,000,000 to 60,000,000 shares and
filed the Information Statement in accordance with Section 14 of the Exchange
Act. On May 16, 2006, the Company issued to Heung Mei Tsui an additional
4,723,056 shares of common stock as provided in the Exchange Agreement. Upon the
issuance of the Post Closing Shares, Ms. Tsui holds 25,278,385 shares or
approximately 72.8% of the issued and outstanding common stock of the Company.
On July 24, 2006, Zhilin Li, Heung Mei Tsui and the Company entered into that
certain Stock Transfer Agreement, as amended on November 24, 2006, pursuant to
which Heung Mei Tsui transferred 10,000,000 shares of her personal holdings of
the Company's common stock to Zhilin Li in exchange for a sublicense to a patent
held by a third party, which is licensed to Ms. Li. After the aforementioned
stock transfer, Ms. Tsui holds 15,278,385 shares or 44.0% of the total
outstanding shares of our common stock. Ms. Li holds 10,000,000 shares or 28.8%
of the total outstanding shares of our common stock.
On February 1, 2007, we completed an offering pursuant to a Subscription and
Registration Rights Agreement (Agreement) with 17 accredited investors
(Investors) in connection with a private placement of 2,505,882 shares of the
Company's common stock at $1.7 per share (Private Placement). Pursuant to the
Agreement, the Investors also received three-year warrants to purchase an
aggregate of 1,252,941 shares of Company's common stock at $2.38 per share.
Pursuant to the transaction on February 1, 2007, we received the subscription
proceeds in the aggregate amount of $4,259,900. The net proceeds, after
deduction of related offering expenses of $ 462,717, amounted to $3,797,183. In
December 2007, the Company received proceeds of $119,000 upon the exercise of
warrants to purchase 50,000 shares of common stock. The remaining warrants
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issued in conjunction with the offering to buy 1,202,941 shares of common stock
have not been exercised at December 31, 2007.
On September 27, 2007, Heung Mei Tsui and the Company entered into four Stock
Transfer Agreements with Chipiu Wong, Ruofeng Xu, Yao Huang and Jian Yang
respectively, pursuant to which, Heung Mei Tsui transferred in aggregate
4,465,734 shares of the Company's common stock at the price of $1.52 per share
to the four individuals. After the aforementioned stock transfer, Ms. Tsui holds
10,812,651 shares or 29.0% of the total outstanding shares of our common stock.
Onny
Onny Investment Limited (Onny) was incorporated on January 12, 2005 under the
laws of the British Virgin Islands. At the time of its incorporation, Onny's
authorized capital was $50,000 and there were 50,000 shares of one class and one
series of capital stock, $1.00 par value, issued and outstanding. Heung Mei Tsui
was, at the time of incorporation, the sole stockholder and director of Onny. On
August 18, 2005, Onny increased its authorized capital to $5,000,000 divided
into 40,000 ordinary shares of capital stock, $100.00 par value, and 10,000
preferred shares, $100.00 par value. As of the date of this Form 10-KSB, there
are 39,700 ordinary shares issued and outstanding, all of which are held by the
Company. No preferred shares of Onny are currently issued and outstanding.
On May 25, 2005, Onny acquired all the equity interests in Hainan Helpson
Medicine and Bio-Technology Co. Ltd. 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. Effective as of June 21,
2005, Onny became the sole stockholder of Helpson, and Helpson became a wholly
foreign-owned enterprise as defined by PRC law.
On October 19, 2005, Onny completed the Onny Offering. Under the terms of the
Onny Offering, Heung Mei Tsui agreed to escrow 6,944,611 shares of the Company's
common stock that she received as a result of the Exchange Transaction. These
shares represent 20% of the Company's issued and outstanding common stock
immediately following the closing of the Exchange Transaction (Make Good
Shares), so that in the event that actual net income set forth in the
consolidated financial statements of the Company for the fiscal year ending
December 31, 2006 (NI) does not reflect $8 million of net income (Guaranteed
NI), the Make Good Shares can be distributed on a pro rata basis to the
participants of the Onny Offering in accordance with the following formula:
Make Good Shares = ((Guaranteed NI - NI) / $8m) X Make Good Pool
4
If required, the Make Good Shares will be delivered to participants in the Onny
Offering within ten (10) business days of the date the audit report for the
period is filed with the SEC.
Additionally, in connection with the Onny Offering, Heung Mei Tsui escrowed
277,785 shares of the Company's common stock that she received as a result of
the Exchange Transaction, which shares represent 0.8% of the Company's issued
and outstanding common stock immediately following the closing of the Exchange
Transaction (HFG Make Good Pool), so that in the event the Company does not
achieve the Guaranteed NI, the HFG Make Good Shares will be distributed to HFG
International, Limited, an affiliate of Halter Financial Group, Inc., in
accordance with the following formula:
HFG Make Good Shares = ((Guaranteed NI - NI) / $8m) X HFG Make Good Pool
If required, the HFG Make Good Shares will be delivered within ten (10) business
days of the date the audit report for the period is filed with the SEC.
According to the audited consolidated financial statement of Company for the
fiscal year ending December 31, 2006, the net income was $8,587,086 which is
more than the Guaranteed NI. Therefore, 7,222,396 shares of Company's common
stock which was escrowed shall be reverted back to Heung Mei Tsui. As of the
date of this Prospectus, Heung Mei Tsui holds 10,812,651 shares or 29.00% of the
total outstanding shares of our common stock.
Helpson
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Hainan Helpson Medicine and Bio-Technology Co. Ltd. (Helpson) is a
foreign-invested enterprise established in Haikou, Hainan Province, PRC on
February 25, 1993. Initially, its name was Hainan Fulin Biomedical Co., Ltd.,
which was changed to "Helpson" in 1999. The company was originally an "equity
joint venture" as defined by China's laws on foreign invested enterprises. The
two joint venturers were Haikou Biomedical Engineering Co., Ltd. (Haikou
Biomedical), a PRC company, and Hong Kong Fudao Development Co., Ltd. (Fudao), a
Hong Kong company. Haikou Biomedical invested RMB 2,100,000 for a 70% share of
Helpson, and Fudao invested $150,000 for a 30% share of Helpson.
On June 16, 2001, Fudao entered into an Equity Interest Transfer Agreement with
Hainan Kaidi Science and Technology Co., Ltd., a PRC company (Kaidi). In
accordance with the Equity Interest Transfer Agreement, Fudao transferred all of
its 30% capital contribution in Helpson to Kaidi in consideration of RMB
2,780,000. As a result of the transfer, Haikou Biomedical continued to hold a
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70% equity interest in Helpson, while Kaidi had a 30% equity interest in
Helpson. Therefore, Helpson became a PRC domestic company, rather than a
foreign-invested company.
Effective on December 26, 2003, Helpson issued new capital stock to Chengdu
Huineng Biomedical Co., Ltd. (Chengdu Bio) and Chongqing Chemical Medicine
Holding Group (Chongqing Chemical). Chengdu Bio contributed RMB 3,000,000 for a
10.71% equity interest in Helpson and an additional RMB 3,000,000 for Helpson's
capital common reserve fund, and Chongqing Chemical contributed RMB 5,000,000
for a 17.86% equity interest in Helpson and an additional RMB 5,000,000 for
Helpson's capital common reserve fund. After the issuance of shares, Helpson had
four equity holders: Haikou Biomedical, holding 50% equity interest; Kaidi,
holding 21.43% equity interest; Chengdu Bio, holding 10.71% equity interest; and
Chongqing Chemical, holding 17.86% equity interest.
On March 8, 2005, Chongqing Chemical entered into an equity interest transfer
agreement with Haikou Biomedical to transfer all of its equity interest in
Helpson to Haikou Biomedical. Upon completion of the transfer, there remained
only three equity holders of Helpson: Haikou Biomedical, holding 67.86% equity
interest; Kaidi, holding 21.43% equity interest, and Chengdu Bio, holding 10.71%
equity interest.
As set forth above, on May 25, 2005, Haikou Biomedical, Kaidi and Chengdu Bio
entered into an equity interest transfer agreement with Onny to transfer all
their equity interests in Helpson to Onny. Effective as of June 21, 2005, Onny
became the sole stockholder of Helpson, and Helpson became a wholly
foreign-owned enterprise as defined by PRC law.
Upon the closing of the Exchange Transaction on October 19, 2005, we acquired
all of the issued and outstanding shares of Onny in exchange for 27,499,940
shares of our common stock and became Onny's sole stockholder. As a result, as
of October 19, 2005, Helpson became our wholly owned subsidiary.
As of July 4, 2006, Helpson increased its registered capital from RMB 28,000,000
to RMB 60,000,000 and changed its registered address from Unit 8, D Area, Office
Hall, Haikou Bonded Zone, Haikou, Hainan Province, China to C09-2, Haikou Bonded
Zone, Haikou, Hainan Province, PRC.
Since its establishment, Helpson has positioned itself in the research,
development, manufacturing, and sales of a series of bio-pharmaceutical
products. Helpson now has eight different production lines, developing,
manufacturing and marketing Western and Chinese medicines. It has a portfolio of
therapeutics that primarily targets CNS, cardiovascular, wound recovery, and
infectious diseases. It has a robust portfolio, a segmented market, a promising
pipeline with high margin which addresses large patient populations, and a
highly professional and experienced management team.
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Principal Products and Services
Helpson's primary business is the manufacturing, marketing and sales of
pharmaceuticals and nutritional supplements. Helpson manufactures and markets
products in three major categories: biochemical products, health products and
cosmetics.
At present, Helpson is manufacturing or ready to manufacture a total of 17 kinds
of medicines, among which the following two kinds of medicines are legitimately
recognized as new medicines according to relevant new medicine certifications:
Naprooxen Sodium and Pseudophedrine Hydrochloride Sustained Release Tablets:
anti-flu medicine in the market mixed with pseudoephederine hydrochloride with a
non-drowsy formula and a runny nose suppressant which temporarily relieves cold,
sinus and flu symptoms.
Bumetnide for Injection: a diuretics drag for the treatment of various edema
diseases (including the heart failure edema, cirrhosis, nephropathy edema,
pulmonary edema, etc.), hypertension and for the treatment and prevention of
acute renal failure, hyperkalemia, hypercalcemia and for the rescue of acute
drug poisoning.
In addition to the above new medicines with new medicine certifications, Helpson
is manufacturing or ready to manufacture the following medicines:
Gastrodin Injection: used in neurasthenia, neurasthenia syndrome and traumatic
syndrome of the brain; vertigo; neuralgia; headache; etc.
Hepatocyte Growth-promoting Factor for Injection: used to assist and treat
various heavy-duty virus hepatitis (acute, subnormal temperature, and chronic
serious disease in the early or middle stage of hepatitis).
Propylgallate for Injection: used for preventing and treating cerebral
thrombosis, coronary heart disease, and complication after the surgery-thrombus
deep phlebitis, etc.
Ozagrel Sodium for Injection: used to treat acute cerebral infarction and
kinesipathy accompanied by cerebral infarction.
Alginic Sodium Diester Injection: used in ischemic heart, cerebrovascular
diseases (cerebral thrombosis, cerebral embolism, coronary heart disease, etc.)
and high lipoprotein blood disease. The product was launched during 2007.
Granisetron Hydrochloride Injection: post-operative nausea and vomiting,
prevention of cancer chemotherapy-induced nausea and vomiting, prevention of
post-operative nausea and vomiting. The product was launched during 2007.
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Cerebroprotein Hydroloysate Injection: for the improvement of the symptom of
sequela of craniocerebral traumatism and cerebrovascular diseases accompanied by
memory decline and attention deficit disorder.
Buflomedil Hydrochloride: used for the treatment of the peripheral blood vessel
diseases including intermission claudication, renaud syndrome and blood vessel
convulsion.
Cefaclor Dispersible Tablets: used in otitis media, when the airway is infected,
the urethra is infected, or skin and skin tissue are infected.
Roxithromycin Dispersible Tablet: a macrolide antibiotic drug for the treatment
of pharyngitis and tonsillitis caused by streptococcus pyogenes; sinusitis,
tympanitis, acute and chronic bronchitis caused by acute bacteria; mycoplasma
pneumonia and chlamydia pneumoniae; urethritis and cervical infection caused by
chlamydia trachomatis (CT); skin soft tissue infection caused by sensitive
bacteria.
Clarthromycin Granules and Clarthromycin Capsules: a macrolide antibiotic drug
for the treatment of nasopharynx infection, lower respiratory tract infection,
skin tissue infection, acute tympanitis and mycoplasma pneumonia caused by
clarithromycin susceptible organisms; urethritis and cervical infection caused
by chlamydia trachomatis (CT); and the treatment of legionella infection,
mycobacterium avium complex (MAC) infection and helicobacter pylori infection.
Anhydroandrographolide: used for clearing away heat and detoxify, antibacterial
and diminish inflammation; used in upper respiratory infection, bacillary
diarrhea.
Vitamin B6 for Injection: vitamin supplement.
Thymopolypetides Injection: used for treating various primary or secondary T
cell defective disease, immune system diseases, assists and treats the diseases
and tumors of various cells with low immunological function.
Cefalexin Capsules: suitable for acute tonsillitis due to the sensitive
funguses, airway infection, urine infections, or in infections of the angina,
otitis media, nasal sinusitis, bronchitis, pneumonia, etc. and when the skin
soft tissue is infected.
In addition, Helpson's products include a Recombined Human Fibroblast Growth
Factor (rhaFGF), which is used as a raw material for cosmetics and has the
function of wound repairing, including damages caused by ultraviolate ray, acne,
analeptic organized by the skin, or citric acid.
There are 9 drugs undergoing research and development including Hugan Granule,
Tiopronin, Omeprazole for Injection, Ceftriaxone Sodium and Tazobactam Sodium,
Donepezil Dispersible Tablets, Mycophenolate Mofetil Granules, rhaFGF drug,
rhCNTF drug and Compound Diclofenac Sodium Injection.
Due to the nature of the biotechnology and pharmaceutical industries, Helpson
continually strives to change its product portfolio to respond to changes in
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market demand. Helpson also plans to expand its biotechnology product series.
Based on the foundation established by some of Helpson's widely recognized
medicine labels such as Neurotrophicpeptide, Helpson has launched and will
continue to launch a variety of biological medicine, including the injected
hepatocyte growth-promoting factors, which are expected to fuel additional
growth beyond that of Neurotrophicpeptide.
Helpson adjusts the delivery system and marketing for each of its products based
on the product's target patient group. Maintaining a variety of delivery systems
(e.g. tablet, injection, powder, etc.) targeted for different groups enhances
Helpson's competitive position in the market. Helpson's present types of
delivery include covered tablet, capsule, troche, oral fluid, injection, frozen
powder, acicula, and germ-free powder acicula.
Principal Markets
The principal markets of Helpson lie within China. With approximately one-fifth
of the world's population and a fast-growing gross domestic product, China
presents significant potential for the pharmaceutical industry. According to the
Freedonia Group, pharmaceutical demand in China reached RMB198.0 billion ($25.4
billion) in 2005, representing a growth of 12.1% annually since 2000. The
Freedonia Group expects the total pharmaceutical expenditure in China to grow at
13.6% annually between 2005 and 2010. Such growth rate is significantly higher
as compared to the rest of the world, where growth of the pharmaceutical
industry is projected to be at a compound annual growth rate of 5.0% to 8.0%
between 2004 and 2009 according to IMS Health. The overall production of Chinese
pharmaceutical industry is expected to reach RMB 740 billion to RMB 760 billion
in 2008, increasing by 20% compared to the previous year. The growth rate of
Chinese pharmaceutical industry is expected to be the sixth highest in the world
in 2011. China is also predicted to become the fifth largest pharmaceutical
market in the world in the near future. (Source: http://www.chinapharm.com.cn)
The predicted growth is based upon the development of Chinese economy, China's
large, aging population and the reform of the healthcare system of China.
Distribution
As of December 31, 2007, Helpson's products were sold in more than 29 provinces,
sovereignties and autonomous regions. Helpson has 16 sales offices and
approximately 680 proxy agents throughout China.
The main channels Helpson uses to deliver its products are as follows: (1)
distribution system (Proxy Agents); (2) direct sale system to hospitals; and (3)
distribution of products to end-market through local medical companies.
9
Industry Background and Competition
The pharmaceutical industry's primary categories include chemical medicine,
traditional Chinese medicinal material, traditional Chinese medicinal film,
prepared Chinese herbal medicine, antibiotics, biological products, biological
medicine, radioactive medicine, medical appliances, sanitation materials,
pharmaceutical machinery, medical packaging and trading.
Competition in the pharmaceutical industry is reduced by barriers to entry. A
company wishing to enter into the industry must comply with the standards and
regulations set forth by the government. In the PRC, the State Food and Drug
Administration of China (SFDA) is the authority that monitors and supervises the
administration of the pharmaceutical industry including pharmaceutical products,
medical appliances, and equipment. Pharmaceutical manufacturing enterprises must
obtain a Pharmaceutical Manufacturing Enterprise Permit issued by the relevant
pharmaceutical administrative authorities and relevant health departments at the
provincial level where the enterprise is located. Furthermore, all
pharmaceutical products produced in the PRC, with the exception of Chinese
herbal medicines in soluble form, must bear a registered number approved by the
appropriate governmental authorities in the PRC. Lastly, in accordance with the
World Health Organization, the PRC now requires compliance with GMP standards in
pharmaceutical production in order to minimize the risks involved in any
pharmaceutical production that cannot be eliminated through testing final
products. As the regulatory approval process becomes more stringent, it also
increases the barriers to entering the market.
Due to the variety of consumer demands within the pharmaceutical market,
pharmaceutical companies have relatively dispersed product lines. We have
identified, however, two primary strategies we must adopt in order to stay
competitive. In expanding market share of common traditional medicine, we must
take advantage of 1) our large manufacturing scale and reasonable cost control
mechanisms, and 2) our strong sales network.
Employees
As of December 31, 2007, Helpson had 170 regular employees. Helpson was also
aided by the efforts of a 110 member outside sales and marketing team.
Risk Factors
10
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WITHIN THE NEXT TWELVE MONTHS TO FUND
OUR OPERATIONS AND FAILURE TO RAISE ADDITIONAL CAPITAL MAY FORCE US TO DELAY,
REDUCE, OR ELMINATE OUR PRODUCT DEVELOPMENT PROGRAMS
Due to the large amount of funds required for research and development and the
subsequent marketing of products, the pharmaceutical industry is very capital
intensive. The industry is characterized by large and slow receivable turnovers,
which signifies that we will need more working capital as our revenues increase.
We have traditionally been committed to biomedical R&D, and are now developing
traditional chemical medicines within specific market segments such as those of
anti-flu and anti-infection. It is likely that we will need to raise additional
capital within the next twelve months. Additional capital may be needed for the
development of new products or product lines, financing of general and
administrative expenses, licensing or acquisition of additional technologies,
and marketing of new or existing products. There are no assurances that we will
be able to raise the appropriate amount of capital needed for our future
operations. Failure to obtain funding when needed may force us to delay, reduce,
or eliminate our product development programs and have a material adverse effect
on our profitability.
WE RELY ON A FEW SUPPLIERS AND ANY DISRUPTION WITH OUR SUPPLIERS COULD DELAY
PRODUCT SHIPMENTS AND MATERIALLY ADVERSELY AFFECT OUR BUSINESS OPERATIONS AND
PROFITABILITY
We have developed relationships with a single or limited number of suppliers for
materials that are otherwise generally available. Purchases from our three
largest suppliers, Sichuan Chengxin Pharmaceutical Company, Anhui Fuyang Xinte
Pharmaceutical Company and Hainan Xinxin Bio-Technology Company as of December
31, 2007, accounted for approximately 17%, 17% and 11% respectively of the total
purchases of Helpson. Although we believe that alternative suppliers are
available to supply materials, should either of these suppliers terminate their
business arrangements with us or increase their prices of materials supplied, it
could delay product shipments and materially adversely affect our business
operations and profitability.
IF ALL OR A SIGNIFICANT PORTION OF OUR TRADE RECIEVABLES ARE NOT COLLECTED OR
COLLECTION IS DELAYED, OUR NET INCOME WILL DECREASE AND OUR PROFITABILITY WILL
BE MATERIALLY ADVERSELY AFFECTED
11
Our Company had trade receivables, net of allowance for doubtful accounts, of
approximately $12,101,979 ($1,562,494 for doubtful accounts) and $18,572,976
($2,440,852 for doubtful accounts) as of December 31, 2006 and 2007,
respectively.
It is usual commercial practice that certain customers may repay their debts
beyond credit periods granted or may repay slowly when transaction volume
increases. There is no assurance that our trade receivables will be fully repaid
on a timely basis. The percentage of a trade receivable that is deemed doubtful
is as follows: 100% after 720 days; 50% after 360 days; and 7.5% up to 360 days.
If all or a significant portion of our customers with trade receivables fail to
pay all or part of the trade receivables or delay the payment due to us for
whatever reason, our net profit will decrease and our profitability will be
materially adversely affected.
WE MAY UNDERTAKE ACQUISITIONS IN THE FUTURE, AND ANY DIFFICULTIES IN INTEGRATING
THESE ACQUISITIONS MAY DAMAGE OUR PROFITABILITY
In the future, we may acquire additional businesses or products that complement
our existing business and expand our business scale. The integration of new
businesses and products may prove to be an expensive and time consuming
procedure. We can offer no assurance that we will be able to successfully
integrate the newly acquired businesses and products or operate the acquired
business in a profitable manner. Failure to locate an appropriate acquisition
target or failure to successfully integrate and operate acquired businesses and
products may materially adversely impact our operations and profits.
THE FAILURE TO MANAGE GROWTH EFFECTIVELY COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OUR OPERATIONS
The rapid market growth of our pharmaceutical products may require our Company
to expand our employee base for managerial, operational, financial, and other
purposes. As of December 31, 2007, we had 170 regular employees. The continued
future growth will impose significant responsibilities upon the members of
management to identify, recruit, maintain, integrate, and motivate new
employees. Aside from increased difficulties in the management of human
resources, we may also encounter working capital issues, as we need increased
liquidity to finance the purchases of raw materials and supplies, research and
development of new products, acquisition of new businesses and technologies, and
the hiring of additional employees. For effective growth management, we will be
required to continue improving our operations, management, and financial systems
and control. Our failure to manage growth effectively may lead to operational
and financial inefficiencies that will have a negative effect on the Company's
profitability.
12
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND LOSS OF THESE KEY PERSONNEL COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FIANANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our Company's success is, to a certain extent, attributable to the management,
sales and marketing, and pharmaceutical factory operational expertise of key
personnel. Zhilin Li, Heqi Cai, and Yao Huang perform key functions in the
operation of our Company. Ms. Li entered into an Employment Agreement with
Helpson, which provides that she shall act as its CEO. The term of her
Employment Agreement is from July 1, 2005, to June 30, 2010. Mr. Cai entered
into an Employment Agreement with Helpson to act as its Director of Development
Department for a term from July 1, 2005, to June 30, 2010. Ms. Huang entered
into an Employment Agreement with Helpson to act as its Head of Pharmaceutical
Plant for a term from July 1, 2005, to June 30, 2010. There can be no assurance
that we will be able to retain these officers after the term of their employment
or after their contracts expire. The loss of officers could have a material
adverse effect upon our business, financial condition, and results of
operations. We must attract, recruit and retain a sizeable workforce of
technically competent employees. Our ability to effectively implement our
business strategy will depend upon, among other factors, the successful
recruitment and retention of additional highly skilled, experienced management
and other key personnel. We cannot assure that we will be able to hire or retain
such employees.
IF WE FAIL TO DEVELOP NEW PRODUCTS WITH HIGH PROFIT MARGINS AND OUR HIGH PROFIT
MARGIN PRODUCTS ARE REPLACED BY COMPETITOR'S PRODUCTS, THEN OUR GROSS AND NET
PROFIT MARGINS WILL BE ADVERSELY AFFECTED
In the years ended December 31, 2006 and 2007, the gross profit margin for our
Company was 46.2% and 46.91% respectively. However, there is no assurance that
we will be able to sustain such profit margins in the future. The pharmaceutical
market in the PRC is very competitive, and there may be pressure to reduce sale
prices of products without a corresponding decrease in the price of raw
materials. To the extent that we fail to develop new products with high profit
margins and our high profit margin products are substituted by competitors'
products, gross profit margins will be adversely affected.
WE FACE COMPETITION IN THE PHARMACEUTICAL MARKET IN THE PRC AND SUCH COMPETITION
COULD CAUSE OUR SALES REVENUE AND PROFITS TO DECLINE
13
According to the State Food and Drug Administration of China (the "SFDA"), there
were approximately 5,071 pharmaceutical manufacturing companies in the PRC as of
the end of June 2004, of which approximately 3,237 manufacturers obtained
certificates of Good Manufacturing Practices Certification ("GMP
certification"). After GMP certification became a mandatory requirement on July
1, 2004, approximately 1,834 pharmaceutical manufacturers were forced to cease
production. Only the 3,237 pharmaceutical manufacturers with GMP certifications
may continue their manufacturing operations. As of the end of 2006, there are
4682 enterprises manufacturing medicines and formulation in China. The
certificates, permits, and licenses required for pharmaceutical operation in the
PRC create a potentially significant barrier for new competitors seeking
entrance into the market. Despite these obstacles, we face competitors that will
attempt to create, or are already marketing, products in the PRC that are
similar to ours. There can be no assurance that our products will be either more
effective in their therapeutic abilities and/or be able to compete in price with
that of our competitors. Failure to do either of these may result in decreased
profits for our Company.
OUR SUCCESS IS HIGHLY DEPENDENT ON CONTINUALLY DEVELOPING NEW AND ADVANCED
PRODUCTS, TECHNOLOGIES, AND PROCESSES AND FAILURE TO DO SO MAY CAUSE US TO LOSE
OUR COMPETITIVENESS IN THE PHARMACEUTICAL INDUSTRY AND MAY CAUSE OUR PROFITS TO
DECLINE
To remain competitive in the pharmaceutical industry, it is important to
continually develop new and advanced products, technologies and processes. There
is no assurance that our competitors' new products, technologies and processes
will not render our Company's existing products obsolete or non-competitive. Our
Company's competitiveness in the pharmaceutical market therefore relies upon our
ability to enhance our current products, introduce new products, and develop and
implement new technologies and processes. Our Company's failure to
technologically evolve and/or develop new or enhanced products may cause us to
lose our competitiveness in the pharmaceutical industry and may cause our
profits to decline.
THE COMMERCIAL SUCCESS OF OUR PRODUCTS DEPENDS UPON THE DEGREE OF MARKET
ACCEPTANCE AMONG THE MEDICAL COMMUNITY AND FAILURE TO ATTAIN MARKET ACCEPTANCE
AMONG THE MEDICAL COMMUNICTY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATIONS AND
PROFITABILITY
The commercial success of our products depends upon the degree of market
acceptance among the medical community. Even if our products are approved by the
SFDA, there is no assurance that physicians will prescribe or recommend our
products to patients. Furthermore, a product's prevalence and use at hospitals
may be contingent upon our relationship with the medical community. The
14
acceptance of our products among the medical community may depend upon several
factors including, but not limited to, the product's acceptance by physicians
and patients as a safe and effective treatment, cost effectiveness, potential
advantages over alternative treatments, and the prevalence and severity of side
effects. Failure to attain market acceptance among the medical community may
have an adverse impact on our operations and profitability.
THE DISCONTINUATION OF ANY PREFERENTIAL TAX TREATMENTS OR OTHER INCENTIVES
CURRENTLY AVAILABLE TO US IN THE PRC COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Pursuant to the original Income Tax Law of the PRC for Enterprises with Foreign
Investment and Foreign Enterprises and its implementation rules, a foreign
invested enterprise as defined under PRC laws shall pay 30% corporate income tax
and 3% local income tax; an enterprise with foreign investment of a production
nature scheduled to operate for a period of not less than ten years shall, from
the year of making profits, be exempt from enterprise income tax in the first
and second years and allowed a fifty percent reduction in the third to fifth
years. Pursuant to the State Council's Regulations on Encouraging Investment in
and Development of Hainan Island promulgated in May, 1988, the corporate income
tax for all companies incorporated in Hainan Province is reduced to 15%.
Pursuant to the Regulations on Foreign Investment in Hainan Special Economic
Zone promulgated by Hainan Province in March, 1991 (Regulation on Foreign
Investment), all foreign invested enterprises incorporated in Hainan Province
are exempt from the local income tax.
Helpson has obtained the approval for preferential enterprise income tax
treatment from Hainan State Administration of Taxation at the end of 2006 and
has begun to enjoy the preferential tax treatment. Therefore, Helpson shall be
exempt from enterprise income tax in the first and second years after it begins
to make profit, and shall pay enterprise income tax at the rate of 7.5% from the
third to the fifth year after it begins to make profit.
However, on March 16, 2007, China's national congress approved the Enterprise
Income Tax Law of the PRC (New Income Tax Law), which takes effect from January
1, 2008. The New Income Tax Law unifies the enterprise income tax rate, cost
deduction and tax incentive policies for both domestic and foreign invested
enterprises. Under the New Income Tax Law, enterprises that were established and
already enjoyed preferential tax rates or tax holidays before March 16, 2007
will (i) in case of preferential tax rates, gradually increase to 25% rate for a
period of 5 years, (ii) in case of tax holidays continue to enjoy them until the
expiration of such term.
15
Therefore, Helpson will continue to enjoy preferential tax treatment until the
expiration of the preferential term. There can be no assurance that Helpson will
continue to be entitled to any preferential tax treatment or tax holidays after
the transition period expires. The discontinuation of any such special or
preferential tax treatment or other incentives could have an adverse affect our
business, financial condition and results of operations.
WE MAY BE SUBJECT TO THE PRC'S PRICE CONTROL OF DRUGS WHICH MAY LIMIT OUR
PROFITABILITY AND EVEN CAUSE US TO STOP MANUFACTURING CERTAIN PRODUCTS
The State Development and Reform Commission (SDRC) of the PRC and the price
administration bureaus of the relevant provinces of the PRC in which the
pharmaceutical products are manufactured are responsible for the retail price
control over our pharmaceutical products. The SDRC sets the price ceilings for
certain pharmaceutical products in the PRC. Although our products have not been
subject to such price controls as of the date of this Form 10-KSB, there is no
assurance that our products will remain unaffected by it. Where our products are
subject to a price ceiling, we will need to adjust the product price to meet the
requirement and to accommodate for the pricing of competitors in the competition
for market shares. The price ceilings set by the SDRC may limit our
profitability, and in some instances, such as where the price ceiling is below
production costs, may cause us to stop manufacturing certain products which may
adversely affect our results of operations.
OUR CERTIFICATES, PERMITS, AND LICENSES ARE SUBJECT TO GOVERNMENTAL CONTROL AND
RENEWAL, AND THE FAILURE TO OBTAIN RENEWAL WOULD CAUSE ALL OR PART OF OUR
OPERATIONS TO BE SUSPENDED AND HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION
Our Company is subject to various PRC laws and regulations pertaining to the
pharmaceutical industry. Our Company has attained certain certificates, permits,
and licenses required for the operation of a pharmaceutical enterprise and the
manufacturing of pharmaceutical products in the PRC. We obtained the Medicine
Production Permit in December 2005, which is valid through December 31, 2010. We
also obtained five GMP certificates which are effective through July 17, 2008,
December 2, 2009, February 2, 2010, May 19, 2010 and April 17, 2011,
respectively. The pharmaceutical production permits and GMP certificates are
each valid for a term of five years and must be renewed before their expiration.
During the renewal process, we will be re-evaluated by the appropriate
governmental authorities and must comply with the prevailing standards and
regulations, which may change from time to time. In the event that we are not
able to renew the certificates, permits and licenses, all or part of our
operations may be suspended by the government, which would have a material
adverse effect on our financial condition. Furthermore, if escalating compliance
16
costs associated with governmental standards and regulations restrict or
prohibit any part of our operations, it may adversely affect our results of
operations and profitability.
IF OUR PRODUCTS FAIL TO RECEIVE REGULATORY APPROVAL OR ARE SEVERELY LIMITED IN
THE PRODUCTS SCOPE OF USE, THEN WE MAY BE UNABLE TO RECOUP CONSIDERABLE RESEARCH
AND DEVELOPMENT EXPENDITURES ALREADY INCURRED
Our products that are approved to be manufactured as of December 31, 2007
include 17 medicines. There are 9 products in the stage of research and
development as of December 31, 2007. The production of our pharmaceutical
products is subject to the regulatory approval of the SFDA. The regulatory
approval procedure for pharmaceuticals can be quite lengthy, costly, and
uncertain. Depending upon the discretion of the SFDA, the approval process may
be significantly delayed by additional clinical testing and require the
expenditure of currently unavailable resources; in such an event, it may be
necessary for us to abandon our application. Even where approval of the product
is granted, it may contain significant limitations in the form of narrow
indications, warnings, precautions, or contra-indications with respect to
conditions of use. If approval of our product is denied, abandoned, or severely
limited in terms of the scope of products use, it may result in the inability to
recoup considerable research and development expenditures already incurred.
OUR RESEARCH AND DEVELOPMENT MAY BE COSTLY AND/OR UNTIMELY, AND THERE ARE NO
ASSURANCES THAT OUR RESEARCH AND DEVELOPMENT WILL EITHER BE SUCCESSFUL OR
COMPLETED WITHIN THE ANTICIPATED TIMEFRAME, IF EVER AT ALL
The research and development of our new and existing products and their
subsequent commercialization plays an important role in our success. As of
December 31, 2007, there are 9 products under research and development,
including Hugan Granule, Tiopronin, Omeprazole for Injection, Ceftriaxone Sodium
and Tazobactam Sodium, Donepezil dispersible tablets, Mycophenolate Mofetil
Granules, rhaFGF, rhCNTF and Compand Diclofenac Sodium Injection. The research
and development of new products is costly and time consuming, and there are no
assurances that our research and development of new products will either be
successful or completed within the anticipated time frame, if ever at all. There
are also no assurances that if the product is developed, that it will lead to
successful commercialization.
WE CANNOT GUARANTEE THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS, AND IF
INFRINGEMENT OR COUNTERFEITING OF OUR INTELLECTUAL PROPERTY RIGHTS OCCURS, THEN
OUR REPUTATION AND BUSINESS MAY BE ADVERSELY AFFECTED
17
To protect the brand names of our products, we have registered and applied for
registration of our trademarks in the PRC, where we have a major business
presence.
All of our products are sold under these trademarks. As of the date of this Form
10-KSB, we have not experienced any infringements of such trademarks for sales
of pharmaceutical products, and as of the date of this Form 10-KSB, we were not
aware of any infringement of our intellectual property rights. However, there is
no assurance that there will not be any infringement of our brand name or other
registered trademarks or counterfeiting of our products in the future. Should
any such infringement or counterfeiting occur, our reputation and business may
be adversely affected. We may also incur significant expenses and substantial
amounts of time and effort to protect our intellectual property rights in the
future. Such diversion of our resources may adversely affect our existing
business and future expansion plans.
OUR REPUTATION AND BUSINESS MAY BE ADVERSELY AFFECTED AS A RESULT OF PRODUCT
LIABILITY OR DEFECTIVE PRODUCTS
We may produce products which inadvertently have an adverse pharmaceutical
effect on the health of individuals despite proper testing. Existing PRC laws
and regulations do not require us to maintain third party liability insurance to
cover product liability claims. However, if a product liability claim is brought
against us, it may, regardless of merit or eventual outcome, result in damage to
our reputation, breach of contract with our customers, decreased demand for our
products, costly litigation, product recalls, loss of revenue, and the inability
to commercialize some products. We are currently not aware of any existing or
anticipated product liability claims with respect to our products.
WE RELY ON THE COOPERATION WITH CERTAIN RESEARCH LABORATORIES, PHARMACEUTICAL
INSITITUIONS, AND UNIVERSITIES, AND IF THESE INSTITUTIONS CEASE TO COOPERATE
WITH US AND WE CANNOT FIND OTHER SUITABLE SUBSTITUTE RESEARCH AND DEVELOPMENT
PARTNERS, THEN OUR ABILITY TO DEVELOP NEW PRODUCTS MAY BE HINDERED AND OUR
BUSINESS MAY BE ADVERSELY AFFECTED
Helpson cooperates with several research institutions including the Chinese
Academy of Medical Sciences, China University of Pharmaceuticals, the Academy of
Military Medical Science, the Chongqing Medical Industry Institute and China
Sichuan University. Helpson relies to a certain extent on these institutions for
its development of new products. There is no assurance that these institutions
will continue cooperating with Helpson to develop new products. In the event
that these institutions cease to cooperate with Helpson and Helpson cannot find
18
other suitable substitute research and development partners, our ability to
develop new products may be hindered and our business may be adversely affected.
RISKS RELATED TO DOING BUSINESS IN CHINA
Helpson operates from facilities that are located in China. Accordingly, its
operations must conform to governmental regulations and rules of the PRC.
THE PRC LEGAL SYSTEM HAS INHERENT UNCERTAINTIES THAT COULD LIMIT THE LEGAL
PROTECTIONS AVAILABLE TO US
The PRC legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedential value. In the late 1970s, the PRC government began to promulgate a
comprehensive system of laws and regulations governing commercial matters. The
overall effect of legislation enacted over the past 20 years has significantly
enhanced the protections afforded to foreign-invested enterprises in China.
However, these laws, regulations, and legal requirements are relatively recent
and are evolving rapidly, and their interpretation and enforcement involve
uncertainties. These uncertainties could limit the legal protections available
to foreign investors.
The practical effect of the PRC legal system on our business operations in China
can be viewed from two separate but intertwined considerations. First, as a
matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full benefit of corporate articles and contracts to Foreign
Invested Enterprise participants. These laws, however, do impose standards
concerning corporate formation and governance, which are not qualitatively
different from the corporation laws found in the United States. Similarly, PRC
accounting laws mandate accounting practices which may not be consistent with
the U.S. Generally Accepted Accounting Principles. PRC accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the account books of a foreign invested enterprise be
maintained in accordance with PRC accounting laws. Article 14 of the PRC Wholly
Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to
submit certain periodic fiscal reports and statements to designated financial
and tax authorities.
If a foreign-invested enterprise refuses to keep account books in China, the
financial and tax authorities may impose a fine on it, and the industry and
commerce administration authority may order it to suspend operations or may
revoke its business license.
Second, while the enforcement of substantive rights may be less clear than
United States procedures, foreign invested enterprises and wholly foreign-owned
enterprises are PRC registered companies which enjoy the same status as other
19
PRC registered companies in business-to-business dispute resolutions. The PRC
legal infrastructure, however, is significantly different in operation from its
United States counterpart, and may present a significant impediment to the
operation of a foreign invested enterprise.
PRC ECONOMIC REFORM POLICIES OR NATIONALIZATION COULD RESULT IN A TOTAL
INVESTMENT LOSS IN OUR COMMON STOCK
Since 1979, the PRC government has reformed its economic policies. Because many
reforms are unprecedented or experimental, they are expected to be refined and
improved. Other political, economic and social factors, such as political
changes, changes in the economic growth rates, unemployment or inflation, or in
the disparities in per capita wealth between regions within China, could lead to
further readjustment of the reform measures. This refining and readjustment
process may negatively affect our operations.
Although the PRC government owns the majority of productive assets in China, in
the past several years the government has implemented economic reform measures
that emphasize decentralization and encourage private economic activity. Because
these economic reform measures may be inconsistent or ineffectual, there are no
assurances that:
- We will be able to capitalize on economic reforms;
- The Chinese government will continue its pursuit of economic reform
policies;
- The economic policies, even if pursued, will be successful;
- Economic policies will not be significantly altered from time to time; or
- Business operations in China will not become subject to the risk of
nationalization.
Over the last few years, China's economy has registered high growth rates.
Recently, there have been indications that rates of inflation have increased. In
response, the Chinese government recently has taken measures to curb this
excessively expansive economy. These measures have included restrictions on the
availability of domestic credit, reducing the purchasing capability of some of
its customers, and limited recentralization of the approval process for
purchases of certain foreign products. These austere measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
and may result in severe dislocations in the Chinese economy. The PRC government
may adopt additional measures to further combat inflation, including the
establishment of freezes or restraints on certain projects or markets. These
measures may adversely affect our operations.
There can be no assurance that the reforms to China's economic system will
continue or that we will not be adversely affected by changes in China's
political, economic, and social conditions and by changes in policies of the PRC
government, such as changes in laws and regulations, measures which may be
20
introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import restrictions.
YOU MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING
FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN THE PRC BASED ON U.S. OR OTHER
FOREIGN LAWS AGAINST THE COMPANY OR OUR MANAGEMENT
Helpson, our operating company, is incorporated under the laws of the PRC, and
substantially all of our assets are located in the PRC. In addition, many of our
directors, managers, and executive officers reside within the PRC, and
substantially all of the assets of these persons are located within the PRC. As
a result, it may not be possible to effect service of process within the United
States or elsewhere outside the PRC upon certain of our directors, supervisors
or executive officers, including with respect to matters arising under U.S.
federal securities laws or applicable state securities laws. Moreover, the PRC
does not have treaties providing for the reciprocal recognition and enforcement
of judgments of courts with the United States, the United Kingdom, Japan or many
other countries. As a result, recognition and enforcement in the PRC of
judgments of a court in the United States and any of the other jurisdictions
mentioned above in relation to any matter may be difficult or impossible.
Furthermore, an original action may be brought in the PRC against us, our
directors, managers, or executive officers only if the actions are not required
to be arbitrated by PRC law and Helpson's articles of association, and only if
the facts alleged in the complaint give rise to a cause of action under PRC law.
In connection with any such original action, a PRC court may impose civil
liability, including monetary damages.
BECAUSE WE RECEIVE SUBSTANTIALLY ALL OF OUR REVENUE IN RENMINBI, WHICH CURRENTLY
IS NOT A FREELY CONVERTIBLE CURRENCY, AND THE PRC GOVERNMENT CONTROLS THE
CURRENCY CONVERSION AND THE FLUCTUATION OF THE RENMINBI, WE ARE SUBJECT TO
CHANGES IN THE PRCS' POLITICAL AND ECONOMIC DECISIONS
We receive substantially all of our revenues in Renminbi, which currently is not
a freely convertible currency. The PRC government may, at its discretion,
restrict access in the future to foreign currencies for current account
transactions. Any future restrictions on currency exchanges may limit our
ability to use revenue generated in Renminbi to fund any future business
activities outside China or to make dividend or other payments in U.S. dollars.
Although the Chinese government introduced regulations in 1996 to allow greater
convertibility of the Renminbi for current account transactions, significant
restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies,
21
after providing valid commercial documents, at those banks authorized to conduct
foreign exchange business. In addition, conversion of Renminbi for capital
account items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items. We cannot be certain that
the Chinese regulatory authorities will not impose more stringent restrictions
on the convertibility of the Renminbi, especially with respect to foreign
exchange transactions.
THE VALUE OF OUR SECURITIES WILL BE AFFECTED BY THE FOREIGN EXCHANGE RATE
BETWEEN U.S. DOLLARS AND RMB
The value of our common stock will be affected by the foreign exchange rate
between U.S. dollars and Renminbi. For example, to the extent that we need to
convert U.S. dollars into Renminbi for our operational needs and should the
Renminbi appreciate against the U.S. dollar at that time, our financial position
and the price of our common stock may be adversely affected. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiary in China would be reduced.
THE GROWTH OF THE CHINESE ECONOMY HAS BEEN UNEVEN ACROSS GEOGRAPHIC REGIONS AND
ECONOMIC SECTORS, AND A DOWNTURN IN CERTAIN REGIONS IN WHICH WE DO BUSINESS OR
IN OUR ECONOMIC SECTOR WOULD SLOW DOWN OUR GROWTH AND PROFITABILITY
The growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business. Our profitability may decrease due to a downturn in the Chinese
economy. More specifically, the expansion of our sales area in the less
economically developed central and western provinces of China will depend on
those provinces achieving certain income levels.
ANY OCCURRENCE OF SERIOUS INFECTIOUS DISEASES, SUCH AS RECURRENCE OF SEVERE
ACUTE RESPIRATORY SYNDROME (SARS) CAUSING WIDESPREAD PUBLIC HEALTH PROBLEMS,
COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS
A renewed outbreak of SARS or other widespread public health problems in China,
where all of our revenue is derived, and in Hainan, where our operations are
headquartered, could have a negative effect on our operations. Our operations
may be impacted by a number of public health-related factors, including the
following:
22
o quarantines or closures of our factories or subsidiaries which would
severely disrupt its operations;
o the sickness or death of key officers and employees; and
o general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public health
problems could adversely affect our business and results of operations.
WE ARE SUBJECT TO THE ENVIRONMENTAL PROTECTION LAWS OF THE PRC
Our manufacturing process may produce by-products such as effluent, gases and
noise, which are harmful to the environment. We are subject to multiple laws
governing environmental protection, such as "The Law on Environmental Protection
in the PRC" and "The Law on Prevention of Effluent Pollution in the PRC," as
well as standards set by the relevant governmental bodies determining the
classification of different wastes and proper disposal. We have properly
attained a waste disposal permit for our manufacturing facility, which details
the types and concentration of effluents and gases allowed for disposal. The
temporary waste disposal permit will expire on September 28, 2009. We are
responsible for the renewal of the waste disposal permit. There is no assurance
that we will obtain the renewal of the waste disposal permit when the current
permit expires.
China is experiencing substantial problems with environmental pollution.
Accordingly, it is likely that the national, provincial and local governmental
agencies will adopt stricter pollution controls. There can be no assurance that
future changes in environmental laws and regulations will not impose costly
compliance requirements on us or otherwise subject us to future liabilities. Our
business's profitability may be adversely affected if additional or modified
environmental control regulations are imposed upon us.
RECENT PRC REGULATIONS RELATING TO ACQUISITIONS OF PRC COMPANIES BY FOREIGN
ENTITIES MAY LIMIT OUR ABILITY TO ACQUIRE PRC COMPANIES AND ADVERSELY AFFECT THE
IMPLEMENTATION OF OUR STRATEGY AS WELL AS OUR BUSINESS AND PROSPECTS
The PRC State Administration of Foreign Exchange or SAFE issued a pubic notice
in October 2005 (Decree No. 75), requiring PRC residents and PRC corporate
entities to register with and obtain approvals from competent local SAFE branch
in connection with their direct or indirect offshore investment activities.
Decree No. 75 requires registration by March 31, 2006 of direct or indirect
investments previously made by PRC residents in offshore companies prior to the
23
implementation of Decree No. 75 on November 1, 2005. If a PRC shareholder with a
direct or indirect stake in an offshore parent company fails to make the
required SAFE registration, the PRC subsidiaries of such offshore parent company
may be prohibited from making distributions of profit to the offshore parent and
from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Furthermore, failure
to comply with the various SAFE registration requirements described above could
result in liability under PRC law for foreign exchange evasion.
In addition, SAFE issued updated internal implementing rules (Implementing
Rules) in relation to Decree No. 75. The Implementing Rules were promulgated and
became effective on May 29, 2007. Such Implementing Rules provide more detailed
provisions and requirements regarding the overseas investment foreign exchange
registration procedures. For an offshore special purpose company which was
established and owned the onshore assets or equity interests before the
implementation date of the Decree No. 75, a retroactive SAFE registration
requirement is repeated.
Due to the lack of official interpretation, some of the terms and provisions of
the Decree No. 75 and the Implementing Rules remain unclear, and the
implementation of the Decree No. 75 by central SAFE and local SAFE branches has
been inconsistent since its adoption. Therefore, we cannot predict how Decree
No. 75 will affect our business operations or future strategies. For example,
our present and prospective PRC subsidiaries' ability to conduct foreign
exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with the Decree
No. 75 by our PRC resident shareholders. In addition, such PRC residents may not
always be able to complete registration procedures required by the Decree No.
75. We also have little control over either our present or prospective direct or
indirect shareholders or the outcome of such registration procedures.
A failure by our PRC resident shareholders or future PRC resident shareholders
to comply with the Decree No. 75, if SAFE requires it, could subject us to fines
or legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiary's ability to make distributions or pay dividends or affect
our ownership structure, which could adversely affect our business and
prospects.
On August 8, 2006, six PRC regulatory agencies, including the Chinese Securities
Regulatory Commission (CSRC) promulgated the M&A Regulation (Regulation) which
became effective on September 8, 2006. This Regulation, among other things, has
some provisions that purport to require that an offshore special purpose
vehicle, or SPV, formed for listing purposes and controlled directly or
indirectly by PRC companies or individuals shall obtain the approval of the CSRC
prior to the listing and trading of such SPV's securities on an overseas stock
exchange.
24
There are, however, substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations, including the New M&A
Rule. Accordingly, the Company cannot assure you that PRC government authorities
will not ultimately take a view contrary to the Company's understanding that it
does not need the CSRC approval, and PRC government authorities may impose some
additional approvals and requirements. Therefore, we cannot predict how the M&A
Regulation will affect our business operations or future strategy. If the CSRC
requires that we obtain its approval, we may be unable to obtain a waiver of the
CSRC approval requirements, if and when procedures are established to obtain
such a waiver. Any uncertainties and/or negative publicity regarding this CSRC
approval requirement could have a material adverse effect on the trading price
of our common stocks.
RISKS RELATED TO OUR COMMON STOCK
---------------------------------
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE VOLATILE WHICH COULD RESULT IN A
COMPLETE LOSS OF YOUR INVESTMENT
The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following:
o actual or anticipated fluctuations in our quarterly operating results,
o announcements of new products by us or our competitors,
o changes in financial estimates by securities analysts,
o conditions in the pharmaceutical market,
o changes in the economic performance or market valuations of other companies
involved in pharmaceutical production,
o announcements by our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments,
o additions or departures of key personnel, or
o potential litigation.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
WE MAY ISSUE ADDITIONAL SHARES OF OUR CAPITAL STOCK TO RAISE ADDITIONAL CASH FOR
WORKING CAPITAL; IF WE ISSUE ADDITIONAL SHARES OF OUR CAPITAL STOCK, OUR
STOCKHOLDERS WILL EXPERIENCE DILUTION IN THEIR RESPECTIVE PERCENTAGE OWNERSHIP
IN US THE COMPANY
25
We may issue additional shares of our capital stock to raise additional cash for
working capital. There is no anti-dilution protection or preemptive rights in
connection with our common stock. Thus, the percentage ownership of existing
holders of common stock may be diluted in their respective percentage ownership
in us if we issue additional shares of our capital stock.
A LARGE PORTION OF OUR COMMON STOCK IS CONTROLLED BY A SMALL NUMBER OF
STOCKHOLDERS AND AS A RESULT, THESE STOCKHOLDERS ARE ABLE TO INFLUENCE AND
ULTIMATELY CONTROL THE OUTCOME OF STOCKHOLDER VOTES ON VARIOUS MATTERS
A large portion of our common stock is held by a small number of stockholders.
For instance, Heung Mei Tsui holds 29.00% and Zhilin Li holds 26.82% of the
Company's common stock, respectively, as of the date of this Form 10-KSB. As a
result, these two stockholders are able to influence and ultimately control the
outcome of stockholder votes on various matters, including the election of
directors and other corporate transactions including business combinations. In
addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock
price and could impair our ability to obtain capital through an offering of
equity securities. Furthermore, the current ratios of ownership of our common
stock reduce the public float and liquidity of our common stock which can in
turn affect the market price of our common stock.
THERE IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK WHICH MAY MAKE
IT DIFFICULT TO SELL SHARES OF OUR COMMON STOCK
Our common stock is currently traded in the over-the-counter market through the
Over-the-Counter Bulletin Board (OTC Bulletin Board). The quotation of our
shares on the OTC Bulletin Board may result in a less liquid market available
for our existing and potential stockholders to trade shares of our common stock,
could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the future. While there is an
active trading market for our common stock, it is small. Further, there can be
no assurance that an active trading market will be maintained. We cannot assure
you that our common stock will ever be included for trading on any stock
exchange or through any other quotation system (including, without limitation,
the NASDAQ Stock Market).
WE ARE LIKELY TO REMAIN SUBJECT TO "PENNY STOCK" REGULATIONS AND AS A
CONSEQUENCE THERE ARE ADDITIONAL SALES PRACTICE REQUIREMENTS AND ADDITIONAL
WARNINGS ISSUED BY THE SEC
26
As long as the trading price of our common stock is below $5.00 per share, the
open-market trading of our common stock will be subject to the "penny stock"
rules of the SEC. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability of broker-dealers to sell the
common stock and may affect a stockholder's ability to resell the common stock.
There can be no assurance that our common stock will qualify for exemption from
the "penny stock" rules. In any event, even if our common stock is exempt from
such rules, we would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the SEC the authority to restrict any person from participating in a
distribution of a "penny stock" if the SEC finds that such a restriction would
be in the public interest.
Stockholders should be aware that, according to SEC Release No. 34-29093, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include (i) control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differential and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market.
WE ARE RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS UNDER
CERTAIN CIRCUMSTANCES WHICH COULD RESULT IN SUBSTANTIAL EXPENDITURES, WHICH WE
MAY BE UNABLE TO RECOUP
27
Our bylaws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against attorney's fees and
other expenses incurred by them in any litigation to which they become a party
arising from their association with or activities on behalf of us. This
indemnification policy could result in substantial expenditures, which we may be
unable to recoup.
COMPLIANCE WITH THE SARBANES-OXLEY ACT COULD COST HUNDREDS OF THOUSANDS OF
DOLLARS, REQUIRE ADDITIONAL PERSONNEL AND REQUIRE HUNDREDS OF MAN HOURS OF
EFFORT, AND THERE CAN BE NO ASSURANCE THAT WE WILL HAVE THE PERSONNEL, FINANCIAL
RESOURCES OR EXPERTISE TO COMPLY WITH THESE REGULATIONS
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted
rules requiring public companies to include a report of management on the
Company's internal controls over financial reporting in their annual reports. We
are subject to this requirement commencing with our fiscal year ending December
31, 2007 and a report of our management is included under Item 8A of this Annual
Report on Form 10-KSB. Our management has identified significant deficiencies in
our internal control over financial reporting as of December 31, 2007. Our
management concluded that those internal control deficiencies result in a
material weakness. The identified weakness did not result in material
adjustments to our 2007 financial statements. However, an uncured weakness could
negatively impact our financial statements for subsequent years. We cannot be
certain that we will be able to successfully complete the procedures,
certification and attestation requirements of Section 404 of the Sarbanes-Oxley
Act, or that our auditors will not have to report a material weakness in
conjuction with the presentation of our financial statements. If we fail to
comply with the requirements of Section 404 or if our auditors report such
material weakness, the accuracy and timeliness of our annual report may be
materially adversely affected and could cause investors to lose confidence in
our reported financial information.
OUR HOLDING COMPANY STRUCTURE MAY LIMIT THE PAYMENT OF DIVIDENDS
We have no direct business operations, other than our ownership of our
subsidiaries. While we have no current intention of paying dividends, should we
decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
28
regulatory restrictions as discussed below. PRC regulations currently permit the
payment of dividends only out of accumulated profits as determined in accordance
with PRC accounting standards and regulations. Our subsidiary in China is also
required to set aside a portion of its after tax profits according to PRC
accounting standards and regulations to fund certain reserve funds. Currently,
our subsidiary in China is the only source of revenues or investment holdings
for the payment of dividends. If it does not accumulate sufficient profits under
PRC accounting standards and regulations to first fund certain reserve funds as
required by PRC accounting standards, we will be unable to pay any dividends.
Item 2 - Description of Property
Helpson owns a factory with a construction area of 663.94 square meters located
at the 6th floor of Standard Plant Building B, Jinpan Industrial Development
Zone, Haikou, Hainan Province, PRC.
Helpson owns the land use rights to 22,936 square meters of land located on plot
C09-2, Haikou Bonded Zone, Haikou. Helpson built a factory with a construction
area of 6,593.20 square meters on this land.
In addition, Helpson entered into a lease agreement with Hainan Zhongfu
Going-abroad Personnel Service Center (Zhongfu), under which Helpson rented the
offices located at 2/F, Jiahai Building owned by Zhongfu as its principal
executive offices. The term of the lease is 10 years, from November 21, 2000 to
November 20, 2010. The rent from November 21, 2000 to November 20, 2005 is
RMB3,600 per month. The rent from November 21, 2005 to November 20, 2010 may be
adjusted within 5% of the original rent. Starting from July 21, 2006, the rent
has been adjusted to RMB 3,780 per month.
Intellectual Property
Helpson owns the following 16 registered trademarks: Funalin, Fukexing, Beisha,
Shiduotai, Xinuo, Pusenlitai, Shuchang, Shenkaineng, an AFGF logo, an HPS logo,
two HELPSON logos, as well as four other logos. In addition, Helpson is applying
for registration of six other trademarks used in connection with western
medicine, raw material medicine, Chinese herbal medicine and medicine
injections.
Item 3 - Legal Proceedings
We have no pending legal proceedings. From time to time, we may be involved in
various claims, lawsuits and disputes with third parties, actions involving
allegations of discrimination or breach of contract actions incidental to the
normal operations of the business.
29
Item 4 - Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5 - Market for Company's Common Stock and Related Stockholder Matters
Our common stock is traded on the OTCBB under the symbol "CPHI.OB". The
following table sets forth the price representing the range of high and low
closing sale prices for our common stock as reported during the fiscal years
ended December 31, 2006 and 2007.
Quarter Ended High Low
------------------------ --------------- -------------
2007
------------------------ --------------- -------------
4th Quarter $4.17 $1.95
------------------------ --------------- -------------
3rd Quarter $1.80 $1.35
------------------------ --------------- ---- -------------
2nd Quarter $2.17 $1.64
------------------------ --------------- ---- -------------
1st Quarter $2.28 $1.60
------------------------ --------------- ---- -------------
2006
------------------------ --------------- -------------
4th Quarter $2.35 $1.30
------------------------ --------------- -------------
3rd Quarter $1.60 $1.07
------------------------ --------------- -------------
2nd Quarter $1.70 $1.15
------------------------ --------------- -------------
1st Quarter $2.05 $1.05
------------------------ --------------- -------------
As of March 26, 2008, the closing price of our common stock on the OTCBB was
$2.20. As of March 26, 2008, the stockholders' list for our common stock showed
161 registered shareholders of record, which figure does not take into account
those stockholders whose certificates are held in the name of broker-dealers or
other nominees.
Dividend Policy
Since inception, we have not paid, nor declared, any dividends and we do not
intend to declare any such dividends in the foreseeable future. Our ability to
pay dividends is subject to limitations imposed by Delaware law and the laws of
the PRC.
Transfer Agent
The Transfer Agent and Registrar for our common stock is Securities Transfer
30
Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75234 and its
telephone number is 469.633.0100.
Item 6 - Management's Discussion and Analysis or Plan of Operation
FORWARD-LOOKING STATEMENTS
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 elsewhere in this Current Report on Form 10-KSB.
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.
China Pharma Holdings, Inc. is a specialty bio-pharmaceutical company with
Scalable GMP certified manufacturing facilities. We currently have eight
different production lines, which develop, manufacture and market Western and
Chinese medicines. Over the years we have developed a wide distribution network,
professional marketing team, and strong R&D capabilities. We have a portfolio of
therapeutics that target: CNS, cardiovascular, wound recovery, and infectious
diseases. Our therapeutics have a targeted market segment, both current and
future, which covers a large patient population. We also have a highly
professional and experienced management team.
Strong Revenue Growth and High Margins -We have experienced an average annual
growth rate of over 50% in sales of our therapeutics since 2003. In 2007, we
generated $33 million from therapeutics sales, an increase of 51.93% from sales
of $21 million in 2006. Gross margin for our therapeutics achieved 46% in both
2007 and 2006, which is above the industry average gross margin of 34.2%. We are
31
able to compete in the highly fragmented pharmaceutical industry through our
diversified therapeutics line, cost control and strong sales network. Our
experienced management team, market insights and strong R&D capabilities, enable
us to develop and launch new and improved generic products based on market
demand.
Proven Record of Success - We have a proven track record of success. We have a
porfolio of over 30 specifications of drugs that focus on the treatment of: CNS,
cardiovascular, cerebrovascular, and infectious diseases. Among these
specifications, two are market leaders, Pusenok and Buflomedil hydrochloride. We
were awarded the "National Key New Product" by the Ministry of Science and
Technology of the PRC with the State Administration of Taxation, Ministry of
Commerce of the PRC, General Administration of Quality Supervision, Inspection
and Quarantine of the PRC, and State Environmental Protection Administration of
China. We are a profitable company with a low cost, high margin business model.
We are seeing a quick growth in sales with a constant growth in income, due to
our focus on the largest segment of China's pharmaceutical market. We have eight
different types of modern production lines with capacity to meet future demands.
In addition, our growth strategy is supported by the dynamics pharmaceutical
industry.
Clear Strategy for Growth - We are part of a rapidly growing industry, in which
we are the leader in generic drugs. We have created a competitive advantage,
both currently and in the future, through a segmented therapeutics line designed
to target specific patient groups. Our R&D is guided by the market and targets
name brand drugs and new generic drugs in China. The R&D covers a variety of
diseases, but focuses on high incidence and high mortality diseases in China,
which need more effective treatment. In an attempt to remain a leading player in
the market, we target off-patent drugs or drugs about to be off-patent with
cumulative global sales of over $1 billion. Through December 2007, we have 10
drugs on track to launch, including a new anti-drug-resistance antibiotic which
has already entered the SFDA technical evaluation. We also have three drugs
which are waiting for the SFDA's production approval. Bumetanide received SFDA
production approval in January 2008. It is estimated that all therapeutic
products currently pending approval will contribute to the revenue.
I. Summary
Our financial performance for the twelve months ended December 31, 2007 improved
compared to the twelve months ended December 31, 2006. Total revenue increased
over 51.93%, from $21,183,262 to $33,186,324. This growth is attributable to the
further development of current products and strengthening our marketing on new
products which were launched after late 2006. This is in line with our strategy
of launching new products while expanding into the several competitive
pharmaceutical markets domestically.
32
Our financial performance for 2007 shows that we are still growing. We have seen
an increase in gross profit of 54.17% to $15.57 million. Net income, without
consideration of foreign currency translation adjustment, has increased by
49.22% to $ 12.82 million. This is the result of the development of the new
products and additional marketing activities.
For the twelve months ended December 31, 2007, EPS increased by 40.00%, reaching
$0.35, compared to $0.25 for the twelve months ended December 31, 2006. We are
working closely with various pharmaceutical research institutions to develop
more functional products to meet the customers' needs. Our focus is to create a
steady increase in revenue. We have seen in the past that a successful strategy
is the key to company operation. In the near future, we will build up more
systematic and continuous internal control procedures for the long-term
development and the benefit of our shareholders.
II. Business Overview
We are primarily engaged in the research, development, manufacturing, and
marketing of pharmaceutical and nutritional supplements. During 2007, we
launched two new products, Alginic Sodium Diester and Granisetron hydrochloride.
We plan to expand our biotechnology product series. Based on the foundation
established by some of our widely recognized medicine labels such as
Neurotrophicpeptide, we have launched and will continue to launch a variety of
biological medicines, including the injected hepatocyte growth-promoting
factors, which are expected to fuel additional growth beyond that of
Neurotrophicpeptide.
One of our products, Buflomedil Hydrochloride (including raw material, injection
and troche) has received the following recognitions:
o Designated as the key technology project in Hainan in 2003 by Haikou
Municipality.
o Received the best commercialized technology award in Hainan in 2004 by Hainan
Scientific and Technological Result Examination Committee.
o Awarded 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.
In 2003, we attained GMP authentication and the award of best enterprise for
supporting SARS medicine awarded by Hainan Food and Drug Administration,
demonstrating our industry leadership. Our products have been distributed and
sold to more than 29 provinces, sovereignties, and
33
autonomous regions around China. We have 16 sales offices and approximately 680
proxy agents throughout the PRC. The main channels we use to deliver our
products are as follows: (1) Distribution system (Proxy Agents); (2) Direct sale
system to hospitals; (3) Distribution of products to end-market through local
medical companies.
Onny Investment Limited (Onny) was incorporated in the British Virgin Islands on
January 12, 2005 and was a development stage enterprise through June 15, 2005.
On June 16, 2005, Onny acquired all of the outstanding shares of Hainan Helpson
Medical & Bio-Technology Co., Ltd, a privately held Chinese joint venture
(Helpson) and emerged from the development stage. On October 19, 2005, Onny was
reorganized as a wholly owned subsidiary of China Pharma Holdings, Inc. formerly
TS Electronics.
Additionally, on February 1, 2007, we fulfilled a fund raising equity offering
of units priced at $1.70 each consisting of one share of common stock and a
warrant to purchase one-half of a share of common stock at an exercise price of
$2.38 per share. We received gross proceeds in the aggregate amount of
$4,259,900. The net proceeds, after deducting the related offering expenses of
$462,717 amounted to $3,797,183. In total, we issued 2,505,882 shares of common
stock and issued three-year warrants to purchase an aggregate of 1,252,941
shares of common stock to 17 accredited investors.
III. Trend in the Market.
Studies show that due to the expansion and aging of the world's population, an
increasing number of people have age-related diseases, such as cancer,
Alzheimer's disease, diabetes, and rheumatoid arthritis. These diseases have
already become prevalent, particularly in developed areas. In a growing and
aging population, people need to find more effective methods of treatment.
Patient empowerment has been a factor in high-quality healthcare. Many are
better informed about the importance of health issues and medical advancement.
Naturally, people today are demanding greater care and access to the latest
medical procedures and medicines.
We view this market trend as an opportunity. However, the best way to take
advantage of this opportunity is to identify our business risks beforehand.
Generally speaking, there are three aspects of risks:
o External Risk
34
In recent years, the Chinese medical system has been reformed, resulting in the
State Department's establishment of a basic medical insurance system for
employees. Considering the social environment and the governmental policy in the
pharmaceutical industry in PRC, a large increase in sales can be expected due to
local government involvement in the industry. Competition will also be strong
across the industry overall. Currently, our existing products are competitive in
the market and possess growth potential. However, from a long-term perspective,
some major western medicine producers are also seeking Chinese market share.
This will present us with strong competition in the natural medicine market
sector.
o Operation Risk
One of the major uncertainties in our industry is the purchase of raw materials.
Raw materials are primarily affected by the geographical, island environment of
Hainan Province. Because of high transportation costs and the need to supply
production requirements, we have to store large amounts of inventory to maintain
consistent production levels. In addition, partial raw materials need to be
specially ordered which further increases the need to store inventory. Finally,
due to the increasing sales, we must store a large volume of packaging material.
o 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 the exchange rate fluctuation would inevitably be considered to be
material to our business operations.
All of our revenues and expenses are accounted for in Renminbi (RMB). But we use
the United States Dollar (USD) 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 become volatile again or that the
Renminbi will not devalue significantly against the USD. Exchange rate
fluctuations may adversely affect the value, in USD terms, of our net assets and
income derived from its operations in the PRC.
IV. Analysis of financial performance for the twelve months ended December 31,
2007
35
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year For the year
ended As a ended As a
December 31, percentage December 31, percentage Comparative
2007 of Revenue 2006 of Revenue Variance %
----------- ----------- ----------- ----------- -----------
Revenue $ 33,186,324 100.00% $ 21,843,262 100.00% 51.93%
Cost of Revenue 17,619,180 53.09% 11,745,815 53.77% 50.00%
Gross Profit 15,567,144 46.91% 10,097,447 46.23% 54.17%
Operating expenses:
Selling expenses 1,436,609 4.33% 260,128 1.19% 52.27%
General and administrative 1,879,306 5.66% 1,213,828 5.56% 54.82%
Total Operating Expenses 3,315,915 9.99% 1,473,956 6.75% 124.97%
Income from Operations 12,251,229 36.92% 8,623,491 39.48% 42.06%
Non-operating income(expenses):
Interest income 31,805 0.10% 991 - 3109.38%
Interest expense -237,398 -0.72% -145,881 -0.67% 62.73%
Other Income (Expense) 611,025 1.84% 108,485 0.50% 463.23%
Total Non-operating Income (Expense) 405,432 1.22% -36,405 -0.17% 1221.87%
Income Before Taxes 12,656,661 38.14% 8,587,086 39.31% 47.39%
Income Tax Benefit 162,872 0.49% - -
Net Income $ 12,819,533 38.63% $ 8,587,086 39.31% 49.29%
Comprehensive income-foreign currency
translation adjustments 2,175,433 6.56% 563,945 2.58% 285.75%
Comprehensive income $ 14,994,966 45.18% $ 9,151,031 41.89% 63.86%
36
Revenues
Revenue for the twelve months ended December 31, 2007 is approximately $33
million or an increase of 51.93% compared to the twelve months ended December
31, 2006. This dramatic improvement in sales revenue is due to an increase in
demand and a strong Chinese economy. On the supply side, our output has been
expanded to meet the increased market demands. We are increasing our marketing
efforts for our products and have widened our distribution channels. Our older
products have been well-accepted by customers: with revenues from Pusen OK
contributing approximately 12.45% of the total net revenues in 2007, an increase
of 36.35%, compared to $3 million in 2006, all of which was all sold in China.
Pusen Ok is used to temporarily relieve runny nose, tears, fever, headache, soar
throat, pain of arthritis, and muscular arches. Sales from one of our other
older products, AFGF, has increased by 5.37%, compared to $3.77million of 2006.
Some of the other older products that have increased are: Andrographolide with
an increase of 59.83%, Neurotrophicpetide with an increase of 84.04%, Hepatocyte
with an increase of 44.24%, and Gastrodin with an increase of 38.91%. We also
have products which are now in the maturing stage. Revenues from these maturing
products contributed approzimately $4.71 million to the total increase of
revenues for this period. Ozagrel contributed approximately $3.09 million to the
total increase in revenue by maturing products. Finally, the new products that
have been introduced this year contributed approxiamtely $3.07 million to the
total increase in revenues this year. Granisetron hydrochloride contributed
$1.79 million, and Alginic Sodium Diester contributed $1.28 million to the total
increase in revenue from new products.
Cost of Revenue
Cost of revenue for the twelve months ended December 31, 2007 was approximately
$17.62 million, it accounts for about 53.09% of the revenues, as compared to the
$11.75 million costs for the twelve months ended December 31, 2006, the amount
has increased by $5.87 million or 50%, this was primarily due to the increase in
sales volume this year.
Gross Profit
Gross profit for the twelve months ended December 31, 2007 has increased by
about $5.45 million or 54.17%, when compared to the twelve months ended December
31, 2006, to $15.57 million, the gross margin is 46.91%. The improved profit was
due to the substantially increase in revenues this period.
37
Selling Expenses
Selling expenses for the twelve months ended December 31, 2007 have increased to
about $1.44million or 4.33% of the total revenue, compared to 1.19% for the
twelve months ended December 31, 2006. In an attempt to broaden our market share
further, we have invested heavily in the marketing of our products. We have
added 70 new salespersons causing increases in traveling expenses, office
expenses and salaries.
General & Administrative Expenses
General and administrative expenses incurred in 2007 are about $1.88million,
which represents approximately 5.66% of the total revenue. G&A expense has
increased by $665,478 as compared to 2006. This was mainly caused by the
carrying amount of salaries, advertising, legal services, accounting services,
and investment consulting services. We have also seen an increase in intangible
assets, which has increased the amortization of intangibles expense.
Income from Operations
Income from operations has increased by approximately $3.6 million to
approximately $12.25 million, which is an increased of 42.06% from the prior
year. This is a combined result of the increase in sales, revenue, and gross
profit.
Interest Income
Interest income has increased by $30,814 from last year. This was caused by the
increased cash inflows this year and the resulting increase in cash balances.
Interest Expense
Interest expense has increased by $91,517 for the year ended December 31, 2007.
This is due to a sum of loans (RMB 12,000,000@6.4496% per year, and RMB
5,000,000@6.7721% per year) having expired and having been repaid. Shortly after
the repayment, we entered into a new loan, in the amount of RMB 17,000,000 and
the interest is 7.182% per year. As a result of the interest rate increase,
interest expenses increased as well.
Income Tax Expense
For the twelve months ended December 31, 2007, the company has no tax expense
because the company has been granted a tax holiday by the government. This has
allowed the company to be exempted from income taxes in 2007.
38
Net Income
Although expenses have increased this year, the increase in revenue and
exemption from income taxes have contributed to this year's net income of
$12,819,533, which is 49.29% higher than the net income of $8,587,086 in the
prior year.
V. Analysis of financial performance for the twelve months ended December 31,
2007
As of December 31, 2007, the cash and cash equivalents balance reached
$1.83millioin, which is 4.19% of the total asset compared with $0.66 million as
of December 31, 2006, which was 2.30% of the total asset.
As of December 31, 2007, net cash provided by operating activities was $3.38
million, compared to $18.07 million net cash used in operating activities for
2006. This change was the result of an increase in trade receivables and
inventory in the prior year due to increase sales volume. Decrease in short-term
notes has also impacted our working capital position.
39
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------
2007 2006
------------ ------------
Cash Flows from Operating Activities:
Net income $ 12,819,533 $ 8,587,086
Depreciation and amortization 422,443 397,001
Gain on sale of intangibles (580,922) --
Changes in assets and liabilities:
Trade accounts receivable (5,413,718) (6,077,526)
Other receivables (111,660) 42,642
Advances to suppliers (1,028,199) (61,345)
Inventory (3,325,681) (4,214,702)
Deferred tax assets (162,872) 115,564
Deferred offering costs 60,952 --
Trade accounts payable (204,372) (219,427)
Accrued expenses 73,451 86,265
Accrued taxes payable 126,812 (407,744)
Other payables 20,558 (71,759)
Advances from customers 105,573 87,612
Net Cash from Operating Activities 2,801,898 (1,736,333)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (51,841) (182,346)
Proceeds from the sale of intangibles 1,509,741 --
Purchase of intangible assets (2,937,431) (9,657)
------------ ------------
Net Cash from Investing Activities (1,479,531) (192,003)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 3,797,183 --
Proceeds from exercise of warrants 119,000 --
Proceeds from short term notes payable 2,586,252 2,140,943
Payments of short term notes payable (6,705,456) --
Proceeds from loan from shareholder -- 22,650
Payment of offering costs -- (58,167)
------------ ------------
Net Cash Proceeds from Financing Activities (203,021) 2,105,426
------------ ------------
Effect of Exchange Rate Changes on Cash 54,548 18,131
------------ ------------
Net Change in Cash 1,173,894 195,221
------------ ------------
Cash and Cash Equivalents at Beginning of Period 656,441 461,220
------------ ------------
Cash and Cash Equivalents at End of Period $ 1,830,335 $ 656,441
------------ ------------
As of December 31, 2007, the cash and cash equivalents balance reached
$1,830,335, an increase of approximately 2.78 times when compared to the prior
year. This is a combined result of an improvement in net cash used in operating
activities and an increase in net cash proceeds from financing activities.
Net cash provided by operating activities increased to $2,801,898 from used in
balance of $1.74 million in the prior year. This big improvement came from the
increased net income, and an improvement on collection of trade accounts
receivables.
40
Cash outflows from investing activities have increased to $1.5 million for the
year ended 2007. This is due to the purchase of intangible assets which cost the
company $2.9 million. Cash used in financing activities were $203,021 for the
year ended 2007. This is due to the pay off to former shareholders and pay downs
of short-term notes of $6,705,456. On February 1, 2007, we completed an offering
of units priced at $1.70 per unit consisting of one share of common stock and a
warrant to purchase one-half of a share of common stock at an exercise price of
$2.38 per share. We received gross proceeds in the aggregate amount of
$4,259,900. The net proceeds, after deduction of related offering expenses of
$462,717 amounted to $3,797,183. We issued an aggregate of 2,505,882 shares of
common stock and issued three-year warrants to purchase an aggregate of
1,252,941 shares of common stock to 17 accredited investors.
The common shares and the shares underlying the warrants have registration
rights and, accordingly a registration statement was filed with the Securities
Exchange Commission on March 30, 2007 within the 60 day period prescribed by the
registration rights agreement. The registration statement was declared effective
on May 4, 2007.
In December 2007, we received proceeds of $119,000 upon the exercise of warrants
to purchase 50,000 shares of common stock. The remaining warrants issued in
conjunction with the offering to buy 1,202,941 shares of common stock have not
been exercised at December 31, 2007.
VI. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements.
VII. Recently Enacted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2
which extended the effective date for certain nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15, 2008. The
Company does not expect the adoption of SFAS No. 157 to have a material impact
on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure many financial instruments and certain other items at fair
41
value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect the
adoption of SFAS No. 159 to have a material impact on our consolidated financial
statements.
In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue No.
07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to be
Used in Future Research and Development Activities", ("EITF 07-3") which is
effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires
that nonrefundable advance payments for future research and development
activities be deferred and capitalized. Such amounts will be recognized as an
expense as the goods are delivered or the related services are performed. EITF
07-3 is not expected to have a material impact on our results of operations or
financial position.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a non-controlling interest in a subsidiary should be reported as equity in
the consolidated financial statements, consolidated net income shall be adjusted
to include the net income attributed to the non-controlling interest and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. The Company has not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities to require enhanced
disclosures concerning the manner in which an entity uses derivatives (and the
reasons it uses them), the manner in which derivatives and related hedged items
are accounted for under SFAS No. 133 and interpretations thereof, and the
effects that derivatives and related hedged items have on an entity's financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
financial statements of fiscal years and interim periods beginning after
November 15, 2008. The Company has not yet determined the effects on its
consolidated financial statements, if any, that may result upon the adoption of
SFAS 161.
VIII. Conclusion
The overall performance during the twelve months ended December 31, 2007 was
outstanding. As a public company in the pharmaceutical industry, we focused on
42
product innovation. In order to create products that are innovative and tailored
to the end user, we must concentrate on R&D. As a result, we will continue to
actively pursue the development and distribution of high-quality products to the
market.
Item 7 - Index to Financial Statements
The Financial Statements required by this Item begins at page F-1 hereof.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
Item 8A - Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act, our management has
carried out an evaluation, with the participation and under the supervision of
our chief executive officer and chief financial officer, of the effectiveness of
the design and operation of our disclosure controls and procedures as of
December 31, 2007. Disclosure controls and procedures refer to controls and
other procedures designed to ensure that information required to be disclosed in
the reports we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating and implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under
the supervision of our chief executive officer and our chief financial officer.
Based upon, and as of the date of this evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were not effective, due to the existence of significant internal
control deficiencies discussed below under "Management's Report on Internal
Control over Financial Reporting".
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act.
43
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Our management has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making its assessment,
management used the criteria described in Internal Control -- Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission, or COSO.
A significant deficiency is a deficiency, or a combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for
oversight of the company's financial reporting. The following significant
deficiencies have been identified and included in our management's assessment as
of December 31, 2007:
1) We did not engage an Audit Committee to oversee the effectiveness of
the system of internal control in every process. An effective Board of
Directors and Audit Committee and other corporate governance functions
will play an extremely important oversight role in the internal
control system. If there is no Audit Committee or the Audit Committee
does not function comprehensively and proactively, there might be
reasonable possibility that the significant internal control
deficiencies cannot be detected or prevented.
2) We did not maintain effective controls internal audit function due to
the lack of qualified internal auditors who are familiar with internal
audit and US GAAP, and we did not implement adequate and proper
supervisory review to ensure that the significant internal control
deficiencies can be detected or prevented.
3) We did not maintain effective controls over the financial reporting
processes due to an insufficient complement of internal personnel with
a level of accounting knowledge, experience and training in the
application of U.S. GAAP commensurate with our financial requirements.
For example, we did not maintain effective controls over accounting
for deferred taxes under U.S. GAAP.
Our management believes that these internal control deficiencies result in a
material weakness. This material weakness had not been fully remedied by
December 31, 2007. Never the less, based upon a number of factors, including our
plan for remediation (as described below) and other procedures designed to
assist us in ensuring the reliability of our financial statements, our
management believes that the consolidated financial statements included in the
Annual Report on Form 10-KSB fairly state, in all material respects, our
financial condition, results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles in the
United States of America.
44
The management's assessment of internal controls over financial reporting was
not subject to auditor attestation as of December, 31 2007 pursuant to temporary
rules of the Securities and Exchange Commission. Accordingly, this Annual Report
does not include an attestation report by our independent registered public
accounting firm regarding internal control over financial reporting.
Remediation Measures of Significant Deficiencies
To remediate the significant internal control deficiencies described above in
"Management's Report on Internal Control over Financial Reporting", we have
implemented or plan to implement the measures described below, and will continue
to evaluate and may in the future implement additional measures.
We have planned remediation measures of hiring and training of personnel which
are intended to generally address these significant deficiencies by ensuring
that we will have sufficient personnel with knowledge, experience and training
in the application of U.S. GAAP commensurate with our financial reporting
requirements. These measures include the following:
1) We appointed 3 independent directors, on February 1, 2008, to
establish an effective Audit Committee, together with setting up the
relevant procedures and working plans;
2) We will continue to hire external U.S. accountant at the beginning of
2008 with relevant accounting experience, skills and knowledge in the
preparation of financial statements under the requirements of U.S.
GAAP and financial reporting disclosure under the requirement of SEC
rules; We also plan to train up our staff internally;
3) We plan to hire an internal auditor to implement the internal audit
function, and plan to train our accounting personnel in the
application of U.S. GAAP commensurate with our financial reporting
requirements;
4) We plan to improve our written policies and procedures, as well as
amend and supplement the existing code of conduct to ensure the
compliance with Section 406 of Sarbanes-Oxley Act; and
5) We retained and intend to continue to retain the services of outside
counselors to advise us on the SEC disclosure requirements.
We believe that we are taking the steps necessary for remediation of the
significant deficiencies identified above, and we will continue to monitor the
effectiveness of these steps and to make any changes that our management deems
appropriate.
45
Changes in Internal Controls over Financial Reporting
Despite the remediation measures we have been taking, there were no changes in
our internal controls over financial reporting during the fourth quarter of
fiscal 2007 that have materially affected, or are reasonably likely to
materially affect our internal control over financial reporting.
Item 8B - Other Information
None.
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the name and position of our current directors
and executive officers:
--------------------------------------------------------------------------------
Name (1) Age Position
--------------------------------------------------------------------------------
Zhilin Li 55 Director, President and Chief Executive Officer
--------------------------------------------------------------------------------
Xinhua Wu 45 Director and Chief Financial Officer
--------------------------------------------------------------------------------
Gene Michael Bennett 60 Independent Director
--------------------------------------------------------------------------------
Yingwen Zhang 63 Independent Director
--------------------------------------------------------------------------------
Baowen Dong 67 Independent Director
--------------------------------------------------------------------------------
Jian Yang 53 Secretary
--------------------------------------------------------------------------------
(1) Ms. Heung Mei Tsui, our former director, resigned from our board of
directors on February 1, 2008. The board expanded the number of seats on the
board of directors and appointed three independent directors, Gene Michael
Bennett, Yingwen Zhang and Baowen Dong on the same date.
Ms. Zhilin Li: Ms. Li is the director, President and Chief Executive Officer
(CEO) of the Company. She is a founder of Helpson, and has served as chairman
and CEO of Helpson since 1993. Ms. Li was formerly the president of Haikou
Bio-engineering Institute, and the vice president of the Sichuan Institute of
Biology. She graduated from Sichuan University, where she majored in biology,
and later became an instructor.
46
Mr. Xinhua Wu: Mr. Wu is the director and Chief Financial Officer (CFO) of the
Company. He has acted as CFO of Helpson since his employment in 1999. Mr. Wu
served as CFO and assistant to the CEO at Hainan Guobang Enterprises Inc., where
he was employed from 1992 to 1999. Mr. Wu graduated from the University of Wales
with an MBA degree and Jiangxi Financial College with a Bachelor of Science
degree in Finance.
Mr. Gene Michael Bennett: Mr. Bennett has served as a member of our board of
directors as an independent director since February 1, 2008. Mr. Bennett is
presently a partner of Beijing Nexis Investment Consulting Corporation which
provides management consulting services to Chinese companies. From 2000 to 2004,
he acted as partner of ProCFO Company. Prior to that, he served as CFO and a
Board Member in Argonaut Computers. Mr. Bennett worked as professor of
accounting, taxation and auditing at several universities including California
State University, Chapman University, University of Hawaii and Chaminade
University. Mr. Bennett is a graduate of Michigan State University and Michigan
University. He is also a Doctor of Business Administration (DBA) candidate in
Corporate Governance at City University of Hong Kong.
Mr. Yingwen Zhang: Mr. Zhang has served as a member of our board of directors as
an independent director since February 1, 2008. Mr. Zhang graduated from
Department of Chemical Engineering, Tianjin University in 1967. He worked as the
CEO of Sinopec Sichuan Vinylon Works from 1983 to 1988 and worked as the
director of Sichuan Foreign Trade and Economic Cooperation Bureau (The Bureau of
Commerce of Sichuan Province) from December 1988 to April 2000. Since then, he
has acted as the Economic and Commercial Counselor's Office of the Embassy of
the People's Republic of China in Malaysia. Mr. Zhang currently is the member of
the 9th Chinese People's Political Consultative Conference (CPPCC).
Mr. Baowen Dong: Mr. Dong has served as a member of our board of directors as an
independent director since February 1, 2008. Mr. Dong graduated from Xi'an
University of Science and Technology in 1966. He is the professor, researcher,
director of the staff room, and the department head in Sichuan University since
1974. He is also an expert member of the Sichuan University Teaching Evaluation
Council since August 2001.
Ms. Jian Yang: Ms. Yang has been the Secretary of the Company since October 19,
2005. She is a founder and director of Helpson. Ms. Yang was a technician at the
Sichuan Institute of Biology in 1990 and vice president of Haikou Biomedicine
Engineering Co., Ltd. in 1991. Ms. Yang obtained her MBA degree at the
University of Wales, England.
47
Board Composition and Committees
Since February 1, 2008, the board of directors has been composed of Zhilin Li,
Xinhua Wu, Gene Michael Bennett, Yingwen Zhang and Baowen Dong. All board
actions require the approval of a majority of the directors in attendance at a
meeting at which a quorum is present.
Gene Michael Bennett, Yingwen Zhang and Baowen Dong have served on the Audit
Committee since February 1, 2008. Mr. Bennett, the Chairman of the Audit
Committee, is an audit committee financial expert serving on the Audit
Committee. The board of directors intends to adopt an Auditing Committee Charter
specifying the authorities and responsibilities of the audit committee.
We currently have no Nomination Committee, Compensation Committee, or any other
committees; therefore, the board will act in the capacity of the absent
committees.
Disclosure of Commission Position of Indemnification for Securities and
Liabilities
Our Amended and Restated Certificate of Incorporation, with certain exceptions,
eliminates any personal liability of directors or officers to us or our
stockholders for monetary damages for the breach of such person's fiduciary duty
to the extent permitted by law. We have also adopted by-laws which provide for
indemnification to the full extent permitted under the law which includes all
liability, damages, costs, or expenses arising from or in connection with
service for, employment by, or other affiliation with us to the maximum extent
and under all circumstances permitted by law.
There are presently no material pending legal proceeding to which any of our
directors, officers, or employee is a party. There is no pending litigation or
legal proceeding involving one of our directors, officers, employees or other
agents as to which indemnification is being sought, and we are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director, officer, employee or other agent.
To the extent provisions of our Amended and Restated Certificate of
Incorporation provide for indemnification of directors for liabilities arising
under the Securities Act or the Exchange Act, those provisions are, in the
opinion of the Securities and Exchange Commission, against public policy and
therefore are unenforceable.
Code of Ethics
48
As of December 31, 2007, we have not adopted a code of ethics but intend to
adopt a code of ethics in the near term. Once we have adopted a Code of Ethics,
a copy may be obtained by sending a written request to our corporate Secretary.
Director Compensation
No cash compensation was paid to our directors for services as a director during
the fiscal year ended December 31, 2007. We have no standard arrangement
pursuant to which our internal directors are compensated for their services in
their capacity as directors. The board of directors may award special
remuneration to any director undertaking any special services on behalf of our
company other than services ordinarily required of a director. All authorized
out-of-pocket expenses incurred by a director on our behalf will be subject to
reimbursement upon our receipt of required supporting document of such expenses.
No internal director received and/or accrued any compensation for his services
as a director, including committee participation and/or special assignments.
Our three independent directors are entitled to the following compensation: Mr.
Bennett's compensation consists of $16,000 per year, payable quarterly within 5
days of the start of the quarter, and 5,000 warrants of common stock with an
exercise price of $3.32 per share; Mr. Zhang and Mr. Dong are each entitled to
RMB40,000 annually, payable quarterly within 5 days of the start of the quarter.
Section 16(a) Beneficial Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
officers and directors, and persons who own more than ten percent of a class of
our capital stock, to file reports of ownership and changes in their ownership
with the Securities and Exchange Commission. These persons are required to
furnish us with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms received by us, we believe that during the
year ended December 31, 2007; all persons subject to Section 16(a) filing
requirements have filed on a timely basis reports required to be filed by
Section 16(a) of the Exchange Act.
Item 10 - Executive Compensation
The following table provides compensation information for the period indicated
with respect to the person who served as our president for the years ended
December 31, 2007 and 2006 (collectively, the "Named Executive Officers"). No
other executive officers received compensation in excess of $100,000 during the
fiscal years ended December 31, 2007 and 2006.
49
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------- ---------------------------------- ---------
Long Term Compensation
---------------------------------------------------------------- ---------------------------------- ---------
Annual Compensation Awards Payouts
------------------------- -------- ---------- ----- ------------ ---------- --------------- ------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Principal Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Position ($) ($) Compensa- Stock Under-lying Payouts Compen-
tion Awards($) Options/ SARs ($) sation
(#) ($)
------------------------- -------- ---------- ----- ------------ ---------- --------------- ------- ---------
(1) Zhilin LI 2007 0 0 0 0 0 0 0
Director, CEO and 2006 0 0 0 0 0 0 0
President
------------------------- -------- ---------- ----- ------------ ---------- ----------- ------- ---------
(1) Zhilin Li has been our CEO and president since October 20, 2005. As of
January 20, 2006, Zhilin Li was elected as the director of the Company. Her
salary in the fiscal year ended December 31, 2007 has not been paid as of the
date of this Form 10-KSB.
Stock Option Grants and Exercises
We currently have no option, retirement, pension or profit sharing programs for
the benefit of the directors, officers or other employees, but the board of
directors may recommend adoption of one or more such programs in the future.
Employment, Severance and Change of Control Agreements
Our subsidiary Helpson has employment agreements with the following executive
officers:
Ms. Zhilin Li entered into an Employment Agreement with Helpson, which provides
that Ms. Li is employed by Helpson to perform executive management. The term of
her employment is from July 1, 2005 to June 30, 2010. Her annual salary is
RMB800,000. Mr. Xinhua Wu was employed by Helpson to act as its CFO. The term of
his employment is from July 1, 2005 to June 30, 2010. His annual salary is
RMB500,000. Ms. Jian Yang was employed by Helpson to act as its Deputy General
Manager. The term of her employment is from July 1, 2005 to June 30, 2010. Her
annual salary is RMB500,000.
Ms. Zhilin Li was paid RMB 150,000 as the compensation for acting as the
Company's director, CEO and president during the fiscal year ended June 30,
2005. Mr. Xinhua Wu and Ms. Jian Yang received no compensation
50
for acting as officers during the fiscal year ended June 30, 2005. Ms. Zhilin
Li, Mr. Xinhua Wu and Ms. Jian Yang have not received any compensation for
acting as officers during the fiscal years ended December 31, 2006 and December
31, 2007 as of the date of this Form 10-KSB.
Item 11 - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information known to us with respect to
the beneficial ownership of our common stock as of March 26, 2008 and (i) all
persons who are known to us to be beneficial owners of five percent or more of
the common stock, (ii) each of our Directors, and (iii) all current Directors
and executive officers as a group.
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER (1) OWNED CLASS OWNED
Named Executive Officers
and Directors
Zhilin Li 10,000,000 26.82%
Beneficial Owners of Five
Percent or More
Heung Mei Tsui 10,812,651 29.00%
Jian Yang 2,278,815 6.12%
Total Shares Owned by 23,091,466 61.94%
Persons Named Above
(1) The address of Ms. Li and Ms. Tsui is 2nd Floor, No.17, Jinpan Road, Kaikou,
Hainan Province, China. The address of Ms. Yang is 1 Haoyuan ST, RM 5B, Blog 7,
Asia Luxury Garden, Haikou, Hainan Province, China.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities.
Unless otherwise indicated by footnote, the persons named in the table have sole
voting and sole investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to the applicable community
property laws. Percentage of beneficial ownership is based on 37,278,938 shares
of our common stock outstanding as of March 26, 2008.
51
Item 12 - Certain Relationships and Related Transactions
None.
Item 13 - Exhibits
(1) Our audited financial statements are included in this Annual Report on Form
10-KSB.
(2) EXHIBITS2
Exhibit No. Description
--------------------------------------------------------------------------------
2.1 Securities Exchange Agreement by and among Onny Investment
Limited dated October 19, 2005. (3)
--------------------------------------------------------------------------------
3.1 Memorandum and Articles of Association. (4)
--------------------------------------------------------------------------------
3.2 Articles of Association of Helpson Medical Bio-Technology
Co. (3)
--------------------------------------------------------------------------------
10.1 Stock Purchase Agreement by and among Halter Financial Group
Inc. dated May 11, 2005 filed on May 11, 2005. (1)
--------------------------------------------------------------------------------
10.2 Subscription Agreement by and among Onny Investment Limited
stockholders. (3)
--------------------------------------------------------------------------------
10.3 Employment Contract between Helpson and Zhilin Li dated July
1, 2005. (5)
--------------------------------------------------------------------------------
10.4 Employment Contract between Helpson and Xinhua Wu dated July
1, 2005. (5)
--------------------------------------------------------------------------------
10.5 Employment Contract between Helpson and Jian Yang dated July
1, 2005 (5)
--------------------------------------------------------------------------------
10.6 Subscription and Registration Rights Agreement among China
Pharma Holdings, Inc. and 17 investors (6)
--------------------------------------------------------------------------------
10.7 Form of Warrant (6)
--------------------------------------------------------------------------------
10.8* Supply Contract entered into between Hainan Helpson Medicine
and Bio-Technology Co. Ltd. and Sichuan Chengxin
Pharmaceutical Company
--------------------------------------------------------------------------------
10.9* Supply Contract entered into between Hainan Helpson Medicine
and Bio-Technology Co. Ltd. and Anhui Fuyang Xinte
Pharmaceutical Company
--------------------------------------------------------------------------------
10.10* Sales Contract entered into between Hainan Helpson Medicine
and Bio-Technology Co. Ltd. and Anhui Fuyang Xinte
Pharmaceutical Company
--------------------------------------------------------------------------------
10.11* Sales Contract entered into between Hainan Helpson Medicine
and Bio-Technology Co. Ltd. and Hainan Xinglin Medicine
Company
--------------------------------------------------------------------------------
16.1 Letter regarding Change in the Certified Accountant dated
August 15, 2005. (2)
--------------------------------------------------------------------------------
21 Subsidiaries of China Pharma Holdings, Inc. filed on October
20, 2005. (4)
--------------------------------------------------------------------------------
52
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
*Filed herewithin
(1) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 000-29523) filed with the Commission on May 11, 2005.
(2) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 000-29523) filed with the Commission on August 18, 2005.
(3) Previously filed as an exhibit to our report on Form SB-2 (Commission File
Number: 333-129161) filed with the Commission on October 20, 2005.
(4) Previously filed as an exhibit to our report on Form SB-2 (Commission File
Number: 333-129161) filed with the Commission on December 23, 2005.
(5) Previously filed as an exhibit to our report on Form 10-QSB (Commission
File Number: 000-29523) filed with the Commission on November 16, 2006.
(6) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 000-29523) filed with the Commission on February 6, 2007.
Item 14. Principal Accountant Fees and Services
Hansen, Barnett & Maxwell ("HBM") is the Company's independent registered
accountant. The principal accountant fees of the fiscal year 2006 and the fiscal
year 2007 are as follows:
FISCAL 2006 FISCAL 2007
------------------------------------------------------
--------------------------------------------------------------------------------
Audit Fees (1) $ 124,064 $ 139,800
--------------------------------------------------------------------------------
Audit-Related Fees(2) $ 0 $ 0
--------------------------------------------------------------------------------
Tax Fees(3) $ 1,457 $ 2,732
--------------------------------------------------------------------------------
All Other Fees(4) $ 2,286 $ 0
--------------------------------------------------------------------------------
Total $ 127,807 $ 142,532
--------------------------------------------------------------------------------
53
(1) During the fiscal year ended December 31, 2006, HBM billed us $66,000 in
fees for professional services for the audit of our annual financial statements,
review of financial statements included in our Form 10-QSB quarterly reports; we
paid $58,064 to Baker Tilly China for their involvements in the auditing and
reviews under the supervision of HBM. During the fiscal year ended December 31,
2007, HBM billed us $74,000 in fees for professional services for the audit of
our annual financial statements, review of financial statements included in our
Form 10-QSB quarterly reports; we paid $65,800 to Baker Tilly China for their
involvements in the auditing and reviews under the supervision of HBM.
(2) During the fiscal year ended December 31, 2006 and 2007, HBM billed us $0 in
fees for assurance and related services relating to the performance of the audit
and review of the Company's financial statement.
(3) During the fiscal year ended December 31, 2006, HBM billed us $1,457 in fees
for professional services for tax planning and preparation. During the fiscal
year ended December 31, 2007, HBM billed us $2,732 in fees for professional
services for tax planning and preparation.
(4) During the fiscal year ended December 31, 2006, HBM billed us $2,286 in
other fees. During the fiscal year ended December 31, 2007, HBM billed us $0 in
other fees.
54
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Act of 1933, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
China Pharma Holdings, Inc.
Dated: March 28, 2008 By: /s/ Zhilin Li
------------------ -------------------------------
Zhilin Li,
Director, Chief Executive Officer,
and President
Dated: March 28, 2008 By: /s/ Xinhua Wu
------------------ -------------------------------
Xinhua Wu
Director and Chief Financial
Officer
In accordance with the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of registrant and in
the capacities and on the date as indicated.
Dated: March 28, 2008 By: /s/ Zhilin Li
------------------ -------------------------------
Zhilin Li,
Director, Chief Executive Officer,
and President
Dated: March 28, 2008 By: /s/ Xinhua Wu
------------------- -------------------------------
Xinhua Wu,
Director and Chief Financial
Officer
55
CHINA PHARMA HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2007 and 2006 F-3
Consolidated Statements of Operations and Comprehensive Income
for the Years Ended December 31, 2007 and 2006 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2006 and 2007 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007 and 2006 F-6
Notes to Consolidated Financial Statements F-7
F-1
HANSEN, BARNETT & MAXWELL, P.C.ED]
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders of
China Pharma Holdings, Inc.
We have audited the consolidated balance sheets of China Pharma Holdings, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of China Pharma
Holdings, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
March 28, 2008
F-2
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2007 2006
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,830,335 $ 656,441
Trade accounts receivable, less allowance for doubtful
accounts of $2,440,852 and $1,562,494, respectively 18,572,976 12,101,979
Other receivables, less allowance for doubtful
accounts of $43,908 and $27,517, respectively 496,313 355,554
Deferred offering costs -- 59,390
Advances to suppliers 3,481,948 2,255,877
Inventory 14,448,771 10,277,887
----------- -----------
Total Current Assets 38,830,343 25,707,128
----------- -----------
Non-current Assets:
Property and equipment, net of accumulated depreciation of
$1,003,802 and $619,645, respectively 2,625,216 2,725,173
Intangible assets, net of accumulated amortization of
$221,715 and $135,656, respectively 2,063,252 65,344
Deferred tax assets 187,509 16,736
----------- -----------
Total Non-current Assets 4,875,977 2,807,253
----------- -----------
TOTAL ASSETS $43,706,320 $28,514,381
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 297,299 $ 477,291
Accrued expenses 261,301 104,216
Accrued taxes payable 311,009 167,419
Other payables 86,161 185,096
Advances from customers 261,583 141,871
Accounts payable - related parties -- 22,650
Short-term notes payable 2,693,428 6,533,649
----------- -----------
Total Current Liabilities 3,910,781 7,632,192
----------- -----------
Research and development commitments 34,181 31,980
----------- -----------
Total Liabilities 3,944,962 7,664,172
----------- -----------
Stockholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 37,278,938 and 34,723,056 shares issued and
outstanding, respectively 37,279 34,723
Additional paid-in capital 11,678,606 7,764,979
Foreign currency translation adjustment 2,839,304 663,871
Retained earnings 25,206,169 12,386,636
----------- -----------
Total Stockholders' Equity 39,761,358 20,850,209
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,706,320 $28,514,381
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
For the years
ended December 31,
----------------------------
2007 2006
------------ ------------
Revenue $ 33,186,324 $ 21,843,262
Cost of revenue 17,619,180 11,745,815
------------ ------------
Gross profit 15,567,144 10,097,447
------------ ------------
Operating expenses:
Selling expenses 1,436,609 260,128
General and administrative 1,879,306 1,213,828
------------ ------------
Total operating expenses 3,315,915 1,473,956
------------ ------------
Income from operations 12,251,229 8,623,491
------------ ------------
Non-operating income (expenses):
Interest income 31,805 991
Interest expense (237,398) (145,881)
Other income 611,025 108,485
------------ ------------
Total non-operating income (expense) 405,432 (36,405)
------------ ------------
Income before taxes 12,656,661 8,587,086
Income tax benefit 162,872 --
------------ ------------
Net income $ 12,819,533 $ 8,587,086
------------ ------------
Comprehensive income - foreign currency
translation adjustments 2,175,433 563,945
------------ ------------
Comprehensive income $ 14,994,966 $ 9,151,031
------------ ------------
Earnings Per Share:
Basic $ 0.35 $ 0.25
Diluted $ 0.34 $ 0.25
------------ ------------
Weighted Average Shares Outstanding:
Basic 37,009,655 34,723,056
Diluted 37,259,909 34,723,056
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Total
------------------------- Paid-in Comprehensive Retained Stockholders'
Shares Amount Capital Income Earnings Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2005 34,723,056 $ 34,723 $ 7,764,979 $ 99,926 $ 3,799,550 $11,699,178
Net income for the year -- -- -- -- 8,587,086 8,587,086
Foreign currency translation
adjustment -- -- -- 563,945 -- 563,945
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2006 34,723,056 34,723 7,764,979 663,871 12,386,636 20,850,209
Shares and warrants issued for cash 2,505,882 2,506 3,794,677 -- -- 3,797,183
Exercise of warrants for cash 50,000 50 118,950 -- -- 119,000
Net income for the year -- -- -- -- 12,819,533 12,819,533
Foreign currency translation
adjustment -- -- -- 2,175,433 -- 2,175,433
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2007 37,278,938 $ 37,279 $11,678,606 $ 2,839,304 $25,206,169 $39,761,358
----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------
2007 2006
------------ ------------
Cash Flows from Operating Activities:
Net income $ 12,819,533 $ 8,587,086
Depreciation and amortization 422,443 397,001
Gain on sale of intangibles (580,922) --
Changes in assets and liabilities:
Trade accounts receivable (5,413,718) (6,077,526)
Other receivables (111,660) 42,642
Advances to suppliers (1,028,199) (61,345)
Inventory (3,325,681) (4,214,702)
Deferred tax assets (162,872) 115,564
Deferred offering costs 60,952 --
Trade accounts payable (204,372) (219,427)
Accrued expenses 73,451 86,265
Accrued taxes payable 126,812 (407,744)
Other payables 20,558 (71,759)
Advances from customers 105,573 87,612
------------ ------------
Net Cash from Operating Activities 2,801,898 (1,736,333)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (51,841) (182,346)
Proceeds from the sale of intangibles 1,509,741 --
Purchase of intangible assets (2,937,431) (9,657)
------------ ------------
Net Cash from Investing Activities (1,479,531) (192,003)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 3,797,183 --
Proceeds from exercise of warrants 119,000 --
Proceeds from short term notes payable 2,586,252 2,140,943
Payments of short term notes payable (6,705,456) --
Proceeds from loan from shareholder -- 22,650
Payment of offering costs -- (58,167)
------------ ------------
Net Cash from Financing Activities (203,021) 2,105,426
------------ ------------
Effect of Exchange Rate Changes on Cash 54,548 18,131
------------ ------------
Net Change in Cash 1,173,894 195,221
------------ ------------
Cash and Cash Equivalents at Beginning of Period 656,441 461,220
------------ ------------
Cash and Cash Equivalents at End of Period $ 1,830,335 $ 656,441
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Onny Investment Limited (Onny) was incorporated in the British
Virgin Islands on January 12, 2005 and was a development stage enterprise
through June 15, 2005. On June 16, 2005, Onny acquired all of the outstanding
shares of Hainan Helpson Medical & Bio-Technology Co., Ltd, a privately held
Chinese joint venture (Helpson) and emerged from the development stage.
On October 19, 2005, Onny was reorganized as a wholly owned subsidiary of China
Pharma Holdings, Inc., formerly TS Electronics, (Company). The reorganization
was accomplished by an exchange of Onny's common shares for 25,278,385 shares of
the Company's common stock resulting in a 851-for-1 exchange ratio. In addition,
the prior Onny convertible preferred shareholders exchanged their shares for
6,944,611 shares of the Company's common stock resulting in a 694-for-1 exchange
ratio. 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 the Company's common stock in exchange and the assumption of
$4,473 in liabilities. This transaction was accounted for as a reverse
acquisition of the Company and was recognized as a non-monetary exchange.
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), through its marketing department located in the Hainan
Province. There are also nine other 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
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.
Consolidation and Basis of Presentation - The accompanying financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The functional currency of the operating
subsidiaries in the PRC is the Chinese Yuan Renminbi (CNY); however, the
accompanying financial statements have been expressed in United States Dollars
(USD). The accompanying consolidated balance sheets have been translated into
USD at the exchange rates prevailing at each balance sheet date. The
accompanying consolidated statements of operations have been translated using
the average exchange rates prevailing during the periods of each statement. See
Note 9.
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments - Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the carrying amounts of notes payable that were outstanding during
F-7
the current period approximated fair value because of either the immediate or
short-term maturity of these financial instruments or because the underlying
instruments are at interest rates which approximated current market rates.
Cash and cash equivalents - Cash and cash equivalents include interest bearing
and non-interest bearing bank deposits, money market accounts, and short-term
certificates of deposit with original maturities of three months or less. Cash
deposits are held at financial institutions in the PRC and are not insured by
the FDIC.
Trade receivables and allowance for doubtful accounts - Trade receivables are
carried at original invoiced amounts less an allowance for doubtful accounts.
The allowances for doubtful accounts are calculated based on detailed review of
certain individual customer accounts and an estimation of the overall economic
conditions affecting the Company's customer base. The Company reviews a
customer's credit history before extending credit. If the financial condition of
its customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. A provision is made
against accounts receivable to the extent they are considered unlikely to be
collected. It is common practice in the PRC for receivables to extend beyond one
year. Included in trade receivables is approximately $2,002,059 that occurred
more than one year from December 31, 2007, but is estimated to still be
collectable.
Inventory - Inventories are stated at the lower of cost or net realizable value,
on an average cost basis. The method of determining inventory costs is used
consistently from year to year. Allowance for inventory obsolescence is provided
when the market value of certain inventory items are lower than the cost.
Valuation of Long-lived Assets - The carrying values of the Company's long-lived
assets are reviewed for impairment annually or whenever events or changes in
circumstances indicate that they may not be recoverable. When such an event
occurs, the Company projects the undiscounted cash flows to be generated from
the use of the asset and its eventual disposition over the remaining life of the
asset. If projections were to indicate that the carrying value of the long-lived
asset will not be recovered, the carrying value of the long-lived asset is
reduced by the estimated excess of the carrying value over the projected
discounted cash flows. There were no such impairments at December 31, 2007.
Property and Equipment - Property and equipment are stated at cost. Maintenance
and repairs are charged to expense as incurred and major improvements are
capitalized. Gains or losses on sales or retirements are included in the
statement of operations in the period of disposition.
Intangible Assets - Acquisition costs on patents, trademarks, licenses,
techniques, formulas and other intangibles are capitalized and amortized using
the straight-line method over their useful lives. For those intangible assets,
such as patents, with legal protection over a period, their useful life is the
protected period. Others that do not have legal protection periods are amortized
generally over 5 to 10 years. The Company does not capitalize internally
generated intangible assets. The Company's intangible assets consist of
techniques (formulas and manufacturing processes) for medicines.
Advances to Suppliers and Advances from Customers - The Company, as is the
common practice in the PRC, will often pay advanced payments to suppliers for
materials and receive from customers advances for finished products. As of
December 31, 2007 and 2006, the advances to suppliers were $3,481,948 and
$2,255,877, respectively, and the advances from customers were $261,583 and
F-8
$141,871, respectively.
Revenue Recognition - The Company recognizes revenue when it is realized and
earned. The Company considers revenue realized or realizable and earned when (1)
it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the
sales price is fixed or determinable, and (4) collectability is reasonably
assured. Delivery does not occur until products have been shipped to the client,
risk of loss has transferred to the client and client acceptance has been
obtained, client acceptance provisions have lapsed, or the Company has objective
evidence that the criteria specified in client acceptance provisions have been
satisfied. The sales price is not considered to be fixed or determinable until
all contingencies related to the sale have been resolved.
Cost of Revenues - Cost of revenues includes wages, materials, handling charges,
and other expenses associated with the manufacture and delivery of product.
Research and Development - Research and development expenditures are recorded as
expenses in the period in which they occur.
Retirement Benefit Plans - The Company contributes to various employee
retirement benefit plans organized by provincial governments under which it is
required to make monthly contributions to these plans at rates prescribed by the
related provincial governments. The provincial governments undertake to assume
the retirement benefit obligations of all existing and future retired employees
of the Company. Contributions to these plans are charged to expense as incurred.
Advertising Costs - Advertising costs are expensed when incurred. Total
advertising expense for the years ended December 31, 2007 and 2006 were $10,393
and $3,446, respectively.
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. As of December 31, 2007 potentially dilutive
securities includes warrants outstanding to purchase a total of 1,202,941 shares
of Company common stock at an exercise price of $2.38 per share. There are no
dilutive securities outstanding at December 31, 2006. The following table is a
reconciliation of the numerators and denominators used in the calculation of
basic and diluted earnings per share and the weighted-average common shares
outstanding, respectively:
For the Years Ended December 31,
2007 2006
----------- -----------
Net income $12,819,533 $ 8,587,086
----------- -----------
Basic weighted-average common shares
outstanding 37,009,655 34,723,056
Effect of dilutive securities:
Warrants 250,254 --
----------- -----------
Diluted weighted-average common shares
outstanding 37,259,909 34,723,056
----------- -----------
Basic earnings per share $ 0.35 $ 0.25
----------- -----------
Diluted earnings per share $ 0.34 $ 0.25
----------- -----------
Credit Risk - The carrying amounts of accounts receivable included in the
F-9
balance sheet represent the Company's exposure to credit risk in relation to its
financial assets. No other financial assets carry a significant exposure to
credit risk. The Company performs ongoing credit evaluations of each customer's
financial condition. It maintains allowances for doubtful accounts and such
allowances in the aggregate have not exceeded management's estimations.
The Company has its cash in bank deposits primarily in the PRC. Historically,
deposits in PRC banks have been secure due to the state policy on protecting
depositors' interests. The PRC promulgated a new Bankruptcy Law in August 2006,
which came into effect on June 1, 2007, which contains provisions for the
implementation of measures for the bankruptcy of PRC banks. In the event that
bankruptcy laws are enacted for banks in the PRC, the Company's deposits may be
at a higher risk of loss.
Interest Rate Risk - The Company is exposed to the risk arising from changing
interest rates, which may affect the ability of repayment of existing debts and
viability of securing future debt instruments within the PRC.
Recently Enacted Accounting Standards - In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. In February 2008, the FASB issued
FASB Staff Position (FSP FIN) No. 157-2 which extended the effective date for
certain nonfinancial assets and nonfinancial liabilities to fiscal years
beginning after November 15, 2008. The Company does not expect the adoption of
SFAS No. 157 to have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect the
adoption of SFAS No. 159 to have a material impact on our consolidated financial
statements.
In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue No.
07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to be
Used in Future Research and Development Activities", (EITF 07-3) which is
effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires
that nonrefundable advance payments for future research and development
activities be deferred and capitalized. Such amounts will be recognized as an
expense as the goods are delivered or the related services are performed. EITF
07-3 is not expected to have a material impact on our results of operations or
financial position.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a non-controlling interest in a subsidiary should be reported as equity in
the consolidated financial statements, consolidated net income shall be adjusted
to include the net income attributed to the non-controlling interest and
consolidated comprehensive income shall be adjusted to include the comprehensive
F-10
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. The Company has not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities to require enhanced
disclosures concerning the manner in which an entity uses derivatives (and the
reasons it uses them), the manner in which derivatives and related hedged items
are accounted for under SFAS No. 133 and interpretations thereof, and the
effects that derivatives and related hedged items have on an entity's financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
financial statements of fiscal years and interim periods beginning after
November 15, 2008. The Company has not yet determined the effects on its
consolidated financial statements, if any, that may result upon the adoption of
SFAS 161.
NOTE 2 - INVENTORY
Inventory consisted of the following:
December 31,
-------------------------------
2007 2006
----------- -----------
Raw materials $12,521,536 $ 8,458,210
----------- -----------
Work in progress 60,404 1,679,952
----------- -----------
Finished goods 1,866,831 139,725
----------- -----------
Total Inventory $14,448,771 $10,277,887
----------- -----------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2007 and 2006:
December 31,
------------------------------
2007 2006
----------- -----------
Permit of land use $ 385,102 $ 360,304
Building 1,753,547 1,640,629
Plant, machinery and equipment 1,341,996 1,253,572
Motor vehicle 37,193 14,763
Office equipment 88,210 75,550
Construction in progress 22,970 --
----------- -----------
Total 3,629,018 3,344,818
Less: accumulated depreciation (1,003,802) (619,645)
----------- -----------
Property and Equipment, net $ 2,625,216 $ 2,725,173
----------- -----------
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets as follows:
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Asset Life - years
---------------------------------------- ------------------
Permit of land use 40 - 70
Building 20 - 35
Plant, machinery and equipment 10
Motor vehicle 5 - 10
Office equipment 5
For the years ended December 31, 2007 and 2006, depreciation expense was
$327,921 and $353,831, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the costs on patents, trademarks, licenses,
techniques and formulas. Intangible assets have a weighted-average remaining
useful life of approximately 9.5 years. Amortization of intangible assets was
$94,522 and $43,170 for the year ended December 31, 2007 and 2006, respectively.
The estimated aggregate amortization expense for the next five years follows:
Year Amount
---------------- --------------
2008 $ 221,538
2009 220,553
2010 218,722
2011 214,646
2012 214,646
Thereafter 973,147
--------------
Total $ 2,063,252
--------------
During the third quarter of 2007, the Company entered into agreements to acquire
certain pharmaceutical formulas from an unrelated party for cash for an
aggregate purchase price of $2,091,850. This has been recorded under the caption
Intangible assets in the accompanying balance sheet as of December 31, 2007.
NOTE 5 - DEBT
Short Term Notes Payable - At December 31, 2006, the Company had loans
outstanding totaling $2,174,608 from a bank. The loans bear interest with a
range of 6.14% to 6.43%, principal and accrued interest was repaid in July and
August of 2007. On July 13, 2007, the Company entered into a new line of credit
with the bank collateralized by certain land use rights, machinery and equipment
Advances made under the line of credit of $2,324,278 are due 7 months from the
date of the loan and bear interest payable monthly at rates ranging from 6.90%
to 7.37%. The line of credit expires on April 25, 2008 with any advances or
renewals made prior to this date under the line having a maturity date no later
than October 25, 2008. The Company has borrowed all amounts available under the
line of credit.
Short Term Notes Payable to Former Shareholders - In January 2006, the Company
converted its dividend payable of $4,402,147 into short-term notes bearing
interest at a rate of 2.25% per annum. The balance of the note at December 31,
2006 was $4,359,041. During the fourth quarter of 2007, the Company paid
$3,989,891 of these notes and the final note outstanding as of December 31, 2007
of $369,150 was paid in January, 2008.
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NOTE 6 - INCOME TAXES
The Company accounts for its income taxes in accordance with SFAS No. 109, which
requires recognition of deferred tax 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.
Undistributed earnings of the Company's foreign subsidiary since acquisition
amounted to approximately $22 million at December 31, 2007. Those earnings, as
well as the investment in the subsidiaries of approximately $17 million are
considered to be indefinitely reinvested and, accordingly, no U.S. federal and
state income taxes have been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the PRC. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practical because of the
complexities associated with its hypothetical calculation; however, unrecognized
foreign tax credits may be available to reduce a portion of the U.S. tax
liability.
According to federal law in the PRC, enterprises with foreign investment and
foreign enterprises doing business in the PRC are generally subject to federal
enterprise income tax at a rate of 30%. However, because the Company is located
in a special region, it has a 15% corporate income tax rate and has been granted
a "tax holiday" during which it would pay no income taxes through December 31,
2007. On March 16, 2007, the National People's Congress of China passed the new
Enterprise Income Tax Law, (EIT Law), and on December 6, 2007, the State Council
of China issued the Implementation Regulations for the EIT Law which took effect
on January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
unified EIT of 25.0% on all domestic-invested enterprises and Foreign Invested
Entities, or FIEs, unless they qualify under certain limited exceptions.
As a result of the above change in the income tax laws, The Company will
continue to have a favorable rate of 50% of the tax rates in effect during
fiscal 2008 through 2010 as determined by the PRC government and the regional
tax authorities.
Following is a reconciliation of income taxes calculated at the federal
statutory rates to actual income tax expense:
December 31,
-----------------------------
2007 2006
----------- -----------
Tax at statutory rate of 33% $ 4,176,698 $ 2,919,609
Non-deductible expenses -- 27,559
Change in temporary differences -- (22,654)
Effect of lower foreign tax rates (4,339,570) (2,924,514)
----------- -----------
Deferred income tax benefit $ (162,872) $ --
----------- -----------
The temporary differences which give rise to the deferred income tax asset are
as follows:
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December 31,
-----------------------
2007 2006
-------- --------
Allowance for doubtful trade receivables 183,586 16,446
Allowance for doubtful other receivables 3,923 290
-------- --------
Total deferred income tax assets 187,509 16,736
Valuation allowance -- --
-------- --------
Net deferred income tax asset $187,509 $ 16,736
======== ========
The Company has also incurred various other taxes, comprised primarily of
business taxes, value-added taxes, urban construction taxes, education
surcharges and others. Any unpaid amounts are reflected on the balance sheets as
accrued taxes payable.
NOTE 7 - STOCKHOLDERS' EQUITY
On February 1, 2007 the Company completed an offering of units priced at $1.70
per unit consisting of one share of Company common stock and a warrant to
purchase one-half of a share of Company common stock at an exercise price of
$2.38 per share. The Company received gross proceeds in the aggregate amount of
$4,259,900. The net proceeds, after deduction of related offering expenses of
$462,717 amounted to $3,797,183. The Company issued an aggregate of 2,505,882
shares of common stock and issued three-year warrants to purchase an aggregate
of 1,252,941 shares of Company's common stock to 17 accredited investors. The
proceeds were allocated to the warrants based upon their fair value or
$2,010,219, and the balance of the proceeds was allocated to the shares of
common stock. The fair value of the warrants, determined using the Black-Scholes
Option Pricing Model, was calculated using the following assumptions: risk free
interest rate of 4.80%, expected dividend yield of 0%, expected volatility of
124.39% and an expected life of 3 years.
The common shares and the shares underlying the warrants have registration
rights and, accordingly a registration statement was filed with the Securities
Exchange Commission on March 30, 2007 within the 60 day period prescribed by the
registration rights agreement. The registration statement was declared effective
on May 4, 2007.
In December 2007, the Company received proceeds of $119,000 upon the exercise of
warrants to purchase 50,000 shares of common stock. The remaining warrants
issued in conjunction with the offering to buy 1,202,941 shares of common stock
have not been exercised at December 31, 2007 and have a weighted average life of
2.1 years.
NOTE 8 - TRANSFERS OF TECHNOLOGY
During 2007, the Company entered into agreements to sell certain pharmaceutical
formulas in the research and development stage in two separate transactions to
third parties for an aggregate sales price of $1,509,741 less the cost of
$853,352 and transfer (sales) tax of $75,487 for a net gain on sale of
intangibles of $580,922 which is recorded as other income.
NOTE 9 - 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
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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 from operations 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 (RMB), which must be converted into other currencies before
remittance out of the PRC. Both the conversion of RMB into foreign currencies
and the remittance of foreign currencies abroad require approval of the PRC
government.
NOTE 10 - RELATED PARTY TRANSACTIONS
On April 25, 2005 a dividend of $4,154,041 (adjusted for foreign currency
translations as of the balance sheet dates) was declared to the former
shareholders of Helpson which was not paid at December 31, 2005 and was
subsequently converted to demand notes bearing interest at 2.25% according to
the terms of the dividend. The Company paid these notes and the related accrued
interest as discussed in Note 5.
NOTE 11 - CONCENTRATIONS
For the year ended December 31, 2007, three customers accounted for 21%, 20% and
12% of sales, respectively. For the year ended December 31, 2006, three
customers accounted for 17%, 11% and 10% of sales, respectively. At December 31,
2007, two customers accounted for 20% and 11% of accounts receivable,
respectively. At December 31, 2006, two customers made up 18% and 14% of
accounts receivable. For the year ended December 31, 2007, purchases from three
suppliers made up 17%, 17% and 11% of raw material purchases, respectively. For
the year ended December 31, 2006 purchases from two suppliers accounted for 44%
and 34% of raw material purchases, respectively.
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