UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT Of
1934
For the Quarterly Period Ended June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Transition Period from _________ to _________
Commission file number: 000-29523
China Pharma Holdings, Inc.
(Exact name of registrant as specified on its charter)
Delaware 73-1564807
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2nd Floor, No. 17, Jinpan Road, Haikou, Hainan Province, China
(Address of principle executive offices)
0086-898-66811730 (China)
(Registrant's telephone number, including area code)
Copies to:
Charles Law
King and Wood LLP
Suite 1175, 125 S Market Street,
San Jose, CA 95113
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
As of June 30, 2008, 42,278,938 shares of China Pharma Holdings, Inc. common
stock, par value $0.001 per share, were outstanding.
Transitional Small Business disclosure format: Yes [ ] No [X]
China Pharma Holdings, Inc.
TABLE OF CONTENTS
Part I Financial Information 1
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of March 31, 2008 and
December 31, 2007 (unaudited) 1
Condensed Consolidated Statements of Operations and Comprehensive
Income for the Three Months Ended March 31, 2008 and 2007
(unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2008 and 2007 (unaudited) 3
Notes to Condensed Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Controls and Procedures 23
Part II Other Information 23
Item 1 Legal Proceedings 23
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3 Defaults upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits 24
Signatures 26
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
2008 2007
----------- -----------
(Restated)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,037,074 $ 1,830,335
Trade accounts receivable, less allowance for doubtful
accounts of $3,661,065 and $2,440,852, respectively 27,342,048 18,572,976
Other receivables, less allowance for doubtful
accounts of $94,997 and $43,908, respectively 822,776 413,596
Advances to suppliers 6,260,588 2,757,320
Inventory 14,976,919 14,448,771
----------- -----------
Total Current Assets 56,439,405 38,022,998
----------- -----------
Non-current Assets:
Property and equipment, net of accumulated depreciation of
$1,275,949 and $1,003,802, respectively 2,603,819 2,625,216
Intangible assets, net of accumulated amortization of
$291,809 and $221,715, respectively 2,498,375 2,063,252
Advances for purchases of intangible assets 3,194,915 807,345
Deferred tax assets 375,606 187,509
----------- -----------
Total Non-current Assets 8,672,715 5,683,322
----------- -----------
TOTAL ASSETS $65,112,120 $43,706,320
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 607,489 $ 297,299
Accrued expenses 48,813 261,301
Accrued taxes payable 1,208,254 311,009
Other payables 138,311 86,161
Advances from customers 500,773 261,583
Short-term notes payable 2,473,879 2,693,428
----------- -----------
Total Current Liabilities 4,977,519 3,910,781
----------- -----------
Research and development commitments 36,381 34,181
----------- -----------
Total Liabilities 5,013,900 3,944,962
----------- -----------
Stockholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 42,278,938 and 37,278,938 shares issued and
outstanding, respectively 42,279 37,279
Additional paid-in capital 21,062,586 11,678,606
Foreign currency translation adjustment 5,559,346 2,839,304
Retained earnings 33,434,009 25,206,169
----------- -----------
Total Stockholders' Equity 60,098,220 39,761,358
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $65,112,120 $43,706,320
----------- -----------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue $ 11,278,803 $ 8,570,256 $ 22,995,848 $ 15,804,024
Cost of revenue 5,325,992 4,670,685 11,235,760 8,605,524
------------ ------------ ------------ ------------
Gross profit 5,952,811 3,899,571 11,760,088 7,198,500
------------ ------------ ------------ ------------
Operating expenses:
Selling expenses 456,630 326,147 794,422 474,030
General and administrative 451,096 290,596 799,489 575,079
Research and development 37,226 4,477 37,226 --
Bad debt expense, net of recoveries 612,413 (87,149) 1,079,813 934,058
------------ ------------ ------------ ------------
Total operating expenses 1,557,365 534,071 2,710,950 1,983,167
------------ ------------ ------------ ------------
Income from operations 4,395,446 3,365,500 9,049,138 5,215,333
------------ ------------ ------------ ------------
Non-operating income (expenses):
Interest income 5,035 11,633 5,035 25,408
Interest expense (50,440) (58,942) (95,713) (115,841)
Other (expense) income (77,450) 7,937 (77,450) 575,277
------------ ------------ ------------ ------------
Total non-operating income (expense) (122,855) (39,372) (168,128) 484,844
------------ ------------ ------------ ------------
Income before taxes 4,272,591 3,326,128 8,881,010 5,700,177
Income tax expense 235,292 -- 653,170 --
------------ ------------ ------------ ------------
Net income $ 4,037,299 $ 3,326,128 $ 8,227,840 $ 5,700,177
------------ ------------ ------------ ------------
Comprehensive income -
foreign currency translation adjustments 974,800 216,416 2,720,042 651,683
------------ ------------ ------------ ------------
Comprehensive income $ 5,012,099 $ 3,542,544 $ 10,947,882 $ 6,351,860
------------ ------------ ------------ ------------
Basic and Diluted Earnings Per Share $ 0.10 $ 0.09 $ 0.22 $ 0.15
------------ ------------ ------------ ------------
Basic and Diluted Weighted Average Shares Outstanding 38,982,235 37,228,938 38,130,586 36,785,909
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the six months ended June 30,
--------------------------
2008 2007
----------- -----------
Cash Flows from Operating Activities: (Restated)
Net income $ 8,227,840 $ 5,700,177
Depreciation and amortization 332,077 201,540
Compensation paid with warrants 120,042 --
Gain on sale of intangibles -- (572,446)
Changes in assets and liabilities:
Trade accounts receivable (7,358,577) (4,074,259)
Other receivables (371,696) 235,008
Advances to suppliers (3,231,357) (2,079,529)
Inventory 390,430 (1,828,719)
Deferred tax assets (171,030) --
Deferred offering costs -- 60,062
Trade accounts payable 282,790 341,285
Accrued expenses (117,176) 57,740
Accrued taxes payable 852,319 (2,715)
Other payables (57,543) (75,127)
Advances from customers 216,039 33,704
----------- -----------
Net Cash from Operating Activities (885,842) (2,003,279)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (16,683) (25,931)
Purchase of intangible assets (424,170) --
Advances for purchases of intangibles (2,269,286) --
----------- -----------
Net Cash from Investing Activities (2,710,139) (25,931)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 9,268,938 3,797,183
Payments of short term notes payable (381,753) --
----------- -----------
Net Cash Proceeds from Financing Activities 8,887,185 3,797,183
----------- -----------
Effect of Exchange Rate Changes on Cash (84,465) 11,691
----------- -----------
Net Change in Cash 5,206,739 1,779,664
----------- -----------
Cash and Cash Equivalents at Beginning of Period 1,830,335 656,441
----------- -----------
Cash and Cash Equivalents at End of Period $ 7,037,074 $ 2,436,105
----------- -----------
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 143,893 $ 115,841
Cash paid for income taxes 422,553 --
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
CHINA PHARMA HOLDINGS, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2008
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of China
Pharma Holdings, Inc. (the Company) and its subsidiaries were prepared pursuant
to the rules and regulations of the United States Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. Management of the Company (Management) believes
that the following disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Form 10-KSB report for the year ended December
31, 2007.
These unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) that, in the
opinion of Management, are necessary to present fairly the consolidated
financial position and results of operations of the Company for the periods
presented. Operating results for the six months ended June 30, 2008 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008.
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 & Biotechnology 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 (the Company).
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 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.
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 June 30, 2008 and 2007 potentially dilutive
securities includes warrants outstanding to purchase a total of 2,652,941 and
1,252,941 shares, respectively, of Company common stock with exercise prices
ranging from $2.38 to $3.50 per share. These have not been included in the
4
computation of earnings per share as their effect is antidilutive.
Recently Enacted Accounting Standards - In September 2006, the Financial
Accounting Standards Board (FASB) issued 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 adoption of the portions of
SFAS No. 157 that were not postponed by (FSP FIN) No. 157-2 did not have a
material impact on our consolidated financial statements. The Company does not
expect the adoption of the postponed portions of SFAS No. 157 to have a material
impact on our consolidated financial statements.
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. SFAS No. 141(R) and SFAS No. 160 are not expected to have a material
impact on our results of operations or financial position.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities", an amendment of SFAS No. 133. SFAS 161
applies to all derivative instruments and non-derivative instruments that are
designated and qualify as hedging instruments pursuant to paragraphs 37 and 42
of SFAS 133 and related hedged items accounted for under SFAS 133. SFAS 161
requires entities to provide greater transparency through additional disclosures
about how and why an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under SFAS 133 and its
related interpretations, and how derivative instruments and related hedged items
affect an entity's financial position, results of operations, and cash flows.
SFAS 161 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2008. The Company does not expect SFAS 161 to have a
material impact on its results of operations or financial position.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS 162 will provide framework for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities. SFAS 162 will be effective 60 days following the
Securities and Exchange Commission's approval of the Public Company Accounting
Oversight Board (PCAOB) amendments to AU Section 411. The Company does not
5
expect the adoption of SFAS 162 will have a material impact on its financial
condition or results of operation.
Restatement of Financial Statements - Subsequent to March 2008, the Company
realized that the December 31, 2007 consolidated financial statements needed to
be revised to correct an overstatement of advances paid to suppliers in amount
of $ 724,628, an overstatement of other receivables in amount of $ 82,717, and
an understatement of advance for purchase of intangible assets in the amount of
$ 807,345. The Company concluded that advances made for purchase of intangible
assets should be treated as a long-term asset. This correction was not
considered material in accordance with SAB 108 for the year ended December 31,
2007 but is considered significant. As a result, the Company corrected the
financial statements for December 31, 2007. The corrected consolidated balance
sheet is included in these financial statements. The correction of the December
31, 2007 financial statements had no effect on the previously reported net
income. The effect of the restatement was as follows:
Reported Restatement As Restated
-------- ----------- -----------
Considated Balance sheet as of December 31,2007
Other Receivables $ 496,313 $ (82,717) $ 413,596
Advances to suppliers 3,481,948 (724,628) 2,757,320
Total Current Assets 38,830,343 (807,345) 38,022,998
Advances for purchase of intangible assets -- 807,345 807,345
Total Assets $ 43,706,320 $ -- 43,706,320
Considated Statement of Cash Flows
For the year ended December 31,2007
Other receivables $ (111,660) $ 79,426 $ (32,234)
Advances to suppliers (1,028,119) (853,332) 1,881,451
Net Cash provided by Operating Activities 2,801,898 (773,906) 2,027,992
Advances for purchase of intangible assets -- 773,906 773,906
Net Cash used in Investing Activities (1,479,531) 773,906 (705,625)
Net Change in Cash 1,173,894 $ -- $ 1,173,894
NOTE 2 - INVENTORY
Inventory consisted of the following:
June 30, December 31,
2008 2007
----------- -----------
Raw materials $10,509,311 $12,521,536
Work in progress -- 60,404
Finished goods 4,467,608 1,866,831
----------- -----------
Total Inventory $14,976,919 $14,448,771
----------- -----------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
6
June 30, December 31,
2008 2007
----------- -----------
Permit of land use $ 409,889 $ 385,102
Building 1,866,413 1,753,547
Plant, machinery and equipment 1,456,892 1,341,996
Motor vehicle 45,799 37,193
Office equipment 100,775 88,210
Construction in progress -- 22,970
----------- -----------
Total 3,879,768 3,629,018
Less: accumulated depreciation (1,275,949) (1,003,802)
----------- -----------
Property and Equipment, net $ 2,603,819 $ 2,625,216
----------- -----------
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets as follows:
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 six months ended June 30, 2008 and 2007, depreciation expense was
$201,645 and $187,957, 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 9.0 years. Amortization of intangible assets was
$130,432 and $13,583 for the six months ended June 30, 2008 and 2007,
respectively.
In January 2007, the Company entered into an agreement to acquire a certain
pharmaceutical formula from an unrelated party for cash for an aggregate
purchase price of $424,170. This has been recorded under the caption Intangible
assets in the accompanying balance sheet as of June 30, 2008.
NOTE 5 - DEBT
Short Term Notes Payable -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. The outstanding advances made under the line of credit were
$2,473,879 and $2,324,278 at June 30, 2008 and December 31, 2007, respectively.
The line of credit was renewed during the first quarter of 2008 with due dates
of August and September of 2008 and bears interest payable monthly at the rate
of 7.84%.
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 final principal balance of $369,150
was paid in January, 2008. The accrued interest of $213,545 was paid during the
second quarter of 2008.
7
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 $31 million at June 30, 2008. 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.
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% on all domestic-invested enterprises and Foreign Invested
Entities, or FIEs, unless they qualify under certain limited exceptions.
The Company is located in a special region, which had a 15% corporate income tax
rate before the new EIT Law. The new EIT Law abolished the preferential
corporate income tax rate in the special region. However, because the Company
was in existence prior to the March 16, 2007 China tax law change, it will
gradually transition to the new 25% tax rate over the next five years starting
on January 1, 2008. The phase-in income tax rate is 18% for 2008, 20% for 2009,
22% for 2010, 24% for 2011, and 25% for 2012 and after. Also, the Company is
permitted to use their remaining tax holiday, so they will continue to have a
favorable income tax rate of 50% in effect during fiscal 2008 through 2010 as
determined by the PRC government and the regional tax authorities.
As a result of the above changes, starting from 2008, the Company's enterprise
income tax rate will be:
Year Enterprise Income Tax Rate
---- --------------------------
2008 9%
2009 10%
2010 11%
2011 24%
2012 and after 25%
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.
8
NOTE 7 - STOCKHOLDERS' EQUITY
On May 30, 2008 the Company completed an offering of Units priced at $2.00 per
Unit consisting of one share of Company common stock and a three-year warrant to
purchase one-fourth of one share of Company common stock at an exercise price of
$2.80 per share. The Company issued 5,000,000 shares of common stock and
three-year warrants to purchase 1,250,000 shares of common stock to 17
accredited investors for gross proceeds of $10,000,000. The net proceeds, after
deduction of related offering expenses of $731,062, amounted to $9,268,938. In
addition, the placement agent in the transaction was issued three-year warrants
to purchase 300,000 shares of common stock at an exercise price of $2.98 per
share. The proceeds were allocated to the warrants issued to the investors and
the placement agent based upon their fair values of $1,090,342 and $249,366,
respectively and the balance of the proceeds of $8,952,511 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 2.93%, expected dividend yield of 0%,
expected volatility of 62.9% and an expected life of 3 years.
The common shares and the shares underlying the warrants have registration
rights, and the Company is required to file a registration statement including
said shares with the Securities and Exchange Commission. In the event that the
Company does not file a registration statement within 45 days of the closing
date of the offering, or the registration statement is not declared effective
within the 90 or 120 day time periods from the closing date as defined in the
registration rights agreement, or if the Company fails to keep the registration
statement effective, the Company will be required to pay a penalty to each
investor equal to one percent (1%) of the purchase price for each 30 day period.
The Company filed a registration statement with the Securities and Exchange
Commission on July 11, 2008, which has not yet been declared effective. The
Company has not accrued any penalty under the registration rights agreement but
will evaluate any liability related to the effectiveness date of the
registration statement at the end of each reporting period.
On June 24, 2008, the Company issued three-year warrants to purchase 75,000
shares of Company common stock at $2.80 per share and three-year warrants to
purchase 75,000 shares of the Company's common stock at $3.60 per share to a
vendor valued at $90,487. The value was recorded as general and administrative
expense in the accompanying financial statements as of the date of issuance.
Also on June 24, 2008, the Company issued three-year warrants to purchase 25,000
shares of Company common stock at $3.00 per share and three-year warrants to
purchase 25,000 shares of the Company's common stock at $3.50 per share to a
vendor valued at $29,554. The value was recorded as general and administrative
expense in the accompanying financial statements as of the date of issuance.
The fair values of the warrants issued on June 24, 2008, determined using the
Black-Scholes Option Pricing Model, were calculated using the following
assumptions: risk free interest rate of 3.14%, expected dividend yield of 0%,
expected volatility of 61.3% and an expected life of 3 years.
The Company has outstanding warrants to purchase an aggregate of 1,202,941
shares of Company's common stock at an exercise price of $2.38 per share which
expire on January 29, 2010.
9
NOTE 8 - CONTINGENCIES
Economic environment - Significantly all of the Company's operations are
conducted in the PRC, and therefore the Company is subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and fluctuations in the foreign
currency exchange rate. The Company's results 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.
Item 2. Management's Discussion and Analysis or Plan of operation
The following discussion should be read in conjunction with China Pharma Inc.'s
consolidated financial statements and related notes included elsewhere in this
Current Report on Form 10-QSB.
This filing contains forward-looking statements. The words "anticipated",
"believe", "expect", "plan", "intend", "seek", "estimate", "project", "could",
"may" and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect China Pharma management's current views with respect to
future events and financial performance and involve risks and uncertainties,
including but not limited to changes in general economic and business
conditions, changes in foreign, political, social, and economic conditions,
regulatory initiatives and compliance with governmental regulations, the ability
to increase market share, 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,
a professional marketing team, and strong research and development ("R&D")
capabilities. We have a portfolio of therapeutics that target the following
areas: the central nervous system (CNS), cardiovascular system, wound recovery,
and infectious diseases. Our therapeutics target market segments, both current
and future, which cover high incidence and high mortality diseases with a large
patient population. We also have a highly professional and experienced
management team.
Strong Revenue Growth and High Margins -We have experienced a compounded, annual
growth-rate of over 80% in sales of our therapeutics since 2003. For the six
10
months ending June 30 2008, the company generated $23 million in revenue from
therapeutic sales compared to $15,804,024 over the same period in 2007, an
increase of $7,191,824or 45.51%. . The gross margin achieved by our company was
51.14% of total revenue for the six months ending June 30, 2008, which is higher
than the 45.55% of the corresponding period in 2007, and higher than the
industry average gross margin of 34.2%. We are 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
portfolio of over 30 specifications of drugs that focus on the treatment of:
CNS, cardiovascular, cerebrovascular, and infectious diseases. Among these two
are market leaders: PuSenOK(TM) and Buflomedil hydrochloride. We were awarded
the "National Key New Product" by the Ministry of Science and Technology of the
People's Republic of China (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 rapid growth in sales with a constant
growth in income, due to our focus on the largest segments 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 dynamic 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
through a diverse therapeutics line designed to target several specific patient
groups. Our research and development (R&D) is guided by the market and we target
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. We have 9 drugs on track to launch,
including a new anti-drug-resistance antibiotic which has already entered the
State Food and Drug Administration, PRC (SFDA) technical evaluation. We also
have three drugs which are waiting for the SFDA's production approval.
I. Summary on 6 months ended June 30, 2008
For the six months ending June 30, 2008, the Company's total revenue increased
by over 45.51% to a record high of $23 million, compared to $15.8 million for
the six months ending June 30, 2007. This rapid growth was due to sales of new
products, increased sales of existing products, increased promotion of sales,
and widened distribution channels. This is consistent with China Pharma's
strategy of launching new products in an increasingly competitive market and
exploring potential domestic markets.
The financial performance for the six months ending June 30, 2008 was improved
compared to the six months ending June 30, 2007. Gross profit increased 63.37%
to $11.76 million and net income, not including foreign currency translation
adjustment, increased 44.34% to $8.23 million. This growth was attributable to
the development of new product processes and new marketing activities.
11
For the six months ending June 30, 2008, earnings per common share increased
46.67% to $0.22 per share compared to $0.15 per share for the six months ending
June 30, 2007. China Pharma is working closely with various pharmaceutical
research institutions to develop more products to meet 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. Our strategy of continued
research and penetration into the pharmaceutical market is essential to our
success.
We have also enhanced internal controls for accounting and reporting. In the
near future, we will develop a more systematic and continuous internal control
system for the long-term development of the company and the benefit of our
stakeholders and prospective investors.
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.
In addition, we launched a new product Bumetanide in 2008.
We plan to expand our biotechnology product portfolio. Based on the foundation
established by some of our widely recognized medicine labels such as
Neurotrophic peptide, we have offered and will continue to offer a variety of
biological medicines. Those products, including the injected hepatocyte
growth-promoting factors, are expected to fuel additional growth in revenues
beyond what Neurotrophic peptide has provided.
One of our products, Buflomedil Hydrochloride (which includes the raw material,
the injectable form of the product and tablet form) has received the following
recognitions, awards and designations:
o The key technology project in Hainan in 2003 by Haikou Municipality.
o 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.
o The "Best Commercialized Technology" award in Hainan in 2004 by Hainan
Scientific and Technological Result Examination Committee.
In 2003, we attained GMP authentication and the award of "Best Enterprise for
Supporting SARS Medicine" awarded by Hainan Food and Drug Administration. We
have an extensive distribution network with 16 sales offices and approximately
680 proxy agents covering 30 provinces, municipalities, and autonomous regions
around China. Our main market channels are GSP certified medical companies which
directly distribute to hospitals and the final market.
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 & Biotechnology 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, Inc. ("the Company").
12
Furthermore, On May 30, 2008 the Company completed an offering and issued five
million shares of common stock at a purchase price of $2.00 per share, and
three-year warrants to purchase an aggregate of 1.25 million shares of the
Company's common stock at an exercise price of $2.80 per share. Net proceeds
from the offering of approximately $9.3 million are expected to be used for the
expansion of the Company's existing product line, sales and marketing, and
general working capital purposes.
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 heart disease. 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.
The main factors driving the growth in market demand of China's pharmaceutical
industry include economic growth, improved awareness of self-health care, the
aging and the continued urban migration of the population and the start of a
complete reform of the health system which has greatly improved the
accessibility to and desire for medical care. China's increased demand for the
medical industry in the future will maintain rapid growth. According to the
forecasts of IMS, China will become the seventh largest pharmaceutical market in
the world in 2009 and will jump to the second largest after the U.S.A. in 2020,
with a market capacity of US$220 billion.
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 areas of risk:
o External Risk
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 effects of the social environment, local government
involvement and government policies on the pharmaceutical industry in the PRC, a
large increase in sales can be expected. 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 guarantee
production supply requirements, we have to store large amounts of inventory to
maintain consistent production levels. In addition, part of the 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
finished product and packaging material.
o Foreign Currency Risk
13
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). However,
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
can 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 for the three months ended June 30, 2008
The following table presents the operations of the Company for the three months
ended June 30, 2007 and June 30, 2006; both are given in USD.
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months
ended June 30,
2008 2007 Changes Variance
----------- ----------- ----------- ----------
Revenue 11,278,803 8,570,256 2,708,547 31.60%
----------- ----------- ----------- ----------
Cost of revenue 5,325,992 4,670,685 655,307 14.03%
----------- ----------- ----------- ----------
Gross profit 5,952,811 3,899,571 2,053,240 52.65%
----------- ----------- ----------- ----------
Operating expenses:
Selling expenses 456,630 326,147 130,483 40.01%
----------- ----------- ----------- ----------
General and administrative 451,096 290,596 160,500 55.23%
----------- ----------- ----------- ----------
Research and development 37,226 4,477 32,749 731.49%
----------- ----------- ----------- ----------
Bad debt expense, net of recoveries 612,413 (87,149) 699,562 -802.72%
----------- ----------- ----------- ----------
Total operating expenses 1,557,365 534,071 1,023,294 191.60%
----------- ----------- ----------- ----------
Income from operations 4,395,446 3,365,500 1,029,946 30.60%
----------- ----------- ----------- ----------
Non-operating income (expenses):
Interest income 5,035 11,633 (6,598) -56.72%
----------- ----------- ----------- ----------
Interest expense (50,440) (58,942) 8,502 -14.42%
----------- ----------- ----------- ----------
Other (expense) income (77,450) 7,937 (85,387) -1075.81%
----------- ----------- ----------- ----------
Total non-operating income (expense) (122,855) (39,372) (83,483) 212.04%
----------- ----------- ----------- ----------
Income before taxes 4,272,591 3,326,128 946,463 28.46%
----------- ----------- ----------- ----------
14
Income tax expense 235,292 -- 235,292
----------- ----------- ----------- ----------
Net income 4,037,299 3,326,128 $ 711,171 21.38%
----------- ----------- ----------- ----------
Comprehensive income - foreign currency translation 974,800 216,416 758,384 350.43%
adjustments ----------- ----------- ----------- ----------
Comprehensive income 5,012,099 3,542,544 $ 1,469,555 41.48%
----------- ----------- ----------- ----------
Basic and Diluted Earnings Per Share $ 0.10 $ 0.09 0.01 15.92%
----------- ----------- ----------- ----------
Basic and Diluted Weighted Average Shares Outstanding 38,982,235 37,228,938 1,753,297 4.71%
----------- ----------- ----------- ----------
Revenue
We generated approximately $11.28 million revenue for the three months ending
June 30, 2008, an increase of $2.71 million, which means a 31.60% increase
compared to $8.57 million of the corresponding period in 2007. This increase was
primarily due to the following elements. Although the world economy fluctuated
due to energy problems and Sub-prime Mortgages, the medicine industry was less
sensitive than other industries. Furthermore, our outputs have met the increased
medicine market demand. We are increasing our marketing efforts for our products
and have widened our distribution channels. In the second quarter of 2008, PuSen
OK continued rapid growth. It contributed $1.88 million, accounting for
approximately 16.64% of total revenue, an increase of 84%, which means $550,503,
compared to the same period in 2007. As a flagship product, PuSen OK is the
generic version of Aleve-D(R) and the most effective non-drowsy 12-hour cold
medicine. It is indicated to reduce nasal congestion, relieve pain and reduce
fever, etc. In addition, sales of some of our older products have increased:
Ozagrel Sodium for injection contributed $1,069,766, or 9.52% of the revenue,
with an increase of $391,406, or 57.7% compared to the same period of 2007;
Cerebroprotein Hydroloysate Injection for injection contributed $860,769, or
7.64% of the revenue. Furthermore, due to the increased recognition and
acceptance by the customers of products launched last year, sales of Granisetron
Hydrochloride Injection and Alginic Sodium Diester Injection increased to
$629,931 and $585,335 respectively, and contributed 10.77% of the revenue
together. Another aspect is the recent reforms of the whole pharmaceutical
industry in China implemented by the Chinese government, which have led to
greater transparency and a more formalized system. Our distribution network
covers 30 of the 32 provinces, municipalities and autonomous regions in China.
In addition, we believe our improved production capacity will enhance the growth
of our existing and newly launched products.
Cost of Revenue
Cost of revenue for the three months ending June 30, 2008, was approximately
$5.33 million or 47.22% of total revenue, compared to the corresponding period
of 2007, which was $4.67 million or 54.50% of total revenue. The increased cost
of revenue was primarily due to the increased revenue for the three months
ending June 30, 2008.
Gross Profit
Gross Profit for the three months ending June 30, 2008 was $5.95 million, and
accounted for 52.78% of total revenue. It has increased by 52.65%, or $2.05
million, compared to 3.9million or 45.50% of total revenue of the second quarter
of 2007. The increased sales in new products and high margin products result in
the substantial increase in gross profit.
15
Selling Expense
The selling expense of the second quarter of 2008 has increased to $0.46
million, an increase of $0.13 million, or 40.01%, compared to $0.33 million of
the second quarter of 2007. In line with the growth in revenue, we have invested
more in the expanding of our distribution channels and marketing of our
products, which has increased selling expenses.
G & A Expenses
The general and administrative expenses of the three months ending June 30, 2008
has increased to $0.45 million, an increase of $0.16 million, or 55.23%,
compared to $0.29 million of the same period of 2007. This increase mainly
results from the $0.12 million influence of the warrants issued to our IR firm
and financial consultancy company according to the requirements of GAAP and SEC.
In addition, increases in the cost of consumables as well as the expansion of
business scale have pushed the increase of G&A expense.
Allowance for Bad Debts
The allowance for bad debt for the three months ending June 30, 2008 has
increased to $0.61 million from minus $0.09million of the same period of 2007.
This is mainly because the proportion of long term bad debts collected in the
second quarter 2008 is less than that of the second quarter 2007. During the
normal course of business, we give unsecured credit to our customers. We record
an allowance for bad debts based on age of outstanding accounts receivables at
the end of the period in accordance with generally accepted accounting
principles in the PRC. 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. During the 15 years of operating history, the company has never had
any uncollected receivables.
As to the peculiarity of the Chinese pharmaceutical environment, defaults in
payments to pharmaceutical companies by state owned hospitals are a normal
phenomenon. Over 90% of our drugs are sold to state owned hospitals, the greater
our business with the hospital, the more payments are defaulted, although in
actual fact, all the defaulted payments are eventually paid, it is only a matter
of time.
Income from Operation
Income from Operation of the 2nd quarter of 2008 reached $4.4 million, an
increase of 30.60%, or $1.03 million compared to the same period of 2007. This
increase was primarily caused by the growth of revenue and gross profit in the
three months ending June 30, 2008.
Other (Expense) Income
In the three months ending June 30, 2008, Other income decreased to minus
$77,450, a decrease of $85,387 compared to the same period of 2007. This is
mainly due to the donation of medicine to the Sichuan Earthquake in May 2008. ii
Income Tax Expense
16
Income tax expense for the three months ending June 30, 2008 was $235,292, or
2.09% of revenue, while the company did not have any income tax in the
corresponding period in 2007. We have been granted a `tax holiday' granting a
favorable rate of 50% of the tax rates. This year we pay our tax at the rate of
9%.
Net Income
The net income as of the 2nd quarter of 2008, excluding the effect of foreign
exchange transactions, was approximately $4.04 million, which is $0.71 million
higher than that of the 2nd quarter of 2007, approximately $3.33 million. It has
increased by 21.32%.
V Analysis for the six months ended June 30, 2008
The following table presents the operations of the Company for the six months
ending June 30, 2007 and June 30, 2006; both are given in USD.
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the six months
ended June 30,
2008 2007 Change Variance
----------- ----------- ----------- ----------
Revenue 22,995,848 15,804,024 7,191,824 45.51%
----------- ----------- ----------- ----------
Cost of revenue 11,235,760 8,605,524 2,630,236 30.56%
----------- ----------- ----------- ----------
Gross profit 11,760,088 7,198,500 4,561,588 63.37%
----------- ----------- ----------- ----------
Operating expenses:
Selling expenses 794,422 474,030 320,392 67.59%
----------- ----------- ----------- ----------
General and administrative 799,489 575,079 224,410 39.02%
----------- ----------- ----------- ----------
Research and development 37,226 -- 37,226
----------- ----------- ----------- ----------
Bad debt expense, net of recoveries 1,079,813 934,058 145,755 15.60%
----------- ----------- ----------- ----------
Total operating expenses 2,710,950 1,983,167 727,783 36.70%
----------- ----------- ----------- ----------
Income from operations 9,049,138 5,215,333 3,833,805 73.51%
----------- ----------- ----------- ----------
Non-operating income (expenses):
Interest income 5,035 25,408 (20,373) -80.18%
----------- ----------- ----------- ----------
Interest expense (95,713) (115,841) 20,128 -17.38%
----------- ----------- ----------- ----------
Other (expense) income (77,450) 575,277 (652,727) -113.46%
----------- ----------- ----------- ----------
Total non-operating income (expense) (168,128) 484,844 (652,972) -134.68%
----------- ----------- ----------- ----------
Income before taxes 8,881,010 5,700,177 3,180,833 55.80%
----------- ----------- ----------- ----------
Income tax expense 653,170 -- 653,170
----------- ----------- ----------- ----------
Net income 8,227,840 5,700,177 2,527,663 44.34%
----------- ----------- ----------- ----------
17
Comprehensive income - foreign currency translation 2,720,042 651,683 2,068,359 317.39%
adjustments ----------- ----------- ----------- ----------
Comprehensive income 10,947,882 6,351,860 4,596,022 72.36%
----------- ----------- ----------- ----------
Basic and Diluted Earnings Per Share $ 0.22 $ 0.15 0.06 39.25%
----------- ----------- ----------- ----------
Basic and Diluted Weighted Average Shares Outstanding 38,130,586 36,785,909 1,344,677 3.66%
----------- ----------- ----------- ----------
Revenue
The amount of revenue was approximately $23million for the six months ending
June 30, 2008; this represents an increase of 45.51% or $7.2million compared to
approximately $15.8 million for the same period in 2007. Satisfying the market
demand, PuSen OK contributed $3.77 million, accounting for approximately 16.60%
of total revenue. In addition, in the six months ending June 30, 2008,
Buflomedil and Cerebroprotein contributed $2.39 million or 10.39% of total
revenue and $1.71 million or 7.42% of total revenue respectively, an increase of
78.06% and 83.20% compared to the same period of 2007. The other older products
also realized different degrees of growth. Furthermore, due to increased
recognition by the customers, sales of Granisetron Hydrochloride Injection and
Alginic Sodium Diester Injection both launched in 2007 continued to grow, and
together contributed 10.76% of the revenue
Cost of Revenue
Cost of revenue for the six months ending June 30, 2008 was approximately 11.24
million or 48.86% of total revenue, compared to approximately 8.61 million or
54.45% of total revenue, for the six months ending June 30, 2007. The cost of
revenue in 2008 has increased by 30.56%. The increased cost of revenue was
primarily due to the increased revenue for the six months ending June 30,
2008.The absolute value of the cost of revenue increased in line with the
revenue increase, but the proportion of cost of revenue, to revenue decreased.
Gross Profit
Compared to the gross profits of approximately $7.2 million or 45.55% for the
first half year ending June 30, 2007, the gross margin for the six months ending
June 30, 2008 has increased by 63.37% or approximately $4.56 million to $11.76
million or 51.14% for the corresponding period in 2008. The increased sales in
new products and high margin products result in the substantial increase in
gross profit.
Selling Expense
Selling price for the six months ending June 30, 2008 was $794,422, or 3.45% of
total revenue, which has increased by 67.59% compared to the $474,030, or 3.00%
of revenue, for the corresponding period of 2007. The strengthening in sales and
the increase in sales force resulted in the increase in selling expense.
G&A Expense
G&A expense has increased from approximately $0.58 million for the six months
ending June 30, 2007 to approximately $0.8 million for the six months ending
18
June 30, 2008. This increase mainly results from the $0.12 million influence of
the warrants issued to our IR firm and financial consultancy company according
to the requirements of GAAP and SEC. In addition, inflation as well as the
expansion of business scale have pushed the increase of G&A expense.
Allowance for Bad Debts
The allowance for bad debt for the six months ending June 30, 2008 has increased
to $1.08 million from $0.93 million of the same period of 2007. This is mainly
due to the absolute value of accounts receivable increasing in line with the
increased revenue. We are exploring amendments to the product portfolio
structure as well as discovering new sales channels and clients in order to
reduce the high A/R and long DSO.
Income from Operations
Income from operations has increased by approximately $3.83 million, to
approximately 9.05 million, or 39.35% of the revenue, which is an increase of
73.51% compared to $5.22 million, or 33% of the revenue for the six months
ending June 30, 2007. This increase was primarily caused by the dramatic growth
of revenue and gross profit in the six months ending June 30, 2008.
Income Tax expense
The income tax for the three months ending June 30, 2008 was $653,170, or 2.84%
of the total revenue. We have been granted a `tax holiday' granting a favorable
rate of 50% of the tax rates. This year we pay our tax at the rate of 9%.
Net Income
The net income as of the first half year of 2008, excluding the effect of
foreign exchange transactions, was approximately $8.23 million, which was higher
than that of the corresponding period of 2007, approximately $5.7 million. It
has increased by 44.34% or $2.53 million. Based on the analysis above, the
increase in net income was mainly due to the large increases in revenue and
gross margin.
VI Analysis of the Financial Position
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the six months ended June 30,
2008 2007
----------- -----------
(Restated)
Cash Flows from Operating Activities:
Net income 8,227,840 5,700,177
----------- -----------
Depreciation and amortization 332,077 201,540
----------- -----------
Compensation paid with warrants 120,042 --
----------- -----------
Gain on sale of intangibles -- (572,446)
----------- -----------
19
Changes in assets and liabilities:
Trade accounts receivable (7,358,577) (4,074,259)
----------- -----------
Other receivables (371,696) 235,008
----------- -----------
Advances to suppliers (3,231,357) (2,079,529)
----------- -----------
Inventory 390,430 (1,828,719)
----------- -----------
Deferred tax assets (171,030) --
----------- -----------
Deferred offering costs -- 60,062
----------- -----------
Trade accounts payable 282,790 341,285
----------- -----------
Accrued expenses (117,176) 57,740
----------- -----------
Accrued taxes payable 852,319 (2,715)
----------- -----------
Other payables (57,543) (75,127)
----------- -----------
Advances from customers 216,039 33,704
----------- -----------
Net Cash from Operating Activities (885,842) (2,003,279)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (16,683) (25,931)
----------- -----------
Purchase of intangible assets (424,170) --
----------- -----------
Advances for purchases of intangibles (2,269,286) --
----------- -----------
Net Cash from Investing Activities (2,710,139) (25,931)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 9,268,938 3,797,183
----------- -----------
Payments of short term notes payable (381,753) --
----------- -----------
Net Cash Proceeds from Financing Activities 8,887,185 3,797,183
----------- -----------
Effect of Exchange Rate Changes on Cash (84,465) 11,691
----------- -----------
Net Change in Cash 5,206,739 1,779,664
----------- -----------
Cash and Cash Equivalents at Beginning of Period 1,830,335 656,441
----------- -----------
Cash and Cash Equivalents at End of Period 7,037,074 2,436,105
----------- -----------
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 143,893 $ 115,841
----------- -----------
Cash paid for income taxes 422,553 --
----------- -----------
Cash and Cash Equivalent
As of June 30, 2008, we had cash and cash equivalents of $7,037,074. This
represents an increase of $4,600,969 over the June 30, 2007 balance of
$2,436,105; and an increase of $5,206,739 over the December 31, 2007 balance of
$1,830,335. The increase in cash and cash equivalent is mainly due to the fund
raising activities in this period.
During the six months ending June 30, 2008, cash flow from operating activities
generated minus $885,842, an increase of $1.12 million, or 55.78%, compared to
minus $2,003,279 in the same period of 2007. This increase is mainly due to
strengthening the ability to collect accounts receivable.
20
On May 30, 2008 the Company completed an offering of Units priced at $2.00 per
Unit consisting of one share of Company common stock and a three-year warrant to
purchase one-fourth of one share of Company common stock at an exercise price of
$2.80 per share. The Company issued 5,000,000 shares of common stock and
three-year warrants to purchase 1,250,000 shares of common stock to 17
accredited investors for gross proceeds of $10,000,000. The net proceeds, after
deduction of related offering expenses of $731,062, amounted to $9,268,938. In
addition, the placement agent in the transaction was issued three-year warrants
to purchase 300,000 shares of common stock at an exercise price of $2.98 per
share. The proceeds were allocated to the warrants issued to the investors and
the placement agent based upon their fair values of $1,090,342 and $249,366,
respectively, and the balance of the proceeds of $8,952,511 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 2.93%, expected dividend yield of 0%,
expected volatility of 62.9% and an expected life of 3 years.
The common shares and the shares underlying the warrants have registration
rights, and the Company is required to file a registration statement including
said shares with the Securities and Exchange Commission. In the event that the
Company does not file a registration statement within 45 days of the closing
date of the offering, or the registration statement is not declared effective
within the 90 or 120 day time periods from the closing date as defined in the
registration rights agreement, or if the Company fails to keep the registration
statement effective, the Company will be required to pay a penalty to each
investor equal to one percent (1%) of the purchase price for each 30 day period.
The Company filed a registration statement with the Securities and Exchange
Commission on July 11, 2008. The Company has not accrued any penalty under the
registration rights agreement but will evaluate any liability related to the
effectiveness date of the registration statement at the end of each reporting
period.
VII. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements.
VIII. Commitments
At June 30, 2008, the Company had no material commitments for capital
expenditures other than for those expenditures incurred in the ordinary course
of business.
IX. 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.
21
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
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.
In May 2008, The US Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) published consultative documents
that seek public comment on two of the eight phases of their joint project to
develop an improved conceptual framework. The objective of the project is to
develop an improved conceptual framework that provides a sound foundation for
developing future accounting standards. Further, in June 2008, The Financial
Accounting Standards Board (FASB) issued an Exposure Draft (ED) of a proposed
Statement of Financial Accounting Standards, Disclosure of Certain Loss
Contingencies--an amendment of FASB Statements No. 5 and 141(R). The proposed
22
Statement would be effective for fiscal years ending after December 15, 2008,
and interim and annual periods in subsequent fiscal years. In addition, on June
06, 2008, the Financial Accounting Standards Board (FASB) issued an Exposure
Draft (ED) of a proposed Statement of Financial Accounting Standards, Accounting
for Hedging Activities--an amendment of FASB Statement No. 133. The proposed
Statement would require application of the amended hedging requirements for
financial statements issued for fiscal years beginning after June 15, 2009, and
interim periods within those fiscal years.
X. Conclusion
The overall performance during the six months ending June 30, 2008 was
outstanding. As a public company in the pharmaceutical industry, we focus on
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, the Company will
continue to actively pursue the development and distribution of high-quality
products. The pharmaceutical industry has been called an "industry of eternal
sunrise", and China Pharma forecasts that our clear growth strategy and the
sustained growth in market demand will ensure our continued growth.
Item 3 - Controls and Procedures
Disclosure controls and procedures are designed to ensure that financial
information is accumulated and communicated to management, including the
Company's CEO and CFO in a timely manner and then processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, within the
90 days prior to the filing date of this report, the Company carried out an
evaluation of the effectiveness of the design and operation of the Company's
internal controls over disclosure and reporting procedures. This evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Company's President, CEO and CFO. The Company has
taken steps to improve our internal controls over recording and reporting which
were disclosed as a material weakness in Item 8A "Controls and Procedures" of
our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007
(the "2007 Form 10-KSB").
As part of this correction process, we recruited three independent directors and
formed an Audit Committee in February 2008 to supervise the implementation of an
Internal Audit Department and to oversee the financial reporting of the Company
including direct communication with our independent auditors. There have been
other changes in the Company's internal controls subsequent to our assessment to
improve internal controls as indicated in the 2007 Form 10-KSB.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
23
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
On May 30, 2008, the Company completed an offering of Units priced at $2.00 per
Unit consisting of one share of Company's common stock and a three-year warrant
to purchase one-fourth of one share of Company's common stock at an exercise
price of $2.80 per share. The Company issued 5,000,000 shares of common stock
and three-year warrants to purchase 1,250,000 shares of common stock to 17
accredited investors for gross proceeds of $10,000,000. In addition, the
placement agent in the transaction was issued three-year warrants to purchase
300,000 shares of common stock at an exercise price of $2.98 per share. The
issuance was made in reliance on Section 4(2) of the Securities Act 1933 and was
made without general solicitation or advertising.
On June 24, 2008, the Company issued three-year warrants to purchase 75,000
shares of Company's common stock at $2.80 per share and three-year warrants to
purchase 75,000 shares of Company's common stock at $3.60 per share to FirsTrust
Group, Inc. The issuance was made in reliance on Section 4(2) of the Securities
Act 1933 and was made without general solicitation or advertising.
Also on June 24, 2008, the Company issued three-year warrants to purchase 25,000
shares of Company's common stock at $3.00 per share and three-year warrants to
purchase 25,000 shares of Company's common stock at $3.50 per share to Hayden
Communications International, Inc. The issuance was made in reliance on Section
4(2) of the Securities Act 1933 and was made without general solicitation or
advertising.
Item 3 - Defaults upon Senior Securities
Not Applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits
(a) Exhibits
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.
24
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.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Pharma Holdings, Inc.
Dated: August 5, 2008 By: /s/ Zhilin Li
-----------------------
Zhilin Li
Chief Executive Officer,
President and Director
Dated: August 5, 2008 By: /s/ Xinhua Wu
---------------------
Xinhua Wu
Chief Financial Officer,
and Director
26