Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, such as "anticipate", "believe", "expect", "plan", "intend", "seek", "estimate", "project", "could", "may" or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the readers of the forward-looking statements that any such statements that are contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors, some of which are described in this report and some of which are discussed in our other periodic filings with the Securities and Exchange Commission. These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
Business Overview & Recent Developments
The Chinese Food and Drug Administration (“CFDA”) promulgated Good Manufacturing Practices for Pharmaceutical Products (2010 revised version) (the “new GMP”) on February 12, 2011, which became effective on March 1, 2011. The new GMP outlines the basic principles and standards for the manufacturing of pharmaceutical products and the management of quality controls in the manufacturing process in the PRC. Pursuant to those mandatory requirements, the upgrading of our two sterilization production lines - liquid injectable and dry powder injectable product lines were required to be completed by the end of 2013. As of January 1, 2014, we had suspended such two production lines due to the failure to meet the GMP upgrading deadline. However, construction of the new main building has been completed, and two new sterilization production lines have been installed, and during the third quarter were in testing and commissioning. In November 2014 the CFDA completed their process of the GMP certification for our new facility and issued the GMP certificate to enable us to commence manufacturing our liquid injectable and dry powder injectable product lines. We have commenced the operation on the two product lines as of the date of this report.
We anticipate we will begin upgrading our existing sterilization facility to meet new GMP standards and therefore expand our capacity in this product category during the next year.
On July 18, 2014, a once-in-forty-year 16 grade super typhoon Rammasun hit Haikou. This typhoon caused considerable damage to our manufacturing facilities and inventory. Part of the warehouse was flooded; some damage was caused to our new facility while the water and electricity supply was suspended for several days causing a brief halt to our production activities. We have taken emergency measures to restore and recover post-typhoon. The Company’s losses from natural disaster were approximately $2.3 million (RMB14.2 million) for the nine months ended September 30, 2014. The Company received insurance compensation of $0.01 million as only the new plant building was insured and the damage to it was minor. The old plant has restored to the operational mode at the end of July.
The products in our pipeline have experienced delays. The CFDA has increased the approval criteria and lengthened the process which requires additional supplemental materials and trials, higher cost, and longer approval time for all our products. Started from the year of 2013, we commenced leading formulation screening, new technology exploration and technical criteria improvement activities. We expect this new model will improve our exploration channels for the pipeline products.
The status of our pipeline products remains the same as we reported in our Annual Report on Form 10-K for the year ended December 31, 2013.
In the three months ended September 30, 2014, we continued to execute our prudent marketing strategy to implement a more stringent screening on existing and potential distributors and hospital customers in terms of the speed of payment in order to gradually improve our trade turnover, especially in terms of the collection of our accounts receivable. This strategy temporarily impacts our sales in the current period by limiting our credit sales.
Market Trends
The Chinese pharmaceutical market shows features of rapid expansion, fierce competition, low concentration, and is greatly influenced by government policies. According to Biao Dian Medical Information Co., Ltd. under the CFDA Southern Institute of Economic Research, the annual growth rate of Chinese healthcare market went beyond 20% during 2009-2011 due to the advancement of Healthcare Reform; however, this rate dropped below 20% in 2012 due to the limiting use of antibiotics and strengthening drug-price-control policies issued that year; and this rate further dropped to 15.64% in 2013 due to the impact of continuous drug-price-control policy, anti-commercial bribery, and the new GMP requirement.
A series of changes in the market position of the different categories of medication occurred along with the changes in disease spectrum and prescription habits: the decrease in the systemic use of anti-infection drugs in hospitals became the most significant trend. The market share of anti-infection drugs decreased to 15.3% in 2013, which represented a decrease of roughly 9% from 24.5% in 2007 per “China Pharmaceutical Market Development Blue Book (2014)” ("the “Blue Book”), which was mainly due to a better understanding of antibiotic abuse problems, policy instruction of price cutting in antibiotics, and the release of “Clinical Use of Antibiotics Hierarchical Management Approach”. Meanwhile, the market shares of central nerve system category (CNS) and digestive category increased slightly to 14.5% and 14.1% in 2013 from 13.3% and 12.5% in 2007 per the “Blue Book”. It is notable that Traditional Chinese Medicine (“TCM”) had better performance compared to chemical medicines in the above two categories, which decelerated the sales increase for the latter. All the changes mentioned above had impacted most of our existing products.
In July 2014, National Health Commission of PRC rearranged “New Rural Cooperative Medical System” (“NRCMS”) for the year 2014, which stated the key projects this year as follows: improving funding level, promoting insurance for major diseases, adjusting payment policy, and strengthening fund supervision. It clearly stipulated that the NRCMS fund surplus accumulated this year cannot exceed 25% of the total financing. We believe that at least more than RMB13 billion of new funds will be spent in order to achieve this standard, which could effectively mitigate the adversity of “healthcare payment control”. This change in industrial environment might bring positive impacts to the collection of our accounts receivables because our government-backed hospital clients could potentially benefit from such funding from the government.
Results of Operations for the Three Months Ended September 30, 2014
Revenue
Revenue for the three months ended September 30, 2014 was $5.5 million, a decrease of 31% from $8.1 million for the three months ended September 30, 2013. This was mainly due to the production suspension of our injectable production lines this year.
We suspended production of our dry powder injectable and liquid injectable products at our two old production lines as of January 1, 2014 due to the failure to meet the GMP upgrading deadline. Expecting that this shutdown would affect our sales in 2014, we had gradually increased inventory levels of certain products in advance in order to support the market demand for these products. As mentioned above, we received the GMP certificate from the CFDA this November and we have commenced manufacturing liquid injectable and dry powder injectable products.
Set forth below are our revenues by product categories in millions USD for the three months ended September 30, 2014 and 2013:
|
Product Category
|
Three Months Ended September 30,
|
Net Change
|
% Change
|
|
2014
|
2013
|
|
Anti-Viro/ Infection & Respiratory
|
$3.61
|
$4.20
|
-$0.59
|
-14%
|
|
CNS Cerebral & Cardio Vascular
|
$1.17
|
$1.80
|
-$0.63
|
-35%
|
|
Digestive Diseases
|
$0.29
|
$0.80
|
-$0.51
|
-64%
|
|
Other
|
$0.50
|
$1.30
|
-$0.80
|
-62%
|
“Anti-Viro/Infection &Respiratory” category decreased by $0.59 million to $3.16 million in the third quarter in 2014 compared to $4.20 million in the same period in 2013, which was mainly due to the sales decrease in Andro-grapholide caused by the less supply to the distributors who sold Andro-grapholide with big sum of account receivables.
The decrease in revenue was in our “CNS Cerebral & Cardio Vascular” product category, which generated $1.17 million in sales revenue in the third quarter of 2014 compared to $1.80 million in the same period a year ago, decreased by $0.63 million. This decrease was mainly due to having injectables as the main product in this category. The suspension of the injectables production lines since the beginning of this year has negatively impacted our sales performance.
Sales of the “Digestive Diseases” decreased by $0.51 million to $0.29 million in the third quarter in 2014 compared to $0.80 million in the same period in 2013, mainly due to the decrease in sales of Compound Ammonium Glycyrrhetate injectable and Tiopronin, which were affected primarily by market volatility.
Our “Other” category generated $0.5 million of sales in the third quarter in 2014, compared to $1.30 million in the same period last year, a decrease of $0.8 million. This decrease was mainly due to the decrease in sales of an injectable product Vitamin B6 in this category caused by the production line suspension mentioned above.
In the three months ended September 30, 2014, revenue breakdown by product category showed some changes. Sales of the “Anti-Viro / Infection & Respiratory” products category represented 65% of total sales in the three months ended September 30, 2014, compared to 52% in the same period last year. The “CNS, Cerebral & Cardio Vascular” category represented 21% of total revenue in the three months ended September 30, 2014 and 22% in the same period last year. The “Digestive Diseases” category represented 5% of total revenue in three months ended September 30, 2014 and 10% in the same period last year. The “Other” category represented 9% and 16% of revenues in three months ended September 30, 2014 and 2013, respectively.
Cost of Revenue
For the three months ended September 30, 2014, our cost of revenue was $4.0 million, or 73% of total revenue, which represented a decrease of $1.8 million from $5.8 million, or 73% of total revenue, in the third quarter of 2013. The decrease in cost of revenue in the third quarter of 2014 was mainly due to the decrease in purchasing prices of certain raw materials due to market fluctuations.
Gross Profit and Gross Margin
Gross profit for the three months ended September 30, 2014 was $1.5 million, a decrease of $0.7 million, from gross profit of $2.2 million in the same period of 2013. Our gross profit margin in the third quarter of 2014 was 27% compared to 28% in the same period of 2013. Looking forward, we expect pricing pressures on most products, while our new products have and will support the overall gross margin. For instance, Candesartan, the product we launched last November, is sold at a price that supports our gross margin.
Selling Expenses
Our selling expenses for the three months ended September 30, 2014 were $0.7 million, compared to $0.9 million in the same period last year. Selling expenses accounted for 13% of the total revenue in the third quarter 2014 compared to 11% in the same period in 2013. Due to many adjustments in our selling processes under healthcare reform policies, despite the decrease in sales, we still require comparable personnel and expenses to maintain our revenue and collection of accounts receivable.
General and Administrative Expenses
Our general and administrative expenses for the three months ended September 30, 2014 were $0.42 million, an increase of $0.05 million from $0.37 million in the same period of 2013. General and administrative expenses accounted for 8% and 5% of our total revenues in the three months ended September 30, 2014 and 2013, respectively.
Research and Development Expense
Our research and development expenses for the three months ended September 30, 2014 and 2013 were $0.18 million and $0.35 million, respectively. The change in research and development expense was mainly due to the decreases of costs related to testing of the new production lines.
Bad Debt Expense
Our bad debt expenses for the three months ended September 30, 2014 and 2013 were $3.9 million and $3.2 million, respectively. The increase in bad debt expenses was mainly due to the increase in the aged accounts receivable.
In general, our normal credit or payment terms extended to customers are 90 days. This has not changed in recent years. Due to the peculiarity of the Chinese pharmaceutical market environment, deferred payments to pharmaceutical companies by state-owned hospitals and local medicine distributors are a normal phenomenon. Our customers are primarily pharmaceutical distributors who sell products to mostly government-backed hospitals. Therefore, the age of our receivables from our customers tends to be old. Although these customers typically pay after the due date of the receivables, since the majority of hospitals in China are backed by the government, Management believes that the deferred payments from the state-owned hospitals are relatively secured.
The amount of accounts receivable that were past due (or the amount of accounts receivable that were more than 90 days old) was $30.6 million and $45.1 million as of September 30, 2014 and December 31, 2013, respectively. The following table illustrates our accounts receivable aging distribution in terms of percentage of total accounts receivable as of September 30, 2014 and December 31, 2013.
| |
September 30,
|
|
December 31,
|
|
| |
2014
|
|
2013
|
|
|
1 - 90 Days
|
|
|
8 |
% |
|
|
8.0 |
% |
|
90 - 180 Days
|
|
|
4.6 |
% |
|
|
7.4 |
% |
|
180 - 360 Days
|
|
|
5.8 |
% |
|
|
23.3 |
% |
|
360 - 720 Days
|
|
|
38.4 |
% |
|
|
61.3 |
% |
|
> 720 Days
|
|
|
43.2 |
% |
|
|
0.0 |
% |
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Our bad debt allowance estimate is currently calculated as the sum of 3.5% of accounts receivable that are less than 365 days old, 10% of accounts receivable that are between 365 days and 720 days old and 100% of accounts receivable that are greater than 720 days old.
In order to collect cash to support the construction of our new plant to meet the policy requirements for new GMP upgrading, we have shifted to prudent sales strategies in the recent two years. This strategy strengthened the preference on sales of customers with good credit performance, while reduced the supplement to customers with poor credit record. On one hand, this strategy contributed to the recovery of funds; on the other hand, it negatively impacted our sales and indirectly prolonged the payment from the estranged customers due to their lack of incentive to pay their accounts receivable faster than if they otherwise would have the prospects of having larger supplies from the Company. These two factors resulted in increased proportion of our older-aged accounts receivable balance.
Management has paid high attention to this issue. During the third quarter of 2014, we offered two of our largest customers a discount of 30% for payments made on their outstanding balance of accounts receivable. As a result, we recognized additional bad debt expense of approximately $0.53 million for the three and nine months ended September 30, 2014. In addition, Management evaluated the collection conditions and further considered taking a series of targeted measures to promote collection of older-aged accounts receivable in the fourth quarter.
Losses from Natural Disaster
We suffered losses of $2,275,593 relating to a tropical typhoon during the three months ended September 30, 2014 as discussed more fully in Note 2 to the condensed consolidated financial statements. There was no comparable expense in the prior year period.
Loss from Operations
Our operating loss for the three months ended September 30, 2014 was $6 million, compared to operating loss of $2.7 million in the same period in 2013. The increase in operating loss was primarily due to the decrease in sales, the increase in bad debt expense and the losses from natural disaster recognized during the three months ended September 30, 2014.
Income Tax Expense (Benefit)
For the three months ended September 30, 2014 and 2013, our income tax rate was 15%. Income tax expense was $0.02 million for the three months ended September 30, 2014, and income tax benefit was $0.4 million for the three months ended September 30, 2013. The income taxes recognized for the three months ended September 30, 2014 and 2013 were related to net changes in long-term deferred tax assets and liabilities. We renewed our "National High-Tech Enterprise" status ("National HT Status") from the PRC government in the third quarter of 2013. With this designation, for the years ended December 31, 2014, 2015 and 2016, we will continue to enjoy a preferential tax rate of 15% which is notably lower than the statutory income tax rate of 25%.
Net Loss
Net loss for three months ended September 30, 2014 and 2013 were $6.3 million and $2.3 million, respectively. The increase in net loss was primarily due to the decrease in sales, the increase in bad debt expense and the losses from natural disaster recognized for the three months ended September 30, 2014.
For the three months ended September 30, 2014, loss per basic and diluted common share was $0.15, compared to loss per basic and diluted share of $0.05 for the same period in 2013.
The number of basic and diluted weighted-average outstanding shares used to calculate loss per share was 43,579,557 for the three months ended September 30, 2014 and 2013, respectively.
Nine Months Ended September 30, 2014 and 2013
Revenue
For the nine months ended September 30, 2014, our sales revenue decreased by $5.6 million, or 23%, to $18.8 million from $24.4 million in the corresponding period of 2013.
Set forth below are our revenues by product categories in millions USD for each of the nine months ended September 30, 2014 and 2013.
|
Product Category
|
Nine Months Ended September 30,
|
Net Change
|
% Change
|
|
2014
|
2013
|
|
Anti-Viro/ Infection & Respiratory
|
$12.70
|
$12.90
|
($0.20)
|
-2%
|
|
CNS Cerebral & Cardio Vascular
|
$3.07
|
$5.90
|
($2.83)
|
-48%
|
|
Digestive Diseases
|
$1.06
|
$2.60
|
($1.54)
|
-59%
|
|
Other
|
$1.92
|
$2.90
|
($0.98)
|
-34%
|
During the nine months 2014, our overall sales revenue decreased by 23% on a year-over-year basis led by the CNS Cerebral & Cardio Vascular and Digestive categories. Sales in the Anti-Viro/ Infection & Respiratory category reached $12.7 million, a decrease of $0.2 million, or 2%, compared to $12.90 million in the same period last year, CNS Cerebral & Cardio Vascular category decreased by $2.83 million, or 48%, to $3.07 million from $5.09 million due to the suspension of our injectable production lines. Sales in Digestive category decreased by $1.54 million, or 59%, to $1.06 million from $2.60 million, which was mainly due to the sales decrease of injectable products in this category. Sales of the “Other” category decreased by $0.98 million, or 34%, to $1.92 million from $2.90 million. The decrease was mainly due to the production suspension of our injectable production lines this year.
Gross Margin and Gross Profit
Gross profit for the nine months ended September 30, 2014 was $6.6 million, compared to $2.8 million in the same period of 2013. Gross profit margin for the nine months ended September 30, 2014 and 2013 were 35% and 12% respectively. Without the effect of inventory obsolescence for the nine months ended September 30, 2013, management estimates that our gross profit would have been approximately $6.5 million, and gross margin would have been 27%. The increase in gross profit margin was mainly due to market fluctuation and sales price increases in certain products; in addition, more high-margin products were sold in the first nine months of 2014 compared to the same period a year ago.
Selling Expenses
Our selling expenses for the nine months ended September 30, 2014 were $2.2 million, a decrease of 10%, compared to $2.4 million for the nine months ended September 30, 2013. Selling expenses were approximately 12% of revenue in the first half of 2014 compared to 10% during the comparable period a year ago.
General Administrative Expenses
Our general and administrative expenses for the nine months ended September 30, 2014 were $1.2 million, a decrease of $0.3 million, or 20%, compared to $1.5 million for the same period in 2013. This decrease was mainly due to a financial consulting fee incurred in the first half of 2013 for the preparation of the construction loan facility.
Research and Development Expense
Our research and development expenses for the nine months ended September 30, 2014 and 2013 were $2.5 million and $1.4 million, respectively. The change in research and development expenses was mainly due to the costs related to testing of the new production lines.
Bad Debt Expense
Our bad debt expense for the nine months ended September 30, 2014 was $15.3 million, compared to $7.9 million for the same period in 2013. Please see additional discussion of bad debt and accounts receivables in the section above named "Bad Debt Expense".
We recognize bad debt expense per actual write-offs as well as the changes of allowance for doubtful accounts. To the extent that our current allowance for doubtful accounts is higher than that of the previous period, we recognize a bad debt expense for the difference between the two periods; when the current allowance is lower than that of the previous period, we recognize a bad debt benefit for the difference. The allowance for doubtful accounts was $27.9 million and $13.3 million as of September 30, 2014 and December 31, 2013, respectively. Therefore, the changes in the allowance for doubtful accounts during the nine months ended September 30, 2014 and 2013 were as follows:
| |
For the Nine Months Ended
|
|
| |
September 30,
|
|
| |
2014
|
|
|
2013
|
|
|
Balance, beginning of period
|
|
$ |
13,301,622 |
|
|
$ |
4,429,945 |
|
|
Bad debt expense (benefit)
|
|
|
15,280,588 |
|
|
|
7,910,583 |
|
|
Charged to reserve – collection discount
|
|
|
(531,382 |
) |
|
|
- |
|
|
Foreign currency translation adjustment
|
|
|
(138,649 |
) |
|
|
7,206 |
|
|
Balance, end of period
|
|
$ |
27,912,179 |
|
|
$ |
4,268,356 |
|
Losses from Natural Disaster
We suffered losses of $2,275,593 relating to a tropical typhoon during the nine months ended September 30, 2014 as discussed more fully in Note 2 to the condensed consolidated financial statements. There was no comparable in expense in the prior year period.
Loss from Operations
Our operating loss for the nine months ended September 30, 2014 was approximately $16.85 million, compared to $10.45 million for the same period in 2013, which represented a deterioration of $6.40 million. The deterioration in operating income performance was primarily due to lower revenue, higher bad debt and R&D expense and losses from natural disaster in the current period compared to the corresponding period one year ago.
Net Loss
Our net loss for the nine months ended September 30, 2014 and 2013 was $17.4 million and $9.6 million, respectively. The deterioration in net income performance was primarily due to lower revenue, higher bad debt expense, increased R&D expense and losses from natural disaster in the current period as compared to the corresponding period one year ago.
Liquidity and Capital Resources
Our principal sources of liquidity are cash generated from operations and short-term bank loans. Our cash and cash equivalents were $4.3 million, which represents 3% of our total assets as of September 30, 2014, as compared to $6.0 million, which represents 4% of our total assets as of December 31, 2013. All of the $4.3 million of cash and cash equivalents at September 30, 2014 is considered to be reinvested indefinitely in Helpson and is not expected to be available for payment of dividends, for other payments to our parent company or to its shareholders. As of September 30, 2014, we had a principal balance of $4.9 million in short-term bank loans. This loan was due on November 1, 2014. Management is in the process of obtaining an extension, and anticipates this to be completed during the fourth quarter. In addition, we entered into an eight-year construction loan facility with a bank on September 21, 2013. The total loan facility amount is RMB80,000,000 (approximately $13 million), which had been fully utilized through May 7, 2014. The cash flow generated from operating activities was used to fund the remaining construction of our GMP upgrading project. The current portion of the construction loan facility is $1.6 million as of September 30, 2014. Both the short term bank loan and the construction loan facility are from the same bank.
Based on our current operating plan, management believes that our cash provided by operations will be sufficient to meet our operating capital needs and our anticipated capital expenditures, including expenditures for new formula acquisitions and GMP upgrading related construction and equipment, for the next twelve months. However, if events or circumstances change and we do not meet our operating plan as expected, we may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, when we regard market conditions are most advantageous, we may seek additional financing as necessary for expansion purposes, which may include debt and/or equity financing. There can be no assurance that any additional financing will be available on acceptable terms, if at all.
Operating Activities
Net cash provided by operating activities was $2.6 million in the nine months ended September 30, 2014 compared to $3.7 million for the same period in 2013.
At September 30, 2014, our accounts receivable was $30.6 million, a decrease of $14.5 million from $45.1 million at December 31, 2013. The decrease was due to our enhanced collection efforts as well as the increased allowance for doubtful accounts at September 30, 2014 compared to December 31, 2013.
At September 30, 2014, total inventory was $19.0 million, a decrease of $5.67million from $24.7 million at December 31, 2013. This decrease was mainly due to the damage from typhoon, decreased purchases of raw materials for injectable products and additional inventory needs from R&D expense for trial productions at the new facility.
Investing Activities
During the nine months ended September 30, 2014, net cash used in investing activities decreased to $4.9 million from $9.8 million during the same period in 2013. The investment spending for the nine months ended September 30, 2014 was mainly for the GMP upgrading related construction and equipment. The decrease of $4.9 million in investing activities for the nine months ending September 30, 2014 as compared to the same period of 2013 relates to the decreased costs on construction of the new facility and equipment installation.
Financing Activities
There was $0.6 million cash flow provided from financing activities in the nine months ended September 30, 2014 and $6.4 million for the same period in 2013. The large number of financing activities that occurred in the nine months of 2013 related to the construction loan facility described under the first paragraph in this section entitled “Liquidity and Capital Resources”.
According to relevant PRC laws, companies registered in the PRC, including our PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of their after-tax net income, as determined under accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach fifty percent (50%) of the companies’ registered capital prior to their remittance of funds out of the PRC. Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company in the form of loans, advances or cash dividends. As of September 30, 2014 and December 31, 2013, the net assets of Helpson were $109,560,000 and $127,626,000, respectively. Due to the restriction on dividend distribution to overseas shareholders, the amount of Helpson’s net assets designated for general and statutory capital reserves, and thus could not be transferred to our parent company as cash dividends, were $8,182,770 and $8,182,770 (50% of registered capital) at September 30, 2014 and December 31, 2013, respectively. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 7.5% and 6.4%, respectively, of its total net assets, this reserve does not have a major impact on our liquidity. There were no allocations to the statutory surplus reserve accounts during the nine months ended September 30, 2014.
The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Our businesses and assets are primarily denominated in RMB. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with applicable invoices and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of Helpson, our PRC subsidiary, to transfer its net assets to our parent company through loans, advances or cash dividends.
Off Balance Sheet Arrangements
As of September 30, 2014, we did not have any off-balance sheet arrangements.
Commitments
At September 30, 2014, we were obligated to pay laboratories and others approximately $5.19 million over approximately the next four years upon completion of the various phases of contracts to provide CFDA production approval of medical formulas.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. The discussion of our critical accounting policies contained in Note 1 to our consolidated financial statements, “Organization and Significant Accounting Policies”, is incorporated herein by reference.