UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Quarterly Period Ended September 30, 2007
[.] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Transition Period from _________ to _________
Commission file number: 000-29523
China Pharma Holdings, Inc.
(Exact name of registrant as specified on its charter)
Delaware 73-1564807
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2nd Floor, No. 17, Jinpan Road, Haikou, Hainan Province, China
(Address of principle executive offices)
0086-898-66811730 (China)
(Registrant's telephone number, including area code)
Copies to:
Charles Law
King and Wood LLP
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 September 30, 2007, 37,228,938 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 - September 30, 2007 and
December 31, 2006 (unaudited)
1
Condensed Consolidated Statements of Operations and Comprehensive
Income - Three and Nine months ended September 30, 2007 and 2006
(unaudited) 2
Condensed Consolidated Statements of Cash Flows - Nine months
ended September 30, 2007 and 2006 (unaudited) 3
Notes to Condensed Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Controls and Procedures 19
Part II Other Information 19
Item 1 Legal proceedings 19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3 Defaults upon senior securities 20
Item 4 Submission of matters to a vote of security holders 20
Item 5 Other information 20
Item 6 Exhibits 20
Signatures 21
Item 1 Financial Statements (Unaudited)
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2007 2006
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,715,650 $ 656,441
Trade accounts receivable, less allowance for doubtful
accounts of $2,554,705 and $1,562,494, respectively 17,118,699 12,101,979
Other receivables, less allowance for doubtful
accounts of $54,910 and $27,517, respectively 726,200 355,554
Deferred offering costs -- 59,390
Advances to suppliers 4,903,250 2,255,877
Inventory 13,716,136 10,277,887
----------- -----------
Total Current Assets 38,179,935 25,707,128
----------- -----------
Non-current Assets:
Property and equipment, net of accumulated depreciation of
$935,328 and $619,649, respectively 2,621,864 2,725,173
Intangible assets, net of accumulated amortization of
$229,433 and $135,656, respectively 2,065,264 65,344
Deferred tax assets 17,403 16,736
----------- -----------
Total Non-current Assets 4,704,531 2,807,253
----------- -----------
TOTAL ASSETS $42,884,466 $28,514,381
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 781,630 $ 477,291
Accrued expenses 193,154 104,216
Accrued taxes payable 175,084 167,419
Other payables 56,407 185,096
Advances from customers 195,977 141,871
Accounts payable -related parties -- 22,650
Short-term notes payable 6,794,296 6,533,649
----------- -----------
Total Current Liabilities 8,196,548 7,632,192
----------- -----------
Research and development commitments 33,255 31,980
----------- -----------
Total Liabilities 8,229,803 7,664,172
----------- -----------
Stockholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 37,228,938 and 34,723,056 shares issued and
outstanding, respectively 37,229 34,723
Additional paid-in capital 11,559,656 7,764,979
Foreign currency translation adjustment 1,886,200 663,871
Retained earnings 21,171,578 12,386,636
----------- -----------
Total Stockholders' Equity 34,654,663 20,850,209
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $42,884,466 $28,514,381
----------- -----------
See the accompanying footnotes to the unaudited condensed,
consolidated financial statements.
1
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
---------------------------- ----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenue $ 8,293,497 $ 5,015,272 $ 24,097,521 $ 13,721,587
Cost of revenue 4,413,042 2,521,205 13,018,566 7,151,898
------------ ------------ ------------ ------------
Gross profit 3,880,455 2,494,067 11,078,955 6,569,689
------------ ------------ ------------ ------------
Operating expenses:
Selling expenses 422,098 42,966 896,128 213,350
General and administrative 328,743 100,650 1,912,266 333,654
Research and development 5,941 125,359 846,822 124,715
2007 Bad debt expense (recovery) -- 152,142 -- (28,349)
------------ ------------ ------------ ------------
Total operating expenses 756,782 421,117 3,655,216 643,370
------------ ------------ ------------ ------------
Income from operations 3,123,673 2,072,950 7,423,739 5,926,319
------------ ------------ ------------ ------------
Non-operating income (expenses):
Interest income 4,400 408 29,808 588
Interest expense (50,857) (39,872) (166,698) (87,690)
Other income 7,549 -- 1,498,093 --
------------ ------------ ------------ ------------
Total non-operating income (expense) (38,908) (39,464) 1,361,203 (87,102)
------------ ------------ ------------ ------------
Income before taxes 3,084,765 2,033,486 8,784,942 5,839,217
Income tax expense -- (326,661) -- (730,560)
------------ ------------ ------------ ------------
Net income $ 3,084,765 $ 1,706,825 $ 8,784,942 $ 5,108,657
============ ============ ============ ============
Comprehensive income - foreign currency 570,646 25,307 1,222,329 137,964
translation adjustments ------------ ------------ ------------ ------------
Comprehensive income $ 3,655,411 $ 1,732,132 $ 10,007,271 $ 5,246,621
============ ============ ============ ============
Basic and diluted earnings per common $ 0.08 $ 0.05 $ 0.24 $ 0.15
share ============ ============ ============ ============
Weighted-average common shares 37,228,938 34,723,056 36,935,208 34,723,056
outstanding ============ ============ ============ ============
See the accompanying footnotes to the unaudited condensed
consolidated financial statements.
2
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine For the nine
months ended months ended
September 30, September 30,
2007 2006
----------- -----------
Cash Flows from Operating Activities:
Net income $ 8,784,942 $ 5,108,657
Depreciation and amortization 322,098 288,142
Changes in assets and liabilities:
Trade accounts receivable (4,440,513) (5,405,382)
Other receivables (349,117) (99,868)
Advances to suppliers (2,504,684) 152,181
Inventory (2,965,836) (2,618,835)
Deferred tax assets -- 8,029
Deferred offering costs 60,487 --
Trade accounts payable 279,420 354,002
Accrued expenses 83,034 11,071
Accrued taxes payable -- (197,707)
Other payables (134,647) 144,450
Advances from customers 47,448 31,586
----------- -----------
Net Cash Used in Operating Activities (817,368) (2,223,674)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (77,313) (169,508)
Purchase of intangible assets (1,993,288) --
----------- -----------
Net Cash (Used) by Investing Activities (2,070,601) (169,508)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 3,797,183 --
Proceeds from short term notes payable -- 2,120,150
----------- -----------
Net Cash Proceeds from Financing Activities 3,797,183 2,120,150
----------- -----------
Effect of Exchange Rate Changes on Cash 149,995 5,199
----------- -----------
Net Change in Cash 1,059,209 (267,833)
----------- -----------
Cash and Cash Equivalents at Beginning of Period 656,441 461,220
----------- -----------
Cash and Cash Equivalents at End of Period $ 1,715,650 $ 193,387
----------- -----------
See the accompanying footnotes to the unaudited condensed
consolidated financial statements.
3
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of China
Pharma Holdings, Inc. (the Company) and its subsidiaries were prepared pursuant
to the rules and regulations of the United States Securities and Exchange
Commission. Certain information and 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, 2006.
These unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) that, in the
opinion of Management, are necessary to present fairly the consolidated
financial position and results of operations of the Company for the periods
presented. Operating results for the nine months ended September 30, 2007 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2007.
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 September 30, 2007 potentially dilutive
4
securities includes warrants outstanding to purchase a total of 1,252,941 shares
of Company common stock at an exercise price of $2.38 per share. These are not
included in the computation of fully diluted earnings per share as the effect is
anti-dilutive due to the exercise price of the warrants exceeding the market
price of the stock at September 30, 2007. There are no anti-dilutive securities
outstanding at September 30, 2006.
Recently Issued Accounting Pronouncements - In September 2006, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and requires
additional disclosures about fair value measurements. SFAS 157 aims to improve
the consistency and comparability of fair value measurements by creating a
single definition of fair value. The Statement emphasizes that fair value is not
entity-specific, but instead is a market-based measurement of an asset or
liability. SFAS 157 upholds the requirements of previously issued pronouncements
concerning fair value measurements and expands the required disclosures. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, however earlier application is permitted
provided the reporting entity has not yet issued financial statements for that
fiscal year. The Company does not believe that the adoption of SFAS 157 will
have a material effect on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115 (SFAS 159). This pronouncement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. SFAS 159 is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007. The impact of adopting SFAS 159 on the Company's consolidated
financial statements, if any, has not yet been determined.
NOTE 2 - INVENTORY
Inventory consisted of the following:
September 30, December 31,
2007 2006
----------- -----------
Raw materials $10,622,087 $ 8,458,181
Work in progress 3,035,280 1,579,410
Finished goods 58,769 240,296
----------- -----------
Total Inventory $13,716,136 $10,277,887
----------- -----------
NOTE 3 - 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.
5
According to federal law in the People's Republic of China (PRC), enterprises
with foreign investment and foreign enterprises doing business in the PRC are
generally subject to federal enterprise income tax at a rate of 30%. Effective
at the beginning of 2006 and extending through 2007, the PRC granted the Company
a tax holiday that allows the Company to be exempt from income taxes for the
first two profitable years. This tax holiday further allows the Company to be
exempt from 50% of income taxes during the third through the fifth years. The
reduced tax rate for 2008 through 2010 is 15%. Additionally, Hainan province is
considered a developing economic region which has a reduced statutory tax rate
of 15%, which results in a tax holiday rate of 7.5% during the third through the
fifth years of profitability.
The Company has a deferred tax asset based upon the temporary differences from
the allowance for bad debt. The Company has also incurred various other taxes,
comprised primarily of business taxes, value-added taxes, urban construction
taxes, education surcharges and others. Any unpaid amounts are reflected on the
balance sheets as accrued taxes payable.
NOTE 4 - NOTES PAYABLE
Short Term Notes Payable - During the third quarter of 2006, the Company
borrowed a total of $2,196,113 from a bank. The loans bear interest with a range
of 6.45% to 6.77%, principal and accrued interest are due July and August of
2007 and are collateralized by land use rights, machinery and equipment. On July
13, 2007 the Company renewed the loans with the bank. The renewed loan principal
and accrued interest are due on April 25, 2008.
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. As of September 30, 2007 these notes and
accrued interest remain outstanding.
NOTE 5 - STOCKHOLDERS' EQUITY
On February 1, 2007, the Company completed an offering of units priced at $1.70
per unit consisting of one share of Company common stock and a warrant to
purchase one-half of a share of Company common stock at an exercise price of
$2.38 per share. The Company received gross proceeds in the aggregate amount of
$4,259,900. The net proceeds, after deduction of related offering expenses of
$462,717 amounted to $3,797,183. The Company issued an aggregate of 2,505,882
shares of common stock and issued three-year warrants to purchase an aggregate
of 1,252,941 shares of Company's common stock to 17 accredited investors. The
proceeds were allocated to the warrants based upon their fair value or
$2,010,219, and the balance of the proceeds was allocated to the shares of
common stock. The fair value of the warrants, determined using the Black-Scholes
Option Pricing Model, was calculated using the following assumptions: risk free
interest rate of 4.80%, expected dividend yield of 0%, expected volatility of
124.39% and an expected life of 3 years.
The common shares and the shares underlying the warrants have registration
rights and, accordingly a registration statement was filed with the Securities
Exchange Commission on March 30, 2007 within the 60 day period prescribed by the
registration rights agreement. The registration statement was declared effective
on May 4, 2007.
6
NOTE 6 - TRANSFERS OF TECHNOLOGY
During the first quarter of 2007, the Company entered into agreements to sell
certain pharmaceutical formulas presently in the research and development stage
with two separate transactions to third parties for an aggregate sales price of
$1,479,792 which is recorded as other income, transfer (sales) tax of $73,990,
which has been recorded as part of general and administrative expenses and
$836,404 recorded as research and development expense in the accompanying
statement of operations and comprehensive income for the nine months ended
September 30, 2007. The amounts due under the contracts were collected during
the second quarter of 2007.
During the third quarter of 2007, the Company entered into agreements to acquire
certain pharmaceutical formulas from an unrelated party for cash for an
aggregate purchase price of $1,993,388. This has been recorded under the caption
Intangible assets in the accompanying balance sheet as of September 30, 2007.
NOTE 7 - CONTINGENCIES
Economic environment - Significantly all of the Company's operations are
conducted in the PRC, and therefore the Company is subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and fluctuations in the foreign
currency exchange rate. The Company's results may be adversely affected by
changes in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
In addition, all of the Company's revenue is denominated in the PRC's currency
of Renminbi ("CNY" or "(Y)"), which must be converted into other currencies
before remittance out of the PRC. Both the conversion of CNY into foreign
currencies and the remittance of foreign currencies abroad require approval of
the PRC government.
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,
7
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.
I. The Nine Months Ended September 30, 2007 In Brief
During the nine months ended September 30, 2007, China Pharma continued to show
sound growth and outstanding financial performance. For the nine months ended
September 30, 2007, the Company's total revenue increased by over 75.62% to a
record high of $24 million compared to $14 million for the nine months ended
September 30, 2006. This rapid growth was due to increased sales of existing
products and the products that were developed during the second half year of
2006. This was 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 nine months ended September 30, 2007 improved
compared to the nine months ended September 30, 2006. Gross profit increased by
68.64% to $11.08 million and net income, not including foreign currency
translation adjustment, increased by 71.96% to $8.78 million. This growth was
attributable to the development of new product processes and strengthening our
marketing.
For the nine months ended September 30, 2007, earnings per common share
increased 61.66% to $0.24 per share compared to $0.15 per share for the nine
months ended September 30, 2006. China Pharma started working closely with a
variety of professional pharmaceutical research institutions to deliver more
functional products tailored to the demands of the end-user. Management's goals
are centered on achieving stable profit growth. Accordingly, we operate the
business based on strategic principles, which have proven successful. Thoroughly
exploring the potential in the pharmaceutical field is the key to our success.
We are also concerned with corporate governance as a modern enterprise. In the
near future, we will establish a more systematic and long lasting internal
controls process for prospective development and the benefit of our
shareholders.
II. Business Overview
China Pharma is primarily engaged in the research, development, manufacture, and
marketing of pharmaceutical and nutritional supplements. During 2007, we
launched two new products, Alginic Sodium Diester and Granisetron hydrochloride.
We plan to expand our biotechnology product series. Based on the foundation
established by some of Helpson's widely recognized medicine labels such as
Neurotrophicpeptide, we have launched and will continue to launch a variety of
8
biological medicine, including the injected hepatocyte growth-promoting factors,
which are expected to fuel additional growth beyond that of Neurotrophicpeptide.
One of our products, Buflomedil Hydrochloride (including raw material, injection
and troche) has been recognized in the following ways:
o Designated as the key technology project in Hainan in 2003 by Hai'kou
Municipality.
o Received the best commercialized technology award in Hainan in 2004 by
Hainan Scientific and Technological Result Examination Committee.
o Awarded the national key new products certificate in 2003 by the State
Science and Technology Department, State Taxation Bureau, Ministry of
Commerce, State Bureau of Quality Supervision, Inspection and Quarantine,
and State Environmental Protection Bureau.
In 2003, Helpson attained GMP authentication and the prize as the best
enterprise for supporting SARS medicine awarded by Hainan Food and Drug
Administration, demonstrating our industry leadership. For the nine months ended
September 30, 2007, our products have been distributed to more than 29
provinces, sovereignties, and autonomous regions around China. Our products have
been sold in more than 29 provinces, sovereignties, and autonomous regions. We
have 16 sales offices and approximately 680 proxy agents throughout the PRC. The
main channels we use to deliver our products are as follows: (1) Distribution
system (Proxy Agents); (2) Direct sale system to hospitals; (3) Distribution of
products to end-market through local medical companies.
Onny Investment Limited (Onny) was incorporated in the British Virgin Islands on
January 12, 2005 and was a development stage enterprise through June 15, 2005.
On June 16, 2005, Onny acquired all of the outstanding shares of Hainan Helpson
Medical & 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).
Additionally, on February 1, 2007, China Pharma fulfilled a fund raising equity
offering of units priced at $1.70 each consisting of one share of common stock
and a warrant to purchase one-half of a share of common stock at an exercise
price of $2.38 per share. China Pharma received gross proceeds in the aggregate
amount of $4,259,900. The net proceeds, after deducting the related offering
expenses of $462,717 amounted to $3,797,183. In total, we issued 2,505,882
shares of common stock and issued three-year warrants to purchase an aggregate
of 1,252,941 shares of common stock to 17 accredited investors.
III. Trend in the Market.
Studies show that due to the expansion and aging of the world's population,
ever-growing numbers of people have age-related diseases, such as cancer,
Alzheimer's disease, diabetes and rheumatoid arthritis. These diseases have
already become prevalent, especially in developed areas. In a growing and aging
population, people need to find more effective methods of treatment.
9
Patient empowerment has been a factor in high-quality healthcare. Many are
better informed about the importance of health issues and medical advancement.
Naturally, people today are demanding greater care and access to the latest
medical procedures and medicines.
Helpson views this market trend as an opportunity. However, the best way to take
advantage of this opportunity is to identify our business risks beforehand.
Generally speaking, there are three aspects of risks:
o External Risk
In recent years, the Chinese medical system has been reformed, resulting in the
State Department's establishment of a basic medical insurance system for
employees. Considering the social environment and the governmental policy in the
pharmaceutical industry in PRC, a large increase in sales can be expected due to
local government involvement in the industry. Competition will also be strong
across the industry overall. Currently, the Company's 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 make the Company face strong competition in the
natural medicine market sector.
o Operation Risk
One of the major uncertainties in the Company is the purchase of raw materials.
Raw materials are primarily affected by the geographical, island environment of
Hainan Province. Because of high transportation costs and the need to supply
production requirements, the Company has to store large amounts of inventory to
maintain consistent production levels. In addition, partial raw materials need
to be specially ordered which further increases the need to store inventory.
Finally, due to the increasing sales, the Company must store a large volume of
packaging material.
o Foreign Currency Risk
Substantially all of our operations are conducted in the PRC. Our sales and
purchases are conducted within the PRC in Chinese Renminbi. As a result, the
effect of the exchange rate fluctuation would inevitably be considered to be
material to our business operations.
All of our revenues and expenses are accounted for in Renminbi. But we use the
United States dollar (USD) for financial reporting purposes. Conversion of
Renminbi into foreign currencies is regulated by the People's Bank of China
through a unified floating exchange rate system. Although the PRC government has
stated its intention to support the value of the Renminbi, there could be no
assurance that such exchange rate will not become volatile again or that the
Renminbi will not devalue significantly against the USD. Exchange rate
fluctuations may adversely affect the value, in USD terms, of our net assets and
income derived from its operations in the PRC.
10
IV. Analysis of financial performance for the three months ended September 30,
2007
CHINA PHARMA HOLDING INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE INCOME
(unaudited)
For the three months
ended September 30, Change Variance
----------------------------
2007 2006
------------ ------------ ------------
Revenue $ 8,293,497 $ 5,015,272 $ 3,278,225 65.36%
============
Cost of revenue 4,413,042 2,521,205 1,891,837 75.04%
------------ ------------ ------------ ------------
Gross profit 3,880,455 2,494,067 1,386,388 55.59%
------------ ------------ ------------ ------------
Operation expenses:
Selling expenses 422,098 42,966 379,132 882.40%
Genenral and administrative 328,743 100,650 228,093 226.62%
Research and development 5,941 125,359 (119,418) -95.26%
Bad debt expense (recovery) -- 152,142 (152,142) -100.00%
------------ ------------ ------------ ------------
Total operating expenses 756,782 421,117 335,665 79.71%
------------ ------------ ------------ ------------
Income from operations 3,123,673 2,072,950 1,050,723 50.69%
------------ ------------ ------------ ------------
Non-operating income(expenses):
Interest income 4,400 408 3,992 978.43%
Interest expense (50,857) (39,872) (10,985) 27.55%
Other income 7,549 -- 7,549
------------ ------------ ------------ ------------
Total non-operating income(expense) (38,908) (39,464) 556 -1.41%
------------ ------------ ------------ ------------
Income before taxes 3,084,765 2,033,486 1,051,279 51.70%
Income tax expense -- (326,661) 326,661 -100.00%
------------ ------------ ------------ ------------
Net income $ 3,084,765 $ 1,706,825 $ 1,377,940 80.73%
============ ============ ============ ============
Comprehensive income -foreign
currency translation adjustments 570,646 25,307 545,339 2154.89%
------------ ------------ ------------ ------------
Comprehensive income $ 3,655,411 $ 1,732,132 $ 1,923,279 111.04%
============ ============ ============ ============
Basic and diluted earnings per common
------------ ------------ ------------ ------------
share $ 0.08 $ 0.05 $ 0.03 68.57%
============ ============ ============ ============
Weighted-average common shares
outstanding 37,228,938 34,723,056 2,505,882 7.22%
============ ============ ============ ============
Revenues
Revenues for the three months ended September 30, 2007 is in the amount of
around $8.3 million, there is an approximately $3.28 million (or 65.36%)
increase as compared to the corresponding period in 2006. The dramatic
improvement in sales revenue was due to the following reasons; on the demand
side, taking advantage of the booming of China's economy, the demand for medical
products increased a lot. On the supply side, our output has been expanded to
cope with the increased market demands, more efforts have been put in marketing
of our products, and distribution channels have been widened. Our matured
products have been well-accepted by customers, the revenues from these products
increased steadily (23% more than corresponding figure last year) and it
contributes approximately $1.18 million to the total increase of revenues in
this quarter. Some of the maturated products that achieved large increases are;
Andrographolide has increased by 135.07%, Cefaclor has increased by 99.63%,
Neurotrophicpetide increased by 72.58%, Buflomedil has increased by 64.12%.
Products which had been introduced last year are in the maturity stage now,
revenues from these products increased as well, and it contributes around $0.45
million to the total increase of revenues in this quarter. Some of those
11
products that show good increase in revenues are, Ozagrel has increased by
$0.397 million. Finally, the new products that have been introduced this year
matched with the market demand, and are well-recognized by the customers, and it
contributes $1.39 million to the total increase in revenues this quarter, within
this increase, Granisetron hydrochloride has contributed $0.779 million, and
Alginic Sodium Diester has contributed $0.58 million.
Cost of revenue
Cost of revenue for the three months ended September 30, 2007 was approximately
$4.41 million, it accounts for about 53.21% of the revenues, as compared to the
$2.52 million costs for the third quarter last year, the amount has increased by
$1.89 million or 75%, this was primarily due to the increase in sales volume
this quarter.
Gross profit
Compared with the gross profits of the corresponding period in 2006 (gross
profit $2.49 million, gross margin 49.73%), gross profit for the three months
ended September 30, 2007 has increased by about $1.39 million or 55.59%, and
reached at around $3.88 million, the gross margin is 46.79%. The improved profit
was due to the substantially increase in revenues this period.
Selling Expenses
The selling expenses for the three months ended September 30, 2007 have
increased a lot (by $379,132) and reached at $422,098, it represents 55.78% of
the total operating expenses. During this year, to broaden our market share
further, we have spent a lot of money in marketing of our products, 70 new
salespersons have been recruited, in line with this, traveling expenses, office
expenses and salaries have increased.
General & Administrative Expenses
General and administrative expenses incurred this quarter are $328,743; it
stands for around 43% of the total operating expenses. It has increased by
$228,093 as compared to the corresponding period last year. This was mainly
caused by a large sum of expenses spend in design of new packaging style (amount
to $94 thousands), and because the carrying amount of the intangible assets has
increased, the amortization expenses of intangible asset have also increased (by
around $34 thousands), and as a result of the increased sales volume, traveling
fees and office expense have increased a lot as well.
Income from operations
Income from operations has increased by approximately $1.05 million and came to
$3.12 million, which is, increased by 50.69%. This is a result of the 55.59%
increase in gross profit.
12
Interest income
Interest income has increased by $3,992 compared with the corresponding period
last year, this was caused by the generous cash inflows this year and the
resulted increase in cash balances.
Interest expense
Interest expense has increased by $10,985 for the year ended 30 September 2007;
the reason was, a sum of loans (?12,000,000@6.4496% per year, and
?5,000,000@6.7721% per year) have expired and have been repaid, and shortly
after the repayment, we entered into a new contract of loan, the amount is
?17,000,000 and the interest is 7.182% per year. As the interest rate increases,
interest expenses increase as well.
Income tax expense
For the three months ended September 30, 2007, the company has no tax expense,
because the company has been granted a tax holiday by the government, and this
allowed the company to be exempted from income taxes in 2007.
Net income
Although expenses have been increased this quarter compared with last year, the
huge increase in revenue and gross profit and exempted from income taxes made
this quarter's net income improved to $3,084,765(1), that is, 80.73% higher than
the net income of $1,706,825 for the three months ended September 30, 2006.
-----------------------------------
(1) Exclude the effects of foreign currency translation.
13
V. Analysis of financial performance for the nine months ended September 30,
2007
CHINA PHARMA HOLDING INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE INCOME
(unaudited)
For the nine months
ended September 30, Change Variance
----------------------------
2007 2006
------------ ------------
Revenue $ 24,097,521 $ 13,721,587 $ 10,375,934 75.62%
------------ ------------ ------------ ------------
Cost of revenue 13,018,566 7,151,898 5,866,668 82.03%
------------ ------------ ------------ ------------
Gross profit 11,078,955 6,569,689 4,509,266 68.64%
------------ ------------ ------------ ------------
Operation expenses:
Selling expenses 896,128 213,350 682,778 320.03%
Genenral and administrative 1,912,266 333,654 1,578,612 473.13%
Research and development 846,822 124,715 722,107 579.01%
Bad debt expense(recovery) -- (28,349) 28,349 -100.00%
------------ ------------ ------------ ------------
Total operating expenses 3,655,216 643,370 3,011,846 468.14%
------------ ------------ ------------ ------------
Income from operations 7,423,739 5,926,319 1,497,420 25.27%
------------ ------------ ------------ ------------
Non-operating income(expenses):
Interest income 29,808 588 29,220 4969.39%
Interest expense (166,698) (87,690) (79,008) 90.10%
Other income 1,498,093 -- 1,498,093
------------ ------------ ------------ ------------
Total non-operating income(expense) 1,361,203 (87,102) 1,448,305 -1662.77%
------------ ------------ ------------ ------------
Income before taxes 8,784,942 5,839,217 2,945,725 50.45%
Income tax expense -- (730,560) 730,560 -100.00%
------------ ------------ ------------ ------------
Net income $ 8,784,942 $ 5,108,657 $ 3,676,285 71.96%
============ ============ ============ ============
Comprehensive income -foreign
currency translation adjustments 1,222,329 137,964 1,084,365 785.98%
------------ ------------ ------------ ------------
Comprehensive income $ 10,007,271 $ 5,246,621 $ 4,760,650 90.74%
============ ============ ============ ============
Basic and diluted earnings per common
share $ 0.24 $ 0.15 $ 0.09 61.66%
============ ============ ============ ============
Weighted-average common shares
outstanding 36,935,208 34,723,056 2,212,152 6.37%
Revenues
Revenues reached at $24 million at the end of September 30 2007, as compared to
last year (about $14 million); there is an increase of $10 million, that is,
75.62%. All three quarters outperformed last year's corresponding figures, this
is due to the improvement of our output and distribution channels, and increased
market recognition of our products. Revenues from our matured products have
increased dramatically, and the newly introduced products, due to the correct
market targeting, are well-welcomed by the customers, and it brought us $3.46
millions of revenues.
14
Cost of revenues
Cost of revenue for the nine months ended September 30, 2007 was approximately
$13 million, it accFounts for about 54% of the revenues, as compared to the $7.2
million costs for the third quarter last year, the amount has increased by $5.87
million or 82.3%, this is a result of increased sales volume.
Gross profit
Compared with the gross profits for the nine month ended 2006 (gross profit
$6.57 million, gross margin 47.88%), gross profit for the nine months ended
September 30, 2007 has increased by approximately $4.51 million or 68.64%, and
reached at around $11.08 million, the gross margin is 45.98%. The improved
profit is due to the huge increase in revenues this period.
Selling Expenses
Selling expenses have increased by $0.68 million, reached at $0.89 million; it
represents 24.51% of the total operating costs. Due to our marketing potency has
been strengthened, the demand to our products increases. There is a great leap
in our output to cope with the demand, and marketing expenses have increased as
more salesperson's salaries and traveling expenses have to be paid.
General and administrative expenses
General and administrative expenses have increased by $1.58 million, reached at
$1.91 million; it represents 52.32% of the total operating costs. As more sales
volumes have been achieved, more office expenses, and traveling fees have been
incurred this year, and because the increase in intangible assets, more
amortization expenses have been incurred as well. Also the launch of new
products is the reason for the increase.
Income from operations
Due to the generous increase in gross profits, there was an increase in income
from operations from approximately $5.93 million for the nine months ended 30
Sep 2006 to approximately $7.42 million for the nine months ended 30 Sep 2007.
It is also due to the increase in revenues.
Other income
Due to the sale of the drug formula, approximately $1.5 million of incomes were
earned for the nine months ended 30 September 2007. It accounts for about 6.22%
of the revenues.
Income tax expense
For the nine months ended September 30, 2007, the company has no tax expense,
because the company has been granted a tax holiday by the government, and this
allowed the company to be exempted from income taxes in 2007.
Net income
15
Excluding the effects of foreign currency translation, net income from the first
three quarters has increased by $3.68 million, and reached at $8.78 million. As
compared to the last year's net income ($5.11 million), there is an increase of
71.96%. The increase is due to the large improvements in revenues, together with
the other income earned.
VI. Analysis of the financial position
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine For the nine
months ended months ended
September 30, September 30,
2007 2006
----------- -----------
Cash Flows from Operating Activities:
Net income $ 8,784,942 $ 5,108,657
Depreciation and amortization 322,098 288,142
Changes in assets and liabilities:
Trade accounts receivable (4,440,513) (5,405,382)
Other receivables (349,117) (99,868)
Advances to suppliers (2,504,684) 152,181
Inventory (2,965,836) (2,618,835)
Deferred tax assets -- 8,029
Deferred offering costs 60,487 --
Trade accounts payable 279,420 354,002
Accrued expenses 83,034 11,071
Accrued taxes payable -- (197,707)
Other payables (134,647) 144,450
Advances from customers 47,448 31,586
----------- -----------
Net Cash Used in Operating Activities (817,368) (2,223,674)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (77,313) (169,508)
Purchase of intangible assets (1,993,288) --
----------- -----------
Net Cash (Used) by Investing Activities (2,070,601) (169,508)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 3,797,183 --
Proceeds from short term notes payable -- 2,120,150
----------- -----------
Net Cash Proceeds from Financing Activities 3,797,183 2,120,150
----------- -----------
Effect of Exchange Rate Changes on Cash 149,995 5,199
----------- -----------
Net Change in Cash 1,059,209 (267,833)
----------- -----------
Cash and Cash Equivalents at Beginning of Period 656,441 461,220
----------- -----------
Cash and Cash Equivalents at End of Period $ 1,715,650 $ 193,387
----------- -----------
At the end of 30 September 2007, the cash and cash equivalents balance reached
at $1,715,650, compared with the figure in 30 September 2006, it has increased
by around eight times. This is a combined result of an improvement in net cash
used in operating activities and an increase in net cash proceeds from financing
activities.
16
Net cash used in operating activities fell from negative $2,223,674 to negative
$817,368; the improvement is partially due to the increased net income, and also
because of the improved collection of trade accounts receivables, however, there
is still a net outflow of cash from operating activities, because new products
have been introduced, large amount of new material are purchased, and advances
to suppliers have increased as well.
Cash outflows from investing activities have increased to $2,070,601; this is
due to the purchase of intangible assets which cost the company $1,993,288.
Net cash proceeds from financing activities have increased to $3,797,183. The
increase was due to the proceeds from sale of common stocks and warrants that
have been taken place in February. On February 1, 2007, the company has issued
2,505,882 common stocks at a price of $1.70 per share, and every share with a
three year embedded warrant to purchase one-half of a company's shares at an
exercise price of $2.38 per share. The net proceeds from the offering of stock
and warrants was $3,797,183, with $2,010,219 allocated to the warrants and the
rest allocated to the shares of common stocks. The fair value of the warrants
were determined based on the Black-Scholes Option pricing model, and the
calculation is based on the following assumptions: risk free interest rate of
4.8%, expected dividend yield of 0%, expected volatility of 124.39%, and an
expected life of 3 years. The common shares and the shares underlying the
warrants have registration rights, and a registration statement was filled to
the Securities Exchange Commission on March 30, 2007 within the 60 day period as
prescribed by the registration rights agreement.
VII. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements in the Company.
VIII. Recently Enacted Accounting Pronouncements
On January 1, 2006, we adopted SFAS No. 151, Inventory Costs - An Amendment of
ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
Among other provisions, the new rule requires that items such as idle facility
expense, excessive spoilage, double freight, and re-handling costs be recognized
as current-period charges. Additionally, SFAS 151 requires that the allocation
of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The effects of adoption of SFAS 151 were
not material.
On January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which revises SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123R also superseded APB 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of Cash Flows. Under SFAS 123R,
share-based payments to employees, including the fair value of grants of
employee stock options, are recognized in the income statement at their fair
value, generally over the option vesting period. The effects of adoption of SFAS
123R were not material.
17
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets--An Amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions (SFAS 153). SFAS 153 eliminated the exception from fair value
measurement for non-monetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, Accounting for Non-monetary Transactions, and
replaced it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The effects of adoption of SFAS 153
were not material.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB
No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement
154 applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. Statement 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. It is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors made occurring in
fiscal years beginning after June 1, 2005. The effects of adoption of SFAS 154
were not material.
In June 2005, the FASB Emerging Issues Task Force (EITF) reached a consensus on
Issue No.05-6, determining the Amortization Period for Leasehold Improvements.
The guidance requires that leasehold improvements acquired in a business
combination or purchased subsequent to the inception of a lease be amortized
over the lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the date of the business combination or
purchase. The guidance is effective for periods beginning after June 29, 2005.
The effects of adoption of EITF No. 05-6 were not material.
In February 2006, the FASB issued SFAS No. 155, accounting for Certain Hybrid
Financial Instruments -- an amendment of FASB Statements No. 133 and 140 (SFAS
155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities and SFAS No.140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and related
interpretations. SFAS155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation and clarifies which interest-only strips and principal-only
strips are not subject to recognition as liabilities. SFAS 155 eliminates the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 is effective for the Company for all
financial instruments acquired or issued beginning January 1, 2007. The impact
of adoption of this statement on the Company's consolidated financial
statements, if any, has not yet been determined.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140 (SFAS 140). SFAS 156
amends SFAS 140 Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and related interpretations. SFAS 156 requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset. It also requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable. SFAS 156 permits an entity to use either
18
the amortization method or the fair value measurement method for each class of
separately recognized servicing assets and servicing liabilities. SFAS 156 is
effective for the Company as of January 1, 2007. The impact of adoption of this
statement on our consolidated financial statements, if any, has not yet been
determined.
VX. Conclusion
The overall performance during the nine months ended September 30, 2007 was
outstanding. As a public company in the pharmaceutical industry, we focused 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 to the market.
Item 3 - Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, 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 disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, the Company's President and Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
19
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 - Defaults upon Senior Securities
Not Applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
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.
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.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Pharma Holdings, Inc.
Dated: November 13, 2007 By: /s/ Zhilin Li
-----------------------
Zhilin Li
Chief Executive Officer,
President and Director
Dated: November 13, 2007 By: /s/ Xinhua Wu
---------------------
Xinhua Wu
Chief Financial Officer,
and Director