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 March 31, 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 of incorporation (IRS Employer
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 March 31, 2008, 37,278,938 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 9
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 19
Item 3 Defaults upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits 20
Signatures 21
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2008 2007
----------- -----------
(Restated)
ASSETS
Current Assets:
Cash and cash equivalents $ 682,017 $ 1,830,335
Trade accounts receivable, less allowance for doubtful
accounts of $3,019,930 and $2,440,852, respectively 24,804,992 18,572,976
Other receivables, less allowance for doubtful
accounts of $64,230 and $43,908, respectively 476,749 413,596
Advances to suppliers 1,568,111 2,757,320
Inventory 14,810,192 14,448,771
----------- -----------
Total Current Assets 42,342,061 38,022,998
----------- -----------
Non-current Assets:
Property and equipment, net of accumulated depreciation of
$1,150,987 and $1,003,802, respectively 2,636,030 2,625,216
Intangible assets, net of accumulated amortization of
$291,809 and $221,715, respectively 2,515,356 2,063,252
Advances for purchase of intangible assets 2,801,633 807,345
Deferred tax assets 195,303 187,509
----------- -----------
Total Non-current Assets 8,148,322 5,683,322
----------- -----------
TOTAL ASSETS $50,490,383 $43,706,320
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 590,722 $ 297,299
Accrued expenses 265,008 261,301
Accrued taxes payable 1,078,850 311,009
Other payables 42,521 86,161
Advances from customers 359,646 261,583
Short-term notes payable 2,420,894 2,693,428
----------- -----------
Total Current Liabilities 4,757,641 3,910,781
----------- -----------
Research and development commitments 35,601 34,181
----------- -----------
Total Liabilities 4,793,242 3,944,962
----------- -----------
Stockholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 37,278,938 shares issued and outstanding 37,279 37,279
Additional paid-in capital 11,678,606 11,678,606
Foreign currency translation adjustment 4,584,546 2,839,304
Retained earnings 29,396,710 25,206,169
----------- -----------
Total Stockholders' Equity 45,697,141 39,761,358
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,490,383 $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 ended March 31,
------------------------------------
2008 2007
------------ ------------
Revenue $ 11,717,045 $ 7,233,768
Cost of revenue 5,909,768 3,934,849
------------ ------------
Gross profit 5,807,277 3,298,919
------------ ------------
Operating expenses:
Selling expenses 337,792 147,883
General and administrative 815,793 1,306,086
------------ ------------
Total operating expenses 1,153,585 1,453,969
------------ ------------
Income from operations 4,653,692 1,844,950
------------ ------------
Non-operating income (expenses):
Interest income -- 13,775
Interest expense (45,273) (56,899)
Other income -- 572,213
------------ ------------
Total non-operating income (expense) (45,273) 529,089
------------ ------------
Income before taxes 4,608,419 2,374,039
Income tax expense 417,878 --
------------ ------------
Net income $ 4,190,541 $ 2,374,039
------------ ------------
Comprehensive income - foreign currency translation adjustments 1,745,242 216,416
------------ ------------
Comprehensive income $ 5,935,783 $ 2,590,455
------------ ------------
Basic and Diluted Earnings Per Share $ 0.11 $ 0.07
------------ ------------
Basic and Diluted Weighted Average Shares Outstanding 37,278,938 36,337,958
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 three months ended March 31,
------------------------------------
2008 2007
----------- -----------
(Restated)
Cash Flows from Operating Activities:
Net income $ 4,190,541 $ 2,374,039
Depreciation and amortization 162,779 100,063
Gain on sale of intangibles -- (569,398)
Changes in assets and liabilities:
Trade accounts receivable (5,343,190) (1,728,236)
Other receivables (44,977) (739,783)
Advances to suppliers 1,275,939 (1,095,219)
Inventory 234,072 (1,092,813)
Deferred offering costs -- 59,743
Trade accounts payable 275,053 247,713
Accrued expenses (7,001) 27,960
Accrued taxes payable 738,767 78,756
Other payables (46,030) 88,814
Advances from customers 85,325 6,571
----------- -----------
Net Cash from Operating Activities 1,521,278 (2,241,790)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (6,994) (2,360)
Proceeds from the sale of intangibles -- 38,453
Purchase of intangible assets (418,079) --
Advances for purchase of intangible assets (1,918,791) 836,404
----------- -----------
Net Cash from Investing Activities (2,343,864) 872,497
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants -- 3,797,183
Payments of short term notes payable (376,271) --
Related party payables/receivables -- (138,860)
----------- -----------
Net Cash from Financing Activities (376,271) 3,658,323
----------- -----------
Effect of Exchange Rate Changes on Cash 50,539 5,247
----------- -----------
Net Change in Cash (1,148,318) 2,294,277
----------- -----------
Cash and Cash Equivalents at Beginning of Period 1,830,335 656,441
----------- -----------
Cash and Cash Equivalents at End of Period $ 682,017 $ 2,950,718
----------- -----------
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 83,515 $ 56,899
Cash paid for income taxes -- --
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 THREE MONTHS ENDED MARCH 31, 2008
(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, 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 three months ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the year ended
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, Inc. (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 March 31, 2008 and 2007 potentially dilutive
securities includes warrants outstanding to purchase a total of 1,202,941 and
4
1,252,941 shares, respectively, of Company common stock at an exercise price of
$2.38 per share. These have not been included in the computation of earnings per
share as their effect is anti-dilutive.
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.
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 the 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:
5
Reported Restatement As Restated
------------ ------------ ------------
Consolidated 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
------------ ------------ ------------
Consolidated 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
Advance 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:
March 31, December 31,
2008 2007
----------- -----------
Raw materials $11,770,466 $12,521,536
Work in progress 62,915 60,404
Finished goods 2,976,811 1,866,831
----------- -----------
Total Inventory $14,810,192 $14,448,771
----------- -----------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31, December 31,
2008 2007
----------- -----------
Permit of land use $ 401,110 $ 385,102
Building 1,826,439 1,753,547
Plant, machinery and equipment 1,397,780 1,341,996
Motor vehicle 44,818 37,193
Office equipment 92,945 88,210
Construction in progress 23,925 22,970
----------- -----------
Total 3,787,017 3,629,018
Less: accumulated depreciation (1,150,987) (1,003,802)
----------- -----------
Property and Equipment, net $ 2,636,030 $ 2,625,216
----------- -----------
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets as follows:
6
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 three months ended March 31, 2008 and 2007, depreciation expense was
$103,203 and $93,307, 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 9.25 years. Amortization of intangible assets was
$59,576 and $6,756 for the three months ended March 31, 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 $427,217. This has been recorded under the caption Intangible
assets in the accompanying balance sheet as of March 31, 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
$2,420,894 and $2,324,278 at March 31, 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 $215,933 is still outstanding
and is included in accrued liabilities.
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 $26 million at March 31, 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
7
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 transit 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.
NOTE 7 - STOCKHOLDERS' EQUITY
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.
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
8
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
Holdings, 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, information regarding future operations,
capital expenditures, and cash flows. Such statements reflect management's views
with respect to future events and financial performance, which involve risks and
uncertainties. Those risks include, but not limited to, changes in general
economic and business conditions, changes in 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 our 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 Good Manufacturing Practice ("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: central nervous system ("CNS"), cardiovascular, wound recovery, and
infectious diseases. Our therapeutics has a targeted market segment, both
current and future, which covers a large patient population. We also have a
highly professional and experienced management team.
Strong Revenue Growth and High Margins -We have experienced a compound annual
growth rate of over 80% in sales of our therapeutics since 2003. In the three
months ended March 31, 2008, we generated $11.72 million revenue, an increase of
61.98%, or $4.48 million, from sales of $7.23 million in the three months ended
March 31, 2007. We achieved a gross margin of 49.56% in the first quarter of
2008, while in the first quarter of 2007, the gross margin was 45.60%, which is
above the industry average gross margin of 34.20%. 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.
9
Proven Record of Success - We have a proven track record of success. We have a
porfolio of over 30 specifications of drugs that focus on the treatment of: CNS,
cardiovascular, cerebrovascular, and infectious diseases. Among these
specifications two are market leaders: FGF and Buflomedil hydrochloride. We were
awarded the "National Key New Product" by the Ministry of Science and Technology
of the PRC with the State Administration of Taxation, Ministry of Commerce of
the PRC, General Administration of Quality Supervision, Inspection and
Quarantine of the PRC, and State Environmental Protection Administration of
China. We are a profitable company with a low cost, high margin business model.
We are seeing a quick growth in sales with a constant growth in income, due to
our focus on the largest segment of China's pharmaceutical market. We have eight
different types of modern production lines with capacity to meet future demands.
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 segmented therapeutics line designed to target specific patient
groups. Our R&D is guided by the market and we target name brand drugs and new
generic drugs in China. The R&D covers a variety of diseases, but focuses on
high incidence and high mortality diseases in China, which need more effective
treatment. In an attempt to remain a leading player in the market, we target
off-patent drugs or drugs about to be off-patent with cumulative global sales of
over $1 billion. Through September 2007, we have 10 drugs on track to launch,
including a new anti-drug-resistance antibiotic which has already entered the
SFDA technical evaluation. We also have three drugs which are waiting for the
SFDA's production approval. Bumetanide received SFDA production approval in
January 2008. It is estimated that all therapeutic products currently pending
approval will contribute to the revenue.
I. Summary
During the three months ended March 31, 2008, we maintained steady and speedy
growth and excellent financial performance. Revenue has increased 61.98%, gross
profit 76.04%, net income 76.52% and EPS 72.06%, compared to the three months
ended March 31, 2007. For the three months ended March 31, 2008, our total
revenue reached $11.72 million, an increase of 61.98% from $7.23 million in the
three months ended March 31, 2007. This growth is attributable to the
development of existing products and strengthening our marketing with new
products which were launched after late 2006. This is in line with our strategy
of launching new products while expanding into the several competitive
pharmaceutical markets domestically.
Our financial performance for the first quarter of 2008 has an obvious growth
compared to the first quarter of 2007. We have seen an increase in gross profit
of 76.04% to $5.81 million. Net income, without consideration of foreign
currency translation adjustment, has increased by 76.52% to $ 4.19 million in
the first quarter of 2008. This is the result of the development of the new
products and additional marketing activities.
For the three months ended March 31, 2008, EPS increased by 72.06%, reaching
$0.11 compared to $0.07 for the three months ended March 31, 2007. We are
working closely with various pharmaceutical research institutions to develop
more functional products to meet the customers' needs. Our focus is to create a
steady increase in revenue. We have seen in the past that the key to our success
is to maximize the possibilities of health care industry.
10
We also have adopted a modern enterprise system to enhance internal control over
accounting and reporting. In the near future, we will build up more systematic
and continuous internal control procedures for the long-term development and the
benefit of our shareholders 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.
And we are planning to launch a new product, Bumetanide, in 2008.
We plan to expand our biotechnology product series. Based on the foundation
established by some of our widely recognized medicine labels such as
Neurotrophicpeptide, we have launched and will continue to launch a variety of
biological medicines, including the injected hepatocyte growth-promoting
factors, which are expected to fuel additional growth beyond that of
Neurotrophicpeptide.
One of our products, Buflomedil Hydrochloride (which includes the raw material,
injectable 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. Our
products have been distributed and sold to more than 29 provinces,
sovereignties, and autonomous regions around China. We have 16 sales offices and
approximately 680 proxy agents throughout the PRC. The main channels we use to
deliver our products are as follows: (1) Distribution system (Proxy Agents); (2)
Direct sale system to hospitals; (3) Distribution of products to end-market
through local medical companies.
Onny Investment Limited ("Onny") was incorporated in the British Virgin Islands
on January 12, 2005 and was a development stage enterprise through June 15,
2005. On June 16, 2005, Onny acquired all of the outstanding shares of Hainan
Helpson Medical & 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").
Additionally, on February 1, 2007, we fulfilled a fund raising equity offering
of units priced at $1.70 each consisting of one share of common stock and a
warrant to purchase one-half of a share of common stock at an exercise price of
$2.38 per share. We received gross proceeds in the aggregate amount of
$4,259,900. The net proceeds, after deducting the related offering expenses of
11
$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. In December 2007, we received
proceeds of $119,000 upon the exercise of warrants to purchase 50,000 shares of
common stock. The remaining warrants issued in conjunction with the offering to
buy 1,202,941 shares of common stock have not been exercised at December 31,
2007.
III. Trend in the Market.
Studies show that due to the expansion and aging of the world's population, an
increasing number of people have age-related diseases, such as cancer,
Alzheimer's disease, diabetes, and rheumatoid arthritis. These diseases have
already become prevalent, particularly in developed areas. In a growing and
aging population, people need to find more effective methods of treatment.
Patient empowerment has been a factor in high-quality healthcare. Many are
better informed about the importance of health issues and medical advancement.
Naturally, people today are demanding greater care and access to the latest
medical procedures and medicines.
We view this market trend as an opportunity. However, the best way to take
advantage of this opportunity is to identify our business risks beforehand.
Generally speaking, there are three aspects of risks:
o External Risk
In recent years, the Chinese medical system has been reformed, resulting in the
State Department's establishment of a basic medical insurance system for
employees. Considering the social environment and the governmental policy in the
pharmaceutical industry in PRC, a large increase in sales can be expected due to
local government involvement in the industry. Competition will also be strong
across the industry overall. Currently, our existing products are competitive in
the market and possess growth potential. However, from a long-term perspective,
some major western medicine producers are also seeking Chinese market share.
This will present us with strong competition in the natural medicine market
sector.
o Operation Risk
One of the major uncertainties in our industry is the purchase of raw materials.
Raw materials are primarily affected by the geographical, island environment of
Hainan Province. Because of high transportation costs and the need to guarantee
production supply requirements, we have to store large amounts of inventory to
maintain consistent production levels. In addition, partial raw materials need
to be specially ordered which further increases the need to store inventory.
Finally, due to the increasing sales, we must store a large volume of finished
product and 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.
12
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 USD
will not devalue significantly against the Renminbi. Exchange rate fluctuations
may adversely affect the value, in USD terms, of our net assets and income
derived from its operations in the PRC.
IV. Analysis of financial performance for the three months ended March 31, 2008
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months ended March 31,
Percentage Percentage
2008 of Revenue 2007 of Revenue Growth Rate
------------ ------------ ------------ ------------ ------------
Revenue $ 11,717,045 100.00% $ 7,233,768 100.00% 61.98%
Cost of revenue 5,909,768 50.44% 3,934,849 54.40% 50.19%
------------ ------------
Gross profit 5,807,277 49.56% 3,298,919 45.60% 76.04%
------------ ------------
Operating expenses:
Selling expenses 337,792 2.88% 147,883 2.04% 128.42%
General and administrative 815,793 6.96% 1,306,086 18.06% -37.54%
------------ ------------
Total operating expenses 1,153,585 9.85% 1,453,969 20.10% -20.66%
------------ ------------
Income from operations 4,653,692 39.72% 1,844,950 25.50% 152.24%
------------ ------------
Non-operating income (expenses):
Interest income - 13,775 0.19% -100.00%
Interest expense (45,273) -0.39% (56,899) -0.79% -20.43%
Other income - 572,213 7.91% -100.00%
------------ ------------
Total non-operating income (45,273) -0.39% 529,089 7.31% -108.56%
(expense) ------------ ------------
Income before taxes 4,608,419 39.33% 2,374,039 32.82% 94.12%
Income tax expense 417,878 3.57% -
------------ ------------
Net income $ 4,190,541 35.76% $ 2,374,039 32.82% 76.52%
------------ ------------
Comprehensive income - foreign 1,745,242 14.89% 216,416 2.99% 706.43%
currency translation adjustments
------------ ------------
Comprehensive income $ 5,935,783 50.66% $ 2,590,455 35.81% 129.14%
------------ ------------
13
Basic and Diluted Earnings Per
Share $ 0.112 $ 0.065 72.06%
------------ ------------
Basic and Diluted Weighted 37,278,938 36,337,958
Average Shares Outstanding ------------ ------------
Revenues
Revenue for the three months ended March 31, 2008 is approximately $11.72
million or an increase of 61.98% compared to $7.23 million of the fist quarter
of 2007. This dramatic improvement in revenue is due to the following elements:
on the demand side, in addition to the strong Chinese economy, the demands for
medicine are increasing; on the supply side, our output has been expanded to
meet the increased market demands. We are increasing our marketing efforts for
our products and have widened our distribution channels. Our older products have
been well-accepted by customers. In the first quarter of 2008, Pusen OK
contributed approximately $1.89 million of our revenue, which was 16.17% of the
total net revenues, an increase of 99% or $941 thousand when compared to the
same period of 2007. The growth is mainly due to a $5.6 million contract from a
major distributor at the beginning of 2008. Also, we broadened our market
channels and because of the severe snow storms that hit central and south China
from middle January 2008, there was a dramatic increase of flu, cerebrovascular
and cardiovascular diseases. Pusen Ok is used to temporarily relieve runny nose,
watery eyes, fever, headache, soar throat, pain of arthritis, and muscular
arches. In the first quarter of 2008, sales from one of our other older
products, aFGF, reached $1.34 million, an increase of 35%, compared to $1
million of the first quarter of 2007.
Some of the other older products that have greatly increased in the three months
ended March 31, 2008 are: Buflomedil Hydrochloride with an increase of 197.77%,
Gastrodin with an increase of 69.97%, Cefaclor with an increase of 63.86%,
Neurotrophicpetide with an increase of 53.95%, and Andrographolide with an
increase of 23.09%. Products which had been introduced in 2006 are now in the
mature stage. Revenues from these products launched in 2006 contributed
approximately $2.12 million to the total increase of revenues for this period,
among which, Ozagrel contributed approximately $865 thousand. Finally, the new
products that have been introduced last year contributed approximately $1.25
million to the total increase in revenues this year, among which Granisetron
hydrochloride contributed $759 thousand, and Alginic Sodium Diester contributed
$500 thousand to the total increase.
Cost of Revenue
Cost of revenue for the three months ended March 31, 2008 was approximately
$5.91 million, which was 50.44% of revenue for the same period. The cost for the
three months ended March 31, 2007 was $3.93 million, which is an increase of
$1.97 million or 50.19%, this was primarily due to the increase in sales volume
this year.
Gross Profit
The gross margin for the first quarter of 2008 has reached 49.56%, gross profit
for the three months ended March 31, 2008 has reached approximately $5.80
million, which has increased by about $2.51 million or 76.04%, when compared to
the three months ended March 31, 2007 to $3.30 million, the gross margin is
45.60%. The improved profit was due to the substantial increase in revenues and
reduce in product expenses in this period.
14
Selling Expenses
Selling expenses for the three months ended March 31, 2008 have increased to
about $338 thousand or 2.88% of the total revenue, which is an increase of
128.42% from $147 thousand or 2.04% of the total revenue for the three months as
of March 31, 2007. Due to our attempt to broaden our market share further, we
have invested heavily in the marketing of our products, which has increased
traveling expenses, office expenses and salaries.
General & Administrative Expenses
General and administrative expenses incurred in the three months ended March 31,
2008 are about $816 thousand which represents approximately 6.96% of the total
revenue. G&A expense has decreased by $490,293, or 37.54% as compared to the
three months ended March 31, 2007. This was mainly due to the improvement on
accounts receivable collection, lower allowance for doubtful account compared to
the same period in 2007, and the amount of salaries, legal services, accounting
services, and investment consulting services. We have also seen an increase in
intangible assets, which has increased amortization expense.
Income from Operations
Income from operations has increased by approximately $2.81 million to
approximately $4.65 million, which is an increase of 152.24% from the three
months ended March 31, 2007. This is a combined result of the increase in sales
and reduction in general and administrative expenses.
Interest Expense
Interest expense has decreased by $11,626 or 20.43% to $45,273 ended March 31,
2008. This is due to the payment of the money borrowed from the former
shareholders.
Income Tax Expense
We have accrued $ 417,878 income tax, or 3.57% of revenue in this quarter. We
have been granted a "tax holiday" granting a favorable rate of 50% of the tax
rates in effect during fiscal 2008 through 2010 as determined by the PRC
government and the regional tax authorities. This year we accrue our tax at the
rate of 9%.
Net Income
The net income as of March 31 2008 has increased by 1.82 million or 76.52% to
$4.19 million, compared to $2.37million for the corresponding period of 2007.
There are two reasons that contributed to the growth. One is the increase of
revenue and gross profit, the other is the decrease of G&A expense.
15
V. Analysis of financial performance for the three months ended March 31, 2008
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended March 31,
-------------------------------
2008 2007
----------- -----------
(Restated)
Cash Flows from Operating Activities:
Net income $ 4,190,541 $ 2,374,039
Depreciation and amortization 162,779 100,063
Gain on sale of intangibles -- (569,398)
Changes in assets and liabilities:
Trade accounts receivable (5,343,190) (1,728,236)
Other receivables (44,977) (739,783)
Advances to suppliers 1,275,939 (1,095,219)
Inventory 234,072 (1,092,813)
Deferred offering costs -- 59,743
Trade accounts payable 275,053 247,713
Accrued expenses (7,001) 27,960
Accrued taxes payable 738,767 78,756
Other payables (46,030) 88,814
Advances from customers 85,325 6,571
----------- -----------
Net Cash from Operating Activities 1,521,278 (2,241,790)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (6,994) (2,360)
Proceeds from the sale of intangibles -- 38,453
Purchase of intangible assets (418,079) --
Advances for purchase of intangible assets (1,918,791) 836,404
----------- -----------
Net Cash from Investing Activities (2,343,864) 872,497
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and
warrants -- 3,797,183
Payments of short term notes payable (376,271) --
Related party payables/receivables -- (138,860)
----------- -----------
Net Cash from Financing Activities (376,271) 3,658,323
----------- -----------
Effect of Exchange Rate Changes on Cash 50,539 5,247
----------- -----------
Net Change in Cash (1,148,318) 2,294,277
----------- -----------
Cash and Cash Equivalents at Beginning of
Period 1,830,335 656,441
----------- -----------
Cash and Cash Equivalents at End of Period $ 682,017 $ 2,950,718
----------- -----------
16
As of March 31, 2008, the cash and cash equivalents balance reached $682,017, or
1.35% of total assets, while the amount was $2,950,719 or 8.36% of total assets
for the three months ended March 31, 2007.
Net cash from operating activities has increased by $ 3,763,068 or 167.86% to
$1,521,278 in the three months ended March 31, 2008, compared to negative
$2,241,790 during the same time in the prior year. This improvement came from
the increased net income, and an improvement on collection of trade accounts
receivables.
Cash outflows from investing activities were $2,343,864 as of March 31 2008.
This is due to the purchase of intangible assets and fixed assets which cost the
company $418,079 and $6,994 respectively, as well as advances for purchase of
intangibles in the amount of $1,918,791.
Cash used in financing activities were $376,271 for the first quarter ended
March 31 2008. The main reason is that the note to former shareholders of $376,
271 was paid off. For the same time for 2007, the cash from financing activities
was $3,658,323; this is due to the completion of an offering priced at $1.70 per
unit consisting of one share of common stock and a warrant to purchase one-half
of a share of common stock at an exercise price of $2.38 per share. We received
gross proceeds in the aggregate amount of $4,259,900. The net proceeds, after
deduction of related offering expenses of $462,717 amounted to $3,797,183. We
issued an aggregate of 2,505,882 shares of common stock and issued three-year
warrants to purchase an aggregate of 1,252,941 shares of common stock to 17
accredited investors. In December 2007, we received proceeds of $119,000 upon
the exercise of warrants to purchase 50,000 shares of common stock. The
remaining warrants issued in conjunction with the offering to buy 1,202,941
shares of common stock have not been exercised at December 31, 2007.
VII. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements.
VIII. Recently Enacted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2
which extended the effective date for certain nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15, 2008. The
Company does not expect the adoption of SFAS No. 157 to have a material impact
on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect the
17
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.
IX. Conclusion
The overall performance during the three months ended March 31, 2008 was
outstanding. Revenue has increased by 61.98%, gross profit by 76.04%, net income
by 76.52% and EPS by 72.06%, compared to the three months ended March 31, 2007.
In order to maintain our growth and profitability in the future, we must
continue to focus our efforts on marketing and R&D. By distributing our product
to a larger and more varied customer base, we will organically increase revenue
and through massive R&D investment, we will increase our product line.
18
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
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 - Defaults upon Senior Securities
Not Applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
19
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: April 30, 2008 By: /s/ Zhilin Li
------------------------
Zhilin Li
Chief Executive Officer,
President and Director
Dated: April 30, 2008 By: /s/ Xinhua Wu
----------------------
Xinhua Wu
Chief Financial Officer,
and Director