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, 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 March 31, 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
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2007
and December 31, 2006 (unaudited)............................2
Condensed Consolidated Statements of Operations
and Comprehensive Income- Three months ended
March 31, 2007 and 2006 (unaudited).........................3
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2007 and 2006 (unaudited)......4
Notes to Condensed Consolidated Financial
Statements (unaudited)......................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................7
Item 3. Controls and Procedures.....................................15
Part II Other Information
Item 1 Legal proceedings ..........................................15
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds............................................15
Item 3 Defaults upon senior securities.............................15
Item 4 Submission of matters to a vote of security holders.........16
Item 5 Other information...........................................16
Item 6. Exhibits....................................................16
Signatures....................................................................17
Item 1 Financial Statements
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2007 2006
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,950,719 $ 656,441
Trade accounts receivable, less allowance for doubtful
accounts of $2,603,164 and $1,562,494, respectively 13,956,681 12,101,979
Other receivables, less allowance for doubtful
accounts of $29,244 and $27,517, respectively 1,634,790 355,554
Deferred offering costs -- 59,390
Advances to suppliers 2,538,017 2,255,877
Inventory 11,476,631 10,277,887
----------- -----------
Total Current Assets 32,556,838 25,707,128
----------- -----------
Property and equipment, net of accumulated depreciation of
$713,323 and $619,649, respectively 2,660,818 2,725,173
Intangible assets, net of accumulated amortization of
$192,778 and $184,175, respectively 59,208 65,344
Deferred tax assets 16,901 16,736
----------- -----------
Total Non-current Assets 2,736,927 2,807,253
----------- -----------
TOTAL ASSETS $35,293,765 $28,514,381
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 735,664 $ 477,291
Accrued expenses 133,317 104,216
Accrued taxes payable 248,139 167,419
Other payables 112,828 185,096
Advances from customers 149,870 141,871
Accounts payable -related parties 45,544 22,650
Short-term notes payable 6,598,260 6,533,649
----------- -----------
Total Current Liabilities 8,023,622 7,632,192
----------- -----------
Research and development commitments 32,296 31,980
----------- -----------
Total Liabilities 8,055,918 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 880,287 663,871
Retained earnings 14,760,675 12,386,636
----------- -----------
Total Stockholders' Equity 27,237,847 20,850,209
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,293,765 $28,514,381
----------- -----------
See the accompanying notes to the condensed consolidated financial statements.
2
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months
ended March 31,
----------------------------
2007 2006
------------ ------------
Revenue $ 7,233,768 $ 4,732,991
Cost of revenue 3,934,849 2,526,020
------------ ------------
Gross profit 3,298,919 2,206,971
------------ ------------
Operating expenses:
Selling expenses 147,883 88,030
General and administrative 1,380,076 264,200
Research and development 836,404 --
------------ ------------
Total operating expenses 2,364,363 352,230
------------ ------------
Income from operations 934,556 1,854,741
------------ ------------
Non-operating income (expenses):
Interest income 13,775 147
Interest expense (56,899) (23,799)
Other income 1,482,607 22,636
------------ ------------
Total non-operating income (expense) 1,439,483 (1,016)
------------ ------------
Income before taxes 2,374,039 1,853,725
Income tax expense -- (234,789)
------------ ------------
Net income $ 2,374,039 $ 1,618,936
------------ ------------
Comprehensive income - foreign currency translation adjustments 216,416 59,085
------------ ------------
Comprehensive income $ 2,590,455 $ 1,678,021
------------ ------------
Basic and diluted earnings per common share $ 0.07 $ 0.05
------------ ------------
Weighted-average common shares outstanding 36,337,958 34,723,056
------------ ------------
See the accompanying notes to the condensed, consolidated financial statements.
3
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three For the three
months ended months ended
March 31, March 31,
2007 2006
----------- -----------
Cash Flows from Operating Activities:
Net income $ 2,374,039 $ 1,618,936
Depreciation and amortization 100,063 85,140
Changes in assets and liabilities:
Trade accounts receivable (1,728,236) (2,541,404)
Other receivables (1,309,181) (296,864)
Advances to suppliers (258,815) 401,068
Inventory (1,092,813) (765,072)
Deferred tax assets -- (25,892)
Deferred offering costs 59,743 --
Trade accounts payable 247,713 728,040
Accrued expenses 27,960 16,465
Accrued taxes payable 78,756 372,256
Other payables 88,814 (44,269)
Advances from customers 6,571 (264)
----------- -----------
Net Cash Used in Operating Activities (1,405,386) (451,860)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (2,360) (22,074)
Sale of technology 38,453 --
Purchase of intangible assets -- (2,472)
----------- -----------
Net Cash (Used) by Investing Activities 36,093 (24,546)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 3,797,183 --
Related party payables/receivables (138,860) --
----------- -----------
----------- -----------
Net Cash Proceeds from Financing Activities 3,658,323 --
----------- -----------
Effect of Exchange Rate Changes on Cash 5,247 90,110
----------- -----------
Net Change in Cash 2,294,277 (386,296)
----------- -----------
Cash and Cash Equivalents at Beginning of Period 656,441 461,220
----------- -----------
Cash and Cash Equivalents at End of Period $ 2,950,718 $ 74,924
----------- -----------
See the accompanying notes to the condensed consolidated financial statements.
4
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 footnote 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 three months ended March 31, 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 March 31, 2007 potentially dilutive
securities includes warrants outstanding to purchase a total of 1,252,941 shares
of Company common stock. 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 March 31, 2007.
There are no anti-dilutive securities outstanding at March 31, 2006.
Recently Issued Accounting Pronouncements - In September 2006, the FASB issued
Statement of Financial Accounting Standards 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
5
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:
March 31, December 31,
2007 2006
----------- -----------
Raw materials $ 9,370,245 $ 8,458,181
Work in progress 2,004,794 1,579,410
Finished goods 101,592 240,296
----------- -----------
Total Inventory $11,476,631 $10,277,887
----------- -----------
NOTE 3 - INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("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.
According to federal law in the Peoples 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 Peoples Republic of
China 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.
6
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 March 31, 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 the Company is required to file a registration statement including
said shares with the Securities and Exchange Commission. The registration
statement was filed on March 30, 2007 within the 60 day period prescribed by the
registration rights agreement.
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 in the accompanying statement of
operations and comprehensive income. Cost of the technology includes transfer
(sales) tax of $73,990, which has been recorded as part of general and
administrative expenses and $836,404, which is recorded as research and
development expense. Together, the two contracts included a combined deposit of
$38,453 paid upon signing of the contract, $739,984 payable upon transfer of
technological documentation and $701,292 payable upon completion of the transfer
of the technological process. A receivable for $1,441,276 has been booked in
other receivables.
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.
7
This filing contains forward-looking statements. The words "anticipated,"
"believe," "expect", "plan," "intend," "seek," "estimate," "project," "could,"
"may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect China Pharma management's current views with respect to
future events and financial performance and involve risks and uncertainties,
including but not limited to changes in general economic and business
conditions, changes in foreign, political, social, and economic conditions,
regulatory initiatives and compliance with governmental regulations, the ability
to increase market share, and various other matters, many of which are beyond
China Pharma's control. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated or
otherwise indicated. Consequently, all of the forward-looking statements made in
this filing are qualified by these cautionary statements and there can be no
assurance of the actual results or developments.
I. The three months ended March 31, 2007 in brief
During the first quarter of 2007, China Pharma continued to show sound growth
and outstanding financial performance. For the three months ended March 31,
2007, the Company's total revenue increased by over 53% to a record high of $7.2
million compared to $4.7 million for the three months ended March 31, 2006. This
rapid growth was due to increased sales of existing products and sales of
products that were developed during the first quarter of 2007. 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 three months ended March 31, 2007 improved
compared to the three months ended March 31, 2006. Gross profit increased 49.5%
to $3.2 million and net income, not including foreign currency translation
adjustment, increased 46.6% to $2.3 million. This growth was attributable to the
development of new product processes and new marketing activities. In addition,
China Pharma's income increased due to new drug technologies.
For the three months ended March 31, 2007, earnings per common share increased
40% to US$0.07 per share compared to US$0.05 per share for the three months
ended March 31, 2006. China Pharma started working closely with biological,
chemical and medical 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 for 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 2006, we
launched two new products, Ozagrel Sodium for Injection and Gastrodin Injection.
8
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
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 three months
ended March 31, 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 20 provinces, sovereignties, and autonomous regions. We
have 16 sales offices and approximately 550 proxy agents throughout the PRC. The
main channels we use to deliver our products are as follows: (1) Distribution
system (Proxy Agentsy); (2) Direct sale system to hospitals; (3) Direct
representation in clinic hospitals through medical representatives; and (4)
Distribution of products to local medical companies through logistics 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.
9
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.
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 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 U.S. dollar. Exchange rate fluctuations
may adversely affect the value, in U.S.dollar terms, of our net assets and
income derived from its operations in the PRC.
IV. Analysis to the financial performance
The following table presents the operations of the Company for the three months
ended March 31, 2007 and March 31, 2006; both are denominated in U.S. dollars.
10
For the three months
ended March 31,
As a As a Comparative
percentage percentage variance
2007 of revenue 2006 of revenue percentage
------------- ------------- ------------- ------------- -----------
Revenue $ 7,233,768 100.00% $ 4,732,991 100.00% 52.84%
Cost of revenue 3,934,849 54.40% 2,526,020 53.37% 55.77%
------------- -------------
Gross profit 3,298,919 45.60% 2,206,971 46.63% 49.48%
------------- -------------
Operating expenses:
Selling expenses 147,883 2.04% 88,030 1.86% 67.99%
General and administrative 1,380,076 19.08% 264,200 5.58% 422.36%
Research and development 836,404 11.56% -
------------- -------------
Total operating expenses 2,364,363 32.69% 352,230 7.44% 571.26%
------------- -------------
Income from operations 934,556 12.92% 1,854,741 39.19% -49.61%
------------- -------------
Non-operating income (expenses):
Interest income 13,775 0.19% 147 0.00% 9270.75%
Interest expense (56,899) -0.79% (23,799) -0.50% 139.08%
Other income 1,482,607 20.50% 22,636 0.48% 6449.77%
------------- -------------
Total non-operating income (expense) 1,439,483 19.90% (1,016) -0.02% -141781.40%
------------- -------------
0.00%
Income before taxes 2,374,039 32.82% 1,853,725 39.17% 28.07%
Income tax expense - 0.00% (234,789) -4.96% -100.00%
------------- -------------
Net income $ 2,374,039 32.82% $ 1,618,936 34.21% 46.64%
------------- -------------
Comprehensive income -
foreign currency translation adjustments 216,416 2.99% 59,085 1.25% 266.28%
------------- -------------
Comprehensive income $ 2,590,455 35.81% $ 1,678,021 35.45% 54.38%
------------- -------------
Revenues
Revenues increased to approximately $7.2 million for the three months ended
March 31, 2007 as compared to approximately $4.7 million for the three months
ended March 31, 2006. This represents an increase of approximately $2.5 million
or 52.8%. This increase was due largely to the development and sales of new
products for the three months ended March 31, 2007. The products of Ozagrel
Sodium for Injection and Gastrodin Injection comprised a large portion of total
sales. Marketing for these new products has also further increased market share.
In addition, a distribution network has been further developed over a majority
of the 29 provinces or regions in China. Further, with the improvement of
production capacity, a significant increase in sales has been made possible by
an increased yield capacity, both in new and existing products.
Cost of revenue
Cost of revenue for the three months ended March 31, 2007 was approximately $3.9
million or 54.5% of revenues as compared to $2.5 million or 53.4% of revenues
for the three months ended March 31, 2006. The increased cost of sales was due
primarily to the increased revenue for the three months ended March 31, 2007.
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Gross profit
Gross profit for the three months ended March 31, 2007 was approximately $3
million or 45.6% of revenues as compared to $2.2 million or 46.6% of revenues
for the three months ended March 31, 2006. The gross profit for three months
ended March 31, 2007 was higher than that for corresponding period by $1.1
million, representing a 49.5% increase. The increase was primarily due to the
higher revenue for the three months ended March 31, 2007.
Selling Expenses
Selling expenses have increased due to an increase in distribution cost.
Relative to the total operating expenses, selling expenses approximately
accounted for 6.3% of total operating expenses for the three months ended March
31, 2007.
General & Administrative Expenses
General and administrative expenses increased from approximately $0.3 million
for the three months ended March 31, 2006 to approximately $1.3 million for the
three months ended March 31, 2007. Two major factors caused the increase. Due to
the nature of pharmaceutical industry in China, the collection cycle of trade
receivables is relatively longer. Accordingly, an increased bad debt provision
has been accrued with the increase of trade receivables. For the three months
ended March 31 2007, the amount accrued for bad debt provision was $1 million as
opposed to a small amount accrued for the three months ended March 31, 2006. For
the three months ended March 31 2007, R&D expense was comprised of a variety of
pharmaceutical products such as Cardiovascular and Cerebrovascular drugs,
Natural Herb drugs, Diuretics drugs, Liver protecting drugs, inhibitor drugs and
others. In the next two to three years, our company will continue focusing on
R&D for sustainable development of product varieties.
Income from operations
There was a decrease in income from operations from approximately $1.8 million
for the three months ended March 31, 2006 to approximately $0.9 million for the
three months ended March 31, 2007. Although there was an increase in revenue
from the development of new products, the longer collection cycle of trade
receivables mentioned above offset the increase in revenue and resulted in a
decrease in income from operations.
Other income
The amount of other income increased dramatically for the three months ended
March 31, 2007. It was approximately $1,482,609 or 26.5% of revenue which was an
increase of 6,450% compared to $22,636 or 0.5% of revenues for the corresponding
period in 2006. This large increase occured because the Company sold two new
drug technologies to third parties after the Company considered that selling
these specific new drug technologies would be more effective than pursuing
government approval and production development.
Income tax expense
For the three months ended March 31, 2007, the company had no tax expense. The
People's Republic of China granted the company a "tax holiday" that allowed the
Company to be exempt from income taxes in 2007.
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Net Income
Net income, excluding the effect of foreign currency translation, was $2,374,039
for the three months ended March 31, 2007. It was 46.5% higher than the net
income of $1,618,936 for the three months ended March 31, 2006. The
corresponding growth in operations resulting in a sales increase caused the cost
of sales and related expenses as a percentage of total sales to increase. Net
income was further increased due to the transfer of new drug technologies.
V. Analysis of the financial position: Liquidity and Capital Resource As of
March 31, 2007, the company had cash and cash equivalents of $2,950,719. This
represents a 350% increase over the December 31, 2006 balance of $656,441.
During the three months ended March 31 2007, the proceeds from sale of common
stock and warrants increased by approximately $3,797,183. (Figure 2)
For the three For the three
months ended months ended
March 31, March 31,
2007 2006
-------------- -------------
Cash Flows from Operating Activities: $(1,405,386) $ (451,860)
Cash Flows from Investing Activities: 36,093 (24,546)
Cash Flows from Financing Activities: 3,658,323 --
Effect of Exchange Rate Changes on Cash 5,247 90,110
Cash and Cash Equivalents at Beginning of Period 656,441 461,220
Cash and Cash Equivalents at End of Period $ 2,950,718 $ 74,924
Net cash used in operating activities was $1,405,386 for the three months ended
March 31, 2007, nearly three times more than the $ 451,860 used for the period
ended at March 31, 2006. This large increase was due to the increase in other
receivable and inventory.
Net cash used in investing activities, for purchase of property and equipment
decreased to $2,360 at the end of March 2007.
Net cash proceeds for financing activities has increased to $3,797,183 as of
March 31, 2007. The increase was primarily due to the proceeds from sale of
common stock and warrants.
VI. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements in the Company.
VII. Commitments
At March 31, 2007, we had no material commitments for capital expenditures other
than for those expenditures incurred in the ordinary course of business.
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
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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.
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. SFAS 155 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
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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 our 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
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 our 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.
IX. Conclusion
The overall performance during the three months ended March 31, 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, China Pharma will
continue to actively pursue the development and distribution of high-quality
products to the market.
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
On February 1, 2007, we completed an offering pursuant to a Subscription and
Registration Rights Agreement with 17 accredited investors (the "Investors") in
connection with a private placement of 2,505,882 shares of the Company's common
stock at $1.7 per share (the "Second Round Financing"). Pursuant to the
Agreement, the Investors also received three-year warrants to purchase an
aggregate of 1,252,941 shares of Company's common stock at $2.38 per share. This
issuance was made in reliance on Section 4(2) of the Act and was made without
general solicitation or advertising.
Item 3 - Defaults upon Senior Securities
Not Applicable.
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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.
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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: May 15, 2007 By: /s/ Zhilin Li
-----------------------
Zhilin Li
Chief Executive Officer,
President and Director
Dated: May 15, 2007 By: /s/ Xinhua Wu
-----------------------
Xinhua Wu
Chief Financial Officer,
and Director
17