UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Quarterly Period Ended September 30, 2008
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Transition Period from _________ to _________
Commission file number: 000-29523
China Pharma Holdings, Inc.
(Exact name of registrant as specified on its charter)
Delaware 73-1564807
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2nd Floor, No. 17, Jinpan Road, Haikou, Hainan Province, China 570216
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(Address of principle executive offices) (Zip Code)
0086-898-66811730 (China)
-------------------------
(Registrant's telephone number, including area code)
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 large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes |_| No |X|
As of September 30, 2008, 42,278,938 shares of China Pharma Holdings, Inc.
common stock, par value $0.001 per share, were outstanding.
China Pharma Holdings, Inc.
TABLE OF CONTENTS
Part I Financial Information 1
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of September 30, 2008
and December 31, 2007 (unaudited) 1
Condensed Consolidated Statements of Operations and Comprehensive
Income for the Three Months Ended September 30, 2008
and 2007 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2008 and 2007 (unaudited) 3
Notes to Condensed Consolidated Financial Statements (unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
Part II Other Information 24
Item 1 Legal Proceedings 24
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3 Defaults upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 25
Item 6 Exhibits 25
Signatures 26
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2008 2007
----------- -----------
(Restated)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,838,678 $ 1,830,335
Trade accounts receivable, less allowance for doubtful
accounts of $4,124,577 and $2,440,852, respectively 31,670,231 18,572,976
Other receivables, less allowance for doubtful
accounts of $98,151 and $43,908, respectively 189,794 413,596
Advances to suppliers 2,276,440 2,757,320
Inventory 14,542,799 14,448,771
----------- -----------
Total Current Assets 54,517,942 38,022,998
----------- -----------
Non-current Assets:
Property and equipment, net of accumulated depreciation of
$1,350,913 and $1,003,802, respectively 2,619,965 2,625,216
Intangible assets, net of accumulated amortization of
$465,132 and $221,715, respectively 2,432,253 2,063,252
Advances for purchases of intangible assets 6,840,631 807,345
Deferred tax assets 413,890 187,509
----------- -----------
Total Non-current Assets 12,306,739 5,683,322
----------- -----------
TOTAL ASSETS $66,824,681 $43,706,320
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 505,704 $ 297,299
Accrued expenses 47,450 261,301
Accrued taxes payable 946,948 311,009
Other payables 130,652 86,161
Advances from customers 674,135 261,583
Short-term notes payable -- 2,693,428
----------- -----------
Total Current Liabilities 2,304,889 3,910,781
----------- -----------
Research and development commitments 36,381 34,181
----------- -----------
Total Liabilities 2,341,270 3,944,962
----------- -----------
Stockholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 42,278,938 and 37,278,938 shares issued and
outstanding, respectively 42,279 37,279
Additional paid-in capital 21,062,586 11,678,606
Foreign currency translation adjustment 5,693,059 2,839,304
Retained earnings 37,685,487 25,206,169
----------- -----------
Total Stockholders' Equity 64,483,411 39,761,358
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $66,824,681 $43,706,320
----------- -----------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months For the nine months
ended September 30, ended September 30,
---------------------------- ----------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Revenue $ 12,610,642 $ 8,293,497 $ 35,606,490 $ 24,097,521
Cost of revenue 6,494,266 4,413,052 17,730,026 13,018,566
------------ ------------ ------------ ------------
Gross profit 6,116,376 3,880,445 17,876,464 11,078,955
------------ ------------ ------------ ------------
Operating expenses:
Selling expenses 529,432 591,193 1,323,854 896,128
General and administrative 427,399 328,743 1,226,888 927,162
Research and development 5,581 5,941 42,807 5,942
Bad debt expense, net of recoveries 459,500 (169,095) 1,539,313 910,718
------------ ------------ ------------ ------------
Total operating expenses 1,421,912 756,782 4,132,862 2,739,950
------------ ------------ ------------ ------------
Income from operations 4,694,464 3,123,663 13,743,602 8,339,005
------------ ------------ ------------ ------------
Non-operating income (expenses):
Interest income 26,224 4,400 31,259 29,808
Interest expense (34,629) (50,857) (130,342) (166,698)
Other (expense) income (9,588) 7,549 (87,038) 582,827
------------ ------------ ------------ ------------
Total non-operating income (expense) (17,993) (38,908) (186,121) 445,937
------------ ------------ ------------ ------------
Income before taxes 4,676,471 3,084,755 13,557,481 8,784,942
Income tax expense 424,993 -- 1,078,163 --
------------ ------------ ------------ ------------
Net income $ 4,251,478 $ 3,084,755 $ 12,479,318 $ 8,784,942
============ ============ ============ ============
Comprehensive income - foreign currency
translation adjustments 133,713 570,646 2,853,755 1,222,329
------------ ------------ ------------ ------------
Comprehensive income $ 4,385,191 $ 3,655,401 $ 15,333,073 $ 10,007,271
============ ============ ============ ============
Basic and Diluted Earnings Per Share $ 0.10 $ 0.08 $ 0.32 $ 0.24
Basic and Diluted Weighted Average
Shares Outstanding 42,278,938 37,228,938 39,523,464 36,935,208
============ ============ ============ ============
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 nine months ended
September 30,
----------------------------
2008 2007
------------ ------------
Cash Flows from Operating Activities: (Restated)
Net income $ 12,479,318 $ 8,784,942
Depreciation and amortization 505,595 322,098
Compensation paid with warrants 120,042 --
Gain on sale of intangibles -- (572,446)
Changes in assets and liabilities:
Trade accounts receivable (11,610,177) (4,440,513)
Other receivables 246,329 223,329
Advances to suppliers 651,833 (2,504,684)
Inventory 855,485 (2,965,836)
Deferred tax assets (209,434) --
Deferred offering costs -- 60,487
Trade accounts payable 184,627 279,420
Accrued expenses (138,021) 83,034
Accrued taxes payable 602,480 --
Other payables (48,535) (134,647)
Advances from customers 386,922 47,448
------------ ------------
Net Cash from Operating Activities 4,026,464 (817,368)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (125,753) (77,313)
Purchase of intangible assets (428,641) (1,993,288)
Advances for purchases of intangibles (5,856,412) --
------------ ------------
Net Cash from Investing Activities (6,410,806) (2,070,601)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 9,268,938 3,797,183
Payments of short term notes payable (2,814,744) --
------------ ------------
Net Cash Proceeds from Financing Activities 6,454,194 3,797,183
------------ ------------
Effect of Exchange Rate Changes on Cash (61,509) 149,995
------------ ------------
Net Change in Cash 4,008,343 1,059,209
------------ ------------
Cash and Cash Equivalents at Beginning of Period 1,830,335 656,441
------------ ------------
Cash and Cash Equivalents at End of Period $ 5,838,678 $ 1,715,650
------------ ------------
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 130,342 $ 115,841
Cash paid for income taxes 1,289,596 --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
CHINA PHARMA HOLDINGS, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2008
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of China
Pharma Holdings, Inc. (the Company) and its subsidiaries were prepared pursuant
to the rules and regulations of the United States Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. Management of the Company (Management) believes
that the following disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Form 10-K 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 nine months ended September 30, 2008 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2008.
Organization - Onny Investment Limited (Onny) was incorporated in the British
Virgin Islands on January 12, 2005 and was a development stage enterprise
through June 15, 2005. On June 16, 2005, Onny acquired all of the outstanding
shares of Hainan Helpson Medical & Biotechnology Co., Ltd, a privately held
Chinese joint venture (Helpson) and emerged from the development stage.
On October 19, 2005, Onny was reorganized as a wholly owned subsidiary of China
Pharma Holdings, Inc., formerly TS Electronics (the Company).
Nature of Operations - Helpson manufactures and markets several Western and
Chinese medicines sold mainly to hospitals and private retailers in The People's
Republic of China (PRC), through its marketing department located in Hainan
Province. There are also nine other offices, with sales representatives in other
provinces and cities throughout the PRC. Helpson's other operating activities
include biochemical products, health products, and cosmetics.
Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Basic and Diluted Earnings per Common Share - Basic and diluted earnings per
common share are computed by dividing net income by the weighted-average number
of common shares outstanding. As of September 30, 2008 and 2007 potentially
dilutive securities includes warrants outstanding to purchase a total of
2,652,941 and 1,252,941 shares, respectively, of Company common stock with
4
exercise prices ranging from $2.38 to $3.50 per share. These have not been
included in the computation of earnings per share as their effect is
antidilutive.
Recently Enacted Accounting Standards - In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In February
2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which extended the
effective date for certain nonfinancial assets and nonfinancial liabilities to
fiscal years beginning after November 15, 2008. The adoption of the portions of
SFAS No. 157 that were not postponed by (FSP FIN) No. 157-2 did not have a
material impact on our consolidated financial statements. The Company does not
expect the adoption of the postponed portions of SFAS No. 157 to have a material
impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations", and
SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements".
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a non-controlling interest in a subsidiary should be reported as equity in
the consolidated financial statements, consolidated net income shall be adjusted
to include the net income attributed to the non-controlling interest and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. SFAS No. 141(R) and SFAS No. 160 are not expected to have a material
impact on our results of operations or financial position.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities", an amendment of SFAS No. 133. SFAS 161
applies to all derivative instruments and non-derivative instruments that are
designated and qualify as hedging instruments pursuant to paragraphs 37 and 42
of SFAS 133 and related hedged items accounted for under SFAS 133. SFAS 161
requires entities to provide greater transparency through additional disclosures
about how and why an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for under SFAS 133 and its
related interpretations, and how derivative instruments and related hedged items
affect an entity's financial position, results of operations, and cash flows.
SFAS 161 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2008. The Company does not expect SFAS 161 to have a
material impact on its results of operations or financial position.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS 162 will provide framework for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities. SFAS 162 will be effective 60 days following the
5
Securities and Exchange Commission's approval of the Public Company Accounting
Oversight Board (PCAOB) amendments to AU Section 411. The Company does not
expect the adoption of SFAS 162 will have a material impact on its financial
condition or results of operation.
Restatement of Financial Statements - Subsequent to March 2008, the Company
realized that the December 31, 2007 consolidated financial statements needed to
be revised to correct an overstatement of advances paid to suppliers in amount
of $ 724,628, an overstatement of other receivables in amount of $ 82,717, and
an understatement of advance for purchase of intangible assets in the amount of
$ 807,345. The Company concluded that advances made for purchase of intangible
assets should be treated as a long-term asset. This correction was not
considered material in accordance with SAB 108 for the year ended December 31,
2007 but is considered significant. As a result, the Company corrected the
financial statements for December 31, 2007. The corrected consolidated balance
sheet is included in these financial statements. The correction of the December
31, 2007 financial statements had no effect on the previously reported net
income. The effect of the restatement was as follows:
Reported Restatement As Restated
------------ ------------ ------------
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:
September 30, December 31,
2008 2007
----------- -----------
Raw materials $11,448,741 $12,521,536
Work in progress 21,895 60,404
Finished goods 3,072,162 1,866,831
----------- -----------
Total Inventory $14,542,799 $14,448,771
----------- -----------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
6
September 30, December 31,
2008 2007
----------- -----------
Permit of land use $ 410,888 $ 385,102
Building 1,870,960 1,753,547
Plant, machinery and equipment 1,447,960 1,341,996
Motor vehicle 129,215 37,193
Office equipment 110,834 88,210
Construction in progress 1,021 22,970
----------- -----------
Total 3,970,878 3,629,018
Less: accumulated depreciation (1,350,913) (1,003,802)
----------- -----------
Property and Equipment, net $ 2,619,965 $ 2,625,216
----------- -----------
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets as follows:
Asset Life - years
---------------------------------------- ------------------
Permit of land use 40 - 70
Building 20 - 35
Plant, machinery and equipment 10
Motor vehicle 5 - 10
Office equipment 5
For the nine months ended September 30, 2008 and 2007, depreciation expense was
$303,064 and $202,532, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the costs on patents, trademarks, licenses,
techniques and formulas. Intangible assets have a weighted-average remaining
useful life of approximately 9.0 years. Amortization of intangible assets was
$202,535 and $119,566 for the nine months ended September 30, 2008 and 2007,
respectively.
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 advance made under the line of credit was $2,324,278
at December 31, 2007. The line of credit was renewed during the first quarter of
2008 with due dates of August and September of 2008 with interest payable
monthly at the rate of 7.84%. The line of credit was paid in full on the
maturity dates.
Short Term Notes Payable to Former Shareholders - In January 2006, the Company
converted its dividend payable of $4,402,147 into short-term notes bearing
interest at a rate of 2.25% per annum. The final principal balance of $369,150
was paid in January, 2008. The accrued interest of $213,545 was paid during the
second quarter of 2008.
NOTE 6 - INCOME TAXES
7
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 $35.4 million at September 30, 2008. Those earnings,
as well as the investment in the subsidiaries of approximately $22.8 million are
considered to be indefinitely reinvested and, accordingly, no U.S. federal and
state income taxes have been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the PRC. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practical because of the
complexities associated with its hypothetical calculation; however, unrecognized
foreign tax credits may be available to reduce a portion of the U.S. tax
liability.
On March 16, 2007, the National People's Congress of China passed the new
Enterprise Income Tax Law, (EIT Law), and on December 6, 2007, the State Council
of China issued the Implementation Regulations for the EIT Law which took effect
on January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
unified EIT of 25% on all domestic-invested enterprises and Foreign Invested
Entities, or FIEs, unless they qualify under certain limited exceptions.
The Company is located in a special region, which had a 15% corporate income tax
rate before the new EIT Law. The new EIT Law abolished the preferential
corporate income tax rate in the special region. However, because the Company
was in existence prior to the March 16, 2007 China tax law change, it will
gradually transition to the new 25% tax rate over the next five years starting
on January 1, 2008. The phase-in income tax rate is 18% for 2008, 20% for 2009,
22% for 2010, 24% for 2011, and 25% for 2012 and after. The Company is permitted
to use their remaining tax holiday, which was 0% in 2007 and will be a favorable
income tax rate of 50% of the EIT Rate or 9% 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:
Enterprise Income Tax Rate
Year For China Pharma
-------------- --------------------------
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
8
On May 30, 2008 the Company completed an offering of Units priced at $2.00 per
Unit consisting of one share of Company common stock and a three-year warrant to
purchase one-fourth of one share of Company common stock at an exercise price of
$2.80 per share. The Company issued 5,000,000 shares of common stock and
three-year warrants to purchase 1,250,000 shares of common stock to 17
accredited investors for gross proceeds of $10,000,000. The net proceeds, after
deduction of related offering expenses of $731,062, amounted to $9,268,938. In
addition, the placement agent in the transaction was issued three-year warrants
to purchase 300,000 shares of common stock at an exercise price of $2.98 per
share. The proceeds were allocated to the warrants issued to the investors and
the placement agent based upon their fair values of $1,090,342 and $249,366,
respectively and the balance of the proceeds of $8,952,511 was allocated to the
shares of common stock. The fair value of the warrants, determined using the
Black-Scholes Option Pricing Model, was calculated using the following
assumptions: risk free interest rate of 2.93%, expected dividend yield of 0%,
expected volatility of 62.9% and an expected life of 3 years.
The common shares and the shares underlying the warrants have registration
rights, and the Company was required to file a registration statement including
said shares with the Securities and Exchange Commission. In the event that the
Company did not file a registration statement within 45 days of the closing date
of the offering, or the registration statement is not declared effective within
the 90 or 120 day time periods from the closing date as defined in the
registration rights agreement, or if the Company fails to keep the registration
statement effective, the Company will be required to pay a penalty to each
investor equal to one percent (1%) of the purchase price for each 30 day period.
The Company filed a registration statement with the Securities and Exchange
Commission on July 11, 2008 and it was declared effective August 12, 2008. The
Company has not accrued any penalty under the registration rights agreement but
will evaluate any liability related to the effectiveness of the registration
statement at the end of each reporting period.
On June 24, 2008, the Company issued three-year warrants to purchase 75,000
shares of Company common stock at $2.80 per share and three-year warrants to
purchase 75,000 shares of the Company's common stock at $3.60 per share to a
vendor valued at $90,487. The value was recorded as general and administrative
expense in the accompanying financial statements as of the date of issuance.
Also on June 24, 2008, the Company issued three-year warrants to purchase 25,000
shares of Company common stock at $3.00 per share and three-year warrants to
purchase 25,000 shares of the Company's common stock at $3.50 per share to a
vendor valued at $29,554. The value was recorded as general and administrative
expense in the accompanying financial statements as of the date of issuance.
The fair values of the warrants issued on June 24, 2008, determined using the
Black-Scholes Option Pricing Model, were calculated using the following
assumptions: risk free interest rate of 3.14%, expected dividend yield of 0%,
expected volatility of 61.3% and an expected life of 3 years.
The Company also has outstanding warrants to purchase an aggregate of 1,202,941
shares of Company's common stock at an exercise price of $2.38 per share which
expire on January 29, 2010.
9
NOTE 8 - CONTINGENCIES
Economic environment - Significantly all of the Company's operations are
conducted in the PRC, and therefore the Company is subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and fluctuations in the foreign
currency exchange rate. The Company's results from operations may be adversely
affected by changes in the political and social conditions in the PRC, and by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
In addition, all of the Company's revenue is denominated in the PRC's currency
of Renminbi (RMB), which must be converted into other currencies before
remittance out of the PRC. Both the conversion of RMB into foreign currencies
and the remittance of foreign currencies abroad require approval of the PRC
government.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with China Pharma
Holdings, Inc.'s ("China Pharma" or "the Company) consolidated financial
statements and related notes included elsewhere in this Current Report on Form
10-Q.
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 management's current views with respect to future events and
financial performance and involve risks and uncertainties, including but not
limited to changes in general economic and business conditions, changes in
foreign, political, social, and economic conditions, regulatory initiatives and
compliance with governmental regulations, the ability to increase market share,
and various other matters, many of which are beyond China Pharma's control.
Should one or more of these risks or uncertainties occur, or should underlying
assumptions prove to be incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
Consequently, all of the forward-looking statements made in this filing are
qualified by these cautionary statements and there can be no assurance of the
actual results or developments.
China Pharma Holdings, Inc. is a specialty pharmaceutical company with rapidly
growing profit that develops, manufactures, and markets treatments for a wide
range of high incidence and high mortality conditions in China, including
cardiovascular, central nervous system (CNS), infectious, and digestive
diseases. The Company's cost- effective, high margin business model is driven by
market demand and supported by 8 scalable Good Manufacturing Practice
Regulations (GMP)-certified production lines covering the major dosage forms. In
addition, the Company has a broad and expanding distribution network across more
than 29 provinces, municipalities and autonomous regions and possesses a strong
research and development (R&D) platform from numerous well-established
collaborations with prestigious universities. The Company is registered in
Delaware, USA. Hainan Helpson Medical & Biotechnology Co., Ltd (Helpson),
located in Haikou City, Hainan Province, China, is a wholly owned subsidiary of
Onny Investment Limited, which is wholly owned by China Pharma Holdings, Inc.
10
Strong Revenue Growth and High Margins - For the nine months ended September 30,
2008, the Company generated $35.61 million in revenue from therapeutic sales
compared to $24.10 million over the same period in 2007, an increase of
$11,508,969 or 47.76%. The gross margin achieved by our company was 50.21% of
total revenue for the nine months ended September 30, 2008, which is higher than
the 45.98% of the corresponding period in 2007, and higher than the industry
average gross margin of 34.2%. We are able to compete in the highly fragmented
pharmaceutical industry through our diversified therapeutics line, cost control
and strong sales network. Our experienced management team, market insights and
strong R&D capabilities that enable us to develop and launch new and improved
generic products based on market demand.
Proven Record of Success - We have a proven track record of success. We are a
profitable company with a low cost, high margin business model. We are seeing a
rapid growth in sales with a constant growth in income, due to our focus on the
largest segments of China's pharmaceutical market. We have eight different types
of modern production lines with capacity to meet future demands. We have a
portfolio of over 30 specifications of drugs that focus on the treatment of:
CNS, cardiovascular, cerebrovascular, infectious diseases and other therapeutic
areas of high incidence in China. Among these two are market leaders:
PuSenOK(TM) and Buflomedil hydrochloride for which we were awarded the "National
Key New Product" by the Ministry of Science and Technology of the People's
Republic of China (PRC) with the State Administration of Taxation, Ministry of
Commerce of the PRC, General Administration of Quality Supervision, Inspection
and Quarantine of the PRC, and State Environmental Protection Administration of
China. In addition, our growth strategy is supported by the needs of a dynamic
pharmaceutical industry.
Clear Strategy for Growth - We are part of a rapidly growing industry, in which
we are a leader in generic drugs. Directed by market needs, we combine our
internal R&D with strategic alliances and co-operation, to promote new and
improved products targeting China's most prevalent diseases such as CNS disease,
cardio-/cerebrovascular disease, digestive disease, and infectious disease. In
addition, we produce products in a variety of delivery forms which target
specific patient groups, and research and develop new or improved dosage-forms
of existing products. We have nine drugs on track to launch, including a new
anti-drug-resistance antibiotic which has already passed the PRC State Food and
Drug Administration (SFDA) technical evaluation and entered clinical trials, and
three drugs waiting for SFDA production approval. Through strategic mergers and
acquisition (M&A) and through capitalization of this fragmented market, we will
improve our product portfolio and push our integrated growth; maintain and
develop new marketing channels; and leverage our existing retailing network in
China's newly expanded market to raise our overall market share. The organic
growth of the Chinese pharmaceutical market has already and will continue to
direct the company's development.
I. Summary of nine months ended September 30, 2008
In the nine months ended September 30, 2008, China Pharma continued to display
stable growth and outstanding financial achievement. For the nine months ended
September 30, 2008, the Company's total revenue increased by over 47.76% to
$35.61 million, compared to $24.10 million for the nine months ended September
30, 2007. This rapid growth was due to increased sales of existing products, and
increase in market share of new products.
The operational performance for the nine months ended September 30, 2008 was
clearly improved compared to the nine months ended September 30, 2007. Gross
11
profit increased 61.36% to $17.88 million and net income, not including foreign
currency translation adjustment, increased 42.05% to $12.48 million. This growth
was attributable to increased promotion of sales, and increased efforts in
accounts receivable (A/R) collection. These benefits are from China Pharma's low
cost, high margin business model, and experienced management team, as well as
from R&D which follows market needs.
For the nine months ended September 30, 2008, earnings per common share
increased 32.75% to $0.32 per share compared to $0.24 per share for the nine
months ended September 30, 2007. China Pharma is working closely with various
pharmaceutical research institutions to develop more products to meet customers'
needs. Our focus is to create a steady increase in revenue. We have seen in the
past that a successful strategy is the key to company operation. Full
exploration of the potential of the pharmaceutical domain is essential to our
success.
We have also enhanced internal controls for accounting and reporting. In the
near future, we will develop a more systematic and continuous internal control
system for the long-term development of the company and the benefit of our
stakeholders and prospective investors.
II. Business Overview
China Pharma Holdings, Inc., is one of China's leading pharmaceutical
manufacturers which engages research and development institutions for
market-ready formulas to mass produce. In 2008, we launched a new diuretic
product: Bumetanide; in November 2008, we were granted approval for our new
formula antibiotic to enter clinical trials.
We plan to expand our biotechnology product portfolio. Based on the foundation
established by some of our widely recognized medicine brands such as
Cerebroprotein, for the treatment of memory decline and attention deficit
disorder (ADD), we have offered and will continue to offer a variety of
biological medicines. These products, including the injected hepatocyte
growth-promoting factors, are expected to fuel additional growth in revenue
beyond what Cerebroprotein has provided.
One of our products, Buflomedil Hydrochloride (which includes the raw material,
the injectable form of the product, and tablet form) has received the following
recognitions, awards and designations:
o The key technology project in Hainan in 2003 by Haikou Municipality.
o The "National Key New Products" certificate in 2003 by the State Science
and Technology Department, State Taxation Bureau, Ministry of Commerce,
State Bureau of Quality Supervision, Inspection and Quarantine, and State
Environmental Protection Bureau.
o The "Best Commercialized Technology" award in Hainan in 2004 by Hainan
Scientific and Technological Result Examination Committee.
Our scalable, GMP-certified manufacturing has been recognized in China. In 2003,
our manufacturing capabilities attained GMP authentication and we were awarded
"Best Enterprise for Supporting SARS Medicine" by Hainan Food and Drug
Administration. We have an extensive distribution network with 16 sales offices
and approximately 680 proxy agents covering 30 provinces, municipalities, and
autonomous regions around China. Our main market channels are generalized
schemes of preferences (GSP) certified medical companies which directly
distribute to hospitals and the final market.
12
Our subsidiary, 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").
Furthermore, on May 30, 2008 the Company completed an offering and issued five
million shares of common stock at a purchase price of $2.00 per share and
three-year warrants to purchase an aggregate of 1.25 million shares of the
Company's common stock at an exercise price of $2.80 per share. Net proceeds
from the offering of approximately $9.3 million are expected to be used for the
expansion of the Company's existing product line, new drug development, sales
and marketing, and to supplement general working capital purposes.
III. Market Trends
Statistics show that the rise in the world's aging population has led to an
increasing incidence of age-related diseases, such as cancer, Alzheimer's
disease, diabetes, and heart disease. These diseases have already become
prevalent, particularly in developed areas. China Pharma is dedicated to
delivering more effective treatments for these diseases of high incidence and
high mortality.
The growth of China's pharmaceutical market is driven by the country's rapid
economic growth, the highest in economic history. Increased healthcare spending
by the Chinese Government to reform the healthcare system has already greatly
improved the accessibility to and desire for medical care. Important additional
factors include: the aging of the population and the consequent increase in
age-related disorders; the urban migration of the population; and improved
awareness of self-health care. According to IMS forecasts, China will become the
seventh largest pharmaceutical market in the world in 2009 and the second
largest in 2020, with a market capacity of US$220 billion.
We view this market trend as an opportunity. However, the best way to take
advantage of this opportunity is to identify our business risks beforehand.
There are three areas of risk:
o External Risk
In recent years, the Chinese medical system has been reformed, resulting in the
State Department's establishment of a basic medical insurance system for
employees. Considering the effects of the social environment, local government
involvement and government policies on the pharmaceutical industry in the PRC, a
large increase in sales can be expected. Competition will also be strong across
the industry overall. Currently, our existing products are competitive in the
market and possess growth potential. However, from a long-term perspective, some
major western medicine producers are also seeking Chinese market share. This may
present us with strong competition in the China pharma market.
o Operation Risk
One of the major uncertainties in our industry is the purchase of raw materials.
Raw materials are primarily affected by the geography and island environment of
13
Hainan Province. Because of high transportation costs and the need to guarantee
production supply requirements, we have to store large amounts of inventory to
maintain consistent production levels. In addition, part of the raw materials
need to be specially ordered which further increases the need to store
inventory. Finally, due to the increasing sales, we must store a large volume of
finished product and packaging material.
o Foreign Currency Risk
Substantially all of our operations are conducted in the PRC. Our sales and
purchases are conducted within the PRC in Chinese Renminbi (RMB). 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 (RMB). However, we use the
United States Dollar (USD) for financial reporting purposes. Conversion of
Renminbi into foreign currencies is regulated by the People's Bank of China
through a unified floating exchange rate system. Although the PRC government has
stated its intention to support the value of the Renminbi, there can be no
assurance that such exchange rate will not become volatile again or that the
Renminbi will not devalue significantly against the USD. Exchange rate
fluctuations may adversely affect the value, in USD terms, of our net assets and
income derived from its operations in the PRC.
IV. Analysis for the three months ended September 30, 2008
The following table presents the operations of the Company for the three months
ended September 30, 2008 and September 30, 2007; both are given in USD.
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months
ended September 30,
------------------------------------------------------------
2008 2007 change variance
------------ ------------ ------------ ------------
Revenue $ 12,610,642 $ 8,293,497 4,317,145 52.05%
Cost of revenue 6,494,266 4,413,052 2,081,214 47.16%
------------ ------------ ------------ ------------
Gross profit 6,116,376 3,880,445 2,235,931 57.62%
------------ ------------ ------------ ------------
Operating expenses:
Selling expenses 529,432 591,193 (61,761) -10.45%
General and administrative 427,399 328,743 98,656 30.01%
Research and development 5,581 5,941 (360) -6.06%
Bad debt expense, net of recoveries 459,500 (169,095) 628,595 -371.74%
------------ ------------ ------------ ------------
Total operating expenses 1,421,912 756,782 665,130 87.89%
------------ ------------ ------------ ------------
Income from operations 4,694,464 3,123,663 1,570,801 50.29%
------------ ------------ ------------ ------------
14
For the three months
ended September 30,
------------------------------------------------------------
2008 2007 change variance
------------ ------------ ------------ ------------
Non-operating income (expenses):
Interest income 26,224 4,400 21,824 496.00%
Interest expense (34,629) (50,857) 16,228 -31.91%
Other (expense) income (9,588) 7,549 (17,137) -227.01%
------------ ------------ ------------ ------------
Total non-operating income (expense) (17,993) (38,908) 20,915 -53.76%
------------ ------------ ------------ ------------
Income before taxes 4,676,471 3,084,755 1,591,716 51.60%
Income tax expense 424,993 -- 424,993
------------ ------------ ------------ ------------
Net income $ 4,251,478 $ 3,084,755 1,166,723 37.82%
============ ============ ============ ============
Comprehensive income - foreign currency
translation adjustments 133,713 570,646 (436,933) -76.57%
------------ ------------ ------------ ------------
Comprehensive income $ 4,385,191 $ 3,655,401 729,790 19.96%
============ ============ ============ ============
Basic and Diluted Earnings Per Share $ 0.10 $ 0.08 0.02 21.36%
============ ============ ============ ============
Basic and Diluted Weighted Average
Shares Outstanding 42,278,938 37,228,938 5,050,000 13.56%
============ ============ ============ ============
Revenue
We generated approximately $12.61 million revenue for the three months ended
September 30, 2008, an increase of $4.31 million, which means a 52.05% increase
compared to $8.29 million of the corresponding period in 2007. This increase was
primarily due to increased marketing and promotional activities to increase
sales of existing products as well as contribution from the expansion of market
share by new products. In the third quarter, Pusen OK continued its strong
growth trend, and realized revenue of $1.75 million or 14.18% of the total
income for the period, an increase of approximately $0.972 million or 124.23% on
the same period in 2007. Pusen OK, the company's flagship product, is China's
only generic version of Aleve-D TM, and is the most efficient, non-drowsy,
12-hour slow release nasal decongestant, fever reducing and pain relief agent.
Aside from this, during this period, another product with a large contribution
to sales revenue was Buflomedil with approximately $1.11 million, or 9.01% of
total sales revenue, an increase of $265,413 or 31.27% on the same period in
2007, Roxithromycin revenue increased 135.24% to approximately $0.920 million,
or 7.44% of the total revenue. This year's launch, Bumetanide, due to increases
in market recognition and market acceptance also made a significant contribution
to the sales revenue, this period it generated revenue of $0.972 million,
accounting for 7.86% of total sales revenue. Another aspect is that because of
the government reorganization of the pharmaceutical industry the pharmaceutical
marketing environment has greater transparency than previously. The Company's
distribution network in China has already expanded to reach 30 provinces,
municipalities and autonomous regions. Moreover, the improvements in production
capacity have facilitated large growth in sales of the new and existing
products.
The cost of revenue for the three months ended September 30, 2008, was
approximately $6.49 million or 51.50% of total revenue, compared to the
corresponding period of 2007, which was $4.41 million or 53.21% of total
revenue. The main reason for the increase in the cost of revenue was because of
the corresponding increase in revenue for the three months up to September 30,
2008, the cost margin also fell slightly.
Gross Profit
15
Gross Profit for the three months ended September 30, 2008 was $6.12 million,
and accounted for 48.50% of total revenue. It has increased by 57.65%, or $2.24
million, compared to $3.88 million or 46.79% of total revenue of the third
quarter of 2007. The increased sales in new products and high margin products
resulted in the corresponding substantial increase in gross profit.
Selling Expense
The selling expense of the three months ended September 30 2008 was
approximately $0.53 million, a decrease of approximately $60,000, or 10.45%,
compared to approximately $0.59 million of the three months ended September 30
2007. The main reason for this drop was our strict control of expenditure while
investing in our distribution channels and the marketing of our products.
G & A Expenses
The general and administrative expenses of the three months ended September 30,
2008 has increased to approximately $0.43 million, an increase of $0.10 million,
or 30.01%, compared to $0.33 million of the same period of 2007. The main
reasons for this increase were increases in the cost of consumables as well as
the expansion of business scale. The expenditure on each item is also
correspondingly raised.
Collection of Bad Debt
For the three months ended September 30, 2008, allowance for bad debt was
approximately $0.46 million; however, for the three months ended September 30,
2007, the allowance for bad debt was negative $170,000. This is an increase of
371.74%; the main reason for the increase is that at September 30, 2007, we had
collected some long-aged bad debt, according to the calculations, the collected
bad debt offset the bad debt allowance of the previous two quarters.
During the normal course of business, we give unsecured credit to our customers.
We record an allowance for bad debts based on age of outstanding accounts
receivables at the end of the period in accordance with generally accepted
accounting principles in the PRC. The percentage of a trade receivables that is
deemed doubtful is as follows: 100% after 720 days; 50 % after 360 days; and
7.5% up to 360 days. During the 15 years of operating history, the company has
never had any uncollected receivables.
In the Chinese pharmaceutical market environment, deferments in collections from
state owned hospitals are normal. Over 90% of our drugs are sold to state-owned
hospitals, which makes collections slow, but reliably collectible demonstrated
by our collection of all receivables in the past.
Income from Operation
The operating income for the three months ended September 30, 2008 is
approximately $4.69 million, compared to $3.12 million of the same period of
2007, an increase of $1.57 million, or 50.29%. The main reason was due to large
increases in revenue and gross profit, in addition to a fall in expenditures.
16
Interest Income
Interest income for the three months ended September 30, 2008 is $26,224,
compared to $4,400 of the same period of 2007. The main reason is the increase
in the bank deposit, which leads to an increase in the interest returns.
Interest Expense
Interest expense for the three months ended September 30, 2008 is approximately
$35,000, compared to $50,000 of the same period of 2007. The main reason is the
reduction in the company's working capital loan, leading to a corresponding
reduction in the interest on the loan.
Income Tax Expense
Income tax expense for the three months ended September 30, 2008 was $424,993 or
3.37% of revenue, while the company did not have any income tax in the
corresponding period in 2007, as the company was still in the preferential tax
period. We have been granted a `tax holiday' granting a favorable rate of 50% of
the tax rates. This year we pay our tax at the rate of 9%.
Net Income
The net income for the three months ended September 30, 2008, excluding the
effect of foreign exchange transactions, was approximately $4.25 million, which
was $1.17 million higher than that for the three months ended September 30,
2007, of approximately $3.08 million. It has increased by 37.82%.
V. Analysis for the nine months ended September 30, 2008
The following table presents the operations of the Company for the nine months
ended September 30, 2008 and September 30, 2007; both are given in USD.
For the nine months
ended September 30,
--------------------------------------------------------------
2008 2007 change variance
------------- ------------- ------------- -------------
Revenue $ 35,606,490 $ 24,097,521 11,508,969 47.76%
Cost of revenue 17,730,026 13,018,566 4,711,460 36.19%
------------- ------------- ------------- -------------
Gross profit 17,876,464 11,078,955 6,797,509 61.36%
------------- ------------- ------------- -------------
Operating expenses:
Selling expenses 1,323,854 896,128 427,726 47.73%
General and administrative 1,226,888 927,162 299,726 32.33%
17
Research and development 42,807 5,942 36,865 620.41%
Bad debt expense, net of recoveries 1,539,313 910,718 628,595 69.02%
------------- ------------- ------------- -------------
Total operating expenses 4,132,862 2,739,950 1,392,912 50.84%
------------- ------------- ------------- -------------
Income from operations 13,743,602 8,339,005 5,404,597 64.81%
------------- ------------- ------------- -------------
Non-operating income (expenses):
Interest income 31,259 29,808 1,451 4.87%
Interest expense (130,342) (166,698) 36,356 -21.81%
Other (expense) income (87,038) 582,827 (669,865) -114.93%
------------- ------------- ------------- -------------
Total non-operating income (expense) (186,121) 445,937 (632,058) -141.74%
------------- ------------- ------------- -------------
Income before taxes 13,557,481 8,784,942 4,772,539 54.33%
Income tax expense 1,078,163 - 1,078,163
Net income 12,479,318 8,784,942 3,694,376 42.05%
Comprehensive income - foreign currency
translation adjustments 2,853,755 1,222,329 1,631,426 133.47%
Comprehensive income 15,333,073 10,007,271 5,325,802 53.22%
Basic and Diluted Earnings Per Share 0.32 0.24 0.08 32.75%
Basic and Diluted Weighted Average 39,523,464 36,935,208 2,588,256 7.01%
Shares Outstanding ------------- ------------- ------------- -------------
Revenue
For the nine months ended September 30, 2008, revenue reached approximately
$35.61 million, an increase of approximately $11.51 million or 47.76%, compared
with $24.10 million of the same period in 2007. The main reasons for the large
increase in this year's third quarter compared to the same period last year are
clear results from our efforts to increase product marketing and develop sales
channels as well as increased recognition of our products on the market. Our
older products contributed greatly to revenue; Pusen OK increased markedly by
81.59%, Cerebroprotein by 62.63%, and Buflomedil by 59.94%. The recently
launched products also achieved wide acceptance on the market: Alginic Sodium
Diester, Granisetron Hydrochloride realized revenues of 172.38% and 108.68%,
respectively. Correct market positioning enabled our products to gain widespread
customer recognition.
Cost of Revenue
For the nine months ended September 30, 2008, the cost of revenue was
approximately $17.73 million, or 49.79% of total revenue, compared to $13.02
million of the same period of 2007, an increase of $4.71 million, or an increase
of 36.19%. The main reason for this kind of growth is the corresponding increase
in sales.
Gross Profit
For the nine months ended September 30, 2008, gross profit was $17.88 million
and the gross profit margins were 50.21%, gross profit for the nine months ended
September 30, 2007 was $11.08 million, and the gross profit margins were 45.98%.
The increase was $6.80 million, or 61.36%. The main reason for this increase in
18
gross profit was the relatively large increase in sales of high margin products
and new products, which brought the large increase in gross profit and gross
profit margins.
Selling expense
The selling expense for this period increased by $0.43 million, reaching $1.32
million, and accounting for 3.72% of sales revenues. The main reason for the
increase in cost is our investment to increase marketing activities for our
products and expand our sales network. With this increase in marketing, the
promotion costs, sales force wages, travel expenses and related costs all rose.
G&A Expense
The G&A expense for this period increased by approximately $300,000, or 32.33%,
to $1.23 million, compared with $0.93 million for the nine months ended
September 30, 2007, and accounted for 3.45% of the total revenues from sales.
The main reason for the increase was the expansion in the scale of operations,
with the increase in operating activities, and the increases in the cost of many
items; the cost of each kind of service organization such as auditors, lawyers
etc., engaged in order for the company to fit the requirements of the US capital
market, also rose correspondingly.
Allowance for Bad Debt
For the nine months ended September 30, 2008, the allowance for bad debt was
$1.54 million, an increase of $0.63 million, or 69.02%, compared with $0.91
million for the same period last year. The main reason for this increase was
that following the strengthening in the revenue from sales, the absolute value
of the corresponding accounts receivables also increased. For the nine months
ended September 30, 2008, the company collected $27.27 million of accounts
receivables, of these, $12.07 million of payments were owed for over one year.
The company is now actively exploring changes to the product portfolio and
developing new sales channels and sales tactics. The company is striving to
fundamentally change the large amount of accounts receivables and the long date
of sales situation.
Operating Income
The operating income for the nine months ended September 30, 2008, was $13.74
million accounting for 38.60% of the revenue, an increase of $5.40 million or
64.81% compared with $8.34 million accounting for 34.62% of the revenue for the
same period last year.The main reason for this increase is the relatively large
increase in sales and due to the high rise in margins in the nine months ended
September 30, 2008.
Income Tax expense
The income tax for the nine months ended September 30, 2008 was $1.08 million,
or 3.03% of the total revenue. In the same period of 2007, the company was
exempt from paying income tax as the company was still within the preferential
tax period. We have been granted a `tax holiday' granting a favorable rate of
50% of the tax rates. This year we pay our tax at the rate of 9%.
Net Income
19
Excluding the effects of foreign exchange transactions, the net income for the
nine months ended September 30, 2008, increased by approximately $3.69 million
reaching $12.48 million. For the corresponding period of 2007, it was $8.78
million, an increase of 42.05%. This kind of increase was due to the large
increases in revenue and income, and also effective control of cost of
expenditure.
VI. Financial Analysis
Cash flow analysis
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the nine months ended
September 30,
----------------------------
2008 2007
------------ ------------
Cash Flows from Operating Activities: (Restated)
Net income $ 12,479,318 $ 8,784,942
Depreciation and amortization 505,595 322,098
Compensation paid with warrants 120,042 --
Gain on sale of intangibles -- (572,446)
Changes in assets and liabilities:
Trade accounts receivable (11,610,177) (4,440,513)
Other receivables 246,329 223,329
Advances to suppliers 651,833 (2,504,684)
Inventory 855,485 (2,965,836)
Deferred tax assets (209,434) --
Deferred offering costs -- 60,487
Trade accounts payable 184,627 279,420
Accrued expenses (138,021) 83,034
Accrued taxes payable 602,480 --
Other payables (48,535) (134,647)
Advances from customers 386,922 47,448
------------ ------------
Net Cash from Operating Activities 4,026,464 (817,368)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (125,753) (77,313)
Purchase of intangible assets (428,641) (1,993,288)
Advances for purchases of intangibles (5,856,412) --
------------ ------------
Net Cash from Investing Activities (6,410,806) (2,070,601)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 9,268,938 3,797,183
Payments of short term notes payable (2,814,744) --
------------ ------------
Net Cash Proceeds from Financing Activities 6,454,194 3,797,183
------------ ------------
20
Effect of Exchange Rate Changes on Cash (61,509) 149,995
------------ ------------
Net Change in Cash 4,008,343 1,059,209
------------ ------------
Cash and Cash Equivalents at Beginning of Period 1,830,335 656,441
------------ ------------
Cash and Cash Equivalents at End of Period $ 5,838,678 $ 1,715,650
------------ ------------
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 130,342 $ 115,841
Cash paid for income taxes 1,289,596 --
As of September 30, 2008, the company possessed cash and cash equivalents of
$5,838,678 compared with $1,715,650 of the same period in 2007. Compared with
the $1,830,335 of December 31, 2007, this is an increase of $4,008,313. The main
reason for the increase in cash and cash equivalents is that on May 30, 2008,
the Company completed an offering of Units priced at $2.00 per Unit consisting
of one share of Company common stock and a three-year warrant to purchase
one-fourth of one share of Company common stock at an exercise price of $2.80
per share. The Company issued 5,000,000 shares of common stock and three-year
warrants to purchase 1,250,000 shares of common stock to 17 accredited investors
for gross proceeds of $10,000,000. The net proceeds, after deduction of related
offering expenses of $731,062, amounted to $9,268,938. In addition, the
placement agent in the transaction was issued three-year warrants to purchase
300,000 shares of common stock at an exercise price of $2.98 per share.
For the nine months ended September 30, 2008, net cash utilized in operating
activities was $4.03 million, an increase of $4.84 million or 592.61% compared
with negative $0.82 million of the same period of 2007.This increase is due to
the company's strengthening of Accounts Receivables collections and the return
of loans which have met with remarkable success.
VII. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements.
VIII. Commitments
At September 30, 2008, the Company had no material commitments for capital
expenditures other than for those expenditures incurred in the ordinary course
of business.
IX. Recently Enacted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2
which extended the effective date for certain nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15, 2008. The
Company does not expect the adoption of SFAS No. 157 to have a material impact
on our consolidated financial statements.
21
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect the
adoption of SFAS No. 159 to have a material impact on our consolidated financial
statements.
In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue No.
07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to be
Used in Future Research and Development Activities", ("EITF 07-3") which is
effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires
that nonrefundable advance payments for future research and development
activities be deferred and capitalized. Such amounts will be recognized as an
expense as the goods are delivered or the related services are performed. EITF
07-3 is not expected to have a material impact on our results of operations or
financial position.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a non-controlling interest in a subsidiary should be reported as equity in
the consolidated financial statements, consolidated net income shall be adjusted
to include the net income attributed to the non-controlling interest and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. The Company has not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities to require enhanced
disclosures concerning the manner in which an entity uses derivatives (and the
reasons it uses them), the manner in which derivatives and related hedged items
are accounted for under SFAS No. 133 and interpretations thereof, and the
effects that derivatives and related hedged items have on an entity's financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
financial statements of fiscal years and interim periods beginning after
November 15, 2008. The Company has not yet determined the effects on its
consolidated financial statements, if any, that may result upon the adoption of
SFAS 161.
In May 2008, The US Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) published consultative documents
that seek public comment on two of the eight phases of their joint project to
develop an improved conceptual framework. The objective of the project is to
develop an improved conceptual framework that provides a sound foundation for
developing future accounting standards. Further, in June 2008, The Financial
Accounting Standards Board (FASB) issued an Exposure Draft (ED) of a proposed
Statement of Financial Accounting Standards, Disclosure of Certain Loss
Contingencies--an amendment of FASB Statements No. 5 and 141(R). The proposed
Statement would be effective for fiscal years ending after December 15, 2008,
and interim and annual periods in subsequent fiscal years. In addition, on June
06, 2008, the Financial Accounting Standards Board (FASB) issued an Exposure
Draft (ED) of a proposed Statement of Financial Accounting Standards, Accounting
for Hedging Activities--an amendment of FASB Statement No. 133. The proposed
22
Statement would require application of the amended hedging requirements for
financial statements issued for fiscal years beginning after June 15, 2009, and
interim periods within those fiscal years.
X. Conclusion
The overall performance during the nine months ended September 30, 2008 was
outstanding. As a public company in the pharmaceutical industry, we focus on
product innovation. In order to create innovative products that are tailored to
the end user, we must concentrate on additional, innovative cooperative
engagements with special R&D institutes for more market-ready products. As a
result, the Company will continue to actively pursue the development and
distribution of high-quality products. The pharmaceutical industry has been
called an " industry of eternal sunrise", and China Pharma forecasts that our
clear growth strategy and the sustained growth in market demand will ensure our
continued growth.
Item 3 - Quantitative and Qualitative Disclosures About Market Risks
We have exposure to market risk of changes in foreign currency exchange rates.
We neither hold nor issue financial instruments for trading purposes nor do we
make use of derivative instruments to hedge the risks discussed below.
Foreign Currency Exchange Rates
We collect revenue from operations principally in the Chinese Renminbi. All of
our local sales revenue is collected in and substantially all of our expenses
are paid in the Chinese Renminbi. We face foreign currency rate translation risk
when our Chinese subsidaries results are translated to U.S. Dollars and with
respect to financial instruments denominated in foreign currencies. Our results
of operations denominated in foreign currency are translated at the average rate
of exchange during the reporting period. Assets and liabilities denominated in
foreign currencies at the balance sheet date are translated at the market rate
of exchange ruling at that date. The registered equity capital denominated in
the functional currency is translated at the historical rate of exchange at the
time of capital contribution.
The Chinese Renminbi had remained stable against the U.S. Dollar at
approximately 8.28 Renminbi to 1.00 U.S. Dollar for several years and it was not
until July 21, 2005 that the Chinese currency regime was altered, with a 2.1%
revaluation versus the United States Dollar. This move initially valued the
Renminbi at 8.11 Renminbi per United States Dollar. In addition, the Renminbi is
no longer linked to the U.S. currency but rather to a basket of currencies with
a 0.3% margin of fluctuation. However, there remains international pressure on
the Chinese government to adopt an even more flexible currency policy and as of
September 30, 2008 the exchange rate was 6.8183 Renminbi to 1.00 U.S. Dollar.
The exchange rate of Renminbi is subject to changes in the People's Republic of
China's government policies which are, to a large extent, dependent on the
economic and political development both internationally and locally and the
demand and supply of Renminbi in the domestic market. There can be no assurance
that such exchange rate will continue to remain stable in the future amongst the
volatility of currencies, globalization and the unstable economies in recent
years. Since (i) our income and profit are mainly denominated in Renminbi, and
(ii) the payment of dividends will be in U.S. dollars, if any, any exchange
fluctuation of the Renminbi against other foreign currencies would adversely
affect the value of the shares and dividends payable to shareholders, in foreign
currency terms.
Item 4 - Controls and Procedures
23
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
None.
Item 4 - Submission of Matters to a Vote of Security Holders
On February 1, 2008, a majority of the outstanding shares of voting capital
stock approved (1) to elect the following three individuals as independent
members of the board of directors of the Company: G. Michael Bennett, Yingwen
Zhang and Baowen Dong; and (2) to authorize the Company's board of directors to
amend our Bylaws to reflect the proper name and corporate governance of the
Company. The shareholder approval was granted by written consent, in lieu of a
24
special meeting of the shareholders. In order to provide information to our
shareholders regarding this action, we filed a definitive information statement
with the Securities and Exchange Commission on July 11, 2008 and delivered it to
our shareholders of record as of the close of business on February 1, 2008.
Item 5 - Other Information
None.
Item 6 - Exhibits
The following exhibits are filed herewith:
31.1 - Certification pursuant to Rule 13a-14 and Rule 15d-14(a) of the Exchange
Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 - Certification pursuant to Rule 13a-14 and Rule 15d-14(a) of the Exchange
Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Pharma Holdings, Inc.
Dated: November 6, 2008 By: /s/ Zhilin Li
-----------------------
Zhilin Li
Chief Executive Officer,
President and Director
Dated: November 6, 2008 By: /s/ Xinhua Wu
----------------------
Xinhua Wu
Chief Financial Officer,
and Director
26