Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - CHINA BIOPHARMACEUTICALS HOLDINGS INC | cbh_10qa-ex31x2.htm |
EX-31.1 - EXHIBIT 31.1 - CHINA BIOPHARMACEUTICALS HOLDINGS INC | cbh_10qa-ex31x1.htm |
EX-32.2 - EXHIBIT 32.2 - CHINA BIOPHARMACEUTICALS HOLDINGS INC | cbh_10qa-ex32x2.htm |
EX-32.1 - EXHIBIT 32.1 - CHINA BIOPHARMACEUTICALS HOLDINGS INC | cbh_10qa-ex32x1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009 OR
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o |
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to _____________
Commission File No. 814-00063
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. |
(Exact Name of registrant as specified in its charter)
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Delaware |
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13-2949462 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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No. 859, Pan Xu Road, Suzhou, |
Jiangsu Province, China 215000 |
(Address of principal executive offices)(Zip Code) |
(86) 512 6855 0568 |
(Registrants telephone number, including area code) |
(Former name, former address and former fiscal year,
of changed since last report)
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 o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (Section.232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes x No o
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):
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Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o |
Smaller Reporting Company x |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.
State the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date: 37,207,313 shares of Common Stock, par value $0.01 per share, as of October 29, 2009.
TABLE OF CONTENTS
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ITEM NO. |
DESCRIPTION |
PAGE NO. |
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PART I - |
FINANCIAL INFORMATION |
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ITEM 1. |
FINANCIAL STATEMENTS. |
1 |
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ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
34 |
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ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
44 |
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ITEM 4T. |
CONTROLS AND PROCEDURES. |
44 |
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PART II - |
OTHER INFORMATION |
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ITEM 6. |
EXHIBITS. |
45 |
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SIGNATURES |
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45 |
ITEM 1. FINANCIAL STATEMENTS
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
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September 30, |
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December 31, |
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ASSETS |
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(Unaudited) |
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CURRENT ASSETS: |
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Cash |
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$ |
2,847,192 |
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$ |
470,672 |
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Short term investment |
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15,297 |
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4,432,657 |
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Restricted cash |
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3,935,443 |
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1,373,228 |
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Accounts receivable, net of allowance for doubtful accounts of $323,330 and |
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$290,856 at September 30, 2009 and December 31, 2008, respectively |
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3,155,766 |
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3,371,225 |
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Other receivables and prepayments, net of allowance for doubtful accounts of |
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$224,928 and $224,928 at September 30, 2009 and December 31, 2008, respectively |
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288,415 |
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505,987 |
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Other receivables - related parties |
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331,500 |
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321,500 |
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Advances to suppliers |
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266,630 |
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45,877 |
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Inventories, net of $26,249 and $26,250 allowance at September 30, 2009 |
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and December 31, 2008, respectively |
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11,868,536 |
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9,033,655 |
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Loans receivable |
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2,743,290 |
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Assets to be disposed |
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178,717 |
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Total current assets |
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25,452,069 |
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19,733,518 |
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PLANT AND EQUIPMENT, NET |
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4,254,381 |
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4,236,173 |
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CONSTRUCTION-IN-PROGRESS |
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14,309,440 |
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7,379,805 |
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OTHER ASSETS: |
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Intangible asset, net |
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7,451,877 |
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7,587,057 |
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Long term prepayments |
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80,541 |
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Advance on patent purchase |
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1,321,561 |
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1,321,561 |
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Other assets |
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30,676 |
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40,678 |
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Total other assets |
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8,804,114 |
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9,029,837 |
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Total assets |
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$ |
52,820,004 |
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$ |
40,379,333 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Notes payable |
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$ |
10,080,577 |
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$ |
4,563,837 |
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Accounts payable and accrued liabilities |
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6,355,613 |
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4,870,285 |
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Other payables |
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879,054 |
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1,129,031 |
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Other payables - related parties |
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239,571 |
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666,694 |
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Customer deposits |
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998,006 |
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Taxes payable |
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2,620,303 |
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2,212,422 |
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Short-term loans |
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117,360 |
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2,611,260 |
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Dividend payables |
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1,110,346 |
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1,110,346 |
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Liabilities to be disposed |
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411,351 |
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Total current liabilities |
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21,402,824 |
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18,573,232 |
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LONG TERM LIABILITIES: |
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Long-term loans - related party |
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7,702,767 |
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Warrants liabilities |
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1,429,698 |
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Total long-term liabilities |
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9,132,465 |
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COMMITMENTS AND CONTINGENCIES |
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REDEEMABLE PREFERRED STOCK - Series B, $0.01 par value, 6,185,607 |
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shares issued and outstanding at September 30, 2009 and December 31, 2008 |
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12,508,534 |
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12,508,534 |
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EQUITY |
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Preferred stock - $0.01 par value, 10,000,000 shares authorized; |
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Series A, Nil and 50,000 share issued and outstanding at September 30, 2009 and December 31, 2008, respectively; |
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500 |
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Series B, 6,185,607 shares issued and outstanding at September 30, 2009, |
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classified above outside permanent shareholders equity. |
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Common stock, $0.01 par value, 200,000,000 shares authorized; 37,207,313 and 36,590,312 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively |
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372,073 |
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365,903 |
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Paid-in capital |
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10,661,636 |
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13,222,851 |
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Capital receivable |
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(252,471 |
) |
Statutory reserves |
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1,398,677 |
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1,508,798 |
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Accumulated deficit |
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(11,034,247 |
) |
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(16,797,813 |
) |
Accumulated other comprehensive income |
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569,853 |
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904,971 |
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Total shareholders equity (deficit) |
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1,967,992 |
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(1,047,261 |
) |
Non-controlling interests |
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7,808,189 |
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10,344,828 |
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Total equity |
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9,776,181 |
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9,297,567 |
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Total liabilities and shareholders equity |
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$ |
52,820,004 |
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$ |
40,379,333 |
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The accompanying notes are an integral part of these consolidated financial statements.
- 1 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
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Three months ended September 30, |
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Nine months ended September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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REVENUE |
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$ |
17,051,816 |
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$ |
12,512,711 |
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$ |
45,042,881 |
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$ |
36,767,712 |
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COST OF REVENUE |
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11,129,366 |
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8,596,513 |
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29,760,088 |
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25,522,533 |
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GROSS PROFIT |
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5,922,450 |
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3,916,198 |
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15,282,793 |
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11,245,179 |
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OPERATING EXPENSES: |
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Research and development |
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76,035 |
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30,620 |
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312,098 |
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279,909 |
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Selling, general and administrative |
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1,332,672 |
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1,176,356 |
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3,926,645 |
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3,424,263 |
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Total operating expenses |
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1,408,707 |
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1,206,976 |
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4,238,743 |
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3,704,172 |
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INCOME FROM OPERATIONS |
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4,513,743 |
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2,709,222 |
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11,044,050 |
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7,541,007 |
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OTHER INCOME (EXPENSE): |
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Interest (expense) income, net |
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(3,692 |
) |
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76,212 |
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(6,871 |
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7,099 |
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Gain on trading securities |
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42,510 |
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54,015 |
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Changes in fair value of warrants |
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(41,066 |
) |
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(1,005,774 |
) |
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Other (expense) income, net |
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(51,683 |
) |
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13,596 |
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(34,279 |
) |
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(14,058 |
) |
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Total other (expense) income, net |
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(53,931 |
) |
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89,808 |
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(992,909 |
) |
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(6,959 |
) |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND NON-CONTROLLI |
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4,459,812 |
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2,799,030 |
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10,051,141 |
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7,534,048 |
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PROVISION FOR INCOME TAXES |
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554,133 |
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377,583 |
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1,416,393 |
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1,008,196 |
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INCOME FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING INTEREST |
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3,905,679 |
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2,421,447 |
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8,634,748 |
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6,525,852 |
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Less - Income from continuing operations attributable to noncontrolling interest |
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1,997,403 |
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1,186,470 |
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4,841,743 |
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3,343,935 |
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INCOME FROM CONTINUING OPERATIONS ATTRIBUTABLE TO CONTROLLING INTEREST |
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1,908,276 |
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1,234,977 |
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3,793,005 |
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3,181,917 |
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LOSS FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO CONTROLLING INTEREST |
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Loss from discontinued operations, net of tax effect |
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35,381 |
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78,342 |
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77,022 |
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87,369 |
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Loss from disposal of discontinued operations, net of tax effect |
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417,150 |
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417,150 |
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Loss from discontinued operations |
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452,531 |
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78,342 |
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494,172 |
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87,369 |
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INCOME ATTRIBUTABLE TO CONTROLLING INTEREST |
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1,455,745 |
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1,156,635 |
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3,298,833 |
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3,094,548 |
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Dividends and accretion on redeemable preferred stock |
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(318,308 |
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(952,592 |
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NET INCOME AVAILABLE TO COMMON SHAREHOLDERS |
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1,455,745 |
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838,327 |
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3,298,833 |
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2,141,956 |
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OTHER COMPREHENSIVE INCOME (LOSS): |
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Foreign currency translation adjustment attributable to controlling interest |
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(58,294 |
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21,881 |
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(335,118 |
) |
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474,179 |
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Foreign currency translation adjustment attributable to non-controlling interest |
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24,781 |
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46,611 |
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(240,944 |
) |
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494,809 |
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COMPREHENSIVE INCOME |
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$ |
1,422,232 |
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$ |
906,819 |
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$ |
2,722,771 |
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$ |
3,110,944 |
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EARNINGS PER SHARE- BASIC |
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Continuing operations |
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0.05 |
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0.02 |
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0.10 |
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0.06 |
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Discontinued operations |
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(0.01 |
) |
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(0.00 |
) |
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(0.01 |
) |
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(0.00 |
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Earnings per share - Basic |
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$ |
0.04 |
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$ |
0.02 |
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$ |
0.09 |
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$ |
0.06 |
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EARNINGS PER SHARE- DILUTED |
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Continuing operations |
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0.04 |
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0.02 |
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0.08 |
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0.06 |
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Discontinued operations |
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(0.01 |
) |
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(0.00 |
) |
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(0.01 |
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(0.00 |
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Earnings per share - Diluted |
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$ |
0.03 |
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$ |
0.02 |
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$ |
0.07 |
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$ |
0.06 |
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WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING: |
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Basic |
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37,082,739 |
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36,490,312 |
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37,082,457 |
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36,490,312 |
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Diluted |
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49,453,953 |
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36,490,312 |
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49,453,671 |
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36,490,312 |
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The accompanying notes are an integral part of these consolidated financial statements.
- 2 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. Shareholders |
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Accumulated |
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Accumulated |
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Other Income |
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|
|
||||||||||||||
|
|
Preferred stock (series A) |
|
Common Stock |
|
Paid-in |
|
Capital |
|
Statutory |
|
Income |
|
Comprehensive |
|
Noncontrollig |
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
Shares |
|
Par value |
|
Shares |
|
Par Value |
|
Capital |
|
Receivable |
|
Reserves |
|
(Deficit) |
|
(Loss) |
|
Interest |
|
Totals |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
BALANCE, December 31, 2007 |
|
|
50,000 |
|
$ |
500 |
|
|
36,490,312 |
|
$ |
364,903 |
|
$ |
13,178,101 |
|
$ |
(252,471 |
) |
$ |
976,439 |
|
$ |
(18,059,232 |
) |
$ |
389,084 |
|
$ |
5,942,144 |
|
$ |
2,539,468 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,750 |
|
|||
Dividends and accretion on redeemable preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,033,239 |
) |
|
|
|
|
|
|
|
(1,033,239 |
) |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,141,956 |
|
|
|
|
|
3,385,321 |
|
|
5,527,277 |
|
|||
Statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691,820 |
|
|
(691,820 |
) |
|
|
|
|
|
|
|
|
|
|||
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474,179 |
|
|
494,809 |
|
|
968,988 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
BALANCE, September 30, 2008 (Unaudited) |
|
|
50,000 |
|
|
500 |
|
|
36,490,312 |
|
|
364,903 |
|
|
13,196,851 |
|
|
(252,471 |
) |
|
1,668,259 |
|
|
(17,642,335 |
) |
|
863,263 |
|
|
9,822,274 |
|
|
8,021,244 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Common shares issued for service |
|
|
|
|
|
|
|
|
100,000 |
|
|
1,000 |
|
|
26,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,000 |
|
|||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685,061 |
|
|
|
|
|
536,727 |
|
|
1,221,788 |
|
|||
Statutory reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,461 |
) |
|
159,461 |
|
|
|
|
|
|
|
|
|
|
|||
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,708 |
|
|
(14,173 |
) |
|
27,535 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
BALANCE, December 31, 2008 |
|
|
50,000 |
|
$ |
500 |
|
|
36,590,312 |
|
$ |
365,903 |
|
$ |
13,222,851 |
|
$ |
(252,471 |
) |
$ |
1,508,798 |
|
$ |
(16,797,813 |
) |
$ |
904,971 |
|
|
10,344,828 |
|
$ |
9,297,567 |
|
|||
Cumulative effect of reclassification of warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,874,548 |
) |
|
|
|
|
|
|
|
8,450,624 |
|
|
|
|
|
|
|
|
(423,924 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
BALANCE, January 1, 2009, as adjusted |
|
|
50,000 |
|
|
500 |
|
|
36,590,312 |
|
|
365,903 |
|
|
4,348,303 |
|
|
(252,471 |
) |
|
1,508,798 |
|
|
(8,347,189 |
) |
|
904,971 |
|
|
10,344,828 |
|
|
8,873,643 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Reconcilation of discrepancy shares |
|
|
25,000 |
|
|
250 |
|
|
492,001 |
|
|
4,920 |
|
|
(5,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Conversion of preferred stock |
|
|
(75,000 |
) |
|
(750 |
) |
|
75,000 |
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Common shares issued for service |
|
|
|
|
|
|
|
|
50,000 |
|
|
500 |
|
|
11,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,500 |
|
|||
Dividend declaration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,307,503 |
|
|
|
|
|
|
|
|
(6,712,396 |
) |
|
|
|
|
(7,208,920 |
) |
|
(7,613,813 |
) |
|||
Disposal of Keyuan and CBC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,471 |
|
|
(110,121 |
) |
|
726,505 |
|
|
(83,176 |
) |
|
71,482 |
|
|
857,161 |
|
|||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,298,833 |
|
|
|
|
|
4,841,743 |
|
|
8,140,576 |
|
|||
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(251,942 |
) |
|
(240,944 |
) |
|
(492,886 |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
BALANCE, September 30, 2009 (Unaudited) |
|
|
|
|
$ |
|
|
|
37,207,313 |
|
$ |
372,073 |
|
$ |
10,661,636 |
|
$ |
|
|
$ |
1,398,677 |
|
$ |
(11,034,247 |
) |
$ |
569,853 |
|
$ |
7,808,189 |
|
$ |
9,776,181 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 3 -
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
||||
|
|
2009 |
|
2008 |
|
||
|
|
|
|
||||
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
3,298,833 |
|
$ |
2,141,956 |
|
Dividends and accretion on redeemable preferred stock |
|
|
|
|
|
952,592 |
|
|
|
|
|
||||
Income attributable to controlling interest |
|
|
3,298,833 |
|
|
3,094,548 |
|
Loss from discontinued operations |
|
|
494,172 |
|
|
87,369 |
|
|
|
|
|
||||
Income from continuing operations attributable to controlling interest |
|
|
3,793,005 |
|
|
3,181,917 |
|
Income from continuing operations attributable to noncontrolling interest |
|
|
4,841,743 |
|
|
3,343,935 |
|
|
|
|
|
||||
Income from continuing operations |
|
|
8,634,748 |
|
|
6,525,852 |
|
Adjustments to reconcile net income from operations to cash provided by operating activities: |
|
|
|
|
|
|
|
Amortization of shares issued for service |
|
|
11,500 |
|
|
18,750 |
|
Depreciation |
|
|
402,005 |
|
|
398,305 |
|
Amortization |
|
|
135,106 |
|
|
132,931 |
|
Bad debt expense |
|
|
32,449 |
|
|
58,965 |
|
Change in fair value of warrants |
|
|
1,005,774 |
|
|
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
|
182,848 |
|
|
(488,973 |
) |
Accounts receivable - related parties |
|
|
|
|
|
(15,743 |
) |
Other receivable and prepayments |
|
|
315,155 |
|
|
1,062,777 |
|
Advance to suppliers |
|
|
(140,107 |
) |
|
520,053 |
|
Inventories |
|
|
(2,832,755 |
) |
|
(667,406 |
) |
Other assets |
|
|
10,002 |
|
|
29,791 |
|
Increase in notes payable |
|
|
5,512,603 |
|
|
3,303,245 |
|
Accounts payable |
|
|
1,054,248 |
|
|
(776,962 |
) |
Accounts payable - related parties |
|
|
|
|
|
(79,021 |
) |
Other payable and other current liabilities |
|
|
153,672 |
|
|
(754,151 |
) |
Customer deposits |
|
|
(997,258 |
) |
|
565,082 |
|
Taxes payable |
|
|
407,606 |
|
|
926,787 |
|
|
|
|
|
||||
Net cash provided by continuing operating activities |
|
|
13,887,596 |
|
|
10,760,282 |
|
|
|
|
|
||||
CASH FLOWS FROM CONTINUING OPERATION INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Income tax paid on dividend distributed to CBH |
|
|
(404,893 |
) |
|
|
|
Proceeds from long term notes receivables |
|
|
|
|
|
92,118 |
|
Purchase of equipment |
|
|
(420,185 |
) |
|
(286,503 |
) |
Payment to construction-in-progress |
|
|
(6,924,439 |
) |
|
(5,904,126 |
) |
Increase in other receivables - related parties |
|
|
(10,000 |
) |
|
(698,569 |
) |
(Payments on) repayment received from loan to third parties |
|
|
(2,741,233 |
) |
|
42,840 |
|
Decrease in short term Investment |
|
|
4,414,048 |
|
|
1,146,960 |
|
|
|
|
|
||||
Net cash used in continuing operation investing activities |
|
|
(6,086,702 |
) |
|
(5,607,280 |
) |
|
|
|
|
||||
CASH FLOWS FROM CONTINUING OPERATION FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Increase in restricted cash |
|
|
(2,560,294 |
) |
|
(993,147 |
) |
Principal payment on bank loans |
|
|
(2,492,030 |
) |
|
(71,685 |
) |
Decrease on other payables - related parties |
|
|
(499,872 |
) |
|
|
|
Increase (decrease) on long term liabilities |
|
|
100,150 |
|
|
(13,659 |
) |
|
|
|
|
||||
Net cash used in continuing financing activities |
|
|
(5,452,046 |
) |
|
(1,078,491 |
) |
|
|
|
|
||||
EFFECT OF EXCHANGE RATE ON CASH |
|
|
27,672 |
|
|
(54,904 |
) |
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operation |
|
|
2,376,520 |
|
|
4,019,608 |
|
|
|
|
|
||||
Cash provided by discontinued operation operating activities |
|
|
(67,953 |
) |
|
52,742 |
|
Cash provided by discontinued operation investing activities |
|
|
|
|
|
(1,048 |
) |
Cash providied by discontinued operation financing activities |
|
|
|
|
|
126,307 |
|
Effect of exchange rate on cash - discontinued opeartions |
|
|
(43,102 |
) |
|
(10,097 |
) |
|
|
|
|
||||
Net cash (used in) provided by discontinued operations |
|
|
(111,055 |
) |
|
167,904 |
|
|
|
|
|
||||
CASH, beginning of period - continuing operations |
|
|
470,672 |
|
|
634,189 |
|
CASH,beginning of period - discontinued operations |
|
|
111,055 |
|
|
35,510 |
|
|
|
|
|
||||
CASH, beginning of period |
|
|
581,727 |
|
|
669,699 |
|
|
|
|
|
||||
CASH, end of period - continuing operations |
|
|
2,847,192 |
|
|
4,653,797 |
|
CASH, end of period - discontinued operations |
|
|
|
|
|
203,414 |
|
|
|
|
|
||||
CASH, end of period |
|
$ |
2,847,192 |
|
$ |
4,857,211 |
|
|
|
|
|
||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
$ |
81,073 |
|
|
|
|
|
||||
Income taxes paid |
|
$ |
1,098,623 |
|
$ |
112,150 |
|
|
|
|
|
||||
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Loan payable to related party which was transferred from dividend payable and noncontrolling interes |
|
$ |
7,476,086 |
|
$ |
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 4 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Note 1 - ORGANIZATION AND OPERATIONS
China Biopharmaceuticals Holdings, Inc. (CBH, We and the Company), a Delaware corporation, was originally organized as a Corporation under the laws of the state of New York on August 6, 1976. Since August 2004, the Company acquired various subsidiaries located in mainland China (PRC). The principal activities of the Company, through its subsidiaries, are research, manufacture, and sale of drug raw materials and intermediates as well as prescription and non-prescription drugs and traditional Chinese medicines. The Company is also engaged in the discovery, development and commercialization of innovative drugs and related bio-pharmaceutical products in China.
As a pre-condition to complete the merger with Neostem (see detail disclosure in Note 20), on July 11, 2009, the Company decided to spin-off China Biopharmaceuticals Corporation (CBC), the 100% owned subsidiary of CBH, and to write off the investment in Keyuan Pharmaceutical R&D Co., Ltd (Keyuan), which is 90% owned by CBC.
On September 4, 2009, CBH entered into a trust agreement with Stephen Globus, a board member of CBH, as trustee for the benefit of the holders of the common stock of CBH (the Trust Agreement). Keyuan was written off on August 31, 2009 (see detail disclosure in Note 20)
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Companys Annual Report on Form 10-K. The results for the nine months ended September 30, 2009, are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and have been consistently applied.
The consolidated financial statements include the financial statements of the Company and all its majority-owned subsidiaries that require consolidation. Material inter-company transactions have been eliminated in the consolidation. The consolidated financial statements of China Biopharmaceuticals Holdings, Inc. and Subsidiaries reflect the activities of the following subsidiaries:
|
|
|
Entity |
Percentage of Ownership |
Location |
CBH |
Parent Company |
United States of America |
Erye |
51% owned by CBH |
Peoples Republic of China (P.R.C.) |
In the accompanying financial statements, financial results related to the divested operations of CBC and Keyuan are presented as discontinued operations. Previously reported amounts have been restated to present the divested operations in a manner consistent with the current period presentation. Total assets and liabilities of CBC and Keyuan were reclassified as Assets( Liabilities) held for disposal on the consolidated balance sheet as of December 31, 2008. Unless otherwise noted, discussions and amounts throughout these notes relate to CBHs continuing operations.
- 5 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
|
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, the Company estimates the collectability of its receivables which affects the carry value of the related asset and the fair value of share-based compensation which affects the amount of compensation recognized in earnings. Management makes these estimates using the best information available at the time the estimate are made, however, actual results could differ materially from those estimates.
Foreign Currency Translation
The reporting currency of the Company is the US dollar. The Companys operating subsidiaries financial records are maintained in its local currency, Renminbi (RMB); therefore, the Companys functional currency is the RMB. Results of operations are translated at the average exchange rates during the period, assets and liabilities are translated at the unified exchange rate as quoted by the Peoples Bank of China at the end of each reporting period, and equity are stated at their historical rates. Cash flows are also translated at average translation rates for the period, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
This quotation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the Peoples Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the Peoples Bank of China.
Translation adjustments resulting from this process are included in accumulated other comprehensive income in the consolidated statement of shareholders equity and amounted to $569,853 and $ 904,971 as of September 30, 2009 and December 31, 2008, respectively. Assets and liabilities at September 30, 2009 and December 31, 2008 were translated at 6.82 and 6.82 RMB to $1.00. The average translation rates applied to income statement accounts and the statement of cash flows for the three and nine months ended September 30, 2009 were 6.82 and 6.82 RMB to $1.00, respectively. The average translation rates applied to income statement accounts, statement of cash flows for the three and nine months ended September 30, 2008 were 6.83 and 6.97 RMB to $1.00.
The Company adjusted $385,807 from accumulated other comprehensive income to non-controlling interest which was presented as component of equity section as of December 31, 2007 as a result of application of Financial Accounting Standard Board's (FASB) accounting standard regarding Non-controlling Interest in Consolidated Financial Statements effective January 1, 2009. For the nine months ended September 30, 2009 and 2008, $240,944 of loss and $494,809 of gain from translation adjustment was borne by noncontrolling interest.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. These amounts are immaterial to the consolidated financial statements.
- 6 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Economic and Political Risks
The Company faces a number of risks and challenges since its assets are located in China and its revenues are derived from its operations in China. China is a developing country with a young economic market system overshadowed by the state. Its political and economic systems are very different from the more developed countries and are still in the stage of change. China also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and its relationship with other countries, including but not limited to the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Companys performance.
Concentration of Risks
Cash includes cash on hand and demand deposits in accounts maintained with banks within the Peoples Republic of China, Hong Kong and the United States. Total cash in these banks at September 30, 2009 and December 31, 2008 amounted to $6,779,455 and $1,953,720 of which $18,102 and $0 deposits are federally-insured, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
The Company sells pharmaceutical products to pharmacies and hospitals. There is no sales concentration risk for the Company since no sales to one customer individually accounted for more than 10% of the total sales revenue for the three and nine months ended September 30, 2009 and 2008.
For the three months ended September 30, 2009, one major supplier provided approximately 10.8% of the Companys purchases of raw material. For the nine-month period ended September 30, 2009, two major suppliers provided approximately 26.0% of the Companys purchases of raw materials with each supplier individually accounting for 15.7% and 10.3%, respectively. As of September 30, 2009, the total accounts payable to the two major suppliers was $777,168, 13.6% of the total accounts payable.
For the three months ended September 2008, two major suppliers provided approximately 28.5% of the Companys purchases of raw materials with each supplier individually provided 15.7% and 12.8%, respectively. For the nine months ended September 30, 2008, two major suppliers provided approximately 33.1% of the Companys purchases of raw materials with each supplier individually accounting for 18.4%, and 14.7%, respectively.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted FASB's accounting standards regarding fair value of financial instruments and related fair value measurements. Those accounting standards established a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the accompanying consolidated balance sheets for receivables, payables and short term loans qualify as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available. The three levels of valuation hierarchy are defined as follows:
|
|
|
|
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
|
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
|
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
- 7 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
As required by the accounting standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Balance of short term investment represented the quoted price of the securities in active markets.
The Company determined the fair value of the issued and outstanding warrants using the Black-Scholes option pricing model (Black-Scholes Model,) as level 2 inputs, which does not entail material subjectivity because the methodology employed does not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets. The change in the fair value of warrants liabilities were charged to non-operating expenses. As a result, the warrant liabilities are carried on the consolidated balance sheets at fair value.
The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
|
Fair Value Measurements Using Fair Value Hierarchy |
|
||||||||
|
|
|
|
||||||||||
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
Short term investment |
|
$ |
15,297 |
|
$ |
15,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities |
|
$ |
(1,429,698 |
) |
|
|
|
$ |
(1,429,698 |
) |
|
|
|
Other than the short-term investments and warrant liabilities carried at fair value, the Company did not identify any other assets and liabilities that are required to be presented on the balance sheet at fair value in accordance with the FASBs accounting standards.
Revenue Recognition
The Company has various categories of revenue resources: sales of new drug formulas, R&D services and revenue from sales of medical products.
The Company recognizes revenue from product and drug formula sales when title has passed, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable, and the collection of the related receivable is probable which is generally at the time of shipment. Allowances are established for estimated rebates, wholesaler charge backs, prompt pay sales discounts, product returns, and bad debts.
Management regularly reviews aging of receivables and changes in payment trends by its customers, and records a reserve when they believe collection of amounts due are at risk. The Company reserves 20%, 50% and 100% for AR balances with aging more than six-month, nine-month and more than one year, respectively, based on the nature of the business and AR collection history.
Revenue was made up of the following product categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the nine months ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
(Unaudited) |
|
(Unaudited) |
|
||||||||
|
|
|
|
||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermediary pharmaceuticals products |
|
$ |
3,853,302 |
|
$ |
2,744,041 |
|
$ |
9,523,631 |
|
$ |
10,261,372 |
|
Prescription drugs |
|
|
13,140,136 |
|
|
9,750,436 |
|
|
35,460,872 |
|
|
26,490,154 |
|
Others |
|
|
58,378 |
|
|
18,234 |
|
|
58,378 |
|
|
16,186 |
|
|
|
|
|
|
|
||||||||
Total revenue |
|
$ |
17,051,816 |
|
$ |
12,512,711 |
|
$ |
45,042,881 |
|
$ |
36,767,712 |
|
|
|
|
|
|
|
- 8 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Cash
Cash includes cash on hand, demand deposits with banks and liquid investments with an original maturity of three months or less.
Short Term Investment
In 2007, the Company opened an account with an investment broker to invest in a short term in initial public offering securities. The Company classified the account balance as trading securities, which should be carried at fair value with unrealized gains and losses reported as other comprehensive income. Total balance of this account was $15,297 and $4,432,657 as of September 31, 2009 and December 31, 2008, respectively. For the three and nine months ended September 30, 2009, the Company recorded $42,510 and $54,015 gain on trading securities, respectively. No realized gain or loss on short-term investment for the three and nine months ended September 30, 2008. In addition, there was no unrealized gain or loss relating to short-term investments for the three and nine months ended September 30, 2009 and 2008, there was no such amounts were included in other comprehensive income for the afore-mentioned periods.
Restricted Cash
Restricted cash represents cash required to be deposited with banks for the balance of bank notes payable but are subject to withdrawal with restrictions according to the agreement with the bank and saving accounts. The required deposit rate is approximately 30-50% of the notes payable. Given the nature of the restricted cash, it is reclassified as a financing activity in Statement of Cash Flows.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a monthly review of all outstanding amounts. Managements judgment and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, the Company analyzes the aging of accounts receivables balances, historical bad debts, customer concentration and credit-worthiness, current economic trends and changes in the Companys customer payment terms. Significant changes in customer concentrations or payment terms, deterioration of customer credit-worthiness or weakening economic trends could have a significant impact on the collectibility of the receivables and the Companys operating results. If the financial condition of the Companys customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out basis. The Company reviews its inventory periodically for possible obsolescence or to determine if any reserves are necessary.
Plant and Equipment, Net
Plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows.
- 9 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
|
|
Equipment and machinery |
5 years |
Motor vehicles |
5 years |
Furniture and fixtures |
5 years |
Buildings |
20 years |
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of operations. The cost of maintenance and repairs is charged to operations as incurred, whereas significant renewals and betterments are capitalized.
Construction-In-Progress
Construction-in-progress represents the costs incurred in connection with the construction of buildings or new additions to the Companys plant facilities. Interest incurred during the period of construction, if material, is capitalized. Construction-in-progress is not depreciated until the assets are completed and placed into service.
Impairment of Long-term Assets
Long-term assets of the Company are reviewed at each financial reporting date, more often if necessary, to determine whether their carrying value has become impaired, pursuant to the guidelines established by the FASB. The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the net asset carrying value. An impairment loss, if it exists, is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Based on its review, management concluded there was no impairment for its plant and equipment, and construction-in-progress as of September 30, 2009 and December 31, 2008.
Intangible asset - Land Use Rights
According to the Chinese law, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 40 to 50 years. The Company reviews the carrying value of land use rights at each financial reporting date, more often if necessary, to determine whether their carrying value has become impaired. Impairment charges are recorded when the carrying value of the asset exceeds future benefits to be derived from the asset.
Intangible asset - Patents - Approved Drugs
The Company obtained various official registration certificates or official approvals for clinical trials representing patented pharmaceutical formulas. No amortization is recorded when the Company intends to and has the ability to sell the patent or formulas within two months; otherwise the patent costs will be subject to amortization over its estimated useful life period, generally fifteen years. Such costs comprise purchase costs of patented pharmaceutical formulas and costs incurred for patent application. Patent costs are accounted for on an individual basis. The carrying value of patent costs is reviewed for impairment at each financial reporting date, and more often when events and changes in circumstances indicate that the carrying value may not be recoverable.
Income Taxes
Income taxes are provided on the liability method whereby deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and reported amounts of assets and liabilities. Deferred tax assets and liabilities are computed using enacted tax rates expected to apply to taxable income in the periods in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides a valuation allowance for certain deferred tax assets, if it is more likely than not that the Company will not realize tax assets through future operations.
- 10-
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Effective January 1, 2007, the Company adopted an accounting standard which indicates a tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The adoption had no effect on the Companys financial statements.
Warrants Liabilities
Effective January 1, 2009, the Company adopted the provisions of an accounting standard regarding instruments that are indexed to an entitys own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Companys own stock and (b) classified in stockholders equity in the statement of financial position would not be considered a derivative financial instrument. It provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuers own stock and thus able to qualify for the scope exception within the standards.
As a result, 20,370,298 of our issued and outstanding warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment because the strike price of the warrants is denominated in US dollar, a currency other than the Companys functional currency, the Chinese Renminbi. As a result, the warrants are not considered indexed to the Companys own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expired.
As such, effective January 1, 2009, we reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their corresponding issuance dates. On January 1, 2009, we reclassified from additional paid-in capital, as a gain of cumulative effect adjustment of $8,450,624 to beginning retained earnings and $423,924 to long-term derivative instruments to recognize the fair value of such warrants on such date. The fair value of these warrants increased to $1,429,698 as of September 30, 2009. As such, the Company recognized loss of $41,066 and $1,005,774 for the three and nine months ended September 30, 2009, respectively. These warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes Model using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||||||||||||||
|
|
#A |
|
#B |
|
#C |
|
#A |
|
#B |
|
#C |
|
||||||
Number of warrants |
|
|
1,000,000 |
|
|
7,370,298 |
|
|
12,000,000 |
|
|
1,000,000 |
|
|
7,370,298 |
|
|
12,000,000 |
|
Expected life (years) |
|
|
0.34 |
|
|
0.44 |
|
|
2.64 |
|
|
1.1 |
|
|
1.2 |
|
|
3.4 |
|
Annual dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
0.18 |
% |
|
0.18 |
% |
|
1.45 |
% |
|
0.4 |
% |
|
0.4 |
% |
|
1.1 |
% |
Expected volatility |
|
|
86.1 |
% |
|
96.5 |
% |
|
130.2 |
% |
|
131.2 |
% |
|
134.5 |
% |
|
115.4 |
% |
- 11-
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the term of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on the U.S. Treasury securities with compatible life terms.
Shares Subject to Mandatory Redemption
FASBs accounting standard regarding certain financial instruments with characteristics of both liabilities and equity establishes classification and measurement standards for three types of freestanding financial instruments that have characteristics of both liabilities and equity. Instruments within the scope of this accounting standard must be classified as liabilities within the Companys Consolidated Financial Statements and be reported at settlement date value. FASBs accounting standard regarding classification and measurement of redeemable securities requires contingently redeemable securities to be classified outside of permanent equity until the contingency occurs, and then the instrument will need to be analyzed for proper classification as a liability or permanent equity.
The Company issued redeemable stock in November 2007 related to the settlement of notes payables owed to RimAisa. Under the terms of the redeemable stock, the issuer has the right to redeem and the holder has the right to convert any time up to and including the fourth anniversary of the issuance. Therefore, liability accounting is not triggered because the stock is not mandatorily redeemable until after the fourth anniversary. However, pursuant to FASBs accounting standard regarding classification and measurement of redeemable securities, the redeemable stock is classified outside of shareholders equity, because pursuant to the terms of the preferred stock, if the redeemable stock is not converted by the fourth anniversary, then mandatory redemption is triggered, and the shares will be reclassified to liabilities.
Comprehensive Income
FASBs accounting standard regarding comprehensive income establishes requirements for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. This accounting standard defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, it also requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in financial statement that is presented with the same prominence as other financial statements. The Companys only current component of comprehensive income is the foreign currency translation adjustment.
Earnings per Share
The Company has adopted the FASBs accounting standard regarding earnings per share (EPS) which requires the presentation of earnings per share as Basic and Diluted EPS. Basic earnings per share are calculated by taking net income divided by the weighted average shares of common stock outstanding during the period. Diluted earnings per share is calculated by taking basic weighted average shares of common stock and increasing it for dilutive common stock equivalents such as preferred stock, as well as warrants and options that are in the money.
Noncontrolling interests
Effective January 1, 2009, the Company adopted a FASBs accounting standard regarding non-controlling interest in consolidated financial statements. Certain provisions of this accounting standard are required to be adopted retrospectively for all periods presented. Such provisions include a requirement that the carrying value of non-controlling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity.
- 12 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Further, as a result of adoption this accounting standard, net income attributable to non-controlling interests is now excluded from the determination of consolidated net income. In addition, foreign currency translation adjustment is allocated between controlling and non-controlling interests.
The Company reclassified non-controlling interests in the amounts of $7,808,189 and $10,344,828 from the mezzanine section to equity in the September 30, 2009 and December 31, 2008 balance sheets, respectively.
Research and Development Costs
Research and development (R&D) expenses include salaries, benefits, and other headcount related costs, clinical trial and related clinical manufacturing costs, contract and other outside service fees, and facilities and overhead costs. R&D costs are expensed when incurred.
Under the guidance of the FASBs accounting standard regarding research and development costs, the Company expenses the costs associated with the research and development activities when incurred. None of the intangible assets of the Company was recorded based on R&D costs.
Advertising Costs
The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the three months ended September 30, 2009 and 2008 amounted $5,727 and $10,202, respectively. Advertising costs for the nine months ended September 30, 2009 and 2008 amounted $78,104 and $83,320, respectively.
Shipping and Handling Costs
Shipping and handling costs related to costs of goods sold are included in selling, general and administrative costs were $145,352 and $90,620 for the three-month period ended September 30, 2009 and 2008, and $376,308 and $288,691 for the nine months ended September 30, 2009 and 2008, respectively.
Reclassification
Certain prior period amounts have been reclassified to conform to current periods presentation. Those reclassifications had no material effect on operations or cash flows.
The Company made certain reclassifications of prior period amounts in the consolidated financial statements to conform to the 2009 presentation. The reclassifications were to reflect the retrospective adoption of the FASBs accounting standards regarding non-controlling interest, as well as the standards regarding the discontinued operations. The reclassifications had no impact on previously reported net income.
Recent Accounting Pronouncements
In January 2009, the FASB issued an accounting standard which amended the impairment model by removing its exclusive reliance on market participant estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the market participant view to a holders estimate of whether there has been a probable adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of this accounting standard did not have a material impact on the Companys consolidated financial statements because all of the investments in debt securities are classified as trading securities.
- 13 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
In April 2009, the FASB issued an accounting standard that makes the other-than-temporary impairments guidance more operational and improves the presentation of other-than-temporary impairments in the financial statements. This standard replaced the existing requirement that the entitys management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. This standard provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this standard does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. The Company adopted this accounting standard, but it did not have a material impact on its consolidated financial statements.
In April 2009, the FASB issued an accounting standard that requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this accounting standard, fair values for these assets and liabilities were only disclosed annually. This standard applies to all financial instruments within its scope and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This standard does not require disclosures for earlier periods presented for comparative purposes at initial adoption, but in periods after the initial adoption, this standard requires comparative disclosures only for periods ending after initial adoption. The Company adopted this accounting standard, but it did not have a material impact on the disclosures related to its consolidated financial statements.
In June 2009, the FASB issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entitys continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (QSPE). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, and the Company does not expect this standard to have a material effect on its consolidated financial statements.
In June 2009, the FASB also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (VIEs). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a companys involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the companys financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, and the Company does not expect this standard to have a material effect on its consolidated financial statements.
- 14 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
In August 2009, the FASB issued an Accounting Standards Update (ASU) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
Note 3 - RESTRICTED CASH
Restricted cash consisted of the followings:
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
Name of Bank |
|
(Unaudited) |
|
|
|
||
|
|
|
|
||||
Hua Xia Bank, Suzhou |
|
$ |
374,179 |
|
$ |
3,863 |
|
China CITIC Bank |
|
|
683,215 |
|
|
1,369,365 |
|
China Merchants Bank |
|
|
2,875,892 |
|
|
|
|
Others |
|
|
2,157 |
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
3,935,443 |
|
$ |
1,373,228 |
|
|
|
|
|
Note 4 - ACCOUNTS RECEIVABLE, NET
The Company had accounts receivable amounted to $3,155,766 and $3,371,225 after net of allowance for doubtful accounts of $323,330 and $290,856 as of September 30, 2009 and December 31, 2008, respectively.
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
(Unaudited) |
|
|
|
||
|
|
|
|
||||
Accounts receivable |
|
$ |
3,479,096 |
|
$ |
3,662,081 |
|
Allowance for doubtful accounts |
|
|
(323,330 |
) |
|
(290,856 |
) |
|
|
|
|
||||
Accounts receivable, net |
|
$ |
3,155,766 |
|
$ |
3,371,225 |
|
|
|
|
|
The following table consists of allowance for doubtful accounts.
- 15 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
|
|
|
|
|
Allowance for doubtful accounts, December 31, 2007 |
|
$ |
410,192 |
|
Addition |
|
|
|
|
Recovery |
|
|
(145,484 |
) |
Translation adjustment |
|
|
26,148 |
|
|
|
|
||
Allowance for doubtful accounts, December 31, 2008 |
|
$ |
290,856 |
|
Addition |
|
|
33,639 |
|
Written-off |
|
|
(1,190 |
) |
Recovery |
|
|
|
|
Translation adjustment |
|
|
25 |
|
|
|
|
||
Allowance for doubtful accounts, September 30, 2009 (Unaudited) |
|
$ |
323,330 |
|
|
|
|
As of September 30, 2009 and December 31, 2008, management concluded its allowance for bad debts was adequate.
Note 5 - INVENTORIES, NET
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
(Unaudited) |
|
|
|
||
|
|
|
|
||||
Raw materials |
|
$ |
4,355,711 |
|
$ |
2,043,597 |
|
Refinery materials |
|
|
1,682,399 |
|
|
2,231,623 |
|
Packaging supplies |
|
|
351,464 |
|
|
274,282 |
|
Finished goods |
|
|
5,007,524 |
|
|
3,859,646 |
|
Work in process |
|
|
475,976 |
|
|
637,021 |
|
Sundry supplies |
|
|
21,711 |
|
|
13,736 |
|
|
|
|
|
||||
Total inventory |
|
|
11,894,785 |
|
|
9,059,905 |
|
Minus: inventory allowance |
|
|
(26,249 |
) |
|
(26,250 |
) |
|
|
|
|
||||
Total inventories, net |
|
$ |
11,868,536 |
|
$ |
9,033,655 |
|
|
|
|
|
As of September 30, 2009 and December 31, 2008, the Company reserved $26,249 and $26,250 as inventory allowance, respectively.
Note 6 LOANS RECEIVABLE
The Company had loans to three unrelated parties amounting to $1,980,450, $586,800, and $176,040 with a total loan amount of $2,743,290 as of September 30, 2009. The loans are non-interest bearing, unsecured and due on demand.
Note 7 - PLANT AND EQUIPMENT, NET
Plant and equipment consisted of the following:
- 16 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
(Unaudited) |
|
|
|
||
|
|
|
|
||||
Plant |
|
$ |
2,482,911 |
|
$ |
2,446,124 |
|
Machinery and equipment |
|
|
7,690,665 |
|
|
7,306,952 |
|
Vehicles |
|
|
196,093 |
|
|
196,093 |
|
|
|
|
|
||||
Total plant and equipment |
|
|
10,369,669 |
|
|
9,949,169 |
|
Less: accumulated depreciation |
|
|
(6,115,288 |
) |
|
(5,712,996 |
) |
|
|
|
|
||||
Plant and equipment, net |
|
$ |
4,254,381 |
|
$ |
4,236,173 |
|
|
|
|
|
Depreciation expense for the three months ended September 30, 2009 and 2008 amounted to $120,184 and $114,095, respectively. Depreciation expense for the nine months ended September 30, 2009 and 2008 amounted to $402,005 and $398,305, respectively.
Note 8 - CONSTRUCTION-IN-PROGRESS
Erye is currently under construction of a new factory and will relocate to the new place after the entire project is completed. Construction in progress is related to a production facility being built in accordance with the PRCs Good Manufacturing Practices (GMP) Standard. The Company expects that the work shops for the main products Penicillin and Cephems Sterile Injection Powder will be completed by the end of 2009 and the estimated additional cost to be completed will be approximately $13.50 million. No depreciation is provided for construction-in-progress until such time the assets are completed and placed into service.
As of September 30, 2009 and December 31, 2008, the Company had construction-in-progress amounted to $14,309,440 and $7,379,805, respectively. For the three months ended September 30, 2009 and 2008, the Company capitalized interest as part of construction-in-progress amounted to $109,034 and $19,736, respectively. For the nine months ended September 30, 2009 and 2008, the Company capitalized interest as part of construction-in-progress amounting to $285,162 and $105,056 with 5.6% and 7.0% effective weighted average interest rate, respectively.
Note 9 - INTANGIBLE ASSETS, NET
Intangible assets consist of the following as of September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
(Unaudited) |
|
|
|
||
|
|
|
|
||||
Land use rights: |
|
$ |
8,058,504 |
|
$ |
8,058,504 |
|
Less: accumulated amortization |
|
|
(765,562 |
) |
|
(641,074 |
) |
|
|
|
|
||||
Land use rights, net |
|
|
7,292,942 |
|
|
7,417,430 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
Patent - Approved drugs |
|
|
190,710 |
|
|
190,710 |
|
Less: accumulated amortization |
|
|
(31,775 |
) |
|
(21,083 |
) |
|
|
|
|
||||
Patent, net |
|
|
158,935 |
|
|
169,627 |
|
|
|
|
|
||||
Total intangible assets, net |
|
$ |
7,451,877 |
|
$ |
7,587,057 |
|
|
|
|
|
Land use rights are pledged as collateral for notes payable as of September 30, 2009. Amortization expense for the three months periods ended September 30, 2009 and 2008 amounted $55,047 and $25,747, respectively. Amortization expenses for the nine months periods ended September 30, 2009 and 2008 amounted $135,106 and $132,931, respectively.
- 17 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
On September 1, 2008, the Company and RimAisa entered into a Memorandum of Understanding (the Understanding). Pursuant to term #2 of the Understanding, both parties agreed that all the proceeds arising from the land of Eryes original plant belong to Erye Trading (including income derived from relocation compensation, lease, transfer or other income related to the land use right). As of September 30, 2009, the aforesaid land use right was valued at approximately $5,500,000 net of accumulated amortization.
One of the Companys patent of approved drug was fully amortized during 2008, $151,790 of costs and accumulated amortization were deducted from intangible asset account.
The following table consists of the expected amortization expense for the next five years:
|
|
|
|
|
Years ended September 30, |
|
Amount |
|
|
|
|
|
||
2010 |
|
$ |
180,142 |
|
2011 |
|
|
180,142 |
|
2012 |
|
|
180,142 |
|
2013 |
|
|
180,142 |
|
2014 |
|
|
180,142 |
|
Thereafter |
|
|
6,551,167 |
|
|
|
|
||
Total |
|
$ |
7,451,877 |
|
|
|
|
Note 10 - RELATED PARTIES TRANSACTIONS
Other Receivables Related Parties
Other receivable contained the following related party balances where Enshi was the discontinued subsidiary since July 2007. Chris Peng Mao is the CEO of the Company. Lufan An is the board member and shareholder of the Company. Stephen Globus is a shareholder of CBC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
Due From |
|
Term |
|
Manner of Settlement |
|
|||||
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
||||||||||||||
CBH |
|
$ |
46,058 |
|
$ |
46,058 |
|
|
Chris Peng Mao |
|
|
Short Term |
|
|
Cash |
|
CBH |
|
|
10,000 |
|
|
10,000 |
|
|
Lufan An |
|
|
Short term |
|
|
Cash |
|
CBH |
|
|
10,000 |
|
|
|
|
|
Stephen Globus |
|
|
Short Tern |
|
|
Cash |
|
CBH |
|
|
265,442 |
|
|
265,442 |
|
|
Enshi |
|
|
Short Term |
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
331,500 |
|
$ |
321,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Payables Related Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
Due To |
|
Term |
|
Manner of Settlement |
|
|||||
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
||||||||||||||
Erye |
|
$ |
42,949 |
|
$ |
499,186 |
|
|
Erye Trading |
|
|
Short Term |
|
|
Cash |
|
CBH |
|
|
196,622 |
|
|
167,508 |
|
|
Erye Trading |
|
|
Short Term |
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
239,571 |
|
$ |
666,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erye Trading was a company owned by minority shareholders of Erye. The 38 minority shareholders of Erye transferred their shares of Erye to Erye Trading in 2008 and the transactions was consummated on June 24, 2008. Erye Trading is the 49% shareholder of Erye as of September 30, 2009.
- 18 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Long-term Loans Related Party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
Due To |
|
Term |
|
Manner of Settlement |
|
|||||
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
||||||||||||||
Erye |
|
$ |
7,702,767 |
|
$ |
|
|
|
Erye Trading |
|
|
Long-term |
|
|
Cash |
|
In May 2009, Erye entered a loan agreement with Erye Trading, the noncontrolling shareholder of Erye, to borrow the dividend Erye was entitled to for the purpose of constructing the new factory pursuant to the board resolutions executed on the same time. The total loan amounted to $7,702,767 was unsecured with due date on the later of 1)one year after all new buildings pass the inspection, and the new factory is in the production stage; 2) December 31, 2013. The applied interest rate equals to the prevailing interest rate of the one-year bank loan, currently 5.31% per annum. Interest payment is due every six months. Erye Trading will lend Erye the dividend received from Erye in future following the same terms.
For the three months and nine months ended September 30, 2009, Erye accrued $103,154 and $232,063 interest expense payable to Erye Trading connected to the said long-term loan.
Note 11 - NOTES PAYABLE
The Companys subsidiary Erye has $10,080,577 and $4,563,837 of notes payables as of September 30, 2009 and December 31, 2008, respectively. Notes are payables to the banks who issue bank notes to Eryes creditors. Notes payable are interest free and usually mature after a three to six months period.
In order to issue notes payable on behalf of the Company, the banks required collateral, such as cash deposit which was approximately 30%-50% of notes to be issued, or properties owned by companies or etc. As of September 30, 2009 and December 31, 2008, $3,935,443 and $1,373,228 of restricted cash were put up for collateral for the balance of notes payable, respectively, which was approximately 39.0% of the notes payable (See notes 3) the Company issued, and the remaining of the notes payable is collateralized by pledging the land use right the Company owned amounted to approximately $1,840,000 as of September 30, 2009 and December 31, 2008.
Note 12 SHORT-TERM LOANS
The Company had a total of $117,360 of short-term loans as of September 30, 2009. These loans are due on demand, unsecured and interest free. The average interest rates including short-term and long-term loans (see Note 8) was approximately 5.6% for the nine months period ended September 30, 2009. During the nine months ended September 30, 2009, the Company paid the loan principal back to several Chinese banks amounted to $2,492,030.
The Company had $2,611,260 short term loans as of December 31, 2008, including bank loans amounted to $2,492,030. These loans mature in one year or less. The average interest rates were approximately 7.1% for the year ended December 31, 2008. Bank loans were collateralized by certain buildings owned by Erye with historical value of $127,749 as of December 31, 2008.
Interest expense of short-term loans for the three months ended September 30, 2009 and 2008 were $109,034 and $30,211, respectively, of which $109,034 and $19,736 were capitalized as part of construction-in-progress. Interest expense of the short-term loans for the nine months ended September 30, 2009 and 2008 amounted to $285,162 and $115,531 respectively, of which $285,162 and $105,056 were capitalized for construction in progress, respectively.
- 19 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Note 13 REDEEMABLE PREFERRED STOCK
On November 16, 2007, the Company entered a conditional loan conversion agreement (the Agreement) with RimAsia, under which the principal amount of the $11.5 million loan owed to RimAsia in connection with the Enshi acquisitions plus unpaid interest of $1,008,534 (combined total of $12,508,534) was converted into 6,185,607 shares of Series B redeemable convertible preferred shares of the Company at an effective conversion price at $2.0222 per share. Each series B share may be converted into two shares of common stock. Additionally, the exercise price of $1.375 for the 12 million existing warrants exercisable into common stock previously issued to and currently held by RimAsia in connection with the extension of the loan financing (Existing Warrants) was lowered to $1.26 per share and the term extended to 4.5 years from the closing date. This Agreement was conditional subsequent to the completion of at least one of sizeable acquisition by the end of June 2008. RimAsia extended the wavier to not to convert the Series B preferred stock to debt to earlier of (a) October 31, 2009 or (b) abandonment of the merger with NeoStem which is disclosed in Note 18.
Under the terms of the redeemable stock, the issuer has the right to redeem and the holder has the right to convert any time up to and including the fourth anniversary of the issuance. Pursuant to the FASBs accounting standard, the redeemable stock is classified outside of permanent equity.
According to the Agreement, the series B preferred stock is subject to optional redemption at the Companys option before the 4th anniversary of issuance date and mandatory redemption at the investors of the Companys option thereafter. The Company may be required to repurchase the remaining series B preferred stock four years after the closing date at a per share price of the sum of (1) the original Series B issue price $2.0222 per share; (2) all accrued but unpaid annual dividends; (3) 5% of the original series B issue price per annum accrued from the occurrence of certain triggering events, such as the Companys failure to pay annual dividends, mandatory redemption price or any other amount due, either in cash or in kind. (4)The four-percent suspendible premium which shall be deemed to have begun to accrue from the Series B Issuance date and shall continue to accrue until the date when the average closing price of the common stock over 30 consecutive trading days each with a daily trading volume of no fewer than 100,000 shares exceeds the following price thresholds: during the 2nd year from the Series B Issuance date, $1.4, during the 3rd year, $1.58, and during the 4th year, $1.72.
On March 31, 2009, RimAsia waived the dividend of 5% of the original Series B issue price and 4% suspendible premium for the period from September 15, 2008 through the earlier of (a) October 31, 2009 and (b) abandonment of the Merger Agreement. However, RimAsia reserves the right to reinstate all the waived dividends and premiums if the Merger announced on November 2008 is not consummated by October 31, 2009.
The series B redeemable stock was recorded at fair value on the date of issuance. As of September 30, 2009 and December 31, 2008, redeemable preferred stock amounted to $12,508,534. Dividend payables amounted to $1,110,346 as of September 30, 2009 and December 31, 2008. Pursuant to the optional redemption clause, the holders of the series B are be entitled to receive an annual dividend of 5% amounted to $651,129; and, the four-percent suspendible premium was accrued in the amount of $459,217, which were included in dividend payable. For the nine months periods ended September 30, 2009 and 2008, the Company recorded $0 and $952,592 dividends and accretion on the redeemable preferred stock, respectively.
- 20 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
On November 2, 2008, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Neostem, Inc., a Delaware corporation, and CBH Acquisition LLC (Merger Sub), a Delaware NBS limited liability company and wholly-owned subsidiary of Neostem. Pursuant to the Merger Agreement, CBH will merge into Merger Sub, with Merger Sub as the surviving entity. All of the shares of the Companys series B shares issued and outstanding immediately prior to the effective time of the Merger will be converted into (i) 5,383,009 shares of NeoStem Common Stock, (ii) 6,977,512 shares of Series C Convertible Preferred Stock, without par value, of NeoStem, each with a liquidation preference of $1.125 per share and convertible into shares of NeoStem Common Stock at a conversion price of $0.90 per share, and (iii) warrants to purchase 2,400,000 shares of NeoStem Common Stock at an exercise price of $0.80 per share.
As of July 1, 2009, the Company entered into Amendment No. 1 to the Merger Agreement with Neostem, CBC and CBH Acquisition LLC, NeoStems wholly-owned subsidiary. Pursuant to the terms of the Amendment:
The number of shares of NeoStem Common Stock to be issued to the CBH Common Stockholders was reduced to an aggregate of 7,150,000 shares, with no additional shares being escrowed;
The number of shares to be issued to RimAsia will be increased to 6,458,009 shares of Common Stock and 8,177,512 shares of NeoStem Series C Convertible Preferred Stock, each with a liquidation preference of $1.125 and convertible to shares of NeoStem Common Stock at an initial conversion price of $.90 (with the Class B warrants to be issued to RimAsia eliminated), in exchange for certain advances made or to be made by RimAsia and described below;
Privately issued NeoStem warrants outstanding immediately prior to the closing of the merger shall be amended to reduce their exercise price if the current exercise price is $4.00 and above;
the Compensation Committee of NeoStems Board of Directors may in lieu of lowering the exercise price of outstanding options to $.80 as provided in the original merger agreement, lower the exercise price to a price which is greater than $.80 (but not less than fair market value) and provide alternative cash or equity consideration to eligible NeoStem employees, directors, advisors and consultants;
Note 14 - STATUTORY RESERVES
The laws and regulations of the PRC require that before foreign invested enterprise can legally distribute profits, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, after the statutory reserves. The statutory reserves include the surplus reserve fund and the common welfare fund.
The Company is required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Companys registered capital. This statutory reserve fund is planned for future development of the company or use for employees benefits. These reserves represent restricted retained earnings.
The transfer to this reserve must be made before distribution of any dividends to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. The Chinese government restricts distributions of registered capital and the additional investment amounts required by a foreign invested enterprise. Approval by the Chinese government must be obtained before distributions of these amounts can be returned to the shareholders.
- 21 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
The Company had fully contributed its required surplus reserve as of December 31, 2008. As of September 30, 2009, the Company has statutory surplus reserve and common welfare reserve amounted to $1,337,979 and $60,698, respectively.
Note 15 DIVIDEND DISTRIBUTION
On May 2009, the board of Erye declared a dividend to be distributed pro rata accordingly to the ownership percentage which is 51% owned by CBH and 49% owned by the non-controlling shareholder Erye Trading. The board also decided that board would request the dividend distributed to Erye Trading to be lent back to Erye for the ongoing construction-in-project, and the dividend distributed to CBH would be invested back to Erye as additional paid in capital.
The table below represents the detail of dividend distribution and utilization:
|
|
|
|
|
Dividend Declaration to |
|
Amount |
|
|
|
|
|
||
Erye Trading |
|
$ |
7,208,920 |
|
CBH |
|
|
6,712,396 |
|
|
|
|
||
Total |
|
$ |
13,921,316 |
|
|
|
|
||
|
|
|
|
|
Dividend distributed to Erye Trading |
|
$ |
7,208,920 |
|
Foreign currency translation gain |
|
|
493,847 |
|
|
|
|
||
Long-term loans from related party increased through dividend distributed |
|
$ |
7,702,767 |
|
|
|
|
||
|
|
|
|
|
Dividend distributed to CBH |
|
$ |
6,712,396 |
|
Chinese income tax applied (see Note 16) |
|
|
(432,040 |
) |
Foreign currency translation gain |
|
|
27,147 |
|
|
|
|
||
Additional paid-in capital increased through dividend distributed |
|
$ |
6,307,503 |
|
|
|
|
Note 16 - INCOME TAXES
Corporation Income Tax (CIT)
The Companys subsidiaries operate in China. According to the Chinese Joint Venture Business Law, these subsidiaries have been registered and incorporated with the status of Sino-foreign joint venture companies and are subject to a two year tax exemption and a three year 50% reduction in income tax rates preference treatment, which generally commences from the first year of establishing a joint venture or the approval date of the income tax preference application.
- 22 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Effective January 1, 2008, the New Enterprise Income Tax (EIT) law replaced the existing laws for Domestic Enterprises (DES) and Foreign Invested Enterprises (FIEs). The new standard EIT rate of 25% has replaced the 33% rate previously applicable to both DES and FIEs. Companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by local government for a grace period of the next 5 years or until the tax holiday term is completed, whichever is sooner.
The Companys subsidiaries, Suzhou Erye was established before March 16, 2007 and therefore is qualified to continue enjoying the reduced tax rate as described above. Erye was granted income tax exemption for two years commencing from January 1, 2006, and is subject to 50% of the 25% EIT tax rate, or 12.5% from January 1, 2008 through December 31, 2010. Provision for income taxes amounted $1,416,393 and $1,008,196 for the nine months ended September 30, 2009 and 2008, respectively.
Pursuant to the China Tax Regulation No. 91 executed in 2008, the Chinese tax authority no longer granted tax credit for reinvestment in Chinese company, and the dividend paid to foreign shareholders from foreign-owned Chinese company is subjected to 10% income tax rate. Also, based on PRC Tax Regulation No. 1 item 4, only dividend declared after 2008 is subjected to 10% income tax rate. As of September 30, 2009, $432,040 income tax has been paid by CBH for the 2008 dividend distributed and reinvested to Erye as additional paid-in capital.
The following table reconciles the U.S. statutory rates to the Companys effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
||||||||
U.S. Statutory rate |
|
|
34.0 |
% |
|
34.0 |
% |
|
34.0 |
% |
|
34.0 |
% |
Foreign income not recognized in USA |
|
|
(34.0 |
) |
|
(34.0 |
) |
|
(34.0 |
|
|
(34.0 |
) |
China income taxes rate |
|
|
25.0 |
|
|
25.0 |
|
|
25.0 |
|
|
25.0 |
|
China income tax exemption |
|
|
(12.5 |
) |
|
(12.5 |
) |
|
(12.5 |
) |
|
(12.5 |
) |
Other items (1) |
|
|
(0.1 |
) |
|
1.0 |
|
|
1.6 |
|
|
1.3 |
|
|
|
|
|
|
|
||||||||
Total provision for income taxes |
|
|
12.4 |
% |
|
13.5 |
% |
|
14.1 |
% |
|
13.8 |
% |
|
|
|
|
|
|
|
|
(1) |
The (0.1%) represents the $117,863 expense incurred by CBH that is not deductible in PRC, and offset by the $24,358 prior year income tax refund received by Erye for the three months ended September 30, 2009, and 1.0% represents the $67,878 expenses incurred by CBH that is not deductible in PRC for the three months ended September 30, 2008. The 1.6% represents the $1,246,357 expense incurred by CBH that is not deductible in PRC, and offset by the $24,358 prior year income tax refund received by Erye for the nine months ended September 30, 2009, and 1.3% represents the $392,349 expenses incurred by CBH that is not deductible in PRC for the nine months ended September 30, 2008. |
The estimated tax savings due to the reduced tax rate for the three months ended September 30, 2009 and 2008 are $553,986 and $377,583, respectively. The net effect on income per basic outstanding share if the income tax had been applied would decrease income per share by $0.01 and $0.01 for the three months ended September 30, 2009 and 2008, respectively.
The estimated tax savings due to the reduced tax rate for the nine months ended September 30, 2009 and 2008 are $1,416,393 and $1,008,196, respectively. The net effect on income per basic outstanding if the income tax had been applied would decrease income per share by $0.04 and $0.03 for the nine months ended September 30, 2009 and 2008, respectively.
- 23 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
The Company was incorporated in the United States and incurred a net operating loss for income tax purposes for 2009 and 2008. The estimated net operating loss carry forwards for United States income tax purposes amounted to $5,414,808 and $5,358,669 as of September 30, 2009 and December 31, 2008, respectively, which may be available to reduce future years taxable income. These carry forwards will expire, if not utilized, in 2029. Management believes that the realization of the benefits arising from this loss appear to be uncertain due to Companys limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance at September 30, 2009 and December 31, 2008. Management reviews this valuation allowance periodically and makes adjustments as warranted
The estimated valuation allowance for the nine months periods ended September 30, 2009 and 2008 were as follow:
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
||
Balance of December 31, 2008 |
|
$ |
1,821,947 |
|
Increase |
|
|
19,087 |
|
|
|
|
||
Balance of September 30, 2009 (unaudited) |
|
$ |
1,841,034 |
|
|
|
|
The Company has cumulative undistributed earnings of foreign subsidiaries of approximately $6.1 million as of September 30, 2009, is included in consolidated retained earnings and will continue to be indefinitely reinvested in internationaloperations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
Business Tax
The Company is subject to business tax, which is charged on the selling price of applicable product and service at a general rate of 5% in accordance with the tax law applicable. Keyuan is exempt from business tax according to local applicable favorable tax policy.
Value Added Tax (VAT)
In accordance with the relevant taxation laws in China, the VAT rate for domestic sales is 17% and 0% for export sales on the invoiced value of sales and is payable by the purchaser. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Companys finished products can be used to offset the VAT due on sales of the finished product.
VAT on sales and VAT on purchases amounted to $2,892,296 and $1,774,719 for the three months ended September 30, 2009, and $2,254,536 and $1,347,136 for the three months ended September 30, 2008. VAT on sales and VAT on purchases amounted to $7,649,272 and $5,797,836 for the nine months period ended September 30, 2009, and $6,212,023 and $4,575,536 for the same period in 2008, respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.
Tax payable
Taxes payable was comprised as follows as of September 30, 2009 and December 31, 2008:
- 24 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
December 31, 2008 |
|
||
|
|
(Unaudited) |
|
|
|
||
|
|
|
|
||||
Income tax payable |
|
$ |
1,869,762 |
|
$ |
1,548,509 |
|
VAT payable |
|
|
705,727 |
|
|
657,978 |
|
Other taxes payable |
|
|
44,814 |
|
|
5,935 |
|
|
|
|
|
||||
Total |
|
$ |
2,620,303 |
|
$ |
2,212,422 |
|
|
|
|
|
Note 17 EARNINGS PER SHARE
The Company reports earnings per share in accordance with the provisions of SFAS 128, Earnings per Share. SFAS 128 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
The following is a reconciliation of the basic and diluted earnings per share computation (unaudited) for the three and nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||||
|
|
|
|
||||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
||||||||
Net income from continuing operations for earnings per share |
|
$ |
1,908,276 |
|
$ |
1,234,977 |
|
$ |
3,793,005 |
|
$ |
3,181,917 |
|
|
|
|
|
|
|
||||||||
Net loss from discontinued operations for earnings per share |
|
$ |
(452,531 |
) |
$ |
(78,342 |
) |
$ |
(494,172 |
) |
$ |
(87,369 |
) |
|
|
|
|
|
|
||||||||
Weighted average shares used in basic computation |
|
|
37,082,739 |
|
|
36,490,312 |
|
|
37,082,457 |
|
|
36,490,312 |
|
Diluted effect of stock options and warrants |
|
|
12,371,214 |
|
|
|
|
|
12,371,214 |
|
|
|
|
|
|
|
|
|
|
||||||||
Weighted average shares used in diluted computation |
|
|
49,453,953 |
|
|
36,490,312 |
|
|
49,453,671 |
|
|
36,490,312 |
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
0.05 |
|
|
0.02 |
|
|
0.10 |
|
|
0.06 |
|
|
|
|
|
|
|
||||||||
Discontinued operations |
|
|
(0.01 |
) |
|
(0.00 |
) |
|
(0.01 |
) |
|
(0.00 |
) |
|
|
|
|
|
|
||||||||
Basic |
|
$ |
0.04 |
|
$ |
0.02 |
|
$ |
0.09 |
|
$ |
0.06 |
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
0.04 |
|
|
0.02 |
|
|
0.08 |
|
|
0.06 |
|
|
|
|
|
|
|
||||||||
Discontinued operations |
|
|
(0.01 |
) |
|
(0.00 |
) |
|
(0.01 |
) |
|
(0.00 |
) |
|
|
|
|
|
|
||||||||
Diluted |
|
$ |
0.03 |
|
$ |
0.02 |
|
$ |
0.07 |
|
$ |
0.06 |
|
|
|
|
|
|
|
- 25 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Note 18 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space from third parties. Accordingly, the Company incurred rent expenses amounted to $0 and $3,865 for the three months ended September 30, 2009 and 2008, respectively. The Company recognized rent expenses of $6,592 and $11,595 for the nine months periods ended September 30, 2009 and 2008, respectively.
As of September 30, 2009, the Company has no outstanding commitments in respect to non-cancelable operating leases.
Research and Development Contract
On November 5, 2007, the Company entered into a new drug development contract with a third party (the Developer). Pursuant to the contract, the Developer will transfer a drug patent to the Company, and also is responsible for obtaining the New Drug Certificate and the Drug Manufacturing Approval from the PRC Drug Administration Authority no later than July 1, 2009. In exchange, the Company will pay up to approximately $1,600,000 (RMB12,000,000) to the Developer. Of the total $1,600,000, approximately $933,800 and $266,800 will need to be paid before December 31, 2007 and February 25, 2008, respectively, and the final payment ranging from $0 to $400,200 (depending on the date of the Manufacturing Approval) needs to be paid no later than 10 days after the grant date of the Manufacturing Approval. Further, the two parties agreed that the Company will pay sales commission to the Developer based on the sales volume of the contracted new drug during a 10 year period after this drug is put into production. If the PRC Drug Administration Authority denies the application of the Drug Manufacturing, all payments made by the Company would be fully returned to the Company by the Developer. As of September 30, 2009, the new drug has been in the trial stage. The Company expected the developing contract to delay one more year to complete.
The Company had advanced $1,321,561 (RMB9,008,596) and $1,321,561 (RMB9,008,596) for the aforesaid contract as of September 30, 2009 and December 31, 2008, respectively.
Purchase commitment
The Company entered a Long-term purchase contract with one of its major suppliers (Supplier A) for the period of May 1, 2006 to April 30, 2009 and later extended to February 28, 2010. Pursuant to the contract, Erye committed to purchase a certain quantity of raw materials from Supplier A at a fixed price with VAT and pay the purchase price with bank notes or bank remittances within 30 days after the raw materials are delivered. If Supplier A could not provide the raw materials on time which resulted in the contract being in default by Supplier A, Supplier A would pay a penalty to the Company amounting to $146,500 (RMB1,000,000) and other related loss. The fixed purchase price was adjusted one time on November 18, 2008 in an amendment in which the two parties agreed that no more price increases would be allowed during the remaining period of the contract.
For the nine months ended September 30, 2009, the Company purchased raw materials from the aforesaid supplier amounted to $3,234,939 to which the Company had accounts payable in the amount of $46,940, 0.8% of total payable balance as of September 30, 2009.
Legal Proceedings
- 26 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
In March 2007, the Company identified non-existent trade accounts receivable acquired in the acquisition of Enshi. RACP Pharmacetical Holdings Limited, (RACP), a former subsidiary of CBH, commenced legal proceeding for damages of $10,000,000 against Mr. Li Xiaobo (Mr. Li), the previous owner and controlling shareholder of Enshi, and his related parties (Defendants) for breach of representations and warranties and fraud (LXB Litigation) The Hong Kong courts has frozen approximately $10,000,000 worth of assets per the court order in Hong Kong and the Defendants lost their opposition actions against the seizure order.
In July 2007, Enshi was foreclosed on by RimAsia and ceased to be part of the Company. RimAsia assumed the litigation activities against Mr. Li Xiaobo and certain other defendants in connection with the acquisition of shares of Enshi (LXB) and on October 17, 2008_reached a settlement with LXB pursuant to which Enshi was returned to LXB against a payment of certain sum of funds of which the residual sum post litigation costs were to be eventually transferred to the Company. The expected residual is not expected to be meaningful to the Company.
On November 16, 2007 and amended on January 22, 2008, the Company and RimAisa entered into a litigation agreement (Litigation Agreement). Pursuant to this Litigation Agreement, if RimAisa or RACP (as the plaintiff) prevail in the LXB Litigation or the settlement is reached, any judgment awards, settlement amount and salvage value realized from Enshi, would be firstly used to reimburse all the legal and related expenses incurred by RimAsia in the LXB Litigation, up to $4,000,000, and the remaining amounts of the judgment proceeds would be entitled to the Company. If RimAisa and the Company do not prevail in the LXB Litigation, RACP should be returned to CBH and all the proceeds of any sale of liquidation of Enshi or any assets of or interest in Enshi shall be distributed as agreed by both parties. In addition, all the costs and expenses (including attorneys fees) incurred by or on behalf of the plaintiffs shall be borne 55% by RimAsia and 45% by the Company.
On September 1, 2008, the Company and RimAisa entered into a Memorandum of Understanding (the Understanding). Pursuant to term #7 of the Understanding - Litigation Residual Payment, if there is no consummation of the Merger, the gross residual (the Gross Residual) from the LXB Litigation receivable by CBH (being the gross settlement proceeds of the LXB litigation paid by Li Xiao Bo less the litigation and related expenses incurred by and reimbursed to RACP pursuant to the Litigation Agreement shall be paid to CBH in cash or shares of common stock and warrants to purchase common stock of NBS (collectively, NBS Securities), such NBS Securities being valued at their original purchase price but in no case to be more than (a) US$1,250,000 or (b) the value of the Gross Residual, whichever is less, and only to the extent there is any such residual from the LXB litigation. Any amount of the Gross Residual remaining after deducting the value of NBS Securities under the immediately preceding sentence shall be immediately paid to CBH in cash. In case of a closing of the Merger, RACP may no longer deliver such NBS Securities to CBH, but shall be able to deliver to Erye Trading NBS Securities, valued at their purchase price and up to an amount equal to 50% of the Net Residual (to be defined below), in exchange for the withholding of an equal amount of cash from the Gross Residual, pursuant to the terms of an agreement with Erye Trading that will be documented and signed prior to or at the closing of the Merger. The Net Residual means the Gross Residual minus the sum of (a) US$1.3 million representing the legal fees and costs and the un-reimbursed advances and expenses made by Erye to Shenyang Enshi Pharmaceutical Ltd. and CBH, and (b) US$300,000 for operating expenses of CBH over the next 12 months.
Note 19 SHAREHOLDERS EQUITY
Issuance of Shares for Services
In December 2008, the Company issued 100,000 shares of common stock to a consultant for the services provided during the period from January 2007 to February 2009. Shares were valued at $27,000 based on the market price at the service contract signing dates.
- 27 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
On July 11 2009, the board of directors of the Company approved to issue 50,000 shares of common stock to a consultant for the service provided during the period from March 1, 2009 to August 15, 2009. Shares were valued at $11,500 based on the market price at the service contract signing dates.
Reconciliation of Discrepancy Shares
The Company reconciled the outstanding 25,000 shares of the Companys Series A convertible preferred stock as of September 30, 2009 which was previously recorded as cancelled shares. The Company reconciled the outstanding 492,001 shares of common stock which was the provision for the original Globus Growth Fund that have not exchanged for CBH shares. As a result of this reconciliation, the Company adjusted $5,170 out from additional paid in capital, and allocated $250 and $4,920 to the par value of the preferred stock and the common stock, respectively.
Conversion of Series A preferred stock
In July 2009, 75,000 shares of Series A preferred stock were converted to 75,000 shares of the Companys common stock.
Warrants
Following is a summary of the status of warrants outstanding at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Warrants |
|
Exercisable Warrants |
|
|||||||||||
|
|
||||||||||||||
|
Exercise Price |
|
Number |
|
Average Remaining Contractual Life |
|
Average Exercise Price |
|
Number |
|
|||||
|
|
|
|||||||||||||
|
|
1.26 |
|
|
12,000,000 |
|
|
2.64 |
|
|
1.26 |
|
|
12,000,000 |
|
|
|
1.25 |
|
|
1,000,000 |
|
|
0.34 |
|
|
1.25 |
|
|
1,000,000 |
|
|
|
1.26 |
|
|
7,370,298 |
|
|
0.44 |
|
|
1.26 |
|
|
7,370,298 |
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
20,370,298 |
|
|
|
|
|
|
|
|
20,370,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a summary of the Warrant activity:
|
|
|
|
|
|
|
Warrants |
|
|
Outstanding as of January 1, 2008 |
|
|
22,094,738 |
|
Granted |
|
|
|
|
Forfeited |
|
|
(1,639,833 |
) |
Exercised |
|
|
|
|
|
|
|
||
Outstanding as of December 31, 2008 |
|
|
20,454,905 |
|
Granted |
|
|
|
|
Forfeited |
|
|
(84,607 |
) |
Exercised |
|
|
|
|
|
|
|
||
Outstanding as of September 30, 2009 |
|
|
20,370,298 |
|
|
|
|
Note 20 RESTRUCTURING
BUSINESS COMBINATIONS
- 28 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
Merger with NeoStem, Inc.
As previously mentioned in Note 1, on November 2, 2008, CBH entered into an Agreement and Plan of Merger (the Merger agreement) with CBC, NeoStem, Inc., and CBH Acquisition LLC (Merger Sub). The Merger Agreement contemplates the merger of CBH with and into Merger Sub, with Merger Sub as the surviving entity (the Merger). Prior to the consummation of the Merger, CBH will spin off all of its shares of capital stock of CBC to CBHs stockholders in a liquidating distribution so that the only material assets of CBH following such spin-off will be CBHs 51% ownership interest in Erye, plus net cash which shall not be less than $550,000.
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, all of CBHs common stock, par value $.01 per share, issued and outstanding immediately prior to the effective time of the Merger (the Effective Time) will be converted into the right to receive, in the aggregate, 7,500,000 shares of NeoStems common stock at par value of $.001 per share (of which 150,000 shares will be held in escrow pursuant to the terms of an escrow agreement to be entered into between CBH and NeoStem).
Subject to the cancellation of outstanding warrants to purchase shares of CBH Common Stock held by RimAsia, all of the shares of CBH series B preferred stock solely held by RimAsia, issued and outstanding immediately prior to the Effective Time will be converted into NeoStems common stock, series C convertible preferred stock and warrants to purchase NeoStems common stock. See details in Note 13.
At the Effective Time, in exchange for cancellation of all of the outstanding shares of CBH series A convertible preferred stock which is held by Stephen Globus, a director of CBH, and/or related persons, NeoStem will issue to Mr. Globus and/or related persons 50,000 shares of NeoStem common stock at $1.00 per share. NeoStem also will issue 60,000 shares of NeoStem Common Stock to Mr. Globus and 40,000 shares of NeoStem common stock to Chris Peng Mao, the Chief Executive Officer of CBH, in exchange for the cancellation and the satisfaction in full of indebtedness in the aggregate principal amount of $90,000, plus any and all accrued but unpaid interest thereon, and other obligations of CBH to Globus and Mao. NeoStem will bear 50% of up to $450,000 of CBHs expenses post-merger, and satisfaction of the liabilities of Messrs. Globus and Mao will count toward that obligation. NeoStem also will issue 200,000 shares to CBC to be held in escrow, payable if NeoStem successfully consummates its previously announced acquisition of control of Shandong New Medicine Research Institute of Integrated Traditional and Western Medicine Limited Liability Company.
Also at the Effective Time, subject to acceptance by the holders of all of the outstanding warrants to purchase shares of CBH common stock (other than warrants held by RimAsia), such warrants shall be canceled and the holders thereof shall receive warrants to purchase up to an aggregate of up to 2,012,097 shares of NeoStem common stock at an exercise price of $2.50 per share.
Upon consummation of the transactions contemplated by the Merger, Merger Sub will own 51% of the ownership interests in Erye, and Suzhou Erye Economy and Trading Co. Ltd., a company incorporated in the PRC (EET), will own the remaining 49% ownership interest. In connection with the execution of the Merger Agreement, NeoStem, Merger Sub and Erye Trading have negotiated a revised joint venture agreement (the Joint Venture Agreement), which, subject to finalization and approval by the requisite PRC governmental authorities, will become effective and will govern the rights and obligations with respect to their respective ownership interests in Erye. Pursuant to the terms and conditions of the Joint Venture Agreement, dividend distributions to Erye Trading and Merger Sub will be made in proportion to their respective ownership interests in Erye; provided, however, that for the three-year period commencing on the first day of the first fiscal quarter after the Joint Venture Agreement becomes effective, (i) 49% of undistributed profits (after tax) will be distributed to Erye Trading and lent back to Erye by Erye Trading for use by Erye in connection with the construction of a new plant for Erye; (ii) 45% of the net profit (after tax) will be provided to Erye as part of the new plant construction fund, which will be characterized as paid-in capital for Merger Subs 51% interest in Erye; and (iii) 6% of the net profit will be distributed to Merger Sub directly for NeoStems operating expenses. In the event of the sale of all of the assets of Erye or liquidation of Erye, Merger Sub will be entitled to receive the return of such additional paid-in capital before distribution of Eyres assets is made based upon the ownership percentages of NeoStem and Erye Trading, and upon an initial public offering of Erye which raises at least $7,300,000 (RMB 50,000,000), Merger Sub will be entitled to receive the return of such additional paid-in capital. CBC will receive $300,000 from the settlement proceeds from the settlement of the litigation in Hong Kong and Canada by RACP Pharmaceutical Holdings Limited, a wholly-owned subsidiary of CBC, against Li Xiaobo and certain other defendants in connection with the acquisition of shares of Enshi (the LXB Litigation) and use it as working capital.
- 29 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
As of July 1, 2009, the Company entered into Amendment No. 1 to Agreement and Plan of Merger with NeoStem, CBC and CBH Acquisition LLC, NeoStems wholly-owned subsidiary. Pursuant to the terms of the Amendment:
The number of shares of NeoStem Common Stock to be issued to the CBH Common Stockholders was reduced to an aggregate of 7,150,000 shares, with no additional shares being escrowed, and Exchange Ratio was amended such that, as of the date thereof, it was 0.19255;
The number of shares to be issued to RimAsia was increased to 6,458,009 shares of NeoStem Common Stock and 8,177,512 shares of NeoStem Series C Convertible Preferred Stock, each with a liquidation preference of $1.125 and convertible to shares of NeoStem Common Stock at an initial conversion price of $.90 (with the Class B warrants to be issued to RimAsia eliminated), in exchange for certain advances made or to be made by RimAsia and as described below under that certain Funding Agreement;
125,000 shares of NeoStem Common Stock will be issued to Erye Trading or its designee for assistance in effectuating the merger;
The number of shares of NeoStem Common Stock to be issued to Steven E. Globus and Chris Peng Mao, a director and the CEO of CBH, respectively, in exchange for satisfaction of loans made by them to CBH, shall be reduced to an aggregate of approximately 17,158 shares;
Conditions to closing were amended to (a) add a condition that in order to satisfy its obligations under a memorandum of understanding with EET, CBH shall have caused Erye to transfer the land and building for its principal manufacturing facility to Erye Trading or its affiliate for a sum to be agreed upon, and for Erye Trading or its affiliate to lease that facility back to Erye at a nominal fee for a term through the construction and validation period of Eryes new manufacturing facility and until such date as Eryes new facility is completed and fully operational (which transaction will remove a significant asset from the CBH balance sheet) and (b) provide that instead of a spin-off of the CBC shares as a liquidating distribution to the shareholders of CBH, such shares will be privately sold to a third party, and CBH and CBC each represent that it has the corporate power and authority to effect the CBC sale transaction;
|
|
|
Eric Wei will be added to the current Board of Directors of NeoStem immediately after the effective time and Shi Mingsheng will be added to the current Board of Directors of NeoStem immediately after receipt of all PRC approvals; |
|
|
|
The exercise price of privately issued NeoStem warrants outstanding immediately prior to the closing of the merger has been adjusted from current exercise prices starting at $4.00 to adjusted exercise prices starting at $3.8182; |
- 30 -
|
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
|
|
|
The Compensation Committee of NeoStems Board of Directors may, in lieu of lowering the exercise price of outstanding options to $.80 as provided in the original merger agreement, lower the exercise price to a price which is greater than $.80 (but not less than fair market value) and provide alternative cash or equity consideration to eligible NeoStem employees, directors, advisors and consultants; |
|
|
|
The outside date for completion of the merger is extended to October 31, 2009. |
|
|
|
There is no longer a need for new employment contracts for Robin Smith and Zhang Jian, and the consulting agreement for Chris Mao has been amended to release NeoStem and CBH from any obligations with respect to any employment agreement or arrangements between Mr. Mao and CBH and its affiliates; |
|
|
|
Certain PRC approvals and assurances are no longer strict conditions to closing and instead CBH will use reasonable commercial efforts to obtain such approvals prior to closing. If NeoStem waives such condition, then such condition shall remain as a condition subsequent to the merger. Mr. Shi and Madame Jian will receive an aggregate of 203,338 shares of NeoStem Common Stock if all PRC approvals are timely received; |
|
|
|
The number and price of shares may be adjusted to reflect any reverse stock split that the company may undertake at the time of the merger; |
|
|
|
The parties reaffirm their respective representations and warranties, and CBC acknowledges that neither it nor any of its affiliates has or will have any claims against NeoStem or CBH and releases NeoStem and CBH in full; and |
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|
As an additional closing condition, NeoStem and CBH each shall provide to the other an opinion of counsel with respect to its corporate authorization of the merger. |
Additionally, as of July 1, 2009, NeoStem, CBH, CBC and RimAsia, which is already a significant investor in Neostem and CBH, entered into a Funding Agreement pursuant to which it was agreed that RimAsia shall supply additional funding to both NeoStem and CBH in an amount up to $1.6 million (including approximately $1 million advanced to date), which amount shall be forgiven upon its receipt of the increased amount of NeoStem securities described above to be received by RimAsia as part of the merger consideration. If less than $1.6 million has been advanced at that time, the difference shall be paid to NeoStem at the closing of the merger. In the event the merger has not received shareholder approval by October 31, 2009, NeoStem is required to repay RimAsia all payments incurred or made by RimAsia on behalf of NeoStem.
On August 27, 2009, the Company entered into Amendment No. 2 to Agreement and Plan of Merger with NeoStem, CBC and CBH Acquisition LLC. Pursuant to the terms of the Amendment:
|
|
|
TheExchange Ratio is amended to 0.1921665; |
|
|
|
The parties eliminated any exchange offer with respect to outstanding CBH Common Stock Purchase Warrants. |
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|
CBH agrees to cause Erye to use reasonable commercial efforts to obtain certain approvals from PRC regulatory authorities and certain assurances from PRC governmental authorities. However, the parties will not enter into an escrow agreement, and there will be no provision such that the consideration to be paid or issued by NeoStem in connection with the Merger is held in escrow, subject to a right of NeoStem to receive back all such consideration and rescind the Merger if any such PRC regulatory approvals are not obtained. Mr. Mingsheng Shi and Madam Jian Zhang shall use reasonable efforts to expediate the receipt of all PRC approvals and shall be paid an aggregate of 203,338 shares of NeoStems common stock when all PRC approvals are received. |
- 31 -
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
On July 15, 2009, Neostem filed a Form S-4 in connection with the Merger and it was declared effective on October 7, 2009.
Disposal of CBC and Keyuan
Pursuant to the Amendment No. 1 to the Merger Agreement, as an additional covenant of CBH and an additional condition to NeoStems obligation to close, (a) no later than 15 days prior to the effective date of the Form S-4 NeoStem submitted to SEC on July 16, 2009, CBH shall have entered into a binding agreement to transfer the stock of CBC to a third party in a private transaction and (b) no later than 15 days prior to the Closing of the Merger plan with Neostem, CBH shall have consummated the transfer of all of the CBC stock to such third party, all in a manner such that, following the transfer, the only material assets and liabilities of CBH at the time of the merger shall be the Eyre Ownership and at least $550,000 cash, and CBH shall have no liabilities except transaction related expenses of $450,000 or less. All documents and accounting for such CBC sale transaction shall be reasonably acceptable to NeoStem and shall include a full release in favor of NeoStem and its affiliates from any and all claims or liabilities due or asserted to be due to CBC, Keyuan or any of their affiliates. CBH shall take appropriate action to liquidate or extinguish any intercompany debt owed to CBH or Erye by CBC or Keyuan or any of their affiliates
On July 11, 2009, the Company decided to take actions to comply with the requirements of Amendment No. 1 to the Merger Agreement and to write off the Keyuan investment. CBH has already written off Keyuan, effective August 31, 2009. On September 4, 2009, CBH entered into a trust agreement with Stephen Globus, a board member of CBH, as trustee for the benefit of the holders of the common stock of CBH. As a result of those business dispositions, the Company recorded $417,150 loss from disposal of discontinued operations, net of tax effect. Loss from discontinued operations amounted to $35,381 and $77,022 for the three and nine months ended September 30, 2009, respectively. Loss from CBC and Keyuan were $78,342 and $87,369 for the three and nine months ended September 30, 2008, respectively.
Total assets and liabilities of CBC and Keyuan were reclassified as Assets( Liabilities) held for disposal on the consolidated balance sheets as of December 31, 2008, and the major classes of such items are as follows,
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|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
||
Current asset |
|
$ |
138,845 |
|
Equipment |
|
|
39,202 |
|
|
|
|
||
Total assets held for disposal |
|
$ |
178,047 |
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|
|
|
||
|
|
|
|
|
Current liabilities |
|
$ |
411,351 |
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|
|
|
||
Total liabilities held for disposal |
|
$ |
411,351 |
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|
|
|
- 32 -
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CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
SEPTEMBER 30, 2009 |
(Unaudited) |
The transactions contemplated by the Merger Agreement and the Amendment are subject to the authorization for listing on the American Stock Exchange (or any other stock exchange on which shares of NeoStem Common Stock are listed) of the shares to be issued in connection with the Merger, shareholder approval, approval of NeoStems acquisition of 51% ownership interest in Erye by relevant PRC governmental authorities, receipt of a fairness opinion and other customary closing conditions set forth in the Merger Agreement and its Amendment. If the necessary approvals for the Merger are not obtained and the Merger is not consummated, the Company will fail to comply with our agreement with RimAsia which may cause irreparable damage to our business and operations. Specials shareholders meetings of each of CBH and Neostem will be held on October 29, 2009 in order to approve the transactions contemplated by the Merger Agreement and the Amendment.
Note 21 SUBSEQUENT EVENTS
The Company has performed an evaluation of subsequent events through the date these consolidated financial statements were issued.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. China Biopharmaceuticals Holdings, Inc. is referred to herein as we, our,, us, CBH or the Company. The words or phrases would be, will allow, expect to, intends to, will likely result, are expected to, will continue, is anticipated, estimate, or similar expressions are intended to identify forward-looking statements. Such statements include those concerning the Merger Agreement we signed with Neostem Inc., our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities;(c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under Liquidity and Capital Resources. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. Further information on potential factors that could affect our business is described under the heading Risks Factors in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Readers are also urged to carefully review and consider the various disclosures we have made in that report.
OUR BUSINESS
We are a vertically integrated bio-pharmaceutical company focused on developing, manufacturing and distributing innovative drugs in the Peoples Republic of China (China or PRC). Our mission is to maximize investment returns for our shareholders by integrating our strong drug discovery and development strength with manufacturing and commercialization capabilities and by actively participating in the consolidation and privatization of the pharmaceutical industry in China to become a dominant player in the bio-pharmaceutical industry in China.
As reported on our Current Report on Form 8-K dated November 6, 2008, on November 2, 2008, we entered into an Agreement and Plan of Merger (the Merger Agreement) with NeoStem, Inc., a Delaware corporation (NeoStem), China Biopharmaceuticals Corp., a British Virgin Islands corporation and our wholly-owned subsidiary (CBC), and CBH Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of NeoStem (Merger Sub). The Merger Agreement contemplates our merger with and into Merger Sub, with Merger Sub as the surviving entity (the Merger); provided, that prior to the consummation of the Merger, we will spin off all of our shares of capital stock of CBC to our stockholders in a liquidating distribution so that the only material assets of us following such spin-off will be our 51% ownership interest in Suzhou Erye Pharmaceuticals Company Ltd. (Erye), a Sino-foreign joint venture with limited liability organized under the laws of the Peoples Republic of China (the PRC), plus net cash which shall not be less than $550,000. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, all of our shares of common stock, par value $.01 per share (CBH Common Stock), issued and outstanding immediately prior to the effective time of the Merger (the Effective Time) will be converted into the right to receive, in the aggregate, 7,500,000 shares of common stock, par value $.001 per share, of NeoStem (the NeoStem Common Stock) (of which 150,000 shares will be held in escrow pursuant to the terms of an escrow agreement to be entered into between CBH and NeoStem). Subject to the cancellation of outstanding warrants to purchase shares of CBH Common Stock held by RimAsia Capital Partners, L.P. (RimAsia), a current holder of approximately 14% of the outstanding shares of NeoStem Common Stock and the sole holder of shares of Series B Convertible Preferred Stock, par value $0.01 per share, of CBH (the CBH Series B Preferred Stock), all of the shares of CBH Series B Preferred Stock issued and outstanding immediately prior to the Effective Time will be converted into (i) 5,383,009 shares of NeoStem Common Stock, (ii) 6,977,512 shares of Series C Convertible Preferred Stock, without par value, of NeoStem, each with a liquidation preference of $1.125 per share and convertible into shares of NeoStem Common Stock at a conversion price of $.90 per share, and (iii) warrants to purchase 2,400,000 shares of NeoStem Common Stock at an exercise price of $0.80 per share. At the Effective Time, in exchange for cancellation of all of the outstanding shares of CBH Series A Convertible Preferred Stock, par value $.01 per share, of CBH (the CBH Series A Preferred Stock) held by Stephen Globus, a director of CBH, and/or related persons, NeoStem will issue to Mr. Globus and/or related persons an aggregate of 50,000 shares of NeoStem Common Stock. NeoStem also will issue 60,000 shares of NeoStem Common Stock to Mr. Globus and 40,000 shares of NeoStem Common Stock to Chris Peng Mao, the Chief Executive Officer of CBH, in exchange for the cancellation and the satisfaction in full of indebtedness in the aggregate principal amount of $90,000, plus any and all accrued but unpaid interest thereon, and other obligations of CBH to Globus and Mao. NeoStem will bear 50% of up to $450,000 of CBHs expenses post-merger, and satisfaction of the liabilities of Messrs. Globus and Mao will count toward that obligation. NeoStem also will issue 200,000 shares to CBC to be held in escrow, payable if NeoStem successfully consummates its previously announced acquisition of control of Shandong New Medicine Research Institute of Integrated Traditional and Western Medicine Limited Liability Company.
Also at the Effective Time, subject to acceptance by the holders of all of the outstanding warrants to purchase shares of CBH Common Stock (other than warrants held by RimAsia), such warrants shall be canceled and the holders thereof shall receive warrants to purchase up to an aggregate of up to 2,012,097 shares of NeoStem Common Stock at an exercise price of $2.50 per share. Upon consummation of the transactions contemplated by the Merger, Merger Sub will own 51% of the ownership interests in Erye, and Suzhou Erye Economy and Trading Co. Ltd., a company incorporated in the PRC (EET), will own the remaining 49% ownership interest. As of July 1, 2009, the Company entered into an Amendment No. 1 to Agreement and Plan of Merger with NeoStem, CBC and CBH Acquisition LLC, NeoStems wholly-owned subsidiary (Amendment). Pursuant to the terms of the Amendment:
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The number of shares of NeoStem Common Stock to be issued to the CBH Common Stockholders was reduced to an aggregate of 7,150,000 shares, with no additional shares being escrowed, and Exchange Ratio was amended such that, as of the date thereof, it was 0.19255; |
|
|
|
The number of shares to be issued to RimAsia was increased to 6,458,009 shares of NeoStem Common Stock and 8,177,512 shares of NeoStem Series C Convertible Preferred Stock, each with a liquidation preference of $1.125 and convertible to shares of NeoStem Common Stock at an initial conversion price of $.90 (with the Class B warrants to be issued to RimAsia eliminated), in exchange for certain advances made or to be made by RimAsia and as described below under that certain Funding Agreement; |
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125,000 shares of NeoStem Common Stock will be issued to EET or its designee for assistance in effectuating the Merger; |
|
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|
The number of shares of NeoStem Common Stock to be issued to Steven E. Globus and Chris Peng Mao, a director and the CEO of CBH, respectively, in exchange for satisfaction of loans made by them to CBH, shall be reduced to an aggregate of approximately 17,158 shares; |
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Conditions to closing were amended to (a) add a condition that in order to satisfy its obligations under a memorandum of understanding with EET, CBH shall have caused Erye to transfer the land and building for its principal manufacturing facility to EET or its affiliate for a sum to be agreed upon, and for EET or its affiliate to lease that facility back to Erye at a nominal fee for a term through the construction and validation period of Eryes new manufacturing facility and until such date as Eryes new facility is completed and fully operational (which transaction will remove a significant asset from the CBH balance sheet) and (b) provide that instead of a spin-off of the CBC shares as a liquidating distribution to the shareholders of CBH, such shares will be privately sold to a third party, and CBH and CBC each represent that it has the corporate power and authority to effect the CBC sale transaction; |
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Eric Wei will be added to the current Board of Directors of NeoStem immediately after the effective time and Shi Mingsheng will be added to the current Board of Directors of NeoStem immediately after receipt of all PRC approvals; |
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The exercise price of privately issued NeoStem warrants outstanding immediately prior to the closing of the merger has been adjusted from current exercise prices starting at $4.00 to adjusted exercise prices starting at $3.8182; |
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The Compensation Committee of NeoStems Board of Directors may, in lieu of lowering the exercise price of outstanding options to $.80 as provided in the original Merger Agreement, lower the exercise price to a price which is greater than $.80 (but not less than fair market value) and provide alternative cash or equity consideration to eligible NeoStem employees, directors, advisors and consultants; |
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The outside date for completion of the merger is extended to October 31, 2009. |
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There is no longer a need for new employment contracts for Robin Smith and Zhang Jian, and the consulting agreement for Chris Mao has been amended to release NeoStem and CBH from any obligations with respect to any employment agreement or arrangements between Mr. Mao and CBH and its affiliates |
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|
Certain PRC approvals and assurances are no longer strict conditions to closing and instead CBH will use reasonable commercial efforts to obtain such approvals prior to closing. If NeoStem waives such condition, then such condition shall remain as a condition subsequent to the merger. Mr. Shi and Madame Jian will receive an aggregate of 203,338 shares of NeoStem Common Stock if all PRC approvals are timely received; |
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The number and price of shares may be adjusted to reflect any reverse stock split that the company may undertake at the time of the merger; |
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The parties reaffirm their respective representations and warranties, and CBC acknowledges that neither it nor any of its affiliates has or will have any claims against NeoStem or CBH and releases NeoStem and CBH in full; and |
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As an additional closing condition, NeoStem and CBH each shall provide to the other an opinion of counsel with respect to its corporate authorization of the merger. |
Additionally, as of July 1, 2009, NeoStem, CBH, CBC and RimAsia, which is already a significant investor in Neostem and CBH, entered into a Funding Agreement pursuant to which it was agreed that RimAsia shall supply additional funding to both NeoStem and CBH in an amount up to $1.6 million (including approximately $1 million advanced to date), which amount shall be forgiven upon its receipt of the increased amount of NeoStem securities described above to be received by RimAsia as part of the Merger consideration. If less than $1.6 million has been advanced at that time, the difference shall be paid to NeoStem at the closing of the Merger. In the event the Merger has not received shareholder approval by October 31, 2009, NeoStem is required to repay RimAsia all payments incurred or made by RimAsia on behalf of NeoStem.
- 35 -
On July 15, 2009, Neostem filed a registration statement on Form S-4 in connection with the Merger, which was declared effective on October 7, 2009. On July 11, 2009, the Company decided to take actions to comply with the requirements of the Merger Agreement and its amendment and to spin off or dissolve CBC and to write off CBCs 90% owned subsidiary Keyuan Pharmaceutical R&D Co., Ltd. On September 4, 2009, the Company entered into a trust agreement as settlors with Stephen Globus as trustee for the benefit of the holders of the common stock of the Company (the Trust Agreement). Pursuant to the Trust Agreement, the Company transferred all issued and outstanding stock of CBC to the Trust for the benefit of all CBH shareholders for the purpose of winding down the operations of CBC.
As of August 27, 2009, the Company entered into an Amendment No. 2 to Agreement and Plan of Merger with NeoStem, CBC and CBH Acquisition LLC, NeoStems wholly-owned subsidiary (Amendment No. 2). Pursuant to the terms of the Amendment No. 2:
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TheExchange Ratio is amended to 0.1921665; |
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|
The parties eliminated any exchange offer with respect to outstanding CBH Common Stock Purchase Warrants. |
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CBH agrees to cause Erye to use reasonable commercial efforts to obtain certain approvals from PRC regulatory authorities and certain assurances from PRC governmental authorities. However, the parties will not enter into an escrow agreement, and there will be no provision such that the consideration to be paid or issued by NeoStem in connection with the Merger is held in escrow, subject to a right of NeoStem to receive back all such consideration and rescind the Merger if any such PRC regulatory approvals are not obtained.Mr. Mingsheng Shi and Madam Jian Zhang shall use reasonable efforts to expediate the receipt of all PRC approvals and shall be paid an aggregate of 203,338 shares of NeoStems common stock when all PRC approvals are received. |
The transactions contemplated by the Merger Agreement and the Amendment are subject to the authorization for listing on the American Stock Exchange (or any other stock exchange on which shares of NeoStem Common Stock are listed) of the shares to be issued in connection with the Merger, shareholder approval, approval of NeoStems acquisition of 51% ownership interest in Erye by relevant PRC governmental authorities, receipt of a fairness opinion and other customary closing conditions set forth in the Merger Agreement and its Amendment. If the necessary approvals for the Merger are not obtained and the Merger is not consummated, the Company will fail to comply with our agreement with RimAsia which may cause irreparable damage to our business and operations. Specials shareholders meetings of each of CBH and Neostem will be held on October 29, 2009 in order to approve the transactions contemplated by the Merger Agreement and the Amendment.
For more detailed information regarding the Merger, please refer to the Form S-4/A filed on October 6, 2009 at http://www.sec.gov/Archives/edgar/data/320017/000114420409051713/v161358_s4a.htm#tSJPSP.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to understanding of our financial statements. The application of these polices requires management to make estimates and assumptions that affect the valuation of assets and expenses during the reporting period. There can be no assurance that actual results will not differ from these estimates. The impact and any associated risks related to these policies on our business operations are discussed below.
REVENUE AND REVENUE RECOGNITION
The Company has various categories of revenue resources, sales of new drug formulas, R&D services and revenue from sales of medical product.
- 36 -
The Company recognizes revenue from product and drug formula sales when title has passed, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable, and the collection of the related receivable is probable which is generally at the time of shipment. Allowances are established for estimated rebates, wholesaler charge backs, prompt pay sales discounts, product returns, and bad debts.
For revenue from R&D service, revenue is recognized based on fixed-price refundable new drug contracts. The fixed-price refundable new drug contract is also called as milestone contract, which establishes the phase goals of the R&D service provided by the Company and the corresponding milestone payments by the customers. Milestone payments become payable and are recognized as revenue when milestone goals, as defined in the contract, are achieved. Milestones are substantive and not derived solely from arriving at a specific date. Revenue is recognized when milestone goals are achieved at the amount of the corresponding milestone payment. To determine when milestones are achieved, typically, the milestone goals require one or more of the following: (1) a certificate from a licensed authoritative agency, (2) approval/acknowledgement by a governmental agency, such as agency like Food and Drug Administration of the United States,(3) an authoritative professional appraisal report, or (4) an independent technological feasibility report, testing analysis and other form of valuation on the result and value of products and service. After receipt of the certificate, and/or approval and/or report, continued service is not required thus the respective milestone goals are achieved. Therefore, the milestone payment is no longer refundable and revenue is recognized.
ACCOUNTS RECEIVABLE
Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management judgment and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness or weakening in economic trends could have a significant impact on the collectibility of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
We prepare the above consolidated aging based on the aging for each subsidiary in above format. As each subsidiary of the Company conducts business with different customers with different size and creditworthiness, and each subsidiary has different impact on and different relationship with their customers, we determine the allowance on an individual basis. Basically, we assign various rates to each of the aging group of accounts receivable and add up the products for respective aging group to the total allowance for doubtful accounts. Different subsidiaries have different rates for even the same aging category. In addition to that, we also consider the changes in specific financial condition of their customers if situation or events indicate that some accounts may pose unusual risk compared to others, additional allowance may be provided for those accounts.
- 37 -
INCOME TAX
Income taxes are provided on the liability method whereby deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis and reported amounts of assets and liabilities. Deferred tax assets and liabilities are computed using enacted tax rates expected to apply to taxable income in the periods in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides a valuation allowance for certain deferred tax assets, if it is more likely than not that the Company will not realize tax assets through future operations.
In addition the Company accounts for an regarding uncertainty in Income Taxeswhere a tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The adoption had no effect on the Companys financial statements..
FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 2008, the Company adopted the accounting standard regarding fair value of financial instruments and related fair value measurements. Those accounting standard established a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the accompanying consolidated balance sheets for receivables, payables and short term loans qualify as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination of such instruments, their expected realization and, if applicable, the stated rate of interest is equivalent to rates currently available. The three levels of valuation hierarchy are defined as follows:
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Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
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Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
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Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
Effective January 1, 2009, the Company adopted the provisions of an accounting standard regarding instruments that are indexed to an entitys own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Companys own stock and (b) classified in stockholders equity in the statement of financial position would not be considered a derivative financial instrument. It provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuers own stock and thus able to qualify for the scope exception within the standards.
As a result , 20,370,298 of our issued and outstanding warrants previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment because the strike price of the warrants is denominated in US dollar, a currency other than the Companys functional currency, the Chinese Renminbi. As a result, the warrants are not considered indexed to the Companys own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expired.
NONCONTROLLING INTERESTS
Effective January 1, 2009, the Company adopted an accounting standard regarding non-controlling interest in consolidated financial statements. Certain provisions of this accounting standard are required to be adopted retrospectively for all periods presented. Such provisions include a requirement that the carrying value of non-controlling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity. Further, as a result of adoption this accounting standard, net income attributable to non-controlling interests is now excluded from the determination of consolidated net income. In addition, foreign currency translation adjustment is allocated between controlling and non-controlling interests.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2009, the FASB issued an accounting standard which amended the impairment model by removing its exclusive reliance on market participant estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the market participant view to a holders estimate of whether there has been a probable adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of this accounting standard did not have a material impact on the Companys consolidated financial statements because all of the investments in debt securities are classified as trading securities.
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In April 2009, the FASB issued an accounting standard that makes the other-than-temporary impairments guidance more operational and improves the presentation of other-than-temporary impairments in the financial statements. This standard replaced the existing requirement that the entitys management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. This standard provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this standard does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. The Company adopted this accounting standard, but it did not have a material impact on its consolidated financial statements.
In April 2009, the FASB issued an accounting standard that requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this accounting standard, fair values for these assets and liabilities were only disclosed annually. This standard applies to all financial instruments within its scope and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This standard does not require disclosures for earlier periods presented for comparative purposes at initial adoption, but in periods after the initial adoption, this standard requires comparative disclosures only for periods ending after initial adoption. The Company adopted this accounting standard, but it did not have a material impact on the disclosures related to its consolidated financial statements.
In June 2009, the FASB issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entitys continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (QSPE). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, and the Company does not expect this standard to have a material effect on its consolidated financial statements.
In June 2009, the FASB also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (VIEs). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a companys involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the companys financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, and the Company does not expect this standard to have a material effect on its consolidated financial statements.
In August 2009, the FASB issued an Accounting Standards Update (ASU) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In the accompanying financial statements, financial results related to the divested operations of CBC and Keyuan are presented as discontinued operations. Previously reported amounts have been restated to present the divested operations in a manner consistent with the current period presentation. Unless otherwise noted, discussions and amounts throughout these notes relate to CBHs continuing operations.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2009 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2008
REVENUE
Revenue for the three months ended September 30, 2009 was $17,051,816 while the revenue for the three months ended September 30, 2008 was $12,512,711, representing an approximately 36.3% increase. The increase is mainly attributed to the increase in production and sales of prescription drugs, which has increased 34.8% compared with the same period of 2008. The Company has improved its sales structure, sales policy and expanded the market of products to include products with higher gross profit and sales volume. The sales of the major products have increased 54.0% compared with the same period of 2008.The sales agent have increased 36.4% compared with the same period of 2008 Taking advantage of the governments new policy, especially the provincial online purchase system, the Company has made significant progress in expanding its sales market. Sales volume has leaped in pace with the deepening of the reform of medical insurance system in rural areas of China. More than 60% drug categories of the Company have been allowed to enter the New Rural Cooperative Medical Insurance System, through which the Company realized stable growth.
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COST OF GOODS SOLD
Cost of goods sold for the three months ended September 30, 2009 was $11,129,366 as compared to $8,596,513 for the three months ended September 30, 2008. Cost of goods sold as a percentage of sales revenues was approximately 65.3% for the three months ended June 30, 2009 compared to approximately 68.7% for the three months ended September 30, 2008. The increase in cost of goods sold in terms of dollar amount is associated with the increase of sales.
GROSS PROFIT
Gross profit in the three months ended September 30, 2009 amounted to $5,922,450, as compared to $3,916,198 for the three months ended September 30, 2008, representing approximately 51.2% increase. The gross profit margin for the three months ended September 30, 2009 was 34.7% compared to approximately 31.3% for the three months ended September 30, 2008. The increase is attributed primarily by the Companys increased sales of products of higher gross margin replacing products with lower gross margin, especially the high margin products in Cephems and Penicilin. The sales of powders for injection (Cephems) and of Penicillin still play a dominant role. The sales volume for all products has increased 20.1% compared with the same period of 2008, which has lower the fixed cost per product unit and the entire product cost decreased and improved the profit margin as a result.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 2009 amounted to $1,408,707 as compared to $1,206,976 for the three months ended September 30, 2008, representing 16.7% decrease.
RESEARCH AND DEVELOPMENT
Research and development costs for the three months ended September 30, 2009 were $76,035 as compared to $30,620 for the three months ended September 30, 2008. Erye has been working on its research and development projects and one major project has reached the clinical trial stage as of September 30, 2009. As a result, the research and development expenses associated with such projects increased.
INCOME FROM OPERATIONS
Income from operations in the three months ended September 30, 2009 amounted to $4,513,743, as compared to $2,709,222 for the three months ended September 30, 2008, representing approximately 66.6% increase. The increase is mainly attributable by Eryes strong performance in sales revenue
OTHER INCOME (EXPENSE)
Other expense net of other expense was $53,931 for the three months ended September 30, 2009, with $143,739 increase compared with $89,808 other income for the three months ended September 30, 2008. The main reason of the increase was attributed by the loss recognized from change in fair value of warrants for the three months ended September 30, 2009 after adopting the new accounting standard.
PROVISION FOR INCOME TAX
Provision for income tax for the three months ended September 30, 2009 and 2008 were $554,133 and $377,583, respectively with 46.7% increase. The increase is due to Eryes strong performance in sales revenue and the related income tax increased.
LOSS FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO CONTROLLING INTEREST
Loss from discontinued operations for the three months ended September 30, 2009 and 2008 were $35,381 and $78,342, respectively, improved by 54.8%, and represented the operating results of Keyuan and CBC for the aforesaid periods.
Loss from disposal of discontinued operations for the three months ended September 30, 2009 and 2008 were $417,150 and $0, respectively, and this change was because the Company discontinued Keyuan and spun-off CBC in the 3rd quarter of 2009.
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NET INCOME AVAILABLE TO COMMON STOCK SHAREHOLDERS
Net income available to common shareholders for the three months ended September 30, 2009 was $1,455,745 compared to $838,327 for the three months ended September 30, 2008, representing 73.6% increase. The net income increase is mainly attributed by sales increase and gross profit margin improved through Eryes strong performance for the three months ended September 30, 2009. The Company has improved its sales structure, reorganized their sales teams and sales direction based on the National Medical Reform Proposal. The Company has also integrated its customers resources and purchasing power, which helped it make the significant progress in sales.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2009 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2008
REVENUE
Revenue for the nine months ended September 30, 2009 was $45,042,881 compared with $36,767,712 for the nine months ended September 30, 2008, representing an approximately 22.5% increase. The increase is mainly attributed to the increase in production and sales of prescription drugs, which has increased 33.9% compared with the same period of 2008. The Company has improved its sales structure, sales policy and expanded the market of products to include products with higher gross profit and sales volume. The sales of the major products have increased 54.0% compared with the same period of 2008. The sales agent have increased 36.4% compared with the same period of 2008 taking advantage of the governments new policy, especially the provincial online purchase system, the Company has made significant progress in expanding its sales market. Sales volume has leaped in pace with the deepening of the reform of medical insurance system in rural areas of China. More than 60% drug categories of the Company have been allowed to enter the New Rural Cooperative Medical Insurance System, through which the Company realized stable growth.
COST OF GOODS SOLD
Cost of goods sold for the nine months ended September 30, 2009 was $29,760,088 as compared to $25,522,533 for the nine months ended September 30, 2008. Cost of goods sold as a percentage of sales revenues was approximately 66.1% for the nine months ended September 30, 2008 compared to approximately 69.4% for the nine months ended September 30, 2008. The increase in cost of goods sold in terms of dollar amount is associated with the increase of sales.
GROSS PROFIT
Gross profit in the six months ended September 30, 2009 amounted to $15,282,793, as compared to $11,245,179 for the nine months ended September 30, 2008, representing approximately 35.9% increase. The gross profit margin for the nine months ended September 30, 2009 was 33.9% compared to approximately 30.6% for the nine months ended September 30, 2008. The increase is attributed primarily to the Companys increased sales of products of higher gross margin replacing products with lower gross margin, especially the high margin products in Cephems and Penicilin. The sales of powders for injection (Cephems) and of Penicillin still play a dominant role. The sales volume has increased 20.1% compared with the same period of 2008, which has lower the fixed cost per product unit and the entire product cost decreased and improved the profit margin as a result.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2009 was $4,238,743 as compared to $3,704,172 for the nine months ended September 30, 2008, representing 14.4% increase. The increase of operation expenses is related to the increase of sales. In particular, selling expense increased 18.7% for nine months ended September 30, 2009 compared with the same period of 2008, among which the travel expense .meals and entertainment expense and shipping and handling cost etc. all increased signficantly, which were related to visiting customers in wider sales markets more frequently.
RESEARCH AND DEVELOPMENT
Research and development costs for the nine months ended September 30, 2009 were $312,098 as compared to $279,909 for the nine months ended September 30, 2008. Erye has been working on its research and development projects and one major project has reached the clinical trial stage as of September 30, 2009. As a result the research and development expenses associated with such projects decreased.
INCOME FROM OPERATIONS
Income from operations in the nine months ended September 30, 2009 amounted to $11,044,050, as compared to $7,541,007 for the nine months ended September 30, 2008, representing approximately 46.5% increase. The increase is mainly attributable by Eryes strong performance in sales revenue.
OTHER INCOME (EXPENSE)
Other expense net of other expense was $992,909 for the nine months ended September 30, 2009, with $985,950 increase compared with $6,959 other expense for the nine months ended September 30, 2008. The main reason of the increase was attributed by the $1,005,774 loss recognized from change in fair value of warrants for the nine months ended September 30, 2009 after adopting the new accounting standard..
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PROVISION FOR INCOME TAX
Provision for income tax for the nine months ended September 30, 2009 and 2008 were $1,416,391 and $1,008,196, respectively with 40.5% increase. The increase is due to Eryes strong performance in sales revenue and the related income tax increased.
LOSS FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO CONTROLLING INTEREST
Loss from discontinued operations for the nine months ended September 30, 2009 and 2008 were $77,022 and $87,369, respectively, improved by 11.8%, and represented the operating results of Keyuan and CBC for the aforesaid periods..
Loss from disposal of discontinued operations for the three months ended September 30, 2009 and 2008 were $417,150 and $0, respectively, and this change was because the Company discontinued Keyuan and spun-off CBC in the 3rd quarter of 2009.
NET INCOME AVAILABLE TO COMMON STOCK SHAREHOLDERS
Net income available to common stock shareholders for the nine months ended September 30, 2009 was $3, 298,833 compared to $2,141,956 for the nine months ended September 30, 2008, representing 54.0% increase. The net income increase is mainly attributed by sales increase and gross profit margin improved through Eryes strong performance for the nine months ended September 30, 2009. The Company has improved its sales structure, reorganized their sales teams and sales direction based on the National Medical Reform Proposal. The Company has also integrated its customers resources and purchasing power, which helped it make the significant progress in sales.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2009, total current assets were $25,452,069 and total current liabilities were $21,402,824. Cash and cash equivalents on September 30, 2009 was $2,847,192, an increase of $2,376,520 from the $470,672 reported on December 31, 2008. The increase in cash and can equivalents is mainly attributable to the increase in sales revenue of Erye and the receivable collections which increased.
For the nine months ended September 30, 2009, net cash provided by continuing operating activities was $13,887,596. Cash provided by operating activities results primarily from the Eryes strong performance in sales and increase in its profit margin. Erye has paid $2,832,755 more for its inventories in order to produce sufficient products for the busy sales season
Net cash used in investing activities and financing activities were $6,086,702 and $5,452,046, respectively, for the nine month ended September 30, 2009. Cash provided by investing activities during the period was mainly contributed by the withdrawal $4,414,048 from the short-term investment account of Erye. The Company also used $7,344,624 for the construction of the new plant, and purchases of equipment, and lent $2,741,233 out as loans. During the nine months ended September 30, 2009, Net cash used in financing activities was mainly due to Erye repayment of $2,492,030 short-term bank loans and deposited $2,560,294 more in bank accounts for the notes payable issued.
Relocation of Erye
The new plant of Erye is currently under construction. To date, all the buildings in the manufacturing area have been completed, and the Purification plant is under construction and the equipment has been delivered and in the process of being assembled. The Company expects that the Penicillin and Cephems sterile injection powder workshops will be completed by the end of 2009. In early 2010, the company plans to apply for GMP approval with China Food and Drug Administration (SFDA) for these two workshops.
The total expenditure of the new factory project and the relocation of Erye is estimated up to $29,340,000 (RMB200,000,000), of which approximately $15.84 millon has been spent to date.
OUTLOOK
Our Company has entered into a Merger Agreement with Neostem and expects to complete the Merger on the fourth quarter of 2009, subject to receipt of all necessary approvals.
MANAGEMENT ASSUMPTIONS
Management anticipates, based on internal forecasts and assumptions relating to our current operations, that existing cash and funds generated from operations may not be sufficient to meet capital requirements for future acquisition activities. If the Merger is not consummated, we could therefore be required to seek additional financing. There can be no assurance that we will be able to obtain such additional financing at acceptable terms to us, or at all.
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EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our operating subsidiaries are located in China. Their business activities are mainly in China using Chinese Renminbi as the functional currency. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in Chinas political and economic conditions. As we rely entirely on revenues earned in China, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. To date, however, we have not engaged in transactions of either type.
Since 1994 China has pegged the value of the Renminbi to the U.S. dollar. We do not believe that this policy has had a material effect on our business. However, there have been indications that the Chinese government may be reconsidering its monetary policy in light of the overall devaluation of the U.S. dollar against the Euro and other currencies during the last two years. As of September 30, 2009, the value of the Renminbi to the U.S. dollar was translated at 6.82 RMB to $1.00 USD.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of September 30, 2009, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were not effective.
During our assessment of the effectiveness of internal control over financial reporting as of December 31, 2008, our management identified significant deficiencies related to the following:
1. Insufficient U.S.GAAP qualified accounting and finance personnel.
As U.S. GAAP closing process relates to non-routine transactions and estimates, we didnt have sufficient and skilled accounting and finance personnel necessary to close our books under U.S.GAAP at our subsidiaries in China because of the differences between two accounting policies, and on the other hand, the accounting personnel arent familiar with U.S.GAAP and lack training. This material weakness resulted in adjustments to several significant accounts and disclosures and contributed to other material weakness described above.
2. Lack of Internal Audit System.
The Company does not have the internal audit department, which was ineffective in preventing and detecting control lapses and errors in the accounting of certain key areas like revenue recognition, purchase approvals, inter-company transactions, cash receipt and cash disbursement authorizations, inventory safeguard and proper accumulation for cost of products, in accordance with the appropriate costing method used by the Company.
3. Financial Statement closing process.
We found that controls over the financial statement close process related to account reconciliation and analyses, including bank accounts, certain long-lived assets and accrued liabilities, were not effective. As a result, a large volume of adjustments were necessary to completely and accurately present the financial statements close process to the preparation of reliable financial statements, there is reasonable possibility that a material misstatement of the interim and annual financial statements would not have been prevented or detected on a timely basis.
As disclosed in our Managements Annual Report on Internal Control over Financial Reporting filed with the 2008 Form 10-K, the Companys management has identified the steps necessary to address the material weaknesses described above and we are in the process to have the remediation procedures implemented.
Changes in Internal Control over Financial Reporting.
During the fiscal quarter ended September 30, 2009, except as described below, there have been no changes in the Companys internal control over financial reporting, identified in connection with our evaluation thereof, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
We are continuing to build our accounting resources in response to the weaknesses. While we continue to develop and implement new control processes and procedures to address these weaknesses, we have determined that further improvements are required in our accounting processes before we can consider the material weakness remediated.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In September 2009, the Company issued 50,000 shares of its common shares to a consultant in consideration for services rendered. The issuance was deemed to be exempt under Regulation D and Section 4(2) of the 1933 Securities Act, as amended.
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ITEM 6. EXHIBITS
The following exhibits are filed as part of this quarterly report on Form 10-Q:
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EXHIBIT NUMBER |
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DESCRIPTION |
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31.1* |
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2* |
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1** |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2** |
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Certification of Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Filed herewith ** Furnished herewith |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CHINA
BIOPHARMACEUTICALS HOLDINGS, INC. |
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By: /s/ Chris Peng Mao |
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Name: Chris Peng Mao |
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Title: Chief Executive Officer |
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Date: October 29, 2009 |
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By: /s/ ZHANG Jian |
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Name: ZHANG Jian |
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Title: Chief Financial Officer |
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Date: October 29, 2009 |
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