Attached files
file | filename |
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EX-3.5 - China Yongxin Pharmaceuticals Inc. | v184537_ex3-5.htm |
EX-31.2 - China Yongxin Pharmaceuticals Inc. | v184537_ex31-2.htm |
EX-32.1 - China Yongxin Pharmaceuticals Inc. | v184537_ex32-1.htm |
EX-32.2 - China Yongxin Pharmaceuticals Inc. | v184537_ex32-2.htm |
EX-31.1 - China Yongxin Pharmaceuticals Inc. | v184537_ex31-1.htm |
EX-10.20 - China Yongxin Pharmaceuticals Inc. | v184537_ex10-20.htm |
EX-10.21 - China Yongxin Pharmaceuticals Inc. | v184537_ex10-21.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
|
|
For
the Quarterly Period Ended March 31, 2010
|
||
OR
|
||
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
|
For
the transition period
from
to
Commission
File No.: 000-26293
CHINA
YONGXIN PHARMACEUTICALS INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
20-1661391
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
927
Canada Court
City
of Industry, California 91748
(Address
of principal executive offices) (Zip code)
(626)
581-9098
(Company’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
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 (§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 o No o
The
registrant had 63,239,423 shares of common stock, par value $0.001 per
share, outstanding as of May 13, 2010.
CHINA
YONGXIN PHARMACEUTICALS INC.
FORM 10-Q
For
the Quarterly Period Ended March 31, 2010
INDEX
Page
|
||||
Part I
|
Financial
Information
|
|||
Item
1.
|
Financial
Statements
|
2
|
||
(a)
Unaudited Consolidated Balance Sheets as of March 31, 2010 and
December 31, 2009
|
3
|
|||
(b) Unaudited
Consolidated Statements of Income for the Three Month Periods ended March
31, 2010 and 2009
|
4
|
|||
(c) Unaudited Consolidated
Statements of Cash Flows for the Three Month Periods ended March 31, 2010
and 2009
|
5
|
|||
(d) Notes
to Unaudited Consolidated Financial Statements
|
6
|
|||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
32
|
||
|
||||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
32
|
||
Item
4.
|
Controls
and Procedures
|
32
|
||
Part II
|
Other
Information
|
|||
Item
1.
|
Legal
Proceedings
|
33
|
||
|
||||
Item
1A.
|
Risk
Factors
|
33
|
||
Item
2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
33
|
||
|
||||
Item
3.
|
Default
Upon Senior Securities
|
34
|
||
|
||||
Item
5.
|
Other
Information
|
34
|
||
|
||||
Item
6.
|
Exhibits
|
34
|
||
Signatures
|
37
|
1
Part I.
Financial Information
Item
1. Financial Statements
CHINA
YONGXIN PHARMACEUTICALS INC.
CONSOLIDATED
FINANCIAL STATEMENTS
MARCH
31, 2010
(UNAUDITED)
TABLE
OF CONTENTS
Unaudited Consolidated Balance Sheets as at March 31, 2010 and December 31, 2009 |
3
|
Unaudited Consolidated Statements of Income for the Three Month Periods ended March 31, 2010 and 2009 |
4
|
Unaudited Consolidated Statements of Cash Flows for the Three Month Periods ended March 31, 2010 and 2009 |
5
|
Notes
to Unaudited Consolidated Financial Statements
|
6
|
2
CHINA
YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009
(UNAUDITED)
March
31,
2010
|
December
31,
2009
|
|||||||
ASSETS
|
||||||||
Current Assets: | ||||||||
Cash
and cash equivalents
|
$ | 1,995,675 | $ | 1,805,271 | ||||
Restricted
cash
|
1,038,869 | 467,369 | ||||||
Accounts
receivable, net
|
12,564,016 | 12,305,103 | ||||||
Notes
receivable
|
1,948,122 | 903,867 | ||||||
Other
receivable, net
|
1,402,470 | 1,931,084 | ||||||
Advances
to suppliers
|
6,280,863 | 6,255,874 | ||||||
Prepaid
expenses
|
385,932 | 534,769 | ||||||
Inventory,
net
|
7,769,226 | 7,811,628 | ||||||
Total
Current Assets
|
33,385,173 | 32,014,966 | ||||||
Property
and Equipment, Net
|
8,473,966 | 8,753,364 | ||||||
Intangible
Assets, Net
|
960,627 | 987,332 | ||||||
Total
Assets
|
$ | 42,819,766 | $ | 41,755,662 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 4,277,148 | $ | 4,151,219 | ||||
Accrued
expenses & other payable
|
4,006,311 | 5,170,786 | ||||||
Advances
from customers
|
2,004,924 | 2,055,602 | ||||||
Taxes
payable
|
769,919 | 1,421,434 | ||||||
Loans
from related parties
|
- | 184,662 | ||||||
Short-term
loan payable
|
2,327,321 | 1,100,884 | ||||||
Deferred
income
|
110,609 | 419,277 | ||||||
Shares
to be issued
|
71,000 | 65,000 | ||||||
Liabilities
of discontinued operations
|
58,753 | 628,837 | ||||||
Total
Current Liabilities
|
13,625,986 | 15,197,700 | ||||||
Long
Term Loan
|
- | 1,320,300 | ||||||
Convertible
Note Payable, Net
|
63,542 | - | ||||||
Commitments
and Contingencies
|
- | - | ||||||
Stockholders'
Equity:
|
||||||||
Preferred
stock, $0.001 par value; 5,000,000 shares authorized; 1,666,667
shares issued and outstanding as of March 31, 2010 and
December 31, 2009
|
1,667 | 1,667 | ||||||
Common
stock; $0.001 par value; 75,000,000 shares authorized; 57,348,923 shares
issued and outstanding as of March 31, 2010 and 56,448,923 shares
issued and outstanding as of December 31, 2009
|
57,349 | 56,449 | ||||||
Additional
paid in capital
|
2,519,351 | 1,165,899 | ||||||
Deferred
consulting expense - issuance of warrants
|
- | (4,740 | ) | |||||
Prepaid
consulting - issuance of shares
|
- | (5,000 | ) | |||||
Receivable
from a related party for issuance of shares
|
(50,000 | ) | (50,000 | ) | ||||
Statutory
reserve
|
2,716,929 | 2,630,329 | ||||||
Other
comprehensive income
|
1,808,088 | 1,807,859 | ||||||
Retained
earnings
|
16,183,821 | 13,920,650 | ||||||
Total
|
23,237,205 | 19,523,112 | ||||||
Non-controlling
interest
|
5,893,034 | 5,714,550 | ||||||
Total
Stockholders' Equity
|
29,130,239 | 25,237,662 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 42,819,766 | $ | 41,755,662 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements
3
CHINA
YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE THREE MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
2010
|
2009
|
|||||||
Net
Revenues
|
$ | 10,679,465 | $ | 9,184,994 | ||||
Cost
of Goods Sold
|
(8,276,361 | ) | (6,954,270 | ) | ||||
Gross
profit
|
2,403,105 | 2,230,724 | ||||||
Operating
Expenses:
|
||||||||
Selling
expenses
|
794,123 | 820,162 | ||||||
General
and administrative expenses
|
847,830 | 338,492 | ||||||
Total
operating expenses
|
1,641,954 | 1,158,654 | ||||||
Income
From Operations
|
761,151 | 1,072,070 | ||||||
Other
Income (Expense):
|
||||||||
Gain on settlement of
debt
|
75,000 | - | ||||||
Other
income
|
71,351 | 87,797 | ||||||
Other
expense
|
(62,618 | ) | (26,377 | ) | ||||
Interest
income (expense)
|
-50,696 | 8,474 | ||||||
Total
other income
|
158,273 | 69,894 | ||||||
Operating
Income Continued Operations Before Income Tax and Non-controlling
Interest
|
919,424 | 1,141,964 | ||||||
Provision
for Income Tax
|
(290,816 | ) | (204,765 | ) | ||||
Net
Income Before Non-controlling Interest and Discontinued
Operations
|
628,608 | 937,199 | ||||||
Discontinued
Operations
|
||||||||
Gain/
(Loss) from discontinued operations
|
10,997 | (416,222 | ) | |||||
Gain
on disposal of subsidiaries
|
1,889,800 | - | ||||||
Total
income (loss) from discontinued operations
|
1,900,798 | (416,222 | ) | |||||
Net
Income Before Non-controlling Interest
|
2,529,406 | 520,977 | ||||||
Net
Income Attributable to Non-controlling interest
|
(178,425 | ) | (132,585 | ) | ||||
Net
Income Attributable to the Company
|
2,350,980 | 388,392 | ||||||
Other
Comprehensive Item:
|
||||||||
Foreign
exchange translation gain (loss)
|
288 | (23,677 | ) | |||||
Net
Comprehensive Income
|
$ | 2,351,268 | $ | 364,715 | ||||
Earning
Per Share
|
||||||||
Basic
|
$ | 0.04 | $ | 0.01 | ||||
Diluted
|
$ | 0.04 | $ | 0.01 | ||||
Weighted
Average Number of Shares Outstanding
|
||||||||
Basic
|
56,997,812 | 31,041,845 | ||||||
Diluted
|
59,616,201 | 31,041,845 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements
4
CHINA
YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTH PERIODS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 2,350,980 | $ | 388,392 | ||||
Adjustments
to reconcile net income to net cash
provided by (used in) operating activities:
|
||||||||
Beneficial
conversion feature & warrant fee amortization
|
63,542 | - | ||||||
Debt
issue costs amortization
|
9,633 | - | ||||||
Depreciation
and amortization
|
178,938 | 85,036 | ||||||
Amortization
of prepaid & deferred consulting cost
|
15,740 | 141,566 | ||||||
Non-controlling
interest
|
178,425 | 132,585 | ||||||
Gain on settlement of
debt
|
(85,997 | ) | - | |||||
Gain
on sale of subsidiaries
|
(1,880,798 | ) | ||||||
Loss
on sale of assets
|
8,741 | - | ||||||
(Increase)
/ decrease in current assets:
|
||||||||
Accounts
receivable
|
(258,825 | ) | (246,078 | ) | ||||
Notes
receivable
|
(1,043,899 | ) | 726,534 | |||||
Other
receivable
|
548,427 | 6,345 | ||||||
Advances
to suppliers
|
(24,981 | ) | (260,689 | ) | ||||
Prepaid
expenses
|
265,001 | 52,847 | ||||||
Inventory
|
42,388 | 45,600 | ||||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable
|
915,153 | (38,719 | ) | |||||
Accrued
expenses and other payable
|
(301,853 | ) | (457,358 | ) | ||||
Tax
payable
|
(651,293 | ) | 191,627 | |||||
Advances
from customers
|
(50,660 | ) | (722,342 | ) | ||||
Deferred
income
|
(309,562 | ) | (181,776 | ) | ||||
Total
Adjustments
|
(2,381,881 | ) | (524,821 | ) | ||||
Net
cash provided by operating activities from continuing
operations
|
(30,901 | ) | (136,430 | ) | ||||
Net
cash provided by/ (used in) operating activities of discontinued
operations
|
(20,000 | ) | 416,222 | |||||
Net
cash used in / (provided by) operating activities
|
(50,901 | ) | 279,792 | |||||
|
||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Acquisition
of property, equipment and intangible assets
|
- | (262,301 | ) | |||||
Proceeds
from sale of property and equipment
|
117,585 | - | ||||||
Net
cash provided by / (used in) investing activities from continuing
operations
|
117,585 | (262,301 | ) | |||||
|
||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Receipt
of loans from non-related parties
|
695,362 | 981,397 | ||||||
Restricted
cash
|
(571,500 | ) | - | |||||
Net
cash provided by financing activities
|
123,862 | 981,397 | ||||||
|
||||||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
190,546 | 998,889 | ||||||
|
||||||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
(142 | ) | (942 | ) | ||||
|
||||||||
CASH
AND CASH EQUIVALENTS, BEGINNING BALANCE
|
1,805,271 | 609,422 | ||||||
|
||||||||
CASH
AND CASH EQUIVALENTS, ENDING BALANCE
|
$ | 1,995,675 | $ | 1,607,369 | ||||
|
||||||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 40,909 | $ | 14,424 | ||||
Income
tax
|
$ | 983,750 | $ | 122,342 |
The
accompanying notes are an integral part of these unaudited consolidated
financial statements
5
CHINA
YONGXIN PHARMACEUTICALS INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -
ORGANIZATION
China
Yongxin Pharmaceuticals Inc. (formerly Digital Learning Management Corporation
and Nutradyne Group, Inc.) (the “Company") was incorporated in Delaware on
February 18, 1999. The Company, through its Chinese subsidiaries, is engaged in
the
wholesale and retail sales of pharmaceuticals, medical equipment, other
medical-related products, health products including nutritional and dietary
supplements, and cosmetics.
On
December 21, 2006, Changchun Yongxin Dirui Medical Co., Ltd, a Chinese
corporation ("Yongxin") and all of the stockholders of Yongxin entered into a
share exchange agreement (“Share Exchange Agreement”) with the Company. The
Share Exchange Agreement was amended on June 15, 2007 (the “Amended Exchange
Agreement”). On November 16, 2007, Yongxin and the Company closed on the share
exchange under the Amended Exchange Agreement. On April 12, 2008, we
entered into a second amended Share Exchange Agreement with Yongxin, effective
November 16, 2007, in which the Company acquired from the original Yongxin
stockholders, and Yongxin stockholders transferred to the Company, 80% of the
equity interest of Yongxin in exchange for the issuance by the Company of an
aggregate of 21,000,000 shares of newly issued common stock and 5 million shares
of Series A Preferred Stock to the Yongxin stockholders and/or their designees,
representing, immediately following closing, 70% of the total issued and
outstanding shares of common stock of the Company in exchange for 80% shares of
Yongxin (“Share Exchange Transaction”). The Series A Convertible Preferred Stock
is convertible over a 3 year period, into up to 30 million shares of common
stock.
For
accounting purposes, this transaction was accounted for as a reverse merger,
since the stockholders of Yongxin own a majority of the issued and outstanding
shares of common stock of the Company, and the directors and executive officers
of Yongxin became the directors and executive officers of the
Company. This acquisition was accounted for at historical cost in a
manner similar to that in the pooling of interests method since after the
acquisition, the former stockholders of Yongxin acquired a majority of the
outstanding shares of the Company.
Yongxin
was originally established in 1993. The Company is engaged in the wholesale and
retail sale of medicines. The Company’s operations are based in Changchun City,
Jilin Province, China.
In 2001,
Yongxin established Jilin Province Yongxin Chain Drugstore Ltd. (“Yongxin
Drugstore”) with an investment of RMB 2,500,000 (equivalent to $303,000) to
develop a customer-terminal network market. In July 2005, the Company obtained
the franchise rights in Jilin Province from American Medicine Shoppe (Meixin
International Medical Chains) and sells over-the-counter western and traditional
Chinese medicines and other medical-related products.
On March
16, 2007, Jilin Province Yongxin Chain Drugstore Ltd. entered into various
agreements with retail drug stores in Tianjin, and established Tianjin
Jingyongxin Chain Drugstore Ltd. (“Jinyongxin Drugstore”) with an investment of
$116,868, in which the Company has the 90% ownership of the Jinyongxin
Drugstore. Jinyongxin Drugstore is located in Tianjin City,
China.
On May
15, 2007, Yongxin established Jilin Dingjian Natural Health Products Co., Ltd.
(“Dingjian”) with an investment of $116,868 whereby the stockholders of the
company have 90% ownership of Dingjian. Dingjian was formed under laws of the
People's Republic of China and is located in Changchun City, Jilin
Province.
On June
15 2007, Yongxin Drugstore established Baishan Caoantang Chain Drugstore Ltd.
(“Caoantang Drugstore”) with an investment of $328,430, including $144,509 in
cash and $183,921 to purchase the property and equipment and Yongxin agreed to
pay $80,076 evenly over the next 32 months for this investment. Caoantang
Drugstore is a 100% owned subsidiary of Yongxin Drugstore. Caoantang
Drugstore operates a chain of 32 retail drugstores, collectively covers a
business area of 2,804 square meters, and this chain sells over-the-counter
western and traditional Chinese medicines and other medical-related
products.
On May 5,
2008 the Company changed its name from Nutradyne Group, Inc. to China Yongxin
Pharmaceuticals Inc.
In
November 2009, Dingjian entered into an Equity Transfer Agreement (the
“Agreement”) with Sun Shi Wei, an individual, to transfer 90% of ownership with
all its assets and liabilities to Sun Shi Wei. The 10%
non-controlling interest remained unchanged. Both parties agreed that
Sun Shi Wei assumed the net liabilities. No other consideration was exchanged.
Dingjian would be liable for any undiscovered liability other than the liability
assumed by Sun Shi Wei, pursuant to the Agreement.
6
On March
1, 2010, the Company sold its digital e-learning business including its
wholly-owned subsidiary, Digital Learning Institute Inc., a Delaware corporation
(“Digital Learning”); and (i) Digital Learning’s wholly-owned subsidiary
Software Education of America, Inc., a California corporation; (ii) Digital
Learning’s wholly-owned subsidiary McKinley Educational Services, Inc., a
California corporation; (iii) Digital Learning’s wholly-owned subsidiary Digital
Knowledge Works, Inc., a Delaware corporation; and (iv) Digital Learning’s
wholly-owned subsidiary Coursemate, Inc., a California corporation (referred to
collectively herein as the "Digital E-learning Business"). The Digital
E-learning Business constituted a minimal portion of our overall business and it
has been our intention to divest ourselves of the Digital E-learning Business to
focus on the pharmaceutical segment of our business.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL
INFORMATION
The
accompanying unaudited consolidated financial statements have been prepared by
the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”) and generally accepted accounting principles for
interim financial reporting. 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 Company’s Annual
Report on Form 10-K. The results of the three months ended March 31, 2010 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2010.
BASIS OF
PRESENTATION
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. The
functional currency of our operating subsidiary, Changchun Yongxin Dirui Medical
Co., Ltd is Chinese Renminbi (“CNY”); however the accompanying financial
statements have been translated and presented in United States Dollars
(“USD”).
TRANSLATION
ADJUSTMENT
As of
March 31, 2010, the accounts of Yongxin were maintained, and its financial
statements were expressed, in Chinese Yuan Renminbi. Such financial statements
were translated into USD in accordance with Statement of Financial Accounts
Standards (“SFAS”) No. 52 (ASC 830), “Foreign Currency Translation,” with the
CNY as the functional currency. According to the Statement, all assets and
liabilities were translated at the current exchange rate, stockholders’ equity
are translated at the historical rates and income statement items are translated
at the average exchange rate for the period. The resulting translation
adjustments are reported under other comprehensive income in accordance with
SFAS No. 130 (ASC 220), “Reporting Comprehensive Income” as a component of
stockholders’ equity.
USE OF
ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States (“GAAP”) requires management to make
certain 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 period. Actual results could differ from those
estimates. Significant estimates include collectability of accounts
receivable, accounts payable, sales returns and recoverability of long-term
assets.
7
PRINCIPLES OF
CONSOLIDATION
The
consolidated financial statements include the accounts of China Yongxin
Pharmaceuticals Inc. and its subsidiaries collectively referred to within as the
“Company”. All material inter-company accounts, transactions and
profits have been eliminated in consolidation.
NON-CONTROLLING
INTEREST
The
accompanying consolidated financial statements have been prepared by the
Company, pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) and in accordance with GAAP. The Company acquired 80% of
Yongxin, and Yongxin Liu and Yongkui Liu own 11% and 9% of Yongxin,
respectively. The 20% equity interest held by Yongxin Liu and Yongkui
Liu represents the non-controlling interest amounting to
$5,860,892 as of March 31, 2010 as compared to $5,687,633 as of
December 31, 2009.
The
Company owns a 90% ownership interest in Jinyongxin Drugstore. The remaining 10%
interest in Jinyongxin Drugstore is owned by third parties. As of March 31,
2010 and December 31, 2009, the 10% equity interest amounted to $32,142 and
$26,917, respectively.
CASH AND CASH
EQUIVALENTS
Cash and
cash equivalents consist primarily of cash in banks and highly liquid
investments with original maturities of 90 days or less.
ACCOUNTS
RECEIVABLE
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis. As of March 31, 2010 and December 31, 2009, there was no
allowance for doubtful debts.
The
Company entered into a factoring agreement with China Jilin
Bank Corporation Limited (“Jilin Bank”), to transfer accounts receivable
with full recourse. The Company is required to repurchase the transferred
accounts receivable, if any controversy arises on the accounts receivable, at a
price of proceeds received from Jilin Bank less settled accounts receivable plus
interest and other necessary penalty or expense. The Company accounts
for its transferred accounts receivable in accordance with Statement of
Financial Accounting Standard (“SFAS”) No. 166, “Accounting for Transfers of
Financial Assets” (“ASC 810”), with the proceeds received from Jilin Bank being
recognized as secured borrowings (Note 13).
NOTE
RECEIVABLE
Notes
receivable represent bankers’ acceptances that have been arranged with
third-party financial institutions by certain customers to settle their
purchases from us. These bankers’ acceptances are non-interest bearing and are
collectible within six months. Such sales and purchasing arrangements are
consistent with industry practices in the PRC.
ADVANCES TO
SUPPLIERS
The
Company advances to certain vendors for purchase of its material. The
advances to suppliers are interest free and unsecured. As of March 31, 2010 and
December 31, 2009, advances to suppliers amounted to $6,280,863 and $6,255,874,
respectively.
INVENTORIES
Inventories
are valued on a lower of weighted average cost or market
basis. Inventory includes product cost, inbound freight,
warehousing costs and vendor allowances not included as a reduction of
advertising expense. The management compares the cost of inventories with the
market value and allowance is made for writing down their inventories to market
value, if lower. Work in process inventories include the cost of raw materials
and outsource processing fees.
8
PROPERTY AND
EQUIPMENT
Property
and equipment are recorded at cost. Depreciation is computed using the
straight-line method over useful lives ranging from 5 to 20 years. Expenditures
for maintenance and repairs are charged to earnings as incurred; additions,
renewals and betterments are capitalized. When property and equipment are
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the respective accounts, and any gain or loss is included in
operations. Assets held under capital leases are recorded at the lesser of the
present value of the future minimum lease payments or the fair value of the
leased property. Expenditures for maintenance and repairs are charged to
operations as incurred. Depreciation of property and equipment is provided using
the straight-line method for substantially all assets with estimated lives
of:
Buildings
|
20
years
|
Infrastructures
and leasehold improvements
|
10
years
|
Equipment
(including electronic facilities, sports, education and recreation
facilities)
|
10
years
|
Automobiles
|
10
years
|
Furniture
and fixtures
|
5
years
|
Computer
hardware and software
|
5
years
|
IMPAIRMENT OF LONG-LIVED
ASSETS
The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144 “Accounting for the Impairment or
Disposal of Long-Lived Assets” (ASC 360). SFAS 144 (ASC 360) requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal.
REVENUE
RECOGNITION
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104 (ASC 605). Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. The Company recognizes
revenue net of an allowance for estimated returns, at the time the merchandise
is sold or services performed. The allowance for sales returns is estimated
based on the Company’s historical experience. Sales taxes are presented on a net
basis (excluded from revenues and costs). Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
VENDOR
ALLOWANCES
Vendor
allowances are principally received as a result of purchase levels, sales or
promotion of vendors' products. Allowances are generally recorded as
a reduction of inventory and are recognized as a reduction of cost of sales when
the related merchandise is sold. Those allowances received for
promoting vendors' products are offset against advertising expense and result in
a reduction of selling, occupancy and administration expenses to the extent of
advertising costs incurred, with the excess treated as a reduction of inventory
costs.
INCOME
TAXES
The
Company utilizes SFAS No. 109 (ASC 740), "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax basis of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
9
The
Company accounts for income taxes using an asset and liability approach which
allows for the recognition and measurement of deferred tax assets based upon the
likelihood of realization of tax benefits in future years. Under the asset and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future deductibility is uncertain.
The
Company records a valuation allowance for deferred tax assets, if any, based on
its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company
net income when those events occur. The Company does not have any significant
deferred tax asset or liabilities in the PRC tax jurisdiction.
FAIR VALUE OF FINANCIAL
INSTRUMENTS
Statement
of Financial Accounting Standard No. 107, Disclosures about Fair Value of
Financial Instruments, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
STOCK BASED
COMPENSATION
The
Company accounts for stock based compensation in accordance with Statement
No. 123R , Share-Based Payment (SFAS 123R) (ASC 718), which requires
companies to measure and recognize compensation expense for all stock-based
payments at fair value.
BASIC AND DILUTED EARNINGS
PER SHARE
Earnings
per share are calculated in accordance with the Statement of Financial
Accounting Standards No. 128 (SFAS No. 128) (ASC 260), “Earnings per share.”
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. Basic and diluted
earnings per share were $0.04 and $0.01 for the three month periods ended March
31, 2010 and 2009, respectively.
STATEMENT OF CASH
FLOWS
In
accordance with Statement of Financial Accounting Standards No. 95 (ASC 230),
"Statement of Cash Flows," cash flows from the Company's operations is
calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
SEGMENT
REPORTING
Statement
of Financial Accounting Standards No. 131 ("SFAS 131") (ASC 250), "Disclosure
about Segments of an Enterprise and Related Information" requires use of the
"management approach" model for segment reporting. The management
approach model is based on the way a company's management organizes segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company. The Company allocates its resources and assesses the
performance of its sales activities based upon its products and services (see
Note 20).
RISKS AND
UNCERTAINTIES
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
10
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of PRC’s economy. The Company’s business may be influenced by changes
in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Under
current PRC law on foreign investment, foreign companies are allowed to
establish or invest in wholly-owned foreign enterprises or joint ventures that
engage in wholesale or retail sales of pharmaceuticals in China. These
regulations limit the number and size of retail pharmacy outlets that a foreign
investor may establish. If a foreign investor owns more than 30 outlets that
sell a variety of branded pharmaceutical products sourced from different
suppliers, the foreign investor's ownership interests in the outlets may be
limited to 49.0%. The Company currently controls more than 30 retail pharmacy
outlets through its 80% equity ownership interest in Yongxin, Yongxin’s 100% equity
ownership in Yongxin Drugstore, and Yongxin Drugstore’s 100% equity
ownership in Caoantang Drugstore and 90% equity ownership interest in Jinyongxin
Drugstore. At the time of the establishment of Yongxin, Yongxin already
controlled in excess of 30 retail pharmacy outlets and with this structure in
place it obtained all required approvals from the relevant governmental agencies
in Jilin Province for the joint venture. The Company has been advised by its PRC
counsel, that based on their understanding of the current PRC laws, rules and
regulations and the Company’s receipt of all relevant government approvals for
the equity joint venture, the structure under which it operates and holds equity
ownership in its retail pharmacy businesses complies with all applicable PRC
laws, rules and regulations. However, there are uncertainties regarding the
interpretation and application of PRC laws, rules and regulations by PRC
government authorities, and there is a risk that such authorities may later
issue a differing interpretation of the law and determine that the Company’s
corporate and/or ownership structure does not comply with PRC laws, rules and
regulations. In addition, new PRC laws, rules and regulations may be introduced
from time to time to impose additional requirements that may be applicable to
the Company’s corporate structure or its business operations. If the Company
and/or its PRC subsidiaries are determined to be in violation of any existing or
future PRC laws, rules or regulations, including laws applicable to foreign
investment in retail pharmacy outlets, or fail to obtain or maintain any of the
required governmental permits or approvals, the relevant PRC regulatory
authorities would have broad discretion in dealing with such violations,
including: The imposition of penalties and/or a restructuring of the Company’s
holding structure in order to comply with relevant PRC regulations could
severely disrupt the Company’s ability to conduct business and could have a
material adverse effect on the Company’s financial condition, results of
operations and prospects and also could result in:
·
|
revoking
the business and operating licenses of the Company’s PRC consolidated
entities;
|
·
|
discontinuing
or restricting the operations of the Company’s PRC consolidated
entities;
|
·
|
imposing
conditions or requirements with which the Company or its PRC consolidated
entities may not be able to comply;
|
·
|
requiring
the Company or its PRC consolidated entities to restructure the relevant
ownership structure or operations;
|
·
|
restricting
or prohibiting the Company’s use of the proceeds from its financings to
fund its business and operations in China;
or
|
·
|
imposing
fines.
|
CONCENTRATIONS OF CREDIT
RISK
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes
to be credit-worthy financial institutions. The Company has a
diversified customer base, most of which are in China. The Company
controls credit risk related to accounts receivable through credit approvals,
credit limits and monitoring procedures. The Company routinely
assesses the financial strength of its customers and, based upon factors
surrounding the credit risk, establishes an allowance, if required, for
uncollectible accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is limited.
11
CONTINGENCIES
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management
and legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company’s legal
counsel evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial
statements. If the assessment indicates that a potential material
loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material would be
disclosed. Loss contingencies considered to be remote by management are
generally not disclosed unless they involve guarantees, in which case the
guarantee would be disclosed.
RECENT ACCOUNTING
PRONOUNCEMENTS
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation techniques. A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluating the impact of this ASU, however, the
Company expects the adoption of this ASU will have no material impact on
its consolidated financial statements.
12
In
February 2010, FASB issued ASU No. 2010-9 Subsequent Events (Topic 855) –
Amendments to Certain Recognition and Disclosure Requirements. This update
addresses certain implementation issues related to an entity’s requirement to
perform and disclose subsequent-events procedures, removes the requirement that
public companies disclose the date of their financial statements in both issued
and revised financial statements. According to the FASB, the revised statements
include those that have been changed to correct an error or conform to a
retrospective application of U.S. GAAP. The amendments were effective upon
issuance of the update, except for the use of the issued date for conduit debt
obligors. Such amendment is effective for interim or annual periods ending after
June 15, 2010. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
In March
2010, FASB issued ASU No. 2010-10 –Amendments for Certain Investment Funds. This
update defers the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entity’s interest in
certain types of entities. The deferral will mainly impact the evaluation of
reporting enterprises’ interests in mutual funds, private equity funds, hedge
funds, real estate investment entities that measure their investment at fair
value, real estate investment trusts, and venture capital funds. The ASU also
clarifies guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision makers. The
ASU is effective for interim and annual reporting periods in fiscal year
beginning after November 15, 2009. The adoption of this ASU did
not have a material impact on the Company’s consolidated financial
statements.
In March
2010, FASB issued ASU No. 2010-11 –Scope Exception Related to Embedded Credit
Derivatives. Embedded credit-derivative features related only to the transfer of
credit risk in the form of subordination of one financial instrument to another
are not subject to potential bifurcation and separate accounting as clarified by
recently issued FASB guidance. Other embedded credit-derivative features are
required to be analyzed to determine whether they must be accounted for
separately. This update provides guidance on whether embedded credit-derivative
features in financial instruments issued by structures such as collateralized
debt obligations (CDOs) and synthetic CDOs are subject to bifurcation and
separate accounting. The guidance is effective at the beginning of a company’s
first fiscal quarter beginning after June 15, 2010. The Company expects the
adoption of this ASU will have no material impact on the Company’s consolidated
financial statements.
NOTE
3 –OTHER RECEIVABLE
Other
receivables as of March 31, 2010 and December 31, 2009 are summarized as
follows. The receivables are interest free, unsecured, and due on
demand.
March
31,
2010 |
December
31,
2009
|
|||||||
Advance
to employees
|
$ | 42,675 | $ | 26,493 | ||||
Advances
to store employees
|
339,474 | 15,037 | ||||||
Rent
receivable
|
26,406 | 19,218 | ||||||
Deposits
|
54,035 | 765,925 | ||||||
Sponsorship
from customers
|
906,750 | 987,174 | ||||||
Others
|
33,130 | 57,237 | ||||||
Total
|
$ | 1,402,470 | $ | 1,931,084 |
13
NOTE
4 – PREPAID EXPENSES
The
balance of Company prepaid expenses as of March 31, 2010 and December 31, 2009
comprised of the following:
March
31,
2010
|
December
31,
2009
|
|||||||
Prepaid
rent
|
$ | - | $ | 18,087 | ||||
Rent
|
228,241 | 489,156 | ||||||
Other
prepaid expenses
|
42,172 | 27,525 | ||||||
Prepaid
debt issue costs
|
115,519 | - | ||||||
Total
|
$ | 385,932 | $ | 534,769 |
NOTE
5 - INVENTORIES
As of
March 31, 2010 and December 31, 2009, inventory consisted of the
following:
March
31,
2010
|
December
31,
2009
|
|||||||
Packaging
Materials
|
$ | 34,337 | $ | 200,007 | ||||
Finished
Goods
|
7,734,888 | 7,611,621 | ||||||
Total
inventory
|
$ | 7,769,226 | $ | 7,811,628 |
NOTE
6 - PROPERTIES AND EQUIPMENT
As of
March 31, 2010 and December 31, 2009, the property and equipment of the Company
consisted of the following:
March
31,
2010
|
December
31,
2009
|
|||||||
Office
furniture and fixtures
|
$ | 937,991 | $ | 930,962 | ||||
Vehicles
|
386,994 | 392,557 | ||||||
Buildings
|
8,510,942 | 8,629,014 | ||||||
Construction
in progress
|
1,595 | 1,551 | ||||||
Total
property and equipment
|
9,837,522 | 9,953.784 | ||||||
Less:
Accumulated depreciation
|
(1,363,556 | ) | (1,200,420 | ) | ||||
Net
value of property and equipment
|
$ | 8,473,966 | $ | 8,753,364 |
The
Company had depreciation expense of $150,619 and $74,195 for the three month
periods ended March 31, 2010 and 2009, respectively.
14
NOTE
7- INTANGIBLE ASSETS
As of
March 31, 2010 and December 31, 2009, the intangible assets of the Company
consisted of the following:
March
31,
2010
|
December
31,
2009
|
|||||||
Software
|
$ | 1,104,507 | $ | 1,102,893 | ||||
Total
intangible assets
|
1,104,507 | 1,102,893 | ||||||
Less:
Accumulated amortization
|
(143,880 | ) | (115,561 | ) | ||||
Net
value of intangible assets
|
$ | 960,627 | $ | 987,332 |
The
amortization expense for the three month periods ended March 31, 2010 and 2009
amounted to $28,319 and $12,237, respectively.
The
amortization expenses for intangible assets for next five years after March 31,
2010 are as follows:
March
31, 2011
|
$ | 32,797 | ||
March
31, 2012
|
31,845 | |||
March
31, 2013
|
29,411 | |||
March
31, 2014
|
27,050 | |||
March
31, 2015
|
25,047 | |||
Total
|
$ | 146,151 |
The other
payable represents the deposits made by the sales representatives and sales
distributors for the right to sell products for the Company. Other
payables and accrued expenses consist of the following as of March 31, 2010 and
December 31, 2009:
March
31,
2010 |
December
31,
2009
|
|||||||
Accrued
compensation
|
$ | 336,155 | $ | 1,091,299 | ||||
Accrued
rent expense
|
152,381 | 124,874 | ||||||
Accrued
professional fees
|
256,268 | 86,026 | ||||||
Accrued
litigation
|
988,221 | 987,515 | ||||||
Accrued
interest
|
6,060 | 8,133 | ||||||
Accrued
payable
|
2,020,819 | 2,539,032 | ||||||
Other
accrued expense
|
- | 112,151 | ||||||
Sales
agent deposits
|
79,022 | 113,265 | ||||||
Other
payable
|
167,386 | 108,491 | ||||||
$ | 4,006,311 | $ | 5,170,786 |
15
NOTE
9 - ADVANCE FROM CUSTOMERS
The
advances from customers, which amounted to $2,004,924 and $2,055,602,
respectively, as of March 31, 2010 and December 31, 2009, represent the deposits
made by customers to purchase inventory from the Company.
NOTE
10 - DEFERRED INCOME
A portion
of the Company’s net revenue is derived directly from government-sponsored
healthcare programs, and the Company is therefore subject to government
regulations on reimbursement on the sales made through the healthcare
programs. The Jilin Province Social Insurance Bureau and Changchun
City Insurance Bureau reimburse 90% of the sales that the Company’s pharmacy
retail stores made through the healthcare program networks in the following
month, and retain 10% of the sales until the following year. The
amount will be repaid proportionally based on the level of evaluation made by
the Insurance Bureaus in the following year. The Company classified
10% of the sales made through the healthcare program networks as deferred income
as the collectability of these sales is uncertain. As of March 31, 2010 and
December 31, 2009, the Company had deferred income of $110,609 and $419,277,
respectively.
NOTE
11 - SHARES TO BE ISSUED
The
Company classifies all amounts, against which shares have not been issued, as
shares to be issued. Once the Company issues shares, the amounts are
classified as Common stock. As of March 31, 2010, the Company has a
total 500,000 shares to be issued with a balance of $35,000 pursuant to an
agreement with a software consultant entered into by the Company in
2005.
During
the year ended December 31, 2009, the Company entered into an agreement with an
investor relations firm for services. The term of services is one
year and the Company is obligated to issue 600,000 shares to the investor
relations firms. As of March 31, 2010, only 300,000 shares were
issued to the investor relations firm and the balance is still to be
issued. The Company has recorded the fair market value of the 300,000
shares of $36,000 as shares to be issued.
NOTE
12 -TAXES PAYABLE
Tax
payable comprised of the following taxes as of March 31, 2010 and December 31,
2009:
March
31,
2010 |
December
31, 2009
|
|||||||
VAT
|
$ | 12,715 | $ | 7,874 | ||||
Business
Tax
|
94,785 | 94,785 | ||||||
City
Construction Tax
|
6,635 | 6,658 | ||||||
Education
Tax
|
5,346 | 5,356 | ||||||
Income
Tax
|
649,690 | 1,305,906 | ||||||
Others
|
748 | 855 | ||||||
Total
|
$ | 769,919 | $ | 1,421,434 |
The
Company is registered in the State of Delaware and has operations in primarily
two tax jurisdictions; the PRC and the United States. For certain
operations in the U.S., the Company has incurred net accumulated operating
losses for income tax purposes. The Company believes that it is more
likely than not that these net accumulated operating losses will not be utilized
in the future. Therefore, the Company has provided full valuation
allowance for the deferred tax assets arising from the losses at these locations
as of March 31, 2010. Accordingly, the Company has no net deferred
tax assets.
16
The
provision for income taxes from continuing operations on income consists of the
following as of March 31, 2010 and 2009:
March
31, 2010
|
March
31, 2009
|
|||||||
Current
income tax expense
|
||||||||
US
Federal
|
$ | - | $ | - | ||||
US
State
|
- | - | ||||||
PRC
current income tax expense
|
290,816 | 204,765 | ||||||
Total
Provision for Income Tax
|
$ | 290,816 | $ | 204,765 |
The
following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Statement of
Operations:
March
31, 2010
|
March
31, 2009
|
|||||||
Tax
expense (credit) at statutory rate - federal
|
34 | % | 34 | % | ||||
State
tax expense net of federal tax
|
6 | % | 6 | % | ||||
Changes
in valuation allowance
|
(40 | %) | (40 | %) | ||||
Foreign
income tax - PRC
|
25 | % | 25 | % | ||||
Exempt
from income tax
|
- | - | ||||||
Temporary
difference
|
0.24 | % | 3 | % | ||||
Tax
expense at actual rate
|
25 | % | 28 | % |
United States of
America
The
Company has significant income tax net operating losses (“NOL”) carried forward
from prior years. Due to the change in ownership of more than fifty
percent, the amount of NOL which may be used in any one year will be subject to
a restriction under section 382 of the Internal Revenue Code. Due to
the uncertainty of the realizability of the related deferred tax assets of
$4,473,105, a reserve equal to the amount of deferred income taxes has been
established at March 31, 2010.
People’s Republic of China
(“PRC”)
Pursuant
to the PRC Income Tax Laws, the Company's subsidiary is generally subject to
Enterprise Income Taxes ("EIT") at a statutory rate of 25%.
The
following table sets forth the significant components of the provision for
income taxes for operation in PRC as of March 31, 2010 and 2009.
2010
|
2009
|
|||||||
Net
taxable income
|
$ | 1,162,252 | $ | 867,307 | ||||
Income
tax @ 25.24% and 28%
|
$ | 290,816 | $ | 204,765 |
The loans
payable at March 31, 2010 comprised of the following:
March
31,
2010
|
December
31,
2009
|
|||||||
Loan
payable to Jilin Bank, interest at 4.86% annually, due by August 10, 2010
(Note a)
|
$ | 481,176 | $ | - | ||||
Loan
payable to Jilin Bank, interest at 4.86% annually, due by June 10, 2010
(Note b)
|
410,137 | - | ||||||
Loan
payable to a non-related party, interest at 1.5% annually, unsecured, due
by December 31, 2009
|
115,708 | 237,146 | ||||||
Loan
payable to Jilin Bank, interest at 6.9% annually, due by January 22,
2010
|
- | 733,500 | ||||||
Various
loans, interest free, unsecured and due on demand
|
- | 130,238 | ||||||
Loan
payable to Runfeng Agriculture Credit Union, annual interest at 80% over
bank stated rate, secured by personal properties of a significant
stockholder of the Company, due by January 26, 2011
|
1,320,300 | - | ||||||
Total
|
$ | 2,327,321 | $ | 1,100,884 |
(a)
|
As
of March 31, 2010, short-term borrowings, amounting to $481,176, were
pledged by accounts receivable, amounting to $601,470 at
interest rates of approximately 4.86%, maturing by August 10,
2010.
|
(b)
|
As
of March 31, 2010, short-term borrowings, amounting to $410,137, were
pledged by accounts receivable, amounting to $512,671 at interest rates of
approximately 4.86%, maturing by June 10,
2010.
|
NOTE
14 - LONG-TERM LOAN PAYABLE
The
Company had long term loans payable amounting to $0 and $1,320,300 as of March
31, 2010 and December 31, 2009, respectively. The loans are secured
by personal properties of a significant stockholder of the
Company. The loans payable at March 31, 2010 and December 31, 2010
comprised of the following:
March
31,
2010
|
December
31,
2009
|
|||||||
Loan
payable to Runfeng Agriculture Credit Union, annual interest at 80% over
bank stated rate, due by January 26, 2011
|
- | $ | 1,320,300 |
The long
term loan payable was reclassified to short term loan payable as of March 31,
2010.
NOTE
15 - CONVERTIBLE NOTE PAYABLE
On
January 25, 2010, the Company consummated a private placement of its equity
securities with certain accredited investors pursuant to a Subscription
Agreement for total consideration of $700,000. The Company issued to
the investors secured convertible notes with a two year term, bearing 10%
interest per annum, convertible into common stock of the Company at a conversion
price of $0.20 per share, which is subject to adjustment for stock splits,
recapitalizations and other similar events, and will also be adjusted on a
full-ratchet basis to equal the price per share of any subsequent
financing. The notes are secured by a first priority interest in all
current and future assets of the Company, which will be cancelled upon repayment
of the notes or upon conversion of at least 50% of the principal amount of the
notes into shares of Company common stock. The notes, may be
redeemed, by the Company, at any time for 110% of outstanding principal and
interest. The note investors also received, as a part of the
financing, warrants for the purchase of up to 3.5 million shares of the
Company’s common stock with an exercise price $0.50 per share (subject to
adjustment for stock splits, recapitalizations and other similar events)
exercisable for a period of three years. The Company will use the
proceeds of the financing for the payment of auditing expenses, legal fees,
operating expenses, supplies, and general working capital.
18
The notes
were convertible into an aggregate of 3.5 million shares. The relative fair
value of the warrants using the Black Scholes method assuming a volatility of
the stock of 197.3%, term of three years and a discount of 1.75% was determined
to be $418,783 and was recorded as debt discount, a reduction of the carrying
amount of the debt. The relative fair value of the beneficial conversion feature
of the notes was determined to be $281,217 and also recorded as a debt discount.
Using the effective interest method the beneficial conversion feature and the
value of the warrants will be amortized over the 36 months term of the note
and charged to interest expense. In the three month period ended March 31,
2010 $58,333 was expensed. The Company further incurred broker fees of $56,000
cash and 105,000 warrants having fair market value of $50,037, which is recorded
as prepaid debt issue cost and is being amortized over the term of the note. In
the three month period ended March 31, 2010, $8,836 was expensed as a
general expense.
On March
4, 2010, the Company consummated a private placement of its equity securities
with certain accredited investors pursuant to a Subscription Agreement for total
consideration of $125,000. The Company issued to the investors secured
convertible notes with a two year term, bearing 10% interest per annum,
convertible into common stock of the Company at a conversion price of $0.20 per
share, which is subject to adjustment for stock splits, recapitalizations and
other similar events, and will also be adjusted on a full-ratchet basis to equal
the price per share of any subsequent financing. The notes are secured by
pledged stock, and by a first priority interest in all current and future assets
of the Company, which will be cancelled upon repayment of the notes or upon
conversion of at least 50% of the principal amount of the notes into shares of
Company common stock. The notes may be redeemed by the Company at any time for
110% of outstanding principal and interest. The note investors also received, as
a part of the financing, warrants for the purchase of up to 625,000 shares of
our common stock with an exercise price $0.50 per share (subject to adjustment
for stock splits, recapitalizations and other similar events) exercisable for a
period of three years.
The notes
were convertible into an aggregate of 625,000 shares. The relative fair value of
the warrants using the Black Scholes method assuming a volatility of the stock
of 197.3%, term of three years and a discount of 1.75% was determined to be
$74,456 and was recorded as debt discount, a reduction of the carrying amount of
the debt. The relative fair value of the beneficial conversion feature of the
notes was determined to be $50,544 and also recorded as a debt discount. Using
the effective interest method the beneficial conversion feature and the value of
the warrants will be amortized over the 36 months term of the note and
charged to interest expense. In the three month period ended March 31, 2010
$5,208 was expensed. The Company further incurred broker fees of $10,000 cash
and 18,750 warrants having fair market value of $9,115, which is recorded as
prepaid debt issue cost and is being amortized over the term of the note. In the
three month period ended March 31, 2010, $796 was expensed as a general
expense.
NOTE
16 - LOANS FROM RELATED PARTIES
As of
March 31, 2010 and December 31, 2009, the loans from related parties were
comprised of the following:
March
31,
2010
|
December
31,
2009
|
|||||||
Loans
payable to ex-officers, interest free, due on demand, and
unsecured
|
$ | - | $ | 184,662 | ||||
Total
|
$ | - | $ | 184,662 |
NOTE
17 - STOCKHOLDERS' EQUITY
The
Series A Convertible Preferred Stock is convertible over a 3 year period, into
up to 30 million shares of common stock. In particular, the holder of any shares
of Series A Convertible Preferred Stock shall have the right, at its option, to
convert, any such shares of Series A Convertible Preferred Stock into such
number of fully paid and nonassessable shares of Common Stock on a six (6) for
one (1) basis. The conversion formula is conditioned on the Company earning no
less than $3 million of net income in for the fiscal year ending December 31,
2007; $4 million of net income in the fiscal year ending December 31, 2008 and
$5 million of net income in the fiscal year ending December 31, 2009. In the
event that in any of the three fiscal years, the Company earns less than
required net income amounts for conversion, then the conversion right shall be
proportionately reduced by the amount of the shortfall below the required net
income amount, with the "catch-up" right to convert additional shares to the
extent that the net income exceeds $3 million; $4 million and $5 million
respectively in each of the three consecutive years. In no event shall this
conversion right allow for the conversion of the Series A Preferred Stock into
more than 6 common shares for each share of Series A Preferred Stock over the
course of the aforementioned three calendar years. The net income requirements
shall be based upon an audit of the revenues for each fiscal year. All
conversions shall be made within 30 days of the completion of such
audit. During the year ended March 31, 2010, holders of 3,333,333
preferred shares opted to convert the preferred shares into 20,000,000 common
shares.
19
As of
March 31, 2010 and December 31, 2009, the Company had 57,348,923and 56,448,923
shares of common stock issued and outstanding, respectively.
During
the three month period ended March 31, 2010, the Company issued 200,000 shares
each to two ex-officer for settlement of a litigation with one ex-officer and
for settlement of debt with the other. The shares were valued at the fair market
of the shares of $226,000 on the date of settlement.
During
the three month period ended March 31, 2010, the Company issued 500,000 shares
for a litigation settlement. The shares were valued at the fair market of the
shares of $255,000 on the date of settlement.
During
the year ended December 31, 2009, the Company entered into a consulting
agreement with an investor relations firm to provide investor relations and
public relations services. The agreement is for a period of 1 year and the
Company agreed to issue 300,000 shares of restricted common stock and 300,000
warrants at exercise prices ranging from $1 per share to $2 per share, to the
investor relations firm. The Company valued the shares at the fair market value
of $30,000 and expensed $25,000 during the year ended December 31, 2009 in the
consolidated financial statements. The balance $5,000 were expensed during the
three month period ended March 31, 2010.
During
the year ended December 31, 2009, the Company entered into a consulting
agreement with an investor relations firm to provide investor relations and
public relations services. The agreement is for a period of 1 year
and the Company agreed to issue 600,000 shares of restricted common stock to the
investor relation firm. The Company valued the shares at the fair
market value of $72,000 and expensed $66,000 during the year ended December 31,
2009 in the consolidated financial statements. The balance amount of $6,000
was expensed during the three month period ended March 31, 2010. As of March 31,
2010, 300,000 of such shares are still not issued and are included in the shares
to be issued.
On
September 25, 2009, the Company closed a private placement of its equity
securities. We issued a total of 3,338,383 shares of our common
stock, restricted in accordance with Rule 144, to 157 accredited investors, for
total consideration of $467,369. In addition, we issued to the
investors warrants to acquire another 3,338,385 shares of our common stock at
$0.35 per share, exercisable for a period of three years. In relation
to this private placement, the Company also issued 1,000,000 shares of common
stock and paid $35,000 cash. The warrants granted to the investors were valued
using the Black-Scholes option-pricing model.
During
the year ended December 31, 2009, holders of 3,333,333 preferred shares opted to
convert the preferred shares into 20,000,000 common shares.
As of
October 30, 2008, the Company sold 108,695 shares to an unrelated party for
$50,000. The amount was received directly by the related party, and
the Company shows a receivable from the related party for such
amount. The related party receivable is interest free, due on demand,
unsecured and has been reflected in the equity section in the accompanying
consolidated financial statements.
NOTE
18 – WARRANTS
Following
is a summary of the warrant activity for the period ended March 31,
2010:
Outstanding,
December 31, 2009
|
5,188,385 | |||
Granted
|
4,248,750 | |||
Expired
|
- | |||
Exercised
|
- | |||
Outstanding,
March 31, 2010
|
9,437,135 |
20
Following
is a summary of the status of warrants outstanding at March 31,
2010:
Outstanding
Warrants
|
Exercisable
Warrants
|
|||||||||||||||||||||
Exercise
Price
|
Number
of Warrants
|
Average
Remaining Contractual Life
|
Average
Exercise Price
|
Number
of Warrants
|
Intrinsic
Value
|
|||||||||||||||||
$ | 0.5 - $4 | 9,437,135 | 2.72 | $ | 0.55 | 9,437,135 | 1,649,585 |
The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option-pricing model are as follows:
The
4,248,750 warrants granted during the three month period ended March 31,
2010:
Risk-free
interest rate
|
1.75%
|
|||
Expected
life of the warrants
|
3
years
|
|||
Expected
volatility
|
197.3% | |||
Expected
dividend yield
|
0 |
During
the three month period ended March 31, 2010, the Company entered into two
subscription agreements with investors for private placement of equity
securities. The Company issued note payables with 3.5 million warrants and
625,000 warrants attached to them (See Note 15). The Company also granted
105,000 warrants and 18,750 warrants as brokers fees. The Black-Scholes fair
market value of $50,037 and $9,115 of the warrants was calculated using the
above assumptions and is being amortized over the term of the notes. During the
three month period ended March 31, 2010, the Company amortized $4,170 and $380
as general expense.
During
the year ended December 31, 2009 the Company granted 300,000 warrants at
exercise prices ranging from $1 per share to $2 per share, to an investor
relation firm. The Black-Scholes fair market value of the warrants was $28,439.
The Company recorded an expense of $23,699 during the year ended December 31,
2009 in the consolidated financial statements for the warrants. The balance
amount of $4,740 was recorded as expense during the three month period ended
March 31, 2010.
On
September 25, 2009, the Company closed a private placement of our equity
securities. We issued a total of 3,338,385 shares of our common
stock, restricted in accordance with Rule 144, to 157 accredited investors, for
total consideration of $467,369. In addition, we issued to the
investors warrants to acquire another 3,338,385 shares of our common stock at
$0.35 per share, exercisable for a period of three years. The fair
market value of the warrants was calculated using the Black-Scholes option
pricing model and was netted against the net proceeds of the private
placement.
NOTE
19 – COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases its operating locations. Initial terms are typically 5
to 10 years, followed by additional terms containing priority of renewal options
at the maturity of the lease agreements, and may include rent escalation
clauses. The Company recognizes rent expense on a straight-line basis
over the term of the lease.
Minimum
rental commitments at March 31, 2010, under all leases having an initial or
remaining non-cancelable term of more than one year are shown:
2010
|
$ | 1,058,624 | ||
2011
|
959,800 | |||
2012
|
306,110 | |||
2013
|
82,426 | |||
2014
|
17,853 | |||
Total
minimum lease payments
|
$ | 2,424,813 |
21
The
Company subleases its building to an unrelated company. The lease
term is one year.
Legal
proceedings
On or
about October 17, 2008, a former officer initiated an action in the Superior
Court for the State of California, County of Los Angeles, Central District,
against the Company alleging claims for damages related to an alleged employment
agreement. On December 29, 2008, the Company filed an Answer to the
Complaint. The Company strongly disputed the claims and diligently
defended against them. The Company was defending itself against claims for open
account and intentional misrepresentation. The Plaintiff sought past
due attorneys’ fees for services rendered in the amount of
$193,100. The case was settled in October, 2009 for $50,000 cash and
400,000 shares of common stock. The court also ordered interest at
the rate of 10% on $50,000 from June 20, 2009 until the date the amount is paid
off. The Company accrued an aggregate sum of $127,397 for the cash to
be paid and for the fair market value of the shares to be issued. The Company
paid $52,500 in cash and issued 200,000 shares of common stock to the former
officer, valued at $102,000 for the settlement of debt, during the three month
period ended March 31, 2010.
The
Company was also involved in an ongoing legal proceeding filed in Orange County
Superior Court on or about November 9, 2004. In this action, the
Cross-Complainant, Terry Koosed, sought to amend a $219,000 judgment he obtained
to include a subsidiary of the predecessor-in-interest of the Company, which was
not named or a participant in such lawsuit. The Company strongly
disputed the lawsuit and aggressively defended such action. The
Company accrued $219,000 in the accompanying financials statements.
The Company paid $35,000 in cash and 500,000 shares valued at $255,000 for the
settlement of the case during the three month period ended March 31,
2010.
A former
employee of the Company, the plaintiff, brought a lawsuit against the Company
seeking unpaid wages, bonuses, benefits, penalties and interest. The
case went into trial in November 2009 and the trial court thereafter issued a
judgment for plaintiff for $641,018. The Company accrued the amount in 2009. The
court entered a revised judgment in the amount of $746,487 against the Company
on April 20, 2010 to reflect attorney fees. As of March 31, 2010, the
Company has not paid the judgment amount and the revised judgment amount has
been accrued in the accompanying financials as accrued litigation.
On or
about March 10, 2009, a former
employee of the Company, the plaintiff, brought a lawsuit against the Company
seeking unpaid wages that accrued during his employment from 2005 to 2008 as
well as penalties, interest and attorney fees. The Company and the former
employee entered into a stipulation on May 10, 2010 in the amount of $241,733.
The Company accrued the amount in the accompanying financials as accrued
litigation as of March 31, 2010.
NOTE
20 – SEGMENT INFORMATION
The
Company operates in two business segments: retail drug stores
and pharmaceutical medicine wholesales sales. These segments were
identified based on their separate and distinct products and services,
technology, marketing strategies and management reporting. Management evaluates
the segments’ operating performance separately and allocates resources based on
their respective financial condition, results of operations and cash flows.
Inter-segment transactions and balances are eliminated in
consolidation.
The
retail drug store segment is complemented by such core front-end categories as
over-the-counter medications, health and nutritional products, cosmetics
and other items. As of March 31, 2010, the retail drug store segment
operated 79 retail stores with business area of 9,834 square meters in three
cities in China.
The
pharmaceutical medicine wholesales segment, operated through Yongxin, provides
logistics wholesale distribution of over-the-counter and prescribed medicines to
hospitals, clinics, medical institutions and retail drug stores.
22
The
following table summarizes significant financial information by
segment:
For
The Three-Month Period ended March 31, 2010
|
For
The Three-Month Period ended March 31, 2009
|
|||||||
Revenues
from unaffiliated customers:
|
||||||||
Retail
drug stores
|
3,985,119 | 3,340,750 | ||||||
Pharmaceutical
medicine wholesales
|
7,686,995 | 7,191,687 | ||||||
Unallocated
|
||||||||
Revenues
from inter-company sales
|
(992,649 | ) | (1,347,443 | ) | ||||
Consolidated
Totals
|
10,679,465 | 9,184,994 | ||||||
Net
income:
|
||||||||
Retail
drug stores
|
517,956 | 191,978 | ||||||
Pharmacy
wholesales
|
456,054 | 497,512 | ||||||
Unallocated
|
1,402,047 | (141,566 | ) | |||||
Net
income from inter-company
|
(25,077 | ) | (26,947 | ) | ||||
Consolidated
Totals
|
2,350,980 | 520,977 | ||||||
Depreciation
and amortization:
|
||||||||
Retail
drug stores
|
54,960 | 30,424 | ||||||
Pharmacy
wholesales
|
123,978 | 54,612 | ||||||
Unallocated
|
- | - | ||||||
Consolidated
Totals
|
178,938 | 85,036 | ||||||
Interest
income:
|
||||||||
Retail
drug stores
|
764 | 721 | ||||||
Pharmacy
wholesales
|
2,016 | 1,920 | ||||||
Unallocated
|
142 | 112 | ||||||
Consolidated
Totals
|
2,921 | 2,753 | ||||||
Interest
expense:
|
||||||||
Retail
drug stores
|
- | - | ||||||
Pharmacy
wholesales
|
40,909 | 8,302 | ||||||
Unallocated
|
12,308 | 2,925 | ||||||
Consolidated
Totals
|
53,617 | 11,227 | ||||||
Capital
expenditures:
|
||||||||
Retail
drug stores
|
- | 234,293 | ||||||
Pharmacy
wholesales
|
- | 28,008 | ||||||
Unallocated
|
- | - | ||||||
Consolidated
Totals
|
- | 262,301 | ||||||
Identifiable
assets:
|
||||||||
Retail
drug stores
|
9,930,274 | 9,069,536 | ||||||
Pharmacy
wholesales
|
32,703,384 | 23,276,911 | ||||||
Unallocated
|
186,108 | 7,664 | ||||||
Consolidated
Totals
|
42,819,766 | 32,354,111 |
23
NOTE
21 – STATUTORY RESERVE
As
stipulated by the Company Law of the People’s Republic of China (PRC), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:
i.
|
Making
up cumulative prior years’ losses, if
any;
|
ii.
|
Allocations
to the “Statutory Surplus Reserve” of at least 10% of income after tax, as
determined under PRC accounting rules and regulations, until the fund
amounts to 50% of the Company’s registered capital;
and
|
|
iii.
|
Allocations
to the discretionary surplus reserve, if approved in the stockholders’
general meeting.
|
NOTE
22 - DISCONTINUED OPERATIONS
On
September 30, 2005, Software Education of America, Inc., subsidiary of
Nutradyne, filed a petition in bankruptcy under Chapter 7 of the U.S. Bankruptcy
Code. The petition was necessitated because SEA was unable to continue to meet
its financial obligations. SEA is presented in the accompanying financial
statements as discontinued operations.
In
November 2009, a subsidiary of the Company, Jilin Dingjian Natural
Health Products Co., Ltd, entered into an agreement (the “Agreement”)
with Sun Shi Wei, an individual, to transfer 90% of ownership with all its
assets and liabilities to Sun Shi Wei. The 10% minority interest
remained unchanged. Both parties agreed that Sun Shi Wei assumed the
net liability. No other money was exchanged. The Agreement also
indicated that the Company would be liable for any undiscovered liability.
Because
the buyer assumed the net liability, the Company recorded a gain from disposal
of assets and liabilities at November 30, 2009. Jilin Dingjian
Natural Health Products Co., Ltd is presented in the accompanying
financial statements as discontinued operations.
Balance
Sheet information for the discontinued subsidiaries as of March 31, 2010 and
December 31, 2009 is as follows:
Assets:
|
March
31,
2010
|
December
31,
2009
|
||||||
Cash
|
$ | - | $ | - | ||||
Accounts
receivables, net
|
- | |||||||
Other
receivables
|
- | |||||||
Prepaid
expenses
|
- | |||||||
Inventory
|
- | - | ||||||
Total
current assets
|
- | - | ||||||
Property,
Plant & Equipment, net
|
- | - | ||||||
Intangible
Assets, net
|
- | - | ||||||
Total
assets
|
$ | - | $ | - | ||||
Liabilities:
|
||||||||
Accounts
payable
|
$ | $ | 227,590 | |||||
Accrued
expenses
|
58,753 | 238,581 | ||||||
Loans
payable
|
162,666 | |||||||
Total
liabilities
|
$ | 58,753 | $ | 628,837 | ||||
Net
liabilities of discontinued operations
|
$ | 58,753 | $ | 628,837 |
On March
1, 2010, the Company sold its digital e-learning business including its
wholly-owned subsidiary, Digital Learning Institute Inc., a Delaware corporation
(“Digital Learning”); and (i) Digital Learning’s wholly-owned subsidiary
Software Education of America, Inc., a California corporation; (ii) Digital
Learning’s wholly-owned subsidiary McKinley Educational Services, Inc., a
California corporation; (iii) Digital Learning’s wholly-owned subsidiary Digital
Knowledge Works, Inc., a Delaware corporation; and (iv) Digital Learning’s
wholly-owned subsidiary Coursemate, Inc., a California corporation (referred to
collectively herein as the "Digital E-learning Business"). The Company recorded
a gain of $1,889,800. The following are the assets and liabilities of the
disposed entities:
Amount
|
||||
Accounts
payable
|
$ | 728,754 | ||
Accrued
expenses
|
435,469 | |||
Due to related
party
|
140,456 | |||
Loan
payable
|
130,238 | |||
Other
liabilities
|
434,883 | |||
Current
liabilities, total
|
1,869,800 | |||
Net
liability disposed
|
(1,869,800 | ) | ||
Addition
cash received
|
20,000 | |||
Gain
on disposal of subsidiaries
|
$ | 1,889,800 |
24
NOTE
23 - SUBSEQUENT EVENT
On April
9, 2010, the Company consummated a private placement of its equity securities
with certain non-U.S. investors pursuant to a Securities Purchase Agreement for
total consideration of $1,178,100. The Company issued to the
investors an aggregate 5,890,500 shares of common stock, par value $0.001 per
share (the “Common Stock”) at a price of $0.20 per share. The
investors also received, as a part of the financing, warrants for the purchase
of up to an aggregate 5,890,500 shares of our Common Stock at an exercise price
$0.50 per share (subject to adjustment for stock splits, recapitalizations and
other similar events) exercisable for a period of two years. The
Company will use the proceeds of this financing for the payment of auditing
expenses, legal fees, operating expenses, supplies, and general working
capital. The securities were offered and issued in reliance upon an
exemption from registration pursuant to Regulation S of the Securities Act of
1933, as amended (the “Securities Act”). We completed the
offering pursuant to Rule 903 of Regulation S of the Act on the basis that the
sale of the securities was completed in an “offshore transaction”, as defined in
Rule 902(h) of Regulation S. We did not engage in any directed
selling efforts, as defined in Regulation S, in the United States in connection
with the sale of the securities. The investors represented to us that
they were not U.S. persons, as defined in Regulation S, and were not acquiring
the securities for the account or benefit of a U.S. person. The
Securities Purchase Agreements executed between us and the investors included
statements that the securities had not been registered pursuant to the Act and
that the securities may not be offered or sold in the United States unless the
securities are registered under the Act or pursuant to an exemption from the
Act. The investors agreed by execution of the Securities Purchase Agreements for
the securities: (i) to resell the securities purchased only in accordance with
the provisions of Regulation S, pursuant to registration under the Act or
pursuant to an exemption from registration under the Act; (ii) that the Company
is required to refuse to register any sale of the securities purchased unless
the transfer is in accordance with the provisions of Regulation S, pursuant to
registration under the Act or
pursuant to an exemption from registration under the Act; and (iii) not to
engage in hedging transactions with regards to the securities purchased unless
in compliance with the Act. All securities issued were endorsed with
a restrictive legend confirming that the securities have not been registered
under the Act and could not be resold without registration under the Act or an
applicable exemption from the registration requirements of the
Act. The foregoing summary descriptions do not purport to be complete
and are qualified in their entirety by the terms of the Securities Purchase
Agreement and Warrant.
On April
21, 2010, the Company filed a Certificate of Amendment with Delaware’s Division
of Corporations to amend and restate our Certificate of Incorporation (the
“Restated Certificate of Incorporation”). The revisions in the
Restated Certificate of Incorporation included the following: (a) an increase in
the Company’s authorized shares of Common Stock from 75,000,000 to 100,000,000
shares; (b) a decrease in the authorized number of shares of both our preferred
stock and our Series A Convertible Preferred Stock from 5,000,000 shares to
1,666,667 shares; and (c) additional amendments including changes to the rights
of the holders of our Series A Convertible Preferred Stock which included an
increase in the number of votes that each share of Series A Preferred Stock is
entitled to vote when voting with the common stockholders as a single class
which was increased from six (6) to twenty-five (25). As described in
the Definitive Information Statement that we filed with the SEC on February 22,
2010 and which we mailed to our stockholders on or about February 24, 2010, our
board of directors approved the Restated Certificate of Incorporation by
unanimous written consent on February 8, 2010. Further, on February
8, 2010, the holders of a majority of our voting capital stock held by holders
of Common Stock and Series A Preferred Stock, voting as a single class, and
holders of a majority of our Series A Preferred Stock, voting as a separate
class, each approved the Restated Certificate of Incorporation and the adoption
thereof.
On May 3,
2010, the Company consummated a subsequent third closing of its private
placement of its equity securities with certain accredited investors pursuant to
a Subscription Agreement for total consideration of $250,000 (the “Third
Closing”). The Company issued to the investors secured convertible
notes with a two year term, bearing 10% interest per annum, convertible into
common stock of the Company at a conversion price of $0.20 per share, which is
subject to adjustment for stock splits, recapitalizations and other similar
events, and will also be adjusted on a full-ratchet basis to equal the price per
share of any subsequent financing. The notes are secured by a first
priority interest in all current and future assets of the Company, which will be
cancelled upon repayment of the notes or upon conversion of at least 50% of the
principal amount of the notes into shares of Company common
stock. The notes may be redeemed by the Company at any time for 110%
of outstanding principal and interest. The note investors also
received, as a part of the financing, warrants for the purchase of up to 1.25
million shares of our common stock with an exercise price $0.50 per share
(subject to adjustment for stock splits, recapitalizations and other similar
events) exercisable for a period of three years. The Company will use
the proceeds of the financing for the payment of auditing expenses, legal fees,
operating expenses, supplies, and general working capital. The
issuance of these securities was exempt from registration pursuant to Rule 506
of Regulation D promulgated under the Securities Act of 1933. The Company
previously consummated an initial closing of its private placement of its equity
securities on January 25, 2010 in the amount of $700,000 (the “First Closing”)
and a second closing of its private placement of its equity securities on March
4, 2010 in the amount of $125,000 (the “Second Closing”) with certain accredited
investors pursuant to the Subscription Agreement.
25
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis of the financial condition and results of
operations of China Yongxin Pharmaceuticals Inc. (formerly Digital Learning
Management Corporation and Nutradyne Group, Inc.) and its subsidiaries (the
“Company") for the three month periods ending March 31, 2010 and March 31, 2009
should be read in conjunction with its financial statements and the related
notes, and the other financial information included in this quarterly report on
Form 10-Q (“Form 10-Q”).
Forward-Looking
Statements
This Form
10-Q contains forward-looking statements. The words "anticipated," "believe,"
"expect, "plan," "intend," "seek," "estimate," "project," "could," "may" and
similar expressions are intended to identify forward-looking
statements. These statements include, among others, information
regarding future operations, future capital expenditures, and future net cash
flow. Such statements reflect our management's current views with
respect to future events and financial performance and involve risks and
uncertainties, including, without limitation, general economic and business
conditions, changes in foreign, political, social, and economic conditions,
regulatory initiatives and compliance with governmental regulations, the ability
to achieve further market penetration and additional customers, and various
other matters, many of which are beyond our control. Should one or
more of these risks or uncertainties occur, or should underlying assumptions
prove to be incorrect, actual results may vary materially and adversely from
those anticipated, believed, estimated or otherwise
indicated. Consequently, all of the forward-looking statements made
in this report are qualified by these cautionary statements and there can be no
assurance of the actual results or developments.
Overview
The
Company was originally incorporated in Delaware on February 18, 1999 under the
name of FreePCSQuote. On December 21, 2006, Changchun Yongxin Dirui
Medical Co., Ltd, a Chinese corporation ("Yongxin") and all of the shareholders
of Yongxin entered into a share exchange transaction with the
Company. On April 12, 2008, we entered into a second amended Share
Exchange Agreement with Yongxin, effective November 16, 2007, in which the
Company acquired from the original Yongxin shareholders, and Yongxin
shareholders transferred to the Company, 80% of the equity interest of Yongxin
in exchange for the issuance by the Company of an aggregate of 21,000,000 shares
of newly issued common stock and 5,000,000 shares of Series A Convertible
Preferred Stock to the original Yongxin shareholders and/or their designees (the
“Share Exchange Transaction”). For accounting purposes, this Share
Exchange Transaction was accounted for as a reverse acquisition, since the
original stockholders of Yongxin became the owners of a majority of the issued
and outstanding shares of common stock of the Company, and the directors and
executive officers of Yongxin became the directors and executive officers of the
Company. In connection with the Share Exchange Transaction, we
changed our name to “Nutradyne Group Inc.”
Yongxin
was originally established in 1993. Yongxin's business operations consist of
wholesale and retail sales of pharmaceuticals, medical equipment, other
medical-related products, health products including nutritional and dietary
supplements, and cosmetics. Yongxin's operations are based in Changchun City,
Jilin Province, China. In 2001, Yongxin established Jilin Province
Yongxin Chain Drugstore Ltd. ("Yongxin Drugstore") to develop a
customer-terminal network market. In July 2005, the Company obtained the
franchise rights in Jilin Province from American Medicine Shoppe (Meixin
International Medical Chains) and by then had developed four chains under the
name of "Meixin Yongxin." As of April 14, 2010, Yongxin Drugstore has
developed 21 retail chain drug stores under the Yongxin brand which collectively
cover 3,373 square meters of retail space throughout Changchun city in China.
These drugstores sell over-the-counter western and traditional Chinese medicines
and other medical-related products.
On March
16, 2007, Yongxin Drugstore entered into various agreements with retail drug
stores in Tianjin and established Tianjin Jingyongxin Chain Drugstore Ltd.
("Jinyongxin Drugstore"), in which the Company has a 90% equity
ownership. Jinyongxin Drugstore is located in Tianjin City,
China. As of April 14, 2010, Jinyongxin Drugstore has developed 26
retail chain drug stores with total retail space of 3,657 square meters
throughout Tianjin City in China.
26
On May
15, 2007, Yongxin established Jilin Dingjian Natural Health Products Co., Ltd.
("Dingjian") whereby Yongxin acquired a 90% ownership interest in Dingjian. The
other 10% of Dingjian was held by an individual named Jianwei
Chen. Dingjian was formed under laws of the People's Republic of
China and is located in Changchun City, Jilin Province. Dingjian's
products included ginseng products, flower-flavored tea, rare raw medicine
materials and local specialty products. On November 21, 2009, Yongxin
disposed of its entire ownership interest in Dingjian pursuant to an Equity
Transfer Agreement (the "Agreement") with Sun Shi Wei, an
individual. Pursuant to the Agreement, Yongxin transferred its 90%
ownership interest in Dingjian to Sun Shi Wei. No other consideration
was exchanged. As of the date of this Form 10-Q, Yongxin holds no
ownership interest in Dingjian, and is not subject to any of its
liabilities.
On June
15, 2007, Yongxin Drugstore established Baishan Caoantang Chain Drugstore Ltd.
("Caoantang Drugstore") with a total investment of
$408,430. Caoantang Drugstore is a wholly-owned subsidiary of Yongxin
Drugstore. As of April 14, 2010, Caoantang Drugstore operated a chain of 32
retail drugstores that collectively cover 2,804 square meters of retail space
and this chain sells over-the-counter western and traditional Chinese medicines
and other medical-related products.
On May 5,
2008, the Company changed its name from Nutradyne Group, Inc. to China Yongxin
Pharmaceuticals Inc.
On March
9, 2009, the Company formally launched its Electronic Diagnosis System (the
"EDS"), which enables its customers to remotely receive a medical diagnosis and
conveniently purchase prescription drugs at its stores. To date, the
Company has installed 20 EDS units in its Yongxin chain drugstores, all located
in Changchun City, Jilin Province, China.
Since the
beginning of 2009, the Company has also signed 12 exclusive distribution
agreements within the Jilin province with several well known pharmaceutical
manufacturers including Tianjin Smith Kline & French Laboratones
Ltd. As of April 14, 2010, Yongxin has exclusive distribution rights
of an aggregate 96 prescription and over-the-counter drugs in Jilin
province. This portfolio is a key component of its long term growth
strategy to leverage its large distribution center and channels established to
drive incremental future revenue growth. These agreements are
typically one year in duration and renewable.
On March 1, 2010, the Company divested
its digital e-learning business including its wholly-owned subsidiary, Digital
Learning Institute Inc., a Delaware corporation (“Digital Learning”); and (i)
Digital Learning’s wholly-owned subsidiary Software Education of America, Inc.,
a California corporation; (ii) Digital Learning’s wholly-owned subsidiary
McKinley Educational Services, Inc., a California corporation; (iii) Digital
Learning’s wholly-owned subsidiary Digital Knowledge Works, Inc., a Delaware
corporation; and (iv) Digital Learning’s wholly-owned subsidiary Coursemate,
Inc., a California corporation (referred to collectively herein as the "Digital
E-learning Business"). The Digital E-learning Business constituted an immaterial
portion of our overall business and since the Company’s Share Exchange
Transaction, it has been the Company’s intention to divest the Digital
E-learning Business.
On April 21, 2010, we filed a
Certificate of Amendment with Delaware’s Division of Corporations to amend and
restate our Certificate of Incorporation (the “Restated Certificate of
Incorporation”). The revisions in the Restated Certificate of
Incorporation included the following: (a) an increase in the Company’s
authorized shares of Common Stock from 75,000,000 to 100,000,000 shares; (b) a
decrease in the authorized number of shares of both our preferred stock and our
Series A Convertible Preferred Stock from 5,000,000 shares to 1,666,667 shares;
and (c) additional amendments including changes to the rights of the holders of
our Series A Convertible Preferred Stock which included an increase in the
number of votes that each share of Series A Preferred Stock is entitled
to, when voting with the common stockholders as a single class, which was
increased from six (6) to twenty-five (25). As described in the
Definitive Information Statement that we filed with the SEC on February 22, 2010
and which we mailed to our stockholders on or about February 24, 2010, our board
of directors approved the Restated Certificate of Incorporation by unanimous
written consent on February 8, 2010. Further, on February 8, 2010,
the holders of a majority of our voting capital stock held by holders of Common
Stock and Series A Preferred Stock, voting as a single class, and holders of a
majority of our Series A Preferred Stock, voting as a separate class, each
approved the Restated Certificate of Incorporation and the adoption
thereof.
27
Recent
Developments
Our
business is affected by global, national and local economic conditions since
many of our products are discretionary and we depend to a significant extent
upon discretionary consumer spending in China. During economic downturns,
consumers tend to spend less on many of our products, including nutritional and
dietary supplements and cosmetics.
In March
2009, the Chinese government announced certain changes to the national medical
policy relating to the extension of medical benefits to rural areas in China
(“National Medical Policy”) that will be gradually implemented throughout the
nation between 2009 through 2011. These revisions to the National
Medical Policy would extend medical insurance coverage to people who live in the
rural areas of China, which includes approximately 40% of the Chinese
population. Management believes the implementation of these revisions to the
National Medical Policy would be highly beneficial to our sales and
operations. However, throughout 2009, the implementation and
direction of the National Medical Policy had been unclear. Due to
this uncertainty, the Company decided to make changes to the operation of its
business in the second half of 2009, including shifting its focus from the
wholesale sector to the retail sector of its business. In 2010,
the government accelerated implementation of its reforms, extending
benefits to rural areas. As a result, the Company believes that its
operations and sales will improve in 2010.
Critical
Accounting Policies and Estimates
Our
management’s discussion and analysis of our financial condition and results of
operations are based on our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our
estimates and assumptions. We base our estimates on historical
experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
While our
significant accounting policies are described in Note 2 to our financial
statements under the section above titled “Summary of Significant Accounting
Policies,” we believe that the following accounting policies are the most
critical to aid you in fully understanding and evaluating this management
discussion and analysis.
Basis
of Presentation
The accompanying financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America. The functional currency of our operating
Chinese subsidiaries is Chinese Renminbi (“RMB”); however, the accompanying
financial statements have been translated and presented in United States Dollars
(“USD”).
Use
of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles in the United States
(“GAAP”) requires management to make certain 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
period. Actual results could differ from those
estimates. Significant estimates include collectability of accounts
receivable, accounts payable, sales returns and recoverability of long-term
assets.
Non-Controlling
Interest
The accompanying consolidated financial
statements have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission (the “SEC”) and in
accordance with GAAP. The Company acquired 80% of Yongxin, and Yongxin Liu and
Yongkui Liu own 11% and 9% of Yongxin, respectively. The 20% equity
interest held by Yongxin Liu and Yongkui Liu represents
non-controlling interest and the net profit to minority shareholders amounted to
$5,860,892 as of March 31, 2010 compared to $5,687,633 as of December
31, 2009.
28
The Company owns a 90% ownership
interest in Jinyongxin Drugstore. The remaining 10% interest in
Jinyongxin Drugstore is owned by third parties. As of March 31, 2010
and December 31, 2009, the 10% equity interest and net profit to minority
shareholders amounted to $32,148 and $26,917, respectively.
Inventories
Inventories are valued on a lower of
weighted average cost or market basis. Inventory includes
product cost, inbound freight, warehousing costs and vendor allowances not
included as a reduction of advertising expense. The management compares the cost
of inventories with the market value and allowance is made for writing down
their inventories to market value, if lower. Work in process inventories include
the cost of raw materials and outsource processing fees.
Revenue
Recognition
The Company’s revenue recognition
policies are in compliance with Staff Accounting Bulletin (“SAB”) 104 (ASC
605). Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. The Company recognizes
revenue net of an allowance for estimated returns, at the time the merchandise
is sold or services performed. The allowance for sales returns is
estimated based on the Company’s historical experience. Sales taxes are
presented on a net basis (excluded from revenues and costs). Payments
received before all of the relevant criteria for revenue recognition are
satisfied are recorded as unearned revenue.
Recent
Accounting Pronouncements
For a
description of new accounting standards that may affect us, see Note 2 in our
consolidated financial statements included under Part I, Item 1 of this Form
10-Q.
Results
of Operations
Comparison
of Three Month Periods Ended March 31, 2010 and 2009.
The
following table sets forth the results of our operations for the periods
indicated:
Three Months Ended
March
31,
|
||||||||
2010
|
2009
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Net
Revenues
|
$
|
10,679,465
|
$
|
9,184,994
|
||||
Cost
of Goods Sold
|
(8,276,361
|
)
|
(6,954,270
|
)
|
||||
Gross
profit
|
2,403,105
|
2,230,724
|
||||||
Operating
Expenses:
|
||||||||
Selling
expenses
|
794,123
|
820,162
|
||||||
General
and administrative
|
847,830
|
338,492
|
||||||
Total
operating expenses
|
1,641,954
|
1,158,654
|
||||||
Income
From Operations
|
761,151
|
1,072,070
|
||||||
Other
Income (Expense):
|
||||||||
Gain on settlement of
debt
|
75,000 | - | ||||||
Other
income
|
71,351
|
87,797
|
||||||
Other
expense
|
62,618
|
|
(26,377
|
)
|
||||
Interest
income (expense)
|
(50,696
|
)
|
8,474
|
|||||
Total
other income
|
158,273
|
69,894
|
||||||
Operating
Income Before Income Tax & Non-Controlling Interest
|
919,424
|
1,141,964
|
||||||
Provision
For Income Tax
|
(290,816
|
)
|
(204,765
|
)
|
||||
Net
Income Before Non-Controlling Interest and Discontinued
Operations
|
628,608
|
937,199
|
||||||
Discontinued
Operations
|
-
|
|||||||
Loss from discontinued
operations
|
10,997
|
(416,222
|
)
|
|||||
Gain
on disposal of subsidiaries
|
1,889,800
|
-
|
||||||
Total
income (loss) from discontinued operations
|
1,900,798
|
(416,222
|
)
|
|||||
Net
Income Before Non-Controlling Interest
|
2,259,406
|
520,977
|
||||||
Net
Income Attributable to the Non-Controlling Interest
|
(178,425
|
)
|
(132,585
|
)
|
||||
Net
Income Attributable to the Company
|
2,350,980
|
388,392
|
||||||
Other
Comprehensive Item
|
||||||||
Foreign
exchange translation gain
|
288
|
(23,677
|
)
|
|||||
Net
Comprehensive Income
|
2,351,268
|
364,715
|
||||||
Earnings
per share
|
||||||||
Basic
|
0.04
|
0.01
|
||||||
Diluted
|
0.04
|
0.01
|
||||||
Weighted
average number of shares outstanding
|
||||||||
Basic
|
56,997,812
|
31,041,845
|
||||||
Diluted
|
59,616,201
|
31,041,845
|
29
Comparison
of Three Months Ended March 31, 2010 and 2009.
Net
Revenues.
For the three month period ended March 31, 2010, our net revenues increased
approximately 16.3% from $9,184,994 for the three month period ended March 31,
2009 to $10,679,465 for the same period ended March 31, 2010. Our revenues
for the three month period ended March 31, 2010 were higher due to additional
sales of $543,180 from new retail drugstores and an increase in medical care
sales of $420,000, which is reimbursable under the PRC national medical
insurance program for certain medicines by authorized pharmacies.
Cost of Goods
Sold. Cost of
goods sold, which mainly consists of cost of drugs, was $6,954,270, or
approximately 75.7% of net revenues for the three month period ended March 31,
2009, as compared to $8,276,361, or approximately 77.5% of net revenues for the
same period in 2010. The approximate 1.8% increase in percentage was due to the
sales of seasonal medications driven by market demand, such as cold medicine and
antibiotics, the sales of which typically increase during the winter cold and
flu season.
Gross
Profit. Our gross profit decreased 1.8% from $2,230,724 for the three
month period ended March 31, 2009, as compared to $2,403,105 for the same period
ended March 31, 2010. This slight decrease in gross profit
corresponded with the slight increase in our cost of revenue.
Selling
Expenses.
Selling expenses, which consist of advertising and promotion expenses, freight
charges and salaries, decreased approximately 3.2% from $820,162 for the three
month period ended March 31, 2009 to $794,123 for the same period in
2010. The decrease in selling expenses was mainly attributable to
better control of our selling expenses through certain cost-cutting efforts such
as the reduction of utilities usage, cutback of office supplies and cost-saving
changes in the packaging of our products.
General and
Administrative Expenses. General and administrative expenses were
$338,492 for the three month period ended March 31, 2009, as compared to
$847,830 for the three month period ended March 31, 2010, an increase of
150.5%. This increase was largely due to an increase in accrued
litigation settlement costs, and the settlements of such litigations are
expected to be a one-time non-recurring expense.
Other
Income. Other income increased 126.5% from $69,894 for the three
month period ended March 31, 2009 to $158,273 for the same period in
2010. Other income for the three month period ended March 31, 2010
was higher because we received more subsidies from the government and we
recorded a gain of $75,000 from the settlement of debt.
Net
Income. Net
income increased 505.3% from a net income of $388,392 for the three month period
ended March 31, 2009 to a net income of $2,350,980 for the three month period
ended March 31, 2010. Such significant increase in net income was mainly due to
the sale of our e-learning business during the first quarter of 2010, in which
we were able to transfer approximately $1.9 million of liabilities associated
with the e-learning business. The digital e-learning business constituted an
immaterial portion of our overall business and since the Company’s Share
Exchange Transaction, it has been the Company’s intention to divest the digital
e-learning business.
30
Liquidity
Cash
Flow
Net cash
flow used in operating activities was $50,901 for the three month period ended
March 31, 2010, as compared to net cash flow provided by operating activities in
the amount of $279,792 for the three month period ended March 31,
2009. For the three months ended March 31, 2010, the decrease in net
cash flow provided by operating activities was mainly due to an increase in our
notes receivable by $1,043,899, a decrease of tax payable by $651,293 and a
decrease of accrued expenses and deferred income by $309,562.
Net
cash flow provided by investing activities was $117,585 during the three months
ended March 31, 2010, as compared to cash outflow of $262,301 for the same
period in 2009. For the three months ended March 31, 2010, the net cash
flow provided by investing activities increased mainly due to
the proceeds from the sale of property
and equipment.
Net
cash flow provided by financing activities decreased from $981,397 for the three
months ended March 31, 2009 to $123,862 for the three months ended March 31,
2010. The decrease was mainly due to the increase of restricted cash
held in escrow account of $571,500, and the repayment of certain short term
and long term loans, which resulted in lower interest expense.
Capital
Resources
At March
31, 2010, we had cash and cash equivalents of $1,995,675, other current assets
of $33,385,173 and current liabilities of $13,443,481. We presently finance our
operations primarily from the cash flow from our operations, and we anticipate
that this will continue to be our primary source of funds to finance our
short-term cash needs. The Company believes that the existing cash and cash
equivalents, and cash generated from operating activities will be sufficient to
meet the needs of its current operations, including anticipated capital
expenditures and scheduled debt repayments, for the next twelve
months.
We
have certain material commitments for capital expenditures in connection with
the remodeling and construction of our offices and retail drugstores and the
development of our Enterprise Resource Planning software in 2009. The total
capital expenditure budget for 2009 was $6,477,630, and the full expenditure has
been paid as of March 31, 2010. The Company is planning to open an
additional 35 retail drug stores in 2010, including 15 retail stores located in
Chuangchun city, 10 retail stores in Baishan city and 10 retail stores in
Tianjin city. The total capital expenditure budget for the additional of such
retail drug stores is approximately $2.5 million. Other than working
capital and loans, we presently have no other alternative source of working
capital. We may need to raise additional working capital to complete the
projects. We may seek to raise additional capital through the sale of equity
securities. No assurances can be given that we will be successful in obtaining
additional capital, or that such capital will be available in terms acceptable
to our company.
Contractual
Obligations and Off Balance-Sheet Arrangements
Contractual
Obligations
This
table summarizes our known contractual obligations and commercial commitments at
March 31, 2010.
|
Payments Due by Period
|
|||||||||||||||||||
|
Total
|
Less than 1
year
|
1-3 Years
|
3-5 Years
|
5 Years +
|
|||||||||||||||
Contractual
Obligations :
|
||||||||||||||||||||
Bank
Indebtedness
|
$
|
2,211,613
|
$
|
2,211,613
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Other
Indebtedness
|
$
|
5,034,812
|
$
|
5,034,812
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Capital
Lease Obligations
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Operating
Leases
|
$
|
980,319
|
$
|
980,319
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Purchase
Obligations
|
$
|
5,284,899
|
$
|
5,284,899
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Total
Contractual Obligations:
|
$
|
13,511,643
|
$
|
13,511,643
|
$
|
-
|
$
|
-
|
$
|
-
|
31
Off-Balance Sheet
Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholder's equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing
or hedging services with us.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Derivative Financial
Instruments. We do not invest derivative financial instruments, and have
no foreign exchange contracts. Our financial instruments consist of cash and
cash equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly-liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents.
Interest Rates. Our exposure
to market risk for changes in interest rates relates primarily to our short-term
obligations; thus, fluctuations in interest rates would not have a material
impact on the fair value of these securities. At March 31, 2010, we had
approximately $1,995,675 in cash and cash equivalents. A hypothetical 10%
increase or decrease in interest rates would not have a material impact on our
earnings or loss, or the fair market value or cash flows of these
instruments.
Foreign Exchange Rate. We use
the United States Dollar (“USD”) for financial reporting purposes but all of our
sales and inputs are transacted in Renminbi (“RMB”). As a result, changes in the
relative values of USD and RMB affect our reported levels of revenues and
profitability as the results are translated into USD for reporting
purposes. However, since we conduct our sales and purchase inputs in
RMB, fluctuations in exchange rates are not expected to significantly affect our
financial stability, or gross and net profit margins. We do not
currently expect to incur significant foreign exchange gains or losses, or gains
or losses associated with any foreign operations. During the three
months ended March 31, 2010, we recorded a net foreign currency gain of $288
compared to a net foreign currency loss of $23,677 for the same period
in 2009.
Item
4. Controls and Procedures
Evaluation of Disclosure Controls
and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms and that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our principal executive and financial officers, as appropriate to
allow timely decisions regarding required disclosure.
As of the
end of the period covered by this Form 10-Q, we conducted an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, of our disclosure controls and procedures (as defined
in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are
effective.
Changes
in Internal Control Over Financial Reporting
Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 or
15d-15 of the Exchange Act, there were no changes in our internal control over
financial reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
32
Part II.
Other Information
Item 1. Legal
Proceedings
On
or about October 17, 2008, in the legal proceeding titled Craig Nagasugi v. Digital Learning
Management Corporation, et al ., a former officer initiated an
action in Los Angeles Superior Court, Central District, against Digital Learning
Management Corporation alleging claims for damages related to an alleged
employment agreement. On December 29, 2008, the Company filed an
Answer to the Complaint. The Company strongly disputed the claims and
diligently defended against them. The matter went to trial on or about November
2, 2009 and concluded as of November 9, 2009. The case resulted in a
judgment against the Company for $641,018. The court entered a
revised judgment in the amount of $746,487.37 against the Company on April 20,
2010 to reflect attorney fees. So far, the judgment has not been
paid.
Under Allaudin Jinnah v. China Yongxin
Pharmaceuticals, Inc., filed in Los Angeles Superior Court, Central
District, on or about June 27, 2008, the Company defended itself against claims
for open account and intentional misrepresentation. The Plaintiff
sought past due attorneys’ fees for services rendered in the amount of
$193,100. The Plaintiff also sought 67,000 shares of the Company’s
common stock. The Plaintiff filed a motion to enforce the Company’s
settlement to receive up to a $50,000 judgment and 200,000 to 400,000
shares of the Company’s common stock. At the hearing to enforce the
settlement, the court entered judgment against the Company for $50,000 plus
200,000 shares of the Company’s common stock. The court ordered the
Company to issue an additional 200,000 shares of the Company’s common stock as
collateral for the $50,000. The said judgment was satisfied in full by the
Company in February 2010.
The
Company was also involved in a legal proceeding called Wells Fargo Bank. N.A.. v. Software
Education for America Inc. filed in Orange County Superior Court on or
about November 9, 2004. In this action, the Cross-Complainant, Terry
Koosed, sought to amend a $219,000 judgment he obtained to include a subsidiary
of the predecessor-in-interest of the Company, which was not named or a
participant in such lawsuit. On May 8, 2009, the Orange County
Superior Court rendered a decision to enter a judgment of $219,000 against the
Company. This judgment was satisfied in full by the Company in February
2010.
Under Adnan Mann v. China Yongxin
Pharmaceuticals, Inc., on or about March 10, 2009, a former employee
filed claims for unpaid wages and penalties under the California Labor Code and
applicable Industrial Wage Orders. On July 10, 2009, the Company filed an
Answer to the Complaint denying liability. The Company and the former
employee entered into a stipulation on May 10, 2010 in the amount of
$241,733.28.
Item
1A. Risk Factors
The
information to be reported under this item has not changed since it was
disclosed in the Company’s Annual Report on Form 10-K, filed with the Securities
and Exchange Commission on March 30, 2010.
Item
2. Unregistered Sale of Equity Securities and Use of Proceeds
The
Company consummated an initial closing of its private placement of its equity
securities on January 25, 2010 in the amount of $700,000 (the “First Closing”),
a second closing of its private placement of its equity securities on March 4,
2010 in the amount of $125,000 (the “Second Closing”), and a third closing of
its private placement of its equity securities on May 3, 2010 in the amount of
$250,000 (the “Third Closing”) with certain accredited investors pursuant to
subscription agreements. The Company issued to the investors secured
convertible notes with a two year term, bearing 10% interest per annum,
convertible into common stock of the Company at a conversion price of $0.20 per
share, which is subject to adjustment for stock splits, recapitalizations and
other similar events, and will also be adjusted on a full-ratchet basis to equal
the price per share of any subsequent financing. The notes are
secured by a first priority interest in all current and future assets of the
Company, which will be cancelled upon repayment of the notes or upon conversion
of at least 50% of the principal amount of the notes into shares of Company
common stock. The notes may be redeemed by the Company at any time
for 110% of outstanding principal and interest. The note investors
also received, as a part of the financing, warrants for the purchase of up to an
aggregate of 5.375 million shares of our common stock with an exercise price
$0.50 per share (subject to adjustment for stock splits, recapitalizations and
other similar events) exercisable for a period of three years. The
Company will use the proceeds of the financing for the payment of auditing
expenses, legal fees, operating expenses, supplies, and general working
capital. The issuance of these securities was exempt from
registration pursuant to Rule 506 of Regulation D promulgated under the
Securities Act of 1933.
33
On April
9, 2010, the Company consummated a private placement of its equity securities
with certain non-U.S. investors pursuant to a Securities Purchase Agreement for
total consideration of $1,178,100. The Company issued to the
investors an aggregate 5,890,500 shares of common stock, at a price of $0.20 per
share. The investors also received, as a part of the financing,
warrants for the purchase of up to an aggregate 5,890,500 shares of our common
stock at an exercise price $0.50 per share (subject to adjustment for stock
splits, recapitalizations and other similar events) exercisable for a period of
two years. The Company will use the proceeds of this financing for
the payment of auditing expenses, legal fees, operating expenses, supplies, and
general working capital. The securities were offered and issued in
reliance upon an exemption from registration pursuant to Regulation S of the
Securities Act of 1933, as amended (the “Act”). We completed
the offering pursuant to Rule 903 of Regulation S of the Act on the basis that
the sale of the securities was completed in an “offshore transaction”, as
defined in Rule 902(h) of Regulation S. We did not engage in any
directed selling efforts, as defined in Regulation S, in the United States in
connection with the sale of the securities. The investors represented
to us that they were not U.S. persons, as defined in Regulation S, and were not
acquiring the securities for the account or benefit of a U.S.
person. The Securities Purchase Agreements executed between us and
the investors included statements that the securities had not been registered
pursuant to the Act and that the securities may not be offered or sold in the
United States unless the securities are registered under the Act or pursuant to
an exemption from the Act. The investors agreed by execution of the Securities
Purchase Agreements for the securities: (i) to resell the securities purchased
only in accordance with the provisions of Regulation S, pursuant to registration
under the Act or pursuant to an exemption from registration under the Act; (ii)
that the Company is required to refuse to register any sale of the securities
purchased unless the transfer is in accordance with the provisions of Regulation
S, pursuant to registration under the
Act or pursuant to an exemption from registration under the Act; and (iii) not
to engage in hedging transactions with regards to the securities purchased
unless in compliance with the Act. All securities issued were
endorsed with a restrictive legend confirming that the securities have not been
registered under the Act and could not be resold without registration under the
Act or an applicable exemption from the registration requirements of the
Act.
Item 3. Default Upon Senior
Securities
Not
applicable.
Item 5. Other
Information
Not
applicable.
Item
6. Exhibits
The
following exhibits are included in this Form 10-Q or incorporated by reference
into this Form 10-Q:
Exhibit
Number
|
Description
|
|
2.1
|
Exchange
Agreement by and between Digital Learning Management Corporation and
Changchun Yongxin Dirui Medical Co., Ltd dated December 21, 2006
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed with the SEC on December 28, 2006).
|
|
2.2
|
First
Amendment to Share Exchange Agreement, dated as of June 15, 2007, by and
among Digital Learning Management Corporation, Chanchun Yongxin Dirui
Medical Co., Ltd. (“Yongxin”) and the shareholders of Yongxin
(incorporated by reference to Exhibit B to the Definitive Proxy Statement
on Schedule 14A filed with the SEC on September 14,
2007)
|
|
2.3
|
Second
Amendment to the Share Exchange Agreement, dated as of April 12, 2008,and
effective as of November 16, 2007, by and among Nutradyne Group, Inc.,
Chanchun Yongxin Dirui Medical Co., Ltd. (“Yongxin”) and the shareholders
of Yongxin (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed with the SEC on April 15,
2008)
|
|
34
3.1
|
Certificate
of Incorporation (incorporated by reference to Exhibit 3 to the Company’s
General Form For Registration of Securities of Small Business Issuers on
Form 10-SB, filed with the SEC on November 5, 1999).
|
|
3.2
|
Certificate
of Amendment of Articles of Incorporation of the Company (incorporated by
reference to Exhibit A of the Company’s definitive information statement
on Schedule 14C filed with the SEC on February 25,
2004).
|
|
3.3
|
Bylaws
of the Company (incorporated by reference to Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed with the SEC on September 27,
2004).
|
|
3.4
|
Certificate
of Ownership and Merger Merging China Yongxin Pharmaceuticals Inc. and
Nutradyne Group, Inc. (incorporated by reference to Exhibit 3.1 to the
Current Report on Form 8-K Filed with the SEC on May 9,
2008).
|
|
3.5
|
Certificate
of Amendment and Amended and Restated Certificate of Incorporation of
China Yongxin Pharmaceuticals Inc. *
|
|
10.1
|
Summary
English Translation of the Company’s Form Lease Agreement for its
Retail Drugstores (incorporated by reference to Exhibit 10.1 to the Annual
Report on Form 10-K Filed with the SEC on April 15,
2009).
|
|
10.2
|
Stock
Purchase Warrant (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K Filed with the SEC on September 25,
2009).
|
|
10.3
|
Corporate
Communications Consulting Agreement (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K Filed with the SEC on December 23,
2009).
|
|
10.4
|
Form
of Subscription Agreement (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K Filed with the SEC on January 26,
2010).
|
|
10.5
|
Form
of Note (incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K Filed with the SEC on January 26, 2010).
|
|
10.6
|
Form
of Warrant (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K Filed with the SEC on January 26,
2010).
|
|
10.7
|
Form
of Stock Pledge Agreement (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K Filed with the SEC on January 26,
2010).
|
|
10.8
|
Form
of Subsidiary Guaranty Agreement (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K Filed with the SEC on January 26,
2010).
|
|
10.9
|
Form
of Lock Up Agreement (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K Filed with the SEC on January 26,
2010).
|
|
10.10
|
Form
of Leakout Agreement (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K Filed with the SEC on January 26,
2010).
|
|
10.11
|
Form
of Collateral Agent Agreement (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K Filed with the SEC on January 26,
2010).
|
|
10.12
|
Form
of Director Offer and Acceptance Letter (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on March
4, 2010).
|
35
10.13
|
Equity
Transfer Agreement by and between Yongxin and Sun Shi Wei dated November
21, 2009 (incorporated by reference to Exhibit 21.2 to the Company’s
Annual Report on Form 10-K filed with the SEC on March 30,
2010).
|
|
10.14
|
Stock
Purchase Agreement between the Company and PmMaster Beijing Software Co.,
Ltd. dated March 1, 2010 (incorporated by reference to Exhibit 21.2 to the
Company’s Annual Report on Form 10-K filed with the SEC on March 30,
2010).
|
|
10.15
|
Amended
and Restated Director’s Offer and Acceptance Letter dated March 15, 2010
(incorporated by reference to Exhibit 21.2 to the Company’s Annual Report
on Form 10-K filed with the SEC on March 30, 2010).
|
|
10.16
|
Share
Purchase Agreement by and among Digital Learning Management Corp., Yongxin
Liu and Yongkui Liu dated May 13, 2007 (incorporated by reference to
Exhibit 21.2 to the Company’s Annual Report on Form 10-K filed with the
SEC on March 30, 2010).
|
|
10.17
|
Sino-Foreign
Joint Venture Operation Agreement by and among Digital Learning Management
Corp., Yongxin Liu and Yongkui Liu dated May 13, 2007 (incorporated by
reference to Exhibit 21.2 to the Company’s Annual Report on Form 10-K
filed with the SEC on March 30, 2010).
|
|
10.18
|
Form
of Securities Purchase Agreement (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K Filed with the SEC on April 12,
2010).
|
|
10.19
|
Form
of Warrant (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K Filed with the SEC on April 12,
2010).
|
|
10.20
|
Acknowledge
and Amendment Letter by and between the Company and PmMaster Beijing
Software Co., Ltd. dated May 15, 2010.*
|
|
10.21
|
Amendment
to the Acknowledge and Amendment letter and the Original Agreement by and
between the Company and PmMaster Beijing Software Co., Ltd. dated May
19, 2010.*
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
____________
*
|
Filed
herewith.
|
36
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q
to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA
YONGXIN PHARMACEUTICALS INC.
|
||
Dated:
May 21, 2010
|
/s/ Yongxin
Liu
|
|
Yongxin
Liu
|
||
Chairman
of the Board and Chief Executive Officer
|
||
Dated:
May 21, 2010
|
/s/ Harry
Zhang
|
|
Harry
Zhang
|
||
Chief
Financial Officer
|
37