Item 1. Financial Statements

 

 

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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 

 

The following discussion should be read in conjunction with the Huifeng Bio-Pharmaceutical Technology, Inc. consolidated financial statements and accompanying notes included elsewhere in this report. The following discussion contains forward-looking statements that reflect the plans, estimates and beliefs of Huifeng Bio-Pharmaceutical Technology, Inc. The actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report and the Annual Report 10-K, particularly in “Risk Factors” section in the Annual Report on 10-K.   All references to years relate to the calendar year ended December 31 of the particular year.

OVERVIEW

Business

The Company, through its wholly owned subsidiary Northwest BioTechnic Inc., owns 100% of Xi’an Huifeng Bio-Technic Inc (“Huifeng PRC”) which produces and sells plant extracts, biochemical products and pharmaceutical raw products in the PRC and internationally. Huifeng PRC was founded on January 18, 2000. With its proprietary technology of “Producing Rutin by Eliminating Enzyme and Mucus” together with abundant resources of high quality pagoda rice in the Northwest region of China as raw material, Huifeng PRC became one of the major producers of Rutin in Xian city within two years after it was established. Huifeng’s patented Rutin-refining technology is one of the most advanced in China and the Company is one of the major Rutin suppliers in the world market. The Company emphasizes technology and product innovation and its strategic mission is to commercialize Chinese traditional medicine. The Company’s major business goals are as follows:

	¨	Produces pharmaceutical raw materials, active pharmaceutical ingredients, and plant extracts.
	¨	Focuses on expanding extract production and new market penetration.
	¨	Currently is the leading Chinese producer of Rutin and Diosmin.
	¨	Serves a diverse domestic and international client base.
	¨	Maintains all Chinese qualifying certifications for domestic and international sales of plant extracts and related products.
	¨	Includes ISO9000:2001 and multiple national Good Manufacturing Practices (GMP) qualifications.

 

Our Products

 

The Company’s products are primarily in the chemical category called flavonoids, with medicinal benefits and multiple end markets, including pharmaceuticals used for humans and animals, nutraceuticals, cosmetics, functional drink and food. All the products can be reduced to the three categories as follows: 

Pharmaceutical Raw Materials

	¨	Diosmin EP and other specification clients required.
	¨	Rutin USP standard, Rutin DAB9, Rutin DAB10, Rutin EP5, Rutin BP2006
	¨	Troxerutin DAB1999, Troxerutin EP5, Troxerutin EP6
	¨	Silymarin USP, Silymarin DAB, Silymarin BP2006

 

Active Pharmaceutical Ingredients

¨

Quercetin , Rhamnose, Glucomannan, Glucuronolactone, Hesperidin, Synephrine, Resveratrol, etc. Soybean Isoflavones, Lutein, Lycopene, 5-HTP, etc.

 

Plant Extracts

¨

Ginkgo Biloba Extract, Epimedium Extract, Bilberry Extract, Grape Seed Extract, Bitter Melon Extract, Mellisa Officinallis Extract, etc.

Production Facilities

On June 28, 2009, Huifeng Bio-Technic disposed of its 70% interest in Huifeng Engineering, located in Fenghui, Changan, Xian, for a cash consideration of $21,919. At present, we have one major production facility that includes the following equipment resources:

Manufacturing plant located at No. 1, Huifeng Rd, Changwu, Xianyang:

	·	This production site is for refining and manufacturing of new products.
	·	This production site has a total of 10 buildings including:
			-	A two-level office building
			-	A four-level staff building
			-	An one-level building for clean area under GMP standard
			-	One raw materials storage building
			-	Two buildings for storage of finished products
			-	One building for dangerous products
			-	Building for quality testing zone and researching center
			-	Building for power and maintenance (including boiler, power distribution and maintenance)
			-	One cafeteria and staff canteen

 

 

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The production facilities occupy a total area of approximately 117,569 square feet. The Company has pledged part of its production facilities in Changwu factory valued at approximately $978,851 to Xi'an Beilin District Credit Cooperatives to secure a loan in the principal amount of $253,028 due June 2010. The Company has applied for an extension on the loan until June 2011.

We currently obtain all of our raw materials from third parties and from various farmers located in the Shaanxi, Gansu and Shanxi provinces of China. Our principal suppliers include Cungui Zhang, Xiaohe Wang and Yingwei Xu. All of them are the largest wholesalers in their own area.

Target Markets and Principal Customers

As of June 30, 2010, we have developed two new customers. One is a U.S. based customer who primarily purchases Quercetin . Another is a Spain API sourcing company who primarily purchases Diosmin.  The Company is the only Chinese producer that is in the process of applying for a COS from EDQM (European Directorate for Quality Medicines).

For the present, all of our products are raw materials and intermediaries used in the production of medicine, nutraceuticals and cosmetics and our customers are pharmaceutical companies and manufacturers of nutraceuticals, cosmetics, and functional food and drinks.

Dependence on Major Customers

For the quarter ended June 30, 2010, our top five customers accounted for approximately 23% of our revenues. We are working towards developing a broad base of customers to minimize our dependency on any major customers.

Sales and Marketing

For the period ended June 30, 2010, the majority of products were raw materials and intermediaries used in the production of medicine, nutraceuticals and cosmetics. Our target customers were mostly industrial clients and we continued to sell our products to pharmaceutical and nutrition and food manufacturers. Most of our customers place purchase orders directly with our sales and marketing team. However, in order to diversify and expand our product sales networks, we began using outside distribution channels for some of our export sales in 2009. We accepted purchase orders from professional foreign trade corporations in order to expand our international distribution channels and increase sale revenues from exports.

The sales department is divided into two teams, a domestic sales team and an export sales team. During the period ended June 30, 2010, the Company did not add any new employees in the sales department and still stands at 24 employees. All the sales department employees are highly trained. The Company attends international industrial exhibitions and fairs which are held worldwide.

We did not establish any regional representative or sales office in the first half of 2010 because our products were primarily sold through direct orders from our clients who placed orders with our sales department. There was no need for any retail distribution of our product.

Competition

Huifeng engages in Rutin production in China. With its proprietary technology of “Producing Rutin by Eliminating Enzyme and Mucus” and with abundant resources of high quality pagoda rice in the Northwest region of China as a raw material, Huifeng does not face significant competition within China.

Our major competitor for Rutin continues to be Sichuan Xieli Pharmaceutical Company Limited (“Xieli”). However, we believe that due to the lack of technology patents and ready access to raw materials, Xieli is gradually fading out of the Rutin refining business and is shifting its business from raw medicine production to finished medicine production.

Our competitor for Diosmin and L-Rhamnose is Chengdu Huakang Biology Company (“Huakang”). However, Huakang has no licenses for drug production and cannot sell its products for medicinal use.  The scope of its market is therefore restricted. In addition, unlike us, they did not have the requisite European Certification of Suitability (“COS”). Thus they do not pose any threat to us in terms of market share and sales, particularly in the export market.

In the first half of 2010, there were some new domestic competitors for certain new products that we have started selling, including Resveratrol. However, we do not believe that these competitors have mature technologies for producing Resveratrol at costs lower than us. Therefore we do not believe that they pose an immediate threat to our business.

Principal Office

Our principal office is located at 16B/F Ruixin Bldg., No. 25 Gaoxin Road, Xi’an, Shaanxi Province, China 710075.

 

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Employees and Organization

As of June 30, 2010, we had approximately 224 employees. During the three months ended June 30, 2010, there was no change in the number of employees. None of our employees are covered by a collective bargaining agreement and we have never experienced a work stoppage, and we consider our labor relations to be good.

As of June 30, 2010, our Company organization was as follow:

		No. of Employees				No. of Employees
		At				at
		June				June
Department		30, 2010				30, 2009
Sales department:
Domestic sales department			8				8
Export sales department:
Export section I			8				8
Export section II			8				8
Production department			155				154
Technical department			5				5
Inspection department			8				8
Provision department			5				5
Personnel department			5				5
Finance department			7				7
Security department			8				8
Certification department			7				5
TOTAL			224				221

Research and Development

As of June 30, 2010, we continued the research and development of new products and new technologies. We kept the structure of our research and development team.

Research and development costs for the six months ended June 30, 2010 and 2009 were $31,766 and $20,601, respectively. The increase is mainly due to the cost of research materials, related external testing and employees’ wages.

Patents and Intellectual Property

Huifeng's proprietary technology “Producing Rutin by Eliminating Enzyme and Mucus” received a Chinese national technology patent.

Government Regulations

The Chinese government requires all manufacturers of medicine and medicinal related products to obtain GMP certification for their pharmaceutical manufacturing facilities. Huifeng obtained GMP certification from relevant government regulatory bodies. Other than GMP certification requirements, there was no significant change in the regulatory environment in China.

Compliance with Environmental Laws

We believe that we are in compliance with environmental laws in the PRC which are applicable to us. The costs of such compliance do not have a material effect on our financial condition.

Regulation of Enterprise Income Tax Law

The Enterprise Income Tax Law (“EIT Law’) was promulgated by the National People’s Congress on March 16, 2007 to introduce a new uniform taxation regime in the PRC. Both resident and non-resident enterprises deriving income from the PRC will be subject to this EIT Law from January 1, 2008. It replaced the previous two different tax rates applied to foreign-invested enterprises and domestic enterprises by only one single income tax rate applied for all enterprises in the PRC. Under this EIT Law, except for some hi-tech enterprises which are subject to EIT rates of 15% and other very limited situation that allows EIT rates at 20%, the general applicable EIT rate in the PRC is 25%.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have identified one policy area as critical to the understanding of our consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting periods. With respect to net realizable value of the Company's accounts receivable and inventories, significant estimation judgments are made and actual results could differ materially from these estimates.

 

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The Company does not have any reserves against its accounts receivable or inventories at June 30, 2010 and 2009. Management's estimation that there are no reserves is based on the current facts that there are no significant aged accounts receivable and the current inventory turnover is sufficient to realize the current carrying value of the inventories. In making their judgment, management has assumed that there will be continued demand for their products in the future, thereby maintaining adequate turnover of the inventories. Additionally, management has assumed that customers will continue to pay their outstanding invoices timely, and that their customers' financial positions will not deteriorate significantly in the future, which would result in their inability to pay their debts to the Company. While the Company's management currently believes that there is little likelihood that the actual results of their current estimates will differ materially from its current estimates, if customer demand for its products decreases significantly in the near future, or if the financial position of its customers deteriorates in the near future, the Company could realize significant write downs for slow moving inventories or uncollectible accounts receivable.

We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.

We recognize revenue in accordance with ASC Topic 605 (formerly Staff Accounting Bulletin ("SAB") No. 104). All of the following criteria must exist in order for us to recognize revenue:

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

In May 2010, Primary Capital, Inc. (“Primary Capital”) filed a Complaint against the Company entitled Primary Capital, Inc. vs. Huifeng Bio-Pharmaceutical Technology, Inc., in the United States District Court for the Southern District of New York. Primary Capital asserts that the Company breached its contract with Primary Capital by failing to honor the exercise of two million option to purchase the Company’s common stock at the exercise price of $0.9 per share on a cashless basis and to pay the second retainer payment of $150,000 in exchange for investment banking services.  According to the Complaint, Primary Capital seeks a minimum of $930,000 in damages. The Company has filed a formal response to the Complaint in which the Company denies liability for the claims of Primary Capital and also has filed a Counterclaim against Primary Capital asserting breach of contract based on the failure of Primary Capital to provide the required services under the contract.  Because the litigation is at the preliminary stage, the Company cannot comment on whether an adverse outcome is probable or otherwise. The Company believes that any liability it would incur will not have a material impact on its financial positions and results of operations.

Item 1 A. Risk Factors

Not required.