Attached files
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EX-31.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v193834_ex31-1.htm |
EX-32.2 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v193834_ex32-2.htm |
EX-32.1 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v193834_ex32-1.htm |
EX-31.2 - WEIKANG BIO-TECHNOLOGY GROUP CO., INC. | v193834_ex31-2.htm |
U.S.
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 June 30, 2010
Commission
File No. 000-1484042
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
(Exact
name of small business issuer as specified in its charter)
Nevada
|
26-2816569
|
(State
or other jurisdiction of incorporation or formation)
|
(I.R.S.
employer identification
number)
|
No.
365 Chengde Street, Daowai District, Harbin
Heilongjiang
Province, The People’s Republic of China 150020
(Address
of principal executive offices) (Zip Code)
+(86)
0451-88355530
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
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 ¨
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 x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer o
|
Accelerated
Filer o
|
|
Non-Accelerated
Filer o
|
(Do
not check if a smaller reporting company)
|
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
The
number of shares outstanding of the registrant's common stock on August 13, 2010
was 28,024,388.
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
Quarterly
Period Ended June 30, 2010
INDEX
Page
|
||
PART
I. FINANCIAL INFORMATION
|
||
Item
1.
|
Financial
Statements
|
|
Consolidated
Balance Sheets at June 30, 2010 (Unaudited) and December 31,
2009
|
3
|
|
Consolidated
Statements of Income and Comprehensive Income for the Three and Six Months
ended June 30, 2010 and 2009 (Unaudited)
|
4
|
|
Consolidated
Statements of Cash Flows for the Six Months ended June 30, 2010 and 2009
(Unaudited)
|
5
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
18
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
23
|
Item
4.
|
Controls
and Procedures
|
23
|
PART
II. OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
24
|
Item
1A.
|
Risk
Factors
|
24
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
24
|
Item
3.
|
Default
on Senior Securities
|
24
|
Item
5.
|
Other
Information
|
24
|
Item
6.
|
Exhibits
|
24
|
SIGNATURES
|
25
|
2
PART
I - FINANCIAL INFORMATION
Item
1 - Financial Statements
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JUNE 30,
2010
|
DECEMBER 31,
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
& cash equivalents
|
$ | 20,485,278 | $ | 11,380,019 | ||||
Advances
to suppliers and other receivables
|
150,537 | 26,079 | ||||||
Inventory
|
1,045,905 | 285,395 | ||||||
Deferred
tax asset
|
132,788 | - | ||||||
Total
current assets
|
21,814,508 | 11,691,493 | ||||||
NONCURRENT
ASSETS
|
||||||||
Property
and equipment, net
|
9,768,826 | 10,162,946 | ||||||
Construction
in progress
|
446,823 | - | ||||||
Intangible
assets
|
15,500,960 | 15,558,731 | ||||||
Total
noncurrent assets
|
25,716,609 | 25,721,677 | ||||||
TOTAL
ASSETS
|
$ | 47,531,117 | $ | 37,413,170 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 13,669 | $ | 12,668 | ||||
Unearned
revenue
|
- | 11,716 | ||||||
Taxes
payable
|
1,522,402 | 2,247,410 | ||||||
Due
to related party
|
25,034 | - | ||||||
Total
current liabilities
|
1,561,105 | 2,271,794 | ||||||
ADVANCE
FORM OFFICER
|
650,000 | 650,000 | ||||||
OTHER
PAYABLES
|
7,720,321 | 7,620,321 | ||||||
CONTINGENCIES
|
||||||||
DEFERRED
TAX LIABILITY
|
3,421,953 | 3,450,005 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Common
stock, $.00001 par value; authorized shares 100,000,000; issued and
outstanding shares 28,024,388 and 25,486,800 at June 30, 2010 and December
31, 2009, respectively
|
280 | 255 | ||||||
Additional
paid in capital
|
4,967,720 | 139,245 | ||||||
Deferred
compensation
|
(753,306 | ) | - | |||||
Statutory
reserve
|
1,404,276 | 1,069,507 | ||||||
Accumulated
other comprehensive income
|
1,067,168 | 844,526 | ||||||
Retained
earnings
|
27,491,600 | 21,367,517 | ||||||
Total
stockholders' equity
|
34,177,738 | 23,421,050 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 47,531,117 | $ | 37,413,170 |
The
accompanying notes are an integral part of the consolidated financial
statements
3
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
SIX MONTHS ENDED JUNE 30,
|
THREE MONTHS ENDED JUNE 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
$ | 24,452,199 | $ | 23,306,974 | $ | 10,493,659 | $ | 13,195,767 | ||||||||
Cost
of goods sold
|
10,014,363 | 10,564,767 | 4,374,061 | 6,103,182 | ||||||||||||
Gross
profit
|
14,437,836 | 12,742,207 | 6,119,598 | 7,092,585 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expenses
|
1,794,301 | 918,214 | 1,103,042 | 485,371 | ||||||||||||
General
and administrative
|
2,617,383 | 747,756 | 1,427,532 | 541,287 | ||||||||||||
Research
and development
|
802,907 | 1,937,928 | 732,579 | 1,937,928 | ||||||||||||
Total
operating expenses
|
5,214,591 | 3,603,898 | 3,263,153 | 2,964,586 | ||||||||||||
Income
from operations
|
9,223,245 | 9,138,309 | 2,856,445 | 4,127,999 | ||||||||||||
Non-operating
income (expenses)
|
||||||||||||||||
Interest
income
|
36,190 | 1,616 | 19,946 | 1,371 | ||||||||||||
Other
income
|
194 | 521,913 | 1 | 265,635 | ||||||||||||
Other
(expenses)
|
(1,907 | ) | (35,433 | ) | (1,224 | ) | (22,464 | ) | ||||||||
Total
non-operating income, net
|
34,477 | 488,096 | 18,723 | 244,542 | ||||||||||||
Income
before income tax
|
9,257,722 | 9,626,405 | 2,875,168 | 4,372,541 | ||||||||||||
Income
tax
|
2,798,867 | 2,438,475 | 957,758 | 1,038,216 | ||||||||||||
Net
income
|
6,458,855 | 7,187,930 | 1,917,410 | 3,334,325 | ||||||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign
currency translation gain
|
222,642 | 7,145 | 213,335 | 10,285 | ||||||||||||
Comprehensive
Income
|
$ | 6,681,497 | $ | 7,195,075 | $ | 2,130,745 | $ | 3,344,610 | ||||||||
Basic
and diluted weighted average shares outstanding
|
27,692,734 | 25,268,474 | 28,021,751 | 25,306,723 | ||||||||||||
Basic
and diluted net earnings per share
|
$ | 0.23 | $ | 0.28 | $ | 0.07 | $ | 0.13 |
The
accompanying notes are an integral part of the consolidated financial
statements
4
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 6,458,855 | $ | 7,187,930 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
599,057 | 587,162 | ||||||
Stock
issued for consulting expenses
|
65,200 | 127,500 | ||||||
Deferred
compensation
|
1,812,494 | - | ||||||
Changes
in deferred tax
|
(178,885 | ) | (50,671 | ) | ||||
(Increase)
decrease in current assets:
|
||||||||
Accounts
receivable
|
- | (73,178 | ) | |||||
Advances
to suppliers and other receivables
|
(124,277 | ) | (49,501 | ) | ||||
Inventory
|
(755,128 | ) | (275,882 | ) | ||||
Increase
(decrease) in current liabilities:
|
||||||||
Accounts
payable
|
927 | - | ||||||
Unearned
revenue
|
(11,721 | ) | (219,533 | ) | ||||
Other
payables
|
109,948 | 5,296 | ||||||
Taxes
payable
|
(743,596 | ) | 364,740 | |||||
Net
cash provided by operating activities
|
7,232,874 | 7,603,863 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Construction
in progress
|
(444,577 | ) | - | |||||
Acquisition
of property & equipment
|
(8,869 | ) | (2,187 | ) | ||||
Net
cash used in investing activities
|
(453,446 | ) | (2,187 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Changes
in due from management
|
- | 1,242,783 | ||||||
Net
proceeds from shares issued
|
2,197,500 | - | ||||||
Payment
for purchase of Tianfang
|
- | (3,812,283 | ) | |||||
Changes
in due from related party
|
24,908 | (117,628 | ) | |||||
Net
cash provided by (used in) financing activities
|
2,222,408 | (2,687,128 | ) | |||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
103,423 | 5,220 | ||||||
INCREASE
IN CASH & CASH EQUIVALENTS
|
9,105,259 | 4,919,768 | ||||||
CASH
& CASH EQUIVALENTS, BEGINNING OF PERIOD
|
11,380,019 | 16,927 | ||||||
CASH
& CASH EQUIVALENTS, END OF PERIOD
|
$ | 20,485,278 | $ | 4,936,695 | ||||
Supplemental
Cash flow data:
|
||||||||
Income
tax paid
|
$ | 3,020,026 | $ | 1,764,405 | ||||
Interest
paid
|
$ | - | $ | 744 |
The
accompanying notes are an integral part of the consolidated financial
statements
5
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEMBER 31, 2009
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Weikang
Bio-Technology Group Co., Inc., a Nevada corporation (“Weikang” or “the
Company”) was incorporated on May 12, 2004 in Florida as Expedition Leasing,
Inc. (“Expedition”). The Company reincorporated in Nevada and changed to its
present name on July 12, 2008, pursuant to a merger with Weikang, a wholly-owned
subsidiary, with Weikang as the surviving entity. The Company is engaged in
the development, manufacture and distribution of Traditional Chinese Medicine
("TCM") through its indirect wholly-owned operating subsidiary,
Heilongjiang Weikang Biotechnology Group Co., Ltd. (“Heilongjiang Weikang”) in
the People’s Republic of China (“PRC” or “China”).
On
December 7, 2007, the Company (as Expedition) entered into a Share Exchange
Agreement (the “Exchange Agreement”) with Sinary Bio-Technology Holdings Group,
Inc., a Nevada corporation (“Sinary”) and Weili Wang, its sole shareholder,
pursuant to which the Company issued 24,725,200 shares of common stock to Weili
Wang for all of the common shares of Sinary. Concurrently, Sinary paid $650,000
to certain former shareholders of the Company, who surrendered 24,725,200 shares
of the Company’s common stock held by them to the Company for cancellation. This
payment was advanced to Sinary by Yin Wang (the “Advance”). As a result, Weili
Wang owned 98% of the Company after the share exchange. On the Closing
Date, Sinary became a wholly-owned subsidiary of the Company and Mr. Yin Wang
was appointed the Company’s Chief Executive Officer and Chairman of the Board
while his sister, Wei Wang, was appointed as a director of the
Company.
Prior to
the acquisition of Sinary, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission (“SEC”) rules, the
merger or acquisition of a private operating company into a non-operating public
shell corporation with nominal net assets is considered a capital transaction,
rather than a business combination. Accordingly, for accounting purposes, the
transaction was treated as a reverse acquisition and recapitalization, and
pro forma information is not presented. Transaction costs incurred in the
reverse acquisition were expensed.
Sinary
was incorporated under the laws of the State of Nevada on August 31, 2007. On
October 25, 2007, Sinary entered into an Equity Interests Transfer Agreement
(the “Transfer Agreement”) with Yin Wang and Wei Wang, the stockholders of
Heilongjiang Weikang, a limited liability company (“LLC”) in the PRC, (the
“Heilongjiang Shareholders”) to acquire 100% of the equity interests of
Heilongjiang Weikang for 57 million Renminbi (“RMB”), or approximately $7.6
million (the “Acquisition Price”).
Heilongjiang
Weikang was incorporated in Heilongjiang Province, PRC on March 29, 2005,
and was formerly known as Heilongjiang Province Weikang Bio-Engineering Co.,
Ltd. Heilongjiang Weikang is engaged in development, manufacture and
distribution of TCM in the PRC.
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang (Guizhou) Pharmaceutical Co., Ltd.
(“Tianfang”), a Chinese LLC, for $15,000,000, pursuant to a stock transfer
agreement entered into on June 30, 2008 by and among the Heilongjiang Weikang,
Tianfang, and Tianfang’s two shareholders: Beijing Shiji Qisheng Trading Co.,
Ltd., a Chinese LLC (“Shiji Qisheng”) and Tri-H Trade (U.S.A.) Co., Ltd., a
California corporation (“Tri-H”, and together with Shiji Qisheng collectively as
the “Selling Shareholders”).
Tianfang
was incorporated in Guizhou Province, PRC in 1998. Tianfang is engaged
in the development, manufacture and distribution of over the counter (“OTC”)
pharmaceuticals. The Company has expanded its market share to the
southern part of China through the acquisition of
Tianfang.
On
January 6, 2010, Weili Wang formed Lucky Wheel Limited, a British Virgin Islands
corporation and issued to herself 10,000 ordinary shares which represents 100%
of the issued and outstanding share capital of Lucky Wheel. In June
2010 Ms. Weili Wang transferred 22,925,200 of her shares of the Company’s common
stock (representing approximately 82% of the Company’s issued and outstanding
common stock) to Lucky Wheel. On May 5, 2010, Ms. Weili Wang and Ying
Wang, the Company’s Chief Executive Officer and Chairman of the Board entered
into a Call Option Agreement (the “Option Agreement”), pursuant to which Weili
Wang granted Yin Wang an irrevocable and unconditional option to purchase all of
her ordinary shares of Lucky Wheel (the “Option Shares”) for the price of
U.S.$0.10 per ordinary share for a total purchase price of
$1,000. Mr. Wang has the right to purchase thirty-four percent (34%)
of the Option Shares on December 31, 2010 and thirty-three percent (33%) of the
Option Shares on December 31, 2011 and December 31, 2012,
respectively. The Option Agreement expires on June 29,
2015. If and when the option is fully exercised, Yin Wang will become
the sole shareholder of Lucky Wheel whose sole asset is 22,925,200 shares of the
Company’s common stock. Mr. Wang is expected to use his personal
funds to pay for the Option Shares.
6
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
In
connection with the transactions described in the Transfer Agreement, on
November 9, 2007, the Heilongjiang Office of the State Administration for
Industry and Commerce had registered Sinary as the 100% owner of Heilongjiang
Weikang’s registered capital and issued a foreign invested enterprise business
license (the “FIE Business License”) to Heilongjiang Weikang. The initial FIE
Business License was valid until June 30, 2010. On March 12, 2010,
the Harbin City of Administration for Industry and Commerce extended the FIE
Business License until November 9, 2027.
The
unaudited financial statements included herein were prepared by the
Company, pursuant to the rules and regulations of the SEC. The information
furnished herein reflects all adjustments (consisting of normal recurring
accruals and adjustments) that 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 financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) were omitted pursuant to such rules
and regulations. These financial statements should be read in conjunction
with the audited financial statements and footnotes included in the
Company’s 2009 audited financial statements included in the Company’s
Annual Report on Form 10-K. The results for the six and three months ended
June 30, 2010 are not necessarily indicative of the results to be expected for
the full year ending December 31, 2010.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICY
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Sinary, and the results of operations
of Weikang, Sinary’s wholly-owned subsidiary, Tianfang, Weikang’s wholly-owned
subsidiary from the date of acquisition (August 1, 2008). All significant
inter-company accounts and transactions were eliminated in
consolidation.
Use
of Estimates
In
preparing financial statements in conformity with US GAAP, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting year. Significant estimates, required by
management, include the recoverability of long-lived assets, allowance for
doubtful accounts, and the reserve for obsolete and slow-moving inventories.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with an original maturity of three months or less as cash
equivalents.
Accounts
Receivable
The
Company’s policy is to maintain 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. There was no bad debt allowance
recorded based on the Company’s past payment collection experience.
Inventory
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Costs of work in progress and finished goods are
comprised of direct material cost, direct production cost and an allocated
portion of production overhead.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed 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. Depreciation of property and equipment is provided using the
straight-line method for all assets with estimated lives as
follows:
7
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
Building
|
20
years
|
Vehicle
|
5
years
|
Office
Equipment
|
3-7
years
|
Production
Equipment
|
3-10
years
|
Land
Use Right
Right to
use land is stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over 50 years.
Impairment
of Long-Lived Assets
We
evaluate the recoverability of long-lived assets with finite lives in accordance
with ASC Subtopic 360-10-35, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, which requires recognition of impairment of long-lived
assets whenever events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. When events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable based on
estimated undiscounted cash flows, the impairment loss would be measured as the
difference between the carrying amount of the asset and its fair value based on
the present value of estimated future cash flows. Fair value is generally
determined by the asset’s expected future discounted cash flows or market value,
if readily determinable. Based on its review, the Company believes that, as of
June 30, 2010, there were no significant impairments of its long-lived
assets.
Income
Taxes
The
Company uses Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 740, “Accounting for Income Taxes,”, which requires
recognition of deferred tax assets and liabilities for expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are considered as the tax
consequences in future years for differences between the tax bases 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.
The
Company adopted FASB ASC Topic 740 on August 31, 2007. At the time, the Company
made a comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by FASB ASC Topic 740. Based on those
standards, the Company recognized no material adjustments to liabilities or
stockholders’ equity. When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the positions taken
or the amount of the positions that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is more likely
than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions taken are
not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely to be realized upon settlement
with the applicable taxing authority. The portion of the benefits associated
with tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying
balance sheets along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. Interests associated with
unrecognized tax benefits are classified as interest expenses and penalties are
classified in selling, general and administrative expenses in the statements of
income. At June 30, 2010 and December 31, 2009, the Company did not take any
uncertain positions that would necessitate recording of tax related
liability.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with FASB ASC Topic
605, “Revenue Recognition”. 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. Payments received before
all the relevant criteria for revenue recognition is met are recorded as
unearned revenue.
Sales
revenue represents the invoiced value of goods, which is net of value-added tax
(“VAT”). All of the Company’s products are sold in the PRC and are subject to
Chinese value-added tax of 17% of the gross sales price. This VAT may be offset
by VAT paid by the Company on raw materials and other materials included in the
cost of producing their end product. The Company recorded VAT payable and VAT
receivable net of payments in the financial statements. The VAT tax return is
filed offsetting the payables against the receivables.
8
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
Sales and
purchases are recorded net of VAT collected and paid. VAT taxes are
not affected by the income tax holiday.
Sales
returns and allowances was $0 for the six and three months ended June 30,
2010 and 2009. The Company does not provide unconditional right of return,
price protection or any other concessions to its dealers or other
customers.
Cost
of Goods Sold
Cost of
goods sold consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to the lower of cost or
market is also recorded in cost of goods sold.
Concentration
of Credit Risk
Cash
includes cash on hand and demand deposits in accounts maintained within the PRC
and the United States. The Company maintains balances at financial institutions
which, from time to time, may exceed Federal Deposit Insurance Corporation
(“FDIC”) insured limits for the banks located in the United States. Balances at
financial institutions within the PRC are not covered by insurance. As of June
30, 2010 and December 31, 2009, the Company had $0 deposits in the bank located
in US which was in excess of federally insured limits; the Company had
US$20,254,746 and US$11,372,437 deposits in the banks in China, respectively.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant risks on its cash in bank
accounts.
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts and other receivables. The Company does not require
collateral or other security to support these receivables. The Company conducts
periodic reviews of its clients' financial condition and customer payment
practices to minimize collecting risk on accounts receivable.
The
operations of the Company are located 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, as well as by the
overall performance of the PRC’s economy.
Statement
of Cash Flows
In
accordance with FASB ASC Topic 230, “Statement of Cash Flows”, cash flows from
the Company's operations is calculated based upon local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash
flows may not necessarily agree with changes in the corresponding balances on
the balance sheet.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and cash
equivalents, accounts and other payables, accrued liabilities and short-term
debt, the carrying amounts approximate their fair values due to their short
maturities. ASC Topic 820, “Fair Value Measurements and
Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value,
and establishes a three-level valuation hierarchy for disclosures of fair value
measurement that enhances disclosure requirements for fair value measures.
The carrying amounts reported in the consolidated balance sheets for receivables
and current liabilities each qualify as financial instruments and are a
reasonable estimate of their fair values because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels of valuation hierarchy
are defined as follows:
Level 1
inputs to the valuation methodology are quoted prices for identical assets or
liabilities in active markets.
Level 2
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.
Level 3
inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
9
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
As of
June 30, 2010 and December 31, 2009, the Company did not identify any assets and
liabilities that were required to be presented on the balance sheet at fair
value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB were translated into United States Dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income".
Gains and
losses resulting from foreign currency transactions are included in income.
There has been no significant fluctuation in exchange rate for the conversion of
RMB to USD after the balance sheet date.
The
Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive
income is comprised of net income and all changes to the statements of
stockholders’ equity, except the changes in paid-in capital and distributions to
stockholders due to investments by stockholders. Comprehensive income for the
six and three months ended June 30, 2010 and 2009 included net income and
foreign currency translation adjustments.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with FASB ASC
Topic 718, “Share Based Payment”. The Company recognizes in the statement of
operations the grant-date fair value of stock options and other equity-based
compensation issued to employees and non-employees.
Basic
and Diluted Earnings per Share (EPS)
Basic EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed similarly to basic net income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Diluted net earnings 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. For the six and three month ended June 30, 2010, the Company
did not have any dilutive securities due to anti-dilution feature of the
warrants issued in connection with the equity financing. For the six and
three month ended June 30, 2009, the Company did not have any dilutive
securities.
Segment
Reporting
FASB ASC
Topic 280, "Disclosures about Segments of an Enterprise and Related Information"
requires a 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 manners in which
management disaggregates a company.
FASB ASC
Topic 280 has no effect on the Company's financial statements as substantially
all of the Company's operations are conducted in one industry
segment.
Research
and Development
Research
and development costs are related primarily to the development of new drugs,
nutritional and health supplement products. Research and development costs are
expensed as incurred.
10
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
On
January 20, 2009, the Company entered an agreement with Botany medicine research
center of Northeast Forestry University (“the University”) to develop
certain new medicine and health supplemental products. The Company is
responsible for funding the research and development expense and project
examination and registration fee of RMB 15,000,000 (or $2,195,000). According to
the contract, upon successful completion of the research work by the University,
the Company is required to pay 85% of total fund to the University and will own
the rights to the research findings, and is required to pay the remaining 15%
upon successful registration and approval of the research findings from State
Food and Drug Administration and Department of Public Health of Heilongjiang
Province. The Company is responsible for registration of the research
findings and getting approval from related authorities. In case the
registration application is not approved by the authorities, the Company will
not be entitled to refund of the amount it already paid and will not be required
to pay the remaining 15% of RMB 2,300,000 (or $336,000). At June 30, 2009,
the research and development of the new medicine and health supplemental
products was completed successfully. During the term of the contract, the
Company paid RMB 12,700,000 (or $1,859,000) to the University and obtained the
ownership rights of the research findings. The Company is in the process
of registering the research findings with the related authorities. The Company
recorded the payment for the R&D project as R&D
expense.
On March
20, 2010, the Company entered into a one year contract with a professional
research and development team to research and develop licorice flavonoids
extraction technology for industrialization of use in therapeutics. The Company
is responsible for all the research and development expense with the total
payment expected to be approximately $2.95 million. As of June 30, 2010, the
Company paid research and development expenses of approximately $0.74 million
under this agreement and is committed to pay an additional $1.47 million in
September 2010, and the remaining $0.74 million to be paid upon the successful
development of the technology. The Company will own the research and development
results and related intellectual property. The Company recorded $0.74
million R&D expenses during the quarter ended June 30, 2010.
Reclassifications
Certain
prior year amounts were reclassified to conform to the manner of presentation in
the current year.
New
Accounting Pronouncements
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative GAAP for nongovernmental entities to be only comprised
of the FASB Accounting Standards Codification (“Codification”) and, for SEC
registrants, guidance issued by the SEC. The Codification is a
reorganization and compilation of all then-existing authoritative GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
On
February 25, 2010, the FASB issued ASU No. 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU will not
have a material impact on the Company’s consolidated financial
statements.
In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU
No. 2010-17 provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. FASB ASU No. 2010-17 is
effective for fiscal years beginning on or after June 15, 2010, and is
effective on a prospective basis for milestones achieved after the adoption
date. The Company does not expect this ASU will have a material impact on
its financial position or results of operations when it adopts this update on
January 1, 2011.
11
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
3.
ADVANCES TO SUPPLIERS AND OTHER RECEIVABLES
Advances
to suppliers and other receivables at June 30, 2010 and December 31, 2009 were
as follows:
2010
|
2009
|
|||||||
Prepaid
IR expense
|
$
|
116,712
|
$
|
-
|
||||
Advance
to suppliers
|
31,300
|
24,334
|
||||||
Advance
to employees
|
2,525
|
1,745
|
||||||
Total
|
$
|
150,537
|
$
|
26,079
|
The
Company prepaid $150,000 from financing proceeds to an IR firm for IR services
over two years on January 20, 2010. For the six and three months
ended June 30, 2010, the Company incurred $33,288 and $18,904 in IR expense,
respectively.
4. INVENTORY
Inventory
at June 30, 2010 and December 31, 2009 was as follows:
2010
|
2009
|
|||||||
Raw
materials
|
$
|
219,150
|
$
|
148,519
|
||||
Packing
materials
|
121,850
|
54,777
|
||||||
Finished
goods
|
704,905
|
82,099
|
||||||
Total
|
$
|
1,045,905
|
$
|
285,395
|
5.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at June 30, 2010 and December 31,
2009:
2010
|
2009
|
|||||||
Building
|
$
|
8,297,725
|
$
|
8,252,397
|
||||
Building
improvements
|
917,327
|
912,316
|
||||||
Production
equipment
|
2,359,464
|
2,338,779
|
||||||
Office
furniture and equipment
|
194,590
|
192,458
|
||||||
Vehicles
|
119,210
|
118,559
|
||||||
11,888,316
|
11,814,509
|
|||||||
Less:
Accumulated depreciation
|
(2,119,490)
|
(1,651,563)
|
||||||
$
|
9,768,826
|
$
|
10,162,946
|
Depreciation
for the six months ended June 30, 2010 and 2009 was $456,549 and $486,028,
respectively; and for the three months ended June 30, 2010 and 2009 was $229,390
and $243,120, respectively.
6.
CONSTURCTION IN PROGRESS
At June
30, 2010, construction in progress consisted of the payment made for
constructing a manufacturing line for producing licorice
flavonoids.
7.
INTANGIBLE ASSETS
Intangible
assets consisted of the following at June 30, 2010 and December 31,
2009:
2010
|
2009
|
|||||||
Land
use right
|
$
|
12,334,242
|
$
|
12,266,864
|
||||
Goodwill
arising from acquisition of Tianfang (Note 17)
|
3,601,387
|
3,581,715
|
||||||
Software
|
7,255
|
7,216
|
||||||
15,942,884
|
15,855,795
|
|||||||
Less:
Accumulated amortization
|
(441,924)
|
(297,064)
|
||||||
$
|
15,500,960
|
$
|
15,558,731
|
12
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
All land
in the PRC is government owned and cannot be sold to any individual or company.
However, the government grants users a “land use right” to use the land. The
Company has the right to use the land for 50 years and amortizes the right on a
straight-line basis over 50 years.
Amortization
for the six months ended June 30, 2010 and 2009 was approximately $142,508 and
$101,000, respectively. Amortization for the three months ended June 30, 2010
and 2009 was $68,300 and $50,500, respectively. Amortization for the next five
years from June 30, 2010 is expected to be approximately $273,000, $273,000,
$273,000, $272,000 and $272,000, respectively.
8.
RELATED PARTY TRANSACTIONS
Advance
from Officer
Advance
from officer represented the payment of $650,000 made by an officer of
Heilongjiang Weikang on behalf of Sinary to certain former shareholders of the
Company in connection with the reverse acquisition between the Company and
Sinary on December 7, 2007. The advance from officer bears no interest and is
payable on demand. On August 6, 2010, the officer waived his right to repayment
of this advance. The Company treated this waiver as a contribution to
capital.
Dues to Related Party
At June 30, 2010, due to related party represented an advance of $25,034 from a related party company owned by one of the Company’s officers. This advance bears no interest and is payable upon demand.
9.
MAJOR CUSTOMERS AND VENDORS
There
were no customers who accounted for over 10% of the Company’s total sales for
the six and three months ended June 30, 2010 and 2009,
respectively.
Two
vendors collectively provided 31% and 42% of the Company’s purchases of raw
materials for the six and three months ended June 30, 2010, respectively. Each
vendor accounted for 21%, and 10% of the purchases for the six months ended June
30, 2010, and 31% and 11% for the three months ended June 30, 2010,
respectively. The Company did not have any outstanding accounts payable to these
vendors at June 30, 2010.
Three
vendors collectively provided 66% and 74% of the Company’s purchases of raw
materials for the six and three months ended June 30, 2009, respectively. Each
vendor accounted for 50%, 10%, and 6% of the purchases for the six months ended
June 30, 2009, and 57%, 10% and 7% for the three months ended June 30, 2009,
respectively.
10.
TAXES PAYABLE
Taxes
payable consisted of the following at June 30, 2010 and December 31,
2009:
2010
|
2009
|
|||||||
Income
tax payable
|
$
|
1,118,668
|
$
|
1,679,250
|
||||
Value
added tax payable
|
384,034
|
505,545
|
||||||
Sales
tax payable
|
-
|
29,290
|
||||||
Other
|
19,700
|
33,325
|
||||||
$
|
1,522,402
|
$
|
2,247,410
|
13
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
11.
OTHER PAYABLES
At June
30, 2010 and December 31, 2009, other payables mainly represented $7.72 million
that Sinary was obligated to pay Heilongjiang Weikang’s former owners within one
year from the closing of the acquisition of Heilongjiang Weikang. This payable
does not bear any interest, and was extended to June 30, 2010. On August 6,
2010, the officer waived his right to repayment of this amount. The Company
treated this waiver as a contribution to capital.
12.
DEFFERED TAX ASSET (LIABILITY)
Deferred
tax represented differences between the tax basis and book basis of R&D
expense, property, equipment and land use right.
At June
30, 2010 and December 31, 2009, deferred tax asset (liability) consisted of the
following:
2010
|
2009
|
|||||||
Deferred
tax asset from Weikang R&D expense - current
|
$
|
132,788
|
-
|
|||||
Deferred
tax asset (net) on property and equipment for basis differences since
acquisition of Heilongjiang Weikang and Tianfang -
noncurrent
|
$
|
189,923
|
$
|
142,141
|
||||
Deferred
tax asset arising from the acquisition of Heilongjiang Weikang -
noncurrent
|
29,783
|
29,620
|
||||||
Deferred
tax liability arising from the acquisition of Tianfang -
noncurrent
|
(3,641,659
|
)
|
(3,621,766
|
)
|
||||
Deferred
tax liability, net - noncurrent
|
$
|
(3,421,953
|
)
|
$
|
(3,450,005
|
)
|
13.
INCOME TAXES
Weikang
and Sinary were incorporated in the US and have net operating losses (NOL) for
income tax purposes. Weikang and Sinary had NOL carry forwards for income taxes
of $2,050,000 and $669,000 at June 30, 2010; $139,500 and $650,000 at December
31, 2009, respectively, which may be available to reduce future years’ taxable
income as NOL; NOLs can be carried forward up to 20 years from the year the loss
is incurred. Management believes the realization of benefits from these losses
are uncertain due to the Company’s limited operating history and continuing
losses. Accordingly, a 100% deferred tax asset valuation allowance was
provided.
Heilongjiang
Weikang and Tianfang are governed by the Income Tax Law of the PRC concerning
the private enterprises that are generally subject to tax at a statutory rate of
25% on income reported in the statutory financial
statements
after appropriate tax adjustments.
Foreign
pretax earnings approximated $11,188,000 and $11,612,000 for the six months
ended June 30, 2010 and 2009, respectively. Pretax earnings of a foreign
subsidiary are subject to U.S. taxation when effectively repatriated. The
Company provides income taxes on the undistributed earnings of non-U.S.
subsidiaries except to the extent that such earnings are indefinitely invested
outside the US. At June 30, 2010, $30,211,000 of accumulated undistributed
earnings of non-U.S. subsidiaries was indefinitely invested. At the existing
U.S. federal income tax rate, additional taxes of $2,719,000 would have to be
provided if such earnings were remitted currently.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six and three months ended June 30, 2010 and 2009:
|
For the Six Months
|
For the Three Months
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
US
statutory rates
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
||||||||
Tax
rate difference
|
(10.9
|
)%
|
(9.0
|
)%
|
(11.8
|
)%
|
(10.9
|
)%
|
||||||||
Valuation
allowance for US NOL
|
7.1
|
%
|
-
|
%
|
11.1
|
%
|
-
|
%
|
||||||||
Tax
per financial statements
|
30.2
|
%
|
25.0
|
%
|
33.3
|
%
|
23.1
|
%
|
The
provisions for income tax expenses for the six and three months ended June 30,
2010 and 2009 consisted of the following:
|
For the Six Months
|
For the Three Months
|
||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Income
tax expense - current
|
$ | 2,845,632 | $ | 2,489,146 | $ | 980,689 | $ | 1,062,702 | ||||||||
Income
tax benefit - deferred
|
(46,765 | ) | (50,671 | ) | (22,931 | ) | (24,486 | ) | ||||||||
Total
income tax expenses
|
$ | 2,798,867 | $ | 2,438,475 | $ | 957,758 | $ | 1,038,216 |
14
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
14.
COMMON STOCK
Common Stock with Warrants
Issued for Cash
On
January 20, 2010, the Company entered into Subscription Agreements with
"accredited" investors (or “the Investors”). Pursuant to the Subscription
Agreements, the Investors purchased 1,470,588 shares of Company common stock at
$1.70 per share. The Company raised
$2,500,000 in gross proceeds and received net proceeds of $2,047,500. In
connection with the Financing the Company paid the following: (i) $150,000 to an
Investment Relations escrow account, (ii) $250,000 in placement agent fees, and
(iii) $52,500 in offering expenses, including legal fees.
The
Investors received one Series A Warrant and one Series B Warrant for every $8.00
invested in the Company under the Purchase Agreement. Series A Warrants grant
the holder the right to purchase shares of Common Stock at $3.00 per share.
Series B Warrants grant the holder the right to purchase shares of Common Stock
at $5.00 per share. At the closing the Investors received Series A Warrants to
purchase 312,500 shares of Common Stock and Series B Warrants to purchase
312,500 shares of Common Stock.
The
Series A and Series B Warrants expire January 20, 2013. The Warrants provide for
antidilution adjustments to the exercise price for certain convertible
securities issued with conversion prices lower than the Warrants' exercise
price. The value of warrants was determined by using the Black-Scholes pricing
model with the following assumptions: discount rate – 2.76%;
dividend yield – 0%; expected volatility – 100% and term of
3 years. The value of the Warrants was
$1,212,278.
In
connection with the Financing, the Company entered into an Investor Relations
Escrow Agreement, pursuant to which the Company established an escrow account of
$150,000 which may be allocated and released to investor relations firms for
marketing purposes at the sole discretion of a representative of the Investors.
The Company paid $150,000 to an IR firm for it providing IR services over two
years. For the six and three months ended June 30, 2010, the Company
recorded $33,288 and $18,904 as IR expense, respectively.
In
addition the Company issued the following securities: (i) Series A Warrants to
purchase 73,528 shares of Common Stock to placement agents, (ii) Series B
Warrants to purchase 73,528 shares of Common Stock to placement agents, (iii)
180,000 shares of Common Stock to an investor relations firm, (iv) 600,000
shares of Common Stock to a consultant for business development and capital
markets advice, and (v) 7,000 shares of Common Stock for legal
services. The value of warrants was determined by using the
Black-Scholes pricing model with the following assumptions: discount
rate – 2.76%; dividend yield – 0%; expected
volatility – 100% and term of 3 years. The value of the
Warrants was $285,236.
Following
is a summary of the warrant activity:
Number of
Shares
|
Average
Exercise
Price per Share
|
Weighed
Average
Remaining
Contractual
Term in Years
|
||||||||||
Granted
– series A warrants
|
386,028
|
3.00
|
3
|
|||||||||
Granted
– series B warrants
|
386,028
|
5.00
|
3
|
|||||||||
Exercised
|
||||||||||||
Forfeited
|
||||||||||||
Outstanding
at March 31, 2010
|
772,056
|
4.00
|
2.81
|
|||||||||
Exercisable
at March 31, 2010
|
772,056
|
4.00
|
2.81
|
|||||||||
Exercised
|
||||||||||||
Forfeited
|
||||||||||||
Outstanding
at June 30, 2010
|
772,056
|
4.00
|
2.56
|
|||||||||
Exercisable
at June 30, 2010
|
772,056
|
4.00
|
2.56
|
15
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
The
Company agreed to file a resale Registration Statement on Form S-1 by April 9,
2010 registering the Investor Shares and the Investors' Warrants with the SEC.
In the event the Company was not filed the Registration Statement by the
Required Filing Date, or the Registration Statement was not declared effective
by the SEC by 120 days after the Required Filing Date, the Company agreed to pay
liquidated damages to each Investor, from and including the day following such
Filing Default until the date the Registration Statement was filed with the SEC,
or until the Registration Statement was declared effective, as applicable, at a
rate per month (or portion thereof) equal to 0.50% of the total purchase price
of the Shares purchased by such Investor pursuant to the Purchase Agreement. In
no event, however, may the penalties exceed 9% in the aggregate of such total
purchase price. The Form S-1 was filed with SEC on Mach 25, 2010 and
declared effective on April 21, 2010.
In
connection with the financing, the Company also issued 27,000 shares to several
legal counsels and 200,000 shares to a consultant, First Trust China
Ltd.
Deferred
Compensation
On
January 20, 2010, the Company issued 600,000 shares of Common Stock valued at
$3.26 per share (stock price at grant date) to several consultants for
providing consulting services to the Company. In the first quarter of
2010, the Company recorded $1,793,000 as deferred compensation, which was to be
amortized over periods ranging from 2 months to 6 months. During the six and
three months ended June 30, 2010, the Company amortized $1,639,762 and $783,217
as stock-based compensation expense, respectively.
On
January 20, 2010, the Company issued 180,000 shares to an IR firm for providing
IR services for a period of two years; the stock was valued at $3.26 per share
(stock price at grant date). In the first quarter of 2010, the
Company recorded $586,800 as deferred compensation. During the six and three
months ended June 30, 2010, the Company amortized $129,418 and $73,953 as
stock-based compensation expense, respectively.
During
the first quarter of 2010, the Company issued 20,000 shares to one employee with
stock valued at $3.26 per share (stock price at grant date). The
Company recorded $65,200 stock-based compensation expense for all the shares
issued to this employee.
On April
7, 2010, the Company issued 40,000 shares common stock as the annual
compensation to four independent directors of the Company with stock valued at
$4.65 per share (stock price at grant date). The Company recorded $186,000 as
deferred compensation and amortized $43,315 as stock-based compensation during
the quarter ended June 30, 2010.
15.
STATUTORY RESERVES
Pursuant
to the corporate law of the PRC effective on January 1, 2006, the Company is now
only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company is now only required to transfer 10% of its net income, as determined
under the PRC accounting rules and regulations, to a statutory surplus reserve
fund until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common
Welfare Fund
Common
welfare fund is a voluntary fund that the Company can elect to transfer 5% to
10% of its net income to this fund. This fund can only be utilized on capital
items for the collective benefit of the Company’s employees, such as
construction of dormitories, cafeteria facilities, and other staff welfare
facilities. This fund is non-distributable other than upon
liquidation. The Company didn’t contribute to this
fund.
16
WEIKANG
BIO-TECHNOLOGY GROUP CO, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2010 (UNAUDITED)
AND
DECEBMER 31, 2009
16.
CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s operations may be adversely affected 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.
The
Company’s sales, purchases and expense transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. RMB is
not freely convertible into foreign currencies under the current law. In China,
foreign exchange transactions are required by law to be conducted only by
authorized financial institutions. Remittances in currencies other than RMB may
require certain supporting documentation in order to affect the
remittance.
17.
GOODWILL
Goodwill
represents the excess of purchase price and related costs over the value
assigned to the net tangible and identifiable intangible assets of businesses
acquired. In accordance with Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 350, goodwill is not amortized but is tested for impairment
annually, or when circumstances indicate a possible impairment may exist.
Impairment testing is performed at a reporting unit level. An impairment loss
generally would be recognized when the carrying amount of the reporting unit
exceeds the fair value of the reporting unit, with the fair value of the
reporting unit determined using a discounted cash flow (DCF) analysis. A number
of significant assumptions and estimates are involved in the application of the
DCF analysis to forecast operating cash flows, including the discount rate, the
internal rate of return, and projections of realizations and costs to produce.
Management considers historical experience and all available information at the
time the fair values of its reporting units are estimated.
On July
22, 2008, Heilongjiang Weikang completed the acquisition of 100% of the issued
and outstanding equity interests of Tianfang for $15,000,000 (RMB
102,886,500). The total consideration for acquisition exceeded
fair value of the net assets acquired by $3,565,578. The excess was recorded as
goodwill. Goodwill was recorded as intangible assets.
18.
SUBSEQUENT EVENTS
Settlement
Agreement and Release
On August
6, 2010, Sinary on the one hand, and Yin Wang, the Company’s Chief Executive
Officer and Chairman of the Board of Directors and his sister, Wei Wang, entered
into a Settlement Agreement and Release pursuant to which Yin Wang and Wei Wang
waived all of their rights that they have to payment of both the Acquisition
Price of approximately $7.72 million and the Advance of $650,000 and contributed
the Acquisition Price and the Advance to the Company’s capital. The
transaction was approved by the Company’s independent
directors.
17
Item 2. Management's Discussion
and Analysis of Financial Condition and Results of
Operations.
Note
Regarding Forward-Looking Statements
This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are based
upon beliefs of, and information currently available to, Company’s management as
well as estimates and assumptions made by Company’s management. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date hereof. When used in the
filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”,
“intend”, “plan”, or the negative of these terms and similar expressions as they
relate to Company or Company’s management identify forward-looking statements.
Such statements reflect the current view of Company with respect to future
events and are subject to risks, uncertainties, assumptions, and other factors
(including the risks contained in the section of operations and results of
operations, and any businesses that Company may acquire. Should one or more of
these risks or uncertainties materialize, or should the underlying assumptions
prove incorrect, actual results may differ significantly from those anticipated,
believed, estimated, expected, intended, or planned.
Although
Company believes that the expectations reflected in the forward-looking
statements are reasonable, Company cannot guarantee future results, levels of
activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Company does not intend
to update any of the forward-looking statements to conform these statements to
actual results. Readers are urged to carefully review and consider the various
disclosures made throughout the entirety of this quarterly report, which attempt
to advise interested parties of the risks and factors that may affect our
business, financial condition, results of operations, and
prospects.
Our
financial statements are prepared in US Dollars and in accordance with
accounting principles generally accepted in the United States. See "Foreign
Currency Translation and Comprehensive Income (Loss)" and "Foreign Exchange
Rates" below for information concerning the exchange rates at the Renminbi
("RMB") were translated into US Dollars ("USD") at various pertinent dates and
for pertinent periods.
Overview
The
Company, through its wholly-owned subsidiaries, Heilongjiang Weikang
Biotechnology Group Co., Ltd. ("Weikang") and Tianfang (Guizhou) Pharmaceutical
Co., Ltd. (“Tianfang”), engages in the research, development, manufacturing,
marketing, and sales of Traditional Chinese Medicine ("TCM") and other
over-the-counter pharmaceutical products in China.
Weikang
is located in Heilongjiang Province in northeastern China, with its principal
office and manufacturing facility located in the Economic and Technology
Development Zone in the city of Shuangcheng, approximately 42 kilometers south
of the provincial capital Harbin. Tianfang is located in Guizhou Province in
southwestern China, in Zazuo Pharmaceutical Industry Park, about 33 kilometers
from Guiyang City, the provincial capital of Guizhou. Most of our products are
traditonal Chinese medicines and Chinese herbal-based health and
nutritional supplements. Tianfang also develops and manufactures western
prescription and OTC medecines.
Weikang’s
products are under the brand name of “Rongrun” and Tianfang’s are under that of
“Tiangfang”.
The
Company grows its business and expands its market share by investing heavily in
new product R&D and maintaining a high quality and high margin new product
pipeline. We plan to launch four or more new products a year.
We also
seek and acquire pharmaceutical companies that have a complementary product
portfolio to Weikang’s existing one and extensive distribution
networks.
Critical
Accounting Policies and Estimates
Our
management's discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which were
prepared in accordance with accounting principles generally accepted in the
United States (“US GAAP”). 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.
18
While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements, we believe 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 consolidated financial statements were prepared in accordance with
US GAAP and pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”) for annual or quarterly financial statements.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries: (i) Sinary Bio-Technology Holding
Group, Inc., a Nevada corporation, (ii) Heilongjiang Weikang Biotechnology Group
Co., Ltd., a company organized and operating under the laws of the People’s
Republic of China, and (iii) Tianfang(Guizhou) Pharmaceutical Co., Ltd., a
company organized and operating under the laws of the People’s Republic of
China. All significant inter-company accounts and transactions were eliminated
in consolidation.
Accounts
Receivable
The
Company’s policy is to maintain 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.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed 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.
Depreciation of property and equipment is provided using the straight-line
method for all assets with estimated lives ranging from 3 to 20 years as
follows:
Building
|
20
years
|
Vehicle
|
5
years
|
Office
Equipment
|
3-7
years
|
Production
Equipment
|
3-10
years
|
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (“SAB”) 104, codified in FASB ASC Topic 480. 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. Payments received before all of the relevant criteria for revenue
recognition are recorded as unearned revenue.
Revenue
represents the invoiced value of goods, net of value-added tax (“VAT”). All of
the Company’s products sold in the PRC are subject to Chinese value-added tax of
17% of the gross sales price. This VAT may be offset by VAT paid by the Company
on raw materials and other materials included in the cost of producing their
finished product. The Company recorded VAT payable and VAT receivable net of
payments in the financial statements. The VAT tax return is filed offsetting the
payables against the receivables.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB were translated into United States dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders' equity as "Accumulated other
comprehensive income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
19
The
Company uses SFAS No 130, “Reporting Comprehensive Income”, codified in FASB ASC
Topic 220. Comprehensive income is comprised of net income and all changes to
the statements of stockholders’ equity, except those due to investments by
stockholders, changes in paid-in capital and distributions to
stockholders.
NEW
ACCOUNTING PRONOUNCEMENTS
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative GAAP for nongovernmental entities to be only comprised
of the FASB Accounting Standards Codification (“Codification”) and, for SEC
registrants, guidance issued by the SEC. The Codification is a
reorganization and compilation of all then-existing authoritative GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of GAAP in Notes to the Consolidated Financial
Statements.
On
February 25, 2010, the FASB issued ASU No. 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU will not
have a material impact on the Company’s consolidated financial
statements.
In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU
No. 2010-17 provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. FASB ASU No. 2010-17 is
effective for fiscal years beginning on or after June 15, 2010, and is
effective on a prospective basis for milestones achieved after the adoption
date. The Company does not expect this ASU will have a material impact on
its financial position or results of operations when it adopts this update on
January 1, 2011.
Results
of Operations
Comparison
of the Six Months Ended June 30, 2010 and 2009
The
following table summarizes our results of operations. The table and the
discussion below should be read in conjunction with the unaudited financial
statements and the notes thereto appearing elsewhere in this
report.
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
||||||||||
|
|
(in U.S. Dollars, except for percentages)
|
|
|||||||||||||
Net
sales
|
$
|
24,452,199
|
$
|
23,306,974
|
||||||||||||
Cost
of sales
|
10,014,363
|
41
|
%
|
10,564,767
|
45
|
%
|
||||||||||
Gross
profit
|
14,437,836
|
59
|
%
|
12,742,207
|
55
|
%
|
||||||||||
Operating
expense
|
5,214,591
|
21
|
%
|
3,603,898
|
15
|
%
|
||||||||||
Income
from operations
|
9,223,245
|
38
|
%
|
9,138,309
|
40
|
%
|
||||||||||
Other
income net
|
34,477
|
0
|
%
|
488,096
|
2
|
%
|
||||||||||
Income
tax expenses
|
2,798,867
|
11
|
%
|
2,438,475
|
11
|
%
|
||||||||||
Net
income
|
$
|
6,458,855
|
27
|
%
|
$
|
7,187,930
|
31
|
%
|
20
Net sales. During the six
months ended June 30, 2010, sales were $24.45 million, compared to $23.31
million for the comparable period in 2009, an increase of $1.15 million or
5%. The increase in sales was primarily a result of increased demand
from dealers and distributors as a result of increased acceptance and trust in
our products from end users despite an increased selling price of
22%. We believe our sales will continue to grow as we develop new
products and continue to improve the quality of our existing
products.
Cost of sales. Cost of
sales decreased $0.55 million or 5%, from $10.56 million in the six months ended
June 30, 2009 to $10.01 million for the six months ended June 30, 2010. The cost
of sales as a percentage of sales for the six months ended June 30, 2010, was
41% as compared to 45% for the comparable period of 2009, which was attributable
to decreased cost of sales of Tianfang, from 51% to 47% of sales; the cost of
sales was 30% of the sales for Heilongjiang Weikang, a decrease of 3% when
compared with the comparable period of 2009, which was mainly due to our
continuous efficient cost control.
Gross profit. Gross profit
was $14.44 million for the six months ended June 30, 2010, compared to $12.74
million for the comparable period of 2009, representing gross margin of 59% and
55% of sales, respectively. The increase in our gross profit margin in the six
months ended June 30, 2010 was mainly due to decreased cost of sales as a
percentage of sales for the reasons described above.
Operating expenses. Total
operating expenses consisted of selling, general and administrative expenses and
research and development expenses of $5.21 million for the six months ended June
30, 2010 compared to $3.60 million for the six months ended June 30, 2009, an
increase of $1.61 million or 45%. Operating expenses as a percentage of sales
was 21% for the six months ended June 30, 2010 compared to 15% for the same
period in 2009. This increase was attributable to the increased promotion and
marketing expenses for developing our products in new regions, and increased
stock compensation expenses of $1.76 million with respect to stock issued to
consultants.
Net other income
(expense). Other income was $34,477 in the six months ended June 30,
2010 compared to $0.49 million in the six months ended June 30,
2009. Other income in the first six months of 2009 mainly consisted
of lease income received from leasing a workshop and right to use our technology
for manufacturing royal jelly.
Net income. Our net income
for the six months ended June 30, 2010 was $6.46 million compared to net income
of $7.19 million for the six months ended June 30, 2009, a decrease of $0.73
million or 10%. The decrease was mainly attributed to increase
operating expenses. Our management believes net income will increase we continue
to offer better quality and variety of products and continue to improve our
manufacturing efficiency.
Comparison
of the Three Months Ended June 30, 2010 and 2009
The
following table summarizes our results of operations. The table and the
discussion below should be read in conjunction with the unaudited financial
statements and the notes thereto appearing elsewhere in this
report.
|
|
June 30,
2010
|
|
|
June 30,
2009
|
|
||||||||||
|
|
(in U.S. Dollars, except for percentages)
|
|
|||||||||||||
Net
sales
|
$
|
10,493,659
|
$
|
13,195,767
|
||||||||||||
Cost
of sales
|
4,374,061
|
42
|
%
|
6,103,182
|
46
|
%
|
||||||||||
Gross
profit
|
6,119,598
|
58
|
%
|
7,092,585
|
54
|
%
|
||||||||||
Operating
expense
|
3,263,153
|
31
|
%
|
2,964,586
|
22
|
%
|
||||||||||
Income
from operations
|
2,856,445
|
27
|
%
|
4,127,999
|
31
|
%
|
||||||||||
Other
income (expense), net
|
18,723
|
0
|
%
|
244,542
|
2
|
%
|
||||||||||
Income
tax expenses
|
957,758
|
9
|
%
|
1,038,216
|
8
|
%
|
||||||||||
Net
income
|
$
|
1,917,410
|
18
|
%
|
$
|
3,334,325
|
25
|
%
|
Net sales. During the three
months ended June 30, 2010, we had sales of $10.49 million, compared to $13.20
million for the comparable period of 2009, a decrease of $2.70 million or
20%. This decrease was mainly attributable to (i) the transportation
problem for delivering our products to the customers in southern part of China
due to the flood disasters (ii) Some orders of Tianfang were postponed to July
of 2010 as a result of the same transportation problems (iii) Shortage of some
ingredients for production in Weikang which resulted in decreased production
volume, and (iv) Elevated humidity levels in Harbin as a result of the unusually
heavy rain fall resulted in an extended drying cycle for raw
material to two to three times longer than normal at Weikang’s production
facilities. These adverse weather conditions have improved and we believe
our sales will resume a healthy growth rate as we expand our
distribution network and enhance our product portfolio.
21
Cost of sales. Cost of
sales decreased $1.73 million or 28%, from $6.10 million in the three months
ended June 30, 2009 to $4.37 million for the three months ended June 30, 2010.
The decrease was mainly due to decreased sales and production. The cost of
sales as a percentage of sales for the three months ended June 30, 2010, was 42%
compared to 46% for the comparable period of 2009, which was attributable to
decreased cost of sales of Tianfang, from 52% to 47% of the sales, which was a
result of management’s continuous effort on cost control.
Gross profit. Gross profit
was $6.12 million for the three months ended June 30, 2010, compared to $7.09
million for the comparable period of 2009, representing gross margin of 58% and
54% of sales, respectively. The increase in our gross profit margin was mainly
due to decrease in cost of sales as a percentage of sales in Tianfang’s
operations during the second quarter of 2010 for the reason described
above.
Operating expenses. Total
operating expenses consisted of selling, general and administrative
expenses and research and development expense of $3.26 million for
the three months ended June 30, 2010, compared to $2.96 million for the three
months ended June 30, 2009, an increase of $0.30 million or 10%. Operating
expenses as a percentage of sales was 31% for the three months ended June 30,
2010 while it was 22% for the comparable period of 2009, the increase was
primarily due to $0.85 million consulting expense to certain financial advisors
and increased expenses on promoting and marketing of our products during the
second quarter of 2010. In the three month ended June 30, 2010, we had research
and development expense of $0.73 million for the first installment payment to a
professional research and development team for research and developing licorice
flavonoids extraction technology for industrialization of use in therapeutics,
while in the comparable period of 2009, we had research and development expense
of $1.9 million for developing certain new medicine and health supplemental
products with the Botany medicine research center of Northeast Forestry
University.
Net other income
(expense). Other income was $0.02 million in the three months ended
June 30, 2010 compared to $0.24 million in the three months ended June 30,
2009. Other income in the second quarter of 2009 mainly consisted of
lease income received from leasing a workshop and right to use our technology
for manufacturing the royal jelly, the lease was expired at the end of
2009.
Net income. Our net income
for the three months ended June 30, 2010 was $1.92 million compared to net
income of $3.33 million for the three months ended June 30, 2009, a decrease of
$1.41 million or 42%. The decrease was mainly attributed to the
impact of flood disasters to the transportation which caused some orders to be
postponed and shortage of some ingredients for production. Our management
believes net income will increase when the flood disaster is over and we
continue to offer better quality and variety of products and continue to improve
our manufacturing efficiency.
Liquidity
and Capital Resources
At June
30, 2010, the Company had cash and cash equivalents of $20.49 million, other
current assets of $1.33 million, and current liabilities of $1.56 million. In
addition, at June 30, 2010, working capital was $20.25 million and the ratio of
current assets to current liabilities was 13.97-to-1.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the six months ended June 30, 2010 and 2009,
respectively:
|
June 30,
2010
|
June 30,
2009
|
||||||
Cash
provided by (used in):
|
||||||||
Operating
Activities
|
$ | 7,232,874 | $ | 7,603,863 | ||||
Investing
Activities
|
$ | (453,446 | ) | $ | (2,178 | ) | ||
Financing
Activities
|
$ | 2,222,408 | $ | (2,687,128 | ) |
Net cash
provided by operating activities was $7.23 million for the six months ended June
30, 2010, compared to $7.60 million for the comparable period of 2009. The
increase in net cash inflow from operating activities was mainly due to an
increase in our net income with faster collection on accounts
receivable.
Net cash
used in investing activities was $0.45 million for the six months ended June 30,
2010, compared to $2,178 for the comparable period of 2009. The cash
outflow during the six months ended June 30, 2010 was mainly due to construction
of a new workshop and acquisition of equipments.
22
Net cash
provided by financing activities was $2.22 million for the six months ended June
30, 2010 compared to $2.69 million cash outflow for the comparable period of
2009. The cash inflow in financing activities for the six months ended June 30,
2010 mainly consisted of proceeds of $2.20 million for stock
issued.
We do not
believe inflation had a significant negative impact on our results of operations
during the six months ended June 30, 2010.
Off-Balance
Sheet Arrangements
We have
not made any other financial guarantees or other commitments to guarantee the
payment obligations of any third party. 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, hedging or research and development services with
us.
Item 3. Quantitative and Qualitative
Disclosure About Market Risks.
We do not
use derivative financial instruments in our investment portfolio and has 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. However, in order to manage the foreign exchange risks, we may
engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.
Item 4. Controls and
Procedures.
Evaluation
of Disclosure Controls and Procedures
As
required by paragraph (b) of Rules 13a-15 or 15d-15 under the Securities
Exchange Act of 1934, the Company's principal executive officer and principal
financial officer have evaluated the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as
of the end of the period covered by this Quarterly Report on Form 10-Q. Based on
this evaluation these officers have concluded that as of the end of the period
covered by this Quarterly Report on Form 10-Q, our disclosure controls and
procedures were effective and were adequate to insure that the information
required to be disclosed by the Company in reports it files or submits under the
Exchange Act were recorded, processed, summarized and reported within the time
period specified in the Commission's rules and forms.
Changes
in Internal Control Over Financial Reporting
There
have been no significant changes in our internal controls over financial
reporting that could materially affect such controls over financial reporting
subsequent to the date we completed our evaluation. Therefore, no corrective
actions were taken.
Inherent
Limitations of Internal Controls
Our
management, including our CEO and CFO, does not expect that our disclosure
controls and procedures or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.
23
PART
II - OTHER INFORMATION
Item 1. Legal
Proceedings.
We may be
subject to, from time to time, various legal proceedings relating to claims
arising out of our operations in the ordinary course of our business. We are not
currently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
business, financial condition, or results of operations of the
Company.
Item 1A. Risk
Factors.
There
have been no material changes to the risk factors previously disclosed in the
Company’s Registration Statement as Amended, as filed with the United States
Securities and Exchange Commission on April 14, 2010.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
On April
7, 2010, the Company issued 40,000 shares of its common stock to its four
independent directors, valued at $4.65 per share (stock price at grant date).
The issuance of these shares was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
Item 3. Defaults on Senior
Securities.
None.
Item 5. Other
Information.
None.
Item 6. Exhibits.
Exhibits:
|
|
31.1
|
Certification
pursuant to Section 302 of Sarbanes Oxley Act of 2002.
|
31.2
|
Certification
pursuant to Section 302 of Sarbanes Oxley Act of 2002.
|
32.1
|
Certification
pursuant to Section 906 of Sarbanes Oxley Act of 2002.
|
32.2
|
Certification
pursuant to Section 906 of Sarbanes Oxley Act of
2002.
|
24
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, there unto duly
authorized.
WEIKANG
BIO-TECHNOLOGY GROUP COMPANY, INC.
|
||
Dated: August
13, 2010
|
By:
|
/s/ Yin Wang
|
Yin
Wang
|
||
Chief
Executive Officer
|
||
(Principal
Executive Officer)
|
||
By:
|
/s/ Baolin Sun
|
|
Baolin
Sun
|
||
Chief
Financial Officer
|
||
(Principal
Accounting & Financial
Officer)
|
25