Attached files
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EX-31.2 - BIOPHARM ASIA, INC. | e607771_ex31-2.htm |
EX-32.1 - BIOPHARM ASIA, INC. | e607771_ex32-1.htm |
EX-32.2 - BIOPHARM ASIA, INC. | e607771_ex32-2.htm |
EX-31.1 - BIOPHARM ASIA, INC. | e607771_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER
30, 2010
OR
o TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE
TRANSITION FROM _______ TO ________.
COMMISSION
FILE NUMBER: 000-25487
BIOPHARM
ASIA, INC.
(Exact
Name of Small Business Issuer as Specified in its Charter)
NEVADA
|
88-0409159
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
New
Agriculture Development Park, Daquan Village,
Tonghua County, Jilin
Province, P.R. China. 134115
(Address
of principal executive offices) (Zip code)
Issuer's
telephone number: 011-86-435-5211804
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes o No o
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
|
Smaller
reporting company x
|
(Do
not check if a smaller reporting company)
|
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
As of
November 11, 2010, the Registrant had outstanding 50,000,000 shares of
common stock, par value $0.001 per share.
BIOPHARM ASIA, INC.
FORM
10-Q
INDEX
Page
|
||
PART
I
|
FINANCIAL
INFORMATION
|
|
1
|
||
2
|
||
3
|
||
4
|
||
19
|
||
25
|
||
25
|
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PART II
|
OTHER
INFORMATION
|
|
26
|
||
26
|
Special
Note Regarding Forward Looking Information
This
report contains forward-looking statements that reflect management's current
views and expectations with respect to our business, strategies, future results
and events, and financial performance. All statements made in this report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to, cash flows,
revenues, profitability, adequacy of funds from operations, statements
expressing general optimism about future operating results and non-historical
information, are forward-looking statements. In particular, the words "believe,"
"expect," "intend," "anticipate," "estimate," "plan," "may," "will," variations
of such words and similar expressions identify forward-looking statements, but
are not the exclusive means of identifying such statements and their absence
does not mean that the statement is not forward-looking. Readers should not
place undue reliance on forward-looking statements which are based on
management's current expectations and projections about future events, are not
guarantees of future performance, and are subject to risks, uncertainties and
assumptions. Our actual results, performance or achievements could differ
materially from the results expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in this report and in our Annual Report on Form 10-K previously
filed with the Securities and Exchange Commission, particularly under the
caption "Risk Factors." Except as required under the federal securities laws, we
do not undertake any obligation to update the forward-looking statements in this
report.
PART
I
FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
September
30, 2010
|
December
31, 2009
|
|||||||
ASSETS
|
|
|
||||||
Current
Assets:
|
|
|
||||||
Cash
and cash equivalents
|
$ | 15,407,736 | $ | 11,066,671 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $308,391
and $514,011 as of September 30, 2010, and December 31, 2009,
respectively
|
31,538,169 | 18,202,083 | ||||||
Due
from employees and others
|
9,370,277 | 1,538,783 | ||||||
Due
from related parties
|
3,579,984 | 1,339,828 | ||||||
Inventories
|
19,489,046 | 14,057,699 | ||||||
Advances
to suppliers
|
-
|
196,722 | ||||||
Deferred
tax asset
|
77,098
|
- | ||||||
Total
Current Assets
|
79,462,310 | 46,401,786 | ||||||
Property,
plant, and equipment, net
|
14,015,297 | 12,879,378 | ||||||
Intangible
assets, net
|
156,761 | 193,524 | ||||||
Deferred
lease payments
|
1,424,284 | 1,845,289 | ||||||
Total
Assets
|
$ | 95,058,652 | $ | 61,319,977 | ||||
|
|
|
||||||
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
||||||
Current
Liabilities:
|
|
|
||||||
Short-term
loans
|
$ | 4,986,488 | $ | 4,891,479 | ||||
Accounts
payable and accrued liabilities
|
23,927,829 | 15,333,980 | ||||||
Advances
from customers
|
- | 143,751 | ||||||
Taxes
payable
|
2,589,707 | 3,892,749 | ||||||
Other
payables
|
5,522,801 | 4,202,238 | ||||||
Due
to related parties
|
7,405,744 | 304,758 | ||||||
Total
Current Liabilities
|
44,432,569 | 28,768,955 | ||||||
Total
Liabilities
|
44,432,569 | 28,768,955 | ||||||
|
|
|
||||||
Commitments
and Contingencies
|
||||||||
Stockholders'
Equity:
|
|
|
||||||
Preferred
stock, $0.001 par value, 20,000,000 shares authorized; nil and 150,000
shares of Series A Convertible Preferred Stock subscribed for in 2010 and
2009, respectively.
|
- | 310,000 | ||||||
Receivable
related to Preferred stock subscriptions
|
- | (310,000 | ) | |||||
Common
stock, $0.001 par value, 150,000,000 shares authorized; 50,000,000 shares
issued and outstanding in 2010 and 2009
|
50,000 | 50,000 | ||||||
Additional
paid-in capital
|
8,066,293 | 8,066,293 | ||||||
Statutory
reserve fund
|
4,240,623 | 2,678,094 | ||||||
Accumulated
other comprehensive income
|
4,604,604 | 2,154,831 | ||||||
Retained
earnings
|
33,664,563 | 19,601,804 | ||||||
Total
Stockholders' Equity
|
50,626,083 | 32,551,022 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 95,058,652 | $ | 61,319,977 |
See the
accompanying notes to consolidated financial statements
BIOPHARM ASIA, INC. AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
(Unaudited)
|
Three
Months
Ended
September 30,
|
Nine
Months
Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | 44,701,903 | $ | 26,581,826 | $ | 101,967,862 | $ | 69,189,574 | ||||||||
Cost
of goods sold
|
31,817,412 | 16,220,050 | 70,791,913 | 46,865,716 | ||||||||||||
Gross
profit
|
12,884,491 | 10,361,776 | 31,175,949 | 22,323,858 | ||||||||||||
|
|
|
|
|||||||||||||
Expenses:
|
|
|
|
|
||||||||||||
Sales
and marketing
|
2,139,128 | 2,114,289 | 6,323,591 | 5,256,823 | ||||||||||||
General
and administrative
|
1,770,370 | 1,790,376 | 3,981,163 | 2,342,689 | ||||||||||||
Total
operating expenses
|
3,909,498 | 3,904,665 | 10,304,754 | 7,599,512 | ||||||||||||
Income
from operations
|
8,974,993 | 6,457,111 | 20,871,195 | 14,724,346 | ||||||||||||
Interest
expense, net
|
115,015 | 122,089 | 328,231 | 341,804 | ||||||||||||
Income
before income taxes
|
8,859,978 | 6,335,022 | 20,542,964 | 14,382,542 | ||||||||||||
Provision
for income taxes
|
2,334,338 | 1,554,605 | 4,917,676 | 3,682,373 | ||||||||||||
Net
income
|
$ | 6,525,640 | $ | 4,780,417 | $ | 15,625,288 | $ | 10,700,169 | ||||||||
|
|
|
|
|||||||||||||
Weighted
average basic and diluted shares outstanding:
|
50,000,000 | 50,000,000 | 50,000,000 | 50,000,000 | ||||||||||||
|
|
|
|
|||||||||||||
Earnings
per common share - Basic and Diluted
|
$ | 0.13 | $ | 0.10 | $ | 0.31 | $ | 0.21 | ||||||||
|
|
|
|
|||||||||||||
Comprehensive
Income:
|
|
|
|
|
||||||||||||
Net
income
|
$ | 6,525,640 | $ | 4,780,417 | $ | 15,625,288 | $ | 10,700,169 | ||||||||
Foreign
currency translation adjustment
|
2,342,679 | (3,219 | ) | 2,449,773 | 5,597 | |||||||||||
Total
Comprehensive Income
|
$ | 8,868,319 | $ | 4,777,198 | $ | 18,075,061 | $ | 10,705,766 |
See
the accompanying notes to consolidated financial
statements
|
BIOPHARM ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
(Unaudited)
|
||||||||
For
the Nine Months Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
||||||||
Net
income
|
$
|
15,625,288
|
$
|
10,700,169
|
||||
Adjustments
to reconcile net income to net cash
provided
by (used in) operating activities:
|
||||||||
Depreciation
and amortization
|
1,193,755
|
1,147,984
|
||||||
Deferred
tax credit
|
(77,098
|
)
|
(431,453
|
)
|
||||
Recovery
of allowance for bad debts
|
(215,604
|
)
|
(327,909
|
)
|
||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(20,961,960
|
)
|
(119,212
|
)
|
||||
Inventories
|
(5,431,347
|
)
|
(7,182,626
|
)
|
||||
Advances
to suppliers
|
196,722
|
(785,658
|
)
|
|||||
Accounts
payable and accrued liabilities
|
8,593,849
|
10,886,413
|
||||||
Advances
from customers
|
(143,751
|
)
|
9,239
|
|||||
Taxes
payable
|
(1,303,043
|
)
|
(600,202
|
)
|
||||
Other
payables
|
1,320,563
|
1,426,839
|
||||||
Net
cash provided by (used in) operating activities
|
(1,202,626
|
)
|
14,723,584
|
|||||
CASH
USED IN INVESTING ACTIVITIES
|
||||||||
Purchases
of property, plant,
|
(1,871,909
|
)
|
(4,356,724
|
)
|
||||
Long-term
deferred lease expense
|
-
|
(1,585,675
|
)
|
|||||
Net
Cash used in investing activities
|
(1,871,909
|
)
|
(5,942,399
|
)
|
||||
CASH
PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
||||||||
Dividends
paid
|
-
|
(14,710,409
|
)
|
|||||
Proceeds
from short-term loans
|
-
|
3,760,316
|
||||||
Payments
on short-term loans
|
-
|
(3,766,620
|
)
|
|||||
Proceeds
from related parties
|
7,100,986
|
3,684,300
|
||||||
Payments
to related parties
|
(2,240,156
|
)
|
(298,423
|
)
|
||||
Net
cash provided by (used in) financing activities
|
4,860,830
|
(11,330,836
|
)
|
|||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
2,554,770
|
15,536
|
||||||
NET
INCREASE (DECREASE) IN CASH
|
4,341,065
|
(2,534,115
|
)
|
|||||
CASH,
BEGINNING OF YEAR
|
11,066,671
|
5,869,607
|
||||||
CASH,
END OF PERIOD
|
$
|
15,407,736
|
$
|
3,335,492
|
||||
SUPPLEMENTAL
DISCLOSURES
|
||||||||
Cash
paid during the periods for:
|
||||||||
Interest
paid
|
$
|
328,231
|
$
|
341,464
|
||||
Income
taxes paid
|
$
|
5,070,621
|
$
|
4,318,657
|
See
accompanying notes to consolidated financial
statements
|
BIOPHARM ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Note
1-Summary of Significant Accounting Policies
Organization
BioPharm
Asia, Inc. (the "Company" or “BioPharm,” and previously Domain Registration,
Corp.) is an entity that was incorporated under the laws of the State of Nevada
on July 31, 2001. Prior to April 2009, the Company was a development
stage enterprise, and had no assets and had not generated any revenues from
operations. It maintained its registration as a public entity with
the Securities and Exchange Commission (“SEC”).
On April
28, 2009, the Company organized and incorporated DOMR Merger Sub, Inc. (“Merger
Sub”) as a wholly owned subsidiary. On April 30, 2009, BioPharm and
Merger Sub entered into an Agreement and Plan of Merger (the “Merger Agreement”)
by and among the Company, Merger Sub, and China Northern Pharmacy Holding Group
Limited ("CNPH"), a British Virgin Islands corporation, and its
stockholders. On May 7, 2009, Merger Sub merged with and into CNPH,
(the “Merger”) with CNPH designated as the surviving corporation.
Pursuant
to the terms of the Merger Agreement, on May 7, 2009, in exchange for their
shares in CNPH, the stockholders of CNPH received stock consideration consisting
of 42,500,000 newly issued shares of the Company’s common stock, divided
proportionally among the CNPH stockholders in accordance with their respective
ownership interests in CNPH. Prior to the Merger, the Company had
7,500,000 shares of common stock issued and outstanding. As a result
of the Merger, the stockholders of CNPH acquired approximately 85 percent of the
outstanding stock of BioPharm, effectively obtaining operational and management
control of the Company.
For
financial reporting purposes, the transaction has been accounted for as a
reverse merger and recapitalization, whereby CNPH is considered the acquirer for
accounting purposes, and the financial statements of CNPH and BioPharm have been
brought over at their historical bases, with the operations of CNPH presented
under the name of the Company in subsequent filings with the
SEC. Costs and expenses associated with the Merger have been expensed
as incurred.
CNPH is a
holding company, which acquired, on November 25, 2008, all of the outstanding
capital stock of China Northern Pharmacy Holding Group Limited, a Hong Kong
company ("CNPH HK"). CNPH HK was incorporated on October 16,
2008. CNPH HK is a holding company, which acquired, on November 21,
2008, all of the equity interests of Tonghua Huachen Herbal Planting Company
Limited ("HERB"), and Tonghua S&T Medical & Pharmacy Company Limited
("PHARMACY"). Both HERB and PHARMACY are companies organized and
registered in the People’s Republic of China (“PRC”).
HERB is
an operating company incorporated on March 23, 2004, in Tonghua City, Jilin
Province, PRC, and it is engaged in planting, processing, and selling herbs
(such as Chinese Magnolia Vine, Ussuriensis Fritillary Bulb, Membranous Milk
Vetch Root, Chinese Thorowax Root, Manchurian Wild Ginger, Ginseng, and
Kudzurine Root) in the PRC. HERB owns 100 percent of the equity
interests of Tonghua Huachen Pharmaceutical Company Limited ("HUACHEN"), a PRC
company founded in 1989 in Tonghua City, Jilin Province, PRC, and incorporated
in Tonghua City on August 31, 2000. HUACHEN is engaged in the
production and sale of herbal products, such as Qiweixiaoke Capsules, Shengan
Bujin Tablets, Tongqiaobiyan Tablets, Huatanpingchuan Tablets, Wujiarongxue Oral
Liquid, and Methocarbamol Capsules.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
PHARMACY
is an operating company incorporated in Tonghua City, Jilin Province, PRC, on
September 1, 2002. It is engaged in drug logistics and distribution
in the PRC, and as of September 30, 2010, PHARMACY owned and operated 360 retail
drug stores. In addition, PHARMACY owns 100 percent of the equity
interests of Yunnan Silin Pharmaceutical Company Limited ("SILIN"), a PRC
company incorporated in Kunming City, Yunnan Province, on October 25, 2004,
which is engaged in the marketing, distribution and sale of medicinal products
to hospitals and pharmacies in the PRC.
On May 4,
2009, the Board of Directors of CNPH, prior to the Merger, declared a dividend
to its then current stockholders of approximately $14,879,000 (RMB 101,644,311)
at the then prevailing exchange rate. All of the dividends declared
were distributed before December 31, 2009.
On July
17, 2009, the Company filed an amendment to its Articles of Incorporation
changing its corporate name from Domain Registration, Corp., to BioPharm Asia,
Inc., and authorized and provided for the following: (i) the
authorization of 20 million shares of preferred stock, par value $0.001 per
share; and, (ii) an increase in the number of authorized shares of common stock,
par value $0.001, from 50 million shares to 150 million shares. The
Company subsequently issued 155,000 shares of preferred stock on September 3,
2009, which it later cancelled due to non-payment.
On June
18, 2010, and August 7, 2010, the Company acquired all of the outstanding shares
of Beijing Zhehe Ruikang Hospital Management Ltd (“ZHRK”) and Tonghua TianBao
Wood Frog Cultivation Limited Company (“TBWF”) respectively. ZHRK, incorporated
in November 14, 2008, has provided consulting services to approximately 30
Chinese hospitals. TBWF, founded in June 2010, is engaged in the breeding and
processing of wood frogs. The wood frog, also known as forest frog, is valued
for its protein and aminoacid, which are used extensively in vitamins and
various supplementary traditional Chinese medicines, as well as for food and
cosmetics. ZHRK and TBWF are collectively called “Other Business” (“OTHER”) in
the BFAR group.
BioPharm,
Merger Sub, CNPH, CNPH HK, HERB, PHARMACY, HUACHEN, SILIN and OTHER are
collectively referred to as the “Company” unless specific reference is made to
an entity of the consolidated company.
Basis
of Presentation and Consolidation
The
interim consolidated financial statements of the Company as of September 30,
2010, and December 31, 2009, and for the three and nine months ended September
30, 2010 and 2009, have been prepared in conformity with accounting principles
generally accepted in the United States of America (“US GAAP”) for interim
reporting, and in accordance with the requirements of Form 10-Q. All significant
intercompany balances, transactions, and cash flows have been eliminated in
consolidation.
The accompanying interim consolidated financial statements are unaudited and are
subject to year-end adjustments. In the opinion of management, the
accompanying interim consolidated financial statements include all known
adjustments (which consist primarily of normal, recurring accruals, estimates,
and assumptions that impact the financial statements) necessary to present
fairly the consolidated financial position at the balance sheet dates and the
consolidated results of operations for the three months and nine months then
ended. The accompanying interim consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included within the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2009, filed with the SEC. The
results of operations for the three and nine months ended September 30, 2010,
are not necessarily indicative of operating results of the full year ending
December 31, 2010.
Cash
and Cash Equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents. The Company maintains cash and
cash equivalents with various financial institutions mainly in the PRC. Balances
at financial institutions or state-owned banks within the PRC are not covered by
insurance. Non-performance by these institutions could expose the Company to
losses for all amounts on deposit since none are insured. As of September 30,
2010, and December 31, 2009, the Company's bank balances held in Chinese
institutions of approximately $15.4 million and $11.1 million, respectively,
were uninsured. The Company has not experienced, nor does it anticipate,
non-performance by these institutions.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Accounts
Receivable
The
Company records accounts receivable upon the shipment of products to
customers. Trade receivables are not collateralized, and interest is
not charged or accrued on past due accounts. The Company maintains an
allowance for doubtful accounts for estimated losses. Periodically,
management of the Company reviews the accounts receivable and makes general and
specific allowances when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable
balances, the Company considers many factors, including the age of the balance,
the customer’s historical payment history, its current credit-worthiness, and
current economic trends. The amount of the provision, if any, is
recognized in the consolidated statements of operations and comprehensive income
within the general and administrative expenses. Accounts are written
off after appropriate collection efforts are conducted.
Inventories
Inventories
are stated at the lower of cost or market utilizing the moving average method.
Costs of work-in-progress and finished goods are composed of direct materials,
direct labor and an attributable portion of manufacturing overhead. An allowance
is established when management determines that the carrying value of certain
inventories may not be realizable. If inventory costs exceed expected market
value due to obsolescence or quantities in excess of expected demand, the
Company will record reserves for the difference between the cost and the market
value. Any reserves recorded would be based on estimates and reflected in cost
of sales. There were no allowances deemed necessary by management as of
September 30, 2010, and December 31, 2009.
Property,
Plant, and Equipment
Property,
plant, and equipment are recorded at historical cost. Depreciation
and amortization are recorded using the straight-line method over the estimated
useful lives of the assets. Expenditures for major additions or
improvements, which extend the useful lives of assets, are
capitalized. Minor replacements, maintenance and repairs, which do
not improve or extend the lives of the assets, are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation
or amortization, and any resulting gain or loss is reflected in current
operations. In accordance with US GAAP, the Company examines the
possibility of decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be
recoverable. The estimated useful lives for significant property,
plant, and equipment categories are as follows:
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Buildings
|
20
years
|
Biological
assets
|
10
years
|
Machinery
and equipment
|
10
years
|
Vehicles
|
5
years
|
Leasehold
improvements
|
5
years
|
Construction
in progress, which is included in property, plant, and equipment, consists of
costs incurred for construction projects that have not yet been
completed. Once the projects are completed, the costs will be
transferred to the appropriate property and equipment category.
Biological
Assets
Biological
assets, which are included in property, plant, and equipment, consist primarily
of Schisandra berry trees, which provide the extract used to manufacture several
traditional Chinese medicines. The costs to purchase and cultivate these trees
and the expenditures related to labor and materials to prepare the land, to
construct staking and wiring on the field, and labor costs for grafting and
pruning during the early stages of the trees’ development are capitalized until
the trees become commercially productive, at which time annual depreciation is
recognized using the straight-line method over the economic useful life of the
trees, which is estimated to be 10 years. Depreciation expense pertaining to the
biological assets aggregated to $107,761 and $105,764 for the nine months ended
September 30, 2010, and 2009, respectively, and are included in inventory costs
and ultimately become a component of cost of goods sold.
Lease
Obligations
All
noncancellable leases with an initial term greater than one year are categorized
as either capital leases or operating leases. Assets recorded under
capital leases are amortized according to the methods employed for property and
equipment or over the term of the related lease, if shorter.
Impairment
of Long-lived Assets
In
accordance with US GAAP, the Company periodically reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash
flows is less than the carrying amount of the asset. The amount of impairment is
measured as the difference between the asset’s estimated fair value and its book
value. The Company did not consider it necessary to record any impairment
charges during the nine months ended September 30, 2010, and 2009.
Fair
Value of Financial Instruments
Effective
January 1, 2008, the Company adopted Accounting Standards Codification (“ASC”)
820-Fair Value Measurements
and Disclosure (“ASC 820”) for assets and liabilities measured at fair
value on a recurring basis. ASC 820 establishes a common definition for fair
value to be applied to existing generally accepted accounting principles that
require the use of fair value measurements, establishes a framework for
measuring fair value and expands disclosure about such fair value measurements.
The adoption of ASC 820 did not have an impact on the Company’s financial
position or operating results, but did expand certain disclosures.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
ASC 820
defines fair value as the price that would be received upon sale of an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Additionally, ASC 820 requires the use of
valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. These inputs are prioritized below:
Level
1:
|
Observable
inputs such as quoted market prices in active markets for identical assets
or liabilities
|
|
Level
2:
|
Observable
market-based inputs or unobservable inputs that are corroborated by market
data
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data, which require the use
of the reporting entity’s own
assumptions.
|
Cash and
cash equivalents include money market securities and commercial paper that are
considered to be highly liquid and easily tradable. These securities are valued
using inputs observable in active markets for identical securities and are
therefore classified as Level 1 within the fair value hierarchy.
In
addition, the Company did not elect the fair value options for any of its
qualifying financial instruments.
Foreign
Currency Translation
The
Company accounts for foreign currency translation pursuant to Financial
Accounting Standards Board (“FASB”) ASC 830 Foreign Currency Matters
(“ASC 830”). The Company’s functional currency is the Chinese Yuan
Renminbi (“RMB”). Under ASC 830, all assets and liabilities are
translated into United States Dollars using the current exchange rate at the end
of each fiscal period. Revenues and expenses are translated using the
average exchange rates prevailing throughout the respective
periods. Translation adjustments are included in other comprehensive
income (loss) for the period.
Revenue
Recognition
Product
sales are generally recognized when title to the product is transferred to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the SEC Staff Accounting Bulletin (“SAB”) No.
101, Revenue Recognition in
Financial Statements as amended by SAB No. 104 (together, "SAB 104"). SAB
104 states that revenue should not be recognized until it is realized or
realizable and earned. In general, the Company records revenue when persuasive
evidence of an arrangement exists, services have been rendered or product
delivery has occurred, the sales price to the customer is fixed or determinable,
and collectability is reasonably assured.
Shipping
and Handling Expenses
Shipping
and handling expenses (freight-out and delivery) amounted to $1,725,515 and
$1,341,261 for the nine months ended September 30, 2010, and 2009, respectively,
and are included in sales and marketing expenses in the accompanying
consolidated statements of operations and comprehensive income.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Income
Taxes
The
Company is subject to the Income Tax Law of the People’s Republic of
China. Income taxes are accounted for under FASB ASC-740 Income Taxes (“ASC
740”). Under the asset and liability method of ASC 740, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax bases and
tax loss carry forwards. Any deferred tax assets and liabilities
would be measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled.
Concentrations
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consists principally of cash and trade accounts receivable. Substantially
all of the Company's cash is maintained with state-owned banks within the PRC,
and these deposits are not covered by insurance. The Company has not experienced
any losses in such accounts and believes it is not exposed to any risks on its
cash in bank accounts. A significant portion of the Company's sales are credit
sales which are primarily to customers whose ability to pay is dependent upon
their financial condition, as well as the industry economics prevailing in these
areas. The Company performs ongoing credit evaluations of its customers to help
further reduce credit risk.
Other
Comprehensive Income (Loss)
The
Company presents comprehensive income (loss) under FASB ASC 220, Comprehensive Income (“ASC
220”). ASC 220 states that all items that are required to be
recognized under accounting standards as components of comprehensive income
(loss) be reported in the financial statements. Accumulated other
comprehensive income consisted of unrealized gains or losses resulting from the
translation of financial statements from RMB to United States
Dollars. For the nine months ended September 30, 2010, and 2009, the
only components of comprehensive income were the net income for the periods and
the foreign currency translation adjustments.
Basic
and Diluted Earnings per Share
The
Company reports earnings per share in accordance with FASB ASC-260, Earnings per Share. The
Company’s basic earnings per share is computed using the weighted average number
of shares outstanding for the periods presented.
Diluted
earnings per share is based on the assumption that any dilutive options,
warrants or other instruments were converted or exercised. Dilution is computed
by applying the treasury stock method. Under this method, the Company’s
outstanding stock options are assumed to be exercised, and funds thus
obtained were assumed to be used to purchase common stock at the average
market price during the period. There were no dilutive instruments
outstanding during the periods ended September 30, 2010 or September 30,
2009.
Use
of Estimates
The
Company's consolidated financial statements have been prepared in accordance
with US GAAP, which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the related
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions. Significant estimates
include the allowance for doubtful accounts, the allowance for obsolete
inventory, the useful lives of property and equipment, intangible assets,
deferred lease payments, the allowance for deferred tax assets, and accruals for
income taxes.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Note
2-Recent Accounting Pronouncements
Effective
July 1, 2009, the Company adopted FASB ASC Topic 105-10, Generally Accepted Accounting
Principles – Overall (“Topic 105-10”). Topic 105-10
establishes the FASB Accounting Standards Codification (the “Codification”) as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with US GAAP. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources of authoritative
US GAAP for SEC registrants. All guidance contained in the
Codification carries an equal level of authority. The Codification
superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature
not included in the Codification is non-authoritative. The FASB will
not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates (“ASU’s”). The FASB will not consider
ASU’s as authoritative in their own right. ASU’s will serve only to
update the Codification, provide background information about the guidance and
provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this
document have been updated for the Codification.
In
January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair
Value Measurements. This update requires additional disclosure
within the roll forward of activity for assets and liabilities measured at fair
value on a recurring basis, including transfers of assets and liabilities
between Level 1 and Level 2 of the fair value hierarchy and the separate
presentation of purchases, sales, issuances and settlements of assets and
liabilities within Level 3 of the fair value hierarchy. In addition,
the update requires enhanced disclosures of the valuation techniques and inputs
used in the fair value measurements within Levels 2 and 3. The new
disclosure requirements are effective for interim and annual periods beginning
after December 15, 2009, except for the disclosure of purchases, sales,
issuances and settlements of Level 3 measurements. Those disclosures
are effective for fiscal years beginning after December 15,
2010. As ASU 2010-06 only requires enhanced disclosures, the Company
does not expect that the adoption of this update will have a material effect on
its consolidated financial statements.
In
February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition
and Disclosure Requirements, which eliminates the requirement for SEC
filers to disclose the date through which an entity has evaluated subsequent
events. ASC No. 2010-09 is effective for its fiscal quarter beginning
after December 15, 2010. The adoption of ASC No. 2010-09 will not have a
material impact on the Company's consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Note
3-Accounts Receivable
As of
September 30, 2010, and December 31, 2009, accounts receivable consisted of the
following:
September
30, 2010
|
December
31, 2009
|
|||||||
Trade
accounts
|
$ | 31,846,560 | $ | 18,716,094 | ||||
Less
- Allowance for doubtful accounts
|
(308,391 | ) | (514,011 | ) | ||||
Total
accounts receivable
|
$ | 31,538,169 | $ | 18,202,083 |
The
Company records accounts receivable on shipment of products to
customers. The trade receivables are not collateralized, and interest
is not accrued on past due accounts.
The
activity in the allowance for doubtful accounts for the nine months ended
September 30, 2010, and for the year ended December 31, 2009, was as
follows:
Nine
months ended
September
30, 2010
|
Year
ended
December
31, 2009
|
|||||||
Balance,
January 1
|
$
|
514,011
|
$
|
719,224
|
||||
Increase
in allowance for doubtful accounts
|
-
|
57,287
|
||||||
Recovery
of amounts written-off
|
(215,604
|
)
|
(265,296
|
)
|
||||
Foreign
currency translation adjustments
|
9,984
|
2,796
|
||||||
Balance
end of period
|
$
|
308,391
|
$
|
514,011
|
Note
4-Advances to Suppliers
Advances
to suppliers as of September 30, 2010, and December 31, 2009, totaled $0 and
$196,722, respectively, and consisted primarily of prepayments to suppliers for
merchandise that had not yet been shipped to the Company, as well as services
that had not yet been provided to the Company. The Company recognizes advances
as inventory or expense as suppliers make delivery of goods or provide
services.
Note
5-Inventories
As of
September 30, 2010, and December 31, 2009, inventories consisted of the
following:
September
30, 2010
|
December
31, 2009
|
|||||||
Raw
materials
|
$
|
2,137,316
|
$
|
967,608
|
||||
Work
in process
|
2,148
|
1,531,613
|
||||||
Finished
goods
|
17,349,582
|
11,558,478
|
||||||
Total
inventories
|
$
|
19,489,046
|
$
|
14,057,699
|
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
During
the nine-month periods ended September 30, 2010, and 2009, no provision for
obsolete inventory was deemed necessary by the Company.
Note
6–Property, Plant, and Equipment
As of
September 30, 2010, and December 31, 2009, Property, plant, and
equipment, consisted of the following:
Estimated
Useful
Life (Years) |
September
30, 2010
|
December
31, 2009
|
|||||||||
Buildings
|
20 | $ | 5,096,116 | $ | 4,928,544 | ||||||
Biological
assets
|
10 | 7,714,373 | 6,247,016 | ||||||||
Machinery
and equipment
|
10 | 1,600,381 | 1,475,432 | ||||||||
Vehicles
|
5 | 383,779 | 376,467 | ||||||||
Leasehold
improvements
|
5 | 2,926,369 | 2,682,284 | ||||||||
Subtotal
|
17,721,018 | 15,979,743 | |||||||||
Less:
accumulated depreciation
|
(4,914,198 | ) | (4,178,211 | ) | |||||||
Construction
In Progress
|
n/a | 1,208,477 | 1,077,846 | ||||||||
Net
Property, Plant, and Equipment
|
$ | 14,015,297 | $ | 12,879,378 |
The
Company recorded depreciation and amortization expenses of $735,987 and $690,607
for the nine months ended September 30, 2010, and 2009, respectively. There
were no impairment provisions made as of September 30, 2010, and December
31, 2009.
Note
7-Intangible Assets
As of
September 30, 2010, and December 31, 2009, intangible assets consisted of the
following:
September
30, 2010
|
December
31, 2009
|
|||||||
Manufacturing
right (China pharmaceutical manufacturing permit)
|
$ | 418,029 | $ | 410,064 | ||||
License
fees (medicine patent)
|
166,089 | 162,924 | ||||||
Software
(accounting system)
|
4,479 | 4,394 | ||||||
Total
intangible assets
|
588,597 | 577,382 | ||||||
Less-Accumulated
amortization
|
(431,836 | ) | (383,858 | ) | ||||
Net
intangible assets
|
$ | 156,761 | $ | 193,524 |
Amortization
expense amounted to $47,978 and $43,103 for the nine months ended September 30,
2010, and 2009, respectively.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
The
projected amortization expense attributed to future periods is as
follows:
2010
(full year)
|
$
|
45,582
|
||
2011
|
45,890
|
|||
2012
|
41,125
|
|||
2013
|
24,164
|
|||
$
|
156,761
|
Note
8-Deferred Lease Payments
As of
September 30, 2010, and December 31, 2009, deferred lease payments consisted of
the following:
September
30, 2010
|
December
31, 2009
|
|||||||
Deferred
lease payments for the rental of offices
|
$
|
13,437
|
$
|
-
|
||||
Deferred
lease payments for Biological assets
|
1,410,847
|
1,845,289
|
||||||
Total
|
$
|
1,424,284
|
$
|
1,845,289
|
The
Company leases from the local government in the PRC two farms that are used to
plant and cultivate Schisandra trees. Schisandra is harvested once a
year with the highest production yield beginning three years after initial
planting. Schisandra berries can be used to produce Chinese medicines
for a variety of diseases.
The first
land parcel (Lease #1) is approximately 330 acres, and was leased for a 30-year
term, which began on January 1, 2003. A total of four lease payments
of approximately $12,370,000 (RMB 84,000,000) each are to be paid on the dates,
June 30, 2003 (paid by the Company), June 30, 2011, June 30, 2019, and June 30,
2027. The annual lease expense for Lease #1 has been calculated using
the straight-line method over the life of the lease, and is approximately
$410,000 (RMB 2,800,000) per year. As of September 30, 2010, and
December 31, 2009, the Company had deferred lease payments prepaid on this
parcel of land of $104,507 and $409,842, respectively.
The
Company leased a second land parcel (Lease #2) of approximately 165 acres
pursuant to a 25-year lease commencing January 1, 2008. A total of
four lease payments amounting to approximately $5,150,000 (RMB 35,000,000) are
to be paid over the 25-year term of Lease #2 on June 30, 2008 (paid by the
Company), June 30, 2009 (paid by the Company), June 30, 2017 (approximately
$1,650,000), and June 30, 2025 (approximately $1,650,000). The annual
lease expense for Lease #2 has been calculated using the straight-line method
over the life of the lease, and is approximately $205,000 (RMB 1,400,000) per
year. As of September 30, 2010, and December 31, 2009, the Company
had deferred lease payments prepaid on this parcel of land of $1,306,341 and
$1,435,447, respectively.
The
following table reflects the approximate scheduled future lease payment dates
and amounts for Leases #1 and #2:
June
30, 2011
|
$
|
3,369,688
|
||
June
30, 2017
|
1,677,220
|
|||
June
30, 2019
|
3,369,688
|
|||
June
30, 2025
|
1,677,220
|
|||
June
30, 2027
|
2,525,996
|
|||
Total
|
$
|
12,
619,812
|
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Total
deferred lease payments amounted to $1,424,284 and $1,845,289 as of September
30, 2010, and December 31, 2009, respectively.
Note
9-Short-term Loans
Short-term
loans consisted of the following:
September
30, 2010
|
December
31, 2009
|
|||||||
Loan
payable to City Credit Union (Construction Road) due on December 19, 2010,
with annual interest rate of 10.5% and secured by buildings and
equipment.
|
$
|
773,354
|
$
|
758,619
|
||||
Loan
payable to City Credit Union (Construction Road) due on July 21, 2011,
with annual interest rate of 10.5% and secured by building and
equipment.
|
147,803
|
144,987
|
||||||
Loan
payable to Agriculture Finance Bureau of TongHua government, due on
December 6, 2010 non-interest bearing and secured by
buildings.
|
223,944
|
219,677
|
||||||
Loan
payable to City Credit Union (Construction Road) due on April 21, 2011,
with annual interest rate of 5.94% and secured by buildings and
equipment.
|
821,128
|
805,483
|
||||||
Loan
payable to City Credit Union (Construction Road) due on June 20, 2011,
with annual interest rate of 5.94%, secured by buildings and
equipment.
|
3,020,259
|
2,962,713
|
||||||
Total
short-term loans
|
$
|
4,986,488
|
$
|
4,891,479
|
Note
10-Accounts Payable and Accrued Liabilities
At
September 30, 2010, and December 31, 2009, accounts payable and accrued
liabilities were $23,927,829 and $15,333,980, respectively. Accounts payable
consists primarily of amounts due to suppliers and vendors. Items included in
accounts payable and accrued liabilities are the following:
September
30, 2010
|
December
31, 2009
|
|||||||
Accounts
payable – trade
|
$
|
23,620,467
|
$
|
12,722,407
|
||||
Accrued
liabilities
|
163,209
|
2,466,568
|
||||||
Payroll
and welfare payables
|
144,153
|
145,005
|
||||||
Total
accounts payable and accrued expenses
|
$
|
23,927,829
|
$
|
15,333,980
|
Note
11-Advances from Customers
Advances
from customers represent prepayments to the Company for merchandise that had not
yet been shipped to customers or services that had not yet been rendered to
customers. The Company will recognize these advances as revenue as customers
take delivery of the goods or when the services have been rendered, in
compliance with the Company’s revenue recognition policy. Advances from
customers totaled $0 and $143,751 as of September 30, 2010 and December 31,
2009, respectively.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Note
12-Taxes Payable
As of
September 30, 2010, and December 31, 2009, taxes payable consisted of the
following:
September
30, 2010
|
December
31, 2009
|
|||||||
Income
taxes payable
|
$
|
1,438,928
|
$
|
1,536,184
|
||||
Value
added taxes payable
|
1,023,616
|
2,164,731
|
||||||
Other
taxes payable
|
127,163
|
191,834
|
||||||
Total
taxes payable
|
$
|
2,589,707
|
$
|
3,892,749
|
The
Company accounts for income taxes under a standard that requires the recognition
of deferred tax assets and liabilities for both the expected impact of
differences between the financial statements and the tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from tax
losses and tax credit carry forwards. US GAAP additionally requires
the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. Realization of deferred tax assets is
dependent upon future earnings, if any, of which the timing and amount are
uncertain. The Company is subject to the income tax laws of the PRC, Hong Kong,
and the United States.
The
deferred assets as of September 30, 2010, of $77,098 pertain to the allowance
for bad debts.
The
cumulative net operating losses pertaining to the US available to the Company
are $ 122,199 as of September 30, 2010. These will expire by
2030. Due to the uncertainty surrounding the realization of the
favorable U.S. tax attributes in future tax returns, the Company has recorded a
full valuation allowance against the otherwise recognizable U.S. net deferred
tax assets resulting from losses in the US as of September 30, 2010 and December
31, 2009
The
Company calculates its interim income tax provision in accordance with US GAAP
and thus in calculating the provision for income taxes on an interim basis, the
Company uses an estimate of the annual effective tax rate based upon the facts
and circumstances known and applies that rate to its ordinary year to date
earnings or losses. The Company’s effective tax rate is based on
expected income and statutory tax rates and takes into consideration any
permanent differences between financial statement and tax return income
applicable to the Company in the jurisdictions in which the Company
operates. The effect of discrete items, such as changes in estimates,
changes in enacted tax laws or rates or tax status, and unusual or infrequently
occurring events, would be recognized in the interim period in which the
discrete item occurs. The accounting estimates used to compute the
provision for income taxes may change as new events occur, additional
information is obtained or as the result of new judicial interpretations or
regulatory or tax law changes.
Since
January 1, 2008, under the income tax laws of PRC, Chinese companies are
generally subject to an income tax at an effective rate of 25% on income
reported in the their statutory financial statements after appropriate tax
adjustments. The Company's PRC subsidiaries are subject to these
statutory rates. HERB, one of the Company's Chinese operating
subsidiaries, has engaged in the agriculture and wholesale
business. HERB’s business profits from these agriculture operations
are exempt from the income taxes in accordance with the PRC Income Tax
Laws. HERB’s non-agricultural operations are subject to the effective
PRC income tax rate of 25%.
CNPH HK
was incorporated in Hong Kong and is subject to Hong Kong profit tax of 17.5% on
its activities conducted in Hong Kong and any income arising in or derived from
Hong Kong. No provision for profits tax has been made as the Company
has no assessable income from Hong Kong for the nine month periods ended
September 30, 2010 and September 30, 2009.
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Note
13-Other Payables
As of
September 30, 2010, and December 31, 2009, Other payables consisted of the
following:
September
30, 2010
|
December
31, 2009
|
|||||||
Security
deposits from salesmen
|
$
|
434,790
|
$
|
426,066
|
||||
Union
payable
|
17,060
|
19,013
|
||||||
Employees
benefits payables
|
105,438
|
41,510
|
||||||
Payables
to employees
|
4,965,513
|
3,715,649
|
||||||
Total
other payables
|
$
|
5,522,801
|
$
|
4,202,238
|
Note
14-Preferred Stock
On August
21, 2009, the Company established 155,000 shares of its authorized preferred
stock as Series A Convertible Preferred Stock (the “Series A Preferred Stock”).
Subsequently, on September 3, 2009, the Company entered into subscription
agreements for the sale of its Series A Preferred Stock, and agreed to issue a
total of 155,000 shares to 13 investors at $2.00 per share for a total purchase
price of $310,000 to be paid subsequent to the closing date. When
received, the proceeds from the issuance of the Series A Preferred Stock were to
be used for working capital purposes.
As of May
12, 2010, the Company had not received the subscription amounts due for the
155,000 shares of its Series A Preferred Stock issuable to 13 investors for an
aggregate of $310,000. As a result of nonpayment by the investors,
the Company cancelled the 155,000 shares of Series A Preferred
Stock.
Note
15-Segment Reporting
US GAAP
requires the use of the management approach model for segment
reporting. The management approach model is based on how a company's
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. Based on this
model, the Company has determined that it has five segments plus its Corporate
expenses. The Company’s principal businesses are herbal planting,
drug manufacturing, distribution, and the retail sale of a broad line of health
care products. Based on the various operation activities, the
Company’s reportable segments are as follows:
Herbal
planting – the planting, processing and selling of herbs in China.
Drug
manufacturing – the production and sale of herbal and pharmaceutical
products.
Distribution
– the sale of healthcare products to hospitals and pharmacy shops.
Retailing
– the sale of healthcare products to consumers.
Other
–other small business units of the Company
Three
months ended September 30, 2010
|
|||||||||||||||||||||||||||||||||||
Herbal
Planting
|
Drug
Manufacturing
|
Distribution
|
Retailing
|
Other
small business units of the Company
|
Corporate
|
Total
|
|||||||||||||||||||||||||||||
Revenues
|
$ | - | $ | 10,959,750 | $ | 12,299,348 | $ | 21,411,980 | $ | 30,825 | $ | - | $ | 44,701,903 | |||||||||||||||||||||
Depreciation &
amortization
|
|
100,852 |
|
70,787 |
|
6,372 |
|
39,366 |
|
1,813 |
|
- |
|
219,190 | |||||||||||||||||||||
Income
from operations
|
|
(58,333 | ) |
|
3,287,380 |
|
2,368,197 |
|
3,898,244 |
|
13,674 |
|
(534,169 | ) |
|
8,974,993 | |||||||||||||||||||
Purchase
of property and equipment
|
$ | 850,577 | $ | - | $ | - | $ | - | $ | 71,662 | $ | - |
$
|
$ | 922,239 |
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Three
months ended September 30, 2009
|
||||||||||||||||||||||||
Herbal
Planting
|
Drug
Manufacturing
|
Distribution
|
Retailing
|
Corporate
|
Total
|
|||||||||||||||||||
Revenues
|
$ | (2,808 | ) | $ | 6,781,811 | $ | 10,467,116 | $ | 9,335,707 | $ | - | $ | 26,581,826 | |||||||||||
Depreciation &
amortization
|
329,285 | 116,976 | 5,380 | $ | - | - | 451,641 | |||||||||||||||||
Income
from operations
|
(58,485 | ) | 1,063,407 | 2,781,984 | $ | 2,936,077 | (265,872 | ) | 6,457,111 | |||||||||||||||
Purchase
of property and equipment
|
$ | 2,215,580 | $ | - | $ | 47,712 | $ | 1,348,804 | $ | - | $ | 3,612,096 |
Nine
months ended September 30, 2010
|
||||||||||||||||||||||||||||
|
Herbal
Planting
|
Drug
Manufacturing
|
Distribution
|
Retailing
|
Other
small business units of the Company
|
Corporate
|
Total
|
|||||||||||||||||||||
Revenues
|
$ | 1,393,684 | $ | 27,580,362 | $ | 34,066,797 | $ | 38,896,195 | $ | 30,825 | $ | - | $ | 101,967,862 | ||||||||||||||
Depreciation &
amortization
|
301,717 | 529,948 | 19,692 | 106,616 | 1,813 | - | 959,786 | |||||||||||||||||||||
Income
from operations
|
105,949 | 6,306,182 | 9,350,093 | 5,732,903 | 13,674 | (637,606 | ) | 20,871,195 | ||||||||||||||||||||
Purchase
of property and equipment
|
$
|
1,387,081 |
$
|
$
|
$
|
$
|
71,662 |
$
|
- |
$
|
1,458,743 |
Nine
months ended September 30, 2009
|
||||||||||||||||||||||||
Herbal
Planting
|
Drug
Manufacturing
|
Distribution
|
Retailing
|
Corporate
|
Total
|
|||||||||||||||||||
Revenues
|
$ | 2,337,677 | $ | $ | 36,249,335 | $ | 11,852,602 | $ | - | $ | 69,184,574 | |||||||||||||
Depreciation &
amortization
|
851,387 | 281,871 | 14,726 | $ | - | - | 1,147,984 | |||||||||||||||||
Income
from operations
|
487,464 | 3,797,187 | 7,474,513 | $ | 3,479,306 | (514,124 | ) | 14,724,346 | ||||||||||||||||
Purchase
of property and equipment
|
$ | 2,966,495 | $ | $ | 47,702 | $ | 1,342,527 | $ | - | $ | 4,356,724 |
BIOPHARM
ASIA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010, and 2009
(Unaudited)
Note
16-Related Party Transactions
Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.
Due
to/from Related Parties
Prior to
the Merger (see Note 1), and from time to time thereafter, the Company advanced
funds to or received funds from some stockholders. These advances are
non-interest bearing, unsecured and payable on demand. The related parties make
monthly payments on these advances.
Due to
related parties:
Related
Party
|
September
30, 2010
|
December
31, 2009
|
||||||
Hong
Lin (stockholder)
|
$
|
-
|
$
|
52,368
|
||||
Yanhua
Han (chairman)
|
-
|
9,885
|
||||||
Kean
Yuan (Manager)
|
-
|
155,132
|
||||||
Other
Stockholders
|
7,405,744
|
87,373
|
||||||
Total
due to related parties
|
$
|
7,405,744
|
$
|
304,758
|
Due from
related parties:
Related
Party
|
September
30, 2010
|
December
31, 2009
|
||||||
Yanhua
Han
|
$
|
-
|
$
|
890,074
|
||||
Hong
Lin
|
-
|
449,754
|
||||||
Other
related parties
|
3,579,984
|
-
|
||||||
Total
due from related parties
|
$
|
3,579,984
|
$
|
1,339,828
|
Note
17-Statutory Reserve Fund
In
accordance with PRC regulations, the Company is required to make appropriations
to reserve funds, based on after-tax net income, from its PRC incorporated
subsidiaries. Collectively these are the statutory reserve fund and are
contained in the Company’s stockholders’ equity. Annual appropriations to the
statutory reserve should be at least 10% of the after tax net income determined
in accordance with PRC regulations until the statutory reserve is equal to 50%
of the entity’s registered capital or members’ equity.
HERB and
HUACHEN transfer 10 percent of their profit after tax as reported in their PRC
statutory financial statements to these statutory reserve funds. The reserve
accounts can be used to offset losses incurred or to increase the registered
capital. Except for the reduction of losses incurred, any other application
should not result in this reserve balance falling below 25 percent of the
registered capital. The statutory reserve funds of both PHARMACY and SILIN as of
September 30, 2010, have reached 50 percent of their registered capital, and
thus do not need to make any further contributions.
As of
September 30, 2010, and December 31, 2009, the Company had statutory reserve
fund balances of $3,774,636, and $2,678,094, respectively.
Note
18-Business combinations and acquisitions of minority interest
On June
18, 2010, the Company purchased 100 percent of the outstanding shares of Beijing
Zhihe Ruikang Hospital Management Ltd. for 2,400,000 RMB, or approximately
$350,000. The fair value of the business was approximately equivalent to the
purchase price and no goodwill was deemed accountable due to the relatively
small scale of the operation and short incorporation history of the acquired
company.
On August
7, 2010, the Company purchased 100 percent of the outstanding shares of Tonghua
Tianbao Wood Frog Cultivation Limited Company for RMB 2,000,000, or
approximately $300,000. The fair value of the business was approximately
equivalent to the purchase price and no goodwill was deemed accountable due to
the relatively small scale of the operation and short incorporation history of
the acquired company.
ITEM 2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(“MD&A”)
|
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Report on
Form 10-Q. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected. Factors that may
cause future results to differ materially from those projected include, but are
not limited to, those discussed in "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2009 filed on May 12, 2010 (the “2009 Form
10-K”), and elsewhere in this Form 10-Q.
Business
Segments and Product Offerings
Our
principal businesses are the planting, manufacture, distribution and retail sale
of a broad line of health care products. Based on the various operating
activities, our reportable operating segments are as follows:
l
|
Herbal
planting – planting, processing and selling herbs in
China.
|
l
|
Drug
manufacturing – the production and sale of herbal and pharmaceutical
products.
|
l
|
Distribution
– the sale of healthcare products to hospitals and pharmacy
shops.
|
l
|
Retailing
– the sale of healthcare products to
consumers.
|
l
|
Other
-- other small business units of the
Company
|
The
merchandise offered at our retail drug stores can be broadly classified into the
following categories:
Prescription
Drugs. Our retail stores offer approximately 300 prescription drugs. We
accept prescriptions only from licensed health care providers and do not
prescribe medications or otherwise practice medicine. Our in-store pharmacists
verify the validity, accuracy and completeness of all prescription drug orders.
We ask all prescription drug customers to provide us with information regarding
drug allergies, current medical conditions and current medications. Sales of
prescription drugs accounted for 25% of our retail stores’ revenue in the third
quarter of 2010.
OTC Drugs.
We offer approximately 1,150 over-the-counter (“OTC”) drugs, including western
medicines and traditional Chinese medicines, for the treatment of common
diseases. Sales of OTC drugs accounted for 45% of our retail stores’ revenue in
the third quarter of 2010.
Nutritional
Supplements. We offer approximately 85 nutritional supplements, including
a variety of healthcare supplements, vitamins, minerals and dietary products. We
expect sales of nutritional supplements to increase more rapidly than those of
drugs due to increasing wealth and disposable income of Chinese residents living
in the larger metropolitan cities, and intend to rapidly grow the variety of
nutritional supplements available in our stores. Nutritional supplements
normally generate higher gross margins than prescription and OTC drugs. Sales of
nutritional supplements accounted for 9% of our retail stores’ revenue in the
third quarter of 2010.
Herbal
Products. We offer various types of drinkable herbal remedies and
packages of assorted herbs for making soup, which are used by consumers as
health supplements. Herbal products typically have higher gross margins than
prescription and OTC drugs. Sales of herbal products accounted for 11% of our
retail stores’ revenue in the third quarter of 2010.
Other
Products. Our other products include personal care products such as skin
care, hair care and beauty products, family care products such as portable
medical devices for family use, birth control and early pregnancy test products
and convenience products, including soft drinks, packaged snacks, and other
consumables, cleaning agents and stationery. Our other products also include
seasonal and promotional items tailored to local consumer demand for convenience
and quality. We believe offering these products increases customer visits by
increasing the shopping convenience for our customers. Sales of other products
accounted for 10% of our revenue in the third quarter of 2010.
The
following table presents certain information derived from our consolidated
statements of operations and the statements of cash flows for the three and nine
months ended September 30, 2010, and 2009.
Comparison
of the Results of Operations for the Three Months Ended September 30, 2010
and 2009
Three
months ended September 30,
|
||||||||||||||||
2010
|
2009
|
Increase
(Decrease)
|
Percentage
change
|
|||||||||||||
Revenues
|
$ | 44,701,903 | $ | 26,581,826 | $ | 18,120,077 | 68 | % | ||||||||
Cost
of goods sold
|
31,817,412 | 16,220,050 | 15,597,362 | 96 | % | |||||||||||
Gross
profit
|
12,884,491 | 10,361,776 | 2,522,715 | 24 | % | |||||||||||
Sales
and marketing
|
2,139,128 | 2,114,289 | 24,839 | 1 | % | |||||||||||
General
and administrative expense
|
1,770,370 | 1,790,376 | (20,006 | ) | (1 | %) | ||||||||||
Income
from operations
|
8,974,993 | 6,457,111 | 2,517,882 | 39 | % | |||||||||||
Interest
expense
|
115,015 | 122,089 | (7,074 | ) | (6 | %) | ||||||||||
Income
before income taxes
|
8,859,978 | 6,335,022 | 2,524,956 | 40 | % | |||||||||||
Provision
for income taxes
|
2,334,338 | 1,554,605 | 779,733 | 50 | % | |||||||||||
Net
income
|
$ | 6,525,640 | $ | 4,780,417 | 1,745,223 | 37 | % |
Comparison of the
Results of Operations for the Nine Months Ended September 30, 2010 and
2009
Nine
months ended September 30,
|
||||||||||||||||
2010
|
2009
|
Increase
(Decrease)
|
Percentage
change
|
|||||||||||||
Revenues
|
$ | 101,967,862 | $ | 69,189,574 | $ | 32,778,288 | 47 | % | ||||||||
Cost
of goods sold
|
70,791,913 | 46,865,716 | 23,926,197 | 51 | % | |||||||||||
Gross
profit
|
31,175,949 | 22,323,858 | 8,852,091 | 40 | % | |||||||||||
Sales
and marketing
|
6,323,591 | 5,256,823 | 1,066,768 | 20 | % | |||||||||||
General
and administrative expense
|
3,981,163 | 2,342,689 | 1,638,474 | 70 | % | |||||||||||
Income
from operations
|
20,871,195 | 14,724,346 | 6,146,849 | 42 | % | |||||||||||
Interest
expense
|
328,231 | 341,804 | (13,573 | ) | (4 | %) | ||||||||||
Income
before income taxes
|
20,542,964 | 14,382,542 | 6,160,422 | 43 | % | |||||||||||
Provision
for income taxes
|
(4,917,676 | ) | (3,682,373 | ) | (1,235,303 | ) | 34 | % | ||||||||
Net
income
|
$ | 15,625,288 | $ | 10,700,169 | 4,925,119 | 46 | % |
Revenue:
Revenue was $101,967,862 for nine months ended September 30, 2010, an increase
of $32,778,288 (or approximately 47%) as compared to the comparable 2009 period.
This was primarily attributable to the increased revenue of approximately $27.0
million in our Retail business and $8.8 million in our Drug Manufacturing
segment. These increases largely resulted from the Company’s expansion into the
drug store retail business during 2009 (with 150 stores being opened in May and
210 stores commencing operations in July, 2009), along with the growth of the
healthcare market in China and newly introduced governmental policies that
encourage more OTC drugs to be available to public and social welfare
claimants. These increases were slightly offset by an approximately
$2 million reduction in revenue from the Distribution segment due to the fact
that as the Company expanded into retail drug stores, products were increasingly
being delivered to our own drug stores and thus not reportable as revenue of our
Distribution segment.
Comparison
of Revenue by Segment for the Three Months Ended September 30, 2010 and
2009
Segment
|
2010
|
Percent
of total |
2009
|
Percent
of total |
Increase
(Decrease) |
Percentage
change |
||||||||||||||||||
Herbal
Planting
|
$ | - | 0 | % | $ | (2,808 | ) | 0 | % | $ | 2,808 | n/m | ||||||||||||
Drug
Manufacturing
|
10,959,750 | 25 | % | 6,781,811 | 26 | % | 4,177,939 | 62 | % | |||||||||||||||
Distribution
|
12,299,348 | 28 | % | 10,467,116 | 39 | % | 1,832,232 | 18 | % | |||||||||||||||
Retailing
|
21,411,980 | 48 | % | 9,335,707 | 35 | % | 12,076,273 | 129 | % | |||||||||||||||
Other
|
30,825 | 0 | % | - | 0 | % | 30,825 | n/m | ||||||||||||||||
Total
|
$ | 44,701,903 | 100 | % | $ | 26,581,826 | 100 | % | $ | 18,120,077 | 68 | % |
Comparison
of the Revenue by Segment for the Nine Months Ended September 30, 2010 and
2009
Segment
|
2010
|
Percent
of total |
2009
|
Percent
of total |
Increase (Decrease) |
Percentage
change |
||||||||||||||||||
Herbal
Planting
|
$ | 1,393,684 | 2 | % | $ | 2,337,677 | 3 | % | $ | (943,993 | ) | (40 | %) | |||||||||||
Drug
Manufacturing
|
27,580,362 | 27 | % | 18,749,960 | 27 | % | 8,830,402 | 47 | % | |||||||||||||||
Distribution
|
34,066,796 | 33 | % | 36,249,335 | 52 | % | (2,182,539 | ) | (6 | %) | ||||||||||||||
Retailing
|
38,896,195 | 38 | % | 11,852,602 | 18 | % | 27,043,593 | 228 | % | |||||||||||||||
Other
|
30,825 | 0 | % | - | 0 | % | 30,825 | n/m | ||||||||||||||||
Total
|
$ | 101,967,862 | 100 | % | $ | 69,189,574 | 100 | % | $ | 32,778,288 | 47 | % |
Comparisons
of Cost of Goods Sold and Gross Profit for the Three Months Ended September 30,
2010 and 2009
2010
|
%
of Net
Revenue |
2009
|
%
of Net
Revenue |
Increase
(Decrease) |
||||||||||||||||
Cost
of goods sold
|
$ | 31,817,412 | 71 | % | $ | 16,220,050 | $ | 61 | % | 15,597,362 | ||||||||||
Gross
profit
|
$ | 12,884,491 | 29 | % | $ | 10,361,776 | $ | 39 | % | 2,522,715 |
Comparisons
of Cost of Goods Sold and Gross Profit for the Nine Months Ended September 30,
2010 and 2009
2010
|
%
of Net
Revenue |
2009
|
%
of Net
Revenue |
Increase
(Decrease) |
||||||||||||||||
Cost
of goods sold
|
$ | 70,791,913 | 69 | % | $ | 46,865,716 | $ | 68 | % | 23,926,197 | ||||||||||
Gross
profit
|
$ | 31,175,949 | 31 | % | $ | 22,323,858 | $ | 32 | % | 8,852,091 |
Cost of Goods
Sold: Cost of goods sold reflects raw materials consumed, direct salaries
and benefits of staff engaged in the production process, and electricity and
other manufacturing and logistics costs. The cost of goods sold for the three
and nine month periods ended September 30, 2010 increased by $15.6 million and
$23.9 million, respectively, as compared to the comparable periods in 2009, due
to the revenue increases during such periods, and the adverse effect of higher
cost of products in the Retail segment.
Gross
Profit: The Company’s gross profit as a percentage of net revenue
decreased by ten percent points for the three month period and decreased by one
percent point for the nine month period ended September 30, 2010 as compared to
the same periods in 2009. The decrease in the profit margin was attributable to
price reductions resulting from price competition in the retail market and
recent government-mandated price reductions for the products included in the
national and provincial medical insurance catalogs or in the national essential
drug list. There was also an increase in product costs during the periods, in
part due to the impact of the introduction of a minimum wage in the third
quarter.
Operating
Expenses: The Company’s ability to control its operating expenses is a
key factor driving results of operations. The following table sets forth
operating expenses as a percentage of net revenue for the periods
indicated:
Three
months ended September 30,
|
||||||||||||||||||||||||
2010
|
%
of Net
Revenue |
2009
|
%
of Net
Revenue |
Increase
(Decrease)
|
Percentage
Change |
|||||||||||||||||||
Sales
and marketing expenses
|
$ | 2,139,128 | 5 | % | $ | 2,114,289 | 8 | % | $ | 24,839 | 1.2 | % | ||||||||||||
General
and administrative
|
1,770,370 | 4 | % | 1,790,376 | 7 | % | (20,006 | ) | (1.1 | )% | ||||||||||||||
Total
operating expenses
|
$ | 3,909,498 | 9 | % | $ | 3,904,665 | 15 | % | $ | 4,833 | 0.1 | % |
Nine
months ended September 30,
|
||||||||||||||||||||||||
2010
|
%
of Net
Revenue |
2009
|
%
of Net
Revenue |
Increase
(Decrease) |
Percentage
change |
|||||||||||||||||||
Sales
and marketing expenses
|
$ | 6,323,591 | 6 | % | $ | 5,256,823 | 8 | % | $ | 1,066,768 | 20 | % | ||||||||||||
General
and administrative
|
3,981,163 | 4 | % | 2,342,689 | 3 | % | 1,638,474 | 70 | % | |||||||||||||||
Total
operating expenses
|
$ | 10,304,754 | 10 | % | $ | 7,599,512 | 11.0 | % | $ | 2,705,242 | 36 | % |
Sales and
Marketing Expenses: Our sales and marketing expenses primarily consist of
salaries and benefits to our staff at our retail drug stores and distribution
centers, and rental and utility expenses of our drug stores and distribution
centers. Selling expenses also include depreciation of leasehold improvements of
our stores, distribution centers and store equipment, as well as costs
associated with organizing promotional and marketing activities. There was
little movement in sales and marketing expenses for the three month period ended
September 30, 2010. The increase of $1.07 million for the nine month period
ended September 30, 2010 was mainly due to the increase in the number of retail
stores that occurred during 2009, and continuous cost management over the period
while revenues increased.
General and
Administrative Expenses Our general and administrative expenses primarily
consist of salaries and benefits to our management and administrative personnel,
rental and utility expenses of premises used for administrative purposes,
depreciation of our administrative equipment, legal fees, accounting and other
professional services, office consumables and other expenses associated with our
administrative offices. While general and administrative expenses increased by
an insignificant amount for the three month period ended September 30, 2010 as
compared to the 2009 period, they did increase by about $1.64 million for the
nine month period ended September 30, 2010 as compared to the same period in
2009. The increases reflect the increased expenses resulting from the newly
opened drug stores, higher labor and store rentals, and corporate and
professional costs associated with becoming a public company following the
reverse merger transaction on May 7, 2009.
Comparisons
of Income from Operations the Three Months Ended September 30, 2010 and
2009
Segment
|
2010
|
Percent
of total |
2009
|
Increase
(Decrease)
|
Percent
Change |
|||||||||||||||
Herbal
Planting
|
$ | (58,333 | ) | -0.7 | % | $ | (58,485 | ) | $ | 152 | 0 | % | ||||||||
Drug
Manufacturing
|
3,287,380 | 36 | % | 1,063,407 | 2,223,973 | 209 | % | |||||||||||||
Distribution
|
2,368,197 | 26 | % | 2,781,984 | (413,787 | ) | (15 | %) | ||||||||||||
Retailing
|
3,898,244 | 43 | % | 2,936,077 | 962,167 | 33 | % | |||||||||||||
Other
|
13,674 | 0.3 | % | - |
13,674
|
n/m
|
||||||||||||||
Income
from operations before corporate costs
|
9,509,162 | 106 | % | 6,722,983 | 2,786,179 | 41 | % | |||||||||||||
Corporate
costs
|
(534,169 | ) | -6 | % | (265,872 | ) | 268,297 | 101 | % | |||||||||||
Income
from operations
|
$ | 8,974,993 | 100 | % | $ | 6,457,111 | $ | 2,517,882 | 39 | % |
Comparisons
of Income from Operations the Nine Months Ended September 30, 2010 and
2009
Segment
|
2010
|
Percent
of total
|
2009
|
Increase
(Decrease)
|
Percent
Change
|
|||||||||||||||
Herbal
Planting
|
$ | 105,949 | 1 | % | $ | 487,464 | $ | (381,515 | ) | -78 | % | |||||||||
Drug
Manufacturing
|
6,306,182 | 30 | % | 3,797,187 | 2,508,995 | 66 | % | |||||||||||||
Distribution
|
9,350,093 | 45 | % | 7,474,513 | 1,875,580 | 25 | % | |||||||||||||
Retailing
|
5,732,903 | 27 | % | 3,479,306 | 2,253,597 | 65 | % | |||||||||||||
Other
|
13,674 | 0 | % | - |
13,674
|
n/m | ||||||||||||||
Income
from operations before corporate costs
|
21,508,801 | 103 | % | 15,238,470 | 6,270,331 | 41 | % | |||||||||||||
Corporate
costs
|
(637,606 | ) | -3 | % | (514,124 | ) | 123,482 | 24 | % | |||||||||||
Income
from operations
|
$ | 20,871,195 | 100 | % | $ | 14,724,346 | $ | 6,146,849 | 42 | % |
Income
from operations of the Herbal Planting segment decreased $ 0.4 million for the
nine month period ended September 30, 2010 as compared to the same periods in
2009. This decrease resulted from the increase in the volume of our products
delivered to our own Drug Manufacturing segment, which thus caused third party
revenue to be reduced, and a decrease in the prices received for our Chinese
Magnolia Vine Fruit.
Income
from operations of the Drug Manufacturing segment increased $2.2 million and
$2.5 million for the third quarter and nine month periods ended September 30,
2010 as compared to the comparable periods in 2009. The increases were
attributable to the significant growth in sales volume due to the domestic
market expansion, PRC government-led healthcare reforms and relatively stable
costs in selling, general and administrative expenses.
Income
from operations of the Distribution segment decreased $0.4 million and increased
$1.9 million for the three and nine month periods ended September 30, 2010 as
compared to the same periods in 2009. The movements reflected the competition in
the distribution industry and the reduction in the prices charged to third party
customers in the third quarter. A series of internal control and cost management
procedures were implemented in 2010 that resulted in a significant cost
reductions and improved profit margin.
Income
from operations of the Retailing segment increased $1 million and $2.3 million
for the three and nine months ended September 30, 2010 as compared to the same
periods in 2009, reflecting the significant revenue increases of $12.1 million
and $27.0 million in the three and nine month periods partially offset by lower
gross margins as discussed above.
Net Income
Net income for the three and nine months ended September 30, 2010 increased by
$1.7 million and $4.9 million, respectively, as compared to the comparable 2009
periods. These increases reflect revenue growth, particularly from the newly
opened drug store sales, and distribution sales, and relatively stable costs in
selling, general and administrative expenses, partially offset by a lower gross
margin in retail during the three month period.
LIQUIDITY
AND CAPITAL RESOURCES
As of
September 30, 2010, cash and cash equivalents were $15,407,736 as compared to
$11,066,671 as of December 31, 2009. The components of this increase of
$4,341,065 are reflected below.
Cash
Flows:
For
the nine months ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Net
cash provided by (used in) operating activities
|
$ | (1,202,626 | ) | $ | 14,723,584 | |||
Net
cash used in investing activities
|
(1,871,909 | ) | (5,942,399 | ) | ||||
Net
cash provided by (used in) financing activities
|
4,860,830 | (11,330,836 | ) | |||||
Effect
of exchange rate changes
|
2,554,770 | 15,536 | ||||||
Net
cash inflow (outflow)
|
4,341,065 | (2,534,115 | ) | |||||
Cash,
beginning of year
|
11,066,671 | 5,869,607 | ||||||
Cash,
end of period
|
$ | 15,407,736 | $ | 3,335,492 |
Net
Cash Provided by (Used in) Operating Activities
During
the nine months ended September 30, 2010, we had negative cash flow from
operating activities of $1.2 million, largely attributable to an increase in
accounts receivable of $21 million and in
inventories of $5.4 million, partially offset by net income of $15.6 million,
and an increase in accounts payable of $8.6 million. The increases in
accounts receivable, inventories and accounts payable are primarily due to the
increased level of revenue experienced by the Company.
Net
Cash Used in Investing Activities
The level
of investing activities was greater in 2009 due largely to the setting up of the
Company’s new retail stores, and greater spending for the cultivation of
Schisandra berry trees as compared to these expenditures in 2010.
Net
Cash Provided by (Used in) Financing Activities
The cash
provided by financing activities in the nine months ended September 30, 2010
mainly reflects $7.1 million of proceeds from related parties and $2.2 million
of payments to related parties for advances received previously.
Working
capital as of September 30, 2010 was $35,029,741, compared to $17,632,831 on
December 31, 2009, reflecting an overall increase in cash and cash equivalents
of $4,341,065.
We
believe that our available funds and cash flows generated from operations will
be sufficient to meet our anticipated ongoing operating needs for the next
twelve months. However it is possible that the Company might need to raise
additional capital in order to fund the Company’s expansion plans. There can be
no guarantee that we will be able to obtain such funding, whether through the
issuance of debt or equity, on terms satisfactory to management and our Board of
Directors.
Over the
near term, we intend to focus our efforts on continued expansion within the PRC
market.
I
TEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK.
Not
applicable to small reporting companies.
ITEM 4. EVALUATION OF DISCLOSURE ON CONTROLS AND
PROCEDURES.
(a) Our
senior management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act") designed to
ensure that the information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
On May 7,
2009, we, then a public shell company, acquired CNPH in a transaction treated as
a reverse acquisition. At such time we adopted the system of disclosure controls
and procedures of CNPH as ours. Such disclosure controls and procedures were not
adequate for a public reporting company and our management began the process of
upgrading our disclosure controls and procedures.
Our chief
executive officer and chief financial officer conducted an evaluation of our
disclosure controls and procedures at the end of the period covered by this
report and determined that for the reasons set forth in our 2009 Form 10-K our
disclosure controls and procedures were not effective. We have commenced and
will continue the implementation of certain improvements intended to remediate
these deficiencies.
(b) There
have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II
OTHER
INFORMATION
ITEM
1A. RISK FACTORS.
Our
business is subject to numerous risks and uncertainties, including but not
limited to those discussed in this report and in "Risk Factors" in our
2009 Form 10-K.. Such discussion
is incorporated herein by reference.
ITEM 6. EXHIBITS
The
following exhibits are filed with this report:
31.1 Rule
13a-14(a)/15d-14(a) - Certification of Chief Executive Officer.
31.2 Rule
13a-14(a)/15d-14(a) - Certification of Chief Financial Officer
32.1
Section 1350 Certification - Chief Executive Officer.
32.2
Section 1350 Certification - Chief Financial Officer.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BIOPHARM
ASIA, INC.
|
|||
Dated:
November 19, 2010
|
By:
|
/s/
Ruiying Dong
|
|
Ruiying
Dong
Chief
Financial Officer
|