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EX-31.2 - BIOPHARM ASIA, INC.e607771_ex31-2.htm
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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
     
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
 
 
1

 
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
 
 
2

 
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
 
 
3

 
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.
 
 
4

 
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.
 
 
5

 
 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:
 
 
6

 
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.
 
 
7

 
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.
 
 
8

 
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.
 
 
9

 
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.
 
 
10

 
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
 
 
 
11

 
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.
 
 
12

 
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
 
 
 
13

 
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.
 
 
14

 
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.
 
 
15

 
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  
 
 
16

 
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  
 
 
17

 
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.
 
 
18

 
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.
 
 
19

 
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.
 
 
20

 
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  
 
 
21

 
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.
 
 
22

 
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.
 
 
23

 
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.
 
 
24

 
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.
 
 
25

 

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.
 
 
26

 
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