Attached files
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EX-23.2 - China Botanic Pharmaceutical | v203441_ex23-2.htm |
EX-23.1 - China Botanic Pharmaceutical | v203441_ex23-1.htm |
As
Filed with the Securities and Exchange Commission on December ____,
2010
Registration
No. _____
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
BOTANIC PHARMACEUTICAL INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
|
2834
|
84-1273503
|
(State or other jurisdiction of
incorporation or organization)
|
(Primary Standard Industrial
Classification Code Number)
|
(IRS Employer
Identification No.)
|
The
11th Floor, Changjiang International Building, No. 28, Changjiang Road, Nangang
District,
Harbin,
Heilongjiang Province, P.R. China 150090
86-451-8260-2162
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal
executive
offices)
American
Corporate Enterprises, Inc.
Carson
City, NV 89706
(775)
884-9380
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
|
William
N. Haddad, Esq.
|
DLA
Piper LLP (US)
|
1251
Avenue of the Americas
|
New
York, NY 10020
|
Telephone:
(212) 335-4500
|
Fax:
(212) 335-4501
|
Approximate date of commencement of
proposed sale to the public: As soon as practicable after the effective
date of this registration statement.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. ¨
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
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)
|
CALCULATION
OF REGISTRATION FEE
Title of Each Class
of Securities to Be Registered
|
Proposed Maximum
Aggregate Offering Price
(1)(2)
|
Amount of Registration Fee
|
||||||
Common
stock, par value $0.001 per share
|
$ | 10,000,000 | $ | 2,139 | ||||
TOTAL
|
$ | 10,000,000 | $ | 2,139 |
(1) Estimated
solely for the purpose of calculating the registration fee in accordance with
Rule 457(o) under the Securities Act of 1933, as amended.
(2) Excludes
shares that the underwriter has the option to purchase to cover over-allotments,
if any.
The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until the registration statement shall become effective on such date
as the Securities and Exchange Commission, acting pursuant to said Section 8(a),
may determine.
The
information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and is not
an offer to buy these securities in any state where the offer or sale is
not permitted.
|
PRELIMINARY
PROSPECTUS
|
SUBJECT
TO COMPLETION, DATED _________,
2010
|
CHINA
BOTANIC PHARMACEUTICAL INC.
$
10,000,000 OF SHARES OF COMMON
STOCK
This
is a firm commitment public offering of $ 10,000,000 shares of
our common stock. Our common stock is listed on the NYSE Amex under
the symbol “CBP.” The last reported market price of our shares of common stock
on December 3, 2010 was $2.20.
_____________________
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 17 for certain factors relating to an investment in our securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Per
Share
|
Total
|
|||||||
Public
offering price
|
$ | • | $ | • | ||||
Underwriting
discounts and commissions(1)
|
$ | • | $ | • | ||||
Proceeds
to us, before expenses
|
$ | • | $ | • |
(1)
See “Underwriting” for a description of compensation payable to the
underwriter.
We have
granted a 45 day option to •, the underwriter, to purchase up to an additional
$1,500,000 of shares of common stock from us solely to cover over-allotments, if
any, on the same terms as set forth above. If the underwriter exercises its
right to purchase all of such additional shares of common stock, we estimate
that we will receive gross proceeds of approximately $ • million from the sale
of shares being offered and net proceeds of approximately $ • million after
deducting approximately $ • million for underwriting discounts and commissions,
based on an assumed public offering price of $ • per share. The
shares issuable upon exercise of the underwriter option are identical to those
offered by this prospectus and have been registered under the registration
statement of which this prospectus forms a part.
The
underwriter expects to deliver the shares of common stock to purchasers in the
offering on or
about ,
2010.
•
The date
of this prospectus is _______, 2010
1
Renhuang
Factory
|
Ginseng
and Deer Antler Extract
|
Compound
Honeysuckle Granules
|
Siberian
Ginseng
|
2
TABLE
OF CONTENTS
Page
|
||||
Prospectus
Summary
|
5 | |||
Risk
Factors
|
15 | |||
Special
Note Regarding Forward-Looking Statements
|
31 | |||
Determination
of Offering Price
|
32 | |||
Use
of Proceeds
|
33 | |||
Capitalization
|
34 | |||
Dilution
|
35 | |||
Dividends
and Dividend Policy
|
37 | |||
Market
For Common Equity and Related Stockholder Matters
|
36 | |||
Management’s
Discussion and Analysis Of Financial Condition and Results of
Operations
|
38 | |||
Business
|
56 | |||
Our
History and Corporate Structure
|
||||
Director
and Executive Officers; Corporate Governance
|
71 | |||
Executive
Compensation
|
73 | |||
Security
Ownership of Certain Beneficial Owners and Management
|
76 | |||
Certain
Relationships and Related Party Transactions
|
78 | |||
Description
of Capital Stock
|
||||
Underwriting
|
81 | |||
Certain
Relationships and Related Transactions
|
||||
Disclosure
of Commission Position on Indemnification For Securities Act
Liability
|
89 | |||
Legal
Matters
|
89 | |||
Experts
|
89 | |||
Where
You Can Find More Information
|
91 | |||
Index
to Financial Statements
|
F-1 |
You
should rely only on the information contained or incorporated by reference to
this prospectus in deciding whether to purchase our common stock. We have not
authorized anyone to provide you with information different from that contained
or incorporated by reference to this prospectus. Under no circumstances should
the delivery to you of this prospectus or any sale made pursuant to this
prospectus create any implication that the information contained in this
prospectus is correct as of any time after the date of this prospectus. To the
extent that any facts or events arising after the date of this prospectus,
individually or in the aggregate, represent a fundamental change in the
information presented in this prospectus, this prospectus will be updated to the
extent required by law.
3
We
obtained statistical data, market data and other industry data and forecasts
used throughout this prospectus from market research, publicly available
information and industry publications. Industry publications generally state
that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy and completeness of the
information. Nevertheless, we are responsible for the accuracy and completeness
of the historical information presented in this prospectus, as of the date of
this prospectus.
4
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus and does
not contain all of the information you should consider in making your investment
decision. You should read this summary together with the more detailed
information, including our consolidated financial statements and the related
notes, elsewhere in this prospectus. You should carefully consider, among other
things, the matters discussed in “Risk Factors” beginning on page 17. In
addition, some of the statements made in this prospectus discuss future events
and developments, including our future strategy and our ability to generate
revenue, income and cash flow. These forward-looking statements involve risks
and uncertainties which could cause actual results to differ materially from
those contemplated in these forward-looking statements. See “Cautionary Note
Regarding Forward-Looking Statements.”
Unless
the context otherwise requires, the terms "we", "us", "our", and “CBP" refer to
China Botanic Pharmaceutical Inc. and its consolidated subsidiaries, which
include Harbin Renhuang Pharmaceutical Company Limited, a company incorporated
in the British Virgin Islands, and Harbin Renhuang Pharmaceutical Co., Ltd., a
company incorporated in the People’s Republic of China.
Our
Business
We are a high-tech enterprise engaged
in the development, manufacturing, and distribution of botanical products,
bio-pharmaceutical products, and traditional Chinese medicines, or TCM, in the
People’s Republic of China (“PRC” or “China”). We have three “Good Manufacturing
Practice”, or GMP, certified production facilities - Ah City natural and
biopharmaceutical plant, Dongfanghong pharmaceutical plant and Qingyang natural
extraction plant - capable of producing 18 dosage forms and over 200 different
products. Our products include, but are not limited to, botanical
anti-depression and nerve-regulation products, biopharmaceutical products, and
botanical antibiotic and traditional over-the-counter (“OTC”) Chinese
medicines. Botanical anti-depression and nerve-regulation products
account for over 50% of our revenues and we intend to strengthen our
developments in this area. We have entered into sales agency
agreements with sales agents in 19 provinces and four municipalities, through
which our products are sold to over 3,000 distributors and over 70 sales centers
across 24 provinces in China.
Our
Products
Our products mainly fall into the
following three categories: (i) botanical anti-depression & nerve-regulation
products, (ii) biopharmaceutical products, and (iii) botanical antibiotics and
traditional OTC Chinese medicines. The table below is an illustration of our
products and their main functions:
5
Product
Category
|
Product
|
Main
Functions
|
||
Botanical
anti-depression and nerve-regulation products
|
Siberian
Ginseng (Acanthopanax) Series:
Siberian
Ginseng (Acanthopanax) Tablets
Siberian
Ginseng (Acanthopanax) Syrup
Siberian
Ginseng (Acanthopanax) Extract(200g)
Siberian
Ginseng (Acanthopanax) Extract(338g) [Note: The Drug Approval Number of
Ginseng (Acanthopanax) Extract is under the name of Harbin Renhuang
Pharmaceutical Stock Co., Ltd. (“Stock Co.”), of which Mr. Shaoming Li,
our major shareholder, chairman, chief executive officer and president, is
a 50% shareholder and chairman of the board of directors.]
(1)
|
Antidepressant
properties: Regulation of nervous excitation and inhibition; calm and
inhibit spontaneous activities; improve sleep and anticonvulsant
properties
Improve
blood properties: Improve blood flow, blood lipid profile and blood
viscosity; prevent and improve cerebral thrombosis, hyperlipidemia,
hypotension (low blood pressure), coronary heart disease, diabetes,
leukopenia, and gonadotrophic dilation of blood vessels
|
||
Tianma
Series:
Tianma
Pills (sugar coated, 48 tablets)
Tianma
Pills (sugar coated, 100 tablets)
|
Dispel
coldness; relieve pain and headache caused by blood supply shortage and
blood stasis
|
|||
Compound
Yangjiao Tablets (sugar coated, 50 tablets)
|
Relieve
pain from migraines, vascular headaches, tension headaches and nervous
headaches
|
|||
Compound
Schizandra Tablets
|
Regulation
of the central nervous system. to generate body fluids and alleviate
thirst, nourish the kidneys, cure insomnia and palpitations, and is also
widely used as treatment for neurasthenia.
|
|||
Biopharmaceutical
products
|
Shark
Vital Capsules
|
Improve
the cerebral and cardiovascular oxygen supply; resist radiation; increase
white blood cells; and prevent cancer
|
||
Badger
Fat
[Note:
The Drug Approval Number of Badger Fat is under the name of Stock
Co.]
(1)
Ginseng
and Venison Extract
[Note:
The Drug Approval Number of Ginseng and Venison Extract is under the name
of Stock Co.]
(1)
|
Treatment
of burn and scald
Nourish
the blood and the kidneys, restore the body's energy and increase
endurance.
|
|||
Botanical
antibiotics and traditional OTC Chinese medicines
|
Banlangen
Granules
|
Antiviral
(anti-influenza) and broad-spectrum antibiotic
|
||
Compound
Honeysuckle Granules
|
Antiviral;
antibacterial; and anti-inflammatory
|
|||
Shengmai
Granules
|
Regulate
blood flow; strengthen heart beat; and improve the immune system and blood
quality
|
|||
Qing
Re Jie Du Oral Liquid
|
Treating
the flu, upper respiratory infections, and sore
throats
|
(1) We
have submitted applications to SFDA for the transfer of the registrations of
these three products from Stock Co. to us (without the payment of additional
consideration).
6
Industry
and Market Background
We believe that as a result of the
rapid growth of the Chinese economy, substantial increase in drug spending,
aging of the population, increase in diseases related to lifestyle, government
support in the pharmaceutical market and gradual application of the health
insurance fund, China's pharmaceutical market will have significant
potential. In particular, we believe the demand for our products in
China will increase significantly, based on the following:
Global
market condition of depression and melancholy
Depression has been recognized as a
common mental illness. According to World Health Organization (WHO) officials,
5% of the world population is suffering from depression. In 2002, the WHO
identified depression as the world’s fourth largest disease and estimated that
depression would be the second largest disease by 2020. What was unexpected was
that depression has become the world’s second largest disease (second only to
cardio-cerebral vascular disease) after only 6-7 years.
According to official statistics, about
80 million Chinese were suffering from depression at the end of 2008. But it is
estimated that the actual number of depression patients (including mild
depression patients) has reached more than 200 million. In the past several
decades, Chinese diagnostic techniques and treating solutions of depression
lagged behind western countries. Chinese people do not have adequate knowledge
of this disease. At present, only about 10% of depression patients are getting
medical care, far lagging behind world treatment rate. (Source: Analysis and
Prospect of China’s Anti-depressant Market in 2009, edited by HDCMR.com,
http://www.hdcmr.com/ Source: Medicine Economic News, dated
October 30, 2009).
Currently the eight best-selling
anti-depressants in the world are: fluoxetine, paroxetine, sertraline,
fluvoxamine, venlafaxine, mirtazapine, duloxetine and amitriptyline. Combined,
they have 80% market share in the global anti-depression market. However, they
are relatively high priced and have numerous adverse side
effects. Siberian Ginseng (Acanthopanax) products, which are
botanical medication used to treat depression and nerve-regulation, have minor
side effects and are moderate priced. Therefore we believe they have
significant market potentials.
Medical
Reform in China
The Chinese government has announced
that Renminbi 850 billion will be invested into the national health insurance
system by 2011. This plan has been approved by the State Council. The
implementation of this plan will give more than 90% of China's population basic
health insurance policies, providing better public health and medical
services.
7
On April 6, 2009, the State Council
officially promulgated Opinions of the CPC Central Committee and the State
Council on Deepening the Health Care System Reform (final version).
"The Opinions" first proposed that basic medical and health institutions will be
available to all the people as public products. By 2011, all urban and rural
residents will have been covered by this system. The reform
includes:
|
·
|
Accelerate the building of
basic medical insurance system. The basic medical insurances for
urban workers, urban residents and the new type of rural cooperative
medical care system for rural residents will cover over 90% of those
eligible within three years.
|
|
·
|
Establish national essential
medicines system. All essential medicines will be listed in the
reimbursement catalog of essential medicine for health insurance. To
ensure essential medicine quality, the government will select a number of
preferred manufacturers to be the essential medicine suppliers. The
selection criteria will include but are not limited to quality,
reputation, capacity, qualification, and
price.
|
|
·
|
Perfecting the system of
health care services at grass-roots levels. The construction of
hospitals in counties (including Chinese medicine hospitals), central
health clinics in towns and townships, health care clinics in villages in
remote regions and community-level medical and health institutions in
underdeveloped cities will be enhanced and
improved.
|
|
·
|
Promote the gradual
equalization of basic public health services. Increase in public
health services and improve the funding criteria which will bring broader
acceptance of Chinese medicine.
|
|
·
|
Promote the reform of public
hospitals. Hospital management system, operation and supervision
mechanisms will be reformed to improve service quality of medical
institutions.
|
Pursuant to the Notice Concerning
Releasing the State Medicine Catalogue for Basic Medical Insurance, Occupational
Injury Insurance and Maternity Insurance of the PRC, all medicines in the
national essential drug list are Tier A medicines in the national medical
insurance catalog; a vast majority of patients will be fully reimbursed for
medicines listed in the national essential drug list. Two of our products,
Banlangen Granules and Shengmai Granules, have been included in the national
essential drug list. We believe our company will enjoy long-term benefits from
the healthcare reform as more patients could afford our products due to such
full reimbursement. In addition, we expect to become one of China’s essential
medicine suppliers as the PRC government moves forward with its reforms in 2010
and 2011.
Our
Strategies
Our growth strategy involves maximizing
the opportunities that the developments described above bring and capturing as
much of the market share as possible in the process. To implement
this strategy we plan to:
8
|
·
|
Strengthen
the market position of Siberian Ginseng (Acanthopanax). Siberian
Ginseng (Acanthopanax) products have been widely recognized for their
benefit in the treatment of depression and nerve-regulation. We hope to
strengthen our current market share of Siberian Ginseng (Acanthopanax)
products by focusing on related R&D and launching new products into
market. In addition, we plan to enhance sales and marketing efforts to
promote the application of Siberian Ginseng (Acanthopanax) products as
alternatives to chemical medicines used to treat depression and
nerve-regulation.
|
|
·
|
Expand our
Siberian Ginseng (Acanthopanax) cultivating bases and adopt scientific
management, gradually
improving quality standards of Siberian Ginseng (Acanthopanax).
This would enable us to be the standards-maker of Siberian Ginseng
(Acanthopanax) and provide us with a competitive edge over our
competitors.
|
|
·
|
Reduce
distribution costs through use of direct
sales system: We intend to gradually switch the sales method of our
key products from the current agency system to a direct sales system. We
believe that moving to a direct sales system will reduce distribution cost
and increase our profit margins. In addition, it is expected that once
certain drugs become essential government procurement drugs, the sales of
these drugs will also be part of our direct sales
system.
|
Risks
and Challenges
An
investment in our securities involves a high degree of risk that includes risks
related to our business, the industries in which we operate, the PRC, the
ownership of our common stock and this Offering, including without limitation,
the following risks:
|
·
|
Our
products may not achieve or maintain widespread market
acceptance;
|
|
·
|
Our
future research and development projects may not be
successful;
|
|
·
|
We
face substantial competition in connection with the marketing and sale of
our products;
|
|
·
|
Our
disclosure controls and procedures and our internal control over financial
reporting were ineffective as of October 31, 2009 and July 31, 2010; if we
are unable to effectively improve and maintain such controls and
procedures, investors could lose confidence in our financial and other
reports, the price of our shares of common stock may decline, and we
may be subject to increased risks and
liabilities;
|
|
·
|
Our
chairman and CEO currently owns approximately 48% of our common stock and
has ability to prevent certain types of corporate actions to the detriment
of other stockholders;
|
|
·
|
We
have entered into, and may continue to enter into, transactions with
related parties;
|
|
·
|
We
may not be able to manage our expansion of operations
effectively;
|
|
·
|
Our
results of operations may be affected by fluctuations in availability and
price of raw materials;
|
|
·
|
Extensive
regulation of the pharmaceutical manufacturers in China could increase our
expenses resulting in reduced profits;
and
|
|
·
|
Compliance
with rules and regulations concerning corporate governance may be
costly.
|
We are
subject to a number of additional risks which you should be aware of before you
buy our common stock. The risks are discussed more fully in the
section entitled “Risk Factors” following this prospectus summary.
9
Corporate
History and Structure
We were incorporated in the State of
Nevada on August 18, 1988, originally under the corporate name of Solutions,
Incorporated. We were inactive until August 16, 1996, when we changed
our corporate name to Suarro Communications, Inc, and engaged in the business of
providing internet based business services. In 2006 we
discontinued our business operation at the time and became a non-operating
public company.
On August 28, 2006, we entered into a
Share Exchange Agreement (the “Exchange Agreement”) with Harbin Renhuang
Pharmaceutical Company Limited or Renhuang BVI, a company incorporated in the
British Virgin Islands. Pursuant to the Exchange Agreement we
acquired all of the outstanding capital stock of Renhuang BVI, and indirect
ownership of Renhuang BVI’s wholly owned subsidiary, Harbin Renhuang
Pharmaceutical Co. Ltd, or Renhuang China, which operates a pharmaceutical
development, manufacturing and distribution business through various research
and manufacturing facilities in the PRC.
The
following diagram illustrates our corporate structure as of the date of this
prospectus:
10
11
Corporate
Information
Our principal executive office is
located at The 11th Floor, Changjiang International Building, No. 28, Changjiang
Road, Nangang District, Harbin, Heilongjiang Province, P.R. China 150090. Our
telephone number at that address is 86-451-8260-2162. Our website address is
www.renhuang.com. The information on our website is not a part of this
prospectus. Our agent for service of process in the United States is
American Corporate Enterprises, Inc., Carson City, NV 89706, telephone number
(775) 884-9380.
12
OFFERING
SUMMARY
Common
stock offered
|
$
10,000,000 of
shares of common stock
|
|
Number
of shares outstanding before this offering
|
37,239,536
|
|
Number
of shares outstanding after this offering
|
•
|
|
Option
to purchase additional shares
|
We
have granted to the underwriter an option, exercisable within 45 days from
the date of this prospectus, to purchase up to an additional •
shares.
|
|
Use
of proceeds
|
We
intend to use the net proceeds from this offering for strategic
acquisitions, working capital and other general corporate purposes, as
more fully discussed in the section entitled “Use of
Proceeds”.
|
|
NYSE
Amex symbol for our common stock
|
Our
common stock is listed on the NYSE Amex under the symbol
“CBP.”
|
|
Risk
factors
|
We
are subject to a number of risks of which you should be aware before you
buy our common stock. The risks are discussed more fully in the
section entitled “Risk Factors” following this prospectus
summary.
|
The
shares of common stock to be outstanding after this offering are based on
37,239,536 shares of our common stock outstanding as of November 17, 2010 and
excludes • shares of our common stock underlying the underwriter’s option to
purchase additional shares and • shares of our common stock reserved for
issuance pursuant to outstanding warrants and options to purchase our stock as
of •, 2010, with a weighted average exercise price of $ • per
share.
13
SUMMARY
FINANCIAL INFORMATION
The table
below presents our historical selected consolidated financial data for the
six-month periods ended July 31, 2010 and 2009, derived from our unaudited
consolidated financial statements included elsewhere in this prospectus, and for
the two years ended October 31, 2009 and 2008, derived from our audited
consolidated financial statements included elsewhere in this prospectus.
Historical results are not necessarily indicative of the results that may be
expected for any future period. When you read this historical selected financial
data, it is important that you read along with it the appropriate historical
consolidated financial statements and related notes and “Management's Discussion
and Analysis of Financial Condition and Results of Operations” included
elsewhere in this prospectus.
Nine Months
Ended
July
31,
|
Fiscal
Year Ended
October
31,
|
|||||||||||||||
(in
$thousands)
|
2010
|
2009
|
2009
|
2008
|
||||||||||||
(Unaudited)
|
||||||||||||||||
Statements
of Operations Data
|
||||||||||||||||
Revenue
|
$ | 38,489 | $ | $28,915 | $ | 43,411 | $ | 34,475 | ||||||||
Cost
of Revenue
|
18,151 | $ | 13,826 | $ | 20,311 | $ | 15,981 | |||||||||
Gross
Profit
|
20,338 | 15,089 | $ | 23,100 | $ | 18,494 | ||||||||||
Operating
Expenses
|
||||||||||||||||
Research
and development
|
2,252 | 1,833 | $ | 2,529 | $ | 2,125 | ||||||||||
Selling
expenses
|
3,689 | 2,535 | $ | 3,650 | $ | 3,318 | ||||||||||
General
and administrative expenses
|
2,209 | 1,712 | $ | 2,117 | $ | 2,878 | ||||||||||
Income
From Operations
|
12,188 | 9,009 | $ | 14,847 | $ | 10,291 | ||||||||||
Other
Income (Expense), Net
|
49 | 31 | $ | 43 | $ | 118 | ||||||||||
Income
(Loss) Before Taxes
|
12,237 | 9,040 | ||||||||||||||
Provision
For Income Taxes
|
- | - | ||||||||||||||
Net
Income (Loss)
|
$ | 12,237 | $ | 9,040 | $ | 14,847 | $ | 10,291 | ||||||||
Other
Comprehensive Income
|
||||||||||||||||
Foreign
currency translation adjustment
|
302 | (80 | ) | $ | 66 | $ | 2,392 | |||||||||
Comprehensive
Income
|
12,539 | 8,960 | $ | 14,913 | $ | 12,683 | ||||||||||
Earnings
Per Common Share Data
|
||||||||||||||||
Basic
|
$ | 0.33 | $ | 0.26 | $ | 0.41 | $ | 0.29 | ||||||||
Diluted
|
$ | 0.32 | $ | 0.26 | $ | 0.41 | $ | 0.29 |
The
following table presents consolidated balance sheet data as of July 31, 2010 (i)
on an actual basis and (ii) on a pro forma basis to reflect the sale of • shares
of common stock in this offering by us at an assumed public offering price of $
• per share, after deducting underwriting discounts and commissions and
estimated offering expenses.
July 31, 2010
|
||||||||
Actual
|
As Adjusted
|
|||||||
Balance
Sheet Data:
|
||||||||
Cash
and Cash Equivalents
|
$ | 28,749 | $ | |||||
Working
Capital
|
$ | 42,265 | $ | |||||
Total
Assets
|
$ | 65,545 | $ | |||||
Total
Liabilities
|
$ | 2,493 | $ |
14
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision with regard to our securities. The statements contained in or
incorporated into this offering that are not historic facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by
forward-looking statements. If any of the following risks actually occurs, our
business, financial condition or results of operations could be harmed. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment.
Risks
Related to our Business
Our
products may not achieve or maintain widespread market acceptance.
Success of our products is highly
dependent on market acceptance. We believe that market acceptance of
our products will depend on many factors, including:
|
·
|
the
perceived advantages of our products over competing products and the
availability and success of competing
products;
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·
|
the
brand effect of our products and channel
loyalty;
|
|
·
|
the
effectiveness of our sales and marketing
efforts;
|
|
·
|
the
pricing and cost effectiveness of our
products;
|
|
·
|
the
efficacy of our products and the prevalence and severity of adverse side
effects, if any; and
|
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·
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publicity
concerning our products, product candidates or competing
products.
|
If our products fail to achieve or
maintain market acceptance, or if new products are introduced by others that are
more favorably received than our products, are more cost effective or otherwise
render our products obsolete, or if our competitors spend much more in sales and
marketing efforts than we do, we may experience a decline in the demand for our
products. If we are unable to market and sell our products successfully, our
business, financial condition, results of operation and future growth would be
adversely affected.
Our
future research and development projects may not be successful.
The successful development of
pharmaceutical products can be affected by many factors. Products that appear to
be promising at their early phases of research and development may fail to be
commercialized for various reasons, including the failure to obtain the
necessary regulatory approvals. In addition, the research and development cycle
for new products for which we may obtain an approval certificate is
long.
There is no assurance that all of our
future research and development projects will be successful or completed within
the anticipated time frame or budget or that we will receive the necessary
approvals from relevant authorities for the production of these newly developed
products, or that these newly developed products will achieve commercial
success. Even if such products can be successfully commercialized, they may not
achieve the level of market acceptance that we expect.
15
We
face substantial competition in connection with the marketing and sale of our
products.
Our products compete with products with
similar medical efficacy in similar market areas. Some of our competitors are
well established and may have greater financial, marketing, personnel and other
resources. The pharmaceutical industry is also characterized by the frequent
introduction of new products. We may be unable to compete successfully or our
competitors may develop products which have greater medical efficacy or gain
wider market acceptance than ours.
Our
disclosure controls and procedures and our internal control over financial
reporting were ineffective as of October 31, 2009 and July 31, 2010; if we are
unable to effectively improve and maintain such controls and procedures,
investors could lose confidence in our financial and other reports, the price of
our shares of common stock may decline, and we may be subject to increased risks
and liabilities.
As a public company, we are subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended,
and the Sarbanes-Oxley Act of 2002. The Securities Exchange Act requires, among
other things, that we file annual, quarterly and current reports with respect to
our business and financial condition. Section 404 of the Sarbanes-Oxley Act
requires, among other things, that we include a report of our management on our
internal control over financial reporting. We are also required to
include quarterly reports and certifications of our management regarding the
effectiveness of our disclosure controls and procedures. Our
management has concluded that our disclosure controls and procedures and
internal control over financial reporting was not effective as of October 31,
2009 and July 31, 2010. If we cannot effectively and efficiently improve our
controls and procedures, we could suffer material misstatements in our financial
statements and other information we report and fail to meet our reporting
obligations, which would likely cause investors to lose confidence in our
reported financial and other information. This could lead to a decline in the
trading price of our shares of common stock. Additionally, ineffective internal
control over financial reporting could expose us to increased risk of fraud or
misuse of corporate assets and subject us to potential delisting from NYSE Amex,
regulatory investigations and civil or criminal sanctions.
Our
chairman, chief executive officer and president currently owns approximately 48%
of our common stock and has the ability to prevent certain types of corporate
actions, to the detriment of other stockholders.
Mr. Li Shaoming, our chairman, chief
executive officer and president, owns 17,850,000 shares of our common stock,
which represents approximately 48% of our outstanding shares of common stock.
Mr. Li is able to exercise significant influence over all matters requiring
stockholder approval, including the election of a majority of the directors and
determination of significant corporate actions. This concentration of ownership
could also have the effect of delaying or preventing a change in control that
could otherwise be beneficial to our stockholders.
We
have entered into and may continue to enter into transactions with related
parties.
We have entered into, and may continue
to enter into, transactions with our related parties, including without
limitation Heilongjiang Renhuang Pharmaceutical Limited and Harbin Renhuang
Pharmaceutical Stock Co., Ltd. (“Stock Co.”), during the normal course of our
business or otherwise. Mr. Shaoming Li, a major shareholder of ours
and our chairman, chief executive officer and president, is a major shareholder
of Heilongjiang Renhuang Pharmaceutical Limited and chairman of the board of
directors and 50% shareholder of Stock Co. Among others, in 2009, we
entered into purchase agreements with Stock Co. to acquire certain real property
and intellectual property for a total consideration of $23,472,000 and
$2.347,200, respectively. The purchase prices were based on appraisal
reports issued by an independent third party appraisal firm. Although
we believe that the transactions we have entered into with Heilongjiang Renhuang
Pharmaceutical Limited and Stock Co. are, on the whole, no more favorable, and
no less favorable, than those available from unaffiliated third parties, there
were no independent directors on our board at those times to approve such
transactions. As such, the transactions were approved by only Mr. Shaoming Li in
his capacity as our sole director. See “Certain Relationships and Related Party
Transactions.” We may continue to enter into transactions with Heilongjiang
Renhuang Pharmaceutical Limited and Stock Co. in the future.
16
We
may not be able to manage our expansion of operations effectively.
We anticipate significant continued
expansion of our business to address growth in demand for our products, as well
as to capture new market opportunities. To manage the potential growth of our
operations, we will be required to improve our operational and financial
systems, procedures and controls, increase manufacturing capacity and output,
expand, train and manage our growing employee base, and continuously increase
our promotion budget. Furthermore, we need to maintain and expand our
relationships with our customers, suppliers and other third
parties. In addition, the success of our growth strategy depends on a
number of internal and external factors, such as the expected growth of the
pharmaceutical market in China and the competition from other pharmaceutical
companies. If we are unable to manage our growth effectively, we may not be able
to take advantage of market opportunities, execute our business strategies or
respond to competitive pressures.
Our
future liquidity needs are uncertain and we may need to raise additional funds
in the future.
We may, from time to time, need to
raise funds as part of our business operations, such as to devote financial
resources to research and development of projects that we believe to have
significant commercialization potential, and the acquisition or construction of
manufacturing facilities. We cannot assure you that our revenues will
be sufficient to meet our operational needs and capital requirements. If we need
to obtain external financing, we cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all. Our future
liquidity needs and other business reasons could require us to sell additional
equity or debt securities or obtain a credit facility. The sale of additional
equity or equity-linked securities could result in additional dilution to our
shareholders. The incurrence of additional indebtedness would result in
increased debt service obligations and could result in operating and financing
covenants that would restrict our operations.
The
retail prices of certain of our products are subject to control, including
periodic adjustment, by PRC government authorities.
Certain of our pharmaceutical products,
primarily those included in the national and provincial Medical Insurance
Catalogs, are subject to price controls in the form of fixed retail prices or
retail price ceilings. As such, the retail prices for certain of our
pharmaceutical products can be adjusted downward or upward from time to
time. If the retail prices of our products are reduced by the
government, our business or results of operations may be adversely
affected.
Currently, of our products, Siberian
Ginseng Tablets, Compound Yangjiao Tablets, Tianman Pills, Banlangen Granules,
Qing Re Jie Du Oral Liquid, Compound Honeysuckle Granules and Shengmai Granules,
are subject to such price controls. These seven products accounted for 88.9% of
our total sales in fiscal year 2009.
Our
results of operations may be affected by fluctuations in availability and price
of raw materials.
The raw materials we use are subject to
price fluctuations due to various factors beyond our control, including, among
other pertinent factors:
17
· increasing
market demand;
· inflation;
· severe
climatic and environmental conditions;
· seasonal
factors, and
· changes
in governmental regulations and programs.
Changes to our raw materials prices may
result in increases in production and packaging costs, and we may be unable to
raise the prices of our products to offset the increased costs in the short-term
or at all. As a result, our results of operations may be materially and
adversely affected.
Extensive
regulation of the pharmaceutical manufacturers industry in China could increase
our expenses resulting in reduced profits
We are subject to extensive regulation
by various governmental authorities in jurisdictions in which our products are
manufactured or sold, regarding the processing, packaging, storage, distribution
and labeling of our products. Our processing facilities and products
are subject to periodic inspection by national, provincial and local
authorities. We believe that we are currently in substantial compliance with all
material governmental laws and regulations and maintain all permits and licenses
relating to our operations.
Clinical
trials are expensive, time-consuming and difficult to design and
implement.
Clinical trials are expensive and
difficult to design and implement, in part because they are subject to rigorous
regulatory requirements. The clinical trial process is also time consuming,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials. The commencement and
completion of clinical trials may be delayed by several factors,
including:
· unforeseen
safety issues;
· determination
of dosing issues;
· lack
of effectiveness during clinical trials;
· slower
than expected rates of patient recruitment;
· inability
to monitor patients adequately during or after treatment; and
· inability
or unwillingness of medical investigators to follow our clinical
protocols
In addition, we (or SFDA), may suspend
our clinical trials at any time if it appears that we are exposing participants
to unacceptable health risks or if the regulatory bodies find serious
deficiencies in our investigational new drug, submissions or the conduct of
these trials. Therefore, we cannot predict with any certainty the schedule for
future clinical trials.
The
results of our clinical trials may not support our product candidate
claims.
Even if our clinical trials are
completed as planned, we cannot be certain that their results will support our
product candidate claims. Success in pre-clinical testing and early clinical
trials does not ensure that later clinical trials will be successful, and we
cannot be sure that the results of later clinical trials will replicate the
results of prior clinical trials and pre-clinical testing. The clinical trial
process may fail to demonstrate that our product candidates are safe for humans
and effective for indicated uses. This failure would cause us to abandon a
product candidate and may delay development of other product
candidates.
18
Physicians,
patients and other end consumer may abandon existing drugs or choose not to
accept and use our new drugs.
Physicians and patients may not accept
and use our products. Acceptance and use of our products will depend upon a
number of factors including:
|
·
|
perceptions
by members of the health care community, including physicians, about the
safety and effectiveness of our
products;
|
·
|
cost-effectiveness
of our products relative to competing products;
and
|
·
|
effectiveness
of marketing and distribution efforts by us and distributors, if
any.
|
Because we expect sales of our current
and future products to generate substantially all of our product revenues for
the foreseeable future, the failure to find market acceptance would materially
harm our business and results of operations.
Our
drug-development program depends upon third-party research scientists who are
not subject to our control.
We depend upon independent
investigators and collaborators, such as universities and medical institutions,
to conduct our pre-clinical and clinical trials under agreements with us. These
collaborators are not our employees and we cannot control the amount or timing
of resources that they devote to our programs. These investigators may not
assign as great a priority to our programs or pursue them as diligently as we
would if we were undertaking such programs ourselves. If outside collaborators
fail to devote sufficient time and resources to our drug-development programs,
or if their performance is substandard, the approval of our applications, and
our introduction of new drugs, will be delayed. These collaborators may also
have relationships with other commercial entities, some of which may compete
with us. If our collaborators assist our competitors at our expense, our
competitive position and business could be materially and adversely
affected.
If
we cannot compete successfully for market share against other similar product
oriented companies, we may not achieve sufficient product revenues and our
business will suffer.
The market for our product candidates
is characterized by intense competition and rapid technological advances. We
will compete with a number of existing and future drugs and therapies developed,
manufactured and marketed by others. Existing or future competing products may
provide greater therapeutic convenience or clinical or other benefits for a
specific indication than our products, or may offer comparable performance at a
lower cost. If our products fail to capture and maintain market share, we may
not achieve sufficient product revenues and our business will
suffer.
We will compete against fully
integrated pharmaceutical companies and smaller companies that are collaborating
with larger pharmaceutical companies, academic institutions, government agencies
and other public and private research organizations. Many of these competitors,
either alone or together with their collaborative partners, operate larger
research and development programs or have substantially greater financial
resources than we do, as well as significantly greater experience
in:
· developing
drugs;
· undertaking
pre-clinical testing and human clinical trials;
19
· obtaining
regulatory approvals of drugs;
· formulating
and manufacturing drugs; and
· launching,
marketing and selling drugs.
Developments
by competitors may render our products or technologies obsolete or
non-competitive.
The biotechnology and pharmaceutical
industries are intensely competitive and subject to rapid and significant
technological changes. A large number of companies are pursuing the development
of pharmaceuticals that target the same diseases and conditions that we are
targeting. We face competition from pharmaceutical and biotechnology companies
in China and other countries. In addition, companies pursuing different but
related fields represent substantial competition. Many of these organizations
competing with us have substantially greater capital resources, larger research
and development staffs and facilities, longer drug development history in
obtaining regulatory approvals and greater manufacturing and marketing
capabilities than we do. These organizations also compete with us to attract
qualified personnel and parties for acquisitions, joint ventures or other
collaborations.
We
have limited patent protection and are subject to substantial
competition.
We only have two patented production
techniques, Injection Preparation Method against Hepatitis B (Patent
No.: ZL200410043718.5) and Total Alkaloids of Sophora Flavescens Extraction
Method (Patent No.: ZL200410043717.0). Many pharmaceutical companies compete in
the same market segment with similar products or products having comparable
medicinal applications or therapeutic effects which may be used as direct
substitutes for our products. As a result of the lack of patent
protection, competitors with potential substitutes could launch similar products
in the market with their prices analogous to or lower than those manufactured
and sold by us. Further, the lack of patent protection could also
attract an even greater number of competitors who believe they can develop
products that are substantially similar to ours at a lower cost.
If
we fail to obtain or maintain applicable regulatory clearances or approvals for
our products, or if such clearances or approvals are delayed, we will be unable
to distribute our products in a timely manner, or at all, which could
significantly disrupt our business and materially and adversely affect our sales
and profitability.
The sale and marketing of our products
are subject to regulation in the PRC and in most other countries where we intend
to conduct business. For a significant portion of our products, we need to
obtain and renew licenses and registrations with the PRC State Food and Drug
Administration, or SFDA, and its equivalent in other markets. The processes for
obtaining regulatory clearances or approvals can be lengthy and expensive, and
the results are unpredictable. Our PRC subsidiary is in the process of renewing
the approval registrations for its products and medicines that are currently in
production. Such applications have been accepted by SFDA and our PRC subsidiary
is allowed by SFDA to continue to use the current drug approval numbers to
manufacture its products and medicines during the application period. If we are
unable to obtain clearances or approvals needed to market existing or new
products, or obtain such clearances or approvals in a timely fashion, our
business could be significantly disrupted and our sales and profitability could
be materially and adversely affected.
20
In addition, our PRC subsidiary is
producing three products which are registered under the name of Stock Co.
pursuant to the agreements between Stock Co. and our PRC subsidiary related to
the free use of drug approval numbers. We have submitted applications to SFDA
for the transfer of the registrations of these three products from Stock Co. to
us (without the payment of additional consideration), but there is no assurance
when the transfer will be completed. Before the transfer is
completed, such arrangement made by our PRC subsidiary may be deemed as
producing these three products without obtaining required drug approvals, which
may result in administrative penalties including confiscation of the inventories
of these three products, confiscation of the gains arising from the
manufacturing of these three products, fines, suspension of the operation and/or
revocation of the Drug Production Permit of our PRC subsidiary.
In particular, as we enter foreign
markets, we lack the experience and familiarity with both the regulators and the
regulatory systems, which could make the process more difficult, more costly,
more time consuming and less likely to succeed.
We
have limited insurance coverage and may incur losses resulting from product
liability claims or business interruptions.
The nature of our business exposes us
to the risk of product liability claims that is inherent in the research and
development, manufacturing and marketing of pharmaceutical
products. These risks are greater for our products that receive
regulatory approval for commercial sale. Even if a product were approved for
commercial use by an appropriate governmental agency, there can be no assurance
that users will not claim effects other than those intended resulted from the
use of our products. While to date no material claim for personal injury
resulting from allegedly defective products has been brought against us, a
substantial claim or a substantial number of claims, if successful, could have a
material adverse impact on our business, financial condition and results of
operations.
Compliance
with rules and regulations concerning corporate governance may be costly, which
could harm our business.
We will continue to incur significant
legal, accounting and other expenses to comply with regulatory requirements. The
Sarbanes-Oxley Act of 2002, together with rules implemented by the Securities
and Exchange Commission has required and will require us to make changes in our
corporate governance, public disclosure and compliance practices. In addition,
we have incurred significant costs and will continue to incur costs in
connection with ensuring that we are in compliance with rules promulgated by the
Securities and Exchange Commission regarding internal controls over financial
reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. Compliance
with these rules and regulations has increased our legal and financial
compliance costs, which have had, and may continue to have, an adverse effect on
our profitability.
We
are unable to assure that all of the distributors and sales centers which are
selling our products have obtained the medicine supply approvals and meet the
Good Supply Practice standards.
A distributor of pharmaceutical
products in China must obtain pharmaceutical distribution permit from the
competent provincial or local SFDA branch. Furthermore, SFDA applies Good Supply
Practice standards, or GSP standards, to all pharmaceutical wholesale and retail
distributors to ensure quality of drug distribution in China.
We believe that our PRC subsidiary does
not need to apply for the pharmaceutical distribution permit or GSP
certification because our PRC subsidiary does not engage in the wholesale or
retail of pharmaceutical manufacturer’s medicines. Instead, we have entered into
sales agency agreements with sales agents in 19 provinces and four
municipalities, through which our products are sold to over 3,000 distributors
and over 70 sales centers in China. Such distributors need to obtain the
pharmaceutical distribution permit and GSP certification to sell our products.
We are unable to assure that all of the distributors and sales centers which are
selling our products have obtained the medicine supply approvals and meet the
Good Supply Practice standards.
21
We
have a limited operating history and limited historical financial information
upon which you may evaluate our performance.
We began our operations in 2006 and
continue to face risks in a growth industry. We may not successfully address
these risks and uncertainties or successfully implement our operating
strategies. If we fail to do so, it could materially harm our business to the
point of having to cease operations and could impair the value of our common
stock to the point investors may lose their entire investment. Even if we
accomplish these objectives, we may not generate positive cash flows or the
profits we anticipate in the future.
We rely on key executive officers and
their knowledge of our business and technical expertise would be difficult to
replace.
Our success is dependent, to a large
extent, on our ability to retain the services of our executive management, who
have contributed to our growth and expansion to date. Our chairman, chief
executive officer and president, Mr. Shaoming Li, has been, and will continue to
be, instrumental to our success. Accordingly, the loss of his services, without
suitable replacements, will have an adverse effect on our business generally,
operating results and future prospects. We have not entered into an employment
agreement with Mr. Li.
In addition, the loss of the technical
knowledge and management and industry expertise of any of our key personnel
could result in delays in product development, loss of customers and sales and
diversion of management resources, which could adversely affect our operating
results.
Our
holding company structure may hinder the payment of dividends.
CBP has no direct business operations,
other than its ownership of our subsidiaries. While we have no current intention
of paying dividends, should we decide in the future to do so, as a holding
company, our ability to pay dividends and meet other obligations depends upon
the receipt of dividends or other payments from our operating subsidiaries and
other holdings and investments. In addition, our operating subsidiaries, from
time to time, may be subject to restrictions on their ability to make
distributions to us due to restrictive covenants in agreements, restrictions on
the conversion of local currency into U.S. dollars or other hard currency and
other regulatory restrictions applicable to our subsidiaries. If future
dividends are paid in Renminbi, fluctuations in the exchange rate for the
conversion of Renminbi into U.S. dollars may reduce the amount received by U.S.
stockholders upon conversion of the dividend payment into U.S.
dollars.
Risks
Related to Doing Business in China
Our
manufacturing plants are located in China and our pharmaceutical and medical
products production, sale and distribution are subject to Chinese
regulation.
Economic reforms adopted by the Chinese
government have had a positive effect on the economic development of the
country, but the government could change these economic reforms or any of the
legal systems at any time. This could either benefit or damage our operations
and profitability. Some changes that could have this effect are: (i) level of
government involvement in the economy; (ii) control of foreign exchange; (iii)
methods of allocating resources; (iv) balance of payment positions; (v)
international trade restrictions; and (vi) international conflict. Additionally,
as a manufacturer of pharmaceutical and medical products located in China, we
are a state-licensed company and facility and subject to Chinese regulations and
laws. The Chinese government has been active in regulating the pharmaceutical
industry. If we were to lose our state-licensed status we would no longer be
able to manufacture pharmaceuticals in China, which is our sole
operation.
22
We
depend upon governmental laws and regulations that may be changed in ways that
will harm our business.
Our business and products are subject
to government regulations mandating the manufacturing of pharmaceuticals in
China and other countries. Changes in the laws or regulations in China, or other
countries we sell into, that govern or apply to our operations could have a
materially adverse effect on our business. For example, the law could change so
as to prohibit the use of certain pharmaceuticals. If one of our pharmaceuticals
or medical products is prohibited, this change would reduce our productivity of
that product.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
China only recently has permitted
provincial and local economic autonomy and private economic activities. The
Chinese government has exercised and continues to exercise substantial control
over virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws
and regulations, including those relating to taxation, import and export
tariffs, pharmaceutical regulations, and other matters. We believe that our
operations in China are in material compliance with all applicable legal and
regulatory requirements. However, the central or local governments of these
jurisdictions may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations.
Accordingly, government actions in the
future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in Chinese
properties or joint ventures.
The
Chinese legal system may have inherent uncertainties that could materially and
adversely impact our ability to enforce the agreements governing our
operations.
We are subject to oversight at the
provincial and local levels of government. Our operations and prospects would be
materially and adversely affected by the failure of the local government to
honor our agreements or an adverse change in the laws governing them. In the
event of a dispute, enforcement of these agreements could be difficult in China.
China tends to issue legislation, which is followed by implementing regulations,
interpretations and guidelines that can render immediate compliance difficult.
Similarly, on occasion, conflicts arise between national legislation and
implementation by the provinces that take time to reconcile. These factors can
present difficulties in our ability to achieve compliance. Unlike the United
States, China has a civil law system based on written statutes in which judicial
decisions have limited precedential value. The Chinese government has enacted
laws and regulations to deal with economic matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, our experience in interpreting and enforcing our rights under these
laws and regulations is limited, and our future ability to enforce commercial
claims or to resolve commercial disputes in China is therefore unpredictable.
These matters may be subject to the exercise of considerable discretion by
agencies of the Chinese government, and forces and factors unrelated to the
legal merits of a particular matter or dispute may influence their
determination.
23
It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.
Substantially all of our assets will be
located outside of the United States and most of our officers and directors will
reside outside of the United States. As a result, it may not be possible for
United States investors to enforce their legal rights, to effect service of
process upon our directors or officers or to enforce judgments of United States
courts predicated upon civil liabilities and criminal penalties of our directors
and officers under Federal securities laws of the United States. Moreover, we
have been advised that the PRC does not have treaties providing for the
reciprocal recognition and enforcement of judgments of courts with the United
States. Further, it is unclear if extradition treaties now in effect between the
United States and the PRC would permit effective enforcement of criminal
penalties of the Federal securities laws of the United States.
National,
provincial and local governments have established many regulations governing our
business operations.
We are also subject to numerous
national, provincial and local governmental regulations, including
environmental, labor, waste management, health and safety matters and product
specifications and regulatory approvals from healthcare agencies. We are subject
to laws and regulations governing our relationship with our employees including:
wage requirements, limitations on hours worked, working and safety conditions,
citizenship requirements, work permits and travel restrictions. These local
labor laws and regulations may require substantial resources for
compliance. Our PRC subsidiary may not fully contribute the social
insurance and housing fund for the employees and the failure to do so may result
in penalties and fines from PRC labor administration authorities at the
provincial and local level. We are also subject to significant
government regulation with regard to property ownership and use in connection
with our facilities in the PRC, import restrictions, currency restrictions and
restrictions on the volume of domestic sales and other areas of regulation.
These regulations can limit our ability to react to market pressures in a timely
or effective way, thus causing us to lose business or miss opportunities to
expand our business.
We
have not sought prior approval of the China Securities Regulatory Commission, or
CSRC for the offering of new stocks.
On August
8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the
State Assets Supervision and Administration Commission, the State Administration
for Taxation, the State Administration for Industry and Commerce, the CSRC and
the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, which became effective on September 8, 2006
(the “New M&A Rules”). This regulation, among other things, includes
provisions that purport to require that an offshore special purpose vehicle
formed for the purposes of overseas listing of equity interests in PRC companies
and controlled directly or indirectly by PRC companies or individuals obtain the
approval of the CSRC prior to the listing and trading of such special purpose
vehicle’s securities on an overseas stock exchange. On September 21, 2006, the
CSRC published on its official website procedures regarding its approval of
overseas listings by special purpose vehicles. The CSRC approval procedures
require the filing of a number of documents with the CSRC and it would take
several months to complete the approval process, if practicable at all. The
application of this new PRC regulation remains unclear with no consensus
currently existing among PRC law firms regarding the scope of the applicability
of the CSRC approval requirement.
24
Based on
our understanding of the current PRC laws and regulations as well as the
procedures announced on September 21, 2006: because we had acquired 100% equity
interests of our PRC subsidiary through offshore special purpose vehicle prior
to the effective date of New M&A Rules, i.e. September 8, 2006,, the New
M&A Rules shall not be applicable to us and we are not required to apply for
the CSRC approval for the offering of our stocks. However, we cannot assure that
the relevant PRC government agency, including the CSRC, would reach the same
conclusion. If CSRC approval is required but not obtained, we may face
regulatory actions or other sanctions from the CSRC or other PRC regulatory
agencies. Any uncertainties and/or negative publicity regarding this CSRC
approval requirement could have a material adverse effect on the trading price
of our stocks.
PRC
regulation of loans and direct investment by offshore holding companies to PRC
entities may delay or prevent us from using the proceeds of this offering to
make loans or additional capital contributions to our PRC subsidiary, which
could materially and adversely affect our liquidity and our ability to fund and
expand our business.
In
utilizing the proceeds of this offering in the manner described in “Use of
Proceeds,” as an offshore holding company, we may make loans or additional
capital contribution to our PRC subsidiary. Loans and capital contribution by us
to our PRC subsidiary to finance its activities cannot exceed statutory limits
and must be registered with the SAFE. On August 29, 2008, SAFE promulgated
Circular 142, a notice regulating the conversion by a foreign-invested company
of foreign currency into RMB by restricting how the converted RMB may be used
(“Circular 142”). This Circular 142 requires that RMB converted from the foreign
currency-denominated capital of a foreign-invested company may only be used for
purposes within the business scope approved by the applicable governmental
authority and may not be used for equity investments within the PRC unless
specifically provided for otherwise. The foreign currency-denominated capital
shall be verified by an accounting firm before converting into RMB. In addition,
SAFE strengthened its oversight over the flow and use of RMB funds converted
from the foreign currency-denominated capital of a foreign-invested company. To
convert such capital into RMB, our PRC subsidiary must report the use of such
RMB to the bank, and the RMB must be used for the reported purposes. According
to Circular 142, change of the use of such RMB without approval is prohibited.
In addition, such RMB may not be used to repay RMB loans if the proceeds of such
loans have not yet been used. Violations of Circular 142 may result in penalties
and fines as set forth in the Foreign Exchange Administration Rules of the
PRC.
The
PRC currency is not a freely convertible currency and fluctuations in the
exchange rate between the PRC currency and the U.S. dollar could adversely
affect our operating results.
The PRC currency, the “Renminbi” or
“RMB,” is not a freely convertible currency. We rely on the PRC government’s
foreign currency conversion policies, which may change at any time, in regard to
our currency exchange needs. This substantial regulation by the PRC government
of foreign currency exchange may restrict our business operations and a change
in any of these government policies could negatively impact our operations,
which could result in a loss of profits.
The functional currency of our
operations in China is the Renminbi. However, results of our operations are
translated at average exchange rates into U.S. dollars for purposes of reporting
results. As a result, fluctuations in exchange rates may adversely affect our
expenses and results of operations as well as the value of our assets and
liabilities. Fluctuations may adversely affect the comparability of
period-to-period results. We do not currently use hedging techniques, and any
hedging techniques which we may use in the future, may not be able to eliminate
and may exacerbate the effects of currency fluctuations. Thus, exchange rate
fluctuations could cause our profits, and therefore our stock prices, to
decline.
25
We
are subject to various tax regimes, which may adversely affect our profitability
and tax liabilities in the future.
CBP is
incorporated in the U.S. and has subsidiaries and other operations in the PRC
and the British Virgin Islands. We will be subject to the tax regimes of these
countries. Although virtually all of CBP’s profits will be earned outside of the
U.S., under U.S. tax laws CBP’s earnings generally will be subject to U.S.
taxation, because U.S. companies are generally taxed on their world-wide income.
This may be true even if CBP does not repatriate any of its foreign earnings to
the U.S. For certain types of income (generally, income from an active trade or
business), U.S. companies are not required to pay tax on that income until they
repatriate those earnings to the U.S. (such as for use in paying dividends or
repurchasing shares). As a result, repatriation of earnings would trigger more
immediate tax obligations. As a result of the imposition of U.S. taxes, CBP’s
after-tax profits could decrease and could be below the level that would have
been obtained if CBP were incorporated outside the U.S. The amount of taxes
payable in the U.S. generally depends on the profitability of our various
operations and the application of available tax credits and tax treaties. We are
not currently receiving the benefit of any U.S. tax credit, and we are not
currently conducting a material amount of business in a country with an
advantageous tax treaty. Since the effect of tax credits and tax treaties
depends on the profitability of operations in various jurisdictions, the amount
of our tax will vary over time as we change the geographic scope of our
activities. However, for the near term we expect that our total tax rate will be
significantly influenced by the taxes we pay in China, so that our total tax
obligation might decrease as a result of favorable tax treatment in China even
though we were subject to additional U.S. taxes. In the future, CBP may pay
significantly higher taxes than we have paid historically. In addition, any
change in tax laws and regulations or the interpretation or application thereof,
either internally in one of those jurisdictions or as between those
jurisdictions, may adversely affect CBP’s profitability and tax liabilities in
the future.
For the
fiscal years of 2010, 2009 and 2008, our PRC subsidiary was granted by the
national tax office of Ah City a tax holiday and was fully exempt from the 25%
enterprise income tax. This tax holiday was granted, without a statutory basis
at the national level, by the governmental authorities of Ah City for the
purposes of promoting local economic development. As a result, this
tax holiday may be terminated and our PRC subsidiary may be subject to the 25%
enterprise income tax upon the termination of the tax holiday. In extreme cases, our
PRC subsidiary may be required to pay all enterprise income taxes that have been
exempted under such tax holiday granted by the local authority.
Because
Chinese law will govern almost all of our material agreements, we may not be
able to enforce our legal rights internationally, which could result in a
significant loss of business, business opportunities, or capital.
Chinese
law will govern almost all of our material agreements. We cannot assure you that
we will be able to enforce any of our material agreements or that remedies will
be available outside of the PRC. The system of laws and the enforcement of
existing laws in the PRC may not be as certain in implementation and
interpretation as in the United States. The Chinese judiciary is relatively
inexperienced in enforcing corporate and commercial law, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. The
inability to enforce or obtain a remedy under any of our future agreements could
result in a significant loss of business, business opportunities or
capital.
26
Risks
Related to our Securities
The
market price of our shares is subject to significant price and volume
fluctuations.
The price
of our common shares may be subject to wide fluctuations due to variations in
our operating results, news announcements, our limited trading volume, general
market trends both domestically and internationally, currency movements, sales
of common shares by our officers, directors and our principal stockholders, and
sales of common shares by existing investors. Certain events, such as the
issuance of common shares upon the exercise of our outstanding stock options,
could also materially and adversely affect the prevailing market price of our
common shares. Further, the stock markets in general have recently experienced
extreme price and volume fluctuations that have affected the market prices of
equity securities of many companies and that have been unrelated or
disproportionate to the operating performance of such companies. In addition, a
change in sentiment by U.S. investors for China-based companies could have a
negative impact on the stock price. These fluctuations may materially and
adversely affect the market price of our common shares and the ability to resell
shares at or above the price paid, or at any price.
Our
Articles of Incorporation authorize our board of directors to issue new series
of preferred stock that may have the effect of delaying or preventing a change
of control, which could adversely affect the value of your shares.
Our
articles of incorporation provide that our board of directors will be authorized
to issue from time to time, without further stockholder approval, up to
1,000,000 additional shares of preferred stock in one or more series and to fix
or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each series, including the dividend
rights, dividend rates, conversion rights, voting rights, rights of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
any series. Such shares of preferred stock could have preferences over our
common stock with respect to dividends and liquidation rights. We may issue
additional preferred stock in ways which may delay, defer or prevent a change of
control of our company without further action by our stockholders. Such shares
of preferred stock may be issued with voting rights that may adversely affect
the voting power of the holders of our common stock by increasing the number of
outstanding shares having voting rights, and by the creation of class or series
voting rights.
We
do not expect to pay dividends.
We expect
to apply our future earnings, if any, toward the further expansion and
development of our business. The likelihood of us paying dividends is further
reduced by the fact that, in order to pay dividends, we would need to repatriate
profits earned outside of the U.S., and in doing so those profits generally
would become subject to U.S. taxation. Thus, the liquidity of your investment is
dependent upon your ability to sell your shares at an acceptable price, rather
than receiving an income stream from your investment. The price of our stock may
decline and fluctuations in market price coupled with limited trading volume in
our shares may limit your ability to realize any value from your investment,
including recovering the initial purchase price.
“Penny
Stock” rules may make buying or selling our common stock difficult, and severely
limit its market and liquidity.
Trading
in our common stock is subject to certain regulations adopted by the SEC,
commonly known as the “penny stock” rules. Our common shares qualify as “penny
stocks” and are covered by Section 15(g) of the Securities Exchange Act, which
imposes additional sales practice requirements on broker-dealers who sell such
common shares in the aftermarket. “Penny stock” rules govern how broker-dealers
can deal with their clients and with “penny stocks”. For sales of our common
stock, the broker-dealer must make a special suitability determination and
receive from you a written agreement prior to making a sale of stock to you. The
additional burdens imposed upon broker-dealers by the “penny stock” rules may
discourage broker-dealers from effecting transactions in our common stock, which
could severely affect its market price and liquidity. This could prevent you
from reselling your shares and could cause the price of the shares to
decline.
27
Risks
Related to the Offering
The
market price for our shares may be volatile.
The
market price for our shares is likely to be highly volatile and subject to wide
fluctuations in response to factors including the following:
|
·
|
actual
or anticipated fluctuations in our quarterly operating results and changes
or revisions of our expected
results;
|
|
·
|
changes
in financial estimates by securities research
analysts;
|
|
·
|
conditions
in the markets for our products;
|
|
·
|
changes
in the economic performance or market valuations of companies in our
industry;
|
|
·
|
announcements
by us, or our competitors of new products, acquisitions, strategic
relationships, joint ventures or capital
commitments;
|
|
·
|
addition
or departure of senior management and key personnel;
and
|
|
·
|
fluctuations
of exchange rates between the RMB and the U.S.
dollar.
|
Volatility
in the price of our shares may result in shareholder litigation that could in
turn result in substantial costs and a diversion of our management’s attention
and resources.
The
financial markets in the United States and other countries have experienced
significant price and volume fluctuations, and market prices have been and
continue to be extremely volatile. Volatility in the price of our shares may be
caused by factors outside of our control and may be unrelated or
disproportionate to our results of operations. In the past, following periods of
volatility in the market price of a public company’s securities, shareholders
have frequently instituted securities class action litigation against that
company. Litigation of this kind could result in substantial costs and a
diversion of our management’s attention and resources.
Because
we do not intend to pay dividends on our shares, stockholders will benefit from
an investment in our shares only if those shares appreciate in
value.
We
currently intend to retain all future earnings, if any, for use in the
operations and expansion of the business. As a result, we do not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
the declaration and payment of cash dividends will be at the discretion of our
board of directors and will depend on factors our board of directors deems
relevant, including among others, our results of operations, financial condition
and cash requirements, business prospects, and the terms of our credit
facilities, if any, and any other financing arrangements. Accordingly,
realization of a gain on stockholders’ investments will depend on the
appreciation of the price of our shares, and there is no guarantee that our
shares will appreciate in value.
Investors
in this offering will experience immediate and substantial dilution in net
tangible book value.
The
assumed public offering price will be substantially higher than the net tangible
book value per share of our outstanding shares of common stock. As a result,
investors purchasing shares of our common stock in this offering will incur
immediate dilution of $ • per share, based on the public offering price of $ •
per share. Investors purchasing shares of our common stock in this offering will
pay a price per share that substantially exceeds the book value of our assets
after subtracting our liabilities.
28
We
have not determined a specific use for a portion of the net proceeds from this
offering, and we may use these proceeds in ways with which you may not
agree.
We have
not determined a specific use for a portion of the net proceeds of this
offering. Our management will have considerable discretion in the application of
these proceeds received in connection with this offering. You will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. You must rely on the judgment of our management
regarding the application of the net proceeds of this offering. The net proceeds
may be used for corporate purposes that do not improve our profitability or
increase our share price. The net proceeds from this offering may also be placed
in investments that do not produce income or lose value.
We
may need additional capital, and the sale of additional shares or equity or debt
securities could result in additional dilution to our shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the proceeds from this offering will be sufficient to meet our
anticipated cash needs for the foreseeable future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If these resources are insufficient to satisfy our cash requirements, we may
seek to sell additional equity or debt securities or obtain one or more
additional credit facilities. The sale of additional equity securities could
result in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations and could result
in operating and financing covenants that would restrict our operations. It is
uncertain whether financing will be available in amounts or on terms acceptable
to us, if at all.
Sales
of a substantial number of shares of our common stock following this offering
may adversely affect the market price of our common stock and the issuance of
additional shares will dilute all other stockholdings.
Sales of
a substantial number of shares of our common stock in the public market or
otherwise following this offering, or the perception that such sales could
occur, could adversely affect the market price of our common stock. After
completion of this offering, our existing stockholders will own approximately •
% of our common stock assuming there is no exercise of the underwriter’s
over-allotment option.
After
completion of this offering, there will be approximately • shares of our common
stock outstanding. Of our outstanding shares, the shares of common stock sold in
this offering will be freely tradable in the public market. In addition, our
certificate of incorporation permits the issuance of up to approximately •
additional shares of common stock after this offering. Thus, we have the ability
to issue substantial amounts of common stock in the future, which would dilute
the percentage ownership held by the investors who purchase our shares in this
offering.
We, each
of our directors and senior officers, and each holder of 5% or more of our
common stock have agreed, with limited exceptions, that we and they will not,
without the prior written consent of •, the underwriter, during the period
ending 180 days after the date of this prospectus, among other things, directly
or indirectly, offer to sell, sell or otherwise dispose of any shares of our
common stock or file a registration statement with the SEC relating to the
offering of any shares of our common stock.
29
After the
lock-up agreements pertaining to this offering expire, up to • of the shares
that had been locked up will be eligible for future sale in the public market at
prescribed times pursuant to Rule 144 under the Securities Act, or otherwise.
Sales of a significant number of these shares of common stock in the public
market could reduce the market price of our common stock.
30
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. Such forward-looking statements
include statements regarding, among other things, our projected sales and
profitability, our growth strategies, anticipated trends in our industry, our
future financing plans, and our anticipated needs for working capital.
Forward-looking statements, which involve assumptions and describe our future
plans, strategies and expectations, are generally identifiable by use of the
words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,”
“intend,” or “project” or the negative of these words or other variations on
these words or comparable terminology. This information may involve known and
unknown risks, uncertainties, and other factors that may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. These statements may be found under “Prospectus Summary”,
“Management's Discussion and Analysis of Financial Condition and Results of
Operations” and “Business,” as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under “Risk Factors” and matters described in this prospectus
generally. This prospectus may contain market data related to our business,
which may have been included in articles published by independent industry
sources. We are responsible for the accuracy and completeness of the historical
information contained in this market data as of the date of this prospectus.
However, this market data also includes projections that are based on a number
of assumptions. If any one or more of these assumptions turns out to be
incorrect, actual results may differ materially from the projections based
on these assumptions. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this prospectus will
in fact occur. In addition to the information expressly required to be
included in this filing, we will provide such further material information, if
any, as may be necessary to make the required statements, in light of the
circumstances under which they are made, not misleading.
Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this prospectus as well as other pubic reports which
may be filed with the Securities and Exchange Commission. You should not place
undue reliance on any forward-looking statement as a prediction of actual
results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances, unless and to the extent required by applicable law. Neither the
Private Securities Litigation Reform Act of 1995 nor Section 27A of the
Securities Act, provides any protection for statements made in this
prospectus.
31
DETERMINATION
OF OFFERING PRICE
Our
common stock is currently listed on the NYSE Amex. Trading of a
security on the NYSE Amex is made through a market maker. Our underwriter, •,
however, is not obligated to make a market in our securities, and even after
making a market, can discontinue market making at any time without notice.
Neither we nor the underwriter can provide any assurance that an active and
liquid trading market in our securities will develop or, if developed, that the
market will continue.
The
public offering price of the shares offered by this prospectus has been
determined by negotiation between us and the underwriter. Among the factors
considered in determining the public offering price of the shares
were:
|
·
|
our
history and our prospects;
|
|
·
|
the
industry in which we operate;
|
|
·
|
the
status and development prospects for our
products;
|
|
·
|
our
past and present operating results;
|
|
·
|
the
previous experience of our executive officers;
and
|
|
·
|
the
general condition of the securities markets at the time of this
offering.
|
The
offering price stated on the cover page of this prospectus should not be
considered an indication of the actual value of the shares. That price is
subject to change as a result of market conditions and other factors, and we
cannot assure you that the shares can be resold at or above the public offering
price.
32
USE
OF PROCEEDS
We
estimate that the net proceeds from our sale of $ 10,000,000 of shares
of common stock in this offering at an assumed public offering price of $ • per
share, after deducting underwriting discounts and commissions and estimated
offering expenses, will be approximately $ • million or $ • million if the
underwriter’s option to purchase additional shares is exercised in
full.
We intend
to use the net proceeds from this offering for strategic acquisitions, working
capital and other general corporate purposes. The amounts and timing of our
actual expenditures will depend on numerous factors, including the status of our
sales and marketing activities, the amount of cash generated or used by our
operations. We may use portions of the proceeds for strategic acquisition
purposes, such as vertically integrating into the cultivation, distribution
and/or retail businesses related to our current business, or horizontally
expanding our current business through acquisition of other complimentary
products, technologies or capacities. However, we have not entered
into any agreements or commitments with respect to any such acquisitions at this
time. Accordingly, our management will have broad discretion in the application
of our net proceeds from this offering, and investors will be relying on the
judgment of our management regarding the application of these proceeds. Pending
these uses, the proceeds will be invested in short-term, interest-bearing,
investment-grade securities.
33
CAPITALIZATION
The
following table sets forth our capitalization as of July 31, 2010:
|
·
|
on
an actual basis, and
|
|
·
|
on
a pro forma basis to reflect the sale by us of • shares of our common
stock in this offering at an assumed public offering price of $ • per
share, after deducting underwriting discounts and commissions and
estimated offering expenses.
|
The
information below is illustrative only and our capitalization following the
completion of this offering will be adjusted based on the actual public offering
price and other terms of this offering determined at pricing. You should read
this table together with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements
and the related notes appearing elsewhere in this prospectus.
As
of July 31, 2010
Actual
|
As Adjusted
|
|||||||
Preferred
stock, no par value, 1,000,000 shares authorized; none issued and
outstanding
|
$ | - | $ | |||||
Common
stock, $0.001 par value, 100,000,000 shares authorized; 37,239,536 shares
issued and outstanding.
|
$ | 37 | $ | |||||
Additional
paid-in-capital
|
$ | 7,651 | $ | |||||
Common
stock warrants
|
$ | 497 | $ | |||||
Reserves
|
$ | 3,373 | $ | |||||
Accumulated
other comprehensive income
|
$ | 3,670 | $ | |||||
Retained
earnings
|
$ | 47,824 | $ | |||||
Total
shareholder’s equity
|
$ | 63,052 | $ | |||||
Total
capitalization
|
$ | $ |
34
DILUTION
At July 31, 2010, our net
tangible book value was approximately $[65,544,922] or $[1.73] per share of common
stock. Net tangible book value per share represents the amount
of our tangible assets less our liabilities, divided by the number of shares of
common stock outstanding. Without taking into account any changes in such net
tangible book value after July 31, 2010, other than to give effect to the sale
by us of ●
shares of common stock offered hereby, as well as the ● shares of common
stock underlying the underwriter’s common stock purchase option, our pro forma
as adjusted net tangible book value at July 31, 2010 would have been $ •, or $ • per share of common stock. This
amount represents an immediate decrease in net tangible book value of $ • per
share to existing shareholders and an immediate increase of $ • per share to new
investors as illustrated in the following table:
Assumed
public offering price per share
|
$ | |||
Net
tangible book value per share before the
offering
|
$ | 1.73 | ||
Decrease
in net tangible book value per share to existing shareholders attributable
to new investors (after deduction of the estimated underwriting discount
and other offering expenses to be paid by us)
|
$ | |||
Pro-forma
net tangible book value per share after the offering
|
$ | |||
Increased
value per share to new investors (determined by taking the adjusted net
tangible book value after the offering and deducting the amount of cash
paid by a new investor for a share of common stock)
|
$ |
The
following table sets forth, on a pro forma basis as of July 31, 2010, the number
of shares of common stock purchased from us, the total consideration paid and
the average price per share paid by the existing shareholders and by the new
investors, assuming in the case of new investors a public offering price of $ •
per share, before deductions of the underwriting discount and other offering
expenses:
Shares
Purchased
Number
|
Percent
|
Total
Consideration
|
Percent
|
Average
Price
Per Share
|
||||||||||||||||
Existing
Shareholders
|
|
% | $ |
|
% | $ | ||||||||||||||
New
Investors
|
|
% | $ |
|
% | $ | ||||||||||||||
Total
|
100 | % | $ | 100 | % |
35
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY
AND
RELATED STOCKHOLDER MATTERS
Market
Information
On July
2, 2010, our common stock started trading on the NYSE Amex under the symbol
“CBP.” Prior to the listing on the NYSE Amex, our common stock was
quoted on the Pink Sheets OTC Markets and OTC Bulletin Board. The
table below lists the high and low sales price or bid price, as applicable, per
share of our common stock for the respective periods as reported on the Pink
Sheet OTC Market, OTC Bulletin Board or the NYSE Amex, as
applicable. The following prices for the period prior to July 2, 2010
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
High
|
Low
|
|||||||
Year
Ended October 31, 2008:
|
||||||||
1st
Quarter
|
$
|
2.66
|
$
|
1.15
|
||||
2nd
Quarter
|
$
|
1.88
|
$
|
0.65
|
||||
3rd
Quarter
|
$
|
2.14
|
$
|
0.80
|
||||
4th
Quarter
|
$
|
1.05
|
$
|
0.20
|
||||
Year
Ended October 31, 2009:
|
||||||||
1st
Quarter
|
$
|
0.65
|
$
|
0.16
|
||||
2nd
Quarter
|
$
|
0.51
|
$
|
0.16
|
||||
3rd
Quarter
|
$
|
0.69
|
$
|
0.20
|
||||
4th
Quarter
|
$
|
1.69
|
$
|
0.50
|
||||
Year
Ending October 31, 2010:
|
||||||||
1st
Quarter
|
$
|
1.18
|
$
|
0.52
|
||||
2nd
Quarter
|
$
|
3.00
|
$
|
1.00
|
||||
3rd
Quarter
|
$
|
2.79
|
$
|
1.69
|
||||
4th
Quarter (through December 3, 2010)
|
$
|
2.80
|
$
|
1.26
|
On
December 3, 2010, the closing sale price of our shares of common stock was $2.20
per share and there were 37,239,536 shares of our common stock
outstanding. On •, 2010, our shares of common stock were held by
approximately • shareholders of record. The number of record holders
was determined from the records of our transfer agent and does not include
beneficial owners of our common stock whose shares are held in the names of
various security brokers, dealers, and registered clearing
agencies.
36
DIVIDENDS
AND DIVIDEND POLICY
We have
not declared or paid any dividends on our common stock and presently do not
expect to declare or pay any such dividends in the foreseeable
future. Payment of dividends to our shareholders would require
payment of dividends by our PRC subsidiary to us. This, in turn,
would require a conversion of Renminbi into US dollars and repatriation of funds
to the US. Under current PRC law, the conversion of Renminbi into
foreign currency generally requires government consent. Further, government
authorities may impose restrictions that could have a negative impact in the
future on the conversion process or on our cash needs, which, in turn, affects
our ability to pay cash dividends to our shareholders. Although our
subsidiary’s classification as a wholly foreign owned enterprise under PRC law
permits them to declare dividends and repatriate their funds to us in the United
States, any change in this status or the regulations permitting such
repatriation could prevent them from doing so. Any inability to
repatriate funds to us would in turn prevent payments of dividends to our
shareholders.
37
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this registration
statement. In addition to historical financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially
from those discussed in the forward-looking statements. Factors that
could cause or contribute to these differences include those discussed below and
elsewhere in this registration statement. See the Risk Factors appearing
elsewhere in this registration statement.
Overview
We are a
high-tech enterprise engaged in the development, manufacturing, and distribution
of botanical products, bio-pharmaceutical products, and traditional Chinese
medicines, or TCM, in the People’s Republic of China. We have three GMP
certified production facilities - Ah City natural and biopharmaceutical plant,
Dongfanghong pharmaceutical plant and Qingyang natural extraction plant -capable
of producing 18 dosage forms and over 200 different products. Our products
include but are not limited to (i) botanical anti-depression and
nerve-regulation products, (ii) biopharmaceutical products, and (iii) botanical
antibiotic and traditional OTC Chinese medicines. Botanical
anti-depression and nerve-regulation products account for over 50% of our
revenues and we intend to strengthen our developments in this
area. We have entered into sales agency agreements with sales agents
in 19 provinces and four municipalities, through which our products are sold to
over 3,000 distributors and over 70 sales centers across 24 provinces in
China.
Factors
Affecting our Results of Operations
Our
operating results are primarily affected by the following factors
|
¨
|
Pharmaceutical
Industry Growth. We believe the market for
pharmaceutical products in China is growing rapidly driven by China’s
economic growth, increased pharmaceutical expenditure, an aging
population, increased lifestyle-related diseases, government support of
the pharmaceutical industry, as well as the increased availability of
funding for medical insurance in China. In particular, in
January 2009, the PRC’s State Council passed a far-reaching medical reform
plan (“Health Reform”) to help provide universal primary medical insurance
coverage and increased access to medical facilities to a greater majority
of its citizens. We expect these factors to continue to drive
industry growth.
|
|
¨
|
Production
Capacity. We
believe much of the pharmaceutical market in China is still underserved,
particularly with respect to treatment of depression, melancholy and nerve
regulation. In 2009 the demand for our products that treat depression,
melancholy and regulate nerves, increased and we were able to increase our
production of such products to capture much of this growth. We believe our
facilities with the ability to manufacture 18 dosage forms and over 200
products will allow us to capture future market growth and increase our
revenue and market share
accordingly.
|
38
|
¨
|
Perceptions
of Product Quality. We believe that rising health concerns in China
have contributed to a greater demand for health-care products with
perceived health benefits. We believe many consumers in China
tend to prefer natural health care products with, we believe, limited side
effects. Accordingly, we believe our reputation for quality and
leadership position in a number of our products allow our products to
command a higher average selling price and generate higher gross margins
than our competitors.
|
|
¨
|
Raw
Material Supply and Prices. The per unit costs of
producing our products are subject to the supply and price volatility of
raw materials, which are affected by various market factors such as market
demands, fluctuations in production and
competition.
|
|
¨
|
Expenses
Associated with Research and Development. In order to enhance
our existing products and develop new products for the market, we have
devoted significant resources to
R&D.
|
|
¨
|
Expenses
Associated with Sales and Marketing. In order to promote
our product brand and gain greater market awareness, we have devoted
significant resources to sales and marketing, in particular advertising
activities.
|
|
¨
|
Pricing of
Our Products. Seven of our products, which accounted for
36% of our total revenues in fiscal year 2009, are subject to government
pricing control. We do not believe pricing control will
influence our sales significantly and expect that the health care reform
will help increase our sales.
|
|
¨
|
Demand for
Our Products. We expect the market demand for our
botanic anti-depression and nerve-regulation products will increase along
with the growth of the general market for such
products.
|
Results
of Operations
Three-Month
Period Ended July 31, 2010 Compared to Three-Month Period Ended July 31,
2009
The
following table sets forth certain information regarding our results of
operation.
Three Months Ended July 31
|
||||||||
2010
|
2009
|
|||||||
($ in thousands)
|
||||||||
Statements
of Operations Data
|
||||||||
Sales,
net
|
9,264
|
6,442
|
||||||
Cost
of goods sold
|
4,621
|
2,942
|
||||||
Gross
profit
|
4,643
|
3,500
|
||||||
Operating
and administrative expenses
|
||||||||
Sales
and marketing
|
1,285
|
1,110
|
||||||
General
and administrative
|
395
|
500
|
||||||
Research
and development
|
1,529
|
1,227
|
||||||
Other
income
|
22
|
12
|
||||||
Income
from operation before income tax expenses
|
1,456
|
675
|
||||||
Income
tax expenses
|
-
|
-
|
||||||
Net
income
|
1,456
|
675
|
||||||
Other
comprehensive income:
|
||||||||
Cumulative
currency translation adjustments
|
462
|
(94
|
)
|
|||||
Total
comprehensive income
|
1,918
|
581
|
39
Total
Comprehensive Income
Total
comprehensive income increased by approximately $1,337 thousand, or 230.1%, from
approximately $581 thousand in 2009 to approximately $1,918 thousand in
2010. This increase was mainly attributable to the increased sale of
our Botanical antibiotic products, Banlangen Granules and Compound Honeysuckle
Granules that were introduced to the market in the last quarter of 2009 and an
increase in average selling prices across our products. Our gross
profit margin decreased from 54.3% in 2009 to 50.1% in 2010, as a result of
reduced sales rebates and price increases of a number of our
products.
Sales
Our sales
consist primarily of revenues generated from sales of Botanical anti-depression
and nerve-regulation products, Biopharmaceutical products and Botanical
antibiotics and traditional OTC Chinese medicines. Sales increased by
approximately $2,822 thousand, or 43.8%, from approximately $6,442 thousand in
2009 to approximately $9,264 thousand in 2010. This increase in sales
was primarily attributable to strong demands for our Botanical antibiotic
products, Banlangen Granules and Compound Honeysuckle Granules that were
introduced to the market in the last quarter of 2009, in addition to an increase
in average selling prices across our products.
We
provide incentive sales rebates to our sales agents. The rebate rate,
which is determined on a product basis, averaged 11% and 21% of sales for the
three months ended July 31, 2010 and 2009, respectively. Sales
rebates are netted against total sales. For the three months ended July 31, 2010
and 2009, the Company has deducted sales rebates in the amount of $1,018,359 and
$1,361,965, respectively, from sales. Sales rebates are calculated
based on terms specified in contracts with individual
distributors. In addition, the Company is using different sales
channels and relying less on the use of sales agents.
The
following table sets forth information regarding the sales of our principal
products before sales rebate during the three months ended July 31, 2010 and
2009:
2010
|
2009
|
2010 over 2009
|
||||||||||||||||||||||||||||||||||
Product
name
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
|||||||||||||||||||||||||||
Siberian
Ginseng
(Acanthopanax)
Series
|
53 | 4,439 | 43.9 | 67 | 4,333 | 55.3 | (14 | ) | 106 | 2.4 | ||||||||||||||||||||||||||
Tianma
Series
|
9 | 763 | 7.5 | 10 | 754 | 9.6 | (1 | ) | 9 | 1.2 | ||||||||||||||||||||||||||
Compound
Yangjiao Tablets
|
13 | 1,352 | 13.4 | 17 | 1,322 | 16.9 | (4 | ) | 30 | 2.3 | ||||||||||||||||||||||||||
Shark
Vital Capsules
|
1 | 235 | 2.3 | 2 | 759 | 9.7 | (1 | ) | (524 | ) | (69 | ) | ||||||||||||||||||||||||
Shengmai
Granules
|
16 | 677 | 6.7 | 18 | 663 | 8.5 | (2 | ) | 14 | 2.1 | ||||||||||||||||||||||||||
Banlangen
Granules
|
9 | 290 | 2.9 | - | - | - | 9 | 290 | 100 | |||||||||||||||||||||||||||
Compound
Honeysuckle Granules
|
39 | 2,350 | 23.3 | - | - | - | 39 | 2,350 | 100 | |||||||||||||||||||||||||||
Total
|
140 | 10,106 | 100.0 | 114 | 7,831 | 100.0 |
40
We
experienced a slight decrease in the demand of a number of our products mainly
from reduced order volumes as the effect of the Health Reform filters through
the chain drug stores. The chain drug stores reacting to the
potential competition that the Heath Reform may bring are being cautious and
maintaining lower than usual stock levels. As the PRC government
moves forward with the Health Reform, hospitals, health clinics and institutions
will be established in villages, remote regions and under-developed cities,
creating additional channels for the rural population to purchase drugs aside
from the chain drug stores. We expect the Health Reform, when fully
in place, will greatly improve the rural population’s access to healthcare,
and therefore increase the demand for our products. We have
established Medical Reform Sales Department as a dedicated resource focused on
capturing this tremendous growth opportunity.
This
quarter ended July 31, 2010, we introduced two new products to the market, Qing
Re Jie Du Oral Liquid, which detoxified and removing heat from intestines, and
Compound Schisandra Tablets, also known as magnolia vine, has been clinically
proven to have significant benefits to the functioning and regulation of the
central nervous system and for upper body respiration.
In the
last quarter of 2009, we introduced two new products to the market, Banlangen
Granules and Compound Honeysuckle Granules, both of which have well accepted
anti-viral qualities, and were in great demand during and post the H1N1 pandemic
and the winter season.
In 2010,
we experienced an increase in the average sales price per pack of our products,
as demonstrated in the table below:
2010
|
2009
|
|||||||
Sales
revenues (in thousands)
|
$
|
10,106
|
$
|
7,831
|
||||
Total
sales quantity (pack in thousands)
|
140
|
114
|
||||||
Average
selling prices/pack (in thousands)
|
$
|
72.19
|
$
|
68.69
|
The
increase in average sales price per pack, as reflected in the table, is
primarily attributable to a change in sale mix, with more products with lower
average price per pack sold, namely Banlangen Granules and Compound Honeysuckle
Granules. Overall, the average price of individual products sold in
both 2010 and 2009 increased as demonstrated in the following table, which
reflects the average sales price per pack by product for 2010 and 2009 and the
percentage change in the sales price per pack.
41
Average Price Per Pack
|
||||||||||||
Product
|
2010
|
2009
|
Percentage
Change
|
|||||||||
Siberian
Ginseng (Acanthopanax) Series
|
$
|
83.75
|
$
|
64.67
|
29.5
|
|||||||
Tianma
Series
|
84.78
|
75.40
|
12.4
|
|||||||||
Compound
Yangjiao Tablets
|
104.00
|
77.76
|
33.74
|
|||||||||
Shark
Vital Capsules
|
235.00
|
379.50
|
(38.08
|
)
|
||||||||
Shengmai
Granules
|
42.31
|
36.83
|
14.9
|
|||||||||
Banlangen
Granules
|
32.22
|
-
|
100.0
|
|||||||||
Compound
Honeysuckle Granules
|
60.26
|
-
|
100.0
|
In
addition to increasing the price of Shengmai Granules, we recently introduced
new dosage forms to our existing Botanical anti-depression and nerve-regulation
product category, which contain less sugar content and are suitable for diabetic
patient consumption. We were able to demand a higher price for these
new dosage forms, namely in our Siberian Ginseng (Acanthopanax) Series and
Compound Yangjiao Tablets. We plan to launch our latest product,
Badger Oil, a natural medicine for the treatment of burns with no known toxic
side effects or allergic reactions in the last quarter of the
year. Based on market research, we anticipate positive market
acceptance to the new product.
Cost
of Goods Sold
Our costs
of goods sold consist primarily of direct and indirect manufacturing costs,
including production overhead costs, and shipping and handling costs for the
products sold. Cost of goods sold increased approximately $1,679
thousand, or 57.1%, from approximately $2,942 thousand in 2009 to approximately
$4,621 thousand in 2010.
Although
we anticipate that the cost of goods will increase due to inflationary price
increases, we do not believe that such increases will be material for fiscal
year 2010. We anticipate that beyond 2010, our price for raw
materials and other production costs will continue to increase due to inflation.
If our costs of goods increase, this may have a negative effect on our net
income because, due to market conditions and competitive conditions, we may not
be able to increase the price for our products in proportion to the increase of
our costs of goods sold.
Operating
and Administrative Expenses
Our total
operating expenses increased by approximately $372 thousand, or 13.1%, from
approximately $2,837 thousand in 2009 to approximately $3,209 thousand in 2010.
This increase was primarily attributable to an increase of approximately $175
thousand, or 15.8%, in sales and marketing expenses from approximately $1,110
thousand for 2009 to approximately $1,285 thousand for 2010, as we continued to
invest in our distribution network and increase TV advertising to increase
product market share and create greater consumer awareness of our premium
quality products. This increase was also attributable to a decrease
of approximately $105 thousand, or 21% in general and administrative expenses
from approximately $500 thousand for 2009 to approximately $395 thousand for
2010, and an increase of research and development expenses of
approximately $302 thousand, or 24.6% from approximately $1,227 thousand for
2009 to approximately $1,529 thousand for 2010. We expect research
and development expenses to continue to increase in the coming quarters as our
pipeline projects advance and our pipeline size grows.
Income
from Operations
As a
result of the foregoing, our income from operations increased by approximately
$781 thousand, or 115.7%, from approximately $675 thousand in 2009 to
approximately $1,456 thousand in 2010.
42
Income
Tax Expenses
We are
subject to U.S. federal and state income taxes. Our subsidiary
registered in the PRC is subject to enterprise income taxes. For the
fiscal year of 2010 and 2009, our PRC subsidiary was granted a tax holiday and
is entitled to full exemption from enterprise income taxes of
25%.
Cumulative
Currency Translation Adjustments
Our
principal country of operations is the PRC and our functional currency is the
Renminbi, but our reporting currency is the U.S. dollar. All
translation adjustments resulting from the translation of our financial
statements into U.S. dollars are reported as cumulative currency translation
adjustments. Our cumulative currency translation adjustments
increased by approximately $556 thousand, or 591.5%, from approximately negative
$94 thousand in 2009 to approximately $462 thousand in 2010.
Nine-Month
Period Ended July 31, 2010 Compared to Nine-Month Period Ended July 31,
2009
The
following table sets forth certain information regarding our results of
operation.
Nine Months Ended July 31
|
||||||||
2010
|
2009
|
|||||||
($ in thousands)
|
||||||||
Statements
of Operations Data
|
||||||||
Sales,
net
|
38,489
|
28,915
|
||||||
Cost
of goods sold
|
18,151
|
13,826
|
||||||
Gross
profit
|
20,338
|
15,089
|
||||||
Operating
and administrative expenses
|
||||||||
Sales
and marketing
|
3,689
|
2,535
|
||||||
General
and administrative
|
2,209
|
1,712
|
||||||
Research
and development
|
2,252
|
1,833
|
||||||
Other
income
|
49
|
31
|
||||||
Income
from operation before income tax expenses
|
12,237
|
9,040
|
||||||
Income
tax expenses
|
-
|
-
|
||||||
Net
income
|
12,237
|
9,040
|
||||||
Other
comprehensive income:
|
||||||||
Cumulative
currency translation adjustments
|
302
|
(80
|
)
|
|||||
Total
comprehensive income
|
12,539
|
8,960
|
Total
Comprehensive Income
Total
comprehensive income increased by approximately $3,579 thousand, or 39.9%, from
approximately $8,960 thousand in 2009 to approximately $12,539 thousand in
2010. This increase was mainly attributable to the increased sales of
our Botanical antibiotic products, Banlangen Granules and Compound Honeysuckle
Granules that were introduced to the market in the last quarter of 2009 and an
increase in average selling prices across our products. Our gross
profit margin increased from 52.2% in 2009 to 52.8% in 2010, as a result of
reduced sales rebates and prices increases of a number of our
products.
43
Sales
Our
sales consist primarily of revenues generated from sales of Botanical
anti-depression and nerve-regulation products, Biopharmaceutical products and
Botanical antibiotics and traditional OTC Chinese medicines. Sales
increased by approximately $9,574 thousand, or 33.1%, from approximately $28,915
thousand in 2009 to approximately $38,489 thousand in 2010. This
increase in sales was primarily attributable to strong demands for our Botanical
antibiotic products, Banlangen Granules and Compound Honeysuckle Granules that
were introduced to the market in the last quarter of 2009, in addition to an
increase in average selling prices across our products.
We
provide incentive sales rebates to our sales agents. The rebate rate,
which is determined on a product basis, averaged 13% and 18% of sales for the
nine months ended July 31, 2010 and 2009, respectively. Sales rebates
are netted against total sales. For the nine months ended July 31, 2010 and
2009, the Company has deducted sales rebates in the amount of $4,923,196 and
$6,545,697, respectively, from sales. Sales rebates are calculated
based on terms specified in contracts with individual
distributors. In addition, the Company is using different sales
channels and relying less on the use of sales agents.
The
following table sets forth information regarding the sales of our principal
products before sales rebate during the nine months ended July 31, 2010 and
2009:
2010
|
2009
|
2010 over 2009
|
||||||||||||||||||||||||||||||||||
Product
name
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
|||||||||||||||||||||||||||
Siberian
Ginseng (Acanthopanax) Series
|
236
|
19,121
|
44.3
|
296
|
19,272
|
54.3
|
(60
|
)
|
(151
|
)
|
(0.8
|
)
|
||||||||||||||||||||||||
Tianma
Series
|
46
|
3,553
|
8.2
|
47
|
3,509
|
9.9
|
(1
|
)
|
44
|
1.3
|
||||||||||||||||||||||||||
Compound
Yangjiao Tablets
|
59
|
5,528
|
12.8
|
65
|
5,175
|
14.6
|
(6
|
)
|
353
|
6.8
|
||||||||||||||||||||||||||
Shark
Vital Capsules
|
4
|
1,973
|
4.6
|
10
|
4,814
|
13.6
|
(6
|
)
|
(2,841
|
)
|
(59.0
|
)
|
||||||||||||||||||||||||
Shengmai
Granules
|
68
|
2,772
|
6.4
|
79
|
2,692
|
7.6
|
(11
|
)
|
80
|
3.0
|
||||||||||||||||||||||||||
Banlangen
Granules
|
45
|
1,230
|
2.8
|
-
|
-
|
-
|
45
|
1,230
|
100.0
|
|||||||||||||||||||||||||||
Compound
Honeysuckle Granules
|
152
|
9,028
|
20.9
|
-
|
-
|
-
|
152
|
9,028
|
100.0
|
|||||||||||||||||||||||||||
Total
|
610
|
43,205
|
100.0
|
497
|
35,462
|
100.0
|
In
the first quarter of 2010, we increased the price of a number of our products
namely, Siberian Ginseng (Acanthoopanax) Series and Shengmai Granules, which has
led to a temporary softening in demand for these products as a result of the
price increases. Although sales declined slightly in these product
categories in the first quarter, we show volume rebounded in the second and
third quarter, however, this was offset by a slight decrease in the demand of a
number of our products mainly from reduced order volumes as the effect of the
Health Reform filters through the chain drug stores. The chain drug
stores reacting to the potential competition that the Heath Reform may bring are
being cautious and maintaining lower than usual stock levels. As the
PRC government moves forward with the Health Reform, hospitals, health clinics
and institutions will be established in villages, remote regions and
under-developed cities, creating additional channels for the rural population to
purchase drugs aside from the chain drug stores. We expect the Health
Reform, when fully in place, will greatly improve the rural population’s access
to healthcare, and therefore increase the demand for our products. We
have established Medical Reform Sales Department as a dedicated resource focused
on capturing this tremendous growth opportunity.
44
This
quarter ended July 31, 2010, we introduced two new products to the market, Qing
Re Jie Du Oral Liquid, which detoxified and removing heat from intestines, and
Compound Schisandra Tablets, also known as magnolia vine, has been clinically
proven to have significant benefits to the functioning and regulation of the
central nervous system and for upper body respiration.
In
the last quarter of 2009, we introduced two new products to the market,
Banlangen Granules and Compound Honeysuckle Granules, both of which have well
accepted anti-viral qualities, and were in great demand during and post the H1N1
pandemic and the winter season.
The
decrease in average sales price per pack, as reflected in the table, is
primarily attributable to a change in sale mix, with more products with lower
average price per pack sold, namely Banlangen Granules and Compound Honeysuckle
Granules. Overall, the average price of individual products sold in
the nine months ended July 30, 2010 and 2009 increased as demonstrated in the
following table, which reflects the average sales price per pack by product for
2010 and 2009 and the percentage change in the sales price per
pack.
Average Price Per Pack
|
||||||||||||
Product
|
2010
|
2009
|
Percentage
Change
|
|||||||||
Siberian
Ginseng (Acanthopanax) Series
|
$
|
81.02
|
$
|
65.11
|
24.4
|
|||||||
Tianma
Series
|
77.24
|
74.66
|
3.5
|
|||||||||
Compound
Yangjiao Tablets
|
93.69
|
79.62
|
17.7
|
|||||||||
Shark
Vital Capsules
|
493.25
|
481.40
|
2.5
|
|||||||||
Shengmai
Granules
|
40.76
|
34.08
|
19.6
|
|||||||||
Banlangen
Granules
|
27.33
|
-
|
100.0
|
|||||||||
Compound
Honeysuckle Granules
|
59.40
|
-
|
100.0
|
In
addition to increasing the price of a number of our products in the first
quarter of 2010, namely Siberian Ginseng (Acanthoopanax) Series and Shengmai
Granules, we recently introduced new dosage forms to our existing Botanical
anti-depression and nerve-regulation product category, which contain less sugar
content and are suitable for diabetic patient consumption. We were
able to demand a higher price for these new dosage forms, namely in our Siberian
Ginseng (Acanthopanax) Series and Compound Yangjiao Tablets. We plan
to launch our latest product, Badger Oil, a natural medicine for the treatment
of burns with no known toxic side effects or allergic reactions in the last
quarter of the year. Based on market research, we anticipate positive
market acceptance to the new product.
45
Cost
of Goods Sold
Our
costs of goods sold consist primarily of direct and indirect manufacturing
costs, including production overhead costs, and shipping and handling costs for
the products sold. Cost of goods sold increased approximately $4,325
thousand, or 31.3%, from approximately $13,826 thousand in 2009 to approximately
$18,151 thousand in 2010. This increase was primarily attributable to
increased products sold and increase in raw material prices, namely sugar, which
had a price increase in March 2010 of approximately 32%.
Although
we anticipate that the cost of goods will increase due to inflationary price
increases, we do not believe that such increases will be material for fiscal
year 2010. We anticipate that beyond 2010, our price for raw
materials and other production costs will continue to increase due to inflation.
If our costs of goods increase, this may have a negative effect on our net
income because, due to market conditions and competitive conditions, we may not
be able to increase the price for our products in proportion to the increase of
our costs of goods sold.
Operating
and Administrative Expenses
Our
total operating expenses increased by approximately $2,070 thousand, or 34.0%,
from approximately $6,080 thousand in 2009 to approximately $8,150 thousand in
2010. This increase was primarily attributable to an increase of approximately
$1,154 thousand, or 45.5%, in sales and marketing expenses from
approximately $2,535 thousand for 2009 to approximately $3,689 thousand for
2010, as we continued to invest in our distribution network and increase TV
advertising to increase product market share and create greater consumer
awareness of our premium quality products. This increase was also
attributable to an increase of approximately $497 thousand, or 29.0% in general
and administrative expenses from approximately $1,712 thousand for 2009 to
approximately $2,209 thousand for 2010, and an increase of approximately $419
thousand, or 22.9% in research and development expenses from approximately
$1,833 thousand for 2009 to approximately $2,252 thousand for
2010. We expect research and development expenses to continue to
increase in the coming quarters as our pipeline projects advance and our
pipeline size grows.
Income
from Operations
As
a result of the foregoing, our income from operations increased by approximately
$3,197 thousand, or 35.4%, from approximately $9,040 thousand in 2009 to
approximately $12,237 thousand in 2010.
Income
Tax Expenses
We
are subject to U.S. federal and state income taxes. Our subsidiary
registered in the PRC is subject to enterprise income taxes. For the
fiscal year of 2010 and 2009, our PRC subsidiary was granted a tax holiday and
is entitled to full exemption from enterprise income taxes of 25%.
Cumulative
Currency Translation Adjustments
Our
principal country of operations is the PRC and our functional currency is the
Renminbi, but our reporting currency is the U.S. dollar. All
translation adjustments resulting from the translation of our financial
statements into U.S. dollars are reported as cumulative currency translation
adjustments. Our cumulative currency translation adjustments
increased by approximately $382 thousand, or 477.5%, from approximately negative
$80 thousand in 2009 to approximately $302 thousand in 2010.
Comparison
of Years Ended October 31, 2009 and 2008
The
following table sets forth certain information regarding our results of
operation for the years ended October 31, 2009 and 2008.
46
Years Ended October 31
|
||||||||
2009
|
2008
|
|||||||
($ in thousands)
|
||||||||
Statements
of Operations Data
|
||||||||
Sales,
net
|
43,411
|
34,475
|
||||||
Cost
of goods sold
|
20,311
|
15,981
|
||||||
Gross
profit
|
23,100
|
18,494
|
||||||
Operating
and administrative expenses
|
||||||||
Sales
and marketing
|
3,650
|
3,318
|
||||||
General
and administrative
|
2,117
|
2,878
|
||||||
Research
and development
|
2,529
|
2,125
|
||||||
Other
income
|
43
|
118
|
||||||
Income
from operation before income tax expenses
|
14,847
|
10,291
|
||||||
Income
tax expenses
|
-
|
-
|
||||||
Net
income
|
14,847
|
10,291
|
||||||
Other
comprehensive income:
|
||||||||
Cumulative
currency translation adjustments
|
66
|
2,392
|
||||||
Total
comprehensive income
|
14,913
|
12,683
|
Total
Comprehensive Income
Total
comprehensive income increased by approximately $2,230 thousand, or 17.6%, from
approximately $12,683 thousand in 2008 to approximately $14,913 thousand in
2009. This increase was primarily attributable to an increase of
approximately $8,936 thousand, or 25.9%, in sales, and a decrease of
approximately $761 thousand, or 26.4% in general and administrative expenses
offset in part by an increase of approximately $4,330 thousand, or 27.1%, in
cost of goods sold and an increase of approximately $332 thousand, or 10.0%, in
sales and marketing expenses, an increase of approximately $404 thousand, or
19.0%, in research and development expenses, and a decrease of $2,326 thousand,
or 97.2% in cumulative currency translation adjustments. Our gross
profit margin decreased from 53.6% in 2008 to 53.2% in 2009.
Sales
Our
sales consist primarily of revenues generated from sales of botanical
anti-depression and nerve-regulation products; biopharmaceutical
products and botanical antibiotics and traditional OTC Chinese
medicines. Sales increased by approximately $8,936 thousand, or
25.9%, from approximately $34,475 thousand in 2008 to approximately $43,411
thousand in 2009. This increase in sales was primarily attributable
to increased demand and strong market acceptance of our products as a result of
our marketing efforts, in addition to price increase for a number of
our products.
We
provide incentive sales rebates to our sales agents. The rebate rate,
which is determined on a product basis, averaged 17% and 19% of sales for the
year ended October 31, 2009 and 2008, respectively. Sales rebates are
netted against total sales.
The
following table sets forth information regarding the sales of our principal
products before sales rebate during the fiscal years ended October 31, 2009 and
2008:
47
2009
|
2008
|
2009 over 2008
|
||||||||||||||||||||||||||||||||
Product name
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
|||||||||||||||||||||||||
Siberian
Ginseng (Acanthopanax) Series
|
408
|
28,340
|
54.3
|
353
|
22,504
|
52.7
|
55
|
5,836
|
25.9
|
|||||||||||||||||||||||||
Tianma
Series
|
68
|
5,127
|
9.8
|
53
|
3,863
|
9.0
|
15
|
1,264
|
32.7
|
|||||||||||||||||||||||||
Compound
Yangjiao Tablets
|
91
|
7,281
|
13.9
|
79
|
6,101
|
14.3
|
12
|
1,180
|
19.3
|
|||||||||||||||||||||||||
Shark
Vital Capsules (1)
|
13
|
5,803
|
11.1
|
16
|
7,249
|
17.0
|
(3
|
) |
(1,446
|
) |
(19.9
|
)
|
||||||||||||||||||||||
Shengmai
Granules
|
104
|
3,621
|
6.9
|
114
|
2,987
|
7.0
|
(10
|
) |
634
|
21.2
|
||||||||||||||||||||||||
Banlangen
Granules
|
12
|
306
|
0.6
|
-
|
-
|
-
|
12
|
306
|
100.0
|
|||||||||||||||||||||||||
Compound
Honeysuckle Granules
|
31
|
1,782
|
3.4
|
-
|
-
|
-
|
31
|
1,782
|
100.0
|
|||||||||||||||||||||||||
Total
|
727
|
52,260
|
100.0
|
615
|
42,704
|
100.0
|
112
|
9,556
|
22.4
|
(1)
|
The
sales of this product declined, as the product approaches the end of its
life cycle and the marketing efforts
decreased.
|
In
the last quarter of 2009, we introduced two new products to the market,
Banlangen Granules and Compound Honeysuckle Granules, both of which have well
accepted anti-viral qualities, and were in great demand during the H1N1
pandemic.
The
increase in average sales price per pack, as reflected in the table, is
primarily attributable to the increase in the sales price of individual
products, namely Siberian Ginseng (Acanthopanax) Series and Shengmai Granules as
demonstrated in the following table, which reflects the average sales price per
pack by product for 2009 and 2008 and the percentage change in the sales price
per pack.
Average Price Per Pack
|
||||||||||||
2009
|
2008
|
Percentage Change
|
||||||||||
Product
|
||||||||||||
Siberian
Ginseng (Acanthopanax) Series
|
$ | 69.29 | $ | 63.75 | 8.7 | |||||||
Tianma
Series
|
75.16 | 72.77 | 3.3 | |||||||||
Compound
Yangjiao Tablets
|
80.18 | 77.63 | 3.3 | |||||||||
Shark
Vital Capsules
|
462.26 | 447.56 | 3.3 | |||||||||
Shengmai
Granules
|
34.86 | 26.20 | 33.1 | |||||||||
Banlangen
Granules
|
26.06 | - | 100.0 | |||||||||
Compound
Honeysuckle Granules
|
57.12 | - | 100.0 |
We expect
the demand for our products will continue to increase as a result of gaining
greater market acceptance, in particular the benefits of our Siberian Ginseng
(Acanthopanax) Series in treating depression and
nerve-regulation. Further, we believe many of our products will be
listed in the reimbursement catalog of essential medicine for health insurance.
In addition, we anticipate that we will be successful in becoming one of China’s
essential medicine suppliers as the PRC government moves forward with its Health
Reforms in 2010.
Cost
of Goods Sold
Our costs
of goods sold consist primarily of direct and indirect manufacturing costs,
including production overhead costs and shipping and handling costs for the
products sold. Cost of goods sold increased approximately $4,330
thousand, or 27.1%, from approximately $15,981 thousand in 2008 to approximately
$20,311 thousand in 2009. This increase was primarily attributable to
increase in products sold and increases in certain raw material prices such
as sugar.
48
Although
we anticipate that the cost of goods will increase due to inflationary price
increases, we do not believe that such increases will be material for fiscal
year 2010. We anticipate that beyond 2010, our price for raw
materials and other production costs will continue to increase due to
inflation. If our costs of goods increase, this may have a negative effect on
our net income because due to market conditions and competitive conditions, we
may not be able to increase the price for our products in proportion to the
increase in our costs of good sold.
Operating
and Administrative Expenses
Our
total operating expenses consist primarily of sales and marketing expenses,
general and administrative expenses and research and development
expenses. Our total operating expenses decreased by approximately $25
thousand, or 0.3%, from approximately $8,321 thousand in 2008 to approximately
$8,296 thousand in 2009.
Sales and
Marketing. Our sales and marketing expenses consist primarily
of advertising and market promotion expenses, and other overhead expenses
incurred by our sales and marketing personnel. Sales and
marketing expenses increased approximately $332 thousand, or 10.0%, from
approximately $3,318 thousand for 2008 to approximately $3,650 thousand for
2009. This increase was primarily attributable to an increase of
approximately $436 thousand, or 13.8%, in advertising expenses. Sales
and marketing expenses are likely to increase as we continue expanding our
distribution network throughout China and seek to increase our market share and
awareness of our products.
General and Administrative.
Our general and administrative expenses consist primarily of salary, travel,
entertainment expenses, benefits, share-based compensation, and professional
service fees. General and administrative expenses decreased by
approximately $761 thousand, or 26.4%, from approximately $2,878 thousand for
2008 to approximately $2,117 thousand for 2009. This decrease was
primarily attributable to decrease of approximately $243 thousand, or 100.0%, in
allowance for receivables since there was no additional allowance in
2009. General and administrative expenses are likely to increase as
we continue to expand our production, sourcing capacity, and distribution
capacity throughout China.
Research and Development. Our
research and development expenses consist primarily of salary, equipment rental
expenses, and expenses related to the cultivation of Siberian Ginseng
(Acanthopanax). Research and development expenses increased
approximately $404 thousand, or 19.0%, from approximately $2,125 thousand for
2008 to approximately $2,529 thousand for 2009. This increase was
primarily attributable to development of Siberian Ginseng (Acanthopanax)
cultivation and extraction of effective components of the Siberian Ginseng
(Acanthopanax) plant, and development of other products. Research and
development expenses are likely to increase as we continue to devote our
resources to the development of new products and enhancement of our existing
products.
Income
from Operations
As
a result of the foregoing, our income from operations increased by approximately
$4,556 thousand, or 44.3%, from approximately $10,291 thousand in 2008 to
approximately $14,847 thousand in 2009.
49
Income
Tax Expenses
We
are subject to U.S. federal and state income taxes. Our subsidiary
registered in the PRC is subject to enterprise income taxes. For the
fiscal years of 2009 and 2010, our PRC subsidiary was granted by the national
tax office of Ah City a tax holiday and was fully exempt from the 25% enterprise
income tax. This tax holiday was granted, without a statutory basis at the
national level, by the governmental authorities of Ah City for the purposes of
promoting local economic development. As a result, this tax holiday
may be terminated and our PRC subsidiary may be subject to the 25% enterprise
income tax upon the termination of the tax holiday. In extreme cases, our PRC
subsidiary may be required to pay all enterprise income taxes that have been
exempted under such tax holiday granted by the local tax authority.
Cumulative
Currency Translation Adjustments
Our
principal country of operations is the PRC and our functional currency is the
Renminbi, but our reporting currency is the U.S. dollar. All
translation adjustments resulting from the translation of our financial
statements into U.S. dollars are reported as cumulative currency translation
adjustments. Our cumulative currency translation adjustments
decreased by approximately $2,326 thousand, or 97.2%, from approximately $2,392
thousand in 2008 to approximately $66 thousand in 2009.
Liquidity
and Capital Resources
We
had retained earnings of approximately $47,824 thousand and $35,587 thousand as
of July 31, 2010 and October 31, 2009, respectively. As of July 31,
2010, we had cash and cash equivalents of approximately $28,749 thousand and
total current assets of approximately $44,758 thousand. As of July
31, 2010, we had a working capital surplus of approximately $42,265
thousand. We believe our cash and cash equivalents are adequate
to satisfy our working capital needs and sustain our ongoing operations for the
next twelve months.
Our
summary cash flow information is as follows:
Nine months ended July 31
|
||||||||
Net cash provided by (used in):
|
2010
|
2009
|
||||||
($ in thousands)
|
||||||||
Operating
activities
|
22,883
|
3,059
|
||||||
Investing
activities
|
(2,559
|
)
|
(16
|
)
|
||||
Financing
activities
|
-
|
-
|
Comparison
of Nine Months Ended July 31, 2010 and 2009
Net
Cash Provided by Operating Activities
Net
cash provided by operating activities increased approximately $19,824 thousand,
from net cash provided by operating activities of approximately $3,059 thousand
in 2009 to net cash provided by operating activities of approximately $22,883
thousand in 2010. This increase was primarily attributable to an
increase in net income from operations of approximately $12,237 thousand, and a
reduction in trade receivables of approximately $12,386 thousand, as average
days sales outstanding fell to 118 days in 2010 from 189 days in 2009, which
included a period of sales term incentives. We have recently
tightened our credit terms with our customers to be within 100 days and will
continue to increase our collection efforts to reduce our days sales
outstanding. This increase in net cash provided by operating
activities was also attributable to a reduction in amounts due from related
parties by approximately $130 thousand, and a decrease in inventory level by
approximately $549 thousand. Furthermore, this increase in net cash
provided by operating activities was offset in part by a decrease in value added
tax payable of approximately $715 thousand.
50
Net
Cash Used in Investing Activities
Net
cash used in investing activities increased approximately $2,543 thousand, from
approximately $16 in 2009 to approximately $2,559 thousand in
2010. This increase was primarily attributable to approximately
$2,559 thousand of payments made to purchase office floors from a third party
during the period ending April 30, 2010.
Comparison
of Years Ended October 31, 2009 and 2008
We
had retained earnings of approximately $35,587 thousand and $21,245 thousand as
of October 31, 2009 and 2008, respectively. As of October 31, 2009,
we had cash and cash equivalents of approximately $8,112 thousand and total
current assets of approximately $34,661 thousand. As of October 31,
2009, we had a working capital surplus of approximately $31,969
thousand.
Our
summary cash flow information for the years ended October 31, 2009 and 2008 is
as follows:
Year ended October 31
|
||||||||
Net cash provided by (used in):
|
2009
|
2008
|
||||||
($ in thousands)
|
||||||||
Operating
activities
|
13,068
|
(1,228)
|
||||||
Investing
activities
|
(16,221)
|
(111)
|
||||||
Financing
activities
|
1,500
|
-
|
Net
Cash Provided by (Used in) Operating Activities
Net
cash provided by (used in) operating activities increased approximately $14,296
thousand, from approximately $1,228 thousand in 2008 to approximately $13,068
thousand in 2009. This increase was primarily attributable to an
increase in net income from operations of approximately $4,556 thousand, a
decrease in the level of increase in trade receivables of approximately $9,103
thousand as a result of tightened credit terms given to customers, a decrease in
the level of increase in inventories of approximately $1,119 thousand, and an
increase in value added tax payable of approximately $477
thousand. This increase was offset in part by an increase in amounts
due from related parties of approximately $547 thousand.
Net
Cash Used in Investing Activities
Net
cash used in investing activities increased approximately $16,110 thousand, from
approximately $111 thousand in 2008 to approximately $16,221 thousand in
2009. This increase was primarily attributable to approximately
$14,670 thousand of payments made to purchase the land use right and properties
of one of our production facilities from a related party, Stock Co, and
approximately $1,467 thousand of payments made to purchase two production
patents from Stock Co.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities increased approximately $1,500 thousand,
from $0 thousand in 2008 to approximately $1,500 thousand in
2009. This increase was attributable to consideration received from
Allied Merit International Investments, Inc. and Griffin Ventures Ltd for an
aggregate of 2,142,856 shares of the Company’s common stock and 1,071,428
warrants with an exercise price of $0.875 per share.
51
Expansion
Strategy
We
believe the market for pharmaceutical products in China is growing
rapidly. Our growth strategy involves capturing as much of this
market as possible during this rapid growth phase. To implement this
strategy we plan to strengthen our market position in the Siberian Ginseng
(Acanthopanax) market, expand our Siberian Ginseng (Acanthopanax) cultivating
bases, improve the quality standards of Siberian Ginseng (Acanthopanax), and
extend our distribution network through internal distribution channels
reforms. Our expansion strategy will require the continued retention
and investment of our earnings from operations and, we believe, additional
funding from private debt and equity financing. In general, the
commitment of funds to research and development, or acquisition or construction
of plant and equipment, tends to impair liquidity. However, we
believe that because of the upward trend in our revenues in recent years, even
if this trend levels off, our income from continuing operations coupled with
such additional financing, if required, should provide sufficient liquidity to
meet our expansion needs.
Outstanding
Long-Term Indebtedness
None.
Off-balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.
Capital
commitments
We
have capital commitments for purchase of land use right, property and equipment
and production patents from a related party, Stock Co, of approximately
$9,655,051. In addition, on April 10, 2010, the Company, through its
wholly own subsidiary, Harbin Renhuang Pharmaceutical Co. Ltd, entered into a
Property Sale and Purchase Contract (“Purchase Agreement”) with
Hongxiangmingyuan of Heilongjiang Yongtai Company, to acquire two office floors
in a building located in the Nangang District, Harbin, PRC, for total
consideration of $5,612,306. Pursuant to the Purchase Agreement, a
payment of $3,957,911 was made in April 2010, and the final payment of
approximately $1,683,692 is due by December 20, 2012, at which time title to the
property will be transferred to the Company. We expect to fund
these commitments with cash provided from operations.
Contractual
Obligations
See
“Properties” description on p. 70.
Critical
Accounting Policies
The
consolidated financial statements include the financial statements of us and our
subsidiaries. All transactions and balances among us and our
subsidiaries have been eliminated upon consolidation.
52
Accounting
Judgments and Estimates
Certain
amounts included in or affecting our consolidated financial statements and
related disclosures must be estimated, requiring us to make certain assumptions
with respect to values or conditions that cannot be known with certainty at the
time the financial statements are prepared. These estimates and assumptions
affect the amounts we report for assets and liabilities and our disclosure of
contingent assets and liabilities at the date of our financial statements. We
routinely evaluate these estimates, utilizing historical experience, consulting
with experts and other methods we consider reasonable in the particular
circumstances. Nevertheless, actual results may differ significantly from our
estimates. Any effects on our business, financial position or results of
operations resulting from revisions to these estimates are recorded in the
period in which the facts that give rise to the revision become
known.
We
believe that certain accounting policies are of more significance in our
consolidated financial statement preparation process than others, which policies
are discussed below. See also Note 2 to the consolidated financial statements
for a summary of our principal accounting policies.
Estimates of allowances for bad
debts – We must periodically review our trade and other receivables
to determine if all are collectible or whether an allowance is required for
possible uncollectible balances.
Estimate of the useful lives of
property and equipment – We must estimate the useful lives and
proper salvage values of our property and equipment. We must also review
property and equipment for possible impairment.
Inventory – We must
determine whether we have any obsolete or impaired inventory.
Revenue recognition –
Revenue from the sale of goods is recognized on the transfer of risks and
rewards of ownership, which generally coincides with the time when the goods are
shipped to customers and the title has passed.
Share-based compensation
– Share-based
compensation to employees is measured by reference to the fair value of the
equity instrument as at the date of grant using the Black-Scholes model, which
requires assumptions for dividend yield, expected volatility and expected life
of stock options. The expected life of stock options is estimated by
observing general option holder behavior. The assumption of the
expected volatility has been set by reference to the implied volatility of our
shares in the open market and historical patterns of
volatility. Performance and service vesting conditions attached to
the options are included in assumptions about the number of shares that the
option holder will ultimately receive. On a regular basis we review
the assumptions made and revise the estimates of the number of options expected
to be settled, where necessary.
Please
refer to the notes to the financial statements included elsewhere in this
prospectus for a more complete listing of all of our critical accounting
policies.
New
Accounting Pronouncements
Accounting
Standards Update (“ASU”) ASU No. 2010-09 (ASC Topic 855), which amends
Subsequent Events Recognition and Disclosures, ASU No. 2009-16 (ASC Topic 860),
which amends Accounting for Transfer of Financial Assets, ASU No. 2009-05 (ASC
Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU
No. 2009-08, Earnings per Share, ASU No. 2009-12 (ASC Topic 820), Investments in
Certain Entities That Calculate Net Asset Value per Share, and various other
ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to
existing guidance or affect guidance to specialized industries or entities were
recently issued. These updates have no current applicability to the Company, or
their effect on the financial statements would not have been
significant.
53
In April 2010, the FASB issued
Accounting Standards Update, 2010-17, Revenue Recognition—Milestone Method
(Topic 605): “Milestone Method
of Revenue Recognition—a consensus of the FASB Emerging Issues Task
Force.” This is an update regarding the milestone method of
revenue recognition. The scope of this update is limited to arrangements that
include milestones relating to research or development deliverables. The update
specifies criteria that must be met for a vendor to recognize consideration that
is contingent upon achievement of a substantive milestone in its entirety in the
period in which the milestone is achieved. The criteria apply to milestones in
arrangements within the scope of this update regardless of whether the
arrangement is determined to have single or multiple deliverables or units of
accounting. The update will be effective for fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. Early application is
permitted. Companies can apply this guidance prospectively to milestones
achieved after adoption. However, retrospective application to all prior periods
is also permitted. This update is not expected to have a material impact on our
financial statements.
In March 2010, the FASB issued
Accounting Standards Update, 2010-13, Compensation—Stock Compensation (Topic
718): “Effect of Denominating
the Exercise Price of a Share-Based Payment Award in the Currency of the Market
in Which the Underlying Equity Security Trades—a consensus of the FASB Emerging
Issues Task Force.” This is an update regarding the effect of
denominating the exercise price of a share-based payment awards in the currency
of the market in which the underlying equity securities trades and that currency
is different from (1) entity’s functional currency, (2) functional currency of
the foreign operation for which the employee provides services, and (3) payroll
currency of the employee. The update clarifies that an employee share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades should be
considered an equity award assuming all other criteria for equity classification
are met. The update will be effective for interim and annual periods beginning
on or after December 15, 2010, and will be applied prospectively. Affected
entities will be required to record a cumulative catch-up adjustment for all
awards outstanding as of the beginning of the annual period in which the
guidance is adopted. This update is not expected to have a material impact on
our financial statements.
In March, 2010, the FASB issued
Accounting Standards Update, 2010-11, Derivatives and Hedging (Topic 815):
“Scope Exception Related to
Embedded Credit Derivatives.” This update clarifies the type
of embedded credit derivative that is exempt from embedded derivative
bifurcation requirements. Specifically, only one form of embedded credit
derivative qualifies for the exemption – one that is related only to the
subordination of one financial instrument to another. As a result, entities that
have contracts containing an embedded credit derivative feature in a form other
than such subordination may need to separately account for the embedded credit
derivative feature. This update also has transition provisions, which permit
entities to make a special one-time election to apply the fair value option to
any investment in a beneficial interest in securitized financial assets,
regardless of whether such investments contain embedded derivative features.
This update is effective on the first day of the first fiscal quarter beginning
after June 15, 2010. Early adoption is permitted at the beginning of any fiscal
quarter beginning after March 5, 2010. This update is not expected to have a
material impact on our financial statements
In January 2010, the FASB issued
Accounting Standards Update, 2010-06, Fair Value Measurements and Disclosures
(Topic 820): “Improving
Disclosures about Fair Value Measurements.” This update
provides guidance to improve disclosures about fair value measurements. This
guidance amends previous guidance on fair value measurements to add new
requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating
to Level 3 measurement on a gross basis rather than on a net basis as currently
required. This update also clarifies existing fair value disclosures about the
level of disaggregation and about inputs and valuation techniques used to
measure fair value. This guidance is effective for annual and interim periods
beginning after December 15, 2009, except for the requirement to provide the
Level 3 activities of purchases, sales, issuances, and settlements on a gross
basis, which will be effective for annual and interim periods beginning after
December 15, 2010. Early application is permitted and, in the period of initial
adoption, entities are not required to provide the amended disclosures for any
previous periods presented for comparative purposes. The adoption of this update
did not have a significant impact on our financial statements.
54
In October 2009, the FASB issued
Accounting Standards Update, 2009-13, Revenue Recognition (Topic 605): “ Multiple Deliverable Revenue
Arrangements – A Consensus of the FASB Emerging Issues Task Force.” This
update provides application guidance on whether multiple deliverables exist, how
the deliverables should be separated and how the consideration should be
allocated to one or more units of accounting. This update establishes a selling
price hierarchy for determining the selling price of a deliverable. The selling
price used for each deliverable will be based on vendor-specific objective
evidence, if available, third-party evidence if vendor-specific objective
evidence is not available, or estimated selling price if neither vendor-specific
or third-party evidence is available. We will be required to apply this guidance
prospectively for revenue arrangements entered into or materially modified after
January 1, 2011; however, earlier application is permitted. We have not
determined the impact that this update may have on our financial
statements.
In June 2009, the FASB issued guidance
related to accounting for transfers of financial assets. This guidance improves
the information that a reporting entity provides in its financial reports about
a transfer of financial assets; the effects of a transfer on its financial
position, financial performance and cash flows; and a continuing interest in
transferred financial assets. In addition, this guidance amends various ASC
concepts with respect to accounting for transfers and servicing of financial
assets and extinguishments of liabilities, including removing the concept of
qualified special purpose entities. This guidance must be
applied to transfers occurring on or after the effective date. On February 1,
2010, we adopted this guidance. The adoption of this guidance did not
have a material impact on our financial statements.
In June 2009, the FASB issued guidance
which amends certain ASC concepts related to consolidation of variable interest
entities. Among other accounting and disclosure requirements, this guidance
replaces the quantitative-based risks and rewards calculation for determining
which enterprise has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power to
direct the activities of a variable interest entity and the obligation to absorb
losses of the entity or the right to receive benefits from the entity. On
February 1, 2010, we adopted this guidance. The adoption of this
guidance did not have a material impact on our financial
statements.
55
BUSINESS
Overview
We are a high-tech enterprise engaged
in the development, manufacturing, and distribution of botanical products,
bio-pharmaceutical products, and traditional Chinese medicines, or TCM, in the
People’s Republic of China (“PRC” or “China”). We have three “Good Manufacturing
Practice” or GMP certified production facilities - Ah City natural and
biopharmaceutical plant, Dongfanghong pharmaceutical plant and Qingyang natural
extraction plant - capable of producing 18 dosage forms and over 200 different
products. Our products include, but are not limited to, botanical
anti-depression and nerve-regulation products, biopharmaceutical products, and
botanical antibiotic and traditional over-the-counter (“OTC”) Chinese
medicines. Botanical anti-depression and nerve-regulation products
account for over 50% of our revenues and we intend to strengthen our
developments in this area. We have entered into sales agency
agreements with sales agents in 19 provinces and four municipalities, through
which our products are sold to over 3,000 distributors and over 70 sales centers
across 24 provinces in China.
Corporate
History and Structure
We were incorporated in the State of
Nevada on August 18, 1988, originally under the corporate name of Solutions,
Incorporated. We were inactive until August 16, 1996, when we changed
our corporate name to Suarro Communications, Inc, and engaged in the business of
providing internet based business services. In 2006 we
discontinued our business operation at the time and became a non-operating
public company.
On August 28, 2006, we entered into a
Share Exchange Agreement (the “Exchange Agreement”) with Harbin Renhuang
Pharmaceutical Company Limited or Renhuang BVI, a company incorporated in the
British Virgin Islands. Pursuant to the Exchange Agreement we
acquired all of the outstanding capital stock of Renhuang BVI, and indirect
ownership of Renhuang BVI’s wholly owned subsidiary, Harbin Renhuang
Pharmaceutical Co. Ltd or Renhuang China, which operates a pharmaceutical
development, manufacturing and distribution business through various research
and manufacturing facilities in the PRC.
Since our inception, we have had
the following name changes:
June
1997
|
ComTech
Consolidation Group, Inc
|
|
February
1999
|
E-Net
Corporation
|
|
May
1999
|
E-Net
Financial Corporation
|
|
January
2000
|
E-Net.Com
Corporation
|
|
February
2000
|
E-Net
Financial.Com Corporation
|
|
January
2002
|
Anza
Capital, Inc (“Anza”)
|
|
July
2006
|
Renhuang
Pharmaceuticals, Inc.
|
|
November
2010
|
China
BotanicPharmaceutical Inc
|
56
Substantially all of our assets and
operations are located in the PRC.
Our
Products
Our products mainly fall into the
following three categories: (i) botanical anti-depression & nerve-regulation
products, (ii) biopharmaceutical products, and (iii) botanical antibiotics and
traditional OTC Chinese medicines. The table below is an illustration of our
products and their main functions:
Product
Category
|
Product
|
Main
Functions
|
||
Botanical
anti-depression and nerve-regulation products
|
Siberian
Ginseng (Acanthopanax) Series:
Siberian
Ginseng (Acanthopanax) Tablets
Siberian
Ginseng (Acanthopanax) Syrup
Siberian
Ginseng (Acanthopanax) Extract(200g)
Siberian
Ginseng (Acanthopanax) Extract(338g) [Note: The Drug Approval Number of
Ginseng (Acanthopanax) Extract is under the name of Stock
Co.]
|
Antidepressant
properties: Regulation of nervous excitation and inhibition; calm and
inhibit spontaneous activities; improve sleep and anticonvulsant
properties
Improve
blood properties: Improve blood flow, blood lipid profile and blood
viscosity; prevent and improve cerebral thrombosis, hyperlipidemia,
hypotension (low blood pressure), coronary heart disease, diabetes,
leukopenia, and gonadotrophic dilation of blood vessels
|
||
Tianma
Series:
Tianma
Pills (sugar coated, 48 tablets)
Tianma
Pills (sugar coated, 100 tablets)
|
Dispel
coldness; relieve pain and headache caused by blood supply shortage and
blood stasis
|
|||
Compound
Yangjiao Tablets (sugar coated, 50 tablets)
|
Relieve
pain from migraines, vascular headaches, tension headaches and nervous
headaches
|
|||
Compound
Schizandra Tablets
|
Regulation
of the central nervous system. to generate body fluids and alleviate
thirst, nourish the kidneys, cure insomnia and palpitations, and is also
widely used as treatment for neurasthenia.
|
|||
Biopharmaceutical
products
|
Shark
Vital Capsules
|
Improve
the cerebral and cardiovascular oxygen supply; resist radiation; increase
white blood cells; and prevent cancer
|
||
Badger
Fat
[Note:
The Drug Approval Number of Badget Fat is under the name of Stock
Co.]
Ginseng
and Venison Extract
[Note:
The Drug Approval Number of Ginseng and Venison Extract is under the name
of Stock Co.]
|
Treatment
of burn and scald
Nourish
the blood and the kidneys, restore the body's energy and increase
endurance.
|
|||
Botanical
antibiotics and traditional OTC Chinese medicines
|
Banlangen
Granules
|
Antiviral
(anti-influenza) and broad-spectrum antibiotic
|
||
Compound
Honeysuckle Granules
|
Antiviral;
antibacterial; and anti-inflammatory
|
|||
Shengmai
Granules
|
Regulate
blood flow; strengthen heart beat; and improve the immune system and blood
quality
|
|||
Qing
Re Jie Du Oral Liquid
|
Treating
the flu, upper respiratory infections, and sore
throats
|
57
The following table reflects the
approximate sales, before sales rebates, of our three product categories during
the fiscal years ended October 31, 2009 and 2008:
2009
|
2008
|
Change (2009 – 2008)
|
||||||||||||||||||||||||||||||||||
Product Category
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
Quantity
(Pack’000)
|
Amount
($’000)
|
% of
Sales
|
|||||||||||||||||||||||||||
Botanical
anti-depression and nerve-regulation
products
|
567
|
40,748
|
78.0
|
485
|
32,468
|
76.0
|
82
|
8,280
|
25.5
|
|||||||||||||||||||||||||||
Biopharmaceutical
products
|
13
|
5,803
|
11.1
|
16
|
7,249
|
17.0
|
(3
|
)
|
(1,446
|
)
|
(19.9
|
)
|
||||||||||||||||||||||||
Botanical
antibiotics and traditional OTC Chinese medicines
|
147
|
5,709
|
10.9
|
114
|
2,987
|
7.0
|
33
|
2,722
|
91.1
|
|||||||||||||||||||||||||||
Total
|
727
|
52,260
|
100.0
|
615
|
42,704
|
100.0
|
112
|
9,556
|
22.4
|
Botanical
anti-depression and nerve-regulation products
Botanical anti-depression and
nerve-regulation products contributed approximately $40,748 thousand to our
revenue in 2009 ($32,468 thousand in 2008) and accounted for approximately 78.0%
of total product sales in 2009 (76.0% in 2008).
Siberian
Ginseng (Acanthopanax):
Acanthopanax, which is known in the
United States as Siberian Ginseng, has been used for centuries in
China. According to Chinese Pharmacopoeia, it has numerous medical
efficacies including, improving kidney and spleen function; tranquilizing the
mind (anxiolytic effect), improving appetite; decreasing pain (analgesic
effect); and improving sleep quality. In addition, further
pharmacologic studies and clinical trials conducted over the medical efficacies
of Siberian Ginseng (Acanthopanax) have shown additional benefits,
including:
58
|
·
|
Antidepressant
|
Regulating the nervous
system: Siberian Ginseng (Acanthopanax) not only improves the excitation
process of the central nervous system but also the inhibition process, making it
more efficient. It also helps to balance the two processes to improve human
intellectual and physical functions. (Source: "Chinese Medicine
Information" - Microbiology Teaching and Research Section of Suzhou Medical
College)
Treating neurasthenia:
Siberian Ginseng (Acanthopanax) can significantly reduce the symptoms of
neurasthenia; improves insomnia, restless sleep, heart palpitations,
forgetfulness, and fatigue. (Source: “Chinese patent medicine studies”
Acanthopanax research situation at home and abroad - Traditional Chinese
Medicine Research Section of Heilongjiang Institute of Chinese
Medicine)
Treating insomnia: Siberian
Ginseng (Acanthopanax) has been proven to be effective in treating hypochondria
and depression caused by insomnia and nerve dysfunction by an increasing number
of scientific research departments and national institutions. There is a natural
link between insomnia and depression. “Junk sleep” will lead to restlessness,
low spirits and decreased work quality. Although hypochondria and depression can
be attributed to external stimulus, stress and other factors, they are mainly
attributed to nerve dysfunction and are classified as a psychiatric
illness. (Source: “Insomnia and depression treatment website”
http://www.shimianyiyu.net
)
|
·
|
Treat
cerebrovascular and cardiovascular disease. Siberian Ginseng
(Acanthopanax) has positive effects on coronary heart disease, angina,
high blood pressure and blood pressure regulation. (Source: “China
Acanthopanax Web” http://bjcp.xsjk.net)
|
|
·
|
Anti-fatigue.Total
Glucosides of Siberian Ginseng (Acanthopanax) has powerful anti fatigue
effects that are more effective than Ginseng. (Source: “China Acanthopanax
Web” http://bjcp.xsjk.net)
|
|
·
|
Antioxidant.
Siberian Ginseng (Acanthopanax) helps to delay the aging process. (Source:
“China Acanthopanax Web” http://bjcp.xsjk.net)
|
|
·
|
Strengthening
the body: Total Glucosides of Siberian Ginseng (Acanthopanax)
promotes fat, sugar and protein metabolism, and regeneration of hepatic
(liver) cells; it improves protein and nucleic acid synthesis and
strengthens physical performance. (Source: “China Acanthopanax
Web” http://bjcp.xsjk.net)
|
Tianma
Pills and Compound Yangjiao Tablets:
Tianma Pills and Compound Yangjiao
Tablets are botanic drugs used to treat headaches and regulate
nerves. Their known benefits and low side-effects have led to them
being the top sellers among medication with similar properties in
China.
59
Biopharmaceutical
products
Biopharmaceutical products contributed
approximately $5,803 thousand to our revenue in 2009 ($7,249 thousand in 2008)
and accounted for approximately 11.1% of total product sales in 2009 (17.0% in
2008).
Shark vital capsule is the only product
currently in this category. It is a marine biology medicine containing squalene,
an extract from shark liver, which is known to have the following
effects: Improve kidney and liver function, reduce cholesterol
levels, alleviate occurrence of heart disease, increase leukocyte in blood,
relieve fatigue and strengthen the overall immune system.
We plan to introduce Badger oil, a new
biopharmaceutical product, which, according to the Chinese Pharmacopoeia, treats
burns and scalds, to the market in the last quarter of 2010.
Botanical
antibiotics and traditional OTC Chinese medicine
Botanical antibiotics and traditional
OTC Chinese medicines contributed approximately $5,709 thousand to our revenue
in 2009 ($2,987 thousand in 2008) and accounted for approximately 10.9% of total
product sales in 2009 (7.0% in 2008).
In our last quarter of 2009, we
introduced Banlangen Granules and Compound Honeysuckle Granules to the
market. As these two products have been widely recognized for their
effects in prevention and treatment of common cold and flu, we anticipate that
their sales will increase significantly during the influenza
epidemic.
Raw
materials and Suppliers
The raw material of Siberian Ginseng
(Acanthopanax) based products are effective ingredients extracted from the
Siberian Ginseng (Acanthopanax) plant. In China, about 94% of the
wild Siberian Ginseng (Acanthopanax) resources grow in the Heilongjiang Province
(Source: Heilongjiang Dongbei net). Through our arrangement with
Dongfanghong Forrestry Bureau, we have the exclusive rights for an indefinite
term to purchase the wild Siberian Ginseng (Acanthopanax) grown on 100,000 acres
of land in Dongfanghong, which represents approximately 500 tons, or 70% of the
annual production, of wild Siberian Ginseng (Acanthopanax) resources in
China. Additionally, since 2006, we have been developing our own
Siberian Ginseng (Acanthopanax) cultivation base in Dongfanghong, Heilongjiang,
China.
Other raw materials and packaging
materials are purchased from various independent suppliers, and do not rely on
any one supplier. To ensure consistent quality, we have established
long-term relationships with many of our suppliers, ensuring that we have at
least ten different suppliers for each type of raw materials. We
chose our suppliers based on criteria such as quality, reputation, price,
delivery capacity and GMP certification. In addition, we conduct stringent
inspections on each batch of raw material supplied, and perform periodic review
of supplier qualifications.
Manufacturing
and production facilities
We have three production
facilities: Ah City natural and biopharmaceutical plant, Dongfanghong
pharmaceutical plant and Qingyang natural extraction plant. The
facilities, with a total usable area of over 160 thousand square meters, are
capable of producing more than 200 kinds of pharmaceuticals, health food, and
functional food in 18 dosage forms, including tablets, capsules (hard and soft),
granules, oral liquid, frozen powder injection, powder injection, liquid
injection, dropping pills, and ointments. We also have β-lactams and plant
extraction lines and
automatic packaging lines.
60
Our production is in strict compliance
with "Good Manufacturing Practice”, or GMP, "Health Food Good Manufacturing
Practice" and "Sterile Product Quality Control Norms". We have state of the art
automated equipments, precise testing instruments, efficient air conditioning,
cleaning systems and modern logistic center for storage and distribution of
products.
Quality
Assurance
We are committed to delivering
high-quality pharmaceutical products, and have set in place comprehensive
testing and quality control measures. We have a quality control
team that carries out quality control procedures in compliance with internal
policies, GMP standards and State Food and Drug Administration, or SFDA,
regulations. There are quality checks at every stage of production,
including testing the quality of raw materials throughout our manufacturing
process, testing finished products against various criteria such as ingredient
composition, weight and physical appearance, and testing sanitary conditions of
the production line. We also have a pre-arranged emergency plan in
the case of adverse effects such as accident treatment process.
Our production facilities comply with
pharmaceutical GMP standards. We employ automated processes and
scientific parameters throughout the manufacturing process that are designed to
ensure that all our products meet our quality requirements. We
believe that our rigorous testing and inspection procedures have been critical
in ensuring that our products are quality products.
Marketing
and Product Distribution
We have entered into sales agency
agreements with sales agents in 19 provinces and four municipalities, through
which our products are sold to over 3,000 distributors and over 70 sales centers
across 24 provinces in China. Our products are mainly sold by our distributors
to pharmacies, medicine wholesale centers, hospitals and other medical agencies.
2 distributors exceeded 10% of our sales during the fiscal years ended October
31, 2008.
Based on our product nature,
distribution channel and market practices, we currently mange our sales and
distribution network through four departments:
|
·
|
General
Business Department. This department is mainly responsible for
distribution of botanical anti-depression and nerve-regulation products.
These products are distributed to provincial distributors, who further
distribute the products to local distributors. The local distributors
through various sales channels, including hospitals and media marketing
methods, will market the products to end
consumers.
|
|
·
|
Brand
Business Department. This department is mainly responsible for
distribution of biopharmaceutical products. These products are distributed
to provincial distributors, who further distribute the products to
regional drugstores. The provincial distributors usually employ their own
sales forces to promote the products and launch promotion campaigns with
our support in marketing the products to end
consumers.
|
|
·
|
OTC
Business Department. This department is mainly responsible for
distribution of botanical antibiotics and traditional OTC Chinese
medicines. These products are distributed to provincial distributors, who
further distribute the products to regional drugstores. The provincial
distributors usually employ their own sales forces and launch their own
promotion campaigns in marketing the products to end
consumers.
|
61
|
·
|
Allocation Business
Department. This department is responsible for bulk distribution of
commonly used products. These products are distributed to medical trading
centers and major market agents, who further distribute the products to
nationwide drugstores and township
clinics.
|
Research
and Development
We are committed to developing new
products and improving our current products. During the fiscal years
ended October 31, 2009 and 2008, we spent approximately $2,529 thousand and
$2,125 thousand, respectively, on research and development.
Aligned with our line of business, our
research and development (“R&D”) activities are focused on the
following:
|
·
|
Development
of single-plant anti-depression & nerve regulation
products;
|
|
·
|
Development
of biopharmaceutical products; and
|
|
·
|
Development
of OTC product upgrades.
|
To become an innovative enterprise, we
continuously employ qualified talent to strengthen our research
team. Currently we have established an open and innovative R&D
environment consisting of Proprietary R&D Centers, Cooperation R&D
Centers and Post-doctoral Workstations.
|
·
|
Proprietary
R&D Centers. These centers are responsible for initial research
of potential products and development of existing product upgrades. We
have comprehensive research and development facilities, including
innovative medicine division, standard extractions division, healthcare
division, comprehensive division, planning & registration division and
mid-phrase test division. In addition, our labs have received government
and industry recognitions, namely: “Key Lab on TCM Extractions’” from the
Science and Technology Bureau of Heilongjiang Province and “Innovative
Medicine Lab” from the Industry Information Committee of
Harbin.
|
|
·
|
Cooperation
R&D Centers. These centers have established committees
consisting of well-known medical professionals in China, who specialize in
biopharmaceutical and botanical medicines. The committee guides and
advises the execution and direction of R&D projects, as well as
evaluates research findings. The Cooperation Centers also work closely
with the academic agencies including Institute of Biophysics and
Ecological Centre of the Environment in the Chinese Academy of
Science; Medical Research Institute of National Navy; Chinese Biochemical
Medicine Research Center; Second Army Medical University; China Medicine
University; Beijing University of Traditional Chinese Medicine;
Heilongjiang Province Chinese Medicine University; Northeast Forestry
University and Harbin Medical
University.
|
|
·
|
Post-doctoral
Workstations. The workstations allow post-doctoral studies on
projects that are considered to be valuable to our
development.
|
R&D
Strategy
Our strategy is to be the first brand
and industry leader in single-plant drugs for the treatment of depression and
nerve-regulation, mainly through development of products from Siberian Ginseng
(Acanthopanax) and Schisandra. Our goal is consistent with the following
trends:
|
·
|
Development
of single-plant medicines is one of the three main developments in the
pharmaceutical industry; and
|
62
|
·
|
Antidepressants
are one of the best selling drugs in the
world.
|
To implement this strategy, we have
established a cultivation base and are focusing our effects to set the industry
standard for Siberian Ginseng (Acanthopanax) and Schisandra
products. This cultivation project has received significant
support from various government departments, including the Ministry of Science
and Technology, Development and Reform Commission.
R&D
Achievements
We have
received the following recognition for our research and
development:
2009
|
The
Siberian Ginseng (Acanthopanax) Polysaccharides products were awarded “Key
Products in Heilongjiang Province” by Heilongjiang Science and Technology
Office
|
|
The
“Pollution-Free and Environment-Friendly Extraction Process for Total
Alkaloids of Sophora Flavescens and Colorless Sterile Injection against
Hepatitis B” project was listed as a Major Intellectual Property Rights
Project by Harbin Intellectual Property Bureau.
|
||
The
“Industrialization of Siberian Ginseng (Acanthopanax) Extraction: Total
Glucosides, Total Flavonoids and Polysaccharides” project was listed as a
special high-tech project by Heilongjiang Development and Reform
Commission.
|
||
The
“Siberian Ginseng (Acanthopanax) Oral liquid” project was listed as a new
industrialization special project by Harbin Development and Reform
Commission.
|
||
2008
|
The
“Research on New Siberian Ginseng (Acanthopanax) Anti-depression Drugs”
project was listed as a Harbin technological innovation talents project by
Harbin Science and Technology Bureau.
|
|
2007
|
The
“Secondary Development and Industrialization of Genuine Medical Materials
Siberian Ginseng (Acanthopanax) Series Products” project was listed as a
major provincial-level pre-project by Heilongjiang Development and Reform
Commission.
|
Current
R&D Projects
|
·
|
Siberian
Ginseng (Acanthopanax) Development Project. We have been
successful in separating effective components of Siberian Ginseng
(Acanthopanax), namely total glucosides, total flavonoids and syringing,
in particular, syringin has significant effects in the treatment of
depression and nerve regulation. We have created a sample of syringin
freeze-dried Acanthopanax powder spasmolytic that is currently undergoing
pilot test. If successful, this achievement represents great pioneering
work in the field of Chinese medicine, and will enhance our competitive
edge in this area.
|
63
|
·
|
Schisandra
Integrated Development Project. Schisandra is
a wild plant with high medical and health values. Modern studies have
shown that Schisandra contains lignin, which has strong effects in
treating insomnia. At present, we have successfully completed preliminary
review of patent application for Schisandra lignin extraction method and
are working on setting its quality standards. These achievements lay the
foundation for advanced development of Schisandra
products.
|
|
·
|
Total
Alkaloids of Sophora Flavescens
Development Project. As a new drug against Hepatitis B, total
alkaloids of Sophora flavescens can be used to replace α - interferon,
matrine and oxymatrine injections.
|
Intellectual
Property
We rely on intellectual property such
as trade secrets and technical innovations, to protect and build our competitive
position.
Patents
We have purchased from Stock Co. two
patents, Injection Preparation Method against Hepatitis B (Patent No.:
ZL200410043718.5) and Total Alkaloids of Sophora Flavescens Extraction Method
(Patent No.: ZL200410043717.0). Our PRC subsidiary has been
registered as the owner of such patents with the Intellectual Property Office of
the PRC.
Trademarks
We have received from Harbin Renhuang
Pharmaceutical Stock Co., Ltd (“Stock Co.”) a perpetual, royalty-free and
non-exclusive license and right to use the word “RENHUANG” in our tradename and
as a trademark in connection with the sale of our products. Stock Co.
is a company of which Mr. Shaoming Li, our chairman, chief executive officer and
president, serves as chairman and is a 50% shareholder.
Growth
Strategy [Revise
similar to the comments in the Prospectus Summary section]
We believe that as a result of the
rapid growth of the Chinese economy, substantial increase in drug spending,
aging of the population, increase in diseases related to lifestyle, government
support in the pharmaceutical market and gradual application of the health
insurance fund, China's pharmaceutical market will have significant
potentials. In particular, we believe the demand for our products in
China will increase significantly, based on the following:
Global
market condition of depression and melancholy
Depression has been recognized as a
common mental illness. According to World Health Organization (WHO) officials,
5% of the world population is suffering from depression. In 2002, the WHO
identified depression as the world’s fourth largest disease and estimated that
depression would be the second largest disease by 2020. What was unexpected
was that depression has become the world’s second largest disease (second
only to cardio-cerebral vascular disease) after only 6-7 years.
According to official statistics, about
80 million Chinese were suffering from depression at the end of 2008. But it is
estimated that the actual number of depression patients (including mild
depression patients) has reached more than 200 million. In the past several
decades, Chinese diagnostic techniques and treating solutions of depression
lagged behind western countries. Chinese people do not have adequate knowledge
of this disease. At present, only about 10% of depression patients are getting
medical care, far lagging behind world treatment rate. (Source: Analysis and
Prospect of China’s Anti-depressant Market in 2009, edited by HDCMR.com,
http://www.hdcmr.com/ Source: Medicine Economic News,
dated October 30, 2009).
64
Currently the eight best-selling
anti-depressants in the world are: fluoxetine, paroxetine, sertraline,
fluvoxamine, venlafaxine, mirtazapine, duloxetine and amitriptyline. Combined,
they have 80% market share in the global anti-depression market. However, they
are relatively high priced and have numerous adverse side
effects. Siberian Ginseng (Acanthopanax) products, which are
botanical medication used to treat depression and nerve-regulation, have minor
side effects and are moderate priced. Therefore we believe they have
significant market potentials.
Medical
Reform in China
The Chinese government has promised
that Renminbi 850 billion will be invested into the national health insurance
system by 2011. This plan has been approved by the State Council. The
implementation of this plan will give more than 90% of China's population basic
health insurance policies, providing better public health and medical
services.
On April 6, 2009, the State Council
officially promulgated Opinions of the CPC Central Committee and the State
Council on Deepening the Health Care System Reform (final version). "The
Opinions" first proposed that basic medical and health institutions will be
available to all the people as public products. By 2011, all urban and rural
residents will have been covered by this system. The reform
includes:
|
·
|
Accelerate
the building of basic medical insurance system. The basic medical
insurances for urban workers, urban residents and the new type of rural
cooperative medical care system for rural residents will cover over 90% of
those eligible within three years.
|
|
·
|
Establish
national essential medicines system. All essential
medicines will be listed in the reimbursement catalog of essential
medicine for health insurance. To ensure essential medicine quality, the
government will select a number of preferred manufacturers to be the
essential medicine suppliers. The selection criteria will include but are
not limited to quality, reputation, capacity, qualification, and
price.
|
|
·
|
Perfecting
the system of health care services at grass-roots levels. The
construction of hospitals in counties (including Chinese medicine
hospitals), central health clinics in towns and townships, health care
clinics in villages in remote regions and community-level medical and
health institutions in underdeveloped cities will be enhanced and
improved.
|
|
·
|
Promote the
gradual equalization of basic public health services. Increase in public
health services and improve the funding criteria which will bring broader
acceptance of Chinese medicine.
|
|
·
|
Promote the
reform of public hospitals. Hospital management system, operation
and supervision mechanisms will be reformed to improve service quality of
medical institutions.
|
Pursuant to the Notice Concerning
Releasing the State Medicine Catalogue for Basic Medical Insurance, Occupational
Injury Insurance and Maternity Insurance of the PRC, all medicines in the
national essential drug list are Tier A medicines in the national medical
insurance catalog; a vast majority of patients will be fully reimbursed for
medicines listed in the national essential drug list. Two of our products,
Banlangen Granules and Shengmai Granules, have been included in the
national essential drug list. We believe our company will enjoy long-term
benefits from the healthcare reform as more patients could afford our products
due to such full reimbursement. In addition, we expect to become one of China’s
essential medicine suppliers as the PRC government moves forward with its
reforms in 2010 and 2011.
65
Our growth strategy involves maximizing
the opportunities that the above developments bring and capturing as much of the
market share as possible in the process. To implement this strategy
we plan to:
|
·
|
Strengthen
the market position of Siberian Ginseng (Acanthopanax).
Siberian Ginseng (Acanthopanax) products have been widely recognized for
their benefit in the treatment of depression and nerve-regulation. We hope
to strengthen our current market share of Siberian Ginseng (Acanthopanax)
products by focusing on related R&D and launching new products into
market. In addition, we plan to enhance sales and marketing efforts to
promote the application of Siberian Ginseng (Acanthopanax) products as
alternatives to chemical medicines used to treat depression and
nerve-regulation.
|
|
·
|
Expand our
Siberian Ginseng (Acanthopanax) cultivating bases and adopt scientific
management, gradually improving quality standards of Siberian Ginseng
(Acanthopanax).
This would enable us to be the standards-maker of Siberian Ginseng
(Acanthopanax) and provide us with a competitive edge over our
competitors.
|
|
·
|
Reduce
distribution costs through use of direct sales system: We intend to
gradually switch the sales method of our key products from the current
agency system to a direct sales system. We believe that moving to a direct
sales system will reduce distribution cost and increase our profit
margins. In addition, it is expected that once certain drugs become
essential government procurement drugs, the sales of these drugs will also
be part of our direct sales system.
|
Competition
We face competition from pharmaceutical
manufacturers producing the same type of pharmaceuticals. Our
competitors vary by product categories:
Botanical
anti-depression and nerve-regulation products
As a result of our low-cost access to
significant wild Siberian Ginseng (Acanthopanax) resources, our advanced
technology and equipment, our R&D efforts and our ability to effectively set
the standard on the market, we have become the main manufacturer of these
products, with more than 50% market share as of fiscal year 2009. Our major
competitors are Heilongjiang Gerun Pharmaceutical Co., Ltd. and Harbin Shengyuan
Biological Engineering Co., Ltd. We intend to further develop this market and
strengthen our leadership position.
Biopharmaceutical
products
We are the main Shark Vital Capsules
manufacturer in China, with a market share of 67% as of fiscal year 2009. We
believe this product is approaching the end of its life cycle and have decreased
the marketing efforts for this product. Our major competitors are
Beijing Saishali Biotechnology Research Center and Shantou Xianle
Pharmaceuticals Co., Ltd.
We have a number of competitive
advantages over our competitors, primarily:
66
|
·
|
Lower
production costs: We purchase our raw materials directly from
Australia at prices which we believe are lower than our competitors, who
mostly purchase from coastal areas in China;
and
|
|
·
|
Solid
customer bases:
We have accumulated a large and firm hospital customer and sales base as a
result of our early entry into this biopharmaceutical market and having
our products recognized for their excellent quality, mainly as a result of
past clinical trials.
|
Botanical
Antibiotics and traditional OTC Chinese medicines
Our Banlangen Granules have a market
share of 13% as of fiscal year 2009. Our major competitors are
Guangzhou Baiyunshan Hutchison Whampoa Chinese Medicine Co., Ltd. and Guangzhou
Xiangxue Bio-Medical Engineering Co., Ltd.
Our Compound Honeysuckle Granules have
a market share of 13% as of fiscal year 2009. Our major competitors are Hebei
Guojin Pharmaceutical Co., Ltd. and Shiyitang Pharmaceutical Factory of Harbin
Pharmaceutical Group.
Our Shengmai Granules have a market
share of 37% as of fiscal year 2009. Our major competitors are Hebei Meibao
Pharmaceutical Co., Ltd. and Guangxi Nanjing Weiwei Pharmacy Co.
Ltd.
We are aware that the main competitive
factors in selling products are quality, price and product awareness. We believe
that we have corresponding advantages in all of these factors.
Government
Regulation
Our products are subject to regulatory
controls governing pharmaceutical products. As a developer, manufacturer and
distributor of pharmaceuticals, we are subject to regulation and oversight by
different levels of the food and drug administration in China, in particular,
the PRC State Food and Drug Administration, or SFDA. The “Law of the PRC on the
Administration of Pharmaceuticals,” as amended on February 28, 2001, provides
the basic legal framework for the administration of the production and sale of
pharmaceuticals in China and covers the manufacturing, distributing, packaging,
pricing and advertising of pharmaceutical products in China. Its implementing
regulations set out detailed rules with respect to the administration of
pharmaceuticals in China. We believe we are in compliance with these laws and
regulations in all materials aspects.
Regulations at the national, provincial
and local levels in China are subject to change. To date, compliance with
governmental regulations has not had a material impact on our earnings or
competitive position, but, because of the evolving nature of such regulations,
we are unable to predict the impact such regulation may have in the
foreseeable future.
Our products are subject to regulatory
controls governing pharmaceutical products. As a developer, manufacturer and
distributor of pharmaceuticals, we are subject to regulation and oversight by
different levels of the food and drug administration in China, in particular,
the PRC State Food and Drug Administration, or SFDA. The “Law of the PRC on the
Administration of Pharmaceuticals,” as amended on February 28, 2001, provides
the basic legal framework for the administration of the production and sale of
pharmaceuticals in China and covers the manufacturing, distributing, packaging,
pricing and advertising of pharmaceutical products in China. Its implementation
regulations set out detailed implementation rules with respect to the
administration of pharmaceuticals in China.
67
Pharmaceutical
Manufacturer
As a manufacturer of pharmaceutical
products and raw materials, we are subject to continuing regulation by the SFDA.
Pursuant to the PRC laws and regulations on the administration and supervision
of the pharmaceutical manufacturers in the PRC, a pharmaceutical manufacturer
must obtain pharmaceutical manufacturing permit from SFDA’s provincial branch.
This permit is valid for five years and is renewable upon its expiration. Our
current pharmaceutical manufacturing permit, issued by the Heilongjiang branch
of SFDA, will be valid until January 1, 2011. We have applied for the renewal of
the pharmaceutical manufacturing permit in July 2010 and expect to renew our
pharmaceutical manufacturing permit in due course.
A pharmaceutical manufacturer must meet
the GMP standards for each of its production facilities in the PRC in respect of
each form of pharmaceutical products it produces. If a manufacturer meets the
GMP standards, SFDA will issue to the manufacturer a GMP certificate with a
five-year validity period. We have obtained GMP certification from SFDA to
produce pharmaceutical products and raw materials in China for all of our
manufacturing facilities. The GMP certification criteria include
institution and staff qualifications, production premises and facilities,
equipment, raw materials, hygiene conditions, production management, quality
controls, product distributions, maintenance of sales records and manner of
handling customer complaints and adverse reaction reports. In addition, we have
obtained pharmaceutical manufacturing permits from the provincial food and drug
administration. Our current pharmaceutical manufacturing permit, issued by the
Heilongjiang branch of SFDA, will be valid until August 17, 2011. We expect to
renew our GMP in due course.
Approval
and Registration of Pharmaceutical Products
A medicine must be registered and
approved by the SFDA before it can be manufactured. A pharmaceutical
manufacturer is allowed to manufacture a medicine only if it has obtained the
medicine registration approval of such medicine. The registration and approval
process requires the manufacturer to submit to SFDA a registration application
containing detailed information concerning the efficacy and quality of the
medicine and the manufacturing process and the production facilities the
manufacturer expects to use. The effective term of such medicine registration
approval is five years and the pharmaceutical manufacturer needs to apply for
and obtain the renewed medicine registration approval if it intends to continue
manufacturing such medicine upon the expiration of the first five-year term. The
process by SFDA for issuing and renewing the medicine registration approvals can
be lengthy, and the results are unpredictable.
All of our products other than Siberian
Ginseng Extract, Badger Fat and Tonic Extract of Ginseng and Vension have
received medicine registration approvals from SFDA, which approves their
manufacturing with a national standard. Our PRC subsidiary is in the process of
renewing the drug approval registrations for certain of its products and
medicines that are currently in production. Such applications have been accepted
by SFDA and our PRC subsidiary is allowed by SFDA to continue to use the current
drug approval numbers to manufacture its products and medicines during the
application process.
Pursuant to the agreements for the free
use of drug approval numbers between Stock Co. and our PRC subsidiary, our PRC
subsidiary is also producing three additional products (namely Siberian Ginseng
Extract, Badger Fat and Tonic Extract of Ginseng and Vension) which are
registered under the name of Stock Co. These three products are produced in
Dofanghong pharmaceutical plant, the ownership of which is still under Stock
Co. We have submitted applications to SFDA for the transfer of the
registrations of these three products from Stock Co. to us (without the payment
of additional consideration). Before the transfer is completed, such
arrangement made by our PRC subsidiary may be deemed as producing these three
products without obtaining required drug approvals, which may result in
administrative penalties including confiscation of the inventories of these
three products, confiscation of the gains arising from the manufacturing of
these three products, fines, suspension of the operation and/or revocation of
the Drug Production Permit of our PRC subsidiary.
68
Price
Controls
The retail prices of certain
pharmaceuticals sold in China, primarily those included in the national and
provincial Medical Insurance Catalogs and those pharmaceuticals whose production
or trading are deemed to constitute monopolies, are subject to price controls in
the form of fixed prices or price ceilings. The retail prices of medicines
that are subject to price controls are administered by the Price Control Office
of the National Development and Reform Commission, or the NDRC, and provincial
and regional price control authorities. Of our products, Siberian
Ginseng Tablets, Compound Yangjiao Tablets, Tianman Pills, Banlangen Granules,
Qing Re Jie Du Oral Liquid, Compound Honeysuckle Granules and Shengmai Granules,
are subject to price controls. These seven procuts accounted for 88.9% of our
total sales in fiscal year 2009.
Reimbursement
Under the National Medical Insurance Program
The Ministry of Labor and Social
Security, together with other government authorities of the PRC, determines
which medicines are to be included in or removed from the national insurance
medicine catalog (including Tier A and Tier B medicines) for the National
Medical Insurance Program, which may affect the amounts reimbursable to program
participants for their purchases of medicines. These determinations are based on
a number of factors, including price and efficacy of a medicine. Although it is
designated as a national program, the implementation of the National Medical
Insurance Program is delegated to provincial governments, each of which has
established its own medicine catalog. A provincial government must include all
Tier A medicines listed in the national insurance medicine catalog in its
provincial medicine catalog, but may at its sole discretion add other medicines
to, or exclude Tier B medicines listed in the national insurance medicine
catalog from, its provincial medicine catalog, so long as the combined numbers
of the medicines added and excluded do not exceed 15% of the Tier B medicines
listed in the national catalog. Depending on which Tier A or Tier B medicine is
classified as in the provincial medicine catalog, a National Medical Insurance
Program participant residing in that province can be reimbursed for the full
cost of a Tier A medicine and for part of the cost of a Tier B
medicine.
Currently, four dosages of our
products, including Siberian Ginseng Tablets, Shengmai Granules, Banlangen
Granules and Qing Re Jie Du Oral Liquid, are included in the national catalog of
the 2009 version and seven dosages of our products, including Siberian Ginseng
Tablets, Shengmai Granules, Banlangen Granules, Compound Honeysuckle Granules,
Tianma Pills, Compound Yangjiao Tablets and Qing Re Jie Du Oral Liquid, are
included in the provincial medicine catalogs of Heilongjiang
province.
National
essential drug list
The national essential drug list is a
part of the recent 2009 healthcare reform of the PRC. This new catalog is
considered superior to the national medical insurance catalog because all
medicines in the essential drug list are Tier A medicines in the national
medical insurance catalog. Under the healthcare reform, the Chinese government
proposed to establish a national basic medicine system based on a national
essential drug list. According to the relevant policy, 90% of China’s
citizens will be covered by a universal healthcare system by the year 2012. As a
result, a vast majority of patients will be fully reimbursed for medicines
listed in the national essential drug list and partially reimbursed for
medicines listed in the national medicine insurance catalog for the National
Medical Insurance Program. Two of our products, Shengmai Granules and Banlangen
Granules, have been included in the national essential drug list. We therefore
believe our company will enjoy long-term benefits from the healthcare reform as
more patients could afford our products due to such full reimbursement. In
addition, we expect that we will become one of China’s essential medicine
suppliers as the PRC government moves forward with its reforms in 2010 and
2011.
69
Environmental
Matters
Our manufacturing facilities are
subject to various pollution control regulations with respect to noise, water
and air pollution and the disposal of waste and hazardous materials. We are also
subject to periodic inspections by local environmental protection authorities.
Our operating facilities have received certifications from the relevant PRC
government agencies in charge of environmental protection indicating that the
operations are in compliance with the relevant PRC environmental laws and
regulations. We are not currently subject to any pending actions alleging any
violations of applicable PRC environmental laws. The Company is in the process of applying
for certification issued by the relevant local environmental protection bureau
to certify Ah City plant’s compliance of environmental laws.
Employees
As of July 31, 2010, we have 66
full-time employees who have entered into labor contracts with our PRC
subsidiary; we have approximately 450 employees dispatched from a labor
dispatching company. We have approximately 40 employees in management
positions, 30 in research and development, 420 in the production, storage and
distribution, and 30 in the marketing and sales (excluding our 3,000
distributors in over 70 sales centers across 24 provinces in China). Our PRC
subsidiary may not fully
contribute the social insurance and housing fund for such 66 employees, and may
not fully contribute the social insurance for the 450 dispatched employees as
required by the agreement between our PRC subsidiary and the relevant employee dispatching
agency.
Properties
We lease our Ah City Natural and
Biopharmaceutical plant and our Dongfanghong Pharmaceutical plant from Stock
Co., a company of which Mr. Shaoming Li, our chairman, chief executive officer
and president, is a 50% shareholder and chairman of the board of directors. The
lease is approximately 105,000 square feet used for production and inventory.
The lease is year-to-year lease, and after May 1, 2010, as a result of the
purchase agreement described immediately below, we may lease such facilities
without any rent.
On October 12, 2009, we entered into a
purchase agreement with Stock Co. to acquire the land use right, property and
plant located at our Ah City Natural and Biopharmaceutical plant for a total
consideration of $23,472,000. Pursuant to the purchase agreement, a payment of
$14,670,000 was made to Stock Co. in October 2009, with a final payment of
$8,802,000 due by December 31, 2011, at which time title for the assets will be
transferred to us.
Our PRC subsidiary entered into a
Contract Letter dated March 3, 2007 with Yerui Pharmaceutical Co of Zhongfa
Industry Group (“Yerui”), under which our PRC
subsidiary may, at a consideration of RMB 3,600,000 (including repayment of a
bank loan granted by Agricultural Bank of China originally borrowed by Yerui
with the amount of RMB 1,090,000), acquire the properties and assets of Yerui’s
Chinese traditional extraction plant located at Qingyang Area of Harbin. Our PRC
subsidiary is currently allowed by Yerui to occupy and use the Qingyang plant.
However, our PRC subsidiary has not fully paid the bank loan on behalf of Yerui
nor has the ownership of the properties of Qingyang plant been transferred to
our PRC subsidiary. Additionally, the properties of Qingyang plant have been
mortgaged to Agricultural Bank of China as collateral for the bank
loan, and the Agricultural Bank of China will have the right to dispose of the
mortgaged properties.
70
Our PRC subsidiary entered into a
Property Purchase Contract dated April 10, 2010 with Heilongjiang Yongtai Co,
pursuant to which our PRC subsidiary may purchase the 10th and
11th
floors of the building located at No. 28, Changjiang St., Nangang District of
Harbin Municipal. Our PRC subsidiary has paid the 1st
installment of the total purchase price pursuant to such Property Purchase
Contract and upon the full payment of the purchase price, Heilongjiang Yongtai
Co will transfer the ownership of such property to our PRC
subsidiary.
We believe that our facilities are
suitable for our current operations. As part of our growth strategy,
we plan to expand our production capacity at our current facilities and to
acquire and construct new facilities in the future.
Legal
Proceedings
From time to time, we may be involved
in litigation relating to claims arising out of its operations in the normal
course of business. Any of these claims could subject us to costly litigation
and, while we generally believe that we have adequate insurance to cover many
different types of liabilities, our insurance carriers may deny coverage or our
policy limits may be inadequate to fully satisfy any damage awards or
settlements. If this were to happen, the payment of any such awards could have a
material adverse effect on our results of operations and financial position.
Additionally, any such claims, whether or not successful, could damage our
reputation and business. We are not a party to, or threatened by, any legal
proceedings, the adverse outcome of which, in management’s opinion, individually
or in the aggregate, would have a material adverse effect on our results of
operations or financial position.
Corporate
Information
Our principal executive office is
located at The 11th Floor, Changjiang International Building, No. 28, Changjiang
Road, Nangang District, Harbin, Heilongjiang Province, P.R. China 150090. Our
telephone number at that address is 86-451-8260-2162. Our website address is
www.renhuang.com. The information on our website is not a part of this
prospectus.
DIRECTORS
AND EXECUTIVE OFFICERS
Directors,
Executive Officers and Significant Employees
The following table sets forth the name
and age of each member of our board of directors and/or executive officers, the
positions and offices held by each of them with us, and the period during which
each has served as one of our directors and/or executive
officers. Directors serve until the election and qualification of
their successors. There was no arrangement or understanding between
any executive officer or director and any other person pursuant to which any
person was elected as an executive officer or director. There are no
family relationships between any of our directors, executive officers, director
nominees or significant employees.
Name
|
Age
|
Position
|
Since
|
|||
Shaoming
Li
|
47
|
Chairman
of the board of directors, Chief Executive Officer, and
President
|
2006
|
|||
Xiaoying
Lu
|
35
|
Interim
Chief Financial Officer
|
2010
|
|||
Jiang
He
|
38
|
Secretary
|
2006
|
|||
Xiaoheng
Shao
|
53
|
Director
|
2010
|
|||
Changxiong
Sun
|
65
|
Director
|
2010
|
|||
Bingchun
Wu
|
73
|
Director
|
2010
|
71
Shaoming Li
has served as the chairman of the board of directors, chief executive
officer and president since founding Harbin Renhuang Pharmaceutical Co. Ltd. in
2006. Mr. Li has more than 20 years experience from the pharmaceutical and
finance industry. Mr. Li has been the chairman and chief executive officer of
Harbin Renhuang Pharmaceutical Stock Co. Ltd since 1996. From 1984 to 1996, Mr.
Li served as vice chairman of Shenzhen Health Pharmaceutical Co. Ltd, a
company dedicated to drug research, production, and sales. Mr. Li is a professor
at Harbin Business University and Northeastern Agriculture University. Mr. Li
also served as vice chairman of Heilongjiang Provincial Chinese Traditional
Medicine Association and Heilongjiang Provincial Medicine Association. Mr. Li
graduated from Central University of Finance and Economics in Beijing, China
with a bachelor degree in finance.
Xiaoying
Lu has served as our interim CFO since August 2010. Prior to joining us,
Ms. Lu was director of accounting at Harbin Santong Energy Limited Company, a
PRC company with more than 500 employees, since 2004. Ms. Lu is a certified
senior accountant and graduated from Harbin Institute of Economic Management
with a Bachelor’s degree in Accounting.
Jiang He
was hired as our as special assistant to the president in 2004 and has
served as secretary since 2006. In this role he is in charge of asset
management, risk and crisis management, and internal audit. From 2001 to 2004,
prior to joining our company, he was the vice general manager of Heilongjiang
Tiansheng High Tech Co. Ltd. In this position Mr. He was primarily responsible
for managing projects, such as, but not limited to, Clean Coal Projects. He
received his Masters degree in Industrial Economics in July, 2004, and his
Bachelor degree in Management from Jilin University in 1992.
Xiaoheng
Shao has served as our independent director and chairman of the audit
committee since April 2010. Mr. Shao currently serves as independent director of
AsiaInfo-Linkage, Inc., a China-based telecom software solutions provider listed
on NASDAQ and China Medicine Corporation, a distributor and developer of
medicines listed on the bulletin board, and as chairman of the nominating
committee of Agria Corporation, a Chinese agricultural company listed on the
NYSE. He also serves as the chairman of the audit committee of: China Biologic
Products, Inc., a plasma-based biopharmaceutical company listed on NASDAQ; China
Recycling Energy Corporation, an energy recycling system design company listed
on NASDAQ; Yongye International, Inc., a Chinese agricultural company listed on
NASDAQ; and China Nuokang Bio-Pharmaceutical, Inc., a biopharmaceutical company
listed on NASDAQ. He served as the chief financial officer of Trina Solar
Limited from 2006 to 2008, where he assisted in its listing on the NYSE in 2006.
In addition, Mr. Shao served from 2004 to 2006 as the chief financial officer of
ChinaEdu Corporation, a Chinese educational service provider, and of Watchdata
Technologies Ltd., a Chinese security software company. Prior to that, Mr. Shao
worked at Deloitte Touche Tohmatsu CPA Ltd. for approximately a decade. Mr. Shao
received his master’s degree in health care administration from the University
of California at Los Angeles in 1988 and his bachelor’s degree in art from East
China Normal University in 1982. Mr. Shao is a member of the American Institute
of Certified Public Accountants.
Changxiong
Sun has served as our director since April 2010. Mr. Sun has
also served as a Professor and Doctoral Tutor at the Management College of
Harbin Institute of Technology since 2005, and Executive Director of the
Overseas Development and Layout Association of China Industry since
2005. Mr. Sun has served as the Director of the Heilongjiang
Dongbeiya Economy and Technology Committee since 2005. From 2004 to
2005, Mr. Sun served as the Vice Secretary General of the Harbin Municipal
Government Committee. From 1999 to 2004, Mr. Sun served as the
Director of the Harbin Finance Management Department. Mr. Sun
has a degree in Management Science and Engineering from the Harbin Institute of
Technology.
72
Bingchun
Wu has served as our director since April 2010. Mr. Wu has
also served as the Team Leader of the Chinese Medicine Research Group at the
Heilongjiang Province Chinese Medicine Research Institute since
2006. From 2006 to 2007, Mr. Wu served as the Chief Expert of the
Chinese Medicine Group of the Innovation System of Heilongjiang Province Science
and Technology Department. From 2004 to 2006, Mr. Wu served as the
Director of the Chinese Pharmacology Research Office and the Head of Chinese
Medicine Research at the Heilongjiang Province Science and Technology
Department. Mr. Wu has a degree in Pharmaceutical Science from
Shenyang Medicine University and a bachelor degree in Financial Management from
Harbin University of Commerce.
Board
and Board Committees
Our Board consists of four members,
Shaoming Li, Xiaoheng Shao, Changxiong Sun and Bingchun Wu. Our Board
has determined that each of Mr. Shao, Mr. Sun and Mr. Wu is “independent” under
the listing standards of the NYSE Amex.
Our board of directors has established
the following committees: the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee. Each
of these committees consists of Mr. Shao, Mr. Sun and Mr. Wu, each an
independent director. Mr. Shao serves as Chairman of the Audit
Committee, Mr. Sun serves as Chairman of the Nominating and Corporate Governance
Committee and Mr. Wu serves as Chairman of the Compensation
Committee. We have adopted a written charter for each of the
committees.
Audit
Committee Financial Expert
Our Board has determined that Mr. Shao
meets the requirements of an “audit committee financial expert” within the
meaning of Item 407(d)(5) of Regulation S-K.
Code
of Ethics
We have adopted a written Code of
Ethics which applies to our directors, officers and employees. The
Code of Ethics is publicly available on our website www.renhuang.com.
Executive
Compensation
Our Compensation Committee assists our
board of directors in reviewing and approving the compensation structure of our
directors and executive officers, including all forms of compensation to be
provided to our directors and executive officers. With the
responsibility of establishing, implementing and monitoring our executive
compensation program philosophy and practices, our Compensation Committee seeks
to ensure that the total compensation paid to our directors and executive
officers is fair and competitive.
The following table sets forth
information regarding all forms of compensation received by our Principal
Executive Officer, Principal Financial Officer and one other executive officer
who served in these capacities during the fiscal year ended October 31, 2009 (no
executive officer’s salary and bonus exceeded $100,000 in any of the applicable
years):
73
Summary
Compensation Table
Name and Principal
Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
All Other
Compensation
|
Total
|
|||||||||||||||||||
Shaoming
Li, Chairman of Board of Directors, Chief Executive Officer and
President
|
2009
|
$
|
31,250
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
31,250
|
|||||||||||||
2008
|
$
|
31,250
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
31,250
|
||||||||||||||
Zuo-Liang
Wang *, Interim Chief Financial Officer
|
2009
|
$
|
4,500
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
4,500
|
|||||||||||||
2008
|
$
|
4,500
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
4,500
|
||||||||||||||
Jiang
He, Secretary
|
2009
|
$
|
4,500
|
$
|
-0-
|
$
|
-0-
|
$
|
-0
|
-
|
$
|
-0-
|
$
|
4,500
|
||||||||||||
2008
|
$
|
4,500
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
4,500
|
*Mr. Wang
resigned as interim chief financial officer on January 13, 2010, and was
replaced by Yan Yi Chen, who resigned effective August 3, 2010.
Employment
Agreements
We have no employment agreements with
our executive officers. Our chairman, chief executive officer and
president, Mr. Li receives $31,250 in annual salary and is reimbursed for out of
pocket expenses. Our secretary, Mr. He receives $4,500 in annual salary and is
reimbursed for out of pocket expenses.
Benefit
Plans
We do not have any profit sharing plan
or similar plans for the benefit of our officers, directors or employees.
However, we may establish such plans in the future. Certain employees
of our subsidiary, including Shaoming Li, our chairman, chief executive officer
and president, have pension and healthcare benefits through plans offered by
such subsidiary, as required by local Chinese laws.
2007
Non-Qualified Company Stock Grant and Option Plan and 2003 Omnibus Securities
Plan
On March 19, 2007, our board of
directors approved the 2007 Non-Qualified
Company Stock Grant and Option Plan (the “2007 Plan”). The 2007
Plan is intended to serve as an incentive and to encourage stock ownership by
our directors, officers, and employees, and certain persons rendering
service to us, so that such persons may acquire or increase their proprietary
interest in our success, and to encourage them to remain in our
service. Under the 2007 Plan, up to 200,000 shares of our common
stock may be subject to options.
On February 28, 2003, our board of
directors approved the Renhuang Pharmaceuticals, Inc. 2003 Omnibus
Securities Plan (the “2003 Plan”), which was approved by our shareholders on
April 11, 2003. The 2003 Plan offers selected employees, directors,
and consultants an opportunity to acquire our common stock, and serves to
encourage such persons to remain employed by us and to attract new
employees. The 2003 Plan allows for the award of stock and options,
up to 25,000 (after giving effect to the 1-for-30 reverse stock split in 2006)
shares of our common stock. On May 1 of each year, the number of
shares in the 2003 Securities Plan is automatically adjusted to an amount equal
to ten percent of our outstanding stock on April 30 of the immediately preceding
year. As of April 30, 2009, the number of shares of common stock
outstanding was 35,096,680 making 3,509,668 shares of common stock subject to
the 2003 Plan
74
As of October 31, 2009, there were no
options or other financial instruments outstanding under either the 2007 Plan or
2003 Plan.
Board
Compensation
Mr. Li was our sole director for the
fiscal year ended October 31, 2009 and did not receive any compensation for his
services as a director for the fiscal year ended October 31, 2009.
We recently appointed outside directors
Messrs. Xiaoheng Shao, Changxiong Sun, and Bingchun Wu. Messrs. Sun
and Wu will each receive RMB3,000 ($439) per month for Board meeting attendance
and will be reimbursed for their expenses incurred in performing their
duties. In addition, Mr. Shao, the Chair of our Audit Committee, will
receive $3,000 per month for Board meeting attendance and will be reimbursed for
his expenses incurred in performing his duties as an outside director. Further,
Mr. Shao will receive an option for 70,000 shares of our common stock pursuant
to our 2003 Omnibus Securities Plan that will vest quarterly from the date of
grant, conditioned upon continued service on such quarterly dates, such options
having a contractual life of three years.
Severance
and Change of Control Agreement
As of October 31, 2009, we had no
agreements or arrangements providing for payments to a named executive officer
in connection with any termination.
Outstanding
Equity Awards at Fiscal Year End
As of October 31, 2009, none of our
named executive officers held any stock options.
75
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of November 17, 2010, information concerning the
beneficial ownership of shares of our common stock held by our directors, our
named executive officers, our directors and executive officers as a group, and
each person known by us to be a beneficial owner of 5% or more of our
outstanding common stock.
Beneficial ownership is determined
according to the rules of the SEC. Beneficial ownership means that a
person has or shares voting or investment power of a security and includes any
securities that person has the right to acquire within 60 days after the
measurement date, such as pursuant to options, warrants or convertible
notes. Except as otherwise indicated, we believe that each of the
beneficial owners of our common stock listed below, based on information each of
them has given to us, has sole investment and voting power with respect to such
beneficial owner’s shares, except where community property or similar laws may
apply. For purposes of the column for shares underlying convertible
securities, in accordance with rules of the SEC, shares of our common stock
underlying securities that a person has the right to acquire within 60 days of
November 17, 2010 are deemed to be beneficially owned by such person for the
purpose of computing the percentage ownership of that person, but we do not
treat them as outstanding for the purpose of computing the ownership percentage
of any other person.
Common Stock Beneficially Owned
|
||||||||||||||||
Name and Address of Beneficial
Owner
|
Total Outstanding
|
Shares Underlying
Convertible Securities (1)
|
Total
|
Percent (2)
|
||||||||||||
Directors
and Named Executive Officers
|
||||||||||||||||
Shaoming
Li (3)
|
17,850,000
|
(4)
|
0
|
17,850,000
|
47.93
|
%
|
||||||||||
Jiang
He
|
0
|
0
|
0
|
0
|
%
|
|||||||||||
Xiaoying
Lu
|
0
|
0
|
0
|
0
|
%
|
|||||||||||
Xiaoheng
Shao
|
0
|
5,833
|
5,833
|
0.02
|
%
|
|||||||||||
Changxiong
Sun
|
0
|
0
|
0
|
0
|
%
|
|||||||||||
Bingchun
Wu
|
0
|
0
|
0
|
0
|
%
|
|||||||||||
Directors
and executive officers as a group (6 persons)
|
17,850,000
|
(4)
|
17,855,833
|
17,855,833
|
47.95
|
%
|
||||||||||
5%
Beneficial Owners
|
||||||||||||||||
Dianjun
Pi – Total Prosperity Company Ltd (5)
|
3,159,450
|
0
|
3,159,450
|
8.48
|
%
|
|||||||||||
Tuya
Wulan – New BVI Co. (6)
|
2,975,000
|
0
|
2,975,000
|
7.99
|
%
|
|||||||||||
Yunman
Cheung – China Wealth Sources Co. (7)
|
4,278,000
|
0
|
4,278,000
|
11.49
|
%
|
(1)
|
Includes
shares of our common stock issuable upon exercise of options or upon
conversion of warrants or convertible notes within 60
days.
|
(2)
|
Based
on 37,239,536 shares of our common stock outstanding as of November 17,
2010.
|
(3)
|
The
address for this beneficial owner is No. 281, Taiping Road, Taiping
District, Harbin, Heilongjiang Province, China
150050.
|
76
(4)
|
Includes
17,850,000 shares of Common Stock owned by Celebrate Fortune Company
Limited, an entity controlled by Mr. Shaoming
Li.
|
(5)
|
Includes
3,159,450 shares of Common Stock owned by Total Prosperity Company Ltd, an
entity controlled by Mr. Dianjun
Pi.
|
(6)
|
Includes
2,975,000 shares of Common Stock owned by New BVI Co., an entity
controlled by Mr. Tuya Wulan.
|
(7)
|
Includes
4,278,000 shares of Common Stock owned by New China Wealth Sources Co., an
entity controlled by Mr. Yun Man
Cheung.
|
Change
in Control
The
Company is not aware of any arrangements including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the registrant.
77
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Transactions
with Related Persons
Mr. Shaoming Li, our chairman, chief
executive officer and president, is also chairman and a 50% shareholder of Stock
Co. We lease property and a plant from Stock Co. Our
rental expenses for this lease during the years ended October 31, 2009 and 2008
amounted to $615,594 and $596,024, respectively.
During the years ended October 31, 2009
and 2008, we sold goods in the amount of $430,889 and $0, respectively, to
Heilongjiang Renhuang Pharmaceutical Limited, a company in which Mr. Li is a
major shareholder.
On October 12, 2009, we through
our wholly-owned subsidiary, Renhuang China, entered into a Purchase
Agreement with Stock Co, to acquire the land use right, property and plant
located at our Ah City Natural and Biopharmaceutical Plant, for a total
consideration of $23,472,000. Pursuant to the Purchase Agreement, a
payment of $14,670,000 was made to Stock Co., in October 2009 and recorded
as deposits on the consolidated balance sheet. Pursuant to the
Purchase Agreement, final payment of $8,802,000 is due by December 31, 2011, at
which time title for the assets will be transferred. Accordingly the transaction
is considered incomplete as at October 31, 2009.
On September 1, 2009, we through our
wholly-owned subsidiary, Renhuang China, entered into a Purchase Agreement with
Stock Co., to acquire two production patents, for a total consideration of
$2,347,200. Pursuant to the Purchase Agreement, a payment of
$1,467,000 was made to Stock Co., in October 2009 and recorded as deposits on
the consolidated balance sheet. Pursuant to the Purchase Agreement,
final payment of $880,200 is due by December 31, 2010, at which time title for
the assets will be transferred. Accordingly the transaction is considered
incomplete as at October 31, 2009.
The purchase prices for the real
property and patent purchase transactions described above were based on
appraisal reports issued by an independent third party appraisal firm in China.
There were no independent directors on our board of directors at the time of the
transactions. As such, both of the transactions were approved by our then sole
director, Shaoming Li and our management. When making the transaction decisions,
our then sole director and our management considered multiple factors,
including, without limitation, the following: Stock Co. did not desire to
continue to lease the land and facilities to us on the terms and conditions of
the original lease; moving to a new production facility would made it necessary
for us to apply for the reissuance of our GMP certificates, production licenses
and drug approval numbers following tests and evaluations of the new facility,
which could affect the stability of our business operations; we were continually
upgrading our production facilities and certain changes to the facilities need
to be approved by the lessor, which could create instability for our expanded
production and long-term operations and restrict our development and possibly
create unnecessary financial burdens; we desired to decrease any continued
related party transactions, and continuing to lease the land and facilities from
an affiliate entity would involve an ongoing related party transaction; the land
and facilities were to be purchased at a fair market value price based on an
appraisal by an independent third party appraisal firm.
Review,
Approval or Ratification of Transactions with Related Persons
Although we have not adopted formal
procedures for the review, approval or ratification of transactions with related
persons, we adhere to a general policy that such transactions should only be
entered into if they are on terms that, on the whole, are no more favorable, or
no less favorable, than those available from unaffiliated third parties and
their approval is in accordance with applicable law. Such
transactions require the approval of our board of directors.
78
DESCRIPTION
OF SECURITIES
Renhuang
is presently authorized under its Articles of Incorporation, as amended, to
issue 100,000,000 shares of common stock, $0.001 par value per share, and
1,000,000 shares of preferred stock, no par value.
The
following is a description of our capital stock, including their material terms
and provisions and as such terms and provisions are applied to our Articles of
Incorporation, as amended, By-laws, and the applicable corporate laws of the
State of Nevada.
Common
Stock
At
November 17, 2010, we had 37,239,536 shares of common stock issued and
outstanding. The holders of Renhuang’s common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of the
stockholders. We may pay dividends at such time and to the extent declared by
the Board of Directors in accordance with Nevada corporate law. Our common stock
has no preemptive or other subscription rights, and there are no conversion
rights or redemption or sinking fund provisions with respect to such shares. All
outstanding shares of common stock are fully paid and non-assessable. To the
extent that additional shares of common stock may be issued in the future, the
relative interests of the then existing stockholders may be
diluted.
Preferred
Stock
We are
currently authorized to issue 1,000,000 shares of preferred stock. There are
currently no issued or outstanding shares of preferred stock.
The Board
of Directors is authorized, subject to any limitation prescribed by the laws of
the State of Nevada, but without further action by our stockholders, to provide
for the issuance of preferred stock in one or more series, to establish from
time to time the number of shares of each such series and any qualifications,
limitations or restrictions thereof, and to increase or decrease the number of
shares of any such series without any further vote or action by stockholders.
The Board of Directors may authorize and issue preferred stock with voting or
conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. In addition, the issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of our Company. The terms of the preferred stock are not
defined in our Articles of Incorporation.
Common
Stock Purchase Options
We have
agreed to sell to our underwriter, •, for $ •, an option to purchase up to a
total of • shares of common stock at $ • per share. The shares issuable upon
exercise of this option are identical to those offered by this prospectus. For a
more complete description of the option, including the registration rights
afforded to the holders of such option, see the section appearing elsewhere in
this prospectus entitled “Underwriting — Common Stock Purchase
Option”.
79
EQUITY
COMPENSATION PLAN INFORMATION
The following table provides aggregate
information as of October 31, 2009 with respect to all compensation plans
(including individual compensation arrangements) under which equity securities
are authorized for issuance. As of October 31, 2009, no shares of our
common stock have been reserved for issuance under either the 2003 Omnibus
Securities Plan or the 2007 Non-Qualified Company Stock Grant and Option
Plan.
A
|
B
|
C
|
||||||||||
Plan Category
|
Number of securities to be
issued upon exercise of
outstanding options, and
warrants
|
Weighted-average exercise
price of outstanding
options, and warrants
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column A)
|
|||||||||
Equity
compensation plans approved by security holders
|
0
|
$
|
0.00
|
3,509,678
|
||||||||
Equity
compensation plans not approved by security holders
|
0
|
$
|
0.00
|
200,000
|
||||||||
Total
|
0
|
$
|
0.00
|
3,709,678
|
80
UNDERWRITING
Subject
to the terms and conditions of an underwriting agreement, dated ·, 2010, we
have agreed to sell to ·, the
underwriter named below, and · has
agreed to purchase on a firm commitment basis the number of shares offered in
this offering set forth opposite its name below, at the public offering price,
less the underwriting discount set forth on the cover page of this
prospectus.
Name
|
Number of
Shares
|
||
·
|
|||
Total
|
Nature
of Underwriting Commitment
The
underwriting agreement provides that the underwriter is committed to purchase
all shares offered in this offering, other than those covered by the
over-allotment option described below, if the underwriter purchases any of these
securities. The underwriting agreement provides that the obligation of the
underwriter to purchase the shares offered hereby are conditional and may be
terminated at its discretion based on its assessment of the state of the
financial markets. The obligation of the underwriter may also be terminated upon
the occurrence of other events specified in the underwriting agreement.
Furthermore, pursuant to the underwriting agreement, the underwriter’s
obligation is subject to various customary conditions, representations and
warranties contained in the underwriting agreement, such as receipt by the
underwriter of officers’ certificates and legal opinions of our
counsel.
Pricing
of Securities
The
underwriter has advised us that it proposes to offer the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers that are members of the Financial Industry
Regulatory Authority (FINRA), at such price less a concession not in excess of $
· per
share. The underwriter may allow, and the selected dealers may reallow, a
concession not in excess of $ · per share
to certain brokers and dealers. After this offering, the offering price and
concessions and discounts to brokers and dealers and other selling terms may
from time to time be changed by the underwriter. These prices should not be
considered an indication of the actual value of our shares and are subject to
change as a result of market conditions and other factors. No variation in those
terms will change the amount of proceeds to be received by us as set forth
on the cover page of this prospectus.
Our
common stock is listed on the NYSE Amex under the symbol “CBP”. On November 17,
2010, the closing market price of our common stock as reported by the NYSE Amex
was $2.27. The public offering price for the shares was determined by
negotiation between us and the underwriter. Among the factors considered in
determining the public offering price of the shares, in addition to prevailing
market conditions, were our historical performance, estimates of our
business potential and earnings prospects, an assessment of our management,
the public demand for our securities in this offering, and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
We cannot
be sure that the public offering price will correspond to the price at which our
shares will trade in the public market following this offering or that an active
trading market for our shares will develop and continue after this
offering.
81
Commissions
and Discounts
The
following table summarizes the compensation to be paid to the underwriter by us
and the proceeds, before expenses, payable to us, assuming a $ · offering
price. The information assumes either no exercise or full exercise by the
underwriter of the over-allotment option.
Total
|
||||||||||||
Per
Share
|
Without
Over-Allotment
|
With
Over-Allotment
|
||||||||||
Public
offering price
|
$ | $ | $ | |||||||||
Underwriting
discount (1)
|
$ | $ | $ | |||||||||
Proceeds,
before expenses, to us (2)
|
$ | $ | $ |
(1)
|
Underwriting
discount is $ · per
share.
|
(2)
|
We
estimate that the total expenses of this offering, excluding the
underwriter’s discount, are approximately $ ·.
|
Over-allotment
Option
We have
granted the underwriter an option, exercisable for 45 days after the closing
date of this offering, to purchase up to 15% of the shares of common stock sold
in the offering (·
additional shares) solely to cover over-allotments, if any, at the same price as
the initial shares offered.
Other
Terms
In
connection with this offering, the underwriter or certain of the securities
dealers may distribute prospectuses electronically. No forms of prospectus other
than printed prospectuses and electronically distributed prospectuses that are
printable in Adobe PDF format will be used in connection with this
offering.
The
underwriter has informed us that it does not expect to confirm sales of shares
offered by this prospectus to accounts over which it exercises discretionary
authority without obtaining the specific approval of the account
holder.
We have
also granted · a right
of first refusal to conduct future offerings for us during the 9 months
following the closing date of this offering.
Stabilization
Until the
distribution of the shares of common stock offered by this prospectus is
completed, rules of the SEC may limit the ability of the underwriter to bid for
and to purchase our securities. As an exception to these rules, the underwriter
may engage in transactions effected in accordance with Regulation M under the
Securities Exchange Act of 1934 that are intended to stabilize, maintain or
otherwise affect the price of our common stock. The underwriter may engage in
over-allotment sales, syndicate covering transactions, stabilizing transactions
and penalty bids in accordance with Regulation M.
|
·
|
Stabilizing
transactions permit bids or purchases for the purpose of pegging, fixing
or maintaining the price of the common stock, so long as stabilizing bids
do not exceed a specified
maximum.
|
82
|
·
|
Over-allotment
involves sales by the underwriter of shares in excess of the number of
shares the underwriter is obligated to purchase, which creates a short
position. The short position may be either a covered short position or a
naked short position. In a covered short position, the number of shares
over-allotted by the underwriter is not greater than the number of shares
that it may purchase in the over-allotment option. In a naked short
position, the number of shares involved is greater than the number of
shares in the over-allotment option. The underwriter may close out any
covered short position by either exercising its over-allotment option or
purchasing shares in the open
market.
|
|
·
|
Covering
transactions involve the purchase of securities in the open market after
the distribution has been completed in order to cover short positions. In
determining the source of securities to close out the short position, the
underwriter will consider, among other things, the price of securities
available for purchase in the open market as compared to the price at
which it may purchase securities through the over-allotment option. If the
underwriter sells more shares of common stock than could be covered by the
over-allotment option, creating a naked short position, the position can
only be closed out by buying securities in the open market. A naked short
position is more likely to be created if the underwriter is concerned that
there could be downward pressure on the price of the securities in the
open market after pricing that could adversely affect investors who
purchase in this offering.
|
|
·
|
Penalty
bids permit the underwriter to reclaim a selling concession from a
selected dealer when the shares of common stock originally sold by the
selected dealer are purchased in a stabilizing or syndicate covering
transaction.
|
These
stabilizing transactions, covering transactions and penalty bids may have the
effect of raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of our common stock. As a
result, the price of our common stock may be higher than the price that
might otherwise exist in the open market.
Neither
we nor the underwriter make any representation or prediction as to the effect
that the transactions described above may have on the prices of our securities.
These transactions may occur on The NYSE Amex or on any other trading market. If
any of these transactions are commenced, they may be discontinued without notice
at any time.
Foreign
Regulatory Restrictions on Purchase of the Common Stock
We have
not taken any action to permit a public offering of shares of our common stock
outside the United States or to permit the possession or distribution of this
prospectus outside the United States. Persons outside the United States who come
into possession of this prospectus must inform themselves about and observe any
restrictions relating to this offering of common shares and the distribution of
the prospectus outside the United States.
In
addition to the public offering of the shares in the United States, the
underwriter may, subject to the applicable foreign laws, also offer the common
shares to certain institutions or accredited persons in the following
countries:
83
Italy. This
offering of shares of our common stock has not been cleared by Consob, the
Italian Stock Exchange’s regulatory agency of public companies, pursuant to
Italian securities legislation and, accordingly, no common shares may be
offered, sold or delivered, nor may copies of this prospectus or of any other
document relating to our common stock be distributed in Italy, except (1) to
professional investors ( operatori
qualificati ); or (2) in circumstances which are exempted from
the rules on solicitation of investments pursuant to Decree No. 58 and Article
33, first paragraph, of Consob Regulation No. 11971 of May 14, 1999, as amended.
Any offer, sale or delivery of our common shares or distribution of copies of
this prospectus or any other document relating to our common stock in Italy
under (1) or (2) above must be (i) made by an investment firm, bank or financial
intermediary permitted to conduct such activities in Italy in accordance with
the Decree No. 58 and Legislative Decree No. 385 of September 1, 1993, or the
Banking Act; and (ii) in compliance with Article 129 of the Banking Act and the
implementing guidelines of the Bank of Italy, as amended from time to time,
pursuant to which the issue or the offer of securities in Italy may need to be
preceded and followed by an appropriate notice to be filed with the Bank of
Italy depending, inter
alia , on the aggregate value of the securities issued or
offered in Italy and their characteristics; and (iii) in compliance with any
other applicable laws and regulations.
Germany. The
offering of shares of our common stock is not a public offering in the Federal
Republic of Germany. The common shares may only be acquired in accordance with
the provisions of the Securities Sales Prospectus Act
(Wertpapier-Verkaudfspropsektgestz), as amended, and any other applicable German
law. No application has been made under German law to publicly market our
common shares in or out of the Federal Republic of Germany. Our common shares
are not registered or authorized for distribution under the Securities Sales
Prospectus Act and accordingly may not be, and are not being, offered or
advertised publicly or by public promotion. Therefore, this prospectus is
strictly for private use and the offering is only being made to recipients to
whom the document is personally addressed and does not constitute an offer or
advertisement to the public. Our common shares will only be available to persons
who, by profession, trade or business, buy or sell securities for their own or a
third party’s account.
France. The
shares of our common stock offered by this prospectus may not be offered or
sold, directly or indirectly, to the public in France. This prospectus has not
been or will not be submitted to the clearance procedure of the Autorité des
Marchés Financiers, or the AMF, and may not be released or distributed to the
public in France. Investors in France may only purchase the common shares
offered by this prospectus for their own account and in accordance with articles
L. 411-1, L. 441-2 and L. 412-1 of the Code Monétaire et Financier and decree
no. 98-880 dated October 1, 1998, provided they are “qualified investors”
within the meaning of said decree. Each French investor must represent in
writing that it is a qualified investor within the meaning of the aforesaid
decree. Any resale, directly or indirectly, to the public of the common shares
offered by this prospectus may be effected only in compliance with the above
mentioned regulations. “Les actions offertes par ce document d’information
ne peuvent pas être, directement ou indirectement, offertes ou vendues au public
en France. Ce document d’information n’a pas été ou ne sera pas soumis au visa
de l’Autorité des Marchés Financiers et ne peut être diffusé ou distribué au
public en France. Les investisseurs en France ne peuvent acheter les actions
offertes par ce document d’information que pour leur compte propre et
conformément aux articles L. 411-1, L. 441-2 et L. 412-1 du Code Monétaire et
Financier et du décret no. 98-880 du 1 octobre 1998, sous réserve qu’ils soient
des investisseurs qualifiés au sens du décret susvisé. Chaque investisseur doit
déclarer par écrit qu’il est un investisseur qualifié au sens du décret susvisé.
Toute revente, directe ou indirecte, des actions offertes par ce document
d’information au public ne peut être effectuée que conformément à la
réglementation susmentionnée.”
Greece. The present
prospectus has been submitted for approval by the United States Securities and
Exchange Commission, or the US SEC, and not the Greek Capital Market Committee.
All information contained in the prospectus is true and accurate. The offering
of the shares of our common stock does not constitute an initial public offer in
Greece according to CL. 2190/1920 and L. 3401/2005 as amended and in force. This
prospectus is strictly for the use of the entity to which it has been addressed
to by us and not to be circulated in Greece or any other
jurisdiction.
84
This
information and documentation is true and accurate and in conformity with the
information contained in the prospectus for the offer of shares of our common
stock, which is being reviewed for approval only by the United States Securities
and Exchange Commission, and does not constitute provision of the investment
service of investment advice according to L. 3606/2007. Any recipient of this
material has stated to be a qualified and experienced investor and will evaluate
the contents and decide on his/her own discretion whether to participate or not
in this offering.
Switzerland. This
prospectus may only be used by those persons to whom it has been directly handed
out by the offeror or its designated distributors in connection with the offer
described therein. The shares of common stock are only offered to those persons
and/or entities directly solicited by the offeror or its designated
distributors, and are not offered to the public in Switzerland. This prospectus
constitutes neither a public offer in Switzerland nor an issue prospectus in
accordance with the respective Swiss legislation, in particular but not limited
to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be
used in connection with any other offer, whether private or public and shall in
particular not be distributed to the public in Switzerland.
United Kingdom.
In the United Kingdom, the shares of common stock offered by
this prospectus are directed to and will only be available for purchase to a
person who is an exempt person as referred to at paragraph (c) below and who
warrants, represents and agrees that: (a) it has not offered or sold, will not
offer or sell, any common shares offered by this prospectus to any person in the
United Kingdom except in circumstances which do not constitute an offer to the
public in the United Kingdom for the purposes of the section 85 of the Financial
Services and Markets Act 2000 (as amended), or the FSMA and (b) it has complied
and will comply with all applicable provisions of FSMA and the regulations made
thereunder in respect of anything done by it in relation to the common shares
offered by this prospectus in, from or otherwise involving the United Kingdom;
and (c) it is a person who falls within the exemptions to Section 21 of the FSMA
as set out in The Financial Services and Markets Act 2000 (Financial Promotion)
Order 2005, or the Order, being either an investment professional as described
under Article 19 or any body corporate (which itself has or a group undertaking
has a called up share capital or net assets of not less than £500,000 (if more
than 20 members) or otherwise £5 million) or an unincorporated association or
partnership (with net assets of not less than £5 million) or is a trustee of a
high value trust or any person acting in the capacity of director, officer or
employee of such entities as defined under Article 49(2)(a) to (d) of the Order,
or a person to whom the invitation or inducement may otherwise lawfully be
communicated or cause to be communicated. The investment activity to which this
document relates will only be available to and engaged in only with exempt
persons referred to above. Persons who are not investment professionals and do
not have professional experience in matters relating to investments or are not
an exempt person as described above, should not review nor rely or act upon this
document and should return this document immediately. It should be noted that
this document is not a prospectus in the United Kingdom as defined in the
Prospectus Regulations 2005 and has not been approved by the Financial Services
Authority or any competent authority in the United Kingdom.
Sweden. Neither
this prospectus nor the shares of common stock offered hereunder have been
registered with or approved by the Swedish Financial Supervisory Authority under
the Swedish Financial Instruments Trading Act (1991:980) (as amended), nor will
such registration or approval be sought. Accordingly, this prospectus may not be
made available nor may the common shares offered hereunder be marketed or
offered for sale in Sweden other than in circumstances which are deemed not to
be an offer to the public in Sweden under the Financial Instruments Trading Act.
This prospectus may not be distributed to the public in Sweden and a Swedish
recipient of the prospectus may not in any way forward the prospectus to the
public in Sweden.
85
Norway. This
prospectus has not been produced in accordance with the prospectus requirements
laid down in the Norwegian Securities Trading Act 1997, as amended. This
prospectus has not been approved or disapproved by, or registered with, either
the Oslo Stock Exchange or the Norwegian Registry of Business Enterprises. This
prospectus may not, either directly or indirectly be distributed to Norwegian
potential investors.
Denmark. This
prospectus has not been prepared in the context of a public offering of
securities in Denmark within the meaning of the Danish Securities Trading Act
No. 171 of 17 March 2005, as amended from time to time, or any Executive Orders
issued on the basis thereof and has not been and will not be filed with or
approved by the Danish Financial Supervisory Authority or any other public
authority in Denmark. The offering of the shares of common stock will only be
made to persons pursuant to one or more of the exemptions set out in Executive
Order No. 306 of 28 April 2005 on Prospectuses for Securities Admitted for
Listing or Trade on a Regulated Market and on the First Public Offer of
Securities exceeding EUR 2,500,000 or Executive Order No. 307 of 28 April 2005
on Prospectuses for the First Public Offer of Certain Securities between EUR
100,000 and EUR 2,500,000, as applicable.
The Netherlands.
Underwriters may not offer, distribute, sell, transfer or deliver
any of our securities, directly or indirectly, in The Netherlands, as a part of
their initial distribution or at any time thereafter, to any person other than
our employees or employees of our subsidiaries, individuals who or legal
entities which trade or invest in securities in the conduct of their profession
or business within the meaning of article 2 of the Exemption Regulation issued
under the Securities Transactions Supervision Act 1995 ( Vrijstellingsregeling
Wet toezich
teffectenverkeer1995 ), which includes banks, brokers, pension funds,
insurance companies, securities institutions, investment institutions, and other
institutional investors, including, among others, treasuries of large
enterprises who or which regularly trade or invest in securities in a
professional capacity.
Cyprus. Each of the book
running managers has represented, warranted and agreed that: (i) it
will not be providing from or within Cyprus any “Investment Services”,
“Investment Activities” and “Non-Core Services” (as such terms are defined in
the Investment Firms Law 144(I) of 2007, or the IFL, in relation to the shares
of common stock, or will be otherwise providing Investment Services, Investment
Activities and Non-Core Services to residents or persons domiciled in Cyprus.
Each book running manager has represented, warranted and agreed that it will not
be concluding in Cyprus any transaction relating to such Investment Services,
Investment Activities and Non-Core Services in contravention of the IFL and/or
applicable regulations adopted pursuant thereto or in relation thereto; and
(ii)it has not and will not offer any of the shares of common stock other than
in compliance with the provisions of the Public Offer and Prospectus Law, Law
114(I)/2005.
Israel. The
shares of common stock offered by this prospectus have not been approved or
disapproved by the Israeli Securities Authority (ISA). The common shares may not
be offered or sold, directly or indirectly, to the public in Israel. The ISA has
not issued permits, approvals or licenses in connection with the offering of the
common shares or publishing the prospectus; nor has it authenticated the details
included herein, confirmed their reliability or completeness, or rendered an
opinion as to the quality of the common shares being offered. Any resale,
directly or indirectly, to the public of the common shares offered by this
prospectus is subject to restrictions on transferability and must be effected
only in compliance with the Israeli securities laws and
regulations.
86
Oman. For the attention
of the residents of Oman:
The
information contained in this prospectus neither constitutes a public offer of
securities in the Sultanate of Oman as contemplated by the Commercial
Companies Law of Oman (Sultani Decree 4/74) or the Capital Market Law of Oman
(Sultani Decree 80/98), nor does it constitute an offer to sell, or the
solicitation of any offer to buy non-Omani securities in Oman as contemplated by
Article 6 of the Executive Regulations to the Capital Market Law of Oman (issued
vide Ministerial Decision No 4/2001), and nor does it constitute a distribution
of non-Omani securities in Oman as contemplated under the Rules for Distribution
of Non-Omani Securities in Oman issued by the Capital Market Authority of Oman,
or the CMA. Additionally, this prospectus is not intended to lead to the
conclusion of any contract of whatsoever nature within the territory of
Oman.
This
prospectus has been sent at the request of the investor in Oman, and by
receiving this prospectus, the person or entity to whom it has been issued and
sent understands, acknowledges and agrees that this prospectus has not been
approved by the CMA or any other regulatory body or authority in Oman, nor has
any authorization, license or approval been received from the CMA or any other
regulatory authority in Oman, to market, offer, sell, or distribute the shares
within Oman.
No
marketing, offering, selling or distribution of any financial or investment
products or services has been or will be made from within Oman and no
subscription to any securities, products or financial services may or will be
consummated within Oman. The underwriter is not a company licensed by the CMA to
provide investment advisory, brokerage, or portfolio management services in
Oman, nor a bank licensed by the Central Bank of Oman to provide investment
banking services in Oman. The underwriter does not advise persons or entities
resident or based in Oman as to the appropriateness of investing in or
purchasing or selling securities or other financial products.
Nothing
contained in this prospectus is intended to constitute Omani investment, legal,
tax, accounting or other professional advice. This prospectus is for your
information only, and nothing herein is intended to endorse or recommend a
particular course of action. You should consult with an appropriate professional
for specific advice on the basis of your situation.
United Arab Emirates.
his document has not been reviewed, approved or licensed by the Central Bank of
the United Arab Emirates, or the UAE, Emirates Securities and Commodities
Authority or any other relevant licensing authority in the UAE including any
licensing authority incorporated under the laws and regulations of any of the
free zones established and operating in the territory of the UAE, in particular
the Dubai International Financial Services Authority, or the DFSA, a regulatory
authority of the Dubai International Financial Centre, or the DIFC. The sale of
the shares does not constitute a public offer of securities in the UAE,
DIFC and/or any other free zone in accordance with the Commercial Companies Law,
Federal Law No. 8 of 1984 (as amended), DFSA Offered Securities Rules and the
Dubai International Financial Exchange Listing Rules, accordingly, or
otherwise.
The
shares may not be offered to the public in the UAE and/or any of the free zones
including, in particular, the DIFC. The shares may be offered and this document
may be issued, only to a limited number of investors in the UAE or any of its
free zones (including, in particular, the DIFC) who qualify as sophisticated
investors under the relevant laws and regulations of the UAE or the free zone
concerned. Management of the Company and the representatives represent and
warrant that the shares will not be offered, sold, transferred or delivered to
the public in the UAE or any of its free zones including, in particular, the
DIFC.
People’s Republic of China.
This prospectus may not be circulated or distributed in the People’s
Republic of China, or PRC, and our common stock may not be offered or sold to
any person for re-offering or resale, directly or indirectly, to any resident of
the PRC except pursuant to applicable laws and regulations of the PRC. For the
purpose of this paragraph, PRC does not include Taiwan and the special
administrative regions of Hong Kong and Macau.
87
Botswana. The company hereby
represents and warrants that it has not offered for sale or sold, and will not
offer or sell, directly or indirectly the shares of common stock to the public
in the Republic of Botswana, and confirms that the offering will not be subject
to any registration requirements as a prospectus pursuant to the requirements
and/or provisions of the Companies Act, 2003 or the Listing Requirements of the
Botswana Stock Exchange.
Hong Kong. The shares
of common stock have not been offered or sold and will not be offered or sold in
Hong Kong, by means of any document, other than (a) to “professional investors”
as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and
any rules made under that Ordinance; or (b) in other circumstances which do not
result in the document being a “prospectus” as defined in the Companies
Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the
public within the meaning of that Ordinance. No advertisement, invitation or
document, whether in Hong Kong or elsewhere, which is directed at, or the
contents of which are likely to be accessed or read by, the public of Hong Kong
(except if permitted to do so under the securities laws of Hong Kong) has been
issued or will be issued in Hong Kong or elsewhere other than with respect to
the common units or shares of common stock which are or are intended to be
disposed of only to persons outside Hong Kong or only to “professional
investors” within the meaning of the Securities and Futures Ordinance (Cap. 571)
of Hong Kong and any rules made under that Ordinance.
The
contents of this document have not been reviewed by any regulatory authority in
Hong Kong. You are advised to exercise caution in relation to the offer. If you
are in any doubt about any of the contents of this document, you should obtain
independent professional advice.
Singapore. This
prospectus has not been registered as a prospectus with the Monetary Authority
of Singapore. Accordingly, this prospectus and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase,
of the shares may not be circulated or distributed, nor may the shares be
offered or sold, or be made the subject of an invitation for subscription or
purchase, whether directly or indirectly, to persons in Singapore other than (i)
to an institutional investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person, or
any person pursuant to Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in
accordance with the conditions of, any other applicable provision of the
SFA.
Where the
shares are subscribed or purchased under Section 275 by a relevant person which
is: (a) a corporation (which is not an accredited investor) the sole business of
which is to hold investments and the entire share capital of which is owned by
one or more individuals, each of whom is an accredited investor; or (b) a trust
(where the trustee is not an accredited investor) whose sole purpose is to hold
investments and each beneficiary is an accredited investor, shares, debentures
and units of shares and debentures of that corporation or the beneficiaries’
rights and interest in that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under Section 275 except:
(1) to an institutional investor under Section 274 of the SFA or to a relevant
person, or any person pursuant to Section 275(1A), and in accordance with the
conditions, specified in Section 275 of the SFA; (2) where no consideration is
given for the transfer; or (3) by operation of law.
Indemnification
The
underwriting agreement provides for indemnification between us and the
underwriter against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriter to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the SEC, indemnification for liabilities under
the Securities Act is against public policy as expressed in the Securities Act,
and is therefore, unenforceable.
88
The
validity of the shares sold by us under this prospectus will be passed upon for
us by DLA Piper LLP (US), New York, New York. ·, has
acted as counsel for the underwriter. Legal matters as to
PRC law will be passed upon for us by Guangsheng & Partners and for the
underwriter by ·.
EXPERTS
The
financial statements as of and for the year ended October 31, 2009 included in
this prospectus have been audited by Windes & McClaughry, independent
certified public accountants to the extent and for the period set forth in their
report appearing elsewhere herein and are included in reliance upon such report
given upon the authority of that firm as experts in auditing and
accounting.
The
financial statements as of and for the year ended October 31, 2008 included in
this prospectus have been audited by MSPC, independent certified public
accountants to the extent and for the period set forth in their report appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of that firm as experts in auditing and accounting.
DISCLOSURE
OF COMMISSION POSITION OF
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Nevada
Law
Section
78.7502 of the Nevada Revised Statutes permits a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of the corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or
proceeding if he:
(a) is
not liable pursuant to Nevada Revised Statute 78.138, or
(b) acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
In
addition, Section 78.7502 permits a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and
reasonably incurred by him in connection with the defense or settlement of the
action or suit if he:
(a) is
not liable pursuant to Nevada Revised Statute 78.138; or
89
(b) acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation.
To the
extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above, or in defense of any claim, issue or matter, the
corporation is required to indemnify him against expenses, including attorneys’
fees, actually and reasonably incurred by him in connection with the
defense.
Section
78.752 of the Nevada Revised Statutes allows a corporation to purchase and
maintain insurance or make other financial arrangements on behalf of any person
who is or was a director, officer, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise for any liability asserted against him and liability and expenses
incurred by him in his capacity as a director, officer, employee or agent, or
arising out of his status as such, whether or not the corporation has the
authority to indemnify him against such liability and expenses.
Other
financial arrangements made by the corporation pursuant to Section 78.752 may
include the following:
(a) the
creation of a trust fund;
(b) the
establishment of a program of self-insurance;
(c) the
securing of its obligation of indemnification by granting a security interest or
other lien on any assets of the corporation; and
(d) the
establishment of a letter of credit, guaranty or surety.
No
financial arrangement made pursuant to Section 78.752 may provide protection for
a person adjudged by a court of competent jurisdiction, after exhaustion of all
appeals, to be liable for intentional misconduct, fraud or a knowing violation
of law, except with respect to the advancement of expenses or indemnification
ordered by a court.
Any
discretionary indemnification pursuant to NRS 78.7502, unless ordered by a court
or advanced pursuant to an undertaking to repay the amount if it is determined
by a court that the indemnified party is not entitled to be indemnified by the
corporation, may be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances. The determination must be
made:
(a) by
the stockholders;
(b) by
the board of directors by majority vote of a quorum consisting of directors who
were not parties to the action, suit or proceeding;
(c) if
a majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding so orders, by independent legal counsel in a written
opinion, or
(d) if
a quorum consisting of directors who were not parties to the action, suit or
proceeding cannot be obtained, by independent legal counsel in a written
opinion.
90
Charter
Provisions
Our
Restated Articles of Incorporation contains the following provisions concerning
the indemnification of our directors and officers:
“Article
XIV. In addition to, and in no way limiting the powers or authority now or
hereafter conferred upon the Corporation by the Articles of Incorporation, the
By-Laws of the Corporation, or the laws of the State of Nevada, the Corporation
shall possess, and may exercise all powers of indemnification of officers,
directors, employees, agents, and other persons and all powers and authority
incidental thereto (including without limitation of power and authority to
advance expenses, and to purchase and maintain insurance with respect thereto),
without regard to whether or not such powers and authority are specifically
provided for by Nevada corporation codes. The Board of Directors of the
Corporation is hereby authorized and empowered on behalf of the Corporation and
without shareholder action, to exercise all of the Corporation's authority and
powers of indemnification.”
These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant's executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of 1933, as
amended (the “Securities Act”).
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. No pending material litigation
or proceeding involving our directors, executive officers, employees or other
agents as to which indemnification is being sought exists, and we are not aware
of any pending or threatened material litigation that may result in claims for
indemnification by any of our directors or executive officers.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
with respect to the common stock being offered pursuant to this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules filed as part of the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the filed exhibit.
You may obtain copies of this information by mail from the Public Reference
Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the public
reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
Internet website that contains reports, proxy statements and other information
about issuers, like us, that file electronically with the SEC. The address of
that website is www.sec.gov .
91
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
Consolidated
Balance Sheets at October 31, 2009 and 2008
|
F-4
|
|
Consolidated
Statements of Operations and Comprehensive Income for Years ended October
31, 2009 and 2008
|
F-5
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for Years Ended October 31,
2009 and 2008
|
F-6
|
|
Consolidated
Statements of Cash Flows for Years Ended October 31, 2009 and
2008
|
F-7
|
|
Notes
to Consolidated
Financial Statements for Years Ended October 31, 2009 and
2008
|
F-8
|
|
Condensed
Consolidated Balance Sheets as of July 31, 2010 (unaudited) and October
31, 2009 (audited)
|
F-31
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income for the
Three and Nine Months Ended July 31, 2010 and 2009
(unaudited)
|
F-32
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended July 31,
2010 and 2009 (unaudited)
|
F-33
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
F-34
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Renhuang Pharmaceuticals, Inc.
We have
audited the accompanying consolidated balance sheet of Renhuang Pharmaceuticals,
Inc. as of October 31, 2009, and the related consolidated statements of
operations and comprehensive income, shareholders’ equity and cash flows for the
year ended October 31, 2009. Renhuang Pharmaceuticals, Inc.’s management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Renhuang Pharmaceuticals,
Inc. as of October 31, 2009, and the results of their operations and their cash
flows for the year ended October 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
/s/
Windes & McClaughry
Windes
& McClaughry Accountancy Corporation
Long
Beach, California
January
29, 2010
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Renhuang
Pharmaceuticals, Inc.
We have
audited the accompanying consolidated balance sheet of Renhuang Pharmaceuticals,
Inc. (the "Company"), as of October 31, 2008, and the related consolidated
statements of income and comprehensive income, changes in shareholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of October
31, 2008, and the results of their operations and cash flows for the year then
ended, in conformity with U.S. generally accepted accounting
principles.
/s/
MSPC
Certified
Public Accountants and Advisors
A
Professional Corporation
New York,
New York
August
28, 2009, except as to the restatement discussed in Note 18 to the consolidated
financial statements for which the date is November 25, 2009
F-3
RENHUANG
PHARMACEUTICALS, INC.
CONSOLIDATED
BALANCE SHEETS
Note
|
October 31,
2009
|
October 31,
2008
|
|||||||||
US$
|
US$
|
||||||||||
Restated
|
|||||||||||
ASSETS
|
|
||||||||||
Current
assets:
|
|||||||||||
Cash
and cash equivalents
|
8,111,514 | 9,747,693 | |||||||||
Trade
receivables, net
|
7
|
23,203,410 | 20,844,479 | ||||||||
Due
from related parties
|
11
|
130,199 | - | ||||||||
Inventory,
net
|
9
|
3,024,016 | 2,625,385 | ||||||||
Prepayments
|
89,281 | 33,695 | |||||||||
Other
receivables, net
|
8
|
102,613 | 133,642 | ||||||||
Total
current assets
|
34,661,033 | 33,384,894 | |||||||||
Property
and equipment, net
|
10
|
2,352,163 | 2,620,949 | ||||||||
Deposits
|
11
|
16,137,000 | - | ||||||||
Total
assets
|
53,150,196 | 36,005,843 | |||||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||||||
Liabilities
|
|||||||||||
Current
liabilities:
|
|||||||||||
Accounts
payable
|
369,329 | 193,934 | |||||||||
Value
added tax payable
|
1,186,642 | 693,607 | |||||||||
Due
to related parties
|
11
|
- | 159,664 | ||||||||
Accrued
employee benefits
|
1,136,267 | 720,498 | |||||||||
Other
payable
|
- | 193,384 | |||||||||
Total
current liabilities
|
2,692,238 | 1,961,087 | |||||||||
Commitments
and Contingencies
|
16
|
||||||||||
Shareholders’
equity
|
|||||||||||
Preferred
stock (no par value, 1,000,000 shares authorized; none issued and
outstanding as of October 31, 2009 and 2008)
|
13
|
- | - | ||||||||
Common
stock ($0.001 par value, 100,000,000 shares authorized; 37,239,536 and
35,096,680 issued and outstanding as of October 31, 2009 and 2008,
respectively)
|
13
|
37,240 | 35,097 | ||||||||
Additional
paid-in capital
|
7,596,525 | 6,595,400 | |||||||||
Common
stock warrants
|
14
|
496,732 | - | ||||||||
Reserves
|
15
|
3,372,697 | 2,867,674 | ||||||||
Accumulated
other comprehensive income
|
3,367,659 | 3,301,314 | |||||||||
Retained
earnings
|
35,587,105 | 21,245,271 | |||||||||
Total
shareholders’ equity
|
50,457,958 | 34,044,756 | |||||||||
Total
liabilities and shareholders’ equity
|
53,150,196 | 36,005,843 |
The
accompanying notes are an integral part of these financial
statements.
F-4
RENHUANG
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For
the year ended October 31,
|
|||||||||||
Note
|
2009
|
2008
|
|||||||||
US$
|
US$
|
||||||||||
Restated
|
|||||||||||
Sales,
net
|
43,411,562 | 34,474,490 | |||||||||
Cost
of goods sold
|
20,311,410 | 15,980,638 | |||||||||
Gross
profit
|
23,100,152 | 18,493,852 | |||||||||
Operating
and administrative expenses:
|
|||||||||||
Sales
and distribution
|
3,649,820 | 3,318,418 | |||||||||
General
and administrative
|
2,117,114 | 2,877,516 | |||||||||
Research
and development
|
2,529,085 | 2,124,511 | |||||||||
Total
operating expenses
|
8,296,019 | 8,320,445 | |||||||||
Income
from operations
|
14,804,133 | 10,173,407 | |||||||||
Other
income:
|
|||||||||||
Interest
income
|
42,724 | 85,993 | |||||||||
Other
income, net
|
- | 31,699 | |||||||||
Income
from operations before income tax expenses
|
14,846,857 | 10,291,099 | |||||||||
Income
tax expenses
|
5
|
- | - | ||||||||
Net
income
|
14,846,857 | 10,291,099 | |||||||||
Other
comprehensive income:
|
|||||||||||
Cumulative
currency translation adjustments
|
66,345 | 2,391,856 | |||||||||
Total
comprehensive income
|
14,913,202 | 12,682,955 | |||||||||
Earnings
per common stock- Basic
|
0.41 | 0.29 | |||||||||
Earnings
per common stock - Diluted
|
0.41 | 0.29 | |||||||||
Weighted
average common stock outstanding
|
|||||||||||
Basic
|
36,088,853 | 35,096,681 | |||||||||
Diluted
|
36,088,853 | 35,096,681 |
The
accompanying notes are an integral part of these financial
statements.
F-5
RENHUANG
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common
stock
|
Accumulated
|
|||||||||||||||||||||||||||||||
($0.001
par value)
|
Additional
|
Common
|
Other
|
Total
|
||||||||||||||||||||||||||||
Number
of
|
Par
|
Paid-in
|
Stock
|
Reserves
|
Comprehensive
|
Retained
|
Shareholders’
|
|||||||||||||||||||||||||
Shares
|
Value
|
Capital
|
Warrants
|
Income
|
Earnings
|
Equity
|
||||||||||||||||||||||||||
US$
|
US$
|
US$
|
US$
|
US$
|
US$
|
US$
|
||||||||||||||||||||||||||
Balance
as of November 1, 2007
|
35,096,680
|
35,097
|
6,595,400
|
31,699
|
1,841,734
|
909,458
|
11,980,112
|
21,393,500
|
||||||||||||||||||||||||
Cancellation
of warrants
|
-
|
-
|
-
|
(31,699
|
)
|
-
|
-
|
-
|
(31,699
|
)
|
||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
10,291,099
|
10,291,099
|
||||||||||||||||||||||||
Appropriation
to statutory reserves
|
-
|
-
|
-
|
-
|
1,025,940
|
-
|
(1,025,940
|
)
|
-
|
|||||||||||||||||||||||
Currency
translation adjustments
|
-
|
-
|
-
|
-
|
-
|
2,391,856
|
-
|
2,391,856
|
||||||||||||||||||||||||
Balance as of October
31, 2008 (Restated)
|
35,096,680
|
35,097
|
6,595,400
|
-
|
2,867,674
|
3,301,314
|
21,245,271
|
34,044,756
|
||||||||||||||||||||||||
Common
stock issued
|
2,142,856
|
2,143
|
1,001,125
|
-
|
-
|
-
|
-
|
1,003,268
|
||||||||||||||||||||||||
Warrants
issued
|
-
|
-
|
-
|
496,732
|
-
|
-
|
-
|
496,732
|
||||||||||||||||||||||||
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
14,846,857
|
14,846,857
|
||||||||||||||||||||||||
Appropriation
to statutory reserves
|
-
|
-
|
-
|
-
|
505,023
|
-
|
(505,023
|
)
|
-
|
|||||||||||||||||||||||
Currency
translation adjustments
|
-
|
-
|
-
|
-
|
-
|
66,345
|
-
|
66,345
|
||||||||||||||||||||||||
Balance
as of October 31, 2009
|
37,239,536
|
37,240
|
7,596,525
|
496,732
|
3,372,697
|
3,367,659
|
35,587,105
|
50,457,958
|
The
accompanying notes are an integral part of these financial
statements.
F-6
RENHUANG
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended October 31,
|
||||||||
2009
|
2008
|
|||||||
US$
|
US$
|
|||||||
Restated
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
14,846,857 | 10,291,099 | ||||||
Adjustments
to reconcile net income to operating activities:
|
||||||||
Depreciation
of property and equipment
|
356,440 | 339,257 | ||||||
Allowance
for doubtful accounts
|
- | 243,282 | ||||||
Warrants
cancelled
|
- | (31,699 | ) | |||||
Changes
in assets and liabilities:
|
||||||||
Increase
in trade receivables
|
(2,328,833 | ) | (11,431,340 | ) | ||||
(Increase)
decrease in due from related parties
|
(275,476 | ) | 271,198 | |||||
Increase
in inventory, net
|
(394,750 | ) | (1,513,512 | ) | ||||
Increase
in prepayments
|
(55,491 | ) | (22,109 | ) | ||||
Decrease
in other receivables, net
|
31,180 | 112,338 | ||||||
Increase
in accounts payable
|
174,979 | 22,642 | ||||||
Increase
in value added tax payable
|
491,666 | 14,197 | ||||||
Increase
in accrued employee benefits
|
414,433 | 300,480 | ||||||
(Decrease)
increase in other payable
|
(193,472 | ) | 176,226 | |||||
Net
cash provided by (used in) operating activities
|
13,067,533 | (1,227,941 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Deposits
for land use right and properties
|
(14,670,000 | ) | - | |||||
Deposits
for patents
|
(1,467,000 | ) | - | |||||
Purchase
of property and equipment
|
(84,371 | ) | (110,760 | ) | ||||
Net
cash used in investing activities
|
(16,221,371 | ) | (110,760 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from share issues
|
1,500,000 | - | ||||||
Net
cash provided by financing activities
|
1,500,000 | - | ||||||
Effect
of exchange rate changes on cash
|
17,659 | 932,791 | ||||||
Net
decrease in cash and cash equivalents
|
(1,636,179 | ) | (405,910 | ) | ||||
Cash
and cash equivalents, beginning of year
|
9,747,693 | 10,153,603 | ||||||
Cash
and cash equivalents, end of year
|
8,111,514 | 9,747,693 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid during the year for income taxes
|
- | - | ||||||
Interest
paid during the year
|
- | - |
The
accompanying notes are an integral part of these financial
statements.
F-7
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
1.
ORGANIZATION AND NATURE OF OPERATION
The
accompanying consolidated financial statements include the financial statements
of Renhuang Pharmaceuticals, Inc. (“Renhuang”) and its subsidiaries.
Renhuang and its subsidiaries are collectively referred to as the
“Company.”
Renhuang
was incorporated in the State of Nevada on August 18, 1988, originally under the
corporate name of Solutions, Incorporated. It was inactive until August
16, 1996, when it changed its corporate name to Suarro Communications, Inc, and
engaged in the business of providing internet based business services.
This line of business was discontinued in 2006, and Renhuang became a
non-operating public company. Renhuang underwent a number of corporate
name changes as follows:
June
1997
|
ComTech Consolidation Group, Inc
|
February
1999
|
E-Net Corporation
|
May
1999
|
E-Net Financial Corporation
|
January
2000
|
E-Net.Com Corporation
|
February
2000
|
E-Net Financial.Com Corporation
|
January
2002
|
Anza Capital, Inc (“Anza”)
|
July
2006
|
Renhuang Pharmaceuticals, Inc.
|
Effective
August 28, 2006, Renhuang completed the acquisition of 100% ownership of Harbin
Renhuang Pharmaceutical Company Limited, a company incorporated in the British
Virgin Islands. As a result, Harbin Renhuang Pharmaceutical Company
Limited became a wholly owned subsidiary of Renhuang.
Harbin
Renhuang Pharmaceutical Company Limited owns 100% of the registered capital of
Harbin Renhuang Pharmaceutical Co. Ltd (“Renhuang China”).
The core
activities of subsidiaries included in the consolidated financial statements are
as follow:
¨
|
Harbin
Renhuang Pharmaceutical Company Limited – Investment
holding.
|
¨
|
Renhuang
China – Development, manufacturing and distribution of pharmaceutical
products.
|
Renhuang
China’s principal country of operations is the People’s Republic of China (the
“PRC”) and maintains their accounting records in Renminbi (“RMB”).
Substantially all of the Company’s assets and operations are located in the
PRC.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation of financial statements
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“US GAAP”) and are expressed in terms of US dollars.
F-8
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162. This statement
modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by
establishing only two levels of GAAP, authoritative and nonauthoritative
accounting literature. Effective July 2009, the FASB Accounting Standards
Codification (“ASC”), also known collectively as the “Codification,” is
considered the single source of authoritative U.S. accounting and reporting
standards, except for additional authoritative rules and interpretive releases
issued by the SEC. Nonauthoritative guidance and literature would include,
among other things, FASB Concepts Statements, American Institute of Certified
Public Accountants Issue Papers and Technical Practice Aids and accounting
textbooks. The Codification was developed to organize GAAP pronouncements by
topic so that users can more easily access authoritative accounting
guidance. It is organized by topic, subtopic, section, and paragraph, each
of which is identified by a numerical designation. This statement applies
beginning in third quarter 2009. All accounting references have been
updated, and therefore SFAS references have been replaced with ASC
references.
The
Company operates in one operating segment in accordance with accounting guidance
FASB ASC Topic 280,
“Segment
Reporting.” Our CEO has been identified as the chief operating
decision maker as defined by FASB ASC Topic 280.
Principles
of consolidation
The
consolidated financial statements include the financial statements of Renhuang
and its subsidiaries.
All
inter-company transactions and balances have been eliminated in
consolidation.
Effective
beginning in the second quarter of 2009, the FASB Topic 810, “Consolidation Topic”, revised
the accounting treatment for noncontrolling minority interests of
partially-owned subsidiaries. Noncontrolling minority interests represent
the portion of earnings that is not within the parent company’s control. These
amounts are now required to be reported as equity instead of as a liability on
the balance sheet. In addition this statement requires net income from
noncontrolling minority interest to be shown separately on the consolidated
statements of operations and comprehensive income. As the Company has no
noncontrolling interest at October 31, 2009, this change did not have an impact
on the Company’s consolidated financial statements.
Use
of estimates
The
preparation of these consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affected the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported
periods.
Significant
estimates and assumptions by management include, among others, uncollectible
accounts receivable, slow moving, obsolete and/or damaged inventory, property
and equipment, reserve for employee benefit obligations, stock warrant
valuation, and other uncertainties. Actual results may differ from these
estimates. The current economic environment has increased the degree of
uncertainty inherent in these estimates and assumptions.
Foreign
currency translation
The
Company’s principal country of operations is in the PRC. The financial position
and results of operations of the subsidiaries are determined using the local
currency (“Renminbi” or “RMB”) as the functional currency.
F-9
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
Translation
of amounts from RMB into US dollars for reporting purposes is performed by
translating the results of operations denominated in foreign currency at the
weighted average rate of exchange during the reporting period. Assets and
liabilities denominated in foreign currencies at the balance sheet date are
translated at the market rate of exchange ruling at that date. The registered
equity capital denominated in the functional currency is translated at the
historical rate of exchange at the time of capital contribution. All translation
adjustments resulting from the translation of the financial statements into the
reporting currency (US dollars) are reported as a component of accumulated other
comprehensive income in shareholders’ equity.
As of
October 31, 2009 and 2008 the exchange rate was RMB6.82 and RMB6.82,
respectively. Translation adjustment totaled $66,345 and $2,391,856 for the year
ended October 31, 2009 and 2008, respectively.
Cash
and cash equivalents
Cash and
cash equivalents represent cash on hand and demand deposits placed with banks or
other financial institutions, which have original maturities less than three
months. There are no restrictions to cash at October 31, 2009 and
2008. Substantially all of the Company’s cash is held in bank accounts in
the PRC and is not protected by the Federal Deposit Insurance Corporation
(“FDIC”) insurance or any other similar insurance. Given the current
economic environment and risks in the banking industry, there is a risk that
deposits may not be readily available.
Trade
receivables, net
Trade
receivables are recorded at the invoiced amount and do not bear interest. Trade
receivable payment terms vary and amounts due from customers are stated in the
financial statements net of an allowance for doubtful accounts and sales
rebates. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its trade receivables. Trade receivables outstanding
longer than the payment terms are considered past due. The Company determines
its allowance by considering a number of factors, including the length of time
the trade receivable is past due, the Company’s previous loss history, the
counter party’s current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole. The Company writes
off receivables when they are deemed uncollectible, and payments subsequently
received on such trade receivables are credited to the allowance for doubtful
accounts. There were no write offs for the years ended October 31, 2009
and 2008. The Company does not have any off-balance sheet credit exposure
related to its customers.
Inventory,
net
Inventory
consists of raw materials, work-in-progress and finished goods and is valued at
the lower of cost or market value. The value of inventory is determined using
the FIFO method on production cost and weighted average cost method on overhead
cost and includes any related production overhead costs incurred in
bringing the inventory to their present location and condition. Overhead costs
included in finished goods include, direct labor cost and other costs directly
applicable to the manufacturing process.
The
Company estimates an inventory allowance for excessive, slow moving and obsolete
inventories as well as inventory whose carrying value is in excess of net
realizable value. Inventory amounts are reported net of such
allowances. There were no inventory write offs for the years ended October
31, 2009 and 2008.
F-10
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
Property
and equipment, net
Property
and equipment are recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance, and repairs
are charged to expense as incurred. When property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in the results of
operations for the respective period.
Depreciation
is provided over the estimated useful lives of the related assets using the
straight-line method. The estimated useful lives for significant property,
plant and equipment categories are as follows:
Machinery
and equipment
|
10
years
|
|
Office
equipment and furnishings
|
5-10
years
|
|
Motor
vehicles
|
|
5-10
years
|
Long-lived
assets
The
Company’s long-lived assets and other assets (consisting of property and
equipment) are reviewed for impairment in accordance with the guidance of the
FASB Topic ASC 360, “
Property, Plant, and Equipment”, and FASB ASC
Topic 205 “ Presentation of
Financial
Statements ”. The Company tests for impairment losses on long-lived
assets used in operations whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of
an asset to be held and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted cash flows expected to be generated by
the asset. If such asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds its fair value. Impairment evaluations involve management’s estimates on
asset useful lives and future cash flows. Actual useful lives and cash
flows could be different from those estimated by management which could have a
material effect on our reporting results and financial positions. Fair
value is determined through various valuation techniques including discounted
cash flow models, quoted market values and third-party independent appraisals,
as considered necessary. Through October 31, 2009, the Company had not
experienced impairment losses on its long-lived assets. However, there can be no
assurances that demand for the Company’s products or services will continue,
which could result in an impairment of Long-Lived assets in the
future.
Fair
value of financial instruments
The
Company applies the provisions of accounting guidance, FASB Topic ASC 825 that
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value, and defines fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties. As of October 31, 2009 and
2008 the fair value of cash, accounts receivable, other receivables, accounts
payable, and other payable approximated carrying value due to the short maturity
of the instruments.
F-11
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
Fair
value measurements
Effective
April 1, 2009, the FASB ASC Topic 825, “Financial Instruments,” requires
disclosures about fair value of financial instruments in quarterly reports as
well as in annual reports.
The FASB
ASC Topic 820, “Fair Value Measurements and Disclosures,” clarifies the
definition of fair value for financial reporting, establishes a framework for
measuring fair value and requires additional disclosures about the use of fair
value measurements.
Various
inputs are considered when determining the fair value of the Company’s financial
instruments. The inputs or methodologies used for valuing securities are not
necessarily an indication of the risk associated with investing in these
securities. These inputs are summarized in the three broad levels listed
below.
|
¨
|
Level
1 – observable market inputs that are unadjusted quoted prices for
identical assets or liabilities in active
markets.
|
|
¨
|
Level
2 – other significant observable inputs (including quoted prices for
similar securities, interest rates, credit risk,
etc…).
|
|
¨
|
Level
3 – significant unobservable inputs (including the Company’s own
assumptions in determining the fair value of financial
instruments).
|
The
Company’s adoption of FASB ASC Topic 825 did not have a material impact on the
Company’s consolidated financial statements.
The
carrying value of financial assets and liabilities recorded at fair value is
measured on a recurring or nonrecurring basis. Financial assets and liabilities
measured on a non-recurring basis are those that are adjusted to fair value when
a significant event occurs. The Company had no financial assets or liabilities
carried and measured on a nonrecurring basis during the reporting periods.
Financial assets and liabilities measured on a recurring basis are those that
are adjusted to fair value each time a financial statement is prepared. The
Company had no financial assets and/or liabilities carried at fair value on a
recurring basis at October 31, 2009. All instrument as of October
31, 2008 are considered as Level 1.
The
availability of inputs observable in the market varies from instrument to
instrument and depends on a variety of factors including the type of instrument,
whether the instrument is actively traded, and other characteristics particular
to the transaction. For many financial instruments, pricing inputs are readily
observable in the market, the valuation methodology used is widely accepted by
market participants, and the valuation does not require significant management
discretion. For other financial instruments, pricing inputs are less observable
in the market and may require management judgment.
F-12
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
Revenue
recognition
Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue
Recognition”, which states that revenue should be recognized when the following
criteria are met: (1) persuasive evidence of an arrangement exists; (2) the
service has been rendered; (3) the selling price is fixed or determinable; and
(4) collection of the resulting receivable is reasonably assured.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable.
As of
October 31, 2009, the Company has no sales or contracts that included multiple
deliverables that would fall under the scope of FASB Topic ASC 605, “ Multiple Deliverable Revenue
Arrangements – A Consensus of the FASB Emerging
Issues Task Force .”
The
Company provided annual sales rebates to its distributors based upon sales
volumes. Sales rebates are recorded as a current liability at the time of
the sale based upon the Company’s estimates of whether each customer would be
entitled to rebates for the year. At year end, the accrued rebate amount
is adjusted to the actual amount earned and reclassified to trade receivables in
accordance with legal right of offset. Sales rebates were deducted from
sales in the accompanying consolidated statements of operations and
comprehensive income.
As of
October 31, 2009 and 2008, the Company has accrued $3,020,898 and $3,893,304,
respectively, for sales rebates. For the year ended October 31, 2009
and 2008, the Company has deducted sales rebates in the amount of $8,848,658 and
$8,229,838, respectively, from sales. Sales rebates are calculated based
on terms specified in contracts with individual distributors.
Sales
returns and allowances
The
Company does not allow return of products except for products that were damaged
during shipment. The total amount of returned product is less than 0.05% of
total sales. The cost of damaged products is netted against sales and cost of
goods sold, respectively.
Cost
of goods sold
Cost of
goods sold primarily consists of direct and indirect manufacturing costs,
including production overhead costs and shipping and handling costs for the
products sold.
Sales
and marketing
Sales and
marketing costs consist primarily of advertising and market promotion expenses,
and other overhead expenses incurred by the Company’s sales and marketing
personnel. Advertising expenses amounted to $3,590,965 and $3,155,063 during the
years ended October 31, 2009 and 2008, respectively.
Advertising
costs are expensed as incurred.
Research
and development
Research
and development (“R&D”) costs are expensed as incurred.
F-13
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
Employee
benefit costs
According
to the PRC regulations on pension, a company contributes to a defined
contribution retirement plan organized by municipal government in the province
in which Renhuang China was registered and all qualified employees are eligible
to participate in the plan. Contributions to the plan are calculated at 20% of
the employees’ salaries above a fixed threshold amount. Employees contribute 4%
and Renhuang China contributes the balance of 16%.
Share-based
compensation
For
purposes of determining the variables used in the calculation of stock
compensation expense under the provisions of FASB ASC Topic 505, “ Equity ” and FASB ASC Topic
718, “ Compensation
— Stock Compensation,” we
perform an analysis of current market data and historical Company data to
calculate an estimate of implied volatility, the expected term of the option and
the expected forfeiture rate. With the exception of the expected forfeiture
rate, which is not an input, we use these estimates as variables in the
Black-Scholes option pricing model. Depending upon the number of stock options
granted, any fluctuations in these calculations could have a material effect on
the results presented in our condensed consolidated statement of income and
other comprehensive income. In addition, any differences between estimated
forfeitures and actual forfeitures could also have a material impact on our
financial statements.
There was
no share-based compensation in the years ended October 2009 and
2008.
Taxation
Taxation
on profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of operations.
The
Company accounts for income tax under the provisions of FASB ASC Topic 740, “Income Taxes”, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of the events that have been included in the financial statements
or tax returns. Deferred income taxes are recognized for all significant
temporary differences between tax and financial statements bases of assets and
liabilities. Valuation allowances are established against net deferred tax
assets when it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
The
Company does not have any long-term deferred tax assets or liabilities in China
that will exist once the tax holiday expires. The Company does not have any
significant deferred tax asset or liabilities that relate to tax jurisdictions
not covered by the tax holiday.
The
Company does not accrue United States income tax on unremitted earnings from
foreign operations, as it is the Company’s intention to invest these earnings in
the foreign operations indefinitely.
F-14
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
Enterprise
income tax
On March
16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income
Tax Law (“New EIT Law”) which became effective on January 1, 2008.
Pursuant to the New EIT Law, a unified enterprise income tax rate of 25 percent
and unified tax deduction standards will be applied consistently to
both domestic-invested enterprises and foreign-invested enterprises.
However, the New EIT Law repealed most of the existing preferential tax rates
and tax holidays. A five-year transition period is allowed for enterprises
that obtained preferential tax treatment under the prior tax regime. Under
the prior tax regime, foreign-invested enterprises were generally subject to a
30 percent federal tax rate plus a 3 percent local tax rate for a total tax rate
of 33 percent.
Renhuang
China secured preferential tax treatment in the jurisdiction where it conducts
its manufacturing activity, where it was granted two year tax holiday from the
local government, for being a new and high-technology enterprise.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets, including tax loss and credit carryforwards, and liabilities are
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. The effect of deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date. Deferred income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components of the deferred
tax assets and liabilities are individually classified as current and
noncurrent based on their characteristics. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
A
provision has not been made at October 31, 2009 for U.S. or additional foreign
withholding taxes on approximately $35,587,105 of undistributed earnings of
foreign subsidiaries because it is the present intention of management to
reinvest the undistributed earnings indefinitely in foreign operations.
Generally, such earnings become subject to U.S. tax upon the remittance of
dividends and under certain other circumstances. It is not practicable to
estimate the amount of deferred tax liability on such undistributed
earnings.
The
Company recognizes that virtually all tax positions in the PRC are not free of
some degree of uncertainty due to tax law and policy changes by the State.
However, the Company cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current State officials.
Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of October 31, 2009 is not
material to its results of operations, financial
condition or cash flows. The Company further believes that there are no tax
positions for which it is reasonably possible, based on current Chinese tax law
and policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.
Value
added tax
The
Provisional Regulations of The People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994. Under
these regulations and the Implementing Rules of the Provisional Regulations of
the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.
F-15
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13%
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided, but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and services in the same financial
year.
Comprehensive
Income
Total
comprehensive income is defined as all changes in shareholders' equity during a
period, other than those resulting from investments by and distributions to
shareholders (i.e., issuance of equity securities and dividends).
Generally, for the Company, total comprehensive income equals net income plus or
minus adjustments for currency translation. Total comprehensive income
represent the activity for a period net of related tax and were $14,913,202 and
$12,682,955 for the years ended October 31, 2009 and 2008,
respectively.
While
total comprehensive income is the activity in a period and is largely driven by
net earnings in that period, accumulated other comprehensive income or loss
(“AOCI”) represents the cumulative balance of other comprehensive income as of
the balance sheet date. For the Company, AOCI is primarily the cumulative
balance related to the currency adjustments and increased overall equity by
$66,345 and $2,391,856 as of October 31, 2009 and 2008,
respectively.
Earnings
per share
Basic net
earnings per common stock is computed by dividing net earnings applicable to
common shareholders by the weighted-average number of common stock outstanding
during the period. Diluted net earnings per common stock is determined using the
weighted-average number of common stock outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, using the treasury stock
method, consisting of shares that might be issued upon exercise of common stock
warrants. In periods where losses are reported, the weighted-average number
of common stock outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive.
Basic
earnings per share is based on the weighted-average number of shares of common
stock outstanding. Earnings per share, assuming dilution, is based on the
weighted-average number of shares of common stock outstanding adjusted for the
effects of common stock that may be issued as a result of the following types of
potentially dilutive instruments:
¨
|
warrants,
|
¨
|
employee
stock options, and
|
¨
|
other
equity awards, which include long-term incentive
awards.
|
F-16
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
The FASB
Topic ASC 260, “Earnings Per
Share”, requires the Company to include additional shares in the
computation of earnings per share, assuming dilution. The additional
shares included in diluted earnings per share represents the number of shares
that would be issued if all of the Company’s outstanding dilutive instruments
were converted into common stock.
Diluted
earnings per share are based on the assumption that all dilutive options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options are assumed to be exercised at the time of
issuance, and as if funds obtained thereby were used to purchase common stock at
the average market price during the period.
Basic and
diluted earnings per share are the same as there were no dilutive effects of the
warrants outstanding as of October 31, 2009.
Warrants
The
Company evaluates its warrants on an ongoing basis considering the accounting
guidance of FASB Topic ASC 825, which establishes standards for issuers of
financial instruments with characteristics of both liabilities and equity
related to the classification and measurement of those instruments. The warrants
are evaluated considering the accounting guidance of FASB Topic ASC 815, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities.
Freestanding
financial instruments with characteristics of both liabilities and
equity
In
accordance with accounting guidance FASB Topic ASC 825, the Company accounts for
financial instruments as a liability if it embodies an obligation to repurchase
the issuer’s equity shares, or is indexed to such an obligation, and that
requires or may require the issuer to settle the obligation by transferring
assets. Freestanding financial instruments are financial instruments that are
entered into separately and apart from any of the entity's other financial
instruments or equity transactions, or that is entered into in conjunction with
some other transaction and is legally detachable and separately exercisable. The
liability recorded is the per share price to be paid and is offset to
equity. As of October 31, 2009 and 2008, there were no financial
instruments recorded as liability.
3.
ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Update ("ASU") ASU No. 2009-05 (ASC Topic 820), which amends Fair
Value Measurements and Disclosures - Overall, ASU No. 2009-08, Earnings per
Share, ASU No. 2009-12 (ASC Topic 820), Investments in Certain Entities That
Calculate Net Asset Value per Share, and various other ASU's No. 2009-2 through
ASU No. 2009-15 which contain technical corrections to existing guidance or
affect guidance to specialized industries or entities were recently issued.
These updates have no current applicability to the Company, or their effect on
the financial statements would not have been significant.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605): “Multiple Deliverable Revenue Arrangements
– A Consensus of the FASB Emerging
Issues Task Force.” This update provides application guidance
on whether multiple deliverables exist, how the deliverables should be separated
and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011;
however, earlier application is permitted. The Company has not determined the
impact that this update may have on its financial statements.
F-17
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
In June
2009, the FASB issued guidance related to accounting for transfers of financial
assets. This guidance improves the information that a reporting entity provides
in its financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows; and a
continuing interest in transferred financial assets. In addition, this guidance
amends various ASC concepts with respect to accounting for transfers and
servicing of financial assets and extinguishments of liabilities , including removing
the concept of qualified special purpose entities. This guidance must be
applied to transfers occurring on or after the effective date. The Company will
adopt this guidance in its first annual and interim reporting periods beginning
after November 15, 2009. The Company has not determined the impact that this
guidance may have on its financial statements.
In June
2009, the FASB issued guidance which amends certain ASC concepts related to
consolidation of variable interest entities. Among other accounting and
disclosure requirements, this guidance replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. The Company will adopt this guidance in its first
annual and interim reporting periods beginning after November 15, 2009. The
Company has not determined the impact that this guidance may have on its
financial statements.
4.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The
Company conducts all of its primary trade in the PRC. There can be no
assurance that the Company will be able to successfully conduct its trade, and
failure to do so would have a material adverse effect on the Company’s financial
position, results of operations and cash flows. Also, the success of the
Company’s operations is subject to numerous contingencies, some of which are
beyond management’s control. These contingencies include general economic
conditions, price of raw material, competition, governmental
and political conditions, and changes in regulations. Because the Company is
dependant on foreign trade in the PRC, the Company is subject to various
additional political, economic and other uncertainties. Among other risks, the
Company’s operations will be subject to risk of restrictions on transfer of
funds, domestic and international customs, changing taxation policies, foreign
exchange restrictions, and political and governmental regulations.
(1)
Cash and cash equivalents and time deposits
The
Company maintains certain bank accounts in the PRC which are not protected by
FDIC insurance or other insurance. Cash balance held in PRC bank accounts
to $8,111,514 and $9,726,813 , as of October 31, 2009 and 2008,
respectively. No cash balances were restricted as at October 31, 2009 and
2008.
As of
October 31, 2009 and 2008 substantially all of the Company’s cash and cash
equivalents were held by major financial institutions located in the PRC which
management believes are of high credit quality.
F-18
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
(2)
Sales and trade receivables
The
Company provides credit in the normal course of business and substantially all
customers are located in the PRC. The Company performs ongoing credit
evaluations of its customers and maintains allowances for doubtful accounts
based on factors surrounding the credit risk of specific customers, historical
trends, and other information. 2 customers accounted for more than 10% of
net revenues during the years ended October 31, 2009 and 2008.
The
Company’s products are sold throughout the PRC. For the years ended October 31,
2009 and 2008, Siberian Ginseng (Acanthopanax) Series accounted for 54% and 53%,
respectively, of total sales.
(3)
Foreign currency
The
Company operates in China, which may give rise to significant foreign currency
risks from fluctuations and the degree of volatility of foreign exchange rates
between U.S. dollars and the Chinese currency RMB.
(4)
Dividends
Payments
of dividends may be subject to some restrictions due to the fact that the
operating activities are conducted in a subsidiary residing in the Peoples
Republic of China.
(5)
Price control
The
retail prices of certain pharmaceuticals sold in China, primarily those included
in the national and provincial Medical Insurance Catalogs are subject to price
controls in the form of fixed prices or price ceilings. As such, the retail
prices for certain of the Company’s pharmaceutical products can be adjusted
downward or upward from time to time. Price controls did not have a material
impact on the Company’s operation in 2009 and 2008.
(6)
Cost of goods sold
Cost of
goods sold is subject to price fluctuations due to various factors beyond the
Company’s control, including, among other pertinent factors, inflation and
changes in governmental regulations and programs. The Company expects cost
of goods sold will continue to fluctuate and be affected by inflation in the
future. The Company’s raw materials are purchased from various independent
suppliers, and do not rely on any one supplier.
5.
|
INCOME
TAXES
|
Taxation
on profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of operations.
6.
|
EARNINGS
PER SHARE
|
When
calculating diluted earnings per share for stock option common stock
equivalents, the Earnings Per Share Topic, ASC 260, requires the Company to
include the potential shares that would be outstanding if all outstanding stock
options or warrants were exercised. This is offset by shares the
Company could repurchase using the proceeds from these hypothetical exercises to
obtain the common stock equivalent.
F-19
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
The following reconciles the
components of the EPS computation:
Income
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
US$
|
US$
|
|||||||||||
For
the year ended October 31, 2009:
|
||||||||||||
Net
income
|
||||||||||||
Basic
EPS income available to common shareholders
|
14,846,857
|
36,088,853
|
0.41
|
|||||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
-
|
-
|
-
|
|||||||||
Diluted
EPS income available to common shareholders
|
14,846,857
|
36,088,853
|
0.41
|
|||||||||
For
the year ended October 31, 2008:
|
||||||||||||
Net
income
|
||||||||||||
Basic
EPS income available to common shareholders
|
10,291,099
|
35,096,681
|
0.29
|
|||||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
-
|
-
|
-
|
|||||||||
Diluted
EPS income available to common shareholders
|
10,291,099
|
35,096,681
|
0.29
|
For the
year ended October 31, 2009, 1,071,428 warrants were excluded from the
calculation of diluted income per share because the conversion price or exercise
price exceeded the average price of the Company’s common stock.
For the
year ended October 31, 2008, there were no securities or other contracts to
issue common stock, that need to be considered in the diluted earnings per share
calculation.
7.
|
TRADE
RECEIVABLES, NET
|
The trade
receivables amount included in the consolidated balance sheets for the years
ended October 31, 2009 and 2008 were as follows:
2009
|
2008
|
|||||||
US$
|
US$
|
|||||||
Trade
receivables
|
26,667,816
|
25,180,695
|
||||||
Less:
Sales rebates
|
(3,020,898
|
)
|
(3,893,304
|
)
|
||||
Less:
Allowance for doubtful accounts
|
(443,508
|
)
|
(442,912
|
)
|
||||
Trade
receivables, net
|
23,203,410
|
20,844,479
|
8.
|
OTHER
RECEIVABLES, NET
|
The other
receivables amount included in the consolidated balance sheets for the years
ended October 31, 2009 and 2008 were as follows:
F-20
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
2009
|
2008
|
|||||||
US$
|
US$
|
|||||||
Other
receivables
|
462,980
|
493,525
|
||||||
Less:
Allowance for doubtful accounts
|
(360,367
|
)
|
(359,883
|
)
|
||||
Other
receivables, net
|
102,613
|
133,642
|
9.
|
INVENTORY,
NET
|
The
inventory amounts included in the consolidated balance sheets for the years
ended October 31, 2009 and 2008 comprised of:
2009
|
2008
|
|||||||
US$
|
US$
|
|||||||
Raw
materials
|
1,530,283
|
1,533,472
|
||||||
Work-in-progress
|
1,006,984
|
906,957
|
||||||
Finished
goods
|
550,982
|
249,103
|
||||||
Less:
Inventory reserves
|
(64,233
|
)
|
(64,147
|
)
|
||||
Total
inventories, net
|
3,024,016
|
2,625,385
|
10.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment and related accumulated depreciation as of October 31, 2009 and
2008 were as follows:
2009
|
2008
|
|||||||
US$
|
US$
|
|||||||
Machinery
and equipment
|
3,435,421
|
3,350,762
|
||||||
Office
equipment and furnishings
|
53,086
|
53,015
|
||||||
Motor
vehicles
|
54,749
|
50,388
|
||||||
3,543,256
|
3,454,165
|
|||||||
Less:
Accumulated depreciation
|
(1,191,093
|
)
|
(833,216
|
)
|
||||
Net
book value
|
2,352,163
|
2,620,949
|
Depreciation
expense for the years ended October 31, 2009 and 2008 was $356,440 and $339,257,
respectively, of which $341,429 and $325,679 were included as a component of
cost of goods sold in the respective years. No assets were pledged for
borrowings as at October 31, 2009 and 2008.
11.
|
RELATED
PARTY TRANSACTIONS
|
Due
from/to related parties included in the consolidated balance sheets for the
years ended October 31, 2009 and 2008 comprised of:
2009
|
2008
|
|||||||
US$
|
US$
|
|||||||
Due
from related parties:
|
||||||||
Advances
(1)
|
130,199
|
-
|
||||||
Deposits
(2)
|
16,137,000
|
-
|
||||||
Total
|
16,267,199
|
-
|
2009
|
2008
|
|||||||
US$
|
US$
|
|||||||
Due
to related parties:
|
-
|
159,664
|
(1)
Advances
Mr.
Shaoming Li, our chairman, chief executive officer and president, is also
chairman and a 50% shareholder of Harbin Renhuang Pharmaceutical Stock Co. Ltd
(“Stock Co).
As of
October 31, 2009, the Company has a net amount due from Stock Co. of
$130,199. This amount consists of $539,130 of repair and maintenance work
performed on property and plant leased from Stock Co. and paid for on Stock
Co.’s behalf. This is offset by $408,931 of professional fees in
connection with the acquisition of Harbin Renhuang Pharmaceutical Company
Limited in 2006, paid for by Stock Co. on the Company’s behalf.
As of
October 31, 2008, the Company has a net amount due to Stock Co. of
$159,664. This amount consists of $248,762 of repair and maintenance work
performed on property and plant leased from Stock Co. and paid for on Stock Co’s
behalf. This is offset by $408,426 of professional fees in connection with
the acquisition of Harbin Renhuang Pharmaceutical Company Limited in 2006, paid
for by Stock Co. on the Company behalf.
F-21
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
(2)
Deposits
On
October 12, 2009, the Company through its wholly own subsidiary, Renhuang China,
entered into a Purchase Agreement with Stock Co., to acquire the land use right,
property and plant, for a total consideration of $23,472,000. Pursuant to
the Purchase Agreement, a payment of $14,670,000 was made to Stock Co., in
October 2009 and recorded as deposits on the consolidated balance sheet.
Pursuant to the Purchase Agreement, final payment of $8,802,000 is due by
December 31, 2011, at which time title for
the
assets will be transferred. Accordingly the transaction is considered
incomplete as at October 31, 2009.
On
September 1, 2009, the Company through its wholly own subsidiary, Renhuang
China, entered into a Purchase Agreement with Stock Co. to acquire two
production patents, for a total consideration of $2,347,200. Pursuant to
the Purchase Agreement, a payment of $1,467,000 was made to Stock Co. in October
2009 and recorded as deposits on the consolidated balance sheet. Pursuant
to the Purchase Agreement, final payment of $880,200 is due by December 31,
2010, at which time title for the assets will be transferred. Accordingly
the transaction is considered incomplete as at October 31, 2009.
(3)
Related party transactions
The
Company leases property and plant from Stock Co. Rental expenses related
to this lease, incurred and expensed to consolidated statements of operations
and comprehensive income during the years ended October 31, 2009 and 2008
amounted to $615,594 and $596,024, respectively.
.
During
the year ended October 31, 2009 and 2008, the Company sold goods in the amount
of $430,889 and $0, respectively, to Heilongjiang Renhuang Pharmaceutical
Limited, a company where Mr. Li Shaoming is a major shareholder.
12.
|
EMPLOYEE
BENEFITS
|
The
full-time employees of the Company’s subsidiary that is incorporated in the PRC
are entitled to staff welfare benefits, including medical care, welfare
subsidies, unemployment insurance and pension benefits. The PRC companies are
required to accrue for these benefits based on certain percentages of the
employees’ salaries in accordance with the relevant regulations, and to make
contributions to the state-sponsored pension and medical plans out of the
amounts accrued for medical and pension benefits. The PRC government is
responsible for the medical benefits and ultimate pension liability to these
employees.
13.
|
PREFERRED
STOCK, COMMON STOCK AND EQUITY
TRANSACTIONS
|
(1)
Preferred Stock
The
Company’s articles of incorporation provide that our board of directors will be
authorized to issue from time to time, without further stockholder approval, up
to 1,000,000 additional shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each series, including the dividend
rights, dividend rates, conversion rights, voting rights, rights of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
any series. Such shares of preferred stock could have preferences over our
common stock with respect to dividends and liquidation rights. At October
31, 2009 and 2008, no preferred stocks have been issued.
F-22
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
(2)
Common Stock and Equity Transactions
The
Company issued 2,142,856 shares of its common stock and 1,071,428 warrants with
an exercise price of $0.875 per share, to Allied Merit International Investments
Inc and Griffin Ventures Ltd, for a total consideration of $1,500,000 paid in
cash.
14.
|
OPTION
PLAN AND WARRANTS
|
(1)
2003 Omnibus Plan
On
February 28, 2003, our board of directors approved the Renhuang Pharmaceuticals,
Inc. 2003 Omnibus Securities Plan (the “2003 Plan”), which was approved by our
shareholders on April 11, 2003. The 2003 Plan offers selected employees,
directors and consultants an opportunity to acquire our common stock, and serves
to encourage such persons to remain employed by us and to attract new employees.
The 2003 Plan allows for the award of stock and options, up to 25,000 (after
giving effect to the 1-for-30 reverse stock split in 2006) shares of our common
stock. On May 1 of each year, the number of shares in the 2003 Securities Plan
is automatically adjusted to an amount equal to ten percent of our outstanding
stock on April 30 of the immediately preceding year. As of April 30, 2009, the
number of shares of common stock outstanding was 35,096,680, thereby making
3,509,668 shares of common stock subject to the 2003 Plan.
(2)
2007 Non-Qualified Company Stock Grant and Option Plan
On March
19, 2007, our board of directors approved the 2007 Non-Qualified Company Stock
Grant and Option Plan (the “2007 Plan”). The 2007 Plan is intended
to serve as an incentive to, and to encourage stock ownership by, our
directors, officers and employees, and certain persons rendering service to us,
so that such persons may acquire or increase their proprietary interest in our
success, and to encourage them to remain in our service. Under the 2007
Plan, up to 200,000 shares of our common stock may be subject to
options.
As of
October 31, 2009, there were no options or other financial instruments
outstanding under either the 2007 Plan or 2003 Plan.
(3)
Warrants
During
the year ended October 31, 2008, 25,000 warrants with an average exercise price
of $2.81 were cancelled.
On May
15, 2009, 1,071,428 warrants, with an exercise price of $0.875 per warrant with
an expiration date in 2012, were issued to Merit International Investment Inc.
and Griffin Ventures Ltd.
The
Company estimates the fair value of warrants using a Black-Scholes option
pricing valuation model, consistent with the accounting guidance FASB Topic ASC
815. Key inputs and assumptions used to estimate the fair value of warrants
include the grant price of the award, the expected warrant term, volatility of
the Company’s stock, the risk-free rate and the Company’s dividend yield.
Estimates of fair value are not intended to predict actual future events or the
value ultimately realized by grantees, and subsequent events are not indicative
of the reasonableness of the original estimates of fair value made by the
Company.
F-23
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
The fair
value of the warrants is estimated on the date of the grant using the
Black-Scholes option pricing model. No dividends were assumed due to the nature
of the Company’s current business strategy. The following table presents the
assumptions used for warrants granted:
Expected
volatility
|
306.6
|
%
|
||
Expected
dividends
|
0
|
%
|
||
Expected
term (in years)
|
3
years
|
|||
Risk-free
rate
|
1.375
|
%
|
The fair
value of the warrants is estimated to be $496,732.
As of
October 31, 2009, the Company has 1,071,428 warrants outstanding at an average
exercise price of $0.875 per warrant for one share each of the Company’s common
stock. The warrants expire in 2012.
Warrants
|
Average
exercise
price
|
|||||||
US$
|
||||||||
Outstanding
warrants at November 1, 2007
|
25,000
|
2.81
|
||||||
Warrants
granted
|
-
|
-
|
||||||
Exercised
|
-
|
-
|
||||||
Expired/cancelled
|
(25,000
|
)
|
2.81
|
|||||
Outstanding
warrants at October 31, 2008
|
-
|
-
|
||||||
Warrants
granted
|
1,071,428
|
0.88
|
||||||
Exercised
|
-
|
-
|
||||||
Expired/cancelled
|
-
|
-
|
||||||
Outstanding
warrants at October 31, 2009
|
1,071,428
|
0.88
|
Information
regarding the warrants outstanding at October 31, 2009 is summarized as
below:
Warrants outstanding at
|
|||||||||||||||
October 31, 2009
|
|||||||||||||||
Weighted
|
Weighted
|
||||||||||||||
Average
|
Average
|
||||||||||||||
Remaining
|
Exercise
|
||||||||||||||
Exercise Prices
|
Warrants
|
Contractual
|
Price
|
||||||||||||
US$
|
Outstanding
|
Life (years)
|
US$
|
||||||||||||
0.88 | 1,071,428 | 2.5 | 0.88 |
F-24
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
15.
|
STATUTORY
RESERVES
|
The
reserve funds as of October 31, 2009 and 2008 were comprised of the
following:
2009
|
2008
|
|||||||
US$
|
US$
|
|||||||
Statutory
surplus reserve
|
3,090,320
|
2,585,297
|
||||||
Public
welfare fund
|
282,377
|
282,377
|
||||||
Total
|
3,372,697
|
2,867,674
|
(1)
Statutory reserves
Pursuant
to the relevant laws and regulations of the PRC, the Company is required to
annually transfer 10% of its after tax profit as reported on financial
statements prepared under the accounting principles of the PRC to a statutory
surplus reserve fund until the balance reaches 50% of the registered share
capital. This reserve can be used to make up any losses incurred or to
increase share capital. Except for reducing losses incurred, any other
application may not result in this reserve balance falling below 25% of the
registered capital.
(2)
Public welfare funds
Prior to
January 1, 2007, the Company was required each year to transfer 5% of its after
tax profit as reported on consolidated financial statements prepared under the
accounting principles of the PRC to the public welfare funds. This reserve
was restricted to capital expenditure for employees’ collective welfare
facilities that are owned by the Company. The public welfare funds are not
available for distribution to the stockholders (except in liquidation).
Once capital expenditures for staff welfare facilities have been made, an
equivalent amount must be transferred from the public welfare funds to the
discretionary common reserve funds. Due to a change in PRC law,
appropriation of profit to the public welfare funds is no longer
required.
16.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business, generally for quantities required
for the Company’s business and at prevailing market prices. No material annual
loss is expected from these commitments and there are no minimum purchase
commitments.
The
Company and its subsidiaries are self-insured, and they do not carry any
property insurance, general liability insurance, or any other insurance that
covers the risks of their business operations. As a result any material loss or
damage to its properties or other assets, or personal injuries arising from its
business operations would have a material adverse effect on the Company’s
financial condition and operations.
The
Company is not involved in any legal matters arising in the normal course of
business. While incapable of estimation, in the opinion of the management, the
individual regulatory and legal matters in which it might involve in the future
are not expected to have a material adverse effect on the Company’s financial
position, results of operations, or cash flows.
F-25
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
(1)
Operating lease arrangements
The
Company leases office premise from a third party, Heilongjiang Jiusanyouzhi Co.,
Ltd. The lease is from May 1, 2007 to April 30, 2010, with monthly rental
payment of $10,514.
The
Company also leases property and plant from a related party, Harbin Renhuang
Pharmaceutical Stock Co. Ltd. The lease is from April 30, 2009 to May 1,
2010, with monthly rental payment of $51,345.
Minimum
lease payments due by year for the next five years and thereafter are as
follow:
Total
|
Related party
|
Third party
|
||||||||||
Year ended October 31,
|
US$
|
US$
|
US$
|
|||||||||
2010
|
371,154
|
308,070
|
63,084
|
|||||||||
2011
|
-
|
-
|
-
|
|||||||||
Thereafter
|
-
|
-
|
-
|
|||||||||
371,154
|
308,070
|
63,084
|
During
the year ended October 31, 2009 and 2008, the Company incurred rental expenses
in the amount of $750,219 and $669,824, respectively.
(2)
Capital commitments
Capital
commitments for purchase of land use right, property and equipment and
production patents as of October 31, 2009 were approximately
$9,682,200.
17.
|
RECLASSIFICATION
|
Certain
amounts in the prior year financial statements have been reclassified to conform
to October 31, 2009 financial statements. Prior to November 1, 2008. Due to
related parties, accrued employee benefits and other payables are shown
aggregately as other payables. There was no impact on previously reported
financial positions, results of operation and cash flows as a result of this
reclassification.
As
filed on December 8, 2009
|
||||
Other
payables
|
$ | 1,767,153 | ||
Reclassified
as filed on January 29, 2010
|
||||
Value
added tax payable
|
693,607 | |||
Due
to related parties
|
159,664 | |||
Accrued
employee benefits
|
720,498 | |||
Other
payable
|
193,384 | |||
Total
|
$ | 1,767,153 |
18.
|
SUBSEQUENT
EVENT
|
In May
2009, the FASB issued accounting guidance now codified as FASB ASC Topic 855,
“Subsequent Events,”
which establishes general standards of accounting for, and disclosures of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. FASB ASC Topic 855 is effective
for interim or fiscal periods ending after June 15, 2009.
Management
has evaluated subsequent events from October 31, 2009 to January 29, 2009, the
date which the Company’s consolidated financial statements have been issued and
were available to be issued, and has concluded the following events should be
reported during this period. Subsequent events that may occur after
January 29, 2009 have not been evaluated in the consolidated financial
statements as of October 31, 2009.
On
January 13, 2010, we entered into an employment agreement with Ms. Chen, who
became our chief financial officer on that date. The agreement has a
three-year term and provides that Ms. Chen will receive a base salary of
approximately $58,700, and will be entitled to receive an option grant under the
2007 Non-Qualified Company Stock Grant and Option Plan to purchase 50,000 shares
of our common stock, at an exercise price of $1.00 per share, on the
commencement date and on the first and second anniversary thereafter (for a
total of 150,000 shares). The options will be subject to a one year vesting
starting from each grant date. Ms. Chen is also eligible to receive
discretionary bonuses at times and in amounts determined by our Compensation
Committee and certain other benefits available to executive
officers.
F-26
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
19.
|
RESTATEMENT
|
After
reviewing the detailed data in the issued audited consolidated financial
statements and certain accounting principles, the Company concluded that the
Company’s previously issued audited consolidated financial statements for the
year ended October 31, 2008, contained errors related to recalculation of sales
rebates. Consequently, management restated its annual consolidated
financial statements as of October 31, 2008 and for the year ended. Theses
restatements, as detailed below, were made in accordance of FASB Topic ASC 250,
“ Accounting Changes and Error
Corrections ” (previously “SFAS 154”). No prior period financial
statements have been restated because 2008 is the first year impacted by
restatements. There was no tax effect as a result of the
restatements.
The
restatements include the adjustments of total assets, total stockholders’
equity, sales, net income and accounts receivable, and other relevant
adjustments, which is recalculation of sales rebates only and no other influence
adversely. The adjustments to the consolidated balance sheet, consolidated
statement of operations and comprehensive income, and consolidated
statement of cash flows are summarized as follows:
F-27
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
CONSOLIDATED
BALANCE SHEETS
AS
OF OCTOBER 31, 2008
Initial Filing
|
Restatement
|
Restated
|
||||||||||
US$
|
US$
|
US$
|
||||||||||
ASSETS
|
||||||||||||
Current
assets:
|
||||||||||||
Cash
and cash equivalents
|
9,747,693
|
9,747,693
|
||||||||||
Trade
receivables, net
|
22,588,580
|
(1,744,101
|
)
|
20,844,479
|
||||||||
Due
from related parties
|
-
|
-
|
||||||||||
Inventory,
net
|
2,625,385
|
2,625,385
|
||||||||||
Prepayments
|
33,695
|
33,695
|
||||||||||
Other
receivables, net
|
133,642
|
133,642
|
||||||||||
Total
current assets
|
35,128,995
|
(1,744,101
|
)
|
33,384,894
|
||||||||
Property
and equipment, net
|
2,620,949
|
2,620,949
|
||||||||||
Total
assets
|
37,729,944
|
(1,744,101
|
)
|
36,005,843
|
||||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||||
Liabilities
|
||||||||||||
Current
liabilities:
|
||||||||||||
Accounts
payable
|
193,934
|
193,934
|
||||||||||
Value
added tax payable
|
693,607
|
693,607
|
||||||||||
Due
to related parties
|
159,664
|
159,664
|
||||||||||
Accrued
employee benefits
|
720,498
|
720,498
|
||||||||||
Other
payable
|
193,384
|
193,384
|
||||||||||
Total
current liabilities
|
1,961,087
|
1,961,087
|
||||||||||
Commitments
and Contingencies
|
||||||||||||
Shareholders’
equity
|
||||||||||||
Preferred
stock (no par value, 1,000,000 shares authorized; none issued and
outstanding as of October 31, 2008)
|
-
|
-
|
||||||||||
Common
stock ($0.001 par value, 100,000,000 shares authorized;
35,096,680 issued and outstanding
as of October 31, 2008)
|
35,097
|
35,097
|
||||||||||
Additional
paid-in capital
|
6,595,400
|
6,595,400
|
||||||||||
Common
stock warrants
|
-
|
-
|
||||||||||
Reserves
|
3,036,617
|
(168,943
|
)
|
2,867,674
|
||||||||
Accumulated
other comprehensive income
|
3,355,986
|
(54,672
|
)
|
3,301,314
|
||||||||
Retained
earnings
|
22,765,757
|
(1,520,486
|
)
|
21,245,271
|
||||||||
Total
shareholders’ equity
|
35,788,857
|
(1,744,101
|
)
|
34,044,756
|
||||||||
Total
liabilities and shareholders’ equity
|
37,749,944
|
(1,744,101
|
) |
36,005,843
|
F-28
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE YEAR ENDED OCTOBER 31, 2008
Initial Filing
|
Restatement
|
Restated
|
||||||||||
US$
|
US$
|
US$
|
||||||||||
Sales,
net
|
36,163,919
|
(1,689,429
|
)
|
34,474,490
|
||||||||
Cost
of goods sold
|
15,980,638
|
15,980,638
|
||||||||||
Gross
profit
|
20,183,281
|
(1,689,429
|
)
|
18,493,852
|
||||||||
Operating
and administrative expenses:
|
||||||||||||
Sales
and distribution
|
3,318,418
|
3,318,418
|
||||||||||
General
and administrative
|
2,877,516
|
2,877,516
|
||||||||||
Research
and development
|
2,124,511
|
2,124,511
|
||||||||||
Total
operating expenses
|
8,320,445
|
8,320,445
|
||||||||||
Income
from operations
|
11,862,836
|
(1,689,429
|
)
|
10,173,407
|
||||||||
Other
income:
|
||||||||||||
Interest
income
|
85,993
|
85,993
|
||||||||||
Other
income, net
|
31,699
|
31,699
|
||||||||||
Income
from operations before income tax expenses
|
11,980,528
|
(1,689,429
|
)
|
10,291,099
|
||||||||
Income
tax expenses
|
-
|
-
|
||||||||||
Net
income
|
11,980,528
|
(1,689,429
|
)
|
10,291,099
|
||||||||
Other
comprehensive income:
|
||||||||||||
Cumulative
currency translation adjustments
|
2,446,528
|
(54,672
|
)
|
2,391,856
|
||||||||
Total
comprehensive income
|
14,427,056
|
(1,744,101
|
)
|
12,682,955
|
||||||||
Earnings
per common stock- Basic
|
0.34
|
(0.05
|
)
|
0.29
|
||||||||
Earnings
per common stock - Diluted
|
0.34
|
(0.05
|
)
|
0.29
|
||||||||
Weighted
average common stock outstanding
|
||||||||||||
Basic
|
35,096,681
|
35,096,681
|
||||||||||
Diluted
|
35,096,681
|
35,096,681
|
F-29
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
October
31, 2009 and 2008
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEAR ENDED OCTOBER 31, 2008
Initial Filing
|
Restatement
|
Restated
|
||||||||||
US$
|
US$
|
US$
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
11,980,528
|
(1,689,429
|
)
|
10,291,099
|
||||||||
Adjustments
to reconcile net income to operating activities:
|
||||||||||||
Depreciation
of property and equipment
|
339,257
|
339,257
|
||||||||||
Allowance
for doubtful accounts
|
243,282
|
243,282
|
||||||||||
Warrants
cancelled
|
(31,699
|
)
|
(31,699
|
)
|
||||||||
Changes
in assets and liabilities:
|
||||||||||||
Increase
in trade receivables
|
(13,120,769
|
)
|
(1,689,429
|
)
|
(11,431,340
|
)
|
||||||
Decrease
in due from related parties
|
271,198
|
271,198
|
||||||||||
Increase
in inventory, net
|
(1,513,512
|
)
|
(1,513,512
|
)
|
||||||||
Increase
in prepayments
|
(22,109
|
)
|
(22,109
|
)
|
||||||||
Decrease
in other receivables, net
|
112,338
|
112,338
|
||||||||||
Increase
in accounts payable
|
22,642
|
22,642
|
||||||||||
Increase
in value added tax payable
|
14,197
|
14,197
|
||||||||||
Increase
in accrued employee benefits
|
300,480
|
300,480
|
||||||||||
Increase
in other payable
|
176,226
|
176,226
|
||||||||||
Net
cash provided by (used in) operating activities
|
(1,227,941
|
)
|
(1,227,941
|
)
|
||||||||
Cash
flows from investing activities:
|
||||||||||||
Purchase
of property and equipment
|
(110,760
|
)
|
(110,760
|
)
|
||||||||
Net
cash used in investing activities
|
(110,760
|
)
|
(110,760
|
)
|
||||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from share issues
|
-
|
-
|
||||||||||
Net
cash provided by financing activities
|
-
|
-
|
||||||||||
Effect
of exchange rate changes on cash
|
932,791
|
932,791
|
||||||||||
Net
decrease in cash and cash equivalents
|
(405,910
|
)
|
(405,910
|
)
|
||||||||
Cash
and cash equivalents, beginning of year
|
10,153,603
|
10,153,603
|
||||||||||
Cash
and cash equivalents, end of year
|
9,747,693
|
9,747,693
|
||||||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the year for income taxes
|
-
|
-
|
||||||||||
Interest
paid during the year
|
-
|
-
|
F-30
RENHUANG
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
Note
|
July 31,
2010
|
October 31,
2009
|
||||||||
US$
|
US$
|
|||||||||
(Unaudited)
|
(Audited)
|
|||||||||
ASSETS
|
||||||||||
Current
assets:
|
||||||||||
Cash
and cash equivalents
|
28,749,480
|
8,111,514
|
||||||||
Trade
receivables, net
|
7
|
10,817,824
|
23,203,410
|
|||||||
Due
from related parties
|
11
|
-
|
130,199
|
|||||||
Inventory,
net
|
9
|
3,573,349
|
3,024,016
|
|||||||
Deposits
|
11
|
1,473,796
|
-
|
|||||||
Prepayments
|
-
|
89,281
|
||||||||
Other
receivables, net
|
8
|
144,011
|
102,613
|
|||||||
Total
current assets
|
44,758,460
|
34,661,033
|
||||||||
Property
and equipment, net
|
10
|
2,090,592
|
2,352,163
|
|||||||
Deposits
|
11
|
18,695,870
|
16,137,000
|
|||||||
Total
assets
|
65,544,922
|
53,150,196
|
||||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||
Liabilities
|
||||||||||
Current
liabilities:
|
||||||||||
Accounts
payable
|
256,993
|
369,329
|
||||||||
Value
added tax payable
|
471,282
|
1,186,642
|
||||||||
Accrued
employee benefits
|
1,422,006
|
1,136,267
|
||||||||
Warrant
liability
|
342,770
|
-
|
||||||||
Total
current liabilities
|
2,493,051
|
2,692,238
|
||||||||
Commitments
and Contingencies
|
17
|
|||||||||
Shareholders’
equity
|
||||||||||
Preferred
stock (no par value, 1,000,000 shares authorized; none issued and
outstanding as of July 31, 2010 and October 31, 2009)
|
14
|
-
|
-
|
|||||||
Common
stock ($0.001 par value, 100,000,000 shares authorized; 37,239,536 issued
and outstanding as of July 31, 2010 and October 31, 2009)
|
14
|
37,240
|
37,240
|
|||||||
Additional
paid-in capital
|
7,651,460
|
7,596,525
|
||||||||
Common
stock warrants
|
15
|
496,732
|
496,732
|
|||||||
Reserves
|
16
|
3,372,697
|
3,372,697
|
|||||||
Accumulated
other comprehensive income
|
3,669,590
|
3,367,659
|
||||||||
Retained
earnings
|
47,824,152
|
35,587,105
|
||||||||
Total
shareholders’ equity
|
63,051,871
|
50,457,958
|
||||||||
Total
liabilities and shareholders’ equity
|
65,544,922
|
53,150,196
|
The
accompanying notes are an integral part of these financial
statements.
F-31
RENHUANG
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three months ended
July 31,
|
Nine months ended
July 31,
|
|||||||||||||||||
Note
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||
US$
|
US$
|
US$
|
US$
|
|||||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
Sales,
net
|
9,263,892
|
6,442,197
|
38,489,012
|
28,915,072
|
||||||||||||||
Cost
of goods sold
|
(4,620,568
|
)
|
(2,942,649
|
)
|
(18,151,062
|
)
|
(13,825,692
|
)
|
||||||||||
Gross
profit
|
4,643,324
|
3,499,548
|
20,337,950
|
15,089,380
|
||||||||||||||
Operating
and administrative expenses:
|
||||||||||||||||||
Sales
and marketing
|
1,284,990
|
1,109,540
|
3,689,290
|
2,534,865
|
||||||||||||||
General
and administrative
|
395,131
|
499,949
|
2,208,965
|
1,712,342
|
||||||||||||||
Research
and development
|
1,528,933
|
1,227,411
|
2,251,854
|
1,833,391
|
||||||||||||||
Total
operating expenses
|
3,209,054
|
2,836,900
|
8,150,109
|
6,080,598
|
||||||||||||||
Income
from operations
|
1,434,270
|
662,648
|
12,187,841
|
9,008,782
|
||||||||||||||
Other
income:
|
||||||||||||||||||
Interest
income
|
22,039
|
12,054
|
49,206
|
31,204
|
||||||||||||||
Income
from operations before income tax expenses
|
1,456,309
|
674,702
|
12,237,047
|
9,039,986
|
||||||||||||||
Income
tax expenses
|
5
|
-
|
-
|
-
|
-
|
|||||||||||||
Net
income
|
1,456,309
|
674,702
|
12,237,047
|
9,039,986
|
||||||||||||||
Other
comprehensive income:
|
||||||||||||||||||
Cumulative
currency translation adjustments
|
461,820
|
(93,739
|
)
|
301,931
|
(79,568
|
)
|
||||||||||||
Total
comprehensive income
|
1,918,129
|
580,963
|
12,538,978
|
8,960,418
|
||||||||||||||
Earnings
per common stock- Basic
|
0.04
|
0.02
|
0.33
|
0.25
|
||||||||||||||
Earnings
per common stock - Diluted
|
0.04
|
0.02
|
0.32
|
0.25
|
||||||||||||||
Weighted
average common stock outstanding
|
||||||||||||||||||
Basic
|
37,239,536
|
36,796,990
|
37,239,536
|
35,669,678
|
||||||||||||||
Diluted
|
37,901,089
|
36,796,990
|
37,793,370
|
35,669,678
|
The
accompanying notes are an integral part of these financial
statements.
F-32
RENHUANG
PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
July 31,
|
||||||||
2010
|
2009
|
|||||||
US$
|
US$
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
12,237,047
|
9,039,986
|
||||||
Adjustments
to reconcile net income to operating activities:
|
||||||||
Depreciation
of property and equipment
|
261,572
|
265,559
|
||||||
Warrants
issued for services
|
342,770
|
-
|
||||||
Share
compensation
|
42,759
|
-
|
||||||
Changes
in assets and liabilities:
|
||||||||
Decrease
(increase) in trade receivables
|
12,385,586
|
(5,868,520
|
)
|
|||||
Decrease
(increase) in due from related parties
|
130,199
|
(321,010
|
)
|
|||||
Decrease
(increase) in inventory, net
|
(549,333
|
)
|
43,425
|
|||||
Decrease
(increase) in prepayments and in other receivables
|
(1,425,913
|
)
|
77,805
|
|||||
Decrease
in accounts payable
|
(112,336
|
)
|
(93,249
|
)
|
||||
Decrease
in VAT, employee benefit, other payables
|
(429,621
|
)
|
(85,208
|
)
|
||||
Increase
in accrued employee benefits
|
285,739
|
281,611
|
||||||
Decrease
in other payables
|
-
|
(96,754
|
)
|
|||||
Net
cash provided by operating activities
|
22,882,730
|
3,058,788
|
||||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
-
|
(16,183
|
)
|
|||||
Deposits
for office properties
|
(2,558,870
|
)
|
-
|
|||||
Net
cash used in investing activities
|
(2,558,870
|
)
|
(16,183
|
)
|
||||
Effect
of exchange rate changes on cash
|
314,106
|
(22,551
|
)
|
|||||
Net
increase in cash and cash equivalents
|
20,637,966
|
3,042,605
|
||||||
Cash
and cash equivalents, beginning of year
|
8,111,514
|
9,747,693
|
||||||
Cash
and cash equivalents, end of year
|
28,749,480
|
12,767,747
|
||||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid during the year for income taxes
|
-
|
-
|
||||||
Interest
paid during the year
|
-
|
-
|
The
accompanying notes are an integral part of these financial
statements.
F-33
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
1.
ORGANIZATION AND NATURE OF OPERATION
The
accompanying consolidated financial statements include the financial statements
of Renhuang Pharmaceuticals, Inc. (“Renhuang”) and its subsidiaries.
Renhuang and its subsidiaries are collectively referred to as the
“Company.”
Renhuang
was incorporated in the State of Nevada on August 18, 1988, originally under the
corporate name of Solutions, Incorporated. It was inactive until August
16, 1996, when it changed its corporate name to Suarro Communications, Inc, and
engaged in the business of providing internet based business services.
This line of business was discontinued in 2006, and Renhuang became a
non-operating public company. Renhuang underwent a number of corporate
name changes as follows:
June
1997
|
ComTech
Consolidation Group, Inc
|
|
February
1999
|
E-Net
Corporation
|
|
May
1999
|
E-Net
Financial Corporation
|
|
January
2000
|
E-Net.Com
Corporation
|
|
February
2000
|
E-Net
Financial.Com Corporation
|
|
January
2002
|
Anza
Capital, Inc (“Anza”)
|
|
July
2006
|
Renhuang
Pharmaceuticals, Inc.
|
Effective
August 28, 2006, Renhuang completed the acquisition of 100% ownership of Harbin
Renhuang Pharmaceutical Company Limited, a company incorporated in the British
Virgin Islands. As a result, Harbin Renhuang Pharmaceutical Company
Limited became a wholly owned subsidiary of Renhuang.
Harbin
Renhuang Pharmaceutical Company Limited owns 100% of the registered capital of
Harbin Renhuang Pharmaceutical Co. Ltd (“Renhuang China”).
The core
activities of subsidiaries included in the consolidated financial statements are
as follow:
¨
|
Harbin
Renhuang Pharmaceutical Company Limited – Investment
holding.
|
¨
|
Renhuang
China – Development, manufacturing and distribution of pharmaceutical
products.
|
Renhuang
China’s principal country of operations is the People’s Republic of China (the
“PRC”) and maintains their accounting records in Renminbi (“RMB”).
Substantially all of the Company’s assets and operation are located in the
PRC.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation of financial statements
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and related
notes. The accompanying unaudited condensed consolidated financial
statements and related notes should be read in conjunction with the audited
consolidated financial statements of the Company and notes thereto for them year
ended October 31, 2009, which are included in the Company’s Form 10-K for the
year ended October 31, 2009, filed with the SEC on January 29,
2010.
F-34
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which include only normal
recurring adjustments) necessary to present fairly the balance sheets of
Renhuang Pharmaceuticals, Inc. and its subsidiaries as of July 31, 2010, the
results of their operations for the three and nine months ended July 31, 2010
and 2009, and their cash flows for the nine months ended July 31, 2010 and
2009. The results of operations for the three and nine months ended July
31, 2010 and 2009 are not necessarily indicative of the results to be expected
for the entire year.
The
accompanying condensed consolidated financial statements are expressed in terms
of US dollars.
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards
Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162 . This statement modifies the Generally Accepted
Accounting Principles (“GAAP”) hierarchy by establishing only two levels of
GAAP, authoritative and nonauthoritative accounting literature. Effective July
2009, the FASB Accounting Standards Codification (“ASC”), also known
collectively as the “Codification,” is considered the single source of
authoritative U.S. accounting and reporting standards, except for additional
authoritative rules and interpretive releases issued by the SEC.
Nonauthoritative guidance and literature would include, among other things, FASB
Concepts Statements, American Institute of Certified Public Accountants Issue
Papers and Technical Practice Aids and accounting textbooks. The Codification
was developed to organize GAAP pronouncements by topic so that users can more
easily access authoritative accounting guidance. It is organized by topic,
subtopic, section, and paragraph, each of which is identified by a numerical
designation. This statement applies beginning in third quarter 2009. All
accounting references have been updated, and therefore SFAS references have been
replaced with ASC references.
The
Company operates in one operating segment in accordance with accounting guidance
FASB ASC Topic 280,
“Segment
Reporting.” Our CEO has been identified as the chief operating
decision maker as defined by FASB ASC Topic 280.
Principles
of consolidation
The
condensed consolidated financial statements include the financial statements of
Renhuang and its subsidiaries.
All
inter-company transactions and balances have been eliminated in
consolidation.
Effective
beginning third quarter 2009, the FASB Topic 810, “Consolidation Topic,” revised
the accounting treatment for noncontrolling minority interests of
partially-owned subsidiaries. Noncontrolling minority interests represent
the portion of earnings that is not within the parent company’s control. These
amounts are now required to be reported as equity instead of as a liability on
the balance sheet. In addition this statement requires net income from
noncontrolling minority interest to be shown separately on the consolidated
statements of operations and comprehensive income. As the Company has no
noncontrolling interest at July 31, 2010, this change did not have an impact on
the Company’s condensed consolidated financial statements.
Use
of estimates
The
preparation of these consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affected the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported
periods.
F-35
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Significant
estimates and assumptions by management include, among others, uncollectible
accounts receivable, slow moving, obsolete and/or damaged inventory, property
and equipment, reserve for employee benefit obligations, stock warrant
valuation, and other uncertainties. Actual results may differ from these
estimates. The current economic environment has increased the degree of
uncertainty inherent in these estimates and assumptions.
Foreign
currency translation
The
Company’s principal country of operations is the PRC. The financial position and
results of operations of the subsidiaries are determined using the local
currency (“Renminbi” or “RMB”) as the functional currency.
Translation
of amounts from RMB into US dollars for reporting purposes is performed by
translating the results of operations denominated in foreign currency at the
weighted average rate of exchange during the reporting period. Assets and
liabilities denominated in foreign currencies at the balance sheet date are
translated at the market rate of exchange ruling at that date. The registered
equity capital denominated in the functional currency is translated at the
historical rate of exchange at the time of capital contribution. All translation
adjustments resulting from the translation of the financial statements into the
reporting currency (US dollars) are reported as a component of accumulated other
comprehensive income in shareholders’ equity.
As of
July 31, 2010 and October 31, 2009 the exchange rate was RMB6.79 and RMB6.82,
respectively. Translation adjustment totaled $461,820 and ($93,739) for the
three months ended July 31, 2010 and 2009, respectively, and $301,931 and
($79,568) for the nine months ended July 31, 2010 and 2009.
Cash
and cash equivalents
Cash and
cash equivalents represent cash on hand and demand deposits placed with banks or
other financial institutions, which have original maturities less than three
months. There are no restriction to cash at July 31, 2010 and October 31,
2009. Substantially all of the Company’s cash is held in bank accounts in
the PRC and is not protected by the Federal Deposit Insurance Corporation
(“FDIC”) insurance or any other similar insurance. Given the current
economic environment and risks in the banking industry, there is a risk that
deposits may not be readily available.
Trade
receivables, net
Trade
receivables are recorded at the invoiced amount and do not bear interest. Trade
receivable payment terms vary and amounts due from customers are stated in the
financial statements net of an allowance for doubtful accounts and sales
rebates. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its trade receivables. Trade receivables outstanding
longer than the payment terms are considered past due. The Company determines
its allowance by considering a number of factors, including the length of
time the trade receivable is past due, the Company’s previous loss history,
the counter party’s current ability to pay its obligation to the Company, and
the condition of the general economy and the industry as a whole. The Company
writes off receivables when they are deemed uncollectible, and payments
subsequently received on such trade receivables are credited to the allowance
for doubtful accounts. There were no write offs for the three and nine
months ended July 31, 2010 and 2009. The Company does not have any
off-balance sheet credit exposure related to its customers.
F-36
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Inventory,
net
Inventory
consists of raw materials, work-in-progress and finished goods and is valued at
the lower of cost or market value. The value of inventory is determined using
the weighted average cost method and includes any related production overhead
costs incurred in bringing the inventory to their present location and
condition. Overhead costs included in finished goods include, direct labor cost
and other costs directly applicable to the manufacturing process.
The
Company estimates an inventory allowance for excessive, slow moving and obsolete
inventories as well as inventory whose carrying value is in excess of net
realizable value. Inventory amounts are reported net of such
allowances. There were no inventory write offs for the three and nine
months ended July 31, 2010 and 2009.
Property
and equipment, net
Property
and equipment are recorded at cost. Expenditures for major additions and
improvements are capitalized and minor replacements, maintenance, and repairs
are charged to expense as incurred. When property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is included in the results of
operations for the respective period.
Depreciation
is provided over the estimated useful lives of the related assets using the
straight-line method. The estimated useful lives for significant property,
plant and equipment categories are as follows:
Machinery
and equipment
|
10
years
|
Office
equipment and furnishings
|
5-10
years
|
Motor
vehicles
|
5-10
years
|
Long-lived
assets
The
Company’s long-lived assets and other assets (consisting of property and
equipment) are reviewed for impairment in accordance with the guidance of the
FASB Topic ASC 360, “
Property, Plant, and Equipment,” and FASB ASC Topic 205 “ Presentation of
Financial
Statements .” The Company tests for impairment losses on long-lived
assets used in operations whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Recoverability of
an asset to be held and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted cash flows expected to be generated by
the asset. If such asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds its fair value. Impairment evaluations involve management’s estimates on
asset useful lives and future cash flows. Actual useful lives and cash
flows could be different from those estimated by management which
could have a material effect on our reporting results and financial
positions. Fair value is determined through various valuation techniques
including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary. Through the three and nine
months ended July 31, 2010 and 2009, the Company had not experienced impairment
losses on its long-lived assets. However, there can be no assurances that demand
for the Company’s products or services will continue, which could result in an
impairment of long-lived assets in the future.
F-37
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Warrant
liability
On March
25, 2010, the Company issued warrants (the “Warrants”) for 160,000 common shares
to a service provider that have an exercise price of $2.00 per share and a
contractual life of 3 years. The terms of the Warrant agreement include
the following factors that in accordance with FASB Topic ASC 815, requires that
the Warrants be classified at their fair value to liabilities each reporting
period.
|
¨
|
The
holder of the Warrants (the “Holder”) is entitled to the benefits of Rule
144 promulgated under the Securities Act of 1933, as amended and any other
rule or regulation of the SEC that may at any time permit the Holder to
sell securities of the Company to the public
without registration. Non compliance with such rules and
regulations could result in the Company having to settle the Warrant
obligation in cash.
|
|
¨
|
The
exercise price and number of shares issuable upon exercise of the Warrants
(the “Warrant Shares”) are subject to adjustment for standard dilutive
events, including the issuance of common stock, or securities convertible
into or exercisable for shares of common stock, that will adversely affect
the Holder’s rights under the Warrants. There were no dilutive
events in the three and nine months ended July 31, 2010, which would
have resulted in an adjustment to the exercise price or number of Warrant
Shares.
|
At July
31, 2010, the fair value of the Company’s warrants liability was $342,770.
The Company used the Black-Scholes valuation model to estimate the fair value of
the Warrants. The valuation was based on the assumptions noted in the
following table.
Expected
volatility
|
205.3 | % | ||
Expected
dividends
|
0 | % | ||
Expected
term (in years)
|
3
years
|
|||
Risk-free
rate
|
1.69 | % |
Fair
value of financial instruments
The
Company applies the provisions of accounting guidance, FASB Topic ASC 825 that
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value, and defines fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties. As of July 31, 2010 and
October 31, 2009 the carrying value of cash, trade receivables, other
receivables, accounts payable, and warrant liability approximated their fair
value.
Fair
value measurements
Effective
April 1, 2009, the FASB ASC Topic 825, “Financial Instruments,” requires
disclosures about fair value of financial instruments in quarterly reports as
well as in annual reports.
The FASB
ASC Topic 820, “Fair Value
Measurements and Disclosures,” clarifies the definition of fair value for
financial reporting, establishes a framework for measuring fair value and
requires additional disclosures about the use of fair value
measurements.
Various
inputs are considered when determining the fair value of the Company’s financial
instruments. The inputs or methodologies used for valuing securities are not
necessarily an indication of the risk associated with investing in these
securities. These inputs are summarized in the three broad levels listed
below.
F-38
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
|
¨
|
Level
1 – observable market inputs that are unadjusted quoted prices for
identical assets or liabilities in active
markets.
|
|
¨
|
Level
2 – other significant observable inputs (including quoted prices for
similar securities, interest rates, credit risk,
etc…).
|
|
¨
|
Level
3 – significant unobservable inputs (including the Company’s own
assumptions in determining the fair value of financial
instruments).
|
The
Company’s adoption of FASB ASC Topic 825 did not have a material impact on the
Company’s condensed consolidated financial statements.
The
carrying value of financial assets and liabilities recorded at fair value is
measured on a recurring or nonrecurring basis. Financial assets and liabilities
measured on a non-recurring basis are those that are adjusted to fair value when
a significant event occurs. The Company had no financial assets or liabilities
carried and measured on a nonrecurring basis during the reporting periods.
Financial assets and liabilities measured on a recurring basis are those that
are adjusted to fair value each time a financial statement is
prepared.
The
availability of inputs observable in the market varies from instrument to
instrument and depends on a variety of factors including the type of instrument,
whether the instrument is actively traded, and other characteristics particular
to the transaction. For many financial instruments, pricing inputs are readily
observable in the market, the valuation methodology used is widely accepted by
market participants, and the valuation does not require significant
management discretion. For other financial instruments, pricing inputs are less
observable in the market and may require management judgment.
Revenue
recognition
Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition,” which
states that revenue should be recognized when the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) the service has been
rendered; (3) the selling price is fixed or determinable; and (4) collection of
the resulting receivable is reasonably assured.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable.
As of
July 31, 2010, the Company has no sales or contracts that included multiple
deliverables that would fall under the scope of FASB Topic ASC 605, “ Multiple Deliverable Revenue
Arrangements – A Consensus of the FASB Emerging
Issues Task Force .”
The
Company provided annual sales rebates to its distributors based upon sales
volumes. Sales rebates are recorded as a current liability at the time of
the sale based upon the Company’s estimates of whether each customer would be
entitled to rebates for the period. At quarter end, the accrued rebate
amount is adjusted to the actual amount earned and reclassified to trade
receivables in accordance with legal right of offset. Sales rebates were
deducted from sales in the accompanying consolidated statements of operations
and comprehensive income.
F-39
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
As of
July 31, 2010 and October 31, 2009, the Company has accrued $550,217 and
$3,020,898, respectively, for sales rebates. For the three months
ended July 31, 2010 and 2009, the Company has deducted sales rebates in the
amount of $1,018,359 and $1,355,468, respectively, from sales. For the
nine months ended July 31, 2010 and 2009, the Company has deducted sales rebates
in the amount of $4,923,196 and $6,545,697, respectively, from sales.
Sales rebates are calculated based on terms specified in contracts with
individual distributors.
Sales
returns and allowances
The
Company does not allow return of products except for products that were damaged
during shipment. The total amount of returned product is less than 0.05% of
total sales. The cost of damaged products is netted against sales and cost of
goods sold, respectively.
Cost
of goods sold
Cost of
goods sold primarily consists of direct and indirect manufacturing costs,
including production overhead costs, shipping and handling costs for the
products sold.
Sales
and marketing
Sales and
marketing costs consist primarily of advertising and market promotion expenses,
and other overhead expenses incurred by the Company’s sales and marketing
personnel. Advertising expenses amounted to $1,232,000 and $1,085,756 during the
three months ended July 31, 2010 and 2009, respectively and $3,558,109 and
$2,476,007 during the nine months ended July 31, 2010 and 2009,
respectively.
Advertising
costs are expensed as incurred.
Research
and development
Research
and development (“R&D”) costs are expensed as incurred.
Employee
benefit costs
According
to the PRC regulations on pension, a company contributes to a defined
contribution retirement plan organized by municipal government in the province
in which the Renhuang China was registered and all qualified employees are
eligible to participate in the plan. Contributions to the plan are calculated at
20% of the employees’ salaries above a fixed threshold amount, employees
contribute 4% and the Renhuang China contributes the balance of
16%.
Share-based
compensation
For
purposes of determining the variables used in the calculation of stock
compensation expense under the provisions of FASB ASC Topic 505, “ Equity ” and FASB ASC Topic
718, “ Compensation
— Stock Compensation,” we
perform an analysis of current market data and historical Company data to
calculate an estimate of implied volatility, the expected term of the option and
the expected forfeiture rate. With the exception of the expected forfeiture
rate, which is not an input, we use these estimates as variables in the
Black-Scholes option pricing model. Depending upon the number of stock options
granted, any fluctuations in these calculations could have a material effect on
the results presented in our condensed consolidated statement of income and
other comprehensive income. In addition, any differences between estimated
forfeitures and actual forfeitures could also have a material impact on our
financial statements.
F-40
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Share-based
compensation amounted to $26,165 and $0 in the three months ended July 31, 2010
and 2009, respectively and $42,759 and $0 in the nine months ended July 31, 2010
and 2009, respectively.
Taxation
Taxation
on profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of operations.
The
Company accounts for income tax under the provisions of FASB ASC Topic 740, “Income Taxes,” which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of the events that have been included in the financial statements
or tax returns. Deferred income taxes are recognized for all significant
temporary differences between tax and financial statements bases of assets and
liabilities. Valuation allowances are established against net deferred tax
assets when it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
The
Company does not have any long-term deferred tax assets or liabilities in China
that will exist once the tax holiday expires. The Company does not have any
significant deferred tax asset or liabilities that relate to tax jurisdictions
not covered by the tax holiday.
The
Company does not accrue United States income tax on unremitted earnings from
foreign operations, as it is the Company’s intention to invest these earnings in
the foreign operations indefinitely.
Generally,
years beginning after fiscal 2006, the Company is open to examination by PRC
taxing authorities. In the United States, we are open to examination from
2006 onward.
Enterprise
income tax
On March
16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income
Tax Law (“New EIT Law”) which became effective on January 1, 2008.
Pursuant to the New EIT Law, a unified enterprise income tax rate of 25 percent
and unified tax deduction standards will be applied consistently to both
domestic-invested enterprises and foreign-invested enterprises. However,
the New EIT Law repealed most of the existing preferential tax rates and tax
holidays. A five-year transition period is allowed for enterprises that
obtained preferential tax treatment under the prior tax regime. Under the
prior tax regime, foreign-invested enterprises were generally subject to a 30
percent federal tax rate plus a 3 percent local tax rate for a total tax rate of
33 percent.
Renhuang
China secured preferential tax treatment in the jurisdiction where it conducts
its manufacturing activity, where it was granted tax holiday from the local
government, for being a new and high-technology enterprise.
F-41
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets, including tax loss and credit carryforwards, and liabilities are
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. The effect of deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. Deferred income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components of the deferred
tax assets and liabilities are individually classified as current and noncurrent
based on their characteristics. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
A
provision has not been made at July 31, 2010 for U.S. or additional foreign
withholding taxes on approximately $48,527,354 of undistributed earnings of
foreign subsidiaries because it is the present intention of management to
reinvest the undistributed earnings indefinitely in foreign operations.
Generally, such earnings become subject to U.S. tax upon the remittance of
dividends and under certain other circumstances. It is not practicable to
estimate the amount of deferred tax liability on such undistributed
earnings.
The
Company recognizes that virtually all tax positions in the PRC are not free of
some degree of uncertainty due to tax law and policy changes by the State.
However, the Company cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current State officials.
Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of July 31, 2010, is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
October 31, 2009, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.
Value
added tax
The
Provisional Regulations of The People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994. Under
these regulations and the Implementing Rules of the Provisional Regulations of
the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.
Value
added tax payable in The People’s Republic of China is charged on an aggregated
basis at a rate of 13% or 17% (depending on the type of goods involved) on the
full price collected for the goods sold or, in the case of taxable services
provided, at a rate of 17% on the charges for the taxable services provided, but
excluding, in respect of both goods and services, any amount paid in respect of
value added tax included in the price or charges, and less any deductible
value added tax already paid by the taxpayer on purchases of goods and services
in the same financial year.
F-42
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Comprehensive
Income
Total
comprehensive income is defined as all changes in shareholders’ equity during a
period, other than those resulting from investments by and distributions to
shareholders (i.e., issuance of equity securities and dividends).
Generally, for the Company, total comprehensive income equals net income plus or
minus adjustments for currency translation. Total comprehensive income
represents the activity for a period net of related tax and was $1,918,129 and
$580,963 for the three months ended July 31, 2010 and 2009, respectively and
$12,538,978 and $8,960,418 for the nine months ended July 31, 2010 and 2009,
respectively.
While
total comprehensive income is the activity in a period and is largely driven by
net earnings in that period, accumulated other comprehensive income or loss
(“AOCI”) represents the cumulative balance of other comprehensive income as of
the balance sheet date. For the Company, AOCI is primarily the cumulative
balance related to the currency adjustments and increased overall equity by
$301,931 as of July 31, 2010 and decreased overall equity by $79,568 as of July
31, 2009.
Earnings
per share
Basic net
earnings per common stock is computed by dividing net earnings applicable to
common shareholders by the weighted-average number of common stock outstanding
during the period. Diluted net earnings per common stock is determined using the
weighted-average number of common stock outstanding during the period, adjusted
for the dilutive effect of common stock equivalents, using the treasury stock
method, consisting of shares that might be issued upon exercise of common stock
warrants. In periods where losses are reported, the weighted-average number of
common stock outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive.
Basic
earnings per share is based on the weighted-average number of shares of common
stock outstanding. Earnings per share, assuming dilution, is based on the
weighted-average number of shares of common stock outstanding adjusted for the
effects of common stock that may be issued as a result of the following types of
potentially dilutive instruments:
|
–
|
warrants,
|
|
–
|
employee
stock options, and
|
|
–
|
other
equity awards, which include long-term incentive
awards.
|
The FASB
Topic ASC 260, “Earnings per
Share,” requires the Company to include additional shares in the
computation of earnings per share, assuming dilution. The additional
shares included in diluted earnings per share represent the number of shares
that would be issued if all of the Company’s outstanding dilutive instruments
were converted into common stock.
Diluted
earnings per share are based on the assumption that all dilutive options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options are assumed to be exercised at the time of
issuance, and as if funds obtained thereby were used to purchase common stock at
the average market price during the period.
F-43
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Warrants
The
Company evaluates its warrants on an ongoing basis considering the accounting
guidance of FASB Topic ASC 825, which establishes standards for issuers of
financial instruments with characteristics of both liabilities and equity
related to the classification and measurement of those instruments. The warrants
are evaluated considering the accounting guidance of FASB Topic ASC 815, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities.
Freestanding
financial instruments with characteristics of both liabilities and
equity
In
accordance with accounting guidance FASB Topic ASC 825, the Company accounts for
financial instruments as a liability if it embodies an obligation to repurchase
the issuer’s equity shares, or is indexed to such an obligation, and that
requires or may require the issuer to settle the obligation by transferring
assets. Freestanding financial instruments are financial instruments that are
entered into separately and apart from any of the entity’s other financial
instruments or equity transactions, or that is entered into in conjunction with
some other transaction and is legally detachable and separately exercisable. The
liability recorded is the per share price to be paid and is offset to
equity. As of July 31, 2010 and October 31, 2009, there were no financial
instruments recorded as liability.
3.
ACCOUNTING PRONOUNCEMENTS
Accounting
Standards Update (“ASU”) ASU No. 2010-09 (ASC Topic 855), which amends
Subsequent Events Recognition and Disclosures, ASU No. 2009-16 (ASC Topic 860),
which amends Accounting for Transfer of Financial Assets, ASU No. 2009-05 (ASC
Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU
No. 2009-08, Earnings per Share, ASU No. 2009-12 (ASC Topic 820), Investments in
Certain Entities That Calculate Net Asset Value per Share, and various other
ASU’s No. 2009-2 through ASU No. 2010-19 which contain technical corrections to
existing guidance or affect guidance to specialized industries or entities were
recently issued. These updates have no current applicability to the
Company, or their effect on the financial statements would not have been
significant.
In April
2010, the FASB issued Accounting Standards Update, 2010-17, Revenue
Recognition—Milestone Method (Topic 605): “Milestone Method of
Revenue
Recognition—a consensus of the FASB Emerging
Issues Task Force.” This is an update regarding the milestone
method of revenue recognition. The scope of this update is limited to
arrangements that include milestones relating to research or development
deliverables. The update specifies criteria that must be met for a vendor to
recognize consideration that is contingent upon achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The
criteria apply to milestones in arrangements within the scope of this update
regardless of whether the arrangement is determined to have single or multiple
deliverables or units of accounting. The update will be effective for fiscal
years, and interim periods within those years, beginning on or after June
15, 2010. Early application is permitted. Companies can apply this guidance
prospectively to milestones achieved after adoption. However, retrospective
application to all prior periods is also permitted. This update is not expected
to have a material impact on the Company’s financial statements.
F-44
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
In March
2010, the FASB issued Accounting Standards Update, 2010-13, Compensation—Stock
Compensation (Topic 718):
“Effect of Denominating
the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades—a consensus of the FASB Emerging
Issues Task Force.” This is an update regarding the
effect of denominating the exercise price of a share-based payment awards in the
currency of the market in which the underlying equity securities trades and that
currency is different from (1) entity’s functional currency, (2) functional
currency of the foreign operation for which the employee provides services,
and (3) payroll currency of the employee. The update clarifies that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity’s equity securities trades
should be considered an equity award assuming all other criteria for equity
classification are met. The update will be effective for interim and annual
periods beginning on or after December 15, 2010, and will be applied
prospectively. Affected entities will be required to record a cumulative
catch-up adjustment for all awards outstanding as of the beginning of the annual
period in which the guidance is adopted. This update is not expected to have a
material impact on the Company’s financial statements.
In March,
2010, the FASB issued Accounting Standards Update, 2010-11, Derivatives and
Hedging (Topic 815): “Scope
Exception Related to Embedded Credit Derivatives. ” This
update clarifies the type of embedded credit derivative that is exempt from
embedded derivative bifurcation requirements. Specifically, only one form of
embedded credit derivative qualifies for the exemption – one that is related
only to the subordination of one financial instrument to another. As a result,
entities that have contracts containing an embedded credit derivative feature in
a form other than such subordination may need to separately account for the
embedded credit derivative feature. This update also has transition provisions,
which permit entities to make a special one-time election to apply the fair
value option to any investment in a beneficial interest in securitized financial
assets, regardless of whether such investments contain embedded derivative
features. This update is effective on the first day of the first fiscal quarter
beginning after June 15, 2010. Early adoption is permitted at the beginning of
any fiscal quarter beginning after March 5, 2010. This update is not expected to
have a material impact on the Company’s financial statements
In
January 2010, the FASB issued Accounting Standards Update, 2010-06, Fair Value
Measurements and Disclosures (Topic 820): “ Improving Disclosures about Fair
Value Measurements. ” This update provides guidance to improve
disclosures about fair value measurements. This guidance amends previous
guidance on fair value measurements to add new requirements for disclosures
about transfers into and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurement on
a gross basis rather than on a net basis as currently required. This update also
clarifies existing fair value disclosures about the level of disaggregation and
about inputs and valuation techniques used to measure fair value. This guidance
is effective for annual and interim periods beginning after December 15, 2009,
except for the requirement to provide the Level 3 activities of purchases,
sales, issuances, and settlements on a gross basis, which will be effective for
annual and interim periods beginning after December 15, 2010. Early application
is permitted and, in the period of initial adoption, entities are not required
to provide the amended disclosures for any previous periods presented for
comparative purposes. The adoption of this update did not have a
significant impact on the Company’s financial statements.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605): “
Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging
Issues Task Force.” This update provides application guidance
on whether multiple deliverables exist, how the deliverables should be separated
and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however,
earlier application is permitted. The Company has not determined the impact that
this update may have on its financial statements.
F-45
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
In June
2009, the FASB issued guidance related to accounting for transfers of financial
assets. This guidance improves the information that a reporting entity provides
in its financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows;
and a continuing interest in transferred financial assets. In addition, this
guidance amends various ASC concepts with respect to accounting for transfers
and servicing of financial assets and extinguishments of liabilities, including
removing the concept of qualified special purpose entities. This
guidance must be applied to transfers occurring on or after the effective date.
On February 1, 2010, the Company adopted this guidance. The adoption
of this guidance did not have a material impact on the Company’s financial
statements.
In June
2009, the FASB issued guidance which amends certain ASC concepts related to
consolidation of variable interest entities. Among other accounting and
disclosure requirements, this guidance replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. On February 1, 2010, the Company adopted this
guidance. The adoption of this guidance did not have a material
impact on the Company’s financial statements.
4. CONCENTRATIONS
OF BUSINESS AND CREDIT RISK
The
Company conducts all of its primary trade in the PRC. There can be no
assurance that the Company will be able to successfully conduct its trade, and
failure to do so would have a material adverse effect on the Company’s financial
position, results of operations and cash flows. Also, the success of the
Company’s operations is subject to numerous contingencies, some of which are
beyond management’s control. These contingencies include general economic
conditions, price of raw material, competition, governmental and political
conditions, and changes in regulations. Because the Company is dependent on
foreign trade in the PRC, the Company is subject to various additional
political, economic and other uncertainties. Among other risks, the Company’s
operations will be subject to risk of restrictions on transfer of funds,
domestic and international customs, changing taxation policies, foreign exchange
restrictions, and political and governmental regulations.
(1)
Cash and cash equivalents
The
Company maintains certain bank accounts in the PRC which are not protected by
FDIC insurance or other insurance. Cash balance held in PRC bank
accounts to $28,749,480 and $8,111,514, as of July 31, 2010 and October 31,
2009, respectively. No cash balances were restricted as at July 31,
2010 and October 31, 2009.
As of
July 31, 2010 and October 31, 2009, substantially all of the Company’s cash and
cash equivalents were held by major financial institutions located in the PRC
which management believes are of high credit quality.
(2)
Sales and trade receivables
The
Company provides credit in the normal course of business and substantially all
customers are located in the PRC. The Company performs ongoing credit
evaluations of its customers and maintains allowances for doubtful accounts
based on factors surrounding the credit risk of specific customers, historical
trends, and other information. Three individual customers accounted
for 10%-12% of net revenues during the three and nine months ended July 31, 2010
and 2009.
F-46
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
The
Company’s products are sold throughout the PRC. For three months ended July 31,
2010 and 2009, Siberian Ginseng (Acanthopanax) Series accounted for 43% and
55.3%, respectively, of total sales. For nine months ended July 31,
2010 and 2009, Siberian Ginseng (Acanthopanax) Series accounted for 44% and
54.3%, respectively, of total sales.
(3)
Foreign currency
The
Company operates in China, which may give rise to significant foreign currency
risks from fluctuations and the degree of volatility of foreign exchange rates
between U.S. dollars and the Chinese currency RMB.
(4)
Dividends
Payments
of dividends may be subject to some restrictions due to the fact that the
operating activities are conducted in a subsidiary residing in the
PRC.
(5)
Price control
The
retail prices of certain pharmaceuticals sold in China, primarily those included
in the national and provincial Medical Insurance Catalogs are subject to price
controls in the form of fixed prices or price ceilings. As such, the retail
prices for certain of the Company’s pharmaceutical products can be adjusted
downward or upward from time to time. Price controls did not have a material
impact on the Company’s operation in the three and nine months ended July 31,
2010 and 2009.
(6)
Cost of goods sold
Cost of
goods sold is subject to price fluctuations due to various factors beyond the
Company’s control, including, among other pertinent factors, inflation and
changes in governmental regulations and programs. The Company expects
cost of goods sold will continue to fluctuate and be affected by inflation in
the future. The Company’s raw materials are purchased from various
independent suppliers, and do not rely on any one supplier.
5. INCOME
TAXES
Taxation
on profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of
operations.
F-47
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
6. EARNINGS
PER SHARE
When
calculating diluted earnings per share for common stock equivalents, the
Earnings Per Share Topic, ASC 260, requires the Company to include the potential
shares that would be outstanding if all outstanding stock options or warrants
were exercised. This is offset by shares the Company could
repurchase using the proceeds from these hypothetical exercises to obtain the
common stock equivalent.
The
following reconciles the components of the EPS computation:
F-48
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Income
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
US$
|
US$
|
|||||||||||
For
the three months ended July 31, 2010:
|
||||||||||||
Net
income
|
1,456,309 | |||||||||||
Basic
EPS income available to common shareholders
|
1,456,309 | 37,239,536 | 0.04 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Share
options
|
26,392 | |||||||||||
Warrants
|
- | 635,161 | ||||||||||
Diluted
EPS income available to common shareholders
|
1,456,309 | 37,901,089 | 0.04 | |||||||||
For
the three months ended July 31, 2009:
|
||||||||||||
Net
income
|
674,702 | |||||||||||
Basic
EPS income available to common shareholders
|
674,702 | 36,796,990 | 0.02 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Share
options
|
- | - | ||||||||||
Warrants
|
- | - | ||||||||||
Diluted
EPS income available to common shareholders
|
674,702 | 36,796,990 | 0.02 |
For the
three months ended July 31, 2010, 70,000 share options were excluded from the
calculation of diluted earnings per share because the exercise price exceeded
the average price of the Company’s common stock.
For the
three months ended July 31, 2009, there were no securities or other contracts to
issue common stock that need to be considered in the diluted earnings per share
calculation.
F-49
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Income
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
US$
|
US$
|
|||||||||||
For
the nine months ended July 31, 2010:
|
||||||||||||
Net
income
|
12,237,047 | |||||||||||
Basic
EPS income available to common shareholders
|
12,237,047 | 37,239,536 | 0.33 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Share
options
|
21,416 | |||||||||||
Warrants
|
- | 532,418 | ||||||||||
Diluted
EPS income available to common shareholders
|
12,237,047 | 37,793,370 | 0.32 | |||||||||
For
the nine months ended July 31, 2009:
|
||||||||||||
Net
income
|
9,039,986 | |||||||||||
Basic
EPS income available to common shareholders
|
9,039,986 | 35,096,680 | 0.26 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Share
options
|
- | - | ||||||||||
Warrants
|
- | - | ||||||||||
Diluted
EPS income available to common shareholders
|
9,039,986 | 35,669,678 | 0.25 |
For the
nine months ended July 31, 2010, 70,000 share options and 160,000 warrants were
excluded from the calculation of diluted earnings per share because the exercise
price exceeded the average price of the Company’s common stock.
For the
nine months ended July 31, 2009, there were no securities or other contracts to
issue common stock that need to be considered in the diluted earnings per share
calculation.
7. TRADE
RECEIVABLES, NET
The trade
receivables amount included in the condensed consolidated balance sheets as at
July 31, 2010 and October 31, 2009 were as follows:
2010
|
2009
|
|||||||
US$
|
US$
|
|||||||
Trade
receivables
|
11,813,603
|
26,667,816
|
||||||
Less:
Sales rebates
|
(550,217
|
)
|
(3,020,898
|
)
|
||||
Less:
Allowance for doubtful accounts
|
(445,562
|
)
|
(443,508
|
)
|
||||
Trade
receivables, net
|
10,817,824
|
23,203,410
|
8. OTHER
RECEIVABLES, NET
The other
receivables amount included in the condensed consolidated balance sheets as at
July 31, 2010 and October 31, 2009 were as follows:
2010
|
2009
|
|||||||
US$
|
US$
|
|||||||
Other
receivables
|
506,047
|
462,980
|
||||||
Less:
Allowance for doubtful accounts
|
(362,036
|
)
|
(360,367
|
)
|
||||
Other
receivables, net
|
144,011
|
102,613
|
F-50
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
9. INVENTORY,
NET
The
inventory amounts included in the condensed consolidated balance sheets for as
at July 31, 2010 and October 31, 2009 comprised of:
2010
|
2009
|
|||||||
US$
|
US$
|
|||||||
Raw
materials
|
1,657,063
|
1,530,283
|
||||||
Work-in-progress
|
1,162,093
|
1,006,984
|
||||||
Finished
goods
|
818,724
|
550,982
|
||||||
Less: Inventory
reserves
|
(64,531
|
)
|
(64,233
|
)
|
||||
Inventory,
net
|
3,573,349
|
3,024,016
|
10. PROPERTY
AND EQUIPMENT, NET
Property
and equipment and related accumulated depreciation as of July 31, 2010 and
October 31, 2009 were as follows:
2010
|
2009
|
|||||||
US$
|
US$
|
|||||||
Machinery
and equipment
|
3,435,421
|
3,435,421
|
||||||
Office
equipment and furnishings
|
54,505
|
53,086
|
||||||
Motor
vehicles
|
53,332
|
54,749
|
||||||
3,543,257
|
3,543,256
|
|||||||
Less:
Accumulated depreciation
|
(1,452,665
|
)
|
(1,191,093
|
)
|
||||
Net
book value
|
2,090,592
|
2,352,163
|
Depreciation
expense for the three months ended July 31, 2010 and 2009 was $80,496 and
$88,335, respectively, of which $76,622 and $84,552 were included as a component
of cost of goods sold in the respective periods.
Depreciation
expense for the nine months ended July 31, 2010 and 2009 was $261,572 and
$265,559, respectively, of which $249,996 and $254,396 were included as a
component of cost of goods sold in the respective periods.
No assets
were pledged for borrowings as at July 31, 2010 and October 31,
2009.
F-51
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
11. RELATED
PARTY TRANSACTIONS
Due from
related parties included in the condensed consolidated balance sheets as at July
31, 2010 and October 31, 2009 comprised of:
2010
|
2009
|
|||||||
US$
|
US$
|
|||||||
Due
from related parties:
|
||||||||
Advances
(1)
|
-
|
130,199
|
||||||
Deposits
(2)
|
20,169,666
|
16,137,000
|
||||||
Total
|
20,169,666
|
16,267,199
|
(1)
Advances
Mr. Li
Shaoming, our chairman, chief executive officer and president, is also chairman
and a 50% shareholder of Harbin Renhuang Pharmaceutical Stock Co. Ltd (“Stock
Co”).
As of
October 31, 2009, the Company has a net amount due from Stock Co, of
$130,199. This amount consists of $539,130 of repair and maintenance
work performed on property and plant leased from Stock Co and paid for on Stock
Co’s behalf. This is offset by $408,931 of professional fees in
connection with the acquisition of Harbin Renhuang Pharmaceutical Company
Limited in 2006, paid for by Stock Co on the Company’s behalf. During
the quarter ended January 31, 2010, the Company received from Stock Co, a
cash payment of $539,130 resulting in a balance of $408,931 due to Stock Co,
which was settled in the quarter ended April 30, 2010.
(2)
Deposits
On
September 1, 2009, the Company through its wholly own subsidiary, Renhuang
China, entered into a Purchase Agreement with Stock Co, to acquire two
production patents, for a total consideration of $2,340,619. Pursuant
to the Purchase Agreement, a payment of $1,467,000 was made to Stock Co, in
October 2009 and $1,473,796 and $1,467,000 was recorded as deposits on the
condensed consolidated balance sheet as at July 31, 2010 and October 31, 2009,
respectively. Pursuant to the Purchase Agreement, final payment of
$877,732 is due by December 31, 2010, at which time title for the assets will be
transferred. Accordingly the transaction is considered incomplete as
at July 31, 2010.
On
October 12, 2009, the Company through its wholly own subsidiary, Renhuang China,
entered into a Purchase Agreement with Stock Co, to acquire the land use right,
property and plant, for a total consideration of
$23,406,185. Pursuant to the Purchase Agreement, a payment of
$14,670,000 was made to Stock Co, in October 2009 and $14,737,959 and
$14,670,000 was recorded as deposits on the condensed consolidated balance sheet
as at July 31, 2010 and October 31, 2009, respectively. Pursuant to
the Purchase Agreement, final payment of $8,777,319 is due by December 31, 2011,
at which time title for the assets will be transferred. Accordingly
the transaction is considered incomplete as at July 31, 2010.
On April
10, 2010, the Company through its wholly own subsidiary, Renhuang China, entered
into a Purchase Agreement with Hongxiangmingyuan of Heilongjiang Yongtai
Company, to acquire two office floors for a total consideration of
$5,612,306. Pursuant to the Purchase Agreement, a payment of
$3,957,911 was made in April 2010 and recorded as deposits on the condensed
consolidated balance sheet. Pursuant to the Purchase Agreement, final
payment of $1,683,692 is due by December 20, 2012, at which
time title for the assets will be transferred. Accordingly the
transaction is considered incomplete as at July 31,
2010.
F-52
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
(3)
Related party transactions
The
Company leases property and plant from Stock Co. Rental expenses
related to this lease, incurred and expensed to condensed consolidated
statements of operations and comprehensive income during the three months ended
July 31, 2010 and 2009 amounted to $153,738 and $153,600, respectively, during
the nine months ended July 31, 2010 and 2009 amounted to $461,214 and $460,800,
respectively.
During
the three and nine months ended July 31, 2010 and 2009, the Company sold goods
in the amount of $0 and $374,301, respectively, to Heilongjiang Renhuang
Pharmaceutical Limited, a company where Mr. Li Shaoming is a major
shareholder.
12. EMPLOYEE
BENEFITS
The
full-time employees of the Company’s subsidiary that is incorporated in the PRC
are entitled to staff welfare benefits, including medical care, welfare
subsidies, unemployment insurance and pension benefits. The PRC companies are
required to accrue for these benefits based on certain percentages of the
employees’ salaries in accordance with the relevant regulations, and to make
contributions to the state-sponsored pension and medical plans out of the
amounts accrued for medical and pension benefits. The PRC government is
responsible for the medical benefits and ultimate pension liability to these
employees.
13.
ASSETS AND LIABILITIES MEASURED AT FAIR
VALUE
At July
31, 2010, the Company had no assets measured at fair value and the following
liabilities measured at fair value:
Fair value measurement
|
||||||||||||
Quoted prices
in active
markets of
identical
assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
||||||||||
US$
|
US$
|
US$
|
||||||||||
Warrants
liability
|
- | 342,770 |
At
October 31, 2009, the Company had no assets and liabilities measured at fair
value.
F-53
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
14. PREFERRED
STOCK, COMMON STOCK AND EQUITY TRANSACTIONS
(1) Preferred
Stock
The
Company’s articles of incorporation provide that our board of directors will be
authorized to issue from time to time, without further stockholder approval, up
to 1,000,000 additional shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each series, including the dividend
rights, dividend rates, conversion rights, voting rights, rights of redemption,
including sinking fund provisions, redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
any series. Such shares of preferred stock could have preferences over our
common stock with respect to dividends and liquidation rights. As at
July 31, 2010 and October 31, 2009, there is no preferred stock
outstanding.
(2) Common
Stock and Equity Transactions
During
the three and nine months ended July 31, 2010, the Company recorded $11,882 and
$25,815, respectively, of share-based compensation expense in connection with an
option to purchase 50,000 shares valued at $47,527 granted to an employee on
January 13, 2010.
During
the three and nine months ended July 31, 2010, the Company recorded $14,283 and
$16,944 of share-based compensation expense in connection with an option to
purchase 70,000 shares valued at $171,397 granted to an independent director on
April 13, 2010.
15. OPTION
PLAN AND WARRANTS
(1) 2003
Omnibus Plan
On
February 28, 2003, our board of directors approved the Renhuang Pharmaceuticals,
Inc. 2003 Omnibus Securities Plan (the “2003 Plan”), which was approved by our
shareholders on April 11, 2003. The 2003 Plan offers selected employees,
directors, and consultants an opportunity to acquire our common stock, and
serves to encourage such persons to remain employed by us and to attract new
employees. The 2003 Plan allows for the award of stock and options, up to 25,000
(after giving effect to the 1-for-30 reverse stock split in 2006) shares of our
common stock. On May 1, of each year, the number of shares in the 2003
Securities Plan is automatically adjusted to an amount equal to ten percent of
our outstanding stock on July 31, of the immediately preceding year. As of July
31, 2010, the number of shares of common stock outstanding was 37,239,536 making
3,723,954 shares of common stock subject to the 2003 Plan.
On April
13, 2010, an option to purchase 70,000 shares was granted under the 2003 Plan to
an independent director that vests on a quarterly basis beginning three months
from the date of grant, conditioned upon continued service on such quarterly
dates, and has a contractual life of 3 years. The fair value of the
option award is estimated on the date of grant using the Black-Scholes option
valuation model to be $171,397, of which $14,283 and $16,944 was recorded as
compensation expense in the three and nine months ended July 31,
2010. The valuation was based on the assumptions noted in the
following table.
F-54
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Expected
volatility
|
227.9
|
%
|
||
Expected
dividends
|
0
|
%
|
||
Expected
term (in years)
|
3
years
|
|||
Risk-free
rate
|
1.65
|
%
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect for
the expected term of the option at the time of grant. The dividend
yield on our common stock is assumed to be zero since we do not pay dividends
and have no current plans to pay them in the future. The market price
volatility of our common stock was based on historical volatility since April
13, 2009. Our methodology is consistent with prior period volatility
assumptions. The expected life of the options is based upon our
anticipated expectations of exercise behavior since no options have been
exercised in the past to provide relevant historical data.
(2) 2007
Non-Qualified Company Stock Grant and Option Plan
On March
19, 2007, our board of directors approved the 2007 Non-Qualified Company Stock
Grant and Option Plan (the “2007 Plan”). The 2007 Plan is
intended to serve as an incentive to and to encourage stock ownership by
our directors, officers, and employees, and certain persons rendering
service to us, so that such persons may acquire or increase their proprietary
interest in our success, and to encourage them to remain in our
service. Under the 2007, up to 200,000 shares of our common stock may
be subject to options.
On
January 13, 2010, an option to purchase 50,000 shares was granted under the 2007
Plan to an employee that vests on the 12-month anniversary of the date of grant,
conditioned upon continued employment on such date, and has a contractual life
of 3 years. The fair value of the option award is estimated on the
date of grant using the Black-Scholes option valuation model to be $47,527, of
which $11,882 and $25,815 was recorded as compensation expense in the three and
nine months ended July 31, 2010, respectively. The valuation was
based on the assumptions noted in the following table.
Expected
volatility
|
236.5
|
%
|
||
Expected
dividends
|
0
|
%
|
||
Expected
term (in years)
|
3
years
|
|||
Risk-free
rate
|
1.5
|
%
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect for
the expected term of the option at the time of grant. The dividend
yield on our common stock is assumed to be zero since we do not pay dividends
and have no current plans to pay them in the future. The market price
volatility of our common stock was based on historical volatility since January
13, 2009. Our methodology is consistent with prior period volatility
assumptions. The expected life of the options is based upon our
anticipated expectations of exercise behavior since no options have been
exercised in the past to provide relevant historical data.
A summary
of option activity under the Company’s option plan as of July 31,
2010 and movement during the nine months then ended are as
follow:
F-55
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Options
|
Weighted
average
exercise price
|
Aggregate
intrinsic
value
|
Weighted
average
remaining
contractual
term
|
|||||||||||||
US$
|
US$
|
|||||||||||||||
Outstanding
at November 1, 2009
|
- | - | - | - | ||||||||||||
Granted
|
120,000 | 1.92 | 16,100 | 2.60 | ||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Forfeited
or expired
|
- | - | - | - | ||||||||||||
Outstanding
at July 31, 2010
|
120,000 | 1.92 | 16,100 | 2.60 |
A summary
of the status of the Company’s non-vested options as of July 31, 2010 and
movements during the nine months then ended are as follow:
Options
|
Weighted
average
granted date fair
value
|
|||||||
US$
|
||||||||
Non-vested
at November 1, 2009
|
- | - | ||||||
Granted
|
120,000 | 1.91 | ||||||
Vested
|
- | - | ||||||
Forfeited
or expired
|
- | - | ||||||
Non-vested
at July 31, 2010
|
120,000 | 1.91 |
As of
July 31, 2010, there was $202,330 of unrecognized compensation cost related to
non-vested share-based compensation granted under the Company’s option
plan. The cost is expected to be recognized over a period of 2.96
years.
(3) Warrants
As of
July 31, 2010, the Company has 1,231,428 warrants outstanding at an average
exercise price of $1.25 per warrant for one share each of the Company’s common
stock. The warrants expire in 2012 and 2013.
Warrants
|
Average exercise
price
|
|||||||
US$
|
||||||||
Outstanding
warrants at November 1, 2009
|
1,071,428 | 0.88 | ||||||
Warrants
granted
|
160,000 | 2.00 | ||||||
Exercised
|
- | - | ||||||
Expired/cancelled
|
- | - | ||||||
Outstanding
warrants at July 31, 2010
|
1,231,428 | 1.25 |
F-56
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
Information
regarding the warrants outstanding at July 31, 2010 is summarized as
below:
Warrants outstanding at
|
||||||||||||
July 31, 2010
|
||||||||||||
Weighted
|
Weighted
|
|||||||||||
Average
|
Average
|
|||||||||||
Remaining
|
Exercise
|
|||||||||||
Exercise Prices
|
Warrants
|
Contractual
|
Price
|
|||||||||
US$
|
Outstanding
|
Life (years)
|
US$
|
|||||||||
0.88
|
1,071,428 | |||||||||||
2.00
|
160,000 | |||||||||||
1,231,428 | 1.91 | 1.02 |
16. STATUTORY
RESERVES
The
reserve funds as of July 31, 2010 and October 31, 2009 were comprised of the
following:
2010
|
2009
|
|||||||
US$
|
US$
|
|||||||
Statutory
surplus reserve
|
3,090,320
|
3,090,320
|
||||||
Public
welfare fund
|
282,377
|
282,377
|
||||||
Total
|
3,372,697
|
3,372,697
|
(1) Statutory
reserves
Pursuant
to the relevant laws and regulations of the PRC, the Company is required to
annually transfer 10% of its after tax profit as reported on financial
statements prepared under the accounting principles of the PRC to a statutory
surplus reserve fund until the balance reaches 50% of the registered share
capital. This reserve can be used to make up any losses incurred or
to increase share capital. Except for reducing losses incurred, any
other application may not result in this reserve balance falling below 25% of
the registered capital.
(2)
Public welfare funds
Prior to
January 1, 2007, the Company was required each year to transfer 5% of its after
tax profit as reported on consolidated financial statements prepared under the
accounting principles of the PRC to the public welfare funds. This reserve was
restricted to capital expenditure for employees’ collective welfare facilities
that are owned by the Company. The public welfare funds are not available for
distribution to the stockholders (except in liquidation). Once capital
expenditures for staff welfare facilities have been made, an equivalent amount
must be transferred from the public welfare funds to the discretionary common
reserve funds. Due to a change in PRC law, appropriation of profit to the public
welfare funds is no longer required.
F-57
RENHUANG
PHARMACEUTICALS, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July
31, 2010 and 2009
17. COMMITMENTS
AND CONTINGENCIES
The
Company has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business, generally for quantities required
for the Company’s business and at prevailing market prices. No material annual
loss is expected from these commitments and there are no minimum purchase
commitments.
The
Company and its subsidiaries are self-insured, and they do not carry any
property insurance, general liability insurance, or any other insurance that
covers the risks of their business operations. As a result any material loss or
damage to its properties or other assets, or personal injuries arising from its
business operations would have a material adverse effect on the Company’s
financial condition and operations.
The
Company is not involved in any legal matters arising in the normal course of
business. While incapable of estimation, in the opinion of the management, the
individual regulatory and legal matters in which it might involve in the future
are not expected to have a material adverse effect on the Company’s financial
position, results of operations, or cash flows.
(1) Operating
lease arrangements
The
Company leases office premise from a third party, Heilongjiang Jiusanyouzhi Co.,
Ltd. The lease is from May 1, 2007 to April 30, 2010, with monthly
rental payment of $10,484.
The
Company also leases property and plant from a related party, Harbin Renhuang
Pharmaceutical Stock Co. Ltd. The lease is from April 30, 2009 to May
1, 2010, with monthly rental payment of $51,246.
As of
July 31, 2010, there is no minimum lease payment in future years.
During
the three months ended July 31, 2010 and 2009, the Company incurred rental
expenses in the amount of $186,301 and $219,898, respectively.
During
the nine months ended July 31, 2010 and 2009, the Company incurred rental
expenses in the amount of $366,977 and $594,315, respectively.
(2) Capital
commitments
As of
July 31, 2010, the Company has capital commitments for purchase of land use
right, property and equipment, office floors and production patents of
approximately $11,338,743.
18. SUBSEQUENT
EVENT
In May
2009, the FASB issued accounting guidance now codified as FASB ASC Topic 855,
“Subsequent Events,”
which establishes general standards of accounting for, and disclosures of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. FASB ASC Topic 855 is
effective for interim or fiscal periods ending after June 15, 2009.
Management
has evaluated subsequent events from July 31, 2010 to September 17, 2010, the
date which the Company’s condensed consolidated financial statements have been
issued and were available to be issued. As of August 3, 2010, Ms. Yan
Yi Chen, the Company's Chief Financial Officer, resigned for personal
reasons. Subsequent events that may occur after September 17, 2010
have not been evaluated in the condensed consolidated financial statements as of
July 31, 2010.
F-58
Tianma
Pills
|
Shengmai
Granules
|
Siberian
Ginseng Extract
|
|
Compound
Schisandra Tablets
|
Siberian
Ginseng
Tablets
|
F-59
$
10,000,000 Shares of Common
Stock
CHINA
BOTANIC PHARMACEUTICAL INC.
PROSPECTUS
•
Until ,
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
F-60
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
following table sets forth the estimated expenses to be incurred in connection
with the issuance and distribution of the securities being
registered.
Registration
Fee
|
$ | 2,139 | ||
Legal
Fees and Expenses
|
$ | • | ||
Accounting
Fees and Expenses
|
$ | • | ||
Miscellaneous
|
$ | • | ||
Total
|
$ | • |
Item
14.
Indemnification of Directors
and Officers.
Nevada
Law
Section
78.7502 of the Nevada Revised Statutes permits a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of the corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or
proceeding if he:
(a) is
not liable pursuant to Nevada Revised Statute 78.138, or
(b) acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
In
addition, Section 78.7502 permits a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and
reasonably incurred by him in connection with the defense or settlement of the
action or suit if he:
(a) is
not liable pursuant to Nevada Revised Statute 78.138; or
(b) acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation.
To the
extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above, or in defense of any claim, issue or matter, the
corporation is required to indemnify him against expenses, including attorneys’
fees, actually and reasonably incurred by him in connection with the
defense.
II-1
Section
78.752 of the Nevada Revised Statutes allows a corporation to purchase and
maintain insurance or make other financial arrangements on behalf of any person
who is or was a director, officer, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise for any liability asserted against him and liability and
expenses incurred by him in his capacity as a director, officer, employee or
agent, or arising out of his status as such, whether or not the corporation
has the authority to indemnify him against such liability and
expenses.
Other
financial arrangements made by the corporation pursuant to Section 78.752 may
include the following:
(a) the
creation of a trust fund;
(b) the
establishment of a program of self-insurance;
(c) the
securing of its obligation of indemnification by granting a security interest or
other lien on any assets of the corporation; and
(d) the
establishment of a letter of credit, guaranty or surety.
No
financial arrangement made pursuant to Section 78.752 may provide protection for
a person adjudged by a court of competent jurisdiction, after exhaustion of all
appeals, to be liable for intentional misconduct, fraud or a knowing violation
of law, except with respect to the advancement of expenses or indemnification
ordered by a court.
Any
discretionary indemnification pursuant to NRS 78.7502, unless ordered by a court
or advanced pursuant to an undertaking to repay the amount if it is determined
by a court that the indemnified party is not entitled to be indemnified by the
corporation, may be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances. The determination must be
made:
(a) by
the stockholders;
(b) by
the board of directors by majority vote of a quorum consisting of directors who
were not parties to the action, suit or proceeding;
(c) if
a majority vote of a quorum consisting of directors who were not parties to the
action, suit or proceeding so orders, by independent legal counsel in a written
opinion, or
(d) if
a quorum consisting of directors who were not parties to the action, suit or
proceeding cannot be obtained, by independent legal counsel in a written
opinion.
Charter
Provisions
Our
Restated Articles of Incorporation contains the following provisions concerning
the indemnification of our directors and officers:
II-2
“Article
XIV. In addition to, and in no way limiting the powers
or authority now or hereafter conferred upon the Corporation by the Articles of
Incorporation, the By-Laws of the Corporation, or the laws of the State of
Nevada, the Corporation shall possess, and may exercise all powers of
indemnification of officers, directors, employees, agents, and other persons and
all powers and authority incidental thereto (including without limitation of
power and authority to advance expenses, and to purchase and maintain insurance
with respect thereto), without regard to whether or not such powers and
authority are specifically provided for by Nevada corporation codes. The Board
of Directors of the Corporation is hereby authorized and empowered on behalf of
the Corporation and without shareholder action, to exercise all of the
Corporation's authority and powers of indemnification.”
These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant's executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of 1933, as
amended (the “Securities Act”).
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. No pending material litigation
or proceeding involving our directors, executive officers, employees or other
agents as to which indemnification is being sought exists, and we are not aware
of any pending or threatened material litigation that may result in claims for
indemnification by any of our directors or executive officers.
Item
15. Recent Sales of Unregistered Securities
On March 25, 2010, we issued to our
investor relations consultant a warrant representing the right to purchase one
hundred and sixty thousand (160,000) fully-paid and non-assessable shares of
our common stock (the “Warrant”) at an exercise price of $2.00 per
share (the “Exercise Price”), subject to adjustment, and exercisable for a
period of three (3) years from the issuance date of the Warrant. The
Warrant was issued without registration under the Securities Act of 1933, as
amended, in reliance upon the exemption afforded by Section 4(2)
thereunder.
On May
15, 2009, we sold an aggregate of 2,142,856 shares of common stock at a purchase
price of $0.70 per share and warrants exercisable until May 14, 2012 to acquire
an aggregate of 1,071,428 shares of common stock (subject to customary
adjustments) at an exercise price of $0.875 per share, to Allied Merit
International Inc. and Griffin Ventures Ltd. for the amount of $1.5 million made
to us on January 29, 2008. The securities were issued under the exemption of
Regulation D and Regulation S under the Securities Act of 1933, as amended
(“1933 Act”). Griffin Ventures Ltd. represented itself as an accredited investor
as that term is defined in Regulation D under the 1933 Act. Allied Merit
International Inc. represented itself as a non U.S. person as that term is
defined in Rule 902 and thus claimed the exemption of Regulation S under the
1933 Act.
Item
16.
Exhibits and Financial
Statement Schedules
(a)
Exhibits.
The
exhibits filed with this registration statement or incorporated herein by
reference are set forth on the Exhibit Index set forth elsewhere
herein.
(b)
Financial Statement Schedules.
Schedules
filed with this registration statement are set forth on the Index to Financial
Statements set forth elsewhere herein.
II-3
Item
17. Undertakings
(a) The
undersigned registrant hereby undertakes to:
(1) File,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
i.
Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the “Securities Act”);
ii.
Reflect in the prospectus any facts or events which, individually or in the
aggregate, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Securities and Exchange Commission (the “Commission”) pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price set forth in
the “Calculation of Registration Fee” table in the effective registration
statement.
iii.
Include any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, each such post-effective
amendment as a new registration statement relating to the securities offered,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering.
(3) File
a post-effective amendment to remove from registration by means of a
post-effective amendment any of the securities that remain unsold at the end of
the offering.
(4) For
determining liability of the undersigned issuer under the Securities Act to any
purchaser in the initial distribution of the securities, the undersigned issuer
undertakes that in a primary offering of securities of the undersigned issuer
pursuant to this registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following communications, the
undersigned issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
i. Any
preliminary prospectus or prospectus of the undersigned issuer relating to the
offering required to be filed pursuant to Rule 424;
ii. Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned issuer or used or referred to by the undersigned
issuer;
iii. The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned issuer or its securities provided by
or on behalf of the undersigned issuer; and
iv. Any
other communication that is an offer in the offering made by the undersigned
issuer to the purchaser.
II-4
(b)
Provide to the underwriters at the closing specified in the underwriting
agreements, certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each
purchaser.
(c)
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the issuer
pursuant to the foregoing provisions, or otherwise, the issuer has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the issuer of expenses incurred or paid by a director, officer or
controlling person of the issuer in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(d)
(1) For
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
issuer under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part
of this registration statement as of the time the Commission declared it
effective.
(2) For
determining any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those
securities.
II-5
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Harbin, Heilongjiang Province, China, on December 6,
2010.
CHINA
BOTANIC PHARMACEUTICAL INC.
|
||
By:
|
/s/ Shaoming Li
|
|
Shaoming
Li
|
||
Chairman
of the Board of Directors, Chief
Executive
Officer and President
|
POWER
OF ATTORNEY
Each
person whose signature appears below hereby constitutes and appoints Shaoming Li
as his or her attorney-in-fact, with full power of substitution, for him in any
and all capacities, to sign any and all amendments, including post-effective
amendments, to this registration statement, and any and all registration
statements related to the offering covered by this registration statement and
filed under the Securities Act of 1933, as amended, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by his or her attorney to any and all
amendments to said registration statement.
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed by the
following persons in the capacities and on the date indicated.
Name
|
Title
|
Date
|
||
/s/ Shaoming Li
|
Chairman
of the Board of
Directors,
Chief Executive Officer
and
President
|
December
6, 2010
|
||
Shaoming
Li
|
(Principal
Executive Officer)
|
|||
/s/ Xiaoying Lu
|
Interim
Chief Financial Officer
|
December
6, 2010
|
||
Xiaoying
Lu
|
(Principal
Accounting Officer)
|
|||
/s/ Xiaoheng Shao
|
Director
|
December
6, 2010
|
||
Xiaoheng
Shao
|
||||
/s/ Changxiong Sun
|
Director
|
December
6, 2010
|
||
Changxiong
Sun
|
||||
/s/ Bingchun Wu
|
Director
|
December
6, 2010
|
||
Bingchun
Wu
|
II-6
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
|
1.1
|
Form
of underwriting agreement **
|
|
3.1
|
Restated
Articles of Incorporation(1)
|
|
3.2
|
Second
Restated Bylaws(1)
|
|
3.3
|
Certificate
of Amendment to Articles of Incorporation(2)
|
|
4.1
|
Form
of Common Stock Certificate
|
|
5.1
|
Form
of Opinion of DLA Piper LLP (US) **
|
|
10.1
|
Renhuang
Pharmaceuticals, Inc. 2007 Non-Qualified Company Stock Grant and Option
Plan(3)
|
|
10.2
|
2003
Omnibus Securities Plan (4)
|
|
10.3
|
English
translation of Patent Transfer Agreement among Harbin Renhuang
Pharmaceutical Co., Ltd., Harbin Renhuang Pharmaceutical Stock Co., Ltd,
Xishui Yu and Youzhi Wang, dated as of September 1, 2009
(5)
|
|
10.4
|
English
translation of Property Purchase Contract between Harbin Renhuang
Pharmaceutical Co., Ltd. and Heilongjiang Yontai Co. dated April 10, 2010
(6)
|
|
10.5
|
Independent
Director Agreement with Mr. Xiaoheng (Sean) Shao, dated April 13, 2010
(6)
|
|
10.6
|
Independent
Director Agreement with Mr. Bingchun Wu, dated April 19, 2010
(6)
|
|
10.7
|
Independent
Director Agreement with Mr. Changxiong Sun, dated April 19, 2010
(6)
|
|
10.8
|
English
translation of Contract for the Free Use of Drug Approval Number in
Respect of Tonic Semifluid Extract of Ginseng and Venison, between Harbin
Renhuang Pharmaceutical Co., Ltd. and Harbin Renhuang Pharmaceutical Stock
Co. Ltd. dated as of [May 1, 2006]
|
|
10.9
|
English
translation of Contract for the Free Use of Drug Approval Number in
Respect of Badger Fat, between Harbin Renhuang Pharmaceutical Co., Ltd.
and Harbin Renhuang Pharmaceutical Stock Co. Ltd. dated as of May 1,
2006
|
|
10.10
|
Contract
for the Free Use of Drug Approval Number in Respect of Siberian
Ginseng (Acanthopanax)
Extract, between Harbin Renhuang Pharmaceutical Co., Ltd. and Harbin
Renhuang Pharmaceutical Stock Co. Ltd. dated as of May 1,
2006
|
|
10.11
|
English
translation of Contract Letter, between Harbin Renhuang Pharmaceutical
Co., Ltd. and Yerui
Pharmaceutical Co of Zhongfa Industry Group dated
as of March 3, 2007
|
|
10.12
|
English
translation of Plantation Transfer Contract, between Harbin Renhuang
Pharmaceutical Co., Ltd. and Harbin Renhuang Pharmaceutical Stock Co. Ltd.
dated as of October 12, 2009
|
|
10.13
|
English
translation of Lease Contract, between Harbin Renhuang Pharmaceutical Co.,
Ltd. and Harbin Renhuang Pharmaceutical Stock Co., Ltd., dated as of May
1, 2009
and a Free Lease confirmation produced by Harbin Renhuang Pharmaceutical
Co., Ltd.
|
|
10.14
|
Trademark
Licensing Contract, between Harbin Renhuang Pharmaceutical Co., Ltd. and
Harbin Renhuang Pharmaceutical Stock Co., Ltd, dated as of July 7,
2007
|
|
10.15
|
English
translation of the
Acquisition Agreement of Siberian
Ginseng, between Harbin Renhuang Pharmaceutical Co., Ltd. and Dongfanghong
Forestry Bureau, dated as of June 1, 2010
|
|
10.16
|
English
translation of Sales Contract between Harbin Renhuang Pharmaceutical Co.,
Ltd. and Heilongjiang Renhuang Pharmaceutical Co.,
Ltd.
|
|
21.1
|
Subsidiaries
of the registrant(2)
|
|
23.1
|
Consent
of MSPC
|
II-7
23.2
|
Consent
Of Windes & McClaughry Accountancy Corporation
|
|
24.1
|
Power
of Attorney (included as part of the signature page to the registration
statement)
|
*
|
Filed
herewith.
|
**
|
To
be filed by amendment.
|
(1)
|
Incorporated
by reference from the Company’s Form 8-K filed with the SEC on April 22,
2003.
|
(2)
|
Incorporated
by reference from the Company’s Form 10-K filed with the SEC on February
13, 2007.
|
(3)
|
Incorporated
by reference from the Company’s Form 8-K filed with the SEC on May 2,
2007.
|
(4)
|
Incorporated
by reference from the Company’s Form 8-K filed with the SEC on April 22,
2003.
|
(5)
|
Incorporated
by reference from the Company’s Form 10-K filed with the SEC on January
29, 2010.
|
(6)
|
Incorporated
by reference from the Company’s Form 10-Q filed with the SEC on June 7,
2010.
|
II-8