UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Quarterly Period Ended June 30, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Transition Period from _________ to _________
Commission file number: 000-29523
China Pharma Holdings, Inc.
(Exact name of registrant as specified on its charter)
Delaware 73-1564807
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2nd Floor, No. 17, Jinpan Road, Haikou, Hainan Province, China
(Address of principle executive offices)
0086-898-66811730 (China, 858-776-8880 (USA)
(Registrant's telephone number, including area code)
Copies to:
Charles Law
King and Wood LLP
650 Page Mill Road,
Palo Alto, CA 94304
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: 34,723,056 shares of common
stock issued and outstanding as of June 30, 2006.
Transitional Small Business disclosure format: Yes [ ] No [X]
China Pharma Holdings, Inc.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements F-1thruF-7
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 1-6
ITEM 3 Controls and Procedures 7
PART II OTHER INFORMATION
ITEM 1 Legal proceedings 7
ITEM 2 Unregistered Sales of Equity Securities and use of proceeds 7
ITEM 3 Defaults upon senior securities 7
ITEM 4 Submission of matters to a vote of security holders 8
ITEM 5 Other information 8
ITEM 6 Exhibits and Reports on 8-K 8
SIGNATURES 9
EXHIBITS
================================================================================
TABLE OF CONTENTS
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets (unaudited), June 30, 2006 and
December 31, 2005 F-2
Condensed Consolidated Statements of Operations (unaudited), for the
three months ended June 30, 2006 and 2005, and for six months ended
June 30, 2006 and from January 12, 2005 (Date of Inception) through
June 30, 2005 F-3
Condensed Consolidated Statements of Cash Flows (unaudited), for the
six months ended June 30, 2006 and from January 12, 2005 (Date of
Inception) through June 30, 2005 F-4
Notes to the Condensed Consolidated Financial Statements (unaudited) F-5thruF-7
F-1
Item 1. Financial Statements
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2006 2005
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 195,224 $ 461,220
Trade accounts receivable, less allowance for doubtful
accounts of $826,146 and $1,412,353, respectively 9,119,327 5,709,762
Other non-trade receivables, less allowance for doubtful
accounts of $79,341 and $111,029, respectively 486,691 385,957
Advances to suppliers 1,978,947 2,123,729
Inventory 6,782,480 5,785,196
------------ ------------
Total Current Assets 18,562,669 14,465,864
------------ ------------
Non-current Assets:
Property and equipment, net 2,806,435 2,808,342
Intangible assets, net 76,604 96,406
Deferred tax assets 107,063 130,458
------------ ------------
Total Non-current Assets 2,990,102 3,035,206
------------ ------------
TOTAL ASSETS $ 21,552,771 $ 17,501,070
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 1,213,611 $ 679,104
Accrued expenses 105,386 15,625
Taxes payable 447,173 565,236
Other accounts payable 217,880 250,317
Advances from customers 68,921 50,755
Short-term notes payable 4,256,158 --
Dividends payable -- 4,209,889
------------ ------------
Total Current Liabilities 6,309,129 5,770,926
------------ ------------
Research and development commitments 31,225 30,966
------------ ------------
Total Liabilities 6,340,354 5,801,892
------------ ------------
Shareholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 34,723,056 shares issued and outstanding 34,723 34,723
Additional paid-in capital 7,764,979 7,764,979
Accumulated other comprehensive income 211,558 99,926
Retained earnings 7,201,157 3,799,550
------------ ------------
Total Shareholders' Equity 15,212,417 11,699,178
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,552,771 $ 17,501,070
------------ ------------
See the accompanying notes to the unaudited condensed consolidated
financial statements.
F-2
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the period
from January 12,
For the three months For the six 2005 (Date of
ended June 30, months ended Inception)
------------------------------------ June 30, through June 30,
2006 2005 2006 2005
---------------- ---------------- ---------------- ----------------
Revenue $ 3,975,569 $ 492,530 $ 8,709,334 $ 492,530
Cost of revenue 2,105,082 324,994 4,631,549 324,994
---------------- ---------------- ---------------- ----------------
Gross profit 1,870,487 167,536 4,077,785 167,536
---------------- ---------------- ---------------- ----------------
Operating expenses:
Selling expenses 82,133 4,490 170,161 4,490
General and administrative 436,340 20,078 680,321 20,078
---------------- ---------------- ---------------- ----------------
Total operating expenses 518,473 24,568 850,482 24,568
---------------- ---------------- ---------------- ----------------
Income from operations 1,352,014 142,968 3,227,303 142,968
---------------- ---------------- ---------------- ----------------
Non-operating income (expenses):
Interest income 87 -- 182 --
Bad debt recovery 627,861 -- 626,580 --
Interest expense (24,103) (28,895) (47,898) (28,895)
Other income (expense) 120,803 -- 120,461 --
---------------- ---------------- ---------------- ----------------
Total non-operating income (expense) 724,648 (28,895) 699,325 (28,895)
---------------- ---------------- ---------------- ----------------
Income before taxes 2,076,662 114,073 3,926,628 114,073
Income tax expense (246,200) (9,521) (525,022) (9,521)
---------------- ---------------- ---------------- ----------------
Net income $ 1,830,462 $ 104,552 $ 3,401,606 $ 104,552
---------------- ---------------- ---------------- ----------------
Comprehensive income -
foreign currency translation
adjustments 62,557 -- 221,558 --
---------------- ---------------- ---------------- ----------------
Comprehensive income $ 1,893,019 $ 104,552 $ 3,623,164 $ 104,552
---------------- ---------------- ---------------- ----------------
Basic and diluted earnings per
common share $ 0.05 $ 1.23 $ 0.10 $ 1.23
---------------- ---------------- ---------------- ----------------
Weighted-average common
shares outstanding 34,723,056 85,112 34,723,056 85,112
---------------- ---------------- ---------------- ----------------
See the accompanying notes to the unaudited condensed consolidated
financial statements.
F-3
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the period
from January 12,
For the six 2005 (Date of
months ended Inception)
June 30, through June 30,
2006 2005
---------------- ----------------
Cash Flows from Operating Activities:
Net income $ 3,401,606 $ 104,552
Depreciation and amortization 193,065 7,289
Loss on disposal of property and equipment -- 19,934
Accretion of discount on notes payable -- 12,870
Deferred tax assets 24,387 --
Changes in assets and liabilities:
Accounts receivable (3,348,145) (472,696)
Other receivables (97,112) (453,974)
Advances to suppliers 161,868 807,785
Inventory (945,068) (529,801)
Trade accounts payable 526,675 536,973
Accrued expenses 84,810 9,389
Taxes payable (122,285) (21,547)
Other accounts payable -- (213,403)
Advances from customers 17,670 95,902
Short-term notes payable 31,653 --
---------------- ----------------
Net Cash Used in Operating Activities (70,876) (96,727)
---------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures, net of dispositions (144,790) (3,565)
Net cash received in purchase of Subsidiary -- 129,073
Proceeds from note receivable -- 11,083
Purchase of intangible assets (2,477) --
---------------- ----------------
Net Cash (Used) Provided by Investing Activities (147,267) 136,591
---------------- ----------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock -- 1
---------------- ----------------
Net Cash Proceeds from Financing Activities -- 1
---------------- ----------------
Effect of Exchange Rate Changes in Cash (47,853) --
---------------- ----------------
Net Change in Cash (265,996) 39,865
---------------- ----------------
Cash and Cash Equivalents at Beginning of Period 461,220 --
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 195,224 $ 39,865
---------------- ----------------
See the accompanying notes to the unaudited condensed consolidated
financial statements.
F-4
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(unaudited)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of China
Pharma Holdings, Inc. (the "Company") and its subsidiaries were prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. Management of the
Company ("Management") believes that the following disclosures are adequate to
make the information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's Form 10-K
report for the year ended December 31, 2005.
These unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) that, in the
opinion of Management, are necessary to present fairly the consolidated
financial position and results of operations of the Company for the periods
presented. Operating results for the six months ended June 30, 2006, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006.
Organization - Onny Investment Limited ("Onny") was incorporated in the British
Virgin Islands on January 12, 2005. Through June 15, 2005, Onny was a
development stage enterprise with no activities except for the acquisition of
Hainan Helpson Medical & Biotechnology Co., Ltd ("Helpson"), as discussed below.
Upon the acquisition of Helpson and its operations, Onny emerged from the
development stage. On June 16, 2005, Onny acquired all of the outstanding shares
of Helpson.
On October 19, 2005, Onny was reorganized as a wholly-owned subsidiary of the
Company. The reorganization was accomplished through the exchange of 29,700
shares of Onny common stock for 20,555,329 shares of the Company's common stock
and for the commitment of the Company to issue an additional 4,723,056 shares
upon amending its articles of incorporation. The exchange of shares was a
851-for-1 exchange ratio. In addition, the prior Onny preferred shareholders
exchanged their 10,000 shares of Onny common stock for 6,944,611 shares of the
Company's common stock for a 694-for-1 exchange ratio. Additionally, the prior
Onny preferred shareholders converted their preferred stock into Onny common
shares. The reorganization of Onny into the Company was recognized as a stock
split of the common stock of Onny and the effective issuance by Onny of
2,500,060 shares of common stock to the Company's pre-reorganization
shareholders and the assumption of $4,473 of liabilities. The reverse
acquisition of the Company was recognized as a non-monetary exchange.
During the period ended March 31, 2006, the Company amended its articles of
incorporation to increase its authorized shares from 30,000,000 shares to
60,000,000 shares.
Nature of Operations - Helpson manufactures and markets several Western and
Chinese medicines sold mainly to hospitals and private retailers in The People's
Republic of China (PRC). The marketing department is in Hainan Province and
there are 16 sales offices in China. Helpson's other products include
biochemical products, health products, and cosmetics.
Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
F-5
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Basic and Diluted Earnings per Common Share - Basic and diluted earnings per
common share are computed by dividing net income by the weighted-average number
of common shares outstanding. There were no dilutive common shares outstanding
at June 30, 2006.
NOTE 2 - Acquisition
On May 25, 2005, Onny entered into an agreement with the shareholders of
Helpson, a privately held PRC joint venture, in which Onny agreed to acquire and
the shareholders of Helpson agreed to sell, all of the outstanding common shares
of Helpson in exchange for the assumption of obligations to make cash payments
to the Helpson shareholders in the form of common stock dividends from Helpson
of $4,154,041, the assumption of $4,646,409 of other liabilities and the
issuance of non-interest bearing promissory notes totaling $3,413,265 payable
three months after Helpson obtains a business license in the PRC as a wholly
foreign owned entity. Helpson obtained such license on June 16, 2005 and the
shares of Helpson were transferred to Onny on that date. Since June 16, 2005 was
recognized as the date of the acquisition, the promissory notes became due
September 16, 2005.
Since Helpson is an operating company and control of Helpson changed upon the
closing of the acquisition agreement, Onny is the accounting acquirer and has
recognized the acquisition of Helpson as a business combination in accordance
with Statements of Financial Accounting Standards No. 141, Business
Combinations. On April 25, 2005, Helpson declared a dividend to the selling
shareholders of $4,154,041 which equaled Helpson's retained earnings at March
31, 2005 less deferred income tax assets of $86,985 that are not considered part
of distributable profits under PRC law. The fair value of the net assets of
Helpson was determined by appraisal. The cost of the net assets exceeded the
fair value. That excess was allocated as a pro-rata reduction of the amounts
that otherwise would have been assigned to the non-current assets acquired.
The following unaudited pro forma information is presented to reflect the
operations of the Company and Helpson on a combined basis as if the acquisition
of Helpson had been completed as of January 1, 2005. The unaudited pro forma
information is only illustrative of the effects of the acquisition and does not
necessarily reflect the results of operations that would have resulted had the
acquisition actually occurred on that date.
ACQUISITION
TS ELECTRONICS, INC.
For the Period from
January 12, through
June 30,
2005
--------------------------------------------------------------------------------
(unaudited)
Revenue $ 5,816,888
Gross Profit 2,236,358
Net income 1,750,591
Basic earnings per common share $ 0.05
--------------------------------------------------------------------------------
Pro forma net income for the for the six months ended June 30, 2005 include
nonrecurring interest expense of $84,577 resulting from the amortization of the
discount on the $3,383,073 promissory notes payable to the former Helpson
shareholders, which discount was computed based upon an imputed interest rate of
10% per annum.
F-6
NOTE 3 - Inventory
Inventory consisted of the following:
June 30, 2006 December 31, 2005
----------------- -----------------
Raw materials $ 4,670,136 $ 4,673,352
Work in process 256,458 819,146
Finished goods 1,855,886 292,698
----------------- -----------------
Total Inventory $ 6,782,480 $ 5,785,196
----------------- -----------------
NOTE 4 - Income Taxes
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and any tax credit carry forwards
available. Deferred tax assets 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 on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Helpson received tax benefits as a
result of a reduced tax rate from 30% to 15%, as a result of being in the first
five years of operations and a reduced tax of 7.5% as a result of operating in a
special economic area in the PRC.
NOTE 5 - Short Term Notes Payable
In January 2006, the Company converted its dividend payable into short-term
notes bearing interest at a rate of 2.25% per annum. As of June 30, 2006 these
notes and accrued interest remain outstanding.
NOTE 6 - Stockholders' Equity
On October 19, 2005, the Company acquired all of the issued and outstanding
common stock of Onny; thus, Onny became a wholly owned subsidiary of the
Company. The reorganization of Onny into the Company was recognized as a stock
split of the common stock of Onny and the effective issuance by Onny of
2,500,060 shares of common stock to the Company's pre-reorganization
shareholders. The number of common shares issued and outstanding has been
restated in the accompanying condensed consolidated financial statements on a
retroactive basis for the effects of the stock split.
NOTE 7 - Contingencies
Economic environment - Significantly all of the Company's operations are
conducted in the PRC, and therefore the Company is subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and fluctuations in the foreign
currency exchange rate. The Company's results may be adversely affected by
changes in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
In addition, all of the Company's revenue is denominated in the PRC's currency
of Renminbi ("CNY" or "(Y)"), which must be converted into other currencies
before remittance out of the PRC. Both the conversion of CNY into foreign
currencies and the remittance of foreign currencies abroad require approval of
the PRC government.
F-7
Item 2 - Management's Discussion and Analysis or Plan of Operation
-------------------------------------------------------------------
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. In addition to historical information, the
following discussion and other parts of this document contain certain
forward-looking information. Our financial statements are prepared in accordance
with accounting principles generally accepted in the United States. When used in
this discussion, the words "believes," "anticipates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected due to a number of factors beyond our
control.
We do not undertake to publicly update or revise any of the forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized. You are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. You
are also urged to carefully review and consider our discussions regarding the
various factors, which affect our business, included in this section and
elsewhere in this report.
Factors that might cause actual results, performance or achievements to differ,
from those projected or implied in such forward-looking statements include,
among other things, (i) the impact of competitive products; (ii) changes in law
and regulations; (iii) adequacy and availability of insurance coverage; (iv)
limitations on future financing; (v) increases in the cost of borrowings and
unavailability of debt or equity capital; (vi) the effect of adverse publicity
regarding our products; (vii) our inability to gain and/or maintain market
share; (viii) exposure to and expense of resolving and defending product
liability claims and other litigation; (ix) consumer acceptance of our products;
(x) managing and maintaining growth; (xi) customer demands; (xii) market and
industry conditions including pricing and demand for products, (xiii) the
success of product development and new product introductions into the
marketplace; (xiv) the departure of key members of management; (xv) our ability
to efficiently market our products; as well as other risks and uncertainties
that are described from time to time in our filings with the Securities and
Exchange Commission.
Notwithstanding the above, Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act expressly state that the safe harbor for forward
looking statements does not apply to companies that issue securities that meet
the definition of a penny stock, as such, the safe harbor for forward looking
statements does not apply to us.
Overview
--------
On June 16, 2005, Onny acquired all of the outstanding common shares of Helpson,
a privately held Chinese joint venture, in exchange for the assumption of
obligations to make cash payments to the Helpson shareholders in the form of
common stock dividends from Helpson of $4,154,041, the assumption of $4,646,409
of other liabilities and the issuance of non-interest bearing promissory notes
totaling $3,413,265 payable three months after Helpson obtains a business
1
license in the PRC as a wholly foreign owned entity. The acquisition of Helpson
was recognized as a business combination.
On October 19, 2005, Onny issued 10,000 preferred shares in exchange for
$4,313,000 in cash, net of offering costs and estimated registration costs, and
on that same date, those preferred shares were converted into 10,000 Onny common
shares. Also on October 19, 2005, Onny was reorganized as a wholly-owned
subsidiary of the Company. The reorganization was accomplished by the original
Onny common shareholder exchanging her 29,700 Onny common shares for 20,555,329
common shares of China Pharma Holdings, Inc. and for the commitment by China
Pharma Holdings, Inc. to issue the original Onny common shareholder 4,723,056
common shares following an amendment of the China Pharma Holdings, Inc. articles
of incorporation increasing the number of common shares authorized to 60,000,000
shares. In addition, the prior Onny preferred shareholders exchanged their
10,000 Onny common shares for 6,944,611 common shares of China Pharma Holdings,
Inc.
We launched an anti-flu product named PuSenOK, which is the only anti flu
medicine in the market mixed with pseudo ephedrine hydrochloride, that has a
non-drowsy formula and a runny nose suppressant. We plan to expand our
biotechnology product series. Based on the foundation established by some of
Helpson's widely recognized medicine labels such as Neurotrophicpeptide, we will
launch several additional biological medicines, including the brain peptide
injection, injected hepatocyte growth-promoting factors, as well as new genetic
medicines, rh-CNTF and rh-aFGF, which will give us a new growth following that
of Neurotrophicpeptide.
Our products have been sold in more than 20 provinces, sovereignties, and
autonomous regions. We have 16 sales offices and approximately 250 proxy agents
in the whole country. The main channels we use to deliver our products were as
follows: (1) Distribution system (Proxy Agency); (2) Direct sale system to
hospitals; (3) Direct representation in clinic hospitals through medical
representatives; and (4) Distribution of products to local medical companies
through logistics companies.
Our recent business activities include the following:
Year 2005: Helpson launched a new anti-flu medicine: PusenOK.
Year 2003: Helpson gained GMP authentication.
Year 2003: Helpson named "the best enterprise for storing SARS medicine" by
Hainan Food and Drug Administration.
Year 2000: Helpson awarded as one of 50 best enterprises in Hainan by Hainan
Economic and Trade Bureau and Hainan Statistical Bureau.
Buflomedil Hydrochloride (Raw material; injection; & troche)
o Received the best technology commercialization award in Hainan in 2004 by
Hainan Scientific and Technological Result Examination Committee.
o Received the national key new products certificate in 2003 by the State
Science and Technology Department, State Taxation Bureau, Ministry of
Commerce, State Bureau of Quality Supervision, Inspection and Quarantine,
and State Environmental Protection Bureau.
2
o Designated as the key technology project in Hainan in 2003 by Haikou
Municipality.
Operations Analysis For the six months ended June 30, 2006
The following table presents the operation of the Company for the six months
ended June 30, 2006:
============================== ==============================================
- For the six months ended June 30,2006
------------------------------ ----------------------------------------------
Revenues $ 8,709,334
------------------------------ ---- -----------------------------------------
Cost of revenue 4,631,549
------------------------------ ---- -----------------------------------------
Total Operating expenses 850,482
------------------------------ ---- -----------------------------------------
Income from operations 3,227,303
------------------------------ ---- -----------------------------------------
Interest expense (47,898)
------------------------------ ---- -----------------------------------------
Net income 3,401,606
------------------------------ ---- -----------------------------------------
Basic and diluted earnings 0.10
per common share
============================== ==== =========================================
Revenues
--------
Revenues were $8,709,334 for the six months ended June 30, 2006. During this
period, the revenues have been growing, the reasons of which mainly are as
follows:
Firstly, the new products have quickly entered the market this year. The above
new products primarily include Gastrodin injection and Naproxen Sodium and
Pesudophedrine Hydrochloride (or Pusen OK). Secondly, the distribution network
has spread over the majority of provinces in China. Finally, increased output of
products ensured a significant improvement in sales since the manufacturing
capacity in Company has expanded.
Cost of Revenue
---------------
The cost of revenue was $4,631,549, which was 53.2% of the revenue.
Two new products we are introducing into the market are expected to have a
higher profit margin. Accordingly, the cost of revenue to total revenue ratio is
expected to decrease upon an increase in the sales volume. Also, in 2006 there
is an expectation that costs will be reduced due to increased economies of
3
scale, implementation of improved cost controls and improved manufacturing
processes.
Operating expenses
------------------
The total operating expenses for the six months ended June 30, 2006 were
$850,482, which is 26.35% of income from operations.
The selling expenses include the salaries and benefits of the sales staff and
related transportation expenses. Considering the revenue realized, the selling
expenses were lower than the industry average level. The main reason is that
four major customers of the Company are hospitals and most of products of the
Company are distributed to hospitals through agents.
The general and administrative expenses include R&D, salaries and benefits of
the administrative staff. Compared with the R&D expenditure in 2005, the amount
of R&D expenditure for new products decreased because most of the researchers
were employed from existing personnel. Another reason for the decrease in
operating expenses was the reduction in the allowance of bad debt as the
collection of old trade receivables, and the amortization expenses of intangible
assets. Income from operations was $3,227,303, which was 37.06% of the total
revenues.
Interest Expenses
-----------------
Interest expense for six months ended June 30, 2006 was $47,898. Pursuant to the
shareholders' agreement, the dividend payable to shareholders would be converted
into loans if the dividends were not paid off by 31/12/2005. The interest on
such loans should be recorded as interest expense at the agreed upon interest
rate.
The company plans to apply for new bank loans in August of this year, which
would result in increased interest expenses in future periods.
Taxation
--------
As a foreign invested enterprise as defined under Chinese laws, Helpson is
entitled to preferential tax treatment, i.e., starting from the year of making
profits, Helpson shall be exempt from income tax in the first and second years
and allowed a fifty percent reduction in the third to fifth years. Since Hainan
Province is a special economic area, its enterprise income tax is 15%.
Therefore, from the third to the fifth year after Helpson begins to make profit,
it shall pay income tax at the rate of half of 15%, or 7.5%. As a new foreign
invested enterprise, the application for the above preferential tax treatment is
expected to be approved later this year. Since the application is still being
processed, the Company will pay the income taxes with the expectation that they
will be refunded by the Chinese government upon the approval of the application.
4
Liquidity and capital resource for the six months ended June 30, 2006.
The following table presents selected items from the balance sheets as of June
30, 2006, and December 31, 2005
============================= ========================= =============================
Items As of June 30, 2006 As of December 31, 2005
----------------------------- ------------------------- -----------------------------
Year 2006 Year 2005
----------------------------- ------------------------- -----------------------------
cash and cash equivalents $ 195,224 $ 461,220
----------------------------- --- --------------------- --- -------------------------
trade accounts receivable 9,119,327 5,709,762
----------------------------- --- --------------------- --- -------------------------
inventory 6,782,480 5,785,196
----------------------------- --- --------------------- --- -------------------------
Total current assets 18,562,669 14,465,864
----------------------------- --- --------------------- --- -------------------------
property and equipment, net 2,806,435 2,808,342
----------------------------- --- --------------------- --- -------------------------
TOTAL ASSETS 21,552,771 17,501,070
----------------------------- --- --------------------- --- -------------------------
Total current liabilities 6,309,129 5,770,926
----------------------------- --- --------------------- --- -------------------------
TOTAL LIABILITIES 6,340,354 5,801,892
----------------------------- --- --------------------- --- -------------------------
TOTAL SHAREHOLDER'S EQUITY 15,212,417 11,699,178
============================= === ===================== === =========================
5
Analysis of Financial Position
------------------------------
At June 30, 2006, cash and cash equivalents of $195, 224, were about 1.05% of
the total current assets. It decreased by 57.67% compared with cash at December
31, 2005. The net value of property and equipment was $2,806,435, 13.03% of the
total assets.
The trade account receivables were $9,119,327 and the valuation of inventory was
$6,782,480 at June 30, 2006. Trade account receivables and inventory amounted to
42.32% and 31.47% of the total assets respectively. The dramatic increase of
sales revenues of Helpson resulted in the increase of trade receivables. A long
collection period of account receivables also caused the balance to increase by
59.72% compared to December 31, 2005. Considering the slow collectibility, the
Company plans to pay more attention to collecting trade account receivables, to
adopt cash-sales orientation when selling products to new customers or
small-sized customers.
An increase of 17.24% in inventory was primarily due to the special geographical
location of Hainan province, where there is a long distance from other provinces
and would lead to difficulty in transportation of inventory. Hence, the Company
needs to prepare more materials in order to satisfy the production demand. In
addition, some materials need to be produced by specific manufacturers, so the
company has to retain parts of materials for meeting the demands of production.
Moreover, a dramatically increasing sale would result in a rising trend of
inventory stored.
The total liabilities of $6,340,354 against total assets of $21,552,771 arrive
at a liability ratio of 29.42%. Likewise, a quick ratio could be obtained that,
if the inventory of $6,782,480 is excluded from total current assets of
$18,562,669, against current liabilities of $6,309,129, then the quick ratio
would be 1.87. This indicates that the Company has capability to be liquid as
necessary.
An increase to $15,212,417 ended up to June 30, 2006 in the shareholder's equity
compared to $11,699,178 at December 31, 2005 is primarily due to the increase of
accumulated other comprehensive income, and the increase of the retained
earnings resulting from the growth of sales revenue.
Operating activities
--------------------
As of June 30, 2006, cash and cash equivalents were up to $195,224, which were
decreased by 57.67% compared with the beginning balance of $461,220. Cash flow
used in operating activities during the first half of 2006 was $70,876. The main
reason for the amount in cash utilized in operating activities was an increase
of trade account receivables with the amount of $3,348,145, and an increase of
inventory in the amount of $945,068 during the period.
Investing activities
--------------------
Net cash utilized in investing activities was $147,267 during the first half of
2006. The employment of net cash was fundamentally due to the capital
expenditure amounting to 144,790 for fixed assets as net of disposition.
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In conclusion, net cash utilized for the first six month of year 2006 was
entirely $265,996. It was primarily on investing activity with the amount of $
147,267, and on operating activity with the net cash flow of $70,876.
Item 3 - Control and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, the Company's President and Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 - Defaults upon Senior Securities
Not Applicable.
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Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a) of the Exchange Act.
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14 and
Rule 15d-14(a) of the Exchange Act.
32.1 - Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 - Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
On May 4, 2006, we filed a report on form 8-K, disclosing that 1) we
increased the size of the Board of Directors from one to three and elected
Zhilin Li and Xinhua Wu as directors to serve until the next annual meeting
of shareholders and until their successors are elected and qualified; 2) we
filed a Certificate of Amendment to our Articles of Incorporation with the
State of Delaware. The amendments included: increasing the authorized
common stock from 30,000,000 shares to 60,000,000 shares; changing the name
to China Pharma Holdings, Inc.; and increasing the number of directors from
one to not less than three nor more than nine, with the exact number to be
fixed from time to time by vote of the majority of the entire Board of
Directors.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Pharma Holdings, Inc.
Dated: August 14, 2006 By: /s/ Zhilin Li
------------------------
Zhilin Li
Chief Executive Officer,
President and Director
Dated: August 14, 2006 By: /s/ Xinhua Wu
------------------------
Xinhua Wu
Chief Financial Officer,
and Director
9