As filed with the Securities and Exchange Commission on July 29, 2008
Registration No.333-152272
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
China Pharma Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 73-1564807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4953
(Primary Standard Industrial
Classification Code Number)
2nd Floor, No. 17, Jinpan Road
Haikou, Hainan Province, China
Telephone: 86-898-66811730 (China)
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Ms. Zhilin Li
CEO and President
China Pharma Holdings, Inc.
2nd Floor, No. 17, Jinpan Road
Haikou, Hainan Province, China
Telephone: 86-898-66811730 (China)
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Charles Law
King and Wood LLP
125 S. Market Street, Suite 1175,
San Jose, CA 95113
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
1
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. |X|
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:
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
(Do not check if a smaller reporting company)
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CALCULATION OF REGISTRATION FEE
----------------------------- ----------------------- ------------------------- --------------------------- --------------------
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per unit aggregate offering price registration fee
*
----------------------------- ----------------------- ------------------------- --------------------------- --------------------
Common Stock, $0.001 par 5,000,000 shares $1.92 $9,600,000.00 $377.28
value (1)
----------------------------- ----------------------- ------------------------- --------------------------- --------------------
Common Stock, 1,325,000 shares $2.80 $3,710,000.00 $145.80
$0.001 par value (2)
----------------------------- ----------------------- ------------------------- --------------------------- --------------------
Common Stock, 25,000 shares $3.00 $75,000.00 $2.95
$0.001 par value (3)
----------------------------- ----------------------- ------------------------- --------------------------- --------------------
Common Stock, 25,000 shares $3.50 $87,500.00 $3.44
$0.001 par value (4)
----------------------------- ----------------------- ------------------------- --------------------------- --------------------
Common Stock, 75,000 shares $3.60 $270,000.00 $10.61
$0.001 par value (5)
----------------------------- ----------------------- ------------------------- --------------------------- --------------------
Total 6,450,000 Shares $13,742,500.00 $540.08
----------------------------- ----------------------- ------------------------- --------------------------- --------------------
* Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) and Rule 457(g) under the Securities Act of 1933, as
amended. The average of the high and low price per share of the
Registrant's common stock on the Over the Counter Bulletin Board as of
July 7, 2008 was $1.92 per share.
(1) Represents currently outstanding shares of the registrant's common stock,
$0.001 par value per share, which may be offered pursuant to this
registration statement.
(2) Represents shares of common stock issuable upon exercise of warrants at a
price equal to $2.80 per share.
(3) Represents shares of common stock issuable upon exercise of warrants at a
price equal to $3.00 per share.
(4) Represents shares of common stock issuable upon exercise of warrants at a
price equal to $3.50 per share.
(5) Represents shares of common stock issuable upon exercise of warrants at a
price equal to $3.60 per share.
To the extent permitted by Rule 416, this registration statement also covers
such additional number of shares of common stock as may be issuable as a result
of the anti-dilution provisions of the warrants in the event of stock splits,
stock dividends or similar transactions.
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 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAYNOT
SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES
3
AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED July [ ], 2007
China Pharma Holdings, Inc.
6,450,000 Shares of Common Stock
This Prospectus is an offering of 6,450,000 shares of our common stock,
including 1,450,000 shares of common stock issuable upon exercise of outstanding
warrants.
These securities are more fully described in the section of this Prospectus
titled "Description of Securities."
These securities are being registered to permit public secondary trading of the
securities offered by the selling stockholders named in this Prospectus. We will
not receive any of the proceeds from the sale of the securities by the selling
stockholders. To the extent the warrants are exercised on a cash basis, we will
receive the exercise price of those warrants.
The selling stockholders may, but are not obligated to, offer all or part of
their shares of common stock for resale from time to time through public or
private transactions, at either prevailing market prices or at privately
negotiated prices. See "Plan of Distribution."
Our common stock is currently quoted on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol "CPHI.OB". On July 7, 2008, the last reported sale
price of our common stock was $1.92 per share.
Investing in our stock involves risks. You should carefully consider the Risk
Factors beginning on page 7 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is [ ], 2008
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China Pharma Holdings, Inc.
TABLE OF CONTENTS
Page
Prospectus Summary 1
Risk Factors 7
Use of Proceeds 21
Market for Common Equity and Related Stockholder Matters 21
Management's Discussion and Analysis or Plan of Operation 22
Business 33
Management 39
Director and Executive Compensation 42
Certain Relationships and Related Transactions 43
Security Ownership of Certain Beneficial Owners and Management 43
Selling Security Holders 44
Description of Securities 48
Plan of Distribution 50
Legal Matters 51
Experts 51
Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure 51
Where You Can Find Additional Information 51
Financial Statements F1-F25
You may only rely on the information contained in this Prospectus in deciding
whether to purchase the securities. We have not authorized anyone to provide
information different from that contained in this Prospectus. The information
contained in the Prospectus is accurate only as of the date of this Prospectus,
regardless of the time of delivery of this Prospectus or of any sale of
securities. Our business, financial condition, results of operations, and
prospects may have changed since that date.
The information contained in this Prospectus is not complete and is subject to
change. The selling stockholders are not permitted to sell securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Prospectus is not an offer to sell these securities, nor is it a
solicitation of an offer to buy these securities in any state where the offer or
sale is not permitted.
i
PROSPECTUS SUMMARY
This summary highlights selected information about China Pharma Holdings, Inc.,
its direct and indirect wholly-owned subsidiaries, and the offering that is
contained elsewhere in this Prospectus. You should read the entire Prospectus
before making an investment decision, especially the information presented under
the heading "Risk Factors" on page 7 and the financial statements and related
notes included elsewhere in this Prospectus, as well as any other documents to
which we refer you. Except as otherwise indicated by context, references in this
Prospectus to "we," "us," "our" or the "Company" are to the combined business of
China Pharma Holdings, Inc., Onny Investment Limited ("Onny"), Hainan Helpson
Medicine and Bio-Technology Co. Ltd. ("Helpson"), and in each case do not
include the selling stockholders. References to "China" or to the "PRC" are
references to the People's Republic of China. This Prospectus contains
forward-looking statements and information about us. (See "Forward-Looking
Statements" on page 22.)
OUR COMPANY
Overview
China Pharma Holdings, Inc. (formerly, TS Electronics, Inc. and prior thereto,
Softstone, Inc.) was incorporated on January 28, 1999, pursuant to the
provisions of the General Corporation Act of the State of Delaware. On May 31,
1999, we merged with Soft Stone Building Products, Inc., an Oklahoma corporation
that was a predecessor to our Company's business. Our initial business
operations were conducted at 620 Dallas Drive, Denton TX, 76205. On February 1,
2000, we moved our offices and facilities to Ardmore, OK. In June 2002, we moved
our office facilities to Pottsboro, TX. On August 13, 2003, we changed our name
to TS Electronics, Inc. On March 15, 2006, we changed our name from TS
Electronics, Inc. to China Pharma Holdings, Inc.
Our focus initially was solely on realizing the commercial benefits of a process
developed and patented by our first president, Frederick Parker. This process
converted waste tires into useful products. We were not successful in promoting
this business, wrote off all assets associated with the business and shifted our
attention to the commercial possibilities of a then, newly discovered
devulcanization process to which we acquired a 5.5 year exclusive license for
the Western Hemisphere. In addition, we entered into the business of importing
hard-to-find and specialty crumb rubber. We were also not successful in these
endeavors and have abandoned all efforts regarding these pursuits.
Effective August 11, 2004, the Company entered into a Stock Exchange Agreement
with Hou Xiao, the sole stockholder of China ESCO Holdings Limited ("China
ESCO"), a company organized in the Hong Kong Special Administration Region in
the People's Republic of China (the "PRC") and its wholly owned operating
subsidiary, AsiaNet PE Systems Limited. China ESCO was engaged in the
development and manufacturing of electrical energy saving systems and products
in the PRC.
1
The consummation of the transaction with China ESCO was subject to a number of
conditions, including receipt by us of financial statements of China ESCO as
required under applicable regulations, and satisfaction of all applicable
regulatory requirements. In January 2005, we declared China ESCO to be in
material breach of the agreement and rescinded the agreement.
Effective February 8, 2005, we executed a Letter of Intent with Osage Energy
Company, LLC ("Osage") whereby Osage would acquire 90% of the equity interests
of the Company. This transaction was never consummated by the parties. The
Company had no operations or significant assets from the quarter ended December
31, 2004 until May 2005.
On May 11, 2005, we sold to Halter Financial Group, Inc., in a private
placement, 1,875,045 shares of common stock at a purchase price of $0.1066641
per share, pursuant to the terms of a Stock Purchase Agreement (the "Purchase
Agreement"). The private placement was exempt from the registration requirements
of the Securities Act, in reliance upon Section 4(2) thereunder. As a result of
the purchase, Halter Financial Group, Inc. became our controlling stockholder,
owning approximately 75% of our issued and outstanding shares of common stock.
Immediately subsequent to, and as a result of, the closing of the transactions
contemplated by the Purchase Agreement, Gene F. Boyd, Keith P. Boyd, Fredrick W.
Parker and Leo G. Templer resigned as officers and directors, as applicable, of
the Company. Timothy P. Halter was concurrently appointed as a member of the
Board of Directors, and Mr. Halter was elected as President, Chief Accounting
Officer and Secretary of the Company.
On October 19, 2005 we entered into a Securities Exchange Agreement (the
"Exchange Agreement") with Onny Investment Limited ("Onny"), a British Virgin
Islands company, and its original stockholders pursuant to which we acquired all
of the issued and outstanding shares of Onny from said stockholders in exchange
for 27,499,940 shares of our common stock. Upon the closing of the exchange
transaction (the "Exchange Transaction"), Onny became the wholly owned
subsidiary of our Company. The Exchange Agreement also provides that, upon the
effectiveness of an amendment to the Company's Certificate of Incorporation to
increase its authorized capital stock, the Company shall issue to Heung Mei
Tsui, the principal stockholder of Onny, an additional 4,723,056 shares of
common stock (the "Post Closing Shares") to which she would otherwise have been
entitled if the Company had enough authorized shares as of the closing of the
Exchange Transaction.
Immediately prior to the closing of the Exchange Transaction, Onny completed a
private placement (the "Onny Offering") of its convertible preferred stock to 46
accredited investors. The Onny Offering raised gross proceeds of $5,000,000.
Additionally, immediately prior to the Exchange Transaction, participants in the
Onny Offering exchanged their preferred shares for an aggregate of 10,000 shares
of Onny's common stock. Participants in the Onny Offering then participated in
the Exchange Transaction by exchanging such 10,000 shares of common stock for
6,944,619 shares of our common stock.
On March 15, 2006, the Company amended its Certificate of Incorporation to
increase its authorized capital stock from 30,000,000 to 60,000,000 shares and
filed the Information Statement in accordance with Section 14 of the Exchange
Act. On May 16, 2006, the Company issued to Heung Mei Tsui an additional
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4,723,056 shares of common stock as provided in the Exchange Agreement. Upon the
issuance of the Post Closing Shares, Ms. Tsui holds 25,278,385 shares or
approximately 72.8% of the issued and outstanding common stock of the Company.
On July 24, 2006, Zhilin Li, Heung Mei Tsui and the Company entered into that
certain Stock Transfer Agreement, as amended on November 24, 2006, pursuant to
which Heung Mei Tsui transferred 10,000,000 shares of her personal holdings of
the Company's common stock to Zhilin Li in exchange for a sublicense to a patent
held by a third party, which is licensed to Ms. Li. After the aforementioned
stock transfer, Ms. Tsui holds 15,278,385 shares or 44.0% of the total
outstanding shares of our common stock. Ms. Li holds 10,000,000 shares or 28.8%
of the total outstanding shares of our common stock.
On February 1, 2007, we completed an offering pursuant to a Subscription and
Registration Rights Agreement ("Agreement") with 17 accredited investors in
connection with a private placement of 2,505,882 shares of the Company's common
stock at $1.70 per share (the "2007 Private Placement"). Pursuant to the
Agreement, the investors also received three-year warrants to purchase an
aggregate of 1,252,941 shares of Company's common stock at $2.38 per share.
Pursuant to the transaction on February 1, 2007, we received the subscription
proceeds in the aggregate amount of $4,259,900. The net proceeds, after
deduction of related offering expenses of $ 462,717, amounted to $3,797,183. In
December 2007, the Company received proceeds of $119,000 upon the exercise of
warrants to purchase 50,000 shares of common stock. The remaining warrants
issued in conjunction with the offering to buy 1,202,941 shares of common stock
have not been exercised at December 31, 2007.
On September 27, 2007, Heung Mei Tsui and the Company entered into four Stock
Transfer Agreements with Chipiu Wong, Ruofeng Xu, Yao Huang and Jian Yang
respectively, pursuant to which, Heung Mei Tsui transferred in aggregate
4,465,734 shares of the Company's common stock at the price of $1.52 per share
to the four individuals. After the aforementioned stock transfer, Ms. Tsui holds
10,812,651 shares or 29.0% of the total outstanding shares of our common stock.
In May 2008, the Company completed an offering of units priced at $2.00 per unit
consisting of one share of the Company's common stock and a warrant to purchase
one-quarter of a share of the Company's common stock with an exercise price of
$2.80 per share ("2008 Private Placement"). The Company issued an aggregate of
5,000,000 shares of common stock and issued three-year warrants to purchase an
aggregate of 1,250,000 shares of Company's common stock to 17 accredited
investors. We received the subscription proceeds in the aggregate amount of
$10,000,000. The net proceeds, after deduction of related offering expenses of
731,061.70, amounted to $ 9,268,938.30.
On June 24, 2008, the Company issued to FirsTrust Group, Inc. three-year
warrants to purchase 75,000 shares of the Company's common stock at $2.80 per
share and three-year warrants to purchase 75,000 shares of the Company's common
stock at $3.60 per share. The Company issued the above warrants as equity
compensation under the Consulting Agreement and the Supplementary Agreement
entered into between the Company and FirsTrust China Ltd. (the wholly-owned
subsidiary of FirsTrust Group, Inc.).
3
On the same date, the Company issued to Hayden Communications International,
Inc. three-year warrants to purchase 25,000 shares of the Company's common stock
at $3.00 per share and three-year warrants to purchase 25,000 shares of the
Company's common stock at $3.50 per share. The Company issued the above warrants
as equity compensation under the Investor Relations Consulting Agreement entered
into between the Company and Hayden Communications International, Inc.
Onny
----
Onny Investment Limited ("Onny") was incorporated on January 12, 2005 under the
laws of the British Virgin Islands. At the time of its incorporation, Onny's
authorized capital was $50,000 and there were 50,000 shares of one class and one
series of capital stock, $1.00 par value, issued and outstanding. Heung Mei Tsui
was, at the time of incorporation, the sole stockholder and director of Onny. On
August 18, 2005, Onny increased its authorized capital to $5,000,000 divided
into 40,000 ordinary shares of capital stock, $100.00 par value, and 10,000
preferred shares, $100.00 par value. As of the date of this Prospectus, there
are 39,700 ordinary shares issued and outstanding, all of which are held by the
Company. No preferred shares of Onny are currently issued and outstanding.
On May 25, 2005, Onny acquired all the equity interests in Hainan Helpson
Medicine and Bio-Technology Co. Ltd. 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. Effective as of June 21,
2005, Onny became the sole stockholder of Helpson, and Helpson became a wholly
foreign-owned enterprise as defined by PRC laws.
On October 19, 2005, Onny completed the Onny Offering. Under the terms of the
Onny Offering, Heung Mei Tsui agreed to escrow 6,944,611 shares of the Company's
common stock that she received as a result of the Exchange Transaction. These
shares represent 20% of the Company's issued and outstanding common stock
immediately following the closing of the Exchange Transaction (the "Make Good
Shares"), so that in the event that actual net income set forth in the
consolidated financial statements of the Company for the fiscal year ending
December 31, 2006 ("NI") does not reflect $8 million of net income (the
"Guaranteed NI"), the Make Good Shares can be distributed on a pro rata basis to
the participants of the Onny Offering in accordance with the following formula:
Make Good Shares = ((Guaranteed NI - NI) / $8m) X Make Good Pool
If required, the Make Good Shares will be delivered to participants in the Onny
Offering within ten (10) business days of the date the audit report for the
period is filed with the SEC.
Additionally, in connection with the Onny Offering, Heung Mei Tsui escrowed
277,785 shares of the Company's common stock that she received as a result of
the Exchange Transaction, which shares represent 0.8% of the Company's issued
and outstanding common stock immediately following the closing of the Exchange
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Transaction (the "HFG Make Good Pool"), so that in the event the Company does
not achieve the Guaranteed NI, the HFG Make Good Shares will be distributed to
HFG International, Limited, an affiliate of Halter Financial Group, Inc., in
accordance with the following formula:
HFG Make Good Shares = ((Guaranteed NI - NI) / $8m) X HFG Make Good Pool
If required, the HFG Make Good Shares will be delivered within ten (10) business
days of the date the audit report for the period is filed with the SEC.
According to the audited consolidated financial statement of Company for the
fiscal year ending December 31, 2006, the net income was $8,587,086 which is
more than the Guaranteed NI. Therefore, 7,222,396 shares of Company's common
stock which was escrowed shall be reverted back to Heung Mei Tsui. As of the
date of this Prospectus, Heung Mei Tsui holds 10,812,651 shares or 29.00% of the
total outstanding shares of our common stock.
Helpson
-------
Hainan Helpson Medicine and Bio-Technology Co. Ltd. ("Helpson") is a
foreign-invested enterprise established in Haikou, Hainan Province, PRC on
February 25, 1993. Initially, its name was Hainan Fulin Biomedical Co., Ltd.,
which was changed to "Helpson" in 1999. The company was originally an "equity
joint venture" as defined by PRC laws on foreign invested enterprises. The two
joint venturers were Haikou Biomedical Engineering Co., Ltd. ("Haikou
Biomedical"), a PRC company, and Hong Kong Fudao Development Co., Ltd.
("Fudao"), a Hong Kong company. Haikou Biomedical invested RMB 2,100,000 for a
70% share of Helpson, and Fudao invested $150,000 for a 30% share of Helpson.
On June 16, 2001, Fudao entered into an Equity Interest Transfer Agreement with
Hainan Kaidi Science and Technology Co., Ltd., a PRC company ("Kaidi"). In
accordance with the Equity Interest Transfer Agreement, Fudao transferred all of
its 30% capital contribution in Helpson to Kaidi in consideration of RMB
2,780,000. As a result of the transfer, Haikou Biomedical continued to hold a
70% equity interest in Helpson, while Kaidi had a 30% equity interest in
Helpson. Therefore, Helpson became a PRC domestic company, rather than a
foreign-invested company.
Effective on December 26, 2003, Helpson issued new capital stock to Chengdu
Huineng Biomedical Co., Ltd. ("Chengdu Bio") and Chongqing Chemical Medicine
Holding Group ("Chongqing Chemical"). Chengdu Bio contributed RMB 3,000,000 for
a 10.71% equity interest in Helpson and an additional RMB 3,000,000 for
Helpson's capital common reserve fund, and Chongqing Chemical contributed RMB
5,000,000 for a 17.86% equity interest in Helpson and an additional RMB
5,000,000 for Helpson's capital common reserve fund. After the issuance of
shares, Helpson had four equity holders: Haikou Biomedical, holding 50% equity
interest; Kaidi, holding 21.43% equity interest; Chengdu Bio, holding 10.71%
equity interest; and Chongqing Chemical, holding 17.86% equity interest.
On March 8, 2005, Chongqing Chemical entered into an equity interest transfer
5
agreement with Haikou Biomedical to transfer all of its equity interest in
Helpson to Haikou Biomedical. Upon completion of the transfer, there remained
only three equity holders of Helpson: Haikou Biomedical, holding 67.86% equity
interest; Kaidi, holding 21.43% equity interest, and Chengdu Bio, holding 10.71%
equity interest.
As set forth above, on May 25, 2005, Haikou Biomedical, Kaidi and Chengdu Bio
entered into an equity interest transfer agreement with Onny to transfer all
their equity interests in Helpson to Onny. Effective as of June 21, 2005, Onny
became the sole stockholder of Helpson, and Helpson became a wholly
foreign-owned enterprise as defined by PRC laws.
Upon the closing of the Exchange Transaction on October 19, 2005, we acquired
all of the issued and outstanding shares of Onny in exchange for 27,499,940
shares of our common stock and became Onny's sole stockholder. As a result, as
of October 19, 2005, Helpson became our wholly owned subsidiary.
As of July 4, 2006, Helpson increased its registered capital from RMB 28,000,000
to RMB 60,000,000 and changed its registered address from Unit 8, D Area, Office
Hall, Haikou Bonded Zone, Haikou, Hainan Province, China to C09-2, Haikou Bonded
Zone, Haikou, Hainan Province, PRC.
Since its establishment, Helpson has positioned itself in the research,
development, manufacturing, and sales of a series of bio-pharmaceutical
products. Helpson now has eight different production lines, developing,
manufacturing and marketing Western and Chinese medicines. It has a portfolio of
therapeutics that primarily targets CNS, cardiovascular, wound recovery, and
infectious diseases. It has a robust portfolio, a segmented market, a promising
pipeline with high margin which addresses large patient populations, and a
highly professional and experienced management team.
THE OFFERING
Common stock outstanding before the 42,278,938 shares
offering
Common stock offered by the selling 6,450,000 shares, which includes
stockholders 1,450,000 shares issuable upon
exercise of outstanding warrants.
Use of Proceeds We will not receive any proceeds
from the sale of the common stock
hereunder. To the extent the
warrants are exercised on a cash
basis, we will receive the exercise
price of those warrants. We intend
to use such proceeds, if any, for
working capital and general
corporate purposes.
6
OTCBB Trading Symbol CPHI.OB
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. SEE RISK FACTORS BEGINNING ON PAGE 7.
RISK FACTORS
The securities being offered hereby are highly speculative, and prospective
investors should carefully consider, among others, the following factors related
to our business, operations and financial position, in addition to the other
information in this Prospectus:
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
------------------------------------------
WE RELY ON A FEW SUPPLIERS AND ANY DISRUPTION WITH OUR SUPPLIERS COULD DELAY
PRODUCT SHIPMENTS AND MATERIALLY ADVERSELY AFFECT OUR BUSINESS OPERATIONS AND
PROFITABILITY
We have developed relationships with a single or limited number of suppliers for
materials that are otherwise generally available. Purchases from our three
largest suppliers, Hainan Xinxin Bio-Technology Company, Sichuan Chengxin
Pharmaceutical Company and Anhui Fuyang Xinte Pharmaceutical Company as of May
31, 2008, accounted for approximately 15.36%, 14.29% and 14.09% respectively of
the total purchases of Helpson. Although we believe that alternative suppliers
are available to supply materials, should either of these suppliers terminate
their business arrangements with us or increase their prices of materials
supplied, it could delay product shipments and materially adversely affect our
business operations and profitability.
IF ALL OR A SIGNIFICANT PORTION OF OUR TRADE RECIEVABLES ARE NOT COLLECTED OR
COLLECTION IS DELAYED, OUR NET INCOME WILL DECREASE AND OUR PROFITABILITY WILL
BE MATERIALLY ADVERSELY AFFECTED
We had trade receivables, net of allowance for doubtful accounts, of
approximately $12,101,979 ($1,562,494 for doubtful accounts) and $18,572,976
($2,440,852 for doubtful accounts) as of December 31, 2006 and 2007,
respectively.
It is usual commercial practice that certain customers may repay their debts
beyond credit periods granted or may repay slowly when transaction volume
increases. There is no assurance that our trade receivables will be fully repaid
on a timely basis. The percentage of a trade receivable that is deemed doubtful
is as follows: 100% after 720 days; 50% after 360 days; and 7.5% up to 360 days.
If all or a significant portion of our customers with trade receivables fail to
pay all or part of the trade receivables or delay the payment due to us for
whatever reason, our net profit will decrease and our profitability will be
materially adversely affected.
7
THE FAILURE TO MANAGE GROWTH EFFECTIVELY COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OUR OPERATIONS
The rapid market growth of our pharmaceutical products may require our Company
to expand our employee base for managerial, operational, financial, and other
purposes. As of May 31, 2008, we had 310 employees in total. The continued
future growth will impose significant responsibilities upon the members of
management to identify, recruit, maintain, integrate, and motivate new
employees. Aside from increased difficulties in the management of human
resources, we may also encounter working capital issues, as we need increased
liquidity to finance the purchases of raw materials and supplies, research and
development of new products, acquisition of new businesses and technologies, and
the hiring of additional employees. For effective growth management, we will be
required to continue improving our operations, management, and financial systems
and control. Our failure to manage growth effectively may lead to operational
and financial inefficiencies that will have a negative effect on the Company's
profitability.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND LOSS OF THESE KEY PERSONNEL COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FIANANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our Company's success is, to a certain extent, attributable to the management,
sales and marketing, and pharmaceutical factory operational expertise of key
personnel. Zhilin Li, Heqi Cai, and Yao Huang perform key functions in the
operation of our Company. Ms. Li entered into an Employment Agreement with
Helpson, which provides that she shall act as its CEO. The term of her
Employment Agreement is from July 1, 2005, to June 30, 2010. Mr. Cai entered
into an Employment Agreement with Helpson to act as its Director of Development
Department for a term from July 1, 2005, to June 30, 2010. Ms. Huang entered
into an Employment Agreement with Helpson to act as its Head of Pharmaceutical
Plant for a term from July 1, 2005, to June 30, 2010. There can be no assurance
that we will be able to retain these officers after the term of their employment
or after their contracts expire. The loss of officers could have a material
adverse effect upon our business, financial condition, and results of
operations. We must attract, recruit and retain a sizeable workforce of
technically competent employees. Our ability to effectively implement our
business strategy will depend upon, among other factors, the successful
recruitment and retention of additional highly skilled, experienced management
and other key personnel. We cannot assure that we will be able to hire or retain
such employees.
IF WE FAIL TO DEVELOP NEW PRODUCTS WITH HIGH PROFIT MARGINS AND OUR HIGH PROFIT
MARGIN PRODUCTS ARE REPLACED BY COMPETITOR'S PRODUCTS, THEN OUR GROSS AND NET
PROFIT MARGINS WILL BE ADVERSELY AFFECTED
In the years ended December 31, 2006 and 2007, the gross profit margin for our
Company was 46.2% and 46.91% respectively. However, there is no assurance that
8
we will be able to sustain such profit margins in the future. The pharmaceutical
market in the PRC is very competitive, and there may be pressure to reduce sale
prices of products without a corresponding decrease in the price of raw
materials. To the extent that we fail to develop new products with high profit
margins and our high profit margin products are substituted by competitors'
products, gross profit margins will be adversely affected.
WE FACE COMPETITION IN THE PHARMACEUTICAL MARKET IN THE PRC AND SUCH COMPETITION
COULD CAUSE OUR SALES REVENUE AND PROFITS TO DECLINE
According to the State Food and Drug Administration of China (the "SFDA"), there
were approximately 5,071 pharmaceutical manufacturing companies in the PRC as of
the end of June 2004, of which approximately 3,237 manufacturers obtained
certificates of Good Manufacturing Practices Certification ("GMP
certification"). After GMP certification became a mandatory requirement on July
1, 2004, approximately 1,834 pharmaceutical manufacturers were forced to cease
production. Only the 3,237 pharmaceutical manufacturers with GMP certifications
may continue their manufacturing operations. As of the end of 2006, there are
4682 enterprises manufacturing medicines and formulation in China. The
certificates, permits, and licenses required for pharmaceutical operation in the
PRC create a potentially significant barrier for new competitors seeking
entrance into the market. Despite these obstacles, we face competitors that will
attempt to create, or are already marketing, products in the PRC that are
similar to ours. There can be no assurance that our products will be either more
effective in their therapeutic abilities and/or be able to compete in price with
that of our competitors. Failure to do either of these may result in decreased
profits for our Company.
OUR SUCCESS IS HIGHLY DEPENDENT ON CONTINUALLY DEVELOPING NEW AND ADVANCED
PRODUCTS, TECHNOLOGIES, AND PROCESSES AND FAILURE TO DO SO MAY CAUSE US TO LOSE
OUR COMPETITIVENESS IN THE PHARMACEUTICAL INDUSTRY AND MAY CAUSE OUR PROFITS TO
DECLINE
To remain competitive in the pharmaceutical industry, it is important to
continually develop new and advanced products, technologies and processes. There
is no assurance that our competitors' new products, technologies and processes
will not render our Company's existing products obsolete or non-competitive. Our
Company's competitiveness in the pharmaceutical market therefore relies upon our
ability to enhance our current products, introduce new products, and develop and
implement new technologies and processes. Our Company's failure to
technologically evolve and/or develop new or enhanced products may cause us to
lose our competitiveness in the pharmaceutical industry and may cause our
profits to decline.
THE COMMERCIAL SUCCESS OF OUR PRODUCTS DEPENDS UPON THE DEGREE OF MARKET
ACCEPTANCE AMONG THE MEDICAL COMMUNITY AND FAILURE TO ATTAIN MARKET ACCEPTANCE
AMONG THE MEDICAL COMMUNICTY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATIONS AND
PROFITABILITY
The commercial success of our products depends upon the degree of market
acceptance among the medical community. Even if our products are approved by the
SFDA, there is no assurance that physicians will prescribe or recommend our
9
products to patients. Furthermore, a product's prevalence and use at hospitals
may be contingent upon our relationship with the medical community. The
acceptance of our products among the medical community may depend upon several
factors including, but not limited to, the product's acceptance by physicians
and patients as a safe and effective treatment, cost effectiveness, potential
advantages over alternative treatments, and the prevalence and severity of side
effects. Failure to attain market acceptance among the medical community may
have an adverse impact on our operations and profitability.
THE DISCONTINUATION OF ANY PREFERENTIAL TAX TREATMENTS OR OTHER INCENTIVES
CURRENTLY AVAILABLE TO US IN THE PRC COULD MATERIALLY AND ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pursuant to the original Income Tax Law of the PRC for Enterprises with Foreign
Investment and Foreign Enterprises and its implementation rules, a foreign
invested enterprise as defined under PRC laws shall pay 30% corporate income tax
and 3% local income tax; an enterprise with foreign investment of a production
nature scheduled to operate for a period of not less than ten years shall, from
the year of making profits, be exempt from enterprise income tax in the first
and second years and allowed a fifty percent reduction in the third to fifth
years. Pursuant to the State Council's Regulations on Encouraging Investment in
and Development of Hainan Island promulgated in May, 1988, the corporate income
tax for all companies incorporated in Hainan Province is reduced to 15%.
Pursuant to the Regulations on Foreign Investment in Hainan Special Economic
Zone promulgated by Hainan Province in March, 1991 (the "Regulation on Foreign
Investment"), all foreign invested enterprises incorporated in Hainan Province
are exempt from the local income tax.
Helpson has obtained the approval for preferential enterprise income tax
treatment from Hainan State Administration of Taxation at the end of 2006 and
has begun to enjoy the preferential tax treatment. Therefore, Helpson shall be
exempt from enterprise income tax in the first and second years after it begins
to make profit, and shall pay enterprise income tax at the rate of 7.5% from the
third to the fifth year after it begins to make profit.
However, on March 16, 2007, China's national congress approved the Enterprise
Income Tax Law of the PRC ("New Income Tax Law"), which takes effect from
January 1, 2008. The New Income Tax Law unifies the enterprise income tax rate,
cost deduction and tax incentive policies for both domestic and foreign invested
enterprises. Under the New Income Tax Law, enterprises that were established and
already enjoyed preferential tax rates or tax holidays before March 16, 2007
will (i) in case of preferential tax rates, gradually increase to the rate of
25% for a period of 5 years, (ii) in case of tax holidays, continue to enjoy
them until the expiration of such term.
Therefore, Helpson will continue to enjoy preferential tax treatment until the
expiration of the preferential term. There can be no assurance that Helpson will
continue to be entitled to any preferential tax treatment or tax holidays after
the transitional period expires. The discontinuation of any such special or
preferential tax treatment or other incentives could have an adverse effect on
our business, financial condition and results of operations.
10
WE MAY BE SUBJECT TO THE PRC'S PRICE CONTROL OF DRUGS WHICH MAY LIMIT OUR
PROFITABILITY AND EVEN CAUSE US TO STOP MANUFACTURING CERTAIN PRODUCTS
The State Development and Reform Commission ("SDRC") of the PRC and the price
administration bureaus of the relevant provinces of the PRC in which the
pharmaceutical products are manufactured are responsible for the retail price
control over our pharmaceutical products. The SDRC sets the price ceilings for
certain pharmaceutical products in the PRC. Although our products have not been
subject to such price controls as of the date of this Prospectus, there is no
assurance that our products will remain unaffected by it. Where our products are
subject to a price ceiling, we will need to adjust the product price to meet the
requirement and to accommodate for the pricing of competitors in the competition
for market shares. The price ceilings set by the SDRC may limit our
profitability, and in some instances, such as where the price ceiling is below
production costs, may cause us to stop manufacturing certain products which may
adversely affect our results of operations.
OUR CERTIFICATES, PERMITS, AND LICENSES ARE SUBJECT TO GOVERNMENTAL CONTROL AND
RENEWAL, AND THE FAILURE TO OBTAIN RENEWAL WOULD CAUSE ALL OR PART OF OUR
OPERATIONS TO BE SUSPENDED AND HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION
Our Company is subject to various PRC laws and regulations pertaining to the
pharmaceutical industry. Our Company has attained certain certificates, permits,
and licenses required for the operation of a pharmaceutical enterprise and the
manufacturing of pharmaceutical products in the PRC. We obtained the Medicine
Production Permit in December 2005, which is valid through December 31, 2010. We
also obtained five GMP certificates which are effective through July 17, 2008,
December 2, 2009, February 2, 2010, May 19, 2010 and April 17, 2011,
respectively. The pharmaceutical production permits and GMP certificates are
each valid for a term of five years and must be renewed before their expiration.
During the renewal process, we will be re-evaluated by the appropriate
governmental authorities and must comply with the prevailing standards and
regulations, which may change from time to time. In the event that we are not
able to renew the certificates, permits and licenses, all or part of our
operations may be suspended by the government, which would have a material
adverse effect on our financial condition. Furthermore, if escalating compliance
costs associated with governmental standards and regulations restrict or
prohibit any part of our operations, it may adversely affect our results of
operations and profitability.
IF OUR PRODUCTS FAIL TO RECEIVE REGULATORY APPROVAL OR ARE SEVERELY LIMITED IN
THE PRODUCTS SCOPE OF USE, THEN WE MAY BE UNABLE TO RECOUP CONSIDERABLE RESEARCH
AND DEVELOPMENT EXPENDITURES ALREADY INCURRED
Our products that are approved to be manufactured as of May 31, 2008 include 17
medicines. There are 9 products in the stage of research and development as of
11
May 31, 2008. The production of our pharmaceutical products is subject to the
regulatory approval of the SFDA. The regulatory approval procedure for
pharmaceuticals can be quite lengthy, costly, and uncertain. Depending upon the
discretion of the SFDA, the approval process may be significantly delayed by
additional clinical testing and require the expenditure of currently unavailable
resources; in such an event, it may be necessary for us to abandon our
application. Even where approval of the product is granted, it may contain
significant limitations in the form of narrow indications, warnings,
precautions, or contra-indications with respect to conditions of use. If
approval of our product is denied, abandoned, or severely limited in terms of
the scope of products use, it may result in the inability to recoup considerable
research and development expenditures already incurred.
OUR RESEARCH AND DEVELOPMENT MAY BE COSTLY AND/OR UNTIMELY, AND THERE ARE NO
ASSURANCES THAT OUR RESEARCH AND DEVELOPMENT WILL EITHER BE SUCCESSFUL OR
COMPLETED WITHIN THE ANTICIPATED TIMEFRAME, IF EVER AT ALL
The research and development of our new and existing products and their
subsequent commercialization plays an important role in our success. As of May
31, 2008, there are 9 products under research and development, including Hugan
Granule, Tiopronin, Omeprazole for Injection, Ceftriaxone Sodium and Tazobactam
Sodium, Donepezil dispersible tablets, Mycophenolate Mofetil Granules, rhaFGF,
rhCNTF and Compound Diclofenac Sodium Injection. The research and development of
new products is costly and time consuming, and there are no assurances that our
research and development of new products will either be successful or completed
within the anticipated time frame, if ever at all. There are also no assurances
that if the product is developed, that it will lead to successful
commercialization.
WE CANNOT GUARANTEE THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS, AND IF
INFRINGEMENT OR COUNTERFEITING OF OUR INTELLECTUAL PROPERTY RIGHTS OCCURS, THEN
OUR REPUTATION AND BUSINESS MAY BE ADVERSELY AFFECTED
To protect the brand names of our products, we have registered and applied for
registration of our trademarks in the PRC, where we have a major business
presence.
All of our products are sold under these trademarks. As of the date of this
Prospectus, we have not experienced any infringements of such trademarks for
sales of pharmaceutical products, and as of the date of this Prospectus, we were
not aware of any infringement of our intellectual property rights. However,
there is no assurance that there will not be any infringement of our brand name
or other registered trademarks or counterfeiting of our products in the future.
Should any such infringement or counterfeiting occur, our reputation and
business may be adversely affected. We may also incur significant expenses and
substantial amounts of time and effort to protect our intellectual property
rights in the future. Such diversion of our resources may adversely affect our
existing business and future expansion plans.
OUR REPUTATION AND BUSINESS MAY BE ADVERSELY AFFECTED AS A RESULT OF PRODUCT
LIABILITY OR DEFECTIVE PRODUCTS
12
We may produce products which inadvertently have an adverse pharmaceutical
effect on the health of individuals despite proper testing. Existing PRC laws
and regulations do not require us to maintain third party liability insurance to
cover product liability claims. However, if a product liability claim is brought
against us, it may, regardless of merit or eventual outcome, result in damage to
our reputation, breach of contract with our customers, decreased demand for our
products, costly litigation, product recalls, loss of revenue, and the inability
to commercialize some products. We are currently not aware of any existing or
anticipated product liability claims with respect to our products.
WE RELY ON THE COOPERATION WITH CERTAIN RESEARCH LABORATORIES, PHARMACEUTICAL
INSITITUIONS, AND UNIVERSITIES, AND IF THESE INSTITUTIONS CEASE TO COOPERATE
WITH US AND WE CANNOT FIND OTHER SUITABLE SUBSTITUTE RESEARCH AND DEVELOPMENT
PARTNERS, THEN OUR ABILITY TO DEVELOP NEW PRODUCTS MAY BE HINDERED AND OUR
BUSINESS MAY BE ADVERSELY AFFECTED
Helpson cooperates with several research institutions including the Chinese
Academy of Medical Sciences, China Pharmaceutical University, Academy of
Military Medical Science, Chongqing Medical University and Sichuan University.
Helpson relies to a certain extent on these institutions for its development of
new products. There is no assurance that these institutions will continue
cooperating with Helpson to develop new products. In the event that these
institutions cease to cooperate with Helpson and Helpson cannot find other
suitable substitute research and development partners, our ability to develop
new products may be hindered and our business may be adversely affected.
RISKS RELATED TO DOING BUSINESS IN CHINA
----------------------------------------
Helpson operates from facilities that are located in China. Accordingly, its
operations must conform to governmental regulations and rules of the PRC.
OUR OPERATIONS AND ASSETS IN CHINA ARE SUBJECT TO SIGNIFICANT POLITICAL AND
ECONOMIC UNCERTAINTIES
Changes in PRC laws and regulations, or their interpretation, or the imposition
of confiscatory taxation, restrictions on currency conversion, imports and
sources of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on our
business, results of operations and financial condition. Under our current
leadership, the Chinese government has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.
A SLOWDOWN IN THE CHINESE ECONOMY OR AN INCREASE IN ITS INFLATION RATE MAY
ADVERSELY IMPACT OUR REVENUES.
13
The Chinese economy has grown at an approximately 9% rate for more than 25
years, making it the fastest growing major economy in recorded history. In 2007,
China's economy grew by 11.4%, the fastest pace in 11 years. While China's
economy has grown, inflation has also recently become a major issue of concern.
China's consumer price index growth rate reached 8.7% year over year in 2008.
We cannot assure you that growth of the Chinese economy will be steady, that
inflation will be controllable or that any slowdown in the economy or
uncontrolled inflation will not have a negative effect on our business. More
recently, the Chinese government announced its intention to continuously use
macroeconomic tools and regulations to slow the rate of growth of the Chinese
economy, the results of which are difficult to predict. Adverse changes in the
Chinese economy will likely impact our financial performance.
YOU MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING
FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN THE PRC BASED ON U.S. OR OTHER
FOREIGN LAWS AGAINST THE COMPANY OR OUR MANAGEMENT
Helpson, our operating company, is incorporated under the laws of the PRC, and
substantially all of our assets are located in the PRC. In addition, many of our
directors, managers, and executive officers reside within the PRC, and
substantially all of the assets of these persons are located within the PRC. As
a result, it may not be possible to effect service of process within the United
States or elsewhere outside the PRC upon certain of our directors, supervisors
or executive officers, including with respect to matters arising under U.S.
federal securities laws or applicable state securities laws. Moreover, the PRC
does not have treaties providing for the reciprocal recognition and enforcement
of judgments of courts with the United States, the United Kingdom, Japan or many
other countries. As a result, recognition and enforcement in the PRC of
judgments of a court in the United States and any of the other jurisdictions
mentioned above in relation to any matter may be difficult or impossible.
Furthermore, an original action may be brought in the PRC against us, our
directors, managers, or executive officers only if the actions are not required
to be arbitrated by PRC law and Helpson's articles of association, and only if
the facts alleged in the complaint give rise to a cause of action under PRC law.
In connection with any such original action, a PRC court may impose civil
liability, including monetary damages.
BECAUSE WE RECEIVE SUBSTANTIALLY ALL OF OUR REVENUE IN RENMINBI, WHICH CURRENTLY
IS NOT A FREELY CONVERTIBLE CURRENCY, AND THE PRC GOVERNMENT CONTROLS THE
CURRENCY CONVERSION AND THE FLUCTUATION OF THE RENMINBI, WE ARE SUBJECT TO
CHANGES IN THE PRCS' POLITICAL AND ECONOMIC DECISIONS
We receive substantially all of our revenues in Renminbi, which currently is not
a freely convertible currency. The PRC government may, at its discretion,
restrict access in the future to foreign currencies for current account
transactions. Any future restrictions on currency exchanges may limit our
ability to use revenue generated in Renminbi to fund any future business
activities outside China or to make dividend or other payments in U.S. dollars.
14
Although the Chinese government introduced regulations in 1996 to allow greater
convertibility of the Renminbi for current account transactions, significant
restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies,
after providing valid commercial documents, at those banks authorized to conduct
foreign exchange business. In addition, conversion of Renminbi for capital
account items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items. We cannot be certain that
the Chinese regulatory authorities will not impose more stringent restrictions
on the convertibility of the Renminbi, especially with respect to foreign
exchange transactions.
THE VALUE OF OUR SECURITIES WILL BE AFFECTED BY THE FOREIGN EXCHANGE RATE
BETWEEN U.S. DOLLARS AND RMB
The value of our common stock will be affected by the foreign exchange rate
between U.S. dollars and Renminbi. For example, to the extent that we need to
convert U.S. dollars into Renminbi for our operational needs and should Renminbi
appreciate against the U.S. dollar at that time, our financial position and the
price of our common stock may be adversely affected. Conversely, if we decide to
convert Renminbi into U.S. dollars for the purpose of declaring dividends on our
common stock or for other business purposes and the U.S. dollar appreciates
against the Renminbi, the U.S. dollar equivalent of our earnings from our
subsidiary in China would be reduced.
THE GROWTH OF THE CHINESE ECONOMY HAS BEEN UNEVEN ACROSS GEOGRAPHIC REGIONS AND
ECONOMIC SECTORS, AND A DOWNTURN IN CERTAIN REGIONS IN WHICH WE DO BUSINESS OR
IN OUR ECONOMIC SECTOR WOULD SLOW DOWN OUR GROWTH AND PROFITABILITY
The growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business. Our profitability may decrease due to a downturn in the Chinese
economy. More specifically, the expansion of our sales area in the less
economically developed central and western provinces of China will depend on
those provinces achieving certain income levels.
ANY OCCURRENCE OF SERIOUS INFECTIOUS DISEASES, SUCH AS RECURRENCE OF SEVERE
ACUTE RESPIRATORY SYNDROME (SARS) CAUSING WIDESPREAD PUBLIC HEALTH PROBLEMS,
COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS
A renewed outbreak of SARS or other widespread public health problems in China,
where all of our revenue is derived, and in Hainan, where our operations are
headquartered, could have a negative effect on our operations. Our operations
may be impacted by a number of public health-related factors, including the
following:
o quarantines or closures of our factories or subsidiaries which would
severely disrupt its operations;
15
o the sickness or death of key officers and employees; and
o general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public health
problems could adversely affect our business and results of operations.
WE ARE SUBJECT TO THE ENVIRONMENTAL PROTECTION LAWS OF THE PRC
Our manufacturing process may produce by-products such as effluent, gases and
noise, which are harmful to the environment. We are subject to multiple laws
governing environmental protection, such as "The Law on Environmental Protection
in the PRC" and "The Law on Prevention of Effluent Pollution in the PRC," as
well as standards set by the relevant governmental authorities determining the
classification of different wastes and proper disposal. We have properly
attained a waste disposal permit for our manufacturing facility, which details
the types and concentration of effluents and gases allowed for disposal. The
temporary waste disposal permit will expire on September 28, 2009. We are
responsible for the renewal of the waste disposal permit. There is no assurance
that we will obtain the renewal of the waste disposal permit when the current
permit expires.
China is experiencing substantial problems with environmental pollution.
Accordingly, it is likely that the national, provincial and local governmental
agencies will adopt stricter pollution controls. There can be no assurance that
future changes in environmental laws and regulations will not impose costly
compliance requirements on us or otherwise subject us to future liabilities. Our
business's profitability may be adversely affected if additional or modified
environmental control regulations are imposed upon us.
RECENT PRC REGULATIONS RELATING TO ACQUISITIONS OF PRC COMPANIES BY FOREIGN
ENTITIES MAY LIMIT OUR ABILITY TO ACQUIRE PRC COMPANIES AND ADVERSELY AFFECT THE
IMPLEMENTATION OF OUR STRATEGY AS WELL AS OUR BUSINESS AND PROSPECTS
The PRC State Administration of Foreign Exchange or SAFE issued a pubic notice
in October 2005 ("Decree No. 75"), requiring PRC residents and PRC corporate
entities to register with and obtain approvals from competent local SAFE branch
in connection with their direct or indirect offshore investment activities.
Decree No. 75 requires registration by March 31, 2006 of direct or indirect
investments previously made by PRC residents in offshore companies prior to the
implementation of Decree No. 75 on November 1, 2005. If a PRC shareholder with a
direct or indirect stake in an offshore parent company fails to make the
required SAFE registration, the PRC subsidiaries of such offshore parent company
may be prohibited from making distributions of profit to the offshore parent and
from paying the offshore parent proceeds from any reduction in capital, share
transfer or liquidation in respect of the PRC subsidiaries. Furthermore, failure
to comply with the various SAFE registration requirements described above could
result in liability under PRC laws for foreign exchange evasion.
16
In addition, SAFE issued updated internal implementing rules ("Implementing
Rules") in relation to Decree No. 75. The Implementing Rules were promulgated
and became effective on May 29, 2007. Such Implementing Rules provide more
detailed provisions and requirements regarding the overseas investment foreign
exchange registration procedures. For an offshore special purpose company which
was established and owned the onshore assets or equity interests before the
implementation date of the Decree No. 75, a retroactive SAFE registration
requirement is repeated.
Due to the lack of official interpretation, some of the terms and provisions of
the Decree No. 75 and the Implementing Rules remain unclear, and the
implementation of the Decree No. 75 by central SAFE and local SAFE branches has
been inconsistent since its adoption. Therefore, we cannot predict how Decree
No. 75 will affect our business operations or future strategies. For example,
our present and prospective PRC subsidiaries' ability to conduct foreign
exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with the Decree
No. 75 by our PRC resident shareholders. In addition, such PRC residents may not
always be able to complete registration procedures required by the Decree No.
75. We also have little control over either our present or prospective direct or
indirect shareholders or the outcome of such registration procedures. A failure
by our PRC resident shareholders or future PRC resident shareholders to comply
with the Decree No. 75, if SAFE requires it, could subject us to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit
our subsidiary's ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and prospects.
On August 8, 2006, six PRC regulatory agencies, including the Chinese Securities
Regulatory Commission, or CSRC, promulgated a regulation (the "M&A Regulation")
which became effective on September 8, 2006. This regulation, among other
things, has some provisions that purport to require that an offshore special
purpose vehicle, or SPV, formed for listing purposes and controlled directly or
indirectly by PRC companies or individuals shall obtain the approval of the CSRC
prior to the listing and trading of such SPV's securities on an overseas stock
exchange.
There are, however, substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations, including the New M&A
Rule. Accordingly, the Company cannot assure you that PRC government authorities
will not ultimately take a view contrary to the Company's understanding that it
does not need the CSRC approval, and PRC government authorities may impose some
additional approvals and requirements. Therefore, we cannot predict how the M&A
Regulation will affect our business operations or future strategy. If the CSRC
requires that we obtain its approval, we may be unable to obtain a waiver of the
CSRC approval requirements, if and when procedures are established to obtain
such a waiver. Any uncertainties and/or negative publicity regarding this CSRC
approval requirement could have a material adverse effect on the trading price
of our common stocks.
17
RISKS RELATED TO OUR COMMON STOCK
---------------------------------
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE VOLATILE WHICH COULD RESULT IN A
COMPLETE LOSS OF YOUR INVESTMENT
The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following:
o actual or anticipated fluctuations in our quarterly operating results,
o announcements of new products by us or our competitors,
o changes in financial estimates by securities analysts,
o conditions in the pharmaceutical market,
o changes in the economic performance or market valuations of other
companies involved in pharmaceutical production,
o announcements by our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments,
o additions or departures of key personnel, or
o potential litigation.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
THE OUTSTANDING WARRANTS MAY ADVERSELY AFFECT US IN THE FUTURE AND CAUSE
DILUTION TO EXISTING SHAREHOLDERS
We currently have warrants outstanding to purchase up to 2,952,941 shares of our
common stock. Exercise of the warrants may cause dilution in the interests of
other shareholders as a result of the additional common stock that would be
issued upon exercise. In addition, sales of the shares of our common stock
issuable upon exercise of the warrants could have a depressive effect on the
price of our stock, particularly if there is not a coinciding increase in demand
by purchasers of our common stock. Further, the terms on which we may obtain
additional financing during the period any of the warrants remain outstanding
may be adversely affected by the existence of these warrants as well.
WE MAY ISSUE ADDITIONAL SHARES OF OUR CAPITAL STOCK TO RAISE ADDITIONAL CASH FOR
WORKING CAPITAL; IF WE ISSUE ADDITIONAL SHARES OF OUR CAPITAL STOCK, OUR
STOCKHOLDERS WILL EXPERIENCE DILUTION IN THEIR RESPECTIVE PERCENTAGE OWNERSHIP
IN THE COMPANY
We may issue additional shares of our capital stock to raise additional cash for
working capital. There is no anti-dilution protection or preemptive rights in
connection with our common stock. Thus, the percentage ownership of existing
holders of common stock may be diluted in their respective percentage ownership
in us if we issue additional shares of our capital stock.
18
A LARGE PORTION OF OUR COMMON STOCK IS CONTROLLED BY A SMALL NUMBER OF
STOCKHOLDERS AND AS A RESULT, THESE STOCKHOLDERS ARE ABLE TO INFLUENCE AND
ULTIMATELY CONTROL THE OUTCOME OF STOCKHOLDER VOTES ON VARIOUS MATTERS
A large portion of our common stock is held by a small number of stockholders.
For instance, Heung Mei Tsui holds 25.57% and Zhilin Li holds 23.65% of the
Company's common stock, respectively, as of the date of this Prospectus. As a
result, these two stockholders are able to influence and ultimately control the
outcome of stockholder votes on various matters, including the election of
directors and other corporate transactions including business combinations. In
addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock
price and could impair our ability to obtain capital through an offering of
equity securities. Furthermore, the current ratios of ownership of our common
stock reduce the public float and liquidity of our common stock which can in
turn affect the market price of our common stock.
THERE IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK WHICH MAY MAKE
IT DIFFICULT TO SELL SHARES OF OUR COMMON STOCK
Our common stock is currently traded in the over-the-counter market through the
Over-the-Counter Bulletin Board ("OTC Bulletin Board"). The quotation of our
shares on the OTC Bulletin Board may result in a less liquid market available
for our existing and potential stockholders to trade shares of our common stock,
could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the future. While there is an
active trading market for our common stock, it is small. Further, there can be
no assurance that an active trading market will be maintained. We cannot assure
you that our common stock will ever be included for trading on any stock
exchange or through any other quotation system (including, without limitation,
the NASDAQ Stock Market).
WE ARE LIKELY TO REMAIN SUBJECT TO "PENNY STOCK" REGULATIONS AND AS A
CONSEQUENCE THERE ARE ADDITIONAL SALES PRACTICE REQUIREMENTS AND ADDITIONAL
WARNINGS ISSUED BY THE SEC
As long as the trading price of our common stock is below $5.00 per share, the
open-market trading of our common stock will be subject to the "penny stock"
rules of the SEC. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
19
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability of broker-dealers to sell the
common stock and may affect a stockholder's ability to resell the common stock.
There can be no assurance that our common stock will qualify for exemption from
the "penny stock" rules. In any event, even if our common stock is exempt from
such rules, we would remain subject to Section 15(b)(6) of the Exchange Act,
which gives the SEC the authority to restrict any person from participating in a
distribution of a "penny stock" if the SEC finds that such a restriction would
be in the public interest.
Stockholders should be aware that, according to SEC Release No. 34-29093, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include (i) control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differential and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market.
WE ARE RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS UNDER
CERTAIN CIRCUMSTANCES WHICH COULD RESULT IN SUBSTANTIAL EXPENDITURES, WHICH WE
MAY BE UNABLE TO RECOUP
Our Restated and Amended Bylaws provide for the indemnification of our
directors, officers, employees, and agents, under certain circumstances, against
attorney's fees and other expenses incurred by them in any litigation to which
they become a party arising from their association with or activities on behalf
of us. This indemnification policy could result in substantial expenditures,
which we may be unable to recoup.
COMPLIANCE WITH THE SARBANES-OXLEY ACT COULD COST HUNDREDS OF THOUSANDS OF
DOLLARS, REQUIRE ADDITIONAL PERSONNEL AND REQUIRE HUNDREDS OF MAN HOURS OF
EFFORT, AND THERE CAN BE NO ASSURANCE THAT WE WILL HAVE THE PERSONNEL, FINANCIAL
RESOURCES OR EXPERTISE TO COMPLY WITH THESE REGULATIONS
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted
rules requiring public companies to include a report of management on the
Company's internal controls over financial reporting in their annual reports.
Our management has identified significant deficiencies in our internal control
over financial reporting as of December 31, 2007. Our management concluded that
those internal control deficiencies result in a material weakness. The
identified weakness did not result in material adjustments to our 2007 financial
statements. However, an uncured weakness could negatively impact our financial
statements for subsequent years. We cannot be certain that we will be able to
successfully complete the procedures, certification and attestation requirements
of Section 404 of the Sarbanes-Oxley Act, or that our auditors will not have to
20
report a material weakness in conjuction with the presentation of our financial
statements. If we fail to comply with the requirements of Section 404 or if our
auditors report such material weakness, the accuracy and timeliness of our
annual report may be materially adversely affected and could cause investors to
lose confidence in our reported financial information.
OUR HOLDING COMPANY STRUCTURE MAY LIMIT THE PAYMENT OF DIVIDENDS
We have no direct business operations, other than the 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, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions as discussed below. PRC regulations currently permit the
payment of dividends only out of accumulated profits as determined in accordance
with PRC accounting standards and regulations. Our subsidiary in China is also
required to set aside a portion of its after tax profits according to PRC
accounting standards and regulations to fund certain reserve funds. Currently,
our subsidiary in China is the only source of revenues or investment holdings
for the payment of dividends. If it does not accumulate sufficient profits under
PRC accounting standards and regulations to first fund certain reserve funds as
required by PRC accounting standards, we will be unable to pay any dividends.
USE OF PROCEEDS
This Prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. To the extent
the warrants are exercised on a cash basis, we will receive the exercise price
of those warrants. We intend to use such proceeds received from the exercise of
the warrants, if any, for working capital and general corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTCBB under the symbol "CPHI.OB". The
following table sets forth the price representing the range of high and low
sales prices for our common stock as reported on the OTCBB for the periods
indicated below. The quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not represent actual transactions.
21
Quarter Ended High Low
--------------------- --------------- -------------
2008
--------------------- --------------- -------------
1st Quarter $3.09 $2.07
--------------------- --------------- -------------
2007
--------------------- --------------- -------------
4th Quarter $4.17 $1.95
--------------------- --------------- -------------
3rd Quarter $1.80 $1.35
--------------------- --------------- -------------
2nd Quarter $2.17 $1.64
--------------------- --------------- -------------
1st Quarter $2.28 $1.60
--------------------- --------------- -------------
2006
--------------------- --------------- -------------
4th Quarter $2.35 $1.30
--------------------- --------------- -------------
3rd Quarter $1.60 $1.07
--------------------- --------------- -------------
2nd Quarter $1.70 $1.15
--------------------- --------------- -------------
1st Quarter $2.05 $1.05
--------------------- --------------- -------------
As of June 27, 2008, the closing price of our common stock on the OTCBB was
$2.02. As of June 23, 2008, the stockholders' list for our common stock showed
171 registered shareholders of record, which figure does not take into account
those stockholders whose certificates are held in the name of broker-dealers or
other nominees.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
The following discussion of China Pharma Holdings, Inc.'s ("China Pharma")
financial condition and results of operations should be read in conjunction with
its financial statements and the related notes, and the other financial
information included elsewhere in this Current Report.
This filing contains forward-looking statements. The words "anticipated,"
"believe," "expect", "plan," "intend," "seek," "estimate," "project," "could,"
"may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect China Pharma management's current views with respect to
future events and financial performance and involve risks and uncertainties,
including, without limitation, general economic and business conditions, changes
in foreign, political, social, and economic conditions, regulatory initiatives
and compliance with governmental regulations, the ability to achieve further
market penetration and additional customers, and various other matters, many of
which are beyond China Pharma's control. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove to be incorrect,
actual results may vary materially and adversely from those anticipated,
believed, estimated or otherwise indicated. Consequently, all of the
forward-looking statements made in this filing are qualified by these cautionary
statements and there can be no assurance of the actual results or developments.
22
China Pharma Holdings, Inc. is a specialty bio-pharmaceutical company with
Scalable Good Manufacturing Practice ("GMP") certified manufacturing facilities.
We currently have eight different production lines which develop, manufacture,
and market Western and Chinese medicines. Over the years we have developed a
wide distribution network, a professional marketing team, and strong research
and development ("R&D") capabilities. We have a portfolio of therapeutics that
target: central nervous system ("CNS"), cardiovascular, wound recovery, and
infectious diseases. Our therapeutics has a targeted market segment, both
current and future, which covers a large patient population. We also have a
highly professional and experienced management team.
Strong Revenue Growth and High Margins -We have experienced a compound annual
growth rate of over 80% in sales of our therapeutics since 2003. In the three
months ended March 31, 2008, we generated $11.72 million revenue, an increase of
61.98%, or $4.48 million, from sales of $7.23 million in the three months ended
March 31, 2007. We achieved a gross margin of49.56% in the first quarter of
2008, while in the first quarter of 2007, the gross margin was 45.60%, which is
above the industry average gross margin of 34.2%. We are able to compete in the
highly fragmented pharmaceutical industry through our diversified therapeutics
line, cost control and strong sales network. Our experienced management team,
market insights and strong R&D capabilities enable us to develop and launch new
and improved generic products based on market demand.
Proven Record of Success - We have a proven track record of success. We have a
porfolio of over 30 specifications of drugs that focus on the treatment of: CNS,
cardiovascular, cerebrovascular, and infectious diseases. Among these
specifications two are market leaders: FGF and Buflomedil hydrochloride. We were
awarded the "National Key New Product" by the Ministry of Science and Technology
of the PRC with the State Administration of Taxation, Ministry of Commerce of
the PRC, General Administration of Quality Supervision, Inspection and
Quarantine of the PRC, and State Environmental Protection Administration of
China. We are a profitable company with a low cost, high margin business model.
We are seeing a quick growth in sales with a constant growth in income, due to
our focus on the largest segment of China's pharmaceutical market. We have eight
different types of modern production lines with capacity to meet future demands.
Clear Strategy for Growth - We are part of a rapidly growing industry, in which
we are the leader in generic drugs. We have created a competitive advantage
through a segmented therapeutics line designed to target specific patient
groups. Our R&D is guided by the market and we target name brand drugs and new
generic drugs in China. The R&D covers a variety of diseases, but focuses on
high incidence and high mortality diseases in China, which need more effective
treatment. In an attempt to remain a leading player in the market, we target
off-patent drugs or drugs about to be off-patent with cumulative global sales of
over $1 billion. Through September 2007, we have 10 drugs on track to launch,
including a new anti-drug-resistance antibiotic which has already entered the
SFDA technical evaluation. We also have three drugs which are waiting for the
SFDA's production approval. Bumetanide received SFDA production approval in
January 2008. It is estimated that all therapeutic products currently pending
approval will contribute to the revenue.
23
I. Summary
During the three months ended March 31, 2008, we maintained steady and speedy
growth and excellent financial performance. Revenue has increased 61.98%, gross
profit 76.04%, net income 76.52% and EPS 72.06%, compared to the three months
ended March 31, 2007. For the three months ended March 31, 2008, our total
revenue reached $11.72 million, an increase of 61.98% from $7.23 million in the
three months ended March 31, 2007. This growth is attributable to the
development of existing products and strengthening our marketing with new
products which were launched after late 2006. This is in line with our strategy
of launching new products while expanding into the several competitive
pharmaceutical markets domestically.
Our financial performance for the first quarter of 2008 has an obvious growth
compared to the first quarter of 2007. We have seen an increase in gross profit
of 76.04% to $5.81 million. Net income, without consideration of foreign
currency translation adjustment, has increased by 76.52% to $ 4.19 million in
the first quarter of 2008. This is the result of the development of the new
products and additional marketing activities.
For the three months ended March 31, 2008, EPS increased by 72.06%, reaching
$0.11 compared to $0.07 for the three months ended March 31, 2007. We are
working closely with various pharmaceutical research institutions to develop
more functional products to meet the customers' needs. Our focus is to create a
steady increase in revenue. We have seen in the past that the key to our success
is to maximize the possibilities of health care industry.
We also have adopted a modern enterprise system to enhance internal control over
accounting and reporting. In the near future, we will build up more systematic
and continuous internal control procedures for the long-term development and the
benefit of our shareholders and prospective investors.
II. Business Overview
We are primarily engaged in the research, development, manufacturing, and
marketing of pharmaceutical and nutritional supplements. During 2007, we
launched two new products, Alginic Sodium Diester and Granisetron hydrochloride.
And we are planning to launch a new product, Bumetanide in 2008.
We plan to expand our biotechnology product series. Based on the foundation
established by some of our widely recognized medicine labels such as
Neurotrophicpeptide, we have launched and will continue to launch a variety of
biological medicines, including the injected hepatocyte growth-promoting
factors, which are expected to fuel additional growth beyond that of
Neurotrophicpeptide.
One of our products, Buflomedil Hydrochloride (which includes the raw material,
injectable product and tablet form) has received the following recognitions,
awards and designations:
o The key technology project in Hainan in 2003 by Haikou Municipality.
24
o 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.
o The "Best Commercialized Technology" award in Hainan in 2004 by Hainan
Scientific and Technological Result Examination Committee.
In 2003, we attained GMP authentication and the award of "Best Enterprise for
Supporting SARS Medicine" awarded by Hainan Food and Drug Administration. Our
products have been distributed and sold to more than 29 provinces,
sovereignties, and autonomous regions around China. We have 16 sales offices and
approximately 680 proxy agents throughout the PRC. The main channels we use to
deliver our products are as follows: (1) Distribution system (Proxy Agents); (2)
Direct sale system to hospitals; (3) Distribution of products to end-market
through local medical companies.
Onny Investment Limited was incorporated in the British Virgin Islands on
January 12, 2005 and was a development stage enterprise through June 15, 2005.
On June 16, 2005, Onny acquired all of the outstanding shares of Hainan Helpson
Medical & Biotechnology Co., Ltd, a privately held Chinese joint venture
(Helpson) and emerged from the development stage. On October 19, 2005, Onny was
reorganized as a wholly owned subsidiary of China Pharma Holdings, Inc. formerly
TS Electronics, Inc. (the Company).
Additionally, on February 1, 2007, we fulfilled a fund raising equity offering
of units priced at $1.70 each consisting of one share of common stock and a
warrant to purchase one-half of a share of common stock at an exercise price of
$2.38 per share. We received gross proceeds in the aggregate amount of
$4,259,900. The net proceeds, after deducting the related offering expenses of
$462,717 amounted to $3,797,183. In total, we issued 2,505,882 shares of common
stock and issued three-year warrants to purchase an aggregate of 1,252,941
shares of common stock to 17 accredited investors. In December 2007, we received
proceeds of $119,000 upon the exercise of warrants to purchase 50,000 shares of
common stock. The remaining warrants issued in conjunction with the offering to
buy 1,202,941 shares of common stock have not been exercised at December 31,
2007.
III. Trend in the Market.
Studies show that due to the expansion and aging of the world's population, an
increasing number of people have age-related diseases, such as cancer,
Alzheimer's disease, diabetes, and rheumatoid arthritis. These diseases have
already become prevalent, particularly in developed areas. In a growing and
aging population, people need to find more effective methods of treatment.
Patient empowerment has been a factor in high-quality healthcare. Many are
better informed about the importance of health issues and medical advancement.
Naturally, people today are demanding greater care and access to the latest
medical procedures and medicines.
25
We view this market trend as an opportunity. However, the best way to take
advantage of this opportunity is to identify our business risks beforehand.
Generally speaking, there are three aspects of risks:
o External Risk
In recent years, the Chinese medical system has been reformed, resulting in the
State Department's establishment of a basic medical insurance system for
employees. Considering the social environment and the governmental policy in the
pharmaceutical industry in PRC, a large increase in sales can be expected due to
local government involvement in the industry. Competition will also be strong
across the industry overall. Currently, our existing products are competitive in
the market and possess growth potential. However, from a long-term perspective,
some major western medicine producers are also seeking Chinese market share.
This will present us with strong competition in the natural medicine market
sector.
o Operation Risk
One of the major uncertainties in our industry is the purchase of raw materials.
Raw materials are primarily affected by the geographical, island environment of
Hainan Province. Because of high transportation costs and the need to guarantee
production supply requirements, we have to store large amounts of inventory to
maintain consistent production levels. In addition, partial raw materials need
to be specially ordered which further increases the need to store inventory.
Finally, due to the increasing sales, we must store a large volume of finished
product and packaging material.
o Foreign Currency Risk
Substantially all of our operations are conducted in the PRC. Our sales and
purchases are conducted within the PRC in Chinese Renminbi. As a result, the
effect of the exchange rate fluctuation would inevitably be considered to be
material to our business operations.
All of our revenues and expenses are accounted for in Renminbi. But we use the
United States dollar ("USD") for financial reporting purposes. Conversion of
Renminbi into foreign currencies is regulated by the People's Bank of China
through a unified floating exchange rate system. Although the PRC government has
stated its intention to support the value of the Renminbi ("RMB"), there could
be no assurance that such exchange rate will not become volatile again or that
the USD will not devalue significantly against the Renminbi. Exchange rate
fluctuations may adversely affect the value, in USD terms, of our net assets and
income derived from its operations in the PRC.
IV. Analysis of financial performance for the three months ended March 31, 2008
26
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months ended March 31,
Percentage Percentage Growth
2008 of Revenue 2007 of Revenue Rate
---------------- ------------- ----------------- ------------- ------------
Revenue $ 11,717,045 100.00% $ 7,233,768 100.00% 61.98%
Cost of revenue 5,909,768 50.44% 3,934,849 54.40% 50.19%
---------------- -----------------
Gross profit 5,807,277 49.56% 3,298,919 45.60% 76.04%
---------------- -----------------
Operating expenses:
Selling expenses 337,792 2.88% 147,883 2.04% 128.42%
General and administrative 815,793 6.96% 1,306,086 18.06% -37.54%
---------------- -----------------
Total operating expenses 1,153,585 9.85% 1,453,969 20.10% -20.66%
---------------- -----------------
Income from operations 4,653,692 39.72% 1,844,950 25.50% 152.24%
---------------- -----------------
Non-operating income (expenses):
Interest income - 13,775 0.19% -100.00%
Interest expense (45,273) -0.39% (56,899) -0.79% -20.43%
Other income - 572,213 7.91% -100.00%
---------------- -----------------
Total non-operating income (45,273) -0.39% 529,089 7.31% -108.56%
(expense) ---------------- -----------------
Income before taxes 4,608,419 39.33% 2,374,039 32.82% 94.12%
Income tax expense 417,878 3.57% -
---------------- -----------------
Net income $ 4,190,541 35.76% $ 2,374,039 32.82% 76.52%
---------------- -----------------
Comprehensive income - foreign
currency translation adjustments 1,745,242 14.89% 216,416 2.99% 706.43%
---------------- -----------------
Comprehensive income $ 5,935,783 50.66% $ 2,590,455 35.81% 129.14%
---------------- -----------------
Basic and Diluted Earnings Per
Share $ 0.112 $ 0.065 72.06%
---------------- -----------------
Basic and Diluted Weighted
Average Shares Outstanding 37,278,938 36,337,958
---------------- -----------------
27
Revenues
Revenue for the three months ended March 31, 2008 is approximately $11.72
million or an increase of 61.98% compared to $7.23 million of the fist quarter
of 2007. This dramatic improvement in revenue is due to the following elements:
on the demand side, in addition to the strong Chinese economy, the demands for
medicine are increasing; on the supply side, our output has been expanded to
meet the increased market demands. We are increasing our marketing efforts for
our products and have widened our distribution channels. Our older products have
been well-accepted by customers. In the first quarter of 2008, Pusen OK
contributed approximately $1.89 million of our revenue, which was 16.17% of the
total net revenues, an increase of 99% or $941 thousand when compared to the
same period of 2007. The growth is mainly due to a $5.6 million contract from a
major distributor at the beginning of 2008. Also, we broadened our market
channels and because of the severe snow storms that hit central and south China
from middle January 2008, there was a dramatic increase of flu, cerebrovascular
and cardiovascular diseases. Pusen Ok is used to temporarily relieve runny nose,
watery eyes, fever, headache, soar throat, pain of arthritis, and muscular
arches. In the first quarter of 2008, sales from one of our other older
products, aFGF, reached $1.34 million, an increase of 35%, compared to $1
million of the first quarter of 2007.
Some of the other older products that have greatly increased in the three months
ended March 31, 2008 are: Buflomedil Hydrochloride with an increase of 197.77%,
Gastrodin with an increase of 69.97%, Cefaclor with an increase of 63.86%,
Neurotrophicpetide with an increase of 53.95%, and Andrographolide with an
increase of 23.09%. Products which had been introduced in 2006 are now in the
mature stage. Revenues from these products launched in 2006 contributed
approximately $2.12 million to the total increase of revenues for this period,
among which, Ozagrel contributed approximately $865 thousand. Finally, the new
products that have been introduced last year contributed approximately $1.25
million to the total increase in revenues this year, among which Granisetron
hydrochloride contributed $759 thousand, and Alginic Sodium Diester contributed
$500 thousand to the total increase.
Cost of Revenue
Cost of revenue for the three months ended March 31, 2008 was approximately
$5.91 million, which was 50.44% of revenue for the same period. The cost for the
three months ended March 31, 2007 was $3.93 million, which is an increase of
$1.97 million or 50.19%, this was primarily due to the increase in sales volume
this year.
Gross Profit
The gross margin for the first quarter of 2008 has reached 49.56%, gross profit
for the three months ended March 31, 2008 has reached approximately $5.80
million, which has increased by about $2.51 million or 76.04%, when compared to
the three months ended March 31, 2007 to $3.30 million, the gross margin is
45.60%. The improved profit was due to the substantial increase in revenues and
reduce in product expenses in this period.
Selling Expenses
28
Selling expenses for the three months ended March 31, 2008 have increased to
about $338 thousand or 2.88% of the total revenue, which is an increase of
128.42% from $147 thousand or 2.04% of the total revenue for the three months as
of March 31, 2007. Due to our attempt to broaden our market share further, we
have invested heavily in the marketing of our products, which has increased
traveling expenses, office expenses and salaries.
General & Administrative Expenses
General and administrative expenses incurred in the three months ended March 31,
2008 are about $816 thousand which represents approximately 6.96% of the total
revenue. G&A expense has decreased by $490,293, or 37.54% as compared to the
three months ended March 31, 2007. This was mainly due to the improvement on
accounts receivable collection, lower allowance for doubtful account compared to
the same period in 2007, and the amount of salaries, legal services, accounting
services, and investment consulting services. We have also seen an increase in
intangible assets, which has increased amortization expense.
Income from Operations
Income from operations has increased by approximately $2.81 million to
approximately $4.65 million, which is an increase of 152.24% from the three
months ended March 31, 2007. This is a combined result of the increase in sales
and reduction in general and administrative expenses.
Interest Expense
Interest expense has decreased by $11,626 or 20.43% to $45,273 ended March 31,
2008. This is due to the payment of the money borrowed from the former
shareholders.
Income Tax Expense
We have accrued $ 417,878 income tax, or 3.57% of revenue in this quarter. We
have been granted a "tax holiday" granting a favorable rate of 50% of the tax
rates in effect during fiscal 2008 through 2010 as determined by the PRC
government and the regional tax authorities. This year we accrue our tax at the
rate of 9%.
Net Income
The net income as of March 31 2008 has increased by 1.82 million or 76.52% to
$4.19 million, compared to $2.37million for the corresponding period of 2007.
There are two reasons that contributed to the growth. One is the increase of
revenue and gross profit, the other is the decrease of G&A expense.
29
V. Analysis of financial performance for the three months ended March 31, 2008
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months
ended March 31,
--------------------------
2008 2007
----------- -----------
(RESTATED)
Cash Flows from Operating Activities:
Net income $ 4,190,541 $ 2,374,039
Depreciation and amortization 162,779 100,063
Gain on sale of intangibles -- (569,398)
Changes in assets and liabilities:
Trade accounts receivable (5,343,190) (1,728,236)
Other receivables (44,977) (739,783)
Advances to suppliers 1,275,939 (1,095,219)
Inventory 234,072 (1,092,813)
Deferred offering costs -- 59,743
Trade accounts payable 275,053 247,713
Accrued expenses (7,001) 27,960
Accrued taxes payable 738,767 78,756
Other payables (46,030) 88,814
Advances from customers 85,325 6,571
----------- -----------
Net Cash from Operating Activities 1,521,278 (2,241,790)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (6,994) (2,360)
Proceeds from the sale of intangibles -- 38,453
Purchase of intangible assets (418,079) --
Advances for purchase of intangible assets (1,918,791) 836,404
----------- -----------
Net Cash from Investing Activities (2,343,864) 872,497
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants -- 3,797,183
Payments of short term notes payable (376,271) --
Related party payables/receivables -- (138,860)
----------- -----------
Net Cash from Financing Activities (376,271) 3,658,323
----------- -----------
Effect of Exchange Rate Changes on Cash 50,539 5,247
----------- -----------
Net Change in Cash (1,148,318) 2,294,277
----------- -----------
Cash and Cash Equivalents at Beginning of Period 1,830,335 656,441
----------- -----------
Cash and Cash Equivalents at End of Period $ 682,017 $ 2,950,718
----------- -----------
30
As of March 31, 2008, the cash and cash equivalents balance reached $682,017, or
1.35% of total assets, while the amount was $2,950,719 or 8.36% of total assets
for the three months ended March 31, 2007.
Net cash from operating activities has increased by $ 3,763,068 or 167.86% to
$1,521,278 in the three months ended March 31, 2008, compared to negative
$2,241,790 during the same time in the prior year. This improvement came from
the increased net income, and an improvement on collection of trade accounts
receivables.
Cash outflows from investing activities were $2,343,864 as of March 31 2008.
This is due to the purchase of intangible assets and fixed assets which cost the
company $418,079 and $6,994 respectively, as well as advances for purchase of
intangibles in the amount of $1,918,791.
Cash used in financing activities were $376,271 for the first quarter ended
March 31 2008. The main reason is that the note to former shareholders of $376,
271 was paid off. For the same time for 2007, the cash from financing activities
was $3,658,323; this is due to the completion of an offering priced at $1.70 per
unit consisting of one share of common stock and a warrant to purchase one-half
of a share of common stock at an exercise price of $2.38 per share. We received
gross proceeds in the aggregate amount of $4,259,900. The net proceeds, after
deduction of related offering expenses of $462,717 amounted to $3,797,183. We
issued an aggregate of 2,505,882 shares of common stock and issued three-year
warrants to purchase an aggregate of 1,252,941 shares of common stock to 17
accredited investors. In December 2007, we received proceeds of $119,000 upon
the exercise of warrants to purchase 50,000 shares of common stock. The
remaining warrants issued in conjunction with the offering to buy 1,202,941
shares of common stock have not been exercised at December 31, 2007.
VII. Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements.
VIII. Recently Enacted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2
which extended the effective date for certain nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15, 2008. The
Company does not expect the adoption of SFAS No. 157 to have a material impact
on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
31
Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect the
adoption of SFAS No. 159 to have a material impact on our consolidated financial
statements.
In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue No.
07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to be
Used in Future Research and Development Activities", ("EITF 07-3") which is
effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires
that nonrefundable advance payments for future research and development
activities be deferred and capitalized. Such amounts will be recognized as an
expense as the goods are delivered or the related services are performed. EITF
07-3 is not expected to have a material impact on our results of operations or
financial position.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statement. SFAS
No. 141(R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. SFAS No. 160 clarifies that a
non-controlling interest in a subsidiary should be reported as equity in the
consolidated financial statements, consolidated net income shall be adjusted to
include the net income attributed to the non-controlling interest and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. The Company has not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities to require enhanced
disclosures concerning the manner in which an entity uses derivatives (and the
reasons it uses them), the manner in which derivatives and related hedged items
are accounted for under SFAS No. 133 and interpretations thereof, and the
effects that derivatives and related hedged items have on an entity's financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
financial statements of fiscal years and interim periods beginning after
November 15, 2008. The Company has not yet determined the effects on its
consolidated financial statements, if any, that may result upon the adoption of
SFAS 161.
IX. Conclusion
The overall performance during the three months ended March 31, 2008 was
outstanding. Revenue has increased by 61.98%, gross profit by 76.04%, net income
by 76.52% and EPS by 72.06%, compared to the three months ended March 31, 2007.
32
In order to maintain our growth and profitability in the future, we must
continue to focus our efforts on marketing and R&D. By distributing our product
to a larger and more varied customer base, we will organically increase revenue
and through massive R&D investment, we will increase our product line.
BUSINESS
Principal Products and Services
Helpson's primary business is medical research and development, manufacturing
and sales of medicines. Helpson manufactures and sells the following categories
of products: western medicine, biomedicine, traditional Chinese medicine and
nutritional supplements.
At present, Helpson is manufacturing 17 kinds of medicines in total. We received
new medicine certifications for the following five kinds of medicines:
Naproxen Sodium and Pseudophedrine Hydrochloride Sustained Release Tablets: to
temporarily relieve cold, sinus and flu symptoms, blocked nose caused by
anaphylaxis rhinitis, runny nose, fever, sore throat, symptoms of myalgia in the
limbs and pain around the joints.
Bumetanide for Injection: a diuretics drug used for the treatment of various
edema diseases (including those associated with heart failure, hepatic
cirrhosis, nephropathy, and pulmonary edema and etc.), hypertension, and for the
treatment and prevention of acute renal failure, hyperkalemia, hypercalcemia and
for the rescue of acute drug poisoning.
Buflomedil Hydrochloride: used for the treatment of peripheral blood vessel
diseases, including intermission claudication, renaud syndrome and blood vessel
convulsion.
Cefaclor Dispersible Tablets: a cephalosporin antibiotic drug used for the
treatment of tympanitis, lower respiratory tract infection, urinary tract
infections (UTI) and skin/skin tissue infection.
Roxithromycin Dispersible Tablet: a macrolide antibiotic used for the treatment
of pharyngitis and tonsillitis caused by Streptococcus pyogenes; sinusitis,
tympanitis, acute and chronic bronchitis caused by acute bacteria, Mycoplasma
pneumonia and Chlamydia pneumoniae; urethritis and cervical infection caused by
Chlamydia trachomatis (CT); skin soft tissue infection caused by sensitive
bacteria.
Helpson is manufacturing the following medicines in addition to the medicines
listed above:
Gastrodin Injection: used in case of the following symptoms: tiredness, loss of
concentration, poor sleep, (the "declined spirit" syndrome), and for traumatic
syndromes of the brain; vertigo; neuralgia; headaches etc.
Hepatocyte Growth-promoting Factor for Injection: used to treat serious viral
hepatitis symptoms caused by various viral hepatitis types (acute, subnormal
33
temperature, chronic serious disease early or middle period of hepatitis)
Propylgallate for Injection: used for preventing and treating cerebral
thrombosis, coronary heart disease, and complication after the surgery-thrombus
deep phlebitis, etc.
Ozagrel Sodium for Injection: used to treat acute thrombus brain infarction and
brain sport obstacle infarction.
Alginic Sodium Diester Injection: used in ischemic heart disease,
cerebrovascular diseases (cerebral thrombosis, cerebral embolism, coronary heart
disease, etc.) and high lipoprotein blood disease.
Granisetron Hydrochloride Injection: indicated to reduce the symptom of nausea
and vomiting caused by radiotherapy and chemotherapy during the treatment of
malignant tumors.
Cerebroprotein Hydroloysate Injection: indicated for the treatment of memory
decline and attention deficit disorder (ADD) caused by the sequela of
craniocerebral trauma and cerebrovascular diseases.
Clarithromycin: a macrolide antibiotic drug for the treatment of nasopharynx
infection, lower respiratory tract infection, skin tissue infection, acute
tympanitis and mycoplasma pneumonia caused by clarithromycin susceptible
organisms; urethritis and cervical infection caused by chlamydia trachomatis
(CT); and the treatment of legionella infection, mycobacterium avium complex
(MAC) infection and helicobacter pylori infection.
Anhydroandrographolide: used for clearing away heat and detoxify, as an
antibacterial and to diminish inflammation; used in upper respiratory infection,
bacillary diarrhea.
Vitamin B6 for Injection: vitamin supplement.
Thymopolypetides Injection: used for treating various primary or recurring T
cell defective diseases, autoimmune diseases, to assist in the treatment of
diseases and tumors of various cells with reduced immunological function.
Cefalexin Capsules: suitable for acute tonsillitis caused by sensitive fungi,
airway infections, such as pharyngitis, otitis media, nasal sinusitis,
bronchitis; pneumonia, respiratory tract infection, urinary tract infections and
skin soft tissue infections etc.
In addition, Helpson's products include a Recombined Human Fibroblast Growth
Factor (rhaFGF), which is used as a raw material for cosmetics and has the
function of wound repairing, including skin injury caused by ultraviolet light,
acne, desquamation and redness after skin replacement, skin injury caused by
alpha hydroxyl acid, skin injury of the deep layer after grazing, and other skin
injuries.
As of May 31, 2008, there are nine drugs in different stages of research and
development. Among them, one innovative anti-resistant antibiotic is undergoing
technical examination by the SFDA. In addition, we are waiting for the SFDA
34
approval of the production of three other drugs.
Due to the nature of the biotechnology and pharmaceutical industries, Helpson
continually strives to change its product portfolio to respond to changes in
market demand. Helpson also plans to expand its biotechnology product series.
Based on the foundation established by some of Helpson's widely recognized
medicine labels such as Neurotrophicpeptide, Helpson has launched and will
continue to launch a variety of biological medicine, including the injected
hepatocyte growth-promoting factors, which are expected to fuel additional
growth beyond that of Neurotrophicpeptide.
Helpson adjusts the delivery system and marketing for each of its products based
on the product's target patient group. Maintaining a variety of delivery systems
(e.g. tablet, injection, powder, etc.) targeted for different groups enhances
Helpson's competitive position in the market. Helpson's present types of
delivery include covered tablet, capsule, troche, oral fluid, injection, frozen
powder, acicula, and germ-free powder acicula.
Positioned in a rapidly growing industry, Helpson has leading generic drugs and
continuously improving sales results. It possesses new competitive advantages
through segmented pipelines designed for the specific target patient groups. Its
products are aimed at treating a variety of prevailing diseases in China,
including neurology, cardiovascular and cerebrovascular diseases, diabetes and
infectious diseases. We are market-oriented in the process of research and
development of new medicines, focusing on innovative medicines with great market
potential and brand generic drugs developed in China. To be a leading player in
the market, we aim at international generic drugs whose patent expires or is to
expire with a sales amount of over $1 billion. Our R&D is concentrated on high
incidence and high mortality diseases which need more effective treatments.
We are able to compete in the highly fragmented pharmaceutical industry through
its diversified pipeline, cost control and strong sales network. Our experienced
management team, market insights and strong R&D capacity enable us to develop
and launch new and improved generic products based on market demand. We are also
able to provide its therapeutic in a variety of delivery mechanisms such as
covered tablet, capsule, oral fluid, injections, frozen powder.
Principal Markets
The principal markets of Helpson lie within China. With approximately one-fifth
of the world's population and a fast-growing gross domestic product, China
presents significant potential for the pharmaceutical industry. According to the
Freedonia Group, pharmaceutical demand in China reached RMB198.0 billion ($25.4
billion) in 2005, representing a growth of 12.1% annually since 2000. The
Freedonia Group expects the total pharmaceutical expenditure in China to grow at
13.6% annually between 2005 and 2010. Such growth rate is significantly higher
as compared to the rest of the world, where growth of the pharmaceutical
industry is projected to be at a compound annual growth rate of 5.0% to 8.0%
between 2004 and 2009 according to IMS Health. The overall production of Chinese
pharmaceutical industry is expected to reach RMB 740 billion to RMB 760 billion
in 2008, increasing by 20% compared to the previous year. (Source:
http://www.chinapharm.com.cn)
35
PricewaterhouseCoopers ("PWC") predicted that China will become the world's
fifth largest pharmaceutical market in 2010 and the largest pharmaceutical
market by 2050. (http://www.jlccd.gov.cn/info/readinfo.cgi?1414092252754364) The
growth is driven by increased income levels, overall improvement of life quality
and the consumer's desire for improved healthcare. In addition, the broader
coverage of healthcare and the increasing aging population contribute to the
increased demand for pharmaceutical products. Patients' choices of drugs depends
on the affordability of and access to medicines. The Chinese government's
increased spending on the rural market is another driving force of our future
development.
Distribution
As of May 31, 2008, Helpson's products were sold in more than 29 provinces,
sovereignties and autonomous regions in China. Helpson has 16 sales offices and
approximately 680 sales agents throughout China.
Helpson has widespread distribution networks and professional sales team.
Helpson delivers its products to clinical hospitals and terminal markets through
local pharmaceutical trading companies with Good Supply Practice Certifications.
Industry Background and Competition
The pharmaceutical industry's primary categories include chemical medicine,
traditional Chinese medicinal material, traditional Chinese medicinal film,
prepared Chinese herbal medicine, antibiotics, biological products, biological
medicine, radioactive medicine, medical appliances, sanitation materials,
pharmaceutical machinery, medical packaging and trading.
Competition in the pharmaceutical industry is reduced by barriers to entry. A
company wishing to enter into the industry must comply with the standards and
regulations set forth by the government. In the PRC, the State Food and Drug
Administration of China (the "SFDA") is the authority that monitors and
supervises the administration of the pharmaceutical industry including
pharmaceutical products, medical appliances, and equipment. Pharmaceutical
manufacturing enterprises must obtain a Pharmaceutical Manufacturing Enterprise
Permit issued by the relevant pharmaceutical administrative authorities and
relevant health departments at the provincial level where the enterprise is
located. Furthermore, all pharmaceutical products produced in the PRC, with the
exception of Chinese herbal medicines in soluble form, must bear a registered
number approved by the appropriate governmental authorities in the PRC. Lastly,
in accordance with the World Health Organization, the PRC now requires
compliance with GMP standards in pharmaceutical production in order to minimize
the risks involved in any pharmaceutical production that cannot be eliminated
through testing final products. As the regulatory approval process becomes more
stringent, it also increases the barriers to entering the market.
Due to the variety of consumer demands within the pharmaceutical market,
pharmaceutical companies have relatively dispersed product lines. We have
formulated the following development strategies: (1) to be market-oriented, to
take advantage of our R&D capacities and to take technology and products as our
36
strategic focus; (2) to launch seven to ten new medicines and one brand medicine
in the next three years; (3) to provide more effective methods to treat patients
by developing innovative medicines; (4) to enlarge market shares by establishing
new sales channels and expanding current sales channels; (5) to launch leading
generic drugs and innovative drugs with an aggregate sales of $ 1 billion in the
world.
Description of Property
Helpson owns a factory with a floor area of 663.94 square meters located at the
East Wing, 6/F, 5 Jianshe Road, Jinpan Industrial Development Zone, Haikou.
Helpson also owns the land use rights to another 31,050 square meters located at
plot C09-2, Hainan Bonded Zone, Haikou. Helpson built a factory with a floor
area of approximately 7,300 square meters on this parcel.
In addition, Helpson entered into a lease agreement with Hainan Zhongfu
Going-abroad Personnel Service Center ("Zhongfu"), under which Helpson rented
the offices located at 2/F, Jiahai Building owned by Zhongfu as its principal
executive offices. The term of the lease is 10 years, from November 21, 2000 to
November 20, 2010.
Intellectual Property
Helpson owns the following 17 registered trademarks: Funalin, Fukexing, Beisha,
Shiduotai, Xinuo, Pusenlitai, Pusenouke, Shuchang, Shenkaineng, an AFGF logo, an
HPS logo, two HELPSON logos, as well as four other logos. The registration
numbers of the 17 registered trademarks are as follows: No.1280259, No.1500459,
No.1511770, No.1535416, No.1537828, No.1535420, No.1272792, No.1272759,
No.1272760, No.1330294, No.1327731, No.1330295, No.1476339 and No.3993785, No.
4074317, No.4074321 and No. 4315247.
In addition, Helpson has applied for registration of five other trademarks used
in connection with western medicine, raw material medicine, Chinese herbal
medicine and medicine injections. Helpson has obtained five acceptance notices
of trademark registration application, and the application numbers are as
follows: No.4074320, No.4074314, No.4075447, No.4074322 and No.4074316.
Employees
As of May 31, 2008, Helpson had 310 employees in total.
Government Regulation
The following is a summary of the principal governmental laws and regulations
that are or may be applicable to pharmaceutical manufacturing companies like
Helpson in China. The scope and enforcement of many of the laws and regulations
described below are uncertain. We cannot predict the effect of further
developments in the Chinese legal system, including the promulgation of new
laws, changes to existing laws, or the interpretation or enforcement of laws.
37
Drug Administration Law of the PRC was promulgated by the Standing Committee of
National People's Congress on February 28, 2001 and effective as of December 1,
2001, and its implemental rules were promulgated by the State Council on August
4, 2004 and effective as of September 15, 2002. According to Drug Administration
Law of the PRC and its implemental rules, a pharmaceutical manufacturer shall
obtain Pharmaceutical Manufacturing Permit and the Drug Approval Number for each
manufactured medicine from relevant SFDA's provincial branch, which are valid
for five years and are renewable upon application before expiration.
Administration Regulations for Drug Registration was promulgated by the SFDA on
July 10, 2007, and was effective as of October 1, 2007. Administration
Regulations for Drug Registration specifies the requirements and procedures of
obtaining a Drug Approval Number for new drug, including the requirements for
clinical trial of new drugs, procedures of registering imported medicines and
report and approval procedures of generic medicines.
Good Manufacturing Practices (GMP) for Pharmaceutical Products, as revised in
1998 was promulgated by the SFDA on June 18, 1999 and became effective as of
August 1, 1999, and the Authentication Regulations for Drug GMP was promulgated
by the SFDA on September 7, 2005 and became effective on October 1, 2005. A
pharmaceutical manufacturer must meet the GMP standards and obtain the GMP
Certificate with a five-year validity period from SFDA. Before the GMP
Certification expires, the pharmaceutical manufacturer must apply again and
complete the relevant procedures, which may take about 120 working days, to
obtain a new GMP Certificate. On October 24, 2007, the SFDA issued the new
guideline for authentication standards of GMP, effective as of January 1, 2008.
The new guideline may result in a rise of cost for a pharmaceutical manufacturer
to meet the new standards so as to maintain the GMP qualification. If a
pharmaceutical manufacturer fails to obtain or maintain GMP Certification and
still carries on its production, it will be fined and the Pharmaceutical
Manufacturing Permit may be revoked under serious circumstances.
Supervision Administration Regulations for Drug Distribution was promulgated by
the SFDA on January 31, 2007 and effective as of May 1, 2007. According to
Supervision Administration Regulations for Drug Distribution, a pharmaceutical
manufacturer can only sell drugs produced by itself, and it shall not sell drugs
produced by other manufacturers or produced by itself but for commissioning
manufacturing purpose.
Regulations for Drug Advertisement Censoring was promulgated by the SFDA and
State Administration for Industry and Commerce (the "SAIC") on March 13, 2007
and effective as of May 1, 2007. Standards for Drug Advertisement Censoring and
Publication promulgated by the SFDA and the SAIC on March 3, 2007 and effective
as of May 1, 2007. According to Regulations for Drug Advertisement Censoring, a
pharmaceutical manufacturer must obtain a Drug Advertisement Approval Number
from the provincial branch of the SFDA which is valid for a period of one year
if the drug advertisement describes the functions or benefits of a drug.
However, if an over-the-counter drug advertisement in any media, or a
prescription drug advertisement in professional medical magazine, only refers to
the name of the drug, including the general name and commercial name, without
any other addition promotional information, the advertisement does not need to
be censored or approved.
38
Legal Proceedings
We have no pending legal proceedings. From time to time, we may be involved in
various claims, lawsuits, disputes with third parties, and actions involving
allegations of breach of contract or product liability actions incidental to the
normal business operations.
MANAGEMENT
The following table sets forth the names of all of our current directors and
executive officers.
--------------------------------------------------------------------------------
Name Age Position
--------------------------------------------------------------------------------
Zhilin Li 55 Director, President and Chief Executive Officer
--------------------------------------------------------------------------------
Xinhua Wu 45 Director and Chief Financial Officer
--------------------------------------------------------------------------------
Gene Michael Bennett 60 Independent Director
--------------------------------------------------------------------------------
Yingwen Zhang 63 Independent Director
--------------------------------------------------------------------------------
Baowen Dong 67 Independent Director
--------------------------------------------------------------------------------
Jian Yang 53 Secretary
--------------------------------------------------------------------------------
Ms. Zhilin Li: Ms. Li is the director, President and Chief Executive Officer
("CEO") of the Company. She is a founder of Helpson, and has served as chairman
and CEO of Helpson since 1993. Ms. Li was formerly the president of Haikou
Bio-engineering Institute, and the vice president of the Sichuan Institute of
Biology. She graduated from Sichuan University, where she majored in biology,
and later became an instructor.
Mr. Xinhua Wu: Mr. Wu is the director and Chief Financial Officer ("CFO") of the
Company. He has acted as CFO of Helpson since his employment in 1999. Mr. Wu
served as CFO and assistant to the CEO at Hainan Guobang Enterprises Inc., where
he was employed from 1992 to 1999. Mr. Wu graduated from the University of Wales
with an MBA degree and Jiangxi Financial College with a Bachelor of Science
degree in Finance.
Mr. Gene Michael Bennett: Mr. Bennett has served as a member of our board of
directors as an independent director since February 1, 2008. Mr. Bennett is
presently a partner of Beijing Nexis Investment Consulting Corporation which
provides management consulting services to Chinese companies. From 2000 to 2004,
he acted as partner of ProCFO Company. Prior to that, he served as CFO and a
Board Member in Argonaut Computers. Mr. Bennett worked as professor of
accounting, taxation and auditing at several universities including California
State University, Chapman University, University of Hawaii and Chaminade
University. Mr. Bennett is a graduate of Michigan State University and Michigan
39
University. He is also a Doctor of Business Administration (DBA) candidate in
Corporate Governance at City University of Hong Kong.
Mr. Yingwen Zhang: Mr. Zhang has served as a member of our board of directors as
an independent director since February 1, 2008. Mr. Zhang graduated from
Department of Chemical Engineering, Tianjin University in 1967. He worked as the
CEO of Sinopec Sichuan Vinylon Works from 1983 to 1988 and worked as the
director of Sichuan Foreign Trade and Economic Cooperation Bureau (The Bureau of
Commerce of Sichuan Province) from December 1988 to April 2000. Since then, he
has acted as the Economic and Commercial Counselor's Office of the Embassy of
the People's Republic of China in Malaysia. Mr. Zhang currently is the member of
the 9th Chinese People's Political Consultative Conference (CPPCC).
Mr. Baowen Dong: Mr. Dong has served as a member of our board of directors as an
independent director since February 1, 2008. Mr. Dong graduated from Xi'an
University of Science and Technology in 1966. He is the professor, researcher,
director of the staff room, and the department head in Sichuan University since
1974. He is also an expert member of the Sichuan University Teaching Evaluation
Council since August 2001.
Ms. Jian Yang: Ms. Yang has been the Secretary of the Company since October 19,
2005. She is a founder and director of Helpson. Ms. Yang was a technician at the
Sichuan Institute of Biology in 1990 and vice president of Haikou Biomedicine
Engineering Co., Ltd. in 1991. Ms. Yang obtained her MBA degree at the
University of Wales, England.
Board Composition and Committees
Since February 1, 2008, the board of directors has been composed of Zhilin Li,
Xinhua Wu, Gene Michael Bennett, Yingwen Zhang and Baowen Dong. All board
actions require the approval of a majority of the directors in attendance at a
meeting at which a quorum is present.
Gene Michael Bennett, Yingwen Zhang and Baowen Dong have served on the Audit
Committee since February 1, 2008. Mr. Bennett, the Chairman of the Audit
Committee, is a financial expert serving on the Audit Committee. The board of
directors has adopted an Audit Committee Charter specifying the authorities and
responsibilities of the Audit Committee.
We currently have no Nomination Committee, Compensation Committee, or any other
committees; therefore, the board will act in the capacity of the absent
committees.
Disclosure of Commission Position of Indemnification for Securities and
Liabilities
Our Amended and Restated Certificate of Incorporation, with certain exceptions,
eliminate any personal liability of directors or officers to us or our
stockholders for monetary damages for the breach of such person's fiduciary duty
to the extent permitted by law. We have also adopted Amended and Restated Bylaws
which provide for indemnification to the full extent permitted under the law
which includes all liability, damages, costs, or expenses arising from or in
40
connection with service for, employment by, or other affiliation with us to the
maximum extent and under all circumstances permitted by law.
There are presently no material pending legal proceeding to which any of our
directors, officers, or employee is a party. There is no pending litigation or
legal proceeding involving one of our directors, officers, employees or other
agents as to which indemnification is being sought, and we are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director, officer, employee or other agent.
To the extent provisions of our Amended and Restated Certificate of
Incorporation and our Amended and Restated Bylaws provide for indemnification of
directors for liabilities arising under the Securities Act or the Exchange Act,
those provisions are, in the opinion of the Securities and Exchange Commission,
against public policy and therefore are unenforceable.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics to provide guiding
principles to all of our employees. Our Code of Business Conduct and Ethics does
not cover every issue that may arise, but it sets out basic principles to guide
our employees and provides that all of our employees must conduct themselves
accordingly and seek to avoid even the appearance of improper behavior. Any
employee which violates our Code of Business Conduct and Ethics will be subject
to disciplinary action, up to an including termination of his or her employment.
Generally, our Code of Business Conduct and Ethics provides guidelines
regarding:
o compliance with laws, rules and regulations,
o conflicts of interest,
o insider trading,
o corporate opportunities,
o competition and fair dealing,
o discrimination and harassment,
o health and safety,
o record keeping,
o confidentiality,
o protection and proper use of company assets,
o payments to government personnel,
o waivers of the Code of Business Conduct and Ethics,
o reporting any illegal or unethical behavior, and
o compliance procedures.
In addition, we have also adopted a Code of Ethics for our Chief Executive
Officer and senior financial officers. In addition to our Code of Business
Conduct and Ethics, our CEO and senior financial officers are also subject to
specific policies regarding:
o disclosures made in our filings with the SEC,
o deficiencies in internal controls or fraud involving management or other
employees who have a significant role in our financial reporting,
disclosure or internal controls,
41
o conflicts of interests, and
o knowledge of material violations of securities or other laws, rules or
regulations to which we are subject. A copy of our Code of Business Conduct
and Ethics has been filed with the Securities and Exchange Commission as an
exhibit to the registration statement of which this prospectus is a part.
DIRECTOR AND EXECUTIVE COMPENSATION
No cash compensation was paid to our directors for services as a director during
the fiscal year ended December 31, 2007. We have no standard arrangement
pursuant to which our internal directors are compensated for their services in
their capacity as directors. The board of directors may award special
remuneration to any director undertaking any special services on behalf of our
company other than services ordinarily required of a director. All authorized
out-of-pocket expenses incurred by a director on our behalf will be subject to
reimbursement upon our receipt of required supporting document of such expenses.
No internal director received and/or accrued any compensation for his services
as a director, including committee participation and/or special assignments.
Our three independent directors are entitled to the following compensation: Mr.
Bennett's compensation consists of $16,000 per year, payable quarterly within 5
days of the start of the quarter, and 5,000 warrants of common stock with an
exercise price of $3.32 per share; Mr. Zhang and Mr. Dong are each entitled to
RMB40,000 annually, payable quarterly within 5 days of the start of the quarter.
The following table provides compensation information for the period indicated
with respect to the person who served as our president for the years ended
December 31, 2007 and 2006 (collectively, the "Named Executive Officers"). No
other executive officers received compensation in excess of $100,000 during the
fiscal years ended December 31, 2007 and 2006.
SUMMARY COMPENSATION TABLE
-------------------------------------------------------- ------------------------------------------- ---------------
Long Term Compensation
-------------------------------------------------------- ------------------------------------------- ---------------
Annual Compensation Awards Payouts
------------------- ------ ----------------------------- ------------------------------ ------------ ---------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Year Salary Bonus Other Annual Restricted Stock Securities LTIP All Other
Principal ($) ($) Compensation Awards ($) Under-lying Payouts Compensation ($)
Position Options/ ($)
SARs (#)
------------------- ------ ------- ------ -------------- ----------------- ------------ ------------ ---------------
(1) Zhilin Li 2007 0 0 0 0 0 0 0
Director, CEO and 2006 0 0 0 0 0 0 0
President
------------------- ------ ------- ------ -------------- ----------------- ------------ ------------ ---------------
(1) Zhilin Li has been our CEO and president since October 20, 2005. As of
January 20, 2006, Zhilin Li was elected as the director of the Company. Her
salary in the fiscal year ended December 31, 2007 has not been paid as of the
date of this Prospectus.
42
Stock Option Grants and Exercises
We currently have no option, retirement, pension, or profit sharing programs for
the benefit of the directors, officers or other employees, but the board of
directors may recommend adoption of one or more such programs in the future.
Employment, Severance and Change of Control Agreements
Ms. Zhilin Li entered into an Employment Agreement with Helpson, which provides
that Ms. Li is employed by Helpson to perform executive management. The term of
her employment is from July 1, 2005 to June 30, 2010. Her annual salary is
RMB800,000 or approximately $100,000. Mr. Xinhua Wu was employed by Helpson to
act as its CFO. The term of his employment is from July 1, 2005 to June 30,
2010. His annual salary is RMB500,000 or approximately $62,500. Ms. Jian Yang
was employed by Helpson to act as its Deputy General Manager. The term of her
employment is from July 1, 2005 to June 30, 2010. Her annual salary is
RMB500,000 or approximately $62,500.
Ms. Zhilin Li was paid RMB 150,000 as the compensation for acting as the
Company's director, CEO and president during the fiscal year ended June 30,
2005. Mr. Xinhua Wu and Ms. Jian Yang received no compensation for acting as
officers during the fiscal year ended June 30, 2005. Ms. Zhilin Li, Mr. Xinhua
Wu and Ms. Jian Yang have not received any compensation for acting as officers
during the fiscal years ended December 31, 2006 and December 31, 2007 as of the
date of this Prospectus.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with respect to
the beneficial ownership of our common stock as of June 27, 2008 and (i) all
persons who are known to us to be beneficial owners of five percent or more of
the common stock, (ii) each of our Directors, and (iii) all current Directors
and executive officers as a group.
43
SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER (1) OWNED CLASS OWNED
Named Executive Officers
and Directors
Zhilin Li 10,000,000 23.65%
Beneficial Owners of Five
Percent or More
Heung Mei Tsui 10,812,651 25.57%
Jian Yang 2,278,815 5.39%
Total Shares Owned by 23,091,466 54.62%
Persons Named Above
(1) The address of Ms. Li and Ms. Tsui is 2nd Floor, No.17, Jinpan Road, Haikou,
Hainan Province, China. The address of Ms. Yang is 1 Haoyuan ST, RM 5B, Blog 7,
Asia Luxury Garden, Haikou, Hainan Province, China.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities.
Unless otherwise indicated by footnote, the persons named in the table have sole
voting and sole investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to the applicable community
property laws. Percentage of beneficial ownership is based on 42,278,938 shares
of our common stock outstanding as of June 27, 2008.
SELLING SECURITY HOLDERS
We have prepared this Prospectus to allow the selling stockholders or their
pledgees, donees, transferees or other successors in interest, to sell up to
6,450,000 shares of our common stock. All of the common stock offered by this
Prospectus is being offered by the selling stockholders for their own accounts.
The following tables set forth:
o the name of the selling stockholders,
o the number of shares of our common stock that the selling stockholders
beneficially owned prior to the offering for resale of the shares under
this Prospectus,
o the number of shares of our common stock that may be offered for resale for
the account of the selling stockholders under this prospectus, and
44
o the number and percentage of shares of our common stock to be beneficially
owned by the selling stockholders after the offering of the resale shares
(assuming all of the offered resale shares are sold by the selling
stockholders).
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to outstanding voting
securities, as well as any voting securities which the person has the right to
acquire within 60 days, through the conversion or exercise of any security or
other right. The information as to the number of shares of our common stock
owned by each selling security holder is based upon our books and records and
the information provided by our transfer agent.
We may amend or supplement this prospectus, from time to time, to update the
disclosure set forth in the table. Because the selling security holders
identified in the table may sell some or all of the shares owned by them which
are included in this prospectus, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares, no
estimate can be given as to the number of shares available for resale hereby
that will be held by the selling security holders upon termination of this
offering. We have, therefore, assumed for the purposes of the following table,
that the selling security holders will sell all of the shares owned beneficially
by them, which are covered by this prospectus, but will not sell any other
shares of our common stock that they presently own.
-------------------------------------- ----------------------- -------------------- -------------------------
Number of Shares of Number of Shares Shares of Common Stock
Name Common Stock Offered Pursuant Beneficially Owned
Beneficially Owned to this Prospectus After the Offering *
Prior to the Offering
-------------------------------------- ----------------------- -------------------- -------------------------
Number Percent
-------------------------------------- ----------------------- -------------------- ------------- -----------
-------------------------------------- ----------------------- -------------------- ------------- -----------
Pope Investments LLC (1) 2,500,000 2,500,000 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Guerrilla Partners, LP (2) 609,375 609,375 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Hua-Mei 21st Century Partners, LP (3) 937,500 937,500 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Guerrilla IRA Partners, LP (4) 15,625 15,625 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Lake Street Fund, L.P. (5) 781,250 781,250 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Gregory Cook Wedbush Morgan Sec Inc. 15,625 15,625 0 0%
CTDN/ IRA Contributory 1/16/02 (6)
-------------------------------------- ----------------------- -------------------- ------------- -----------
Fred L. Astman Wedbush Securities
Inc Cust/ IRA R/O Holding 10/13/92 375,000 375,000 0 0%
(7)
-------------------------------------- ----------------------- -------------------- ------------- -----------
Joseph Anthony Cardaropoli Wedbush
Morgan Securities CTDN/ IRA Rollover 15,625 15,625 0 0%
1/12/06 (8)
-------------------------------------- ----------------------- -------------------- ------------- -----------
John Peter Selda Wedbush Morgan
Securities Inc. CTDN/ IRA 62,500 62,500 0 0%
Contributory 08/27/96 (9)
-------------------------------------- ----------------------- -------------------- ------------- -----------
Heller Capital Investments, LLC (10) 250,000 250,000 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Chestnut Ridge Partners, LP (11) 187,500 187,500 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
45
Kensington Partners, L.P. (12) 178,125 178,125 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Bald Eagle Fund, Ltd. (13) 9,375 9,375 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Straus Partners, L.P. (14) 112,500 112,500 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Straus-GEPT Partners, L.P. (15) 75,000 75,000 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Sandor Capital Master Fund, L.P. (16) 62,500 62,500 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
MidSouth Investor Fund LP (17) 62,500 62,500 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
FirsTrust Group, Inc. (18) 150,000 150,000 0 0%
-------------------------------------- ----------------------- -------------------- ------------- -----------
Hayden Communications International, 50,000 50,000 0 0%
Inc. (19)
-------------------------------------- ----------------------- -------------------- ------------- -----------
TOTAL SHARES OFFERED 6,450,000 6,450,000
-------------------------------------- ----------------------- -------------------- ------------- -----------
* Assumes that all shares of common stock registered will be sold and that
all shares of common stock underlying warrants will be issued and sold.
(1) Includes (a) 2,000,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 500,000 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. William P. Wells has the voting and investment
powers over the shares held by Pope Investments LLC.
(2) Includes (a) 487,500 shares of our common stock purchased in the 2008
Private Placement; and (b) 121,875 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Peter Siris and Leigh S. Curry have the voting
and investment powers over Guerrilla Partners, LP.
(3) Includes (a) 750,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 187,500 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Peter Siris and Leigh S. Curry have the voting
and investment powers over Hua-Mei 21st Century Partners, LP.
(4) Includes (a) 12,500 shares of our common stock purchased in the 2008
Private Placement; and (b) 3,125 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Peter Siris and Leigh S. Curry have the voting
and investment powers over Curry Guerrilla IRA Partners, LP.
(5) Includes (a) 625,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 156,250 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Scott W. Hood and Fred Astman have shared
voting and investment powers over Lake Street Fund, L.P.
(6) Includes (a) 12,500 shares of our common stock purchased in the 2008
Private Placement; and (b) 3,125 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Gregory Cook has the voting and investment
powers over shares held by Gregory Cook Wedbush Morgan Sec Inc. CTDN/ IRA
Contributory 1/16/02.
(7) Includes (a) 300,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 75,000 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Fred L. Astman has the voting and investment
powers over shares held by Fred L. Astman Wedbush Securities Inc Cust/ IRA
R/O Holding 10/13/92.
(8) Includes (a) 12,500 shares of our common stock purchased in the 2008
Private Placement; and (b) 3,125 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Joseph Anthony Cardaropoli has the voting and
investment powers over shares held by Joseph Anthony Cardaropoli Wedbush
Morgan Securities CTDN/ IRA Rollover 1/12/06.
(9) Includes (a) 50,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 12,500 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. John Peter Selda has the voting and investment
powers over shares held by John Peter Selda Wedbush Morgan Securities Inc.
CTDN/ IRA Contributory 08/27/96.
(10) Includes (a) 200,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 50,000 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Ronald I. Heller has the voting and investment
powers over shares held by Heller Capital Investments, LLC.
46
(11) Includes (a) 150,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 37,500 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Kenneth Pasternak has the voting and investment
powers over shares held by Chestnut Ridge Partners, LP.
(12) Includes (a) 142,500 shares of our common stock purchased in the 2008
Private Placement; and (b) 35,625 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Richard Keim has the voting and investment
powers over shares held by Kensington Partners, L.P.
(13) Includes (a) 7,500 shares of our common stock purchased in the 2008 Private
Placement; and (b) 1,875 shares of our common stock issuable upon exercise
of warrants with an exercise price of $2.80 per share purchased in our 2008
Private Placement. Richard Keim has the voting and investment powers over
shares held by Bald Eagle Fund, Ltd.
(14) Includes (a) 90,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 22,500 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Melville Straus has the voting and investment
powers over shares held by Straus Partners, L.P.
(15) Includes (a) 60,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 15,000 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Melville Straus has the voting and investment
powers over shares held by Straus-GEPT Partners, L.P.
(16) Includes (a) 50,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 12,500 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. John S. Lemak has the voting and investment
powers over shares held by Sandor Capital Master Fund, L.P.
(17) Includes (a) 50,000 shares of our common stock purchased in the 2008
Private Placement; and (b) 12,500 shares of our common stock issuable upon
exercise of warrants with an exercise price of $2.80 per share purchased in
our 2008 Private Placement. Lyman O. Heidtke has the voting and investment
powers over shares held by MidSouth Investor Fund LP.
(18) Includes (a) 75,000 shares of our common stock issuable upon exercise of
warrants with an exercise price of $2.80 per share and (b) 75,000 shares of
our common stock issuable upon exercise of warrants with an exercise price
of $3.60 per share. FirsTrust Group, Inc. received the warrants as part of
the compensation for the management consulting and advisory services
provided to us by its wholly owned subsidiary, FirsTrust China Ltd. Jian Ke
has the voting and investment powers over shares held by FirsTrust Group,
Inc.
(19) Includes (a) 25,000 shares of our common stock issuable upon exercise of
warrants with an exercise price of $3.00 per share and (b) 25,000 shares of
our common stock issuable upon exercise of warrants with an exercise price
of $3.50 per share. Hayden Communications International, Inc. received the
warrants as part of the compensation for its consulting services. Matthew
Hayden has the voting and investment powers over shares held by Hayden
Communications International, Inc.
None of the selling stockholders are broker-dealers or affiliates of
broker-dealers. None of the selling stockholders has, or within the past three
years has had, any position, office or other material relationship with us or
any of our predecessors or affiliates, other than as described previously in
this section.
We will not receive any proceeds from the resale of the common stock by the
selling stockholders. To the extent the warrants are exercised on a cash basis,
we will receive the exercise price of those warrants. We have agreed to bear
expenses incurred by the selling stockholders that relate to the registration of
shares being offered and sold by the selling stockholders, including the SEC
registration fee and legal, accounting, printing and other expenses of this
offering.
DESCRIPTION OF SECURITIES
The descriptions in this section and in other sections of this Prospectus of our
47
securities and various provisions of our Restated and Amended Certificate of
Incorporation and our Restated and Amended Bylaws are limited solely to
descriptions of the material terms of our securities, Articles of Incorporation
and Bylaws. Our Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws have been filed with the SEC as exhibits to our registration
statement of which this Prospectus forms a part.
Common Stock
The authorized capital stock of the Company consists of 60,000,000 shares of
common stock, $0.001 par value per share (the "Common Stock"). As of the date of
this Prospectus, approximately 42,278,938 shares of Common Stock were issued and
outstanding. The holders of our Common stock are entitled to equal dividends and
distributions per share with respect to the common stock when and if declared by
the Board of Directors from funds legally available therefore. No holder of any
shares of our Common stock has a preemptive right to subscribe for any of our
securities. Upon liquidation, dissolution, or winding up of us, and after
payment of creditors and preferred stockholders, the assets will be divided
pro-rata on a share-for-share basis among the holders of the shares of Common
Stock. All shares of Common Stock now outstanding are fully paid, validly
issued, and non-assessable.
Each share of Common Stock is entitled to one vote with respect to the election
of any director or any other matter upon which stockholders are required or
permitted to vote. Holders of the Common Stock do not have cumulative voting
rights, so the holders of more than 50% of the combined shares voting for the
election of directors may elect all of the directors if they choose to do so,
and, in that event, the holders of the remaining shares will not be able to
elect any members to the board of directors.
Warrants
In the 2007 Private Placement, we issued to 17 accredited investors three-year
warrants to purchase an aggregate of 1,252,941 shares of our common stock with
an exercise price of $2.38 per share. In December 2007, we received proceeds of
$119,000 upon the exercise of warrants to purchase 50,000 shares of common
stock. The remaining warrants issued in conjunction with the offering to buy
1,202,941 shares of common stock have not been exercised at December 31, 2007.
In the 2008 Private Placement, we issued to 17 accredited investors three-year
warrants to purchase an aggregate of 1,250,000 shares of our common stock with
an exercise price of $2.80 per share.
On June 24, 2008, the Company issued to FirsTrust Group, Inc. three-year
warrants to purchase 75,000 shares of the Company's common stock at $2.80 per
share and three-year warrants to purchase 75,000 shares of the Company's common
stock at $3.60 per share. The Company issued these warrants as equity
compensation under the Consulting Agreement and the Supplementary Agreement
entered into between the Company and FirsTrust China Ltd. (the wholly-owned
subsidiary of FirsTrust Group, Inc.).
48
On the same date, the Company issued to Hayden Communications International,
Inc. three-year warrants to purchase 25,000 shares of the Company's common stock
at $3.00 per share and three-year warrants to purchase 25,000 shares of the
Company's common stock at $3.50 per share. The Company issued these warrants as
equity compensation under the Investor Relations Consulting Agreement entered
into between the Company and Hayden Communications International, Inc.
Shares Eligible for Future Sale
On June 27, 2008, 42,278,938 shares of our common stock were outstanding. Of the
total outstanding shares, 10,384,351 shares of common stock are immediately
eligible for sale in the public market without restriction or further
registration under the Securities Act. All other outstanding shares of our
common stock are "restricted securities" as such term is defined under Rule 144,
in that such shares were issued in private transactions not involving a public
offering and may not be sold in the absence of registration other than in
accordance with Rules 144, 144(k), or 701 promulgated under the Securities Act
or another exemption from registration.
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of one percent
of the then outstanding shares of our common stock or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to various restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at
anytime during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate, such person's
holding period for the purpose of affecting a sale under Rule 144 commences on
the date of transfer from the affiliate.
Future Sales of substantial amounts of our common stock under Rule 144, this
Prospectus, or otherwise, could adversely affect the prevailing market price of
our common stock and could impair our ability to raise capital through the
future sale of our securities.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Securities Transfer
Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75234 and its
telephone number is 469.633.0100.
PLAN OF DISTRIBUTION
We are registering a total of 6,450,000 shares of our common stock, including
1,450,000 shares of common stock issuable upon exercise of outstanding warrants,
that are being offered by the selling stockholders. As used in this Prospectus,
"selling stockholders" includes the pledgees, donees, transferees or others who
may later hold the selling stockholders' interests in the common stock. We will
49
pay the costs and fees of registering the common shares, but the selling
stockholders will pay any brokerage commissions, discounts or other expenses
relating to the sale of the common stock. We will not receive the proceeds from
the sale of the common stock by the selling stockholders. We will, however,
receive proceeds from the exercise of warrants to purchase shares of common
stock.
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
- Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- Block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction;
- Purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
- An exchange distribution in accordance with the rules of the applicable
exchange;
- Privately negotiated transactions;
- Broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
- A combination of any such methods of sale; and
- Any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this Prospectus. Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock or warrants owned by them
and, if they default in the performance of their secured obligations, the
pledges, or secured parties may offer and sell the shares of common stock from
time to time under this Prospectus, or under an amendment to this Prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act,
amending the list of selling stockholders to include the pledgee, transferee, or
other successors in interest as selling stockholders under this Prospectus.
LEGAL MATTERS
The validity of the securities offered by this Prospectus will be passed upon
for us by King & Wood LLP.
50
EXPERTS
Our financial statements as of and for the years ended December 31, 2007 and
2006 included in this prospectus have been audited by Hansen, Barnett & Maxwell,
P.C., independent registered public accounting firm, as indicated in their
report with respect thereto, and have been so included in reliance upon the
report of such firm given on their authority as experts in accounting and
auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act in connection with the offering of the common stock by the
selling stockholders. This Prospectus, which is part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted and you should refer to the registration
statement and its exhibits. With respect to references made in this Prospectus
to any contract, agreement or other document of ours, such references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at 100 F Street N.E. Washington, D.C. 20549. Copies of such material
can be obtained from the Public Reference Section of the SEC at 100 F Street
N.E. Washington, D.C. 20549 at prescribed rates. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's internet website at http://www.sec.gov.
51
F-25
CHINA PHARMA HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Consolidated Balance Sheets for March 31, 2008 (Unaudited)
and December 31, 2007 (Restated) F-2
Consolidated Statements of Operations (Unaudited) for the Three Months
Ended March 31, 2008 and March 31, 2007 F-3
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2008 and March 31, 2007 F-4
Notes to Unaudited Consolidated Financial Statements F-5
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Report of Independent Registered Public Accounting Firm F-11
Consolidated Financial Statements:
Consolidated Balance Sheets F-12
Consolidated Statements of Operations F-13
Consolidated Statement of Stockholders' Equity F-14
Consolidated Statements of Cash Flows F-15
Notes to Consolidated Financial Statements F-16
F-1
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2008 2007
----------- -----------
(Restated)
ASSETS
Current Assets:
Cash and cash equivalents $ 682,017 $ 1,830,335
Trade accounts receivable, less allowance for doubtful
accounts of $3,019,930 and $2,440,852, respectively 24,804,992 18,572,976
Other receivables, less allowance for doubtful
accounts of $64,230 and $43,908, respectively 476,749 413,596
Advances to suppliers 1,568,111 2,757,320
Inventory 14,810,192 14,448,771
----------- -----------
Total Current Assets 42,342,061 38,022,998
----------- -----------
Non-current Assets:
Property and equipment, net of accumulated depreciation of
$1,150,987 and $1,003,802, respectively 2,636,030 2,625,216
Intangible assets, net of accumulated amortization of
$291,809 and $221,715, respectively 2,515,356 2,063,252
Advances for purchase of intangible assets 2,801,633 807,345
Deferred tax assets 195,303 187,509
----------- -----------
Total Non-current Assets 8,148,322 5,683,322
----------- -----------
TOTAL ASSETS $50,490,383 $43,706,320
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 590,722 $ 297,299
Accrued expenses 265,008 261,301
Accrued taxes payable 1,078,850 311,009
Other payables 42,521 86,161
Advances from customers 359,646 261,583
Short-term notes payable 2,420,894 2,693,428
----------- -----------
Total Current Liabilities 4,757,641 3,910,781
----------- -----------
Research and development commitments 35,601 34,181
----------- -----------
Total Liabilities 4,793,242 3,944,962
----------- -----------
Stockholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 37,278,938 shares issued and outstanding 37,279 37,279
Additional paid-in capital 11,678,606 11,678,606
Foreign currency translation adjustment 4,584,546 2,839,304
Retained earnings 29,396,710 25,206,169
----------- -----------
Total Stockholders' Equity 45,697,141 39,761,358
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,490,383 $43,706,320
----------- -----------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-2
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(unaudited)
For the three months
ended March 31,
2008 2007
------------ ------------
Revenue $ 11,717,045 $ 7,233,768
Cost of revenue 5,909,768 3,934,849
------------ ------------
Gross profit 5,807,277 3,298,919
------------ ------------
Operating expenses:
Selling expenses 337,792 147,883
General and administrative 815,793 1,306,086
------------ ------------
Total operating expenses 1,153,585 1,453,969
------------ ------------
Income from operations 4,653,692 1,844,950
------------ ------------
Non-operating income (expenses):
Interest income -- 13,775
Interest expense (45,273) (56,899)
Other income -- 572,213
------------ ------------
Total non-operating income (expense) (45,273) 529,089
------------ ------------
Income before taxes 4,608,419 2,374,039
Income tax expense 417,878 --
------------ ------------
Net income $ 4,190,541 $ 2,374,039
------------ ------------
Comprehensive income - foreign currency translation adjustments 1,745,242 216,416
------------ ------------
Comprehensive income $ 5,935,783 $ 2,590,455
------------ ------------
Basic and Diluted Earnings Per Share $ 0.11 $ 0.07
------------ ------------
Basic and Diluted Weighted Average Shares Outstanding 37,278,938 36,337,958
------------ ------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-3
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended March 31,
2008 2007
----------- -----------
(Restated)
Cash Flows from Operating Activities:
Net income $ 4,190,541 $ 2,374,039
Depreciation and amortization 162,779 100,063
Gain on sale of intangibles -- (569,398)
Changes in assets and liabilities:
Trade accounts receivable (5,343,190) (1,728,236)
Other receivables (44,977) (739,783)
Advances to suppliers 1,275,939 (1,095,219)
Inventory 234,072 (1,092,813)
Deferred offering costs -- 59,743
Trade accounts payable 275,053 247,713
Accrued expenses (7,001) 27,960
Accrued taxes payable 738,767 78,756
Other payables (46,030) 88,814
Advances from customers 85,325 6,571
----------- -----------
Net Cash from Operating Activities 1,521,278 (2,241,790)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (6,994) (2,360)
Proceeds from the sale of intangibles -- 38,453
Purchase of intangible assets (418,079) --
Advances for purchase of intangible assets (1,918,791) 836,404
----------- -----------
Net Cash from Investing Activities (2,343,864) 872,497
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants -- 3,797,183
Payments of short term notes payable (376,271) --
Related party payables/receivables -- (138,860)
----------- -----------
Net Cash from Financing Activities (376,271) 3,658,323
----------- -----------
Effect of Exchange Rate Changes on Cash 50,539 5,247
----------- -----------
Net Change in Cash (1,148,318) 2,294,277
----------- -----------
Cash and Cash Equivalents at Beginning of Period 1,830,335 656,441
----------- -----------
Cash and Cash Equivalents at End of Period $ 682,017 $ 2,950,718
----------- -----------
Supplemental Cash Flow Disclosure:
Cash paid for interest $ 83,515 $ 56,899
Cash paid for income taxes -- --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-4
CHINA PHARMA HOLDINGS, INC.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2008
(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 note 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-KSB report for the year ended December
31, 2007.
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 three months ended March 31, 2008 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2008.
Organization - Onny Investment Limited (Onny) was incorporated in the British
Virgin Islands on January 12, 2005 and was a development stage enterprise
through June 15, 2005. On June 16, 2005, Onny acquired all of the outstanding
shares of Hainan Helpson Medical & Biotechnology Co., Ltd, a privately held
Chinese joint venture (Helpson) and emerged from the development stage.
On October 19, 2005, Onny was reorganized as a wholly owned subsidiary of China
Pharma Holdings, Inc., formerly TS Electronics, Inc. (the Company).
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), through its marketing department located in Hainan
Province. There are also nine other offices, with sales representatives in other
provinces and cities throughout the PRC. Helpson's other operating activities
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
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. As of March 31, 2008 and 2007 potentially dilutive
securities includes warrants outstanding to purchase a total of 1,202,941 and
1,252,941 shares, respectively, of the Company's common stock at an exercise
price of $2.38 per share. These have not been included in the computation of
earnings per share as their effect is antidilutive.
F-5
Recently Enacted Accounting Standards - In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In February
2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which extended the
effective date for certain nonfinancial assets and nonfinancial liabilities to
fiscal years beginning after November 15, 2008. The adoption of the portions of
SFAS No. 157 that were not postponed by (FSP FIN) No. 157-2 did not have a
material impact on our consolidated financial statements. The Company does not
expect the adoption of the postponed portions of SFAS No. 157 to have a material
impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a non-controlling interest in a subsidiary should be reported as equity in
the consolidated financial statements, consolidated net income shall be adjusted
to include the net income attributed to the non-controlling interest and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. SFAS No. 141(R) and SFAS No. 160 are not expected to have a material
impact on our results of operations or financial position.
Restatement of Financial Statements - Subsequent to March 2008, the Company
realized that the December 31, 2007 consolidated financial statements needed to
be revised to correct an overstatement of advances paid to suppliers in the
amount of $724,628, an overstatement of other receivables in the amount of
$82,717, and an understatement of advance for purchase of intangible assets in
the amount of $807,345. The Company concluded that advances made for purchase of
intangible assets should be treated as a long-term asset. This correction was
not considered material in accordance with SAB 108 for the year ended December
31, 2007 but is considered significant. As a result, the Company corrected the
financial statements for December 31, 2007. The corrected consolidated balance
sheet is included in these financial statements. The correction of the December
31, 2007 financial statements had no effect on the previously reported net
income. The effect of the restatement was as follows:
F-6
Reported Restatement As Restated
------------ ------------ ------------
Consolidated Balance Sheet as of December 31, 2007
Other receivables $ 496,313 $ (82,717) $ 413,596
Advances to suppliers 3,481,948 (724,628) 2,757,320
Total Current Assets 38,830,343 (807,345) 38,022,998
Advances for purchase of intangible assets -- 807,345 807,345
------------ ------------ ------------
TOTAL ASSETS $ 43,706,320 $ -- $ 43,706,320
------------ ------------ ------------
Consolidated Statement of Cash Flows
For the year ended December 31, 2007
Other receivables $ (111,660) $ 79,426 $ (32,234)
Advances to suppliers (1,028,119) 853,332 (174,867)
Net Cash provided by Operating Activities 2,801,898 932,758 3,734,656
Advance for purchase of intangible assets -- (932,758) (932,758)
Net Cash used in Investing Activities (1,479,531) (932,758) (2,412,289)
------------ ------------ ------------
Net Change in Cash $ 1,173,894 $ -- $ 1,173,894
------------ ------------ ------------
NOTE 2 - INVENTORY
Inventory consisted of the following:
March 31, December 31,
2008 2007
----------- -----------
Raw materials $11,770,466 $12,521,536
Work in progress 62,915 60,404
Finished goods 2,976,811 1,866,831
----------- -----------
Total Inventory $14,810,192 $14,448,771
----------- -----------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31, December 31,
2008 2007
----------- -----------
Permit of land use $ 401,110 $ 385,102
Building 1,826,439 1,753,547
Plant, machinery and equipment 1,397,780 1,341,996
Motor vehicle 44,818 37,193
Office equipment 92,945 88,210
Construction in progress 23,925 22,970
----------- -----------
Total 3,787,017 3,629,018
Less: accumulated depreciation (1,150,987) (1,003,802)
----------- -----------
Property and Equipment, net $ 2,636,030 $ 2,625,216
----------- -----------
F-7
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets as follows:
Asset Life - years
----- ------------
Permit of land use 40 - 70
Building 20 - 35
Plant, machinery and equipment 10
Motor vehicle 5 - 10
Office equipment 5
For the three months ended March 31, 2008 and 2007, depreciation expense was
$103,203 and $93,307, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the costs on patents, trademarks, licenses,
techniques and formulas. Intangible assets have a weighted-average remaining
useful life of approximately 9.25 years. Amortization of intangible assets was
$59,576 and $6,756 for the three months ended March 31, 2008 and 2007,
respectively.
In January, 2007 the Company entered into an agreement to acquire a certain
pharmaceutical formula from an unrelated party for cash for an aggregate
purchase price of $427,217. This has been recorded under the caption Intangible
assets in the accompanying balance sheet as of March 31, 2008.
NOTE 5 - DEBT
Short Term Notes Payable -On July 13, 2007, the Company entered into a new line
of credit with the bank collateralized by certain land use rights, machinery and
equipment. The outstanding advances made under the line of credit were
$2,420,894 and $2,324,278 at March 31, 2008 and December 31, 2007, respectively.
The line of credit was renewed during the first quarter of 2008 with due dates
of August and September of 2008 and bears interest payable monthly at the rate
of 7.84%.
Short Term Notes Payable to Former Shareholders - In January 2006, the Company
converted its dividend payable of $4,402,147 into short-term notes bearing
interest at a rate of 2.25% per annum. The final principal balance of $369,150
was paid in January, 2008. The accrued interest of $215,933 is still outstanding
and is included in accrued liabilities.
NOTE 6 - INCOME TAXES
The Company accounts for its income taxes in accordance with SFAS No. 109, which
requires recognition of deferred tax 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.
Undistributed earnings of the Company's foreign subsidiary since acquisition
amounted to approximately $26 million at March 31, 2008. Those earnings, as well
as the investment in the subsidiaries of approximately $17 million are
considered to be indefinitely reinvested and, accordingly, no U.S. federal and
state income taxes have been provided thereon. Upon distribution of those
F-8
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the PRC. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practical because of the
complexities associated with its hypothetical calculation; however, unrecognized
foreign tax credits may be available to reduce a portion of the U.S. tax
liability.
On March 16, 2007, the National People's Congress of China passed the new
Enterprise Income Tax Law, (EIT Law), and on December 6, 2007, the State Council
of China issued the Implementation Regulations for the EIT Law which took effect
on January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
unified EIT of 25% on all domestic-invested enterprises and Foreign Invested
Entities, or FIEs, unless they qualify under certain limited exceptions.
The Company is located in a special region, which had a 15% corporate income tax
rate before the new EIT Law. The new EIT Law abolished the preferential
corporate income tax rate in the special region. However, because the Company
was in existence prior to the March 16, 2007 China tax law change, it will
gradually transit to the new 25% tax rate over the next five years starting on
January 1, 2008. The phase-in income tax rate is 18% for 2008, 20% for 2009, 22%
for 2010, 24% for 2011, and 25% for 2012 and after. Also, the Company is
permitted to use their remaining tax holiday, so they will continue to have a
favorable income tax rate of 50% in effect during fiscal 2008 through 2010 as
determined by the PRC government and the regional tax authorities.
As a result of the above changes, starting from 2008, the Company's enterprise
income tax rate will be:
Year Enterprise Income Tax Rate
---- --------------------------
2008 9%
2009 10%
2010 11%
2011 24%
2012 and after 25%
The Company has also incurred various other taxes, comprised primarily of
business taxes, value-added taxes, urban construction taxes, education
surcharges and others. Any unpaid amounts are reflected on the balance sheets as
accrued taxes payable.
NOTE 7 - STOCKHOLDERS' EQUITY
The Company has outstanding warrants to purchase an aggregate of 1,202,941
shares of Company's common stock at an exercise price of $2.38 per share which
expire on January 29, 2010.
NOTE 8 - 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 from operations 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.
F-9
In addition, all of the Company's revenue is denominated in the PRC's currency
of Renminbi (RMB), which must be converted into other currencies before
remittance out of the PRC. Both the conversion of RMB into foreign currencies
and the remittance of foreign currencies abroad require approval of the PRC
government.
NOTE 9 - SUBSEQUENT EVENTS
On May 30, 2008 the Company completed an offering of Units priced at $2.00 per
Unit consisting of one share of Company common stock and a three-year warrant to
purchase one-fourth of one share of Company common stock at an exercise price of
$2.80 per share. The Company issued 5,000,000 shares of common stock and
three-year warrants to purchase 1,250,000 shares of common stock to 17
accredited investors for gross proceeds of $10,000,000. The net proceeds, after
deduction of related offering expenses of $731,062, amounted to $9,268,938. In
addition, the placement agent in the transaction was issued three-year warrants
to purchase 300,000 shares of common stock at an exercise price of $2.98 per
share. The proceeds were allocated to the warrants issued to the investors and
the placement agent based upon their fair values of $1,090,342 and $249,366,
respectively and the balance of the proceeds of $8,952,511 was allocated to the
shares of common stock. The fair value of the warrants, determined using the
Black-Scholes Option Pricing Model, was calculated using the following
assumptions: risk free interest rate of 2.93%, expected dividend yield of 0%,
expected volatility of 62.9% and an expected life of 3 years.
The common shares and the shares underlying the warrants have registration
rights, and the Company is required to file a registration statement including
said shares with the Securities and Exchange Commission. In the event that the
Company does not file a registration statement within 45 days of the closing
date of the offering, or the registration statement is not declared effective
within the 90 or 120 day time periods from the closing date as defined in the
registration rights agreement, or if the Company fails to keep the registration
statement effective, the Company will be required to pay a penalty to each
investor equal to one percent (1%) of the purchase price for each 30 day period.
The Company estimates that the probability of not filing the registration
statement within the allowed time period is remote; therefore no accrual has
been made for these potential penalties. The Company will evaluate any liability
related to the effectiveness date of the registration statement at the end of
each reporting period.
On June 24, 2008, the Company issued three-year warrants to purchase 75,000
shares of Company common stock at $2.80 per share and three-year warrants to
purchase 75,000 shares of the Company's common stock at $3.60 per share to a
vendor valued at $90,487.
Also on June 24, 2008, the Company issued three-year warrants to purchase 25,000
shares of Company common stock at $3.00 per share and three-year warrants to
purchase 25,000 shares of the Company's common stock at $3.50 per share to a
vendor valued at $29,554.
The fair values of the warrants issued on June 24, 2008, determined using the
Black-Scholes Option Pricing Model, were calculated using the following
assumptions: risk free interest rate of 3.14%, expected dividend yield of 0%,
expected volatility of 61.3% and an expected life of 3 years.
F-10
HANSEN, BARNETT & MAXWELL, P.C.
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders of
China Pharma Holdings, Inc.
We have audited the consolidated balance sheets of China Pharma Holdings, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 audits provide 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 China Pharma
Holdings, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1, the accompanying consolidated financial statements have
been restated for the effects of correcting the classification of other
receivables and advances to suppliers as of December 31, 2007 and 2006.
HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
March 28, 2008, except for Note 1 regarding the restatement of financial
statements, as to which the date is May 3, 2008
F-11
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2007 2006
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,830,335 $ 656,441
Trade accounts receivable, less allowance for doubtful
accounts of $2,440,852 and $1,562,494, respectively 18,572,976 12,101,979
Other receivables, less allowance for doubtful
accounts of $43,908 and $27,517, respectively 413,596 355,554
Deferred offering costs -- 59,390
Advances to suppliers 2,757,320 746,443
Inventory 14,448,771 10,277,887
----------- -----------
Total Current Assets 38,022,998 24,197,694
----------- -----------
Non-current Assets:
Property and equipment, net of accumulated depreciation of
$1,003,802 and $619,645, respectively 2,625,216 2,725,173
Intangible assets, net of accumulated amortization of
$221,715 and $135,656, respectively 2,063,252 65,344
Advances for purchase of intangible assets 807,345 1,509,434
Deferred tax assets 187,509 16,736
----------- -----------
Total Non-current Assets 5,683,322 4,316,687
----------- -----------
TOTAL ASSETS $43,706,320 $28,514,381
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 297,299 $ 477,291
Accrued expenses 261,301 104,216
Accrued taxes payable 311,009 167,419
Other payables 86,161 185,096
Advances from customers 261,583 141,871
Accounts payable - related parties -- 22,650
Short-term notes payable 2,693,428 6,533,649
----------- -----------
Total Current Liabilities 3,910,781 7,632,192
----------- -----------
Research and development commitments 34,181 31,980
----------- -----------
Total Liabilities 3,944,962 7,664,172
----------- -----------
Stockholders' Equity:
Common stock, $0.001 par value, 60,000,000 shares
authorized, 37,278,938 and 34,723,056 shares issued and
outstanding, respectively 37,279 34,723
Additional paid-in capital 11,678,606 7,764,979
Foreign currency translation adjustment 2,839,304 663,871
Retained earnings 25,206,169 12,386,636
----------- -----------
Total Stockholders' Equity 39,761,358 20,850,209
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,706,320 $28,514,381
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-12
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
For the years
ended December 31,
----------------------------
2007 2006
------------ ------------
Revenue $ 33,186,324 $ 21,843,262
Cost of revenue 17,619,180 11,745,815
------------ ------------
Gross profit 15,567,144 10,097,447
------------ ------------
Operating expenses:
Selling expenses 1,436,609 260,128
General and administrative 1,879,306 1,213,828
------------ ------------
Total operating expenses 3,315,915 1,473,956
------------ ------------
Income from operations 12,251,229 8,623,491
------------ ------------
Non-operating income (expenses):
Interest income 31,805 991
Interest expense (237,398) (145,881)
Other income 611,025 108,485
------------ ------------
Total non-operating income (expense) 405,432 (36,405)
------------ ------------
Income before taxes 12,656,661 8,587,086
Income tax benefit 162,872 --
------------ ------------
Net income $ 12,819,533 $ 8,587,086
------------ ------------
Comprehensive income - foreign currency 2,175,433 563,945
translation adjustments -- --
Comprehensive income $ 14,994,966 $ 9,151,031
------------ ------------
Earnings Per Share:
Basic $ 0.35 $ 0.25
Diluted $ 0.34 $ 0.25
------------ ------------
Weighted Average Shares Outstanding:
Basic 37,009,655 34,723,056
Diluted 37,259,909 34,723,056
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-13
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Total
------------------------- Paid-in Comprehensive Retained Stockholders'
Shares Amount Capital Income Earnings Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2005 34,723,056 $ 34,723 $ 7,764,979 $ 99,926 $ 3,799,550 $11,699,178
Net income for the year -- -- -- -- 8,587,086 8,587,086
Foreign currency translation
adjustment -- -- -- 563,945 -- 563,945
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2006 34,723,056 34,723 7,764,979 663,871 12,386,636 20,850,209
Shares and warrants issued for cash 2,505,882 2,506 3,794,677 -- -- 3,797,183
Exercise of warrants for cash 50,000 50 118,950 -- -- 119,000
Net income for the year -- -- -- -- 12,819,533 12,819,533
Foreign currency translation
adjustment -- -- -- 2,175,433 -- 2,175,433
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2007 37,278,938 $ 37,279 $11,678,606 $ 2,839,304 $25,206,169 $39,761,358
----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
CHINA PHARMA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
----------------------------
2007 2006
------------ ------------
Cash Flows from Operating Activities:
Net income $ 12,819,533 $ 8,587,086
Depreciation and amortization 422,443 397,001
Gain on sale of intangibles (580,922) --
Changes in assets and liabilities:
Trade accounts receivable (5,413,718) (6,077,526)
Other receivables (32,234) 42,642
Advances to suppliers (174,867) (61,345)
Inventory (3,325,681) (4,214,702)
Deferred tax assets (162,872) 115,564
Deferred offering costs 60,952 --
Trade accounts payable (204,372) (219,427)
Accrued expenses 73,451 86,265
Accrued taxes payable 126,812 (407,744)
Other payables 20,558 (71,759)
Advances from customers 105,573 87,612
------------ ------------
Net Cash from Operating Activities 3,734,656 (1,736,333)
------------ ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (51,841) (182,346)
Proceeds from the sale of intangibles 1,509,741 --
Purchase of intangible assets (2,937,431) (9,657)
Advances for purchase of intangible assets (932,758) --
------------ ------------
Net Cash from Investing Activities (2,412,289) (192,003)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 3,797,183 --
Proceeds from exercise of warrants 119,000 --
Proceeds from short term notes payable 2,586,252 2,140,943
Payments of short term notes payable (6,705,456) --
Proceeds from loan from shareholder -- 22,650
Payment of offering costs -- (58,167)
------------ ------------
Net Cash Proceeds from Financing Activities (203,021) 2,105,426
------------ ------------
Effect of Exchange Rate Changes on Cash 54,548 18,131
------------ ------------
Net Change in Cash 1,173,894 195,221
------------ ------------
Cash and Cash Equivalents at Beginning of Period 656,441 461,220
------------ ------------
Cash and Cash Equivalents at End of Period $ 1,830,335 $ 656,441
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Onny Investment Limited (Onny) was incorporated in the British
Virgin Islands on January 12, 2005 and was a development stage enterprise
through June 15, 2005. On June 16, 2005, Onny acquired all of the outstanding
shares of Hainan Helpson Medical & Biotechnology Co., Ltd, a privately held
Chinese joint venture (Helpson) and emerged from the development stage.
On October 19, 2005, Onny was reorganized as a wholly owned subsidiary of China
Pharma Holdings, Inc., formerly TS Electronics, (Company). The reorganization
was accomplished by an exchange of Onny's common shares for 25,278,385 shares of
the Company's common stock resulting in a 851-for-1 exchange ratio. In addition,
the prior Onny convertible preferred shareholders exchanged their shares for
6,944,611 shares of the Company's common stock resulting in a 694-for-1 exchange
ratio. 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 the Company's common stock in exchange and the assumption of
$4,473 in liabilities. This transaction was accounted for as a reverse
acquisition of the Company and was recognized as a non-monetary exchange.
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), through its marketing department located in the Hainan
Province. There are also nine other offices, with sales representatives in other
provinces and cities throughout the PRC. Helpson's other operating activities
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
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.
Consolidation and Basis of Presentation - The accompanying financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The functional currency of the operating
subsidiaries in the PRC is the Chinese Yuan Renminbi (CNY); however, the
accompanying financial statements have been expressed in United States Dollars
(USD). The accompanying consolidated balance sheets have been translated into
USD at the exchange rates prevailing at each balance sheet date. The
accompanying consolidated statements of operations have been translated using
the average exchange rates prevailing during the periods of each statement. See
Note 9.
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly owned subsidiaries. All significant
F-16
inter-company balances and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments - Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the carrying amounts of notes payable that were outstanding during
the current period approximated fair value because of either the immediate or
short-term maturity of these financial instruments or because the underlying
instruments are at interest rates which approximated current market rates.
Cash and cash equivalents - Cash and cash equivalents include interest bearing
and non-interest bearing bank deposits, money market accounts, and short-term
certificates of deposit with original maturities of three months or less. Cash
deposits are held at financial institutions in the PRC and are not insured by
the FDIC.
Trade receivables and allowance for doubtful accounts - Trade receivables are
carried at original invoiced amounts less an allowance for doubtful accounts.
The allowances for doubtful accounts are calculated based on detailed review of
certain individual customer accounts and an estimation of the overall economic
conditions affecting the Company's customer base. The Company reviews a
customer's credit history before extending credit. If the financial condition of
its customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. A provision is made
against accounts receivable to the extent they are considered unlikely to be
collected. It is common practice in the PRC for receivables to extend beyond one
year. Included in trade receivables is approximately $2,002,059 that occurred
more than one year from December 31, 2007, but is estimated to still be
collectable.
Inventory - Inventories are stated at the lower of cost or net realizable value,
on an average cost basis. The method of determining inventory costs is used
consistently from year to year. Allowance for inventory obsolescence is provided
when the market value of certain inventory items are lower than the cost.
Valuation of Long-lived Assets - The carrying values of the Company's long-lived
assets are reviewed for impairment annually or whenever events or changes in
circumstances indicate that they may not be recoverable. When such an event
occurs, the Company projects the undiscounted cash flows to be generated from
the use of the asset and its eventual disposition over the remaining life of the
asset. If projections were to indicate that the carrying value of the long-lived
asset will not be recovered, the carrying value of the long-lived asset is
reduced by the estimated excess of the carrying value over the projected
discounted cash flows. There were no such impairments at December 31, 2007.
Property and Equipment - Property and equipment are stated at cost. Maintenance
and repairs are charged to expense as incurred and major improvements are
capitalized. Gains or losses on sales or retirements are included in the
statement of operations in the period of disposition.
Intangible Assets - Acquisition costs on patents, trademarks, licenses,
techniques, formulas and other intangibles are capitalized and amortized using
the straight-line method over their useful lives. For those intangible assets,
such as patents, with legal protection over a period, their useful life is the
protected period. Others that do not have legal protection periods are amortized
F-17
generally over 5 to 10 years. The Company does not capitalize internally
generated intangible assets. The Company's intangible assets consist of
techniques (formulas and manufacturing processes) for medicines.
Advances to Suppliers and Advances from Customers - The Company, as is the
common practice in the PRC, will often pay advanced payments to suppliers for
materials and receive from customers advances for finished products. As of
December 31, 2007 and 2006, the advances to suppliers were $2,757,320 and
$746,443, respectively, and the advances from customers were $261,583 and
$141,871, respectively.
Revenue Recognition - The Company recognizes revenue when it is realized and
earned. The Company considers revenue realized or realizable and earned when (1)
it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the
sales price is fixed or determinable, and (4) collectability is reasonably
assured. Delivery does not occur until products have been shipped to the client,
risk of loss has transferred to the client and client acceptance has been
obtained, client acceptance provisions have lapsed, or the Company has objective
evidence that the criteria specified in client acceptance provisions have been
satisfied. The sales price is not considered to be fixed or determinable until
all contingencies related to the sale have been resolved.
Cost of Revenues - Cost of revenues includes wages, materials, handling charges,
and other expenses associated with the manufacture and delivery of product.
Research and Development - Research and development expenditures are recorded as
expenses in the period in which they occur.
Retirement Benefit Plans - The Company contributes to various employee
retirement benefit plans organized by provincial governments under which it is
required to make monthly contributions to these plans at rates prescribed by the
related provincial governments. The provincial governments undertake to assume
the retirement benefit obligations of all existing and future retired employees
of the Company. Contributions to these plans are charged to expense as incurred.
Advertising Costs - Advertising costs are expensed when incurred. Total
advertising expense for the years ended December 31, 2007 and 2006 were $10,393
and $3,446, respectively.
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. As of December 31, 2007 potentially dilutive
securities includes warrants outstanding to purchase a total of 1,202,941 shares
of Company common stock at an exercise price of $2.38 per share. There are no
dilutive securities outstanding at December 31, 2006. The following table is a
reconciliation of the numerators and denominators used in the calculation of
basic and diluted earnings per share and the weighted-average common shares
outstanding, respectively:
F-18
For the Years Ended December 31,
2007 2006
----------- -----------
Net income $12,819,533 $ 8,587,086
----------- -----------
Basic weighted-average common shares
outstanding 37,009,655 34,723,056
Effect of dilutive securities:
Warrants 250,254 --
----------- -----------
Diluted weighted-average common shares
outstanding 37,259,909 34,723,056
----------- -----------
Basic earnings per share $ 0.35 $ 0.25
----------- -----------
Diluted earnings per share $ 0.34 $ 0.25
----------- -----------
Credit Risk - The carrying amounts of accounts receivable included in the
balance sheet represent the Company's exposure to credit risk in relation to its
financial assets. No other financial assets carry a significant exposure to
credit risk. The Company performs ongoing credit evaluations of each customer's
financial condition. It maintains allowances for doubtful accounts and such
allowances in the aggregate have not exceeded management's estimations.
The Company has its cash in bank deposits primarily in the PRC. Historically,
deposits in PRC banks have been secure due to the state policy on protecting
depositors' interests. The PRC promulgated a new Bankruptcy Law in August 2006,
which came into effect on June 1, 2007, which contains provisions for the
implementation of measures for the bankruptcy of PRC banks. In the event that
bankruptcy laws are enacted for banks in the PRC, the Company's deposits may be
at a higher risk of loss.
Interest Rate Risk - The Company is exposed to the risk arising from changing
interest rates, which may affect the ability of repayment of existing debts and
viability of securing future debt instruments within the PRC.
Recently Enacted Accounting Standards - In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. In February 2008, the FASB issued
FASB Staff Position (FSP FIN) No. 157-2 which extended the effective date for
certain nonfinancial assets and nonfinancial liabilities to fiscal years
beginning after November 15, 2008. The Company does not expect the adoption of
SFAS No. 157 to have a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect the
adoption of SFAS No. 159 to have a material impact on our consolidated financial
statements.
F-19
In June 2007, the Emerging Issues Task Force of the FASB issued EITF Issue No.
07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to be
Used in Future Research and Development Activities", (EITF 07-3) which is
effective for fiscal years beginning after December 15, 2007. EITF 07-3 requires
that nonrefundable advance payments for future research and development
activities be deferred and capitalized. Such amounts will be recognized as an
expense as the goods are delivered or the related services are performed. EITF
07-3 is not expected to have a material impact on our results of operations or
financial position.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a non-controlling interest in a subsidiary should be reported as equity in
the consolidated financial statements, consolidated net income shall be adjusted
to include the net income attributed to the non-controlling interest and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. The Company has not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 amends SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities to require enhanced
disclosures concerning the manner in which an entity uses derivatives (and the
reasons it uses them), the manner in which derivatives and related hedged items
are accounted for under SFAS No. 133 and interpretations thereof, and the
effects that derivatives and related hedged items have on an entity's financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
financial statements of fiscal years and interim periods beginning after
November 15, 2008. The Company has not yet determined the effects on its
consolidated financial statements, if any, that may result upon the adoption of
SFAS 161.
Restatement of Financial Statements - Subsequent to March 2008, the Company
realized that the December 31, 2007 consolidated financial statements needed to
be revised to correct an overstatement of advances paid to suppliers in the
amount of $724,628, an overstatement of other receivables in the amount of
$82,717, and an understatement of advance for purchase of intangible assets in
the amount of $807,345. In addition, the December 31, 2006 consolidated
financial statements needed to be revised to correct an overstatement of
advances paid to suppliers and an understatement of advance for purchase of
intangible assets in the amount of $1,509,434. The Company concluded that
advances made for purchase of intangible assets should be treated as a long-term
asset. This correction was not considered material in accordance with SAB 108
for the year ended December 31, 2007 and 2006 but is considered significant. As
a result, the Company corrected the financial statements for December 31, 2007
and 2006. The correction of the December 31, 2007 and 2006 financial statements
F-20
had no effect on the previously reported net income. The effects of the
restatements were as follows:
Reported Restatement As Restated
------------- ------------- -------------
Consolidated Balance Sheet as of December 31, 2007
Other receivables $ 496,313 $ (82,717) $ 413,596
Advances to suppliers 3,481,948 (724,628) 2,757,320
Total Current Assets 38,830,343 (807,345) 38,022,998
Advances for purchase of intangible assets -- 807,345 807,345
TOTAL ASSETS $ 43,706,320 $ -- $ 43,706,320
Consolidated Statement of Cash Flows
For the year ended December 31, 2007
Other receivables $ (111,660) $ 79,426 $ (32,234)
Advances to suppliers (1,028,199) 853,332 (174,867)
Net Cash provided by Operating Activities 2,801,898 932,758 3,734,656
Advances for purchase of intangible assets -- (932,758) (932,758)
Net Cash used in Investing Activities (1,479,531) (932,758) (2,412,289)
Net Change in Cash $ 1,173,894 $ -- $ 1,173,894
Consolidated Balance Sheet as of December 31, 2006
Advances to suppliers $ 2,255,877 $ (1,509,434) $ 746,443
Total Current Assets 25,707,128 (1,509,434) 24,197,694
Advances for purchase of intangible assets -- 1,509,434 1,509,434
TOTAL ASSETS $ 28,514,381 $ -- $ 28,514,381
NOTE 2 - INVENTORY
Inventory consisted of the following:
December 31,
-----------------------------
2007 2006
----------- -----------
Raw materials $12,521,536 $ 8,458,210
Work in progress 60,404 1,679,952
Finished goods 1,866,831 139,725
----------- -----------
Total Inventory $14,448,771 $10,277,887
----------- -----------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2007 and 2006:
F-21
December 31,
-------------------------------
2007 2006
----------- -----------
Permit of land use $ 385,102 $ 360,304
Building 1,753,547 1,640,629
Plant, machinery and equipment 1,341,996 1,253,572
Motor vehicle 37,193 14,763
Office equipment 88,210 75,550
Construction in progress 22,970 --
----------- -----------
Total 3,629,018 3,344,818
Less: accumulated depreciation (1,003,802) (619,645)
----------- -----------
Property and Equipment, net $ 2,625,216 $ 2,725,173
----------- -----------
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets as follows:
Asset Life - years
-------------------------------------------------- ------------------
Permit of land use 40 - 70
Building 20 - 35
Plant, machinery and equipment 10
Motor vehicle 5 - 10
Office equipment 5
For the years ended December 31, 2007 and 2006, depreciation expense was
$327,921 and $353,831, respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the costs on patents, trademarks, licenses,
techniques and formulas. Intangible assets have a weighted-average remaining
useful life of approximately 9.5 years. Amortization of intangible assets was
$94,522 and $43,170 for the year ended December 31, 2007 and 2006, respectively.
The estimated aggregate amortization expense for the next five years follows:
Year Amount
---------------- -------------------
2008 $ 221,538
2009 220,553
2010 218,722
2011 214,646
2012 214,646
Thereafter 973,147
-------------------
Total $ 2,063,252
-------------------
During the third quarter of 2007, the Company entered into agreements to acquire
certain pharmaceutical formulas from an unrelated party for cash for an
aggregate purchase price of $2,091,850. This has been recorded under the caption
Intangible assets in the accompanying balance sheet as of December 31, 2007.
NOTE 5 - DEBT
Short Term Notes Payable - At December 31, 2006, the Company had loans
outstanding totaling $2,174,608 from a bank. The loans bear interest with a
F-22
range of 6.14% to 6.43%, principal and accrued interest was repaid in July and
August of 2007. On July 13, 2007, the Company entered into a new line of credit
with the bank collateralized by certain land use rights, machinery and equipment
Advances made under the line of credit of $2,324,278 are due 7 months from the
date of the loan and bear interest payable monthly at rates ranging from 6.90%
to 7.37%. The line of credit expires on April 25, 2008 with any advances or
renewals made prior to this date under the line having a maturity date no later
than October 25, 2008. The Company has borrowed all amounts available under the
line of credit.
Short Term Notes Payable to Former Shareholders - In January 2006, the Company
converted its dividend payable of $4,402,147 into short-term notes bearing
interest at a rate of 2.25% per annum. The balance of the note at December 31,
2006 was $4,359,041. During the fourth quarter of 2007, the Company paid
$3,989,891 of these notes and the final note outstanding as of December 31, 2007
of $369,150 was paid in January, 2008.
NOTE 6 - INCOME TAXES
The Company accounts for its income taxes in accordance with SFAS No. 109, which
requires recognition of deferred tax 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.
Undistributed earnings of the Company's foreign subsidiary since acquisition
amounted to approximately $22 million at December 31, 2007. Those earnings, as
well as the investment in the subsidiaries of approximately $17 million are
considered to be indefinitely reinvested and, accordingly, no U.S. federal and
state income taxes have been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the PRC. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practical because of the
complexities associated with its hypothetical calculation; however, unrecognized
foreign tax credits may be available to reduce a portion of the U.S. tax
liability.
According to federal law in the PRC, enterprises with foreign investment and
foreign enterprises doing business in the PRC are generally subject to federal
enterprise income tax at a rate of 30%. However, because the Company is located
in a special region, it has a 15% corporate income tax rate and has been granted
a "tax holiday" during which it would pay no income taxes through December 31,
2007. On March 16, 2007, the National People's Congress of China passed the new
Enterprise Income Tax Law, (EIT Law), and on December 6, 2007, the State Council
of China issued the Implementation Regulations for the EIT Law which took effect
on January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
unified EIT of 25.0% on all domestic-invested enterprises and Foreign Invested
Entities, or FIEs, unless they qualify under certain limited exceptions.
As a result of the above change in the income tax laws, The Company will
F-23
continue to have a favorable rate of 50% of the tax rates in effect during
fiscal 2008 through 2010 as determined by the PRC government and the regional
tax authorities.
Following is a reconciliation of income taxes calculated at the federal
statutory rates to actual income tax expense:
December 31,
------------------------------
2007 2006
----------- -----------
Tax at statutory rate of 33% $ 4,176,698 $ 2,919,609
Non-deductible expenses -- 27,559
Change in temporary differences -- (22,654)
Effect of lower foreign tax rates (4,339,570) (2,924,514)
----------- -----------
Deferred income tax benefit $ (162,872) $ --
----------- -----------
The temporary differences which give rise to the deferred income tax asset are
as follows:
December 31,
-----------------------
2007 2006
-------- --------
Allowance for doubtful trade receivables 183,586 16,446
Allowance for doubtful other receivables 3,923 290
-------- --------
Total deferred income tax assets 187,509 16,736
Valuation allowance -- --
-------- --------
Net deferred income tax asset $187,509 $ 16,736
======== ========
The Company has also incurred various other taxes, comprised primarily of
business taxes, value-added taxes, urban construction taxes, education
surcharges and others. Any unpaid amounts are reflected on the balance sheets as
accrued taxes payable.
NOTE 7 - STOCKHOLDERS' EQUITY
On February 1, 2007 the Company completed an offering of units priced at $1.70
per unit consisting of one share of Company common stock and a warrant to
purchase one-half of a share of Company common stock at an exercise price of
$2.38 per share. The Company received gross proceeds in the aggregate amount of
$4,259,900. The net proceeds, after deduction of related offering expenses of
$462,717 amounted to $3,797,183. The Company issued an aggregate of 2,505,882
shares of common stock and issued three-year warrants to purchase an aggregate
of 1,252,941 shares of Company's common stock to 17 accredited investors. The
proceeds were allocated to the warrants based upon their fair value or
$2,010,219, and the balance of the proceeds was allocated to the shares of
common stock. The fair value of the warrants, determined using the Black-Scholes
Option Pricing Model, was calculated using the following assumptions: risk free
interest rate of 4.80%, expected dividend yield of 0%, expected volatility of
124.39% and an expected life of 3 years.
The common shares and the shares underlying the warrants have registration
rights and, accordingly a registration statement was filed with the Securities
Exchange Commission on March 30, 2007 within the 60 day period prescribed by the
registration rights agreement. The registration statement was declared effective
on May 4, 2007.
F-24
In December 2007, the Company received proceeds of $119,000 upon the exercise of
warrants to purchase 50,000 shares of common stock. The remaining 1,202,941
warrants issued in conjunction with the offering have not been exercised at
December 31, 2007 and have a weighted average life of 2.1 years.
NOTE 8 - TRANSFERS OF TECHNOLOGY
During 2007, the Company entered into agreements to sell certain pharmaceutical
formulas in the research and development stage in two separate transactions to
third parties for an aggregate sales price of $1,509,741 which is recorded as
other income, net of transfer (sales) tax of $75,487, which has been recorded as
part of general and administrative expenses and $853,332 of cost in the
accompanying statement of operations and comprehensive income for the year ended
December 31, 2007.
NOTE 9 - 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 from operations 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 (RMB), which must be converted into other currencies before
remittance out of the PRC. Both the conversion of RMB into foreign currencies
and the remittance of foreign currencies abroad require approval of the PRC
government.
NOTE 10 - RELATED PARTY TRANSACTIONS
On April 25, 2005 a dividend of $4,154,041 (adjusted for foreign currency
translations as of the balance sheet dates) was declared to the former
shareholders of Helpson which was not paid at December 31, 2005 and was
subsequently converted to demand notes bearing interest at 2.25% according to
the terms of the dividend. The Company paid these notes and the related accrued
interest as discussed in Note 5.
NOTE 11 - CONCENTRATIONS
For the year ended December 31, 2007, three customers accounted for 21%, 20% and
12% of sales, respectively. For the year ended December 31, 2006, three
customers accounted for 17%, 11% and 10% of sales, respectively. At December 31,
2007, two customers accounted for 20% and 11% of accounts receivable,
respectively. At December 31, 2006, two customers made up 18% and 14% of
accounts receivable. For the year ended December 31, 2007, purchases from three
suppliers made up 17%, 17% and 11% of raw material purchases, respectively. For
the year ended December 31, 2006 purchases from two suppliers accounted for 44%
and 34% of raw material purchases, respectively.
F-25
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of various expenses, all of which
we will pay in connection with the sale and distribution of the securities being
registered. All of the amounts shown are estimates, except the SEC registration
fee.
SEC Registration Fee $ 540.08
Accounting Fees and Expenses $ 15,000.00
Legal Fees and Expenses $ 30,000.00
Miscellaneous $ 2,600.00
Total $ 48,140.08
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to award,
or a corporation's board of directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act.
Our Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws provide for the indemnification of a present or former director or
officer. Such indemnification shall include expenses, including attorney's fees
actually and reasonably incurred by him. We may indemnify such individuals
against all costs, expenses, and liabilities incurred in a threatened, pending,
or completed action, suit, or proceeding brought because such individual is or
was one of our directors or officers.
We have been advised that in the opinion of the Securities and Exchange
Commission indemnification for liabilities arising under the Securities Act 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 is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to a court of appropriate jurisdiction and will be governed by the final
adjudication of such issue.
At the present time, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of our ours in which indemnification
would be required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 11, 2005, we sold to Halter Financial Group, Inc. ("HFG") in a private
placement 1,875,045 shares of restricted common stock at a purchase price of
$0.1066641 per share, pursuant to the terms of a Stock Purchase Agreement (the
II-26
"Purchase Agreement") executed by the parties on said date. As a result of the
purchase, HFG became our controlling shareholder, owning approximately 75% of
our issued and outstanding shares of common stock. This issuance was made in
reliance on Section 4(2) of the Act and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to us that the shares were being acquired for investment.
On October 19, 2005, we entered into a Securities Exchange Agreement with Onny
and its original stockholders pursuant to which we acquired all of the issued
and outstanding shares of Onny from said stockholders in exchange for 27,499,940
shares of our common stock. This issuance was made in reliance on Section 4(2)
of the Act and was made without general solicitation or advertising. The
acquirers were sophisticated investors with access to all relevant information
necessary to evaluate the investment, and who represented to us that the shares
were being acquired for investment.
In February 2007, the Company completed an offering of units priced at $1.70 per
unit consisting of one share of the Company's common stock and a warrant to
purchase one-half of a share of the Company's common stock at an exercise price
of $2.38 per share. The Company issued an aggregate of 2,505,882 shares of
common stock and issued three-year warrants to purchase an aggregate of
1,252,941 shares of Company's common stock to 17 accredited investors. This
issuance was made in reliance on Section 4(2) of the Act and was made without
general solicitation or advertising. The acquirers were sophisticated investors
with access to all relevant information necessary to evaluate the investment,
and who represented to us that the shares were being acquired for investment.
In May 2008, the Company completed an offering of units priced at $2.00 per unit
consisting of one share of the Company's common stock and a warrant to purchase
one-quarter of a share of the Company's common stock at an exercise price of
$2.80 per share. The Company issued an aggregate of 5,000,000 shares of common
stock and issued three-year warrants to purchase an aggregate of 1,250,000
shares of Company's common stock to 17 accredited investors. This issuance was
made in reliance on Section 4(2) of the Act and was made without general
solicitation or advertising. The acquirers were sophisticated investors with
access to all relevant information necessary to evaluate the investment, and who
represented to us that the shares were being acquired for investment.
On June 24, 2008, the Company issued to FirsTrust Group, Inc. three-year
warrants to purchase 75,000 shares of the Company's common stock at $2.80 per
share and three-year warrants to purchase 75,000 shares of the Company's common
stock at $3.60 per share. The Company issued the above warrants as equity
compensation under the Consulting Agreement and the Supplementary Agreement
entered into between the Company and FirsTrust China Ltd. (the wholly-owned
subsidiary of FirsTrust Group, Inc.). The issuances were exempt from
registration under the Securities Act in reliance on an exemption provided by
Section 4(2) of that act.
On the same date, the Company issued to Hayden Communications International,
Inc. three-year warrants to purchase 25,000 shares of the Company's common stock
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at $3.00 per share and three-year warrants to purchase 25,000 shares of the
Company's common stock at $3.50 per share. The Company issued the above warrants
as equity compensation under the Investor Relations Consulting Agreement entered
into between the Company and Hayden Communications International, Inc. The
issuances were exempt from registration under the Securities Act in reliance on
an exemption provided by Section 4(2) of that act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following Exhibits are attached hereto or incorporated herein by reference.
--------------------------------------------------------------------------------
Exhibit No. Description
--------------------------------------------------------------------------------
2.1 Securities Exchange Agreement between China Pharma and Onny Investment
Limited dated October 19, 2005 (3)
--------------------------------------------------------------------------------
3.1 Amendment of Certificate of Incorporation (8)
--------------------------------------------------------------------------------
3.2 Amended and Restated Bylaws of China Pharma (9)
--------------------------------------------------------------------------------
4.1 Form of Warrant issued to FirsTrust Group, Inc. (10)
--------------------------------------------------------------------------------
4.2 Form of Warrant issued to Hayden Communications International, Inc.(10)
--------------------------------------------------------------------------------
5.1* Opinion of King and Wood LLP
--------------------------------------------------------------------------------
10.1 Stock Purchase Agreement between Halter Financial Group Inc. and the
Registrant dated May 11, 2005 (1)
--------------------------------------------------------------------------------
10.2 Subscription Agreement between Onny Investment Limited and the
subscribers (3)
--------------------------------------------------------------------------------
10.3 Employment Contract between Helpson and Zhilin Li dated July 1, 2005
(5)
--------------------------------------------------------------------------------
10.4 Employment Contract between Helpson and Xinhua Wu dated July 1, 2005
(5)
--------------------------------------------------------------------------------
10.5 Employment Contract between Helpson and Jian Yang dated July 1, 2005
(5)
--------------------------------------------------------------------------------
10.6 Securities Purchase Agreement between the Registrant and 17 investors
in the 2008 Private Placement (6)
--------------------------------------------------------------------------------
10.7 Registration Rights Agreement between the Registrant and 17 investors
in the 2008 Private Placement (6)
--------------------------------------------------------------------------------
10.8 Form of Warrant issued to the 17 investors in the 2008 Private
Placement (6)
--------------------------------------------------------------------------------
10.9 Supply Contract entered into between Hainan Helpson Medicine and
Bio-Technology Co. Ltd. and Sichuan Chengxin Pharmaceutical Company (7)
--------------------------------------------------------------------------------
10.10 Supply Contract entered into between Hainan Helpson Medicine and
Bio-Technology Co. Ltd. and Anhui Fuyang Xinte Pharmaceutical Company
(7)
--------------------------------------------------------------------------------
10.11 Sales Contract entered into between Hainan Helpson Medicine and
Bio-Technology Co. Ltd. and Anhui Fuyang Xinte Pharmaceutical Company
(7)
--------------------------------------------------------------------------------
10.12 Sales Contract entered into between Hainan Helpson Medicine and
Bio-Technology Co. Ltd. and Hainan Xinglin Medicine Company (7)
--------------------------------------------------------------------------------
14.1* Code of Business Conduct and Ethics
--------------------------------------------------------------------------------
16.1 Letter regarding Change in certifying Accountant dated August 15. (2)
--------------------------------------------------------------------------------
II-28
--------------------------------------------------------------------------------
21 Subsidiaries of China Pharma Holdings, Inc. filed on October 20, 2005
(4)
--------------------------------------------------------------------------------
23.1* Consent of King and Wood LLP (Included in Exhibit 5.1)
--------------------------------------------------------------------------------
23.2* Consent of Hansen, Barnett & Maxwell, P.C.
--------------------------------------------------------------------------------
* Filed herewithin
(1) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 000-29523) filed with the Commission on May 11, 2005.
(2) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 000-29523) filed with the Commission on August 18, 2005.
(3) Previously filed as an exhibit to our report on Form SB-2 (Commission File
Number: 333-129161) filed with the Commission on October 20, 2005.
(4) Previously filed as an exhibit to our report on Form SB-2 (Commission File
Number: 333-129161) filed with the Commission on December 23, 2005.
(5) Previously filed as an exhibit to our report on Form 10-QSB (Commission
File Number: 000-29523) filed with the Commission on November 16, 2006.
(6) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 000-29523) filed with the Commission on May 28, 2008.
(7) Previously filed as an exhibit to our report on Form 10-KSB (Commission
File Number: 000-29523) filed with the Commission on March 31, 2008.
(8) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 000-29523) filed with the Commission on May 4, 2006.
(9) Previously filed as an exhibit to our report on Form PRE 14C (Commission
File Number: 000-29523) filed with the Commission on June 27, 2008.
(10) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 000-29523) filed with the Commission on June 27, 2008.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To 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;
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth 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 Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
II-29
table in the effective registration statement.
(iii) Include any material or changed information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (1)(i), (1)(ii) and (1)(iii) do not
apply if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement, or is
contained in a form of prospectus filed pursuant to Rule 424(b) that is part of
the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability under the Securities Act to
any purchaser in the initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities of the
undersigned registrant 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 registrant 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 registrant
relating to the offering required to be filed pursuant to Rule 424 of Regulation
C of the Securities Act;
(ii) Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
II-30
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant 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 registrant 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 Act and
will be governed by the final adjudication of such issue.
II-31
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Haikou, on July 29,
2008.
China Pharma Holdings, Inc.
By: /s/ Zhilin Li
-------------------------------
Zhilin Li
Chief Executive Officer,
President and Director
By: /s/ Xinhua Wu
-------------------------------
Xinhua Wu
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer) and Director
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Zhilin Li
-------------
Zhilin Li President , Chief Executive July 29, 2008
Officer and Director
/s/ Xinhua Wu
-------------
Xinhua Wu Chief Financial Officer July 29, 2008
(Principal Financial Officer
and Principal Accounting
Officer) and Director
/s/ Gene Michael Bennett
------------------------
Gene Michael Bennett Director July 29, 2008
/s/ Yingwen Zhang
-----------------
Yingwen Zhang Director July 29, 2008
/s/ Baowen Dong
---------------
Baowen Dong Director July 29, 2008