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CHBO.OB > SEC Filings for CHBO.OB > Form 10-Q/A on 30-Mar-2009All Recent SEC Filings

Show all filings for CHINA BIOPHARMA, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q/A for CHINA BIOPHARMA, INC.


30-Mar-2009

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations or Plan of Operations.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the following discussion together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this report and in the documents that we incorporate by reference into this report. This report may contain certain "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by our use of words such as "may," "will," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential" or "continue" or the negative or other variations of these words, or other comparable words or phrases. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part I, Item 1 of our annual report on Form 10-KSB under the caption "Risk Factors," which annual report was filed on March 25, 2008, as well as the amendment thereto on Form 10-K/A filed on November 12, 2008.

Unless the context requires otherwise, references to "we," "us," "our," "China Biopharma" and the "Company" refer to China Biopharma, Inc. and its consolidated subsidiaries.

CRITICAL ACCOUNTING POLICIES

See "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements December 31, 2007 in our annual report on Form 10-KSB filed on March 25, 2008 and Form 10-K/A filed on November 12, 2008 for our critical accounting policies. These policies include revenue recognition, determining our allowance for doubtful accounts receivable, accounting for cost of revenue, valuation of long-lived assets and research and development costs.

BUSINESS OVERVIEW

The Company is a distributor of human vaccines and other pharmaceutical products. Currently, the Company distributes the products in China. The Company has established its distribution network in China through the acquisition of its interest in its subsidiary, Hainan CITIC Bio-pharmaceutical Development Co., Ltd. ("HCBD") and, through its joint venture with Zhejiang Tianyuan Bio-pharmaceutical Co., Ltd. ("Zhejiang Tianyuan")

The emphasis of the Company is on the introduction and the marketing and distribution of products rather than on manufacturing. Substantially all of the operations are in China.

Over the past year the vaccine business has become more competitive. In order to improve our operating performance and cope with the changing environment, the Company has changed its business strategy and formulated a new business plan to conserve cash, lower expenses and increase profitability. Beginning in 2007 it started to distribute a few specialty drug products, such as Serrapeptase. The Company plans to take more control on the available cash in the subsidiaries and move into areas with higher market potential and higher margin specialty pharmaceutical products. Since then the operation results have significantly improved in increased sales and operating profit.


Move Away from the Low Margin Vaccine Business

The Company has planned to move away from the low margin vaccine business and focus on higher margin vaccine and specialty drugs. Due to the recent changes in vaccine sectors, more and more vaccine manufacturers have entered the low margin vaccine business such as distribution of flu vaccine, which has created severe competition among, and squeezed the profit margin of the vaccine distributors. To avoid this direct competition, the Company had started to negotiate with a few global vaccine manufacturers for carrying their higher margin products. The Company cannot assure you that it be successful in entering into an agreement.

Commence Distribution of Specialty Pharmaceutical Products

In February, 2008 the Company began distributing on a trial basis certain specialty pharmaceutical products of Takeda Pharmaceutical Company, Ltd. ("Takeda"), the largest pharmaceutical company in Japan. Takeda specializes in the research and development of breakthrough drugs, and has marketing operations throughout U.S., Europe, and Asia. In Japan, Takeda has also built a strong presence in the over-the-counter (OTC) drugs market, and holds the second largest share of that domestic market.

Antiviral Products

In October 2007 the Company began working with Soonfast Pharmaceutical Science & Technology Co., Ltd. ("Soonfast") to introduce a new antiviral medicine to the overseas market (including the United States and other overseas markets). This all-natural product has been approved in China for external use to treat human papillomavirus ("HPV") and herpes simplex virus ("HSV"). The commercial product was released in November 2007, and the Company has started distributing this product in certain regions in China and has the right to distribute it in all overseas markets, including the United States.

Take Closer Control on Subsidiaries

The Company is working to take direct control of our subsidiaries' operations and financial management instead of relying on its joint venture partner's performance. The Company reached agreement with its joint venture partner to increase shareholding in the joint venture in China, Zhejiang Tianyuan Biotech Co., Ltd., and eventually to have 100% control and ownership in this joint venture. The Company plans to change its name to Zhejiang Kangchen Pharmaceutical Co., Ltd. The Company does not need to raise additional capital to complete this transaction. It is expected that this will help to preserve the available cash, increase operating stability, provide the Company with more operation flexibility, and improve its current performance. The Company has filed all necessary documents with local government and is waiting for the final approval.

Registered Capital Reduction in HCBD

On June 23, 2008, the Company finished the process to reduce the total registered capital of HCBD from Renminbi Yuan (Chinese currency) 30 million to 6 million. Through this registered capital reduction, the Company shall repatriate some fund from HCBD back to its proposed 100% controlled Zhejiang Kangchen Pharmaceutical Co., Ltd. This reduction will improve the Company's capital structure and make available fund for future acquisitions.


Improve Current Operation Results

After about one year of endeavoring to establish its footing into China, the Company has adjusted to this complicated market environment and business landscape. In an effort to improve its current operating results, the Company has begun taking the steps outlined above with a view to strengthen its control over the operating subsidiaries, preserve cash, apply available resources to, and refocus on, higher margin, less competitive products with greater market potential. The Company cannot assure you that it will be successful with any of these objectives.

Description of Company

In July 2002, the Company was incorporated in Delaware as Techedge, Inc. to serve as the successor to the business and assets of BSD Development Partners, LTD. ("BSD"). BSD was formed in 1997 as a Delaware limited partnership for the purpose of investing in the intellectual property of emerging and established companies. In September 2002, BSD merged with Techedge. From September 2002 until June 2004, Techedge endeavored to continue the business of BSD and sought to enhance the liquidity of the securities owned by its investors by becoming subject to the reporting requirements of the Securities Exchange Act of 1934 and by seeking to have its common stock quoted on the OTC Bulletin Board, or "OTCBB".

On June 9, 2004, Techedge acquired all of the issued and outstanding stock of China Quantum Communication Limited, or CQCL, pursuant to a share exchange agreement, by and among Techedge, certain of its stockholders, CQCL and its stockholders (the "Share Exchange"). In connection with the Share Exchange, Techedge's then existing directors and officers resigned as directors and officers of Techedge and were replaced by directors and officers designated by CQCL.

After the Share Exchange, Techedge refocused its business efforts on developing and providing its IP-based personal communication service, a regional mobile voice over IP ("VoIP") service delivered on unlicensed low-power PCS frequencies through IP-enabled local transceiver and IP-centric soft-switched networks, operating on an advanced proprietary software centric multi-service global communication service platform and management system. Techedge also continued operating CQCL's communications service business through CQCL and CQCL's wholly-owned subsidiaries, China Quantum Communications Inc., a Delaware corporation, and Guang Tong Wang Luo Ke Ji (China) Co. Ltd. (also known as Quantum Communications (China) Co., Ltd.), a Chinese company.

On January 26, 2006, the Company announced its plans to re-position its business for bio-pharmaceutical and other high growth opportunities in China, while continuing its commercialization of its high potential mobile VoIP services.

On February 27, 2006, in conjunction with the Company's re-positioning plans, the Company entered into an agreement to transfer ownership of its Chinese subsidiary Zheijang Guang Tong Wang Luo Co., Ltd to third parties. On January 1, 2006, the Company also entered into an agreement to transfer ownership of its U.S. subsidiary China Quantum Communications, Inc. to a former employee.


On April 7, 2006, the Company entered into a Share Exchange Agreement for the purpose of acquiring 100% of the outstanding capital stock of China BioPharma Limited ("CBL"), a Cayman Islands company, which has rights to invest in Tianyuan Bio-Pharmaceuticals Company, Ltd. and Zhejiang Tianyuan Biotech Co., Ltd. ("ZTBC"). (CBL has signed an investment agreement with Tianyuan Bio-pharmaceuticals Co., Ltd. to invest into the joint venture partner and the joint venture.) In exchange for 100% of the outstanding capital of CBL, the Company issued a total of 3,000,000 shares of restricted common stock to CBL's stockholders.

On July 14, 2006, Techedge and China Biopharma, Inc. ("CBI"), a Delaware corporation and a wholly-owned subsidiary of Techedge, executed and delivered a Plan and Agreement of Merger whereby the parties agreed to merge CBI with and into Techedge, with Techedge being the surviving corporation. By virtue of, and effective upon the consummation of the merger, the Certificate of Incorporation of the Company was amended to change its name from "Techedge, Inc." to "China Biopharma, Inc.". The merger became effective on August 10, 2006.

In April 2006, ZTBC acquired 20% of the outstanding stock of HCBD from three individuals in consideration for approximately $0.9 million; In August 2006, ZTBC acquired an additional 40% of the outstanding stock of HCBD from CITIC Pharmaceutical and China Biological Engineering Corporation in consideration for approximately $1.8 million. In December 2006, ZTBC acquired another 10% of the outstanding stock of HCBD from one individual in consideration for approximately $0.5 million.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto:

RESULTS OF OPERATIONS

For the Three Months Ended September 30, 2008 and 2007

Revenue

Revenue increased by $1,431,580 to $1,593,271 for the three months ended September 30, 2008 compared to $161,691 for the three months ended September 30, 2007. The Company's revenue during the three months ended September 30, 2007 was generated from the vaccine and other bio-pharmaceutical products distribution business solely as a result of consolidation of the financials of HCBD for the period. Vaccine is a seasonal product that is used mainly during the late fall and early winter seasons. Over the past year the vaccine business has become more competitive in China. Later in 2007 we changed our business strategy, with a plan to move away from the vaccine business and focus on specialty drugs. Revenue during the three months ended September 30, 2008 was generated from other pharmaceutical products distribution business conducted by HCBD for the period. Due to recent strategic and operation structure changes, the Company predicts that it would generate much higher sales revenue this year compared with 2007.

Cost of Sales and Gross Margin

Cost of sales increased by $1,376,493 to $1,530,240 for the three months ended September 30, 2008 compared to $153,747 for three months ended September 30, 2007. The decrease in gross margin was due to higher purchasing costs and transportation costs in the third quarter of 2008 compared with same period last year.


Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses consisted primarily of labor cost and related overhead costs for sales, marketing, legal, human resources and general management. Such costs also include the expenses recognized for stock-based compensation pursuant to SFAS 123(R).

SG&A expenses decreased by $190,571 to $107,944 in the three months ended September 30, 2008 from $298,515 in the three months ended September 30, 2007. The relatively high SG&A expenses in the three months ended September 30, 2007 was mainly attributed to some costs incurred during that period related to professional services including legal and other advisory services, as well as amortization of $12,594 for stock-based compensation expenses in that period compared with $9,388 recognized for this quarter.

Uncollectible Accounts Expense

Included in Operating Expenses was a charge for an account deemed to be uncollectible, amounting to $468,773 for the three months ended September 30, 2008. The entire 2005 balance represented an operating fund obligation owed to Quantum Communications (China) Co., Ltd., a wholly-owned subsidiary of the Company, from its business partner, Beijing Guangtung Communications Co., Ltd. ("BGC"). BGC was a privately owned limited liability company registered in Beijing, China and was not a related party of the Company or any of its subsidiaries. BGC acquired 3.5 MHz frequency which is used for 802.16 standard WiMax communication services in China. Instead of undertaking a direct investment into BGC, the Company extended a non-interest bearing loan to be used in operations by BGC, subject to a contractual right to convert the loan into an equity interest based on the success of BGC's business. After determining that the WiMax services business was unsuccessful, the Company refused to make any additional loans to BGC and requested full payment on its original loan. Pursuant to that initial demand, BGC had concurrently agreed to fully repay the loan, while actively seeking buyers or financiers to fund its operations. In the third quarter of 2008, the Chinese economic environment severely deteriorated and BGC declared to the Company the failure in its fund raising efforts. In September 2008, the Company determined that the loan would be uncollectible. BGC closed its business at the end of 2008 due to severe financial distress.

Interest Expense

Interest expense net of interest income, was $24,381 for the three months ended September 30, 2008, compared with $44,836 for the three months ended September 30, 2007. Interest expense primarily comprised of accrued interest for the $3,000,000 Secured Convertible Promissory Notes. Interest payments were made in form of common stock of the Company. Decrease in interest expense during the two contrasting periods was due to repayment of principal over the periods.

Non Operating Income

The company recorded non operating income of $111,868 for the three months ended September 30, 2008, compared with $0 for the three months ended September 30, 2007. Out of the total amount of non operating income in the three months ended September 30, 2008, approximately $94,890 arose from elimination of payables to previous shareholders of HCBD as a result of their waiver of the final outstanding payments for the acquisition of HCBD.


Income Taxes

The Company has been incurring operating losses over the years and therefore is only required to accrue and pay minimum taxes according to local tax regulations. No income tax provision has been recorded for the three months ended September 30, 2008 or 2007 as a result of the accumulated operating losses incurred.

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Comprehensive Loss

Comprehensive loss increased by $300,464 to $471,706 for the three months ended September 30, 2008 compared to comprehensive loss of $171,242 for the three months ended September 30, 2007. The increase in loss was primarily due to the charge to operations of $468,773 uncollectible account expense in the three months ended September 30, 2008, despite of increase in sales and gross profit and decrease in SG&A for the period.

For the Nine Months Ended September 30, 2008 and 2007

Revenue

Revenue increased by $4,997,979 to $5,408,369 for the nine months ended September 30, 2008 compared to $410,390 for the nine months ended September 30, 2007. The Company's revenue during the nine months ended September 30, 2007 was generated from the vaccine and other bio-pharmaceutical products distribution business solely as a result of consolidation of the financials of HCBD for the period. Vaccine is a seasonal product that is used mainly during late the fall and early winter seasons. Over the past year the vaccine business has become more competitive in China. Later in 2007 we changed our business strategy, with a plan to move away from the vaccine business and focus on specialty drugs. Revenue during the nine months ended September 30, 2008 was generated from other pharmaceutical products distribution business conducted by HCBD for the period. Due to recent strategic and operation structure changes, the Company predicts that it would generate much higher sales revenue this year compared with 2007.

Cost of Sales and Gross Margin

Cost of sales increased by $4,816,963 to $5,200,158 for the nine months ended September 30, 2008 compared to $383,195 for nine months ended September 30, 2007. The decrease in gross margin was due to higher purchasing costs and transportation costs in the three quarters of 2008 compared with same period last year.


Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses consisted primarily of labor cost and related overhead costs for sales, marketing, legal, human resources and general management. Such costs also include the expenses recognized for stock-based compensation pursuant to SFAS 123(R).

SG&A expenses decreased by $991,201 to $433,329 in the nine months ended September 30, 2008 from $1,424,530 in the nine months ended September 30, 2007. The relatively high SG&A expenses in the nine months ended September 30, 2007 was mainly attributed to some costs incurred during that period related to professional services including legal and other advisory services, as well as amortization of $165,458 for stock-based compensation expenses in that period compared with $28,164 recognized for the three quarters of 2008.

Uncollectible Accounts Expense

Included in Operating Expenses was a charge for an account deemed to be uncollectible, amounting to $468,773 for the three months ended September 30, 2008. The entire 2005 balance represented an operating fund obligation owed to Quantum Communications (China) Co., Ltd., a wholly-owned subsidiary of the Company, from its business partner, Beijing Guangtung Communications Co., Ltd. ("BGC"). BGC was a privately owned limited liability company registered in Beijing, China and was not a related party of the Company or any of its subsidiaries. BGC acquired 3.5 MHz frequency which is used for 802.16 standard WiMax communication services in China. Instead of undertaking a direct investment into BGC, the Company extended a non-interest bearing loan to be used in operations by BGC, subject to a contractual right to convert the loan into an equity interest based on the success of BGC's business. After determining that the WiMax services business was unsuccessful, the Company refused to make any additional loans to BGC and requested full payment on its original loan. Pursuant to that initial demand, BGC had concurrently agreed to fully repay the loan, while actively seeking buyers or financiers to fund its operations. In the third quarter of 2008, the Chinese economic environment severely deteriorated and BGC declared to the Company the failure in its fund raising efforts. In September 2008, the Company determined that the loan would be uncollectible. BGC closed its business at the end of 2008 due to severe financial distress.

Interest Expense

Interest expense net of interest income, was $72,081 for the nine months ended September 30, 2008, compared with $157,048 for the nine months ended September 30, 2007. Interest expense primarily comprised of accrued interest for the $3,000,000 Secured Convertible Promissory Notes. Interest payments were made in form of common stock of the company. Decrease in interest expense during the two contrasting periods was due to repayment of principal over the periods.

Non Operating Income

The Company recorded non operating income of $129,137 for the nine months ended September 30, 2008, compared with $21,277 for the nine months ended September 30, 2007. Out of the total amount of non operating income in the nine months ended September 30, 2008, approximately $94,890 arose from elimination of payables to previous shareholders of HCBD as a result of their waiver of the final outstanding payments for the acquisition of HCBD.


Income Taxes

The Company has been incurring operating losses over the years and therefore is only required to accrue and pay minimum taxes according to local tax regulations. No income tax provision has been recorded for the nine months ended September 30, 2008 or 2007 as a result of the accumulated operating losses incurred.

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Comprehensive Loss

Comprehensive loss decreased by $727,714 to $565,757 for the nine months ended September 30, 2008 compared to comprehensive loss of $1,293,471 for the nine months ended September 30, 2007. The decrease in loss was primarily due to increase in sales and gross profit and decrease in SG&A for the period, and partially contributed by other comprehensive income for amount of $176,543for the period, resulting from foreign currency translation adjustment, despite of the charge to operations of $468,773 uncollectible account expense in third quarter of 2008.

LIQUIDITY AND CAPITAL RESOURCES

Working capital

As of September 30, 2008, the Company had combined cash and cash equivalents of $146,887 and working capital deficit of $1,938,667, as compared to cash and cash equivalents of $1,317,556 and working capital deficit of $1,157,189 as of December 31, 2007. Current assets of approximately $3.5 million as at September 30, 2008 also mainly included accounts receivable and other receivables totaling approximately $2.5 million, and other current assets for approximately $0.7 million. Current liabilities of approximately $5.5 million as at September 30, 2008 mainly included approximately $2 million of accounts payable and accrued expenses, approximately $1.6 million outstanding principal of the two-year Secured Convertible Promissory Notes due in November 2008, and approximately $1.2 million other current liabilities.

For the nine months ended September 30, 2008, the Company used approximately $1,336,400 of cash for operations as compared to approximately $1,919,072 for the same period in 2007. The decrease in use of cash in operating activities was mainly attributive to the Company's decreased operating loss during the nine months ended September 30, 2008 as compared to the same period in 2007, due to the factors discussed above, and decrease in other receivables between the two periods.

There was no cash flow incurred in investing activities other than $10,813 outflow for the nine months ended September 30, 2008 due to purchase of fixed assets. Payment for principal and interest of the Secured Convertible Promissory Notes was made in form of common stock and thus there was no cash flow for financing activities for the period.

The management of the Company acknowledges that its existing cash and cash equivalents may not be sufficient to fund its operations over the next 12 months. Therefore, the ability of the Company to continue as a going concern will be dependent on whether the Company can generate sufficient revenue or obtain funding from alternative sources.


Capital Stock Transactions

In February 2005, the Company completed a private placement of 260,000 shares of common stock at a price of $1.00 per share, or gross proceeds of $260,000.

During the quarter ended March 31, 2005, the Company granted 402,000 fully vested, non-forfeitable warrants to purchase shares of common stock to two consultants for services in addition to cash payments. Those warrants expired without being exercised. Also during the quarter ended March 31, 2005, the Company granted 100,000 fully vested, non-forfeitable shares of common stock to a consultant for services.

In April 2005, the Company completed a private placement of 95,000 shares of common stock at a purchase price of $1.00 per share, or gross proceeds of $95,000, and, for no additional consideration, a cashless 2-year warrant to purchase an additional 95,000 shares at an exercise price of $1.50 per share. Those warrants have expired without being exercised.

In May 2005, the Company completed a private placement of 500,000 shares of common stock at a purchase price of $0.50 per share, or gross proceeds of $250,000, and for no additional consideration, a cashless 5-year warrant to purchase an additional 147,059 shares at an exercise price of $0.75 per share. A value of $71,470 of the proceeds has been allocated to the warrant.

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