# China Pharma Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2012

- Company: [China Pharma Holdings, Inc.](/companies/cphi.md) (CIK 1106644)
- Form: 10-Q
- Filed: 2012-05-14
- Accepted by EDGAR: May 14, 2012, 17:12 ET
- Period: 2012-03-31
- Accession: 0001010549-12-000533
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1106644/000101054912000533/cphi10q033112.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1106644/000101054912000533/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-01-01 to 2012-03-31 | $16.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2012-01-01 to 2012-03-31 | $10.8m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2012-01-01 to 2012-03-31 | $5.3m | us-gaap:GrossProfit |
| Operating income | 3 months, 2012-01-01 to 2012-03-31 | $3.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-01-01 to 2012-03-31 | −$77.5k | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-01-01 to 2012-03-31 | −$530.6k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-01-01 to 2012-03-31 | $2.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-01-01 to 2012-03-31 | $0.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-01-01 to 2012-03-31 | $0.06 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2012-01-01 to 2012-03-31 | $119.7k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2012-01-01 to 2012-03-31 | −$7.9k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2012-03-31 | $3.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-03-31 | $117.1m | us-gaap:AssetsCurrent |
| Total assets | at 2012-03-31 | $163.6m | us-gaap:Assets |
| Current liabilities | at 2012-03-31 | $17.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-03-31 | $17.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2012-03-31 | $146.2m | us-gaap:StockholdersEquity |
| Shares outstanding | at 2012-03-31 | 43,529,557 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 29,745 characters.

#### Disclosure Regarding Forward-Looking Statements

*The statements contained in this report with respect to our financial condition, results of operations and business that are not historical facts are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, such as "anticipate", "believe", "expect", "plan", "intend", "seek", "estimate", "project", "could", "may" or the negative thereof or other variations thereon, or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the readers of the forward-looking statements that any such statements that are contained in this report reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors, including, but not limited to, economic, competitive, regulatory, technological, key employees, and general business factors affecting our operations, markets, growth, services, products, licenses and other factors, some of which are described in this report and in “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”) and some of which are discussed in our other filings with the SEC. These risk factors should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.*

*These forward-looking statements are only estimates or predictions. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of risks facing our company, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. All written and oral forward-looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, we caution investors not to unduly rely on our forward-looking statements. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.*

### Business Overview

We are principally engaged in the development, manufacture, packaging, marketing and distribution of generic and branded pharmaceutical products for a wide range of high incidence and high mortality conditions in The People’s Republic of China (the “PRC”). All of our operations are conducted in the PRC, where our 8,000-square-meter manufacturing facility is located. With eight different production lines, we have the capability to manufacture pharmaceutical products in the form of dry powder injectables, liquid injectables, tablets, capsules, oral solutions and granules. Over 90% of our pharmaceutical products are sold on a prescription basis and have been approved for at least one or more therapeutic indications by the Chinese State Food and Drug Administration (the “SFDA”) based upon demonstrated safety and efficacy.

At March 31, 2012, we manufactured 20 pharmaceutical products for a wide variety of diseases and medical indications, each of which may be classified into one of three general categories: a basic generic drug, which is a common drug in the PRC marketplace for which there is a very large market, a “super” or “first to market” generic drug, which is a generic Western drug that is new to the PRC marketplace, and a modern Traditional Chinese Medicine, which generally is a non-synthetic, plant-based medicinal compound of the type that has been widely used in the PRC for thousands of years, to which we apply modern production techniques to produce a pharmaceutical product in different formulations, such as tablets, capsules or powders. In selecting generic drugs to develop and manufacture, we consider several factors, including the number of other manufacturers currently producing the particular drug, the size of the market, the proposed or required method of distribution, the existing and expected pricing for the particular drug in the marketplace, the costs of manufacturing that drug, and the costs of acquiring or developing the formula for that drug. We believe we have historically selected to manufacture generic drugs that have very large addressable markets and higher profit margins relative to other drugs being manufactured and distributed in the PRC.

In 2002, we built, and we currently own and operate, an approximately 8,000-square-meter manufacturing facility in Haikou, Hainan Province that supports eight modern, scalable production lines. We implement quality control procedures in compliance with standards for Good Manufacturing Practice, or GMP standards, and applicable SFDA regulations to ensure consistent quality in our products.

We market and sell our products through 16 sales offices covering all major cities and provinces in China. To comply with applicable Chinese law relating to sales of prescription drugs to certain hospitals and clinics, we also use a distribution system comprised of approximately 1,800 independent regional distributors. We have grown significantly in recent years, with our net revenues increasing from $21.8 million in 2006 to $81.1 million in 2011, representing a compound annual growth rate, or CAGR, of 30% during this period. Recently, however, the implementation of the Chinese Healthcare reform is affecting our businesses. Our net revenues decreased by $2.0 million, or by 11%, to $16.1 million for the first three months of 2012 as compared to $18.1 million in the comparable period of 2011. Our net income increased from $8.6 million in 2006 to $19.3 million in 2011, representing a CAGR of 18% during this period. Our net income decreased by $2.3 million to $2.8 million in the first quarter of 2012 as compared to $5.1 million in the comparable period in 2011. The three-month net income figures for 2011 contain the effect of derivative gains of $0.68 as explained below in this management’s discussion and analysis.

We often have a seasonal pattern in our sales revenues throughout the year for a variety of reasons, including 1) the higher rates of occurrence of cerebral/cardio diseases and flu in the winter season and 2) Chinese New Year being in the first quarter. As a result, our fourth quarter revenues tend to be higher and our first quarter revenues tend to be lower.

We have a strong focus on bringing new and first-to-market generic medicines to market through the purchase of medical formulas from research institutions. As of March 31, 2012, in addition to our portfolio of 20 commercialized products, we had a number of drugs at different stages of the SFDA registration process.

Below we list the current status of some of our pipeline products:

- Antibiotic Combination. We completed the Phase I clinical trials of our novel cephalosporin-based combination antibiotic in the third quarter of 2010. We are currently in Phase II of the clinical trial and it is progressing well.
- Rosuvastatin. Rosuvastatin is a generic form of Crestor, a drug for indication of high blood cholesterol level. Clinical trials for this generic drug were completed in the fourth quarter of 2010 and we have submitted an application for production approval.
- Cadesartan. We originally submitted application for production approval of Candesartan, a front-line drug therapy we developed for the treatment of hypertension in 2010. We received request for additional procedures in the fourth quarter of 2011 and we have since completed all newly requested procedures and are currently waiting for the final production approval from the SFDA. We expect to hear from the SFDA before the mid-year mark.
- Heart Disease Drug. We are developing a medicine for the treatment of coronary heart disease. This product comes with a patented TCM formula and we are currently conducting Phase III clinical trials for this drug. We anticipate the completion of the clinical trail for this product to be completed by the end of 2012.

In addition to the products listed above, we have a number of other new products (also with focus on our main therapeutic areas) pending in various stages of SFDA technical review. We are also evaluating additional opportunities on an on-going basis, directed by the organic growth and market demands of China's pharmaceutical market. We are working closely with several pharmaceutical research institutions and universities to help us identify existing drugs and formulas that would fit well with our business model, thus paving the way to generate new products to support our revenue growth in the future. We remain focused on improving our product portfolio and increasing our internal growth, maintaining and developing new marketing channels, and using our existing sales network in the expanding markets in the PRC to raise our overall market share. The organic growth of the Chinese pharmaceutical market has had a positive effect on, and will continue to direct, our company's development.

The growth of China’s pharmaceutical market has largely been driven by China’s rapid economic growth. Increased healthcare spending by the Chinese government to reform the healthcare system has already greatly improved the accessibility to and desire for medical care. Important additional factors include: the aging of the population and the resulting increase in age-related disorders, the urban migration of the population, and improved awareness of self-health care.

The Healthcare Reform program announced by the Chinese government in late 2009 is currently having a significant impact on all healthcare related industries in China, including the pharmaceutical industry. Over all, the government plans to provide a basic, universal healthcare system to all citizens of China. In 2010, the government began to broadly implement the policies from the Healthcare Reform. In this respect, products on the Essential Drug List (EDL) are expected to experience an increase in volume but a reduction in their prices, which will have an adverse affect on their net margins. During the past two years, we have seen first-hand the increase in demand for EDL products, but along with the increase in demand, we also experienced degradation in the pricing compared to the past. Furthermore, we observed that there are significant variations in timing and market reaction to the new environment, causing sales volume to increase in some of the affected products. While pricing is generally set at the central government level, provincial government intervention has added complexity to the pricing-volume interaction. In addition to EDL products, we are also experiencing pricing pressure on most of our products. While these changes have more impact on pharmaceutical distribution companies, manufacturers of pharmaceutical products are also affected. We believe the general implication is that gross margins for pharmaceutical products will continue to be under pressure for some time. That being said, we believe a pharmaceutical manufacturer with experienced management and the ability to react quickly to changes will not only survive but thrive in this environment.

### Results of Operations

The following table presents our results of operations for the three-month period ended March 31, 2012 and 2011.

|  | Three Months Ended March 31 2012 | 2011 | Change | % Chg |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $16,086,731 | $18,119,557 | $(2,032,826) | -11% |
| Cost of Revenue | 10,782,384 | 11,249,946 | (467,562) | -4% |
| Gross Profit | 5,304,347 | 6,869,611 | (1,565,264) | -23% |
| Selling Expenses | 894,060 | 604,481 | 289,579 | 48% |
| General and Admin Expenses | 676,402 | 916,945 | (240,543) | -26% |
| Bad Debt Expense | 320,098 | 9,428 | 310,670 |  |
| Income from Operations | 3,413,787 | 5,338,757 | (1,924,970) | -36% |
| Net Interest Income (Expense) | (76,847) | (59,253) | (17,594) |  |
| Derivative Gain | - | 677,498 | (677,498) |  |
| Income Tax Expense | 530,581 | 853,380 | (322,799) | -38% |
| Net Income | **$2,806,359** | **$5,103,622** | **$(2,297,263)** | **-45%** |
| Basic Net Income per Share | $0.06 | $0.12 | $(0.06) | -50% |
| Basic Weighted Average Shares Outstanding | 43,529,557 | 43,404,557 |  |  |
| Diluted Net Income per Share | $0.06 | $0.12 | $(0.06) | -50% |
| Diluted Weighted Average Shares Outstanding | 43,529,557 | 43,415,163 |  |  |

17

### Three Months Ended March 31, 2012 and 2011

### Revenue

For the three months ended March 31, 2012, our sales revenue decreased by $2.0 million, or 11%, to $16.1 million from the $18.1 million in the corresponding period of 2011. The fall in revenue is mainly due to disruptions from the implementation of the ever-changing Healthcare Reform policies. Volatile profit margins at various links in the distribution chain are affecting our products sales structure in unpredictable ways and negatively impacting our sales revenues.

Set forth below are our revenues by product category in millions USD for each of the three months ended March 31, 2012 and 2011.

### Sales Revenue by Major Category (Dollars in Millions)

| Product Category | Three Months Ended March 31 2012 | 2011 | Net Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| CNS Cerebral & Cardio Vascular | $4.8 | $5.4 | $- 0.6 | -11% |
| Anti-Viro/ Infection & Respiratory | $6.8 | $7.1 | $- 0.3 | -4% |
| Digestive Diseases | $2.5 | $2.6 | $- 0.1 | -2% |
| Other | $2.0 | $3.1 | $- 1.1 | -37% |

During the first quarter of fiscal 2012, our overall sales revenue fell by 11% on a year-over-year basis. Most of the decline was from our “Other’s” category where sales fell by 37% to $2.0 million from $3.1 million for the quarter ended March 31, 2012. Short fall in sales of Vitamin B6 was a large contributor for the decline. Sales in the Anti-Viro Infection & Respiratory category fell by 2% to $6.8 million from $7.1 million in the prior year period. The “Digestive” category sales revenues edged lower by 4% to $2.5 million from $2.6 million in the same period prior year. Sales of CNS Cerebral & Cardio Vascular products fell by 11% to $4.8 million from $5.4 million in Q1 of 2011.

The impact of the implementation of the Healthcare Reform has affected pricing of our products throughout the distribution chain. These changes are causing unpredictable volatility in sales because pricing changes are not uniform across all geographical areas. As margins decline due to pricing pressures, every link of the distribution chain is being squeezed and becoming less active. We think pricing pressure from the Healthcare Reform will continue for some time.

Anti-Viro Infection & Respiratory was our largest category by sales in the first quarter of 2012 by capturing 42% of total revenue compares to 39% a year ago. CNS Cerebral & Cardio Vascular category came in second, representing 30% of total sales compares to 30% in the corresponding quarter a year ago. Sales of our Digestive Disease category were 16% of total sales in the first quarter of 2012 compares to 14% last year. Sales of Other category represented 12% of total sales in the latest quarter compares to 17% a year ago.

### Gross Margin and Gross Profit

Gross profit for the three months ended March 31, 2012 was $5.30 million, which was 23% lower compared to $6.87 million in the first quarter of 2011. Our gross margin for the first quarter of 2012 was 33%, compared to 37.9% in the corresponding quarter of 2011. We are seeing pricing pressure on most of our products, although the pressure is not uniform across product lines. We expect current challenging pricing environment to persist for some time.

Pricing pressure has become more evident over the past few quarters as the effect of the Chinese government healthcare reform is being felt across all pharmaceutical products, especially in EDL related products.

In terms of our gross margins by major categories, CNS Cerebral & Cardio Vascular category margins fell to 39.4% from the first quarter 2011 gross margin of 45.3%. Gross margin for our Anti-Viro/Infection & Respiratory category decreased to 25.4% from 27.5%. Gross margin for our Digestive Diseases category decreased to 35.7% from 48.4%, and gross margin for our Other category fell to 40.0% from 44.9%.

In the coming quarters, we expect to see continued pricing pressures, but believe our new products, such as Candesartan and Rosuvastatin, can help to support overall gross margin once they are launched.

### Selling Expenses

Our selling expenses for the three months ended March 31, 2012 were $0.89 million, an increase of 48%, compared to $0.60 million for the three months ended March 31, 2011. Selling expenses were approximately 5.6% of revenue in the first quarter of 2012 compared to 3.3% during the comparable quarter a year ago. Most of this increase reflects rising labor cost in our sales organization. Expansion of sales team in the grass-root healthcare institutions as well as rising wages contributed to the overall rising labor cost. That being said, our total selling expenses can be quite volatile from quarter to quarter. Our selling expenses will generally stay around 5% of total revenue.

### General Administrative Expenses

Our general and administrative expenses for the three months ended March 31, 2012 were $0.68 million, or 4.2% of total revenue, a decrease of $0.24 million, compared to $0.92 million, or 5.1% of total revenue, for the same period in 2011. Our general and administrative expenses tend to fluctuate at around 5% of total revenue, and our first quarter 2012 general administrative expenses were in line with historical norms.

### Bad Debt Expense and Account Receivables

In general, our normal credit or payments terms extended to customers are 90 days. This has not changed in recent years. Our customers are pharmaceutical distributors who sell to mostly government backed hospitals. Since hospital pharmacies in China typically take a very long time to pay for their pharmaceutical products, the age of our receivables from our customers tends to be long as well. Although these customers typically pay after the due date of the receivables, we have always been able to collect our receivables and have never had an uncollectible receivable from these customers.

The amount of accounts receivable that were past due (or the amount of accounts receivable that were more than 90 days old) was $62.3 million and $51.4 million as of March 31, 2012 and December 31, 2011, respectively. The following table illustrates our accounts receivable aging distribution in terms of percent of total accounts receivable as of March 31, 2012 and December 31, 2011:

|  | March 31, 2012 | December 31, 2011 |
| --- | ---: | ---: |
| 1 - 90 Days | 19.5% | 29.9% |
| 90 - 180 Days | 27.5% | 21.8% |
| 180 - 365 Days | 29.8% | 27.9% |
| 365 - 720 Days | 23.2% | 20.4% |
| Total | 100% | 100% |

Although we have not had to write off any receivables so far in our Company’s history, we do set aside an allowance for doubtful accounts. Our bad debt allowance estimate is currently the sum of 3.5% of accounts receivable that are less than 365 days old, 10% of accounts receivable that are between 365 days and 720 days old and 100% of accounts receivable amounts that are greater than 720 days old (although there were no amounts over 720 days old at March 31, 2012 or December 31, 2011).

To the extent that our current allowance for doubtful accounts is higher than that of the previous period, we recognize a bad debt expense for the difference during the current period, and when the current allowance is lower than that of the previous period, we recognize a bad debt benefit for the difference. As of March 31, 2012, our allowance for doubtful accounts was $3.88 million compared to $3.54 million as of December 31, 2011. The increase in the allowance was mainly due to an increase in our accounts receivable that is between 365 days old and 720 days old, and was recognized as bad debt benefit during the quarter ended March 31, 2012 of $320,098. This is compared to an increase in the allowance of $9,428 during the quarter ended March 31, 2011. The changes in the allowance for doubtful accounts during the three months ended March 31, 2012 and 2011 were as follows (there were no write-offs or recoveries):

|  | For the Three Months Ended March 31, 2012 | 2011 |
| --- | ---: | ---: |
| Balance, Beginning of Period | $3,536,405 | $3,317,017 |
| Bad debt expense (benefit) | 320,098 | 9,428 |
| Foreign currency translation adjustment | 19,966 | 29,342 |
| Balance, End of Period | $3,876,469 | $3,355,787 |

### Income from Operations

Our operating income for the three months ended March 31, 2012 was approximately $3.41 million, compared to $5.34 million for the same period in 2011, which represented a decrease of $1.92 million, or 36%. The decrease in operating income was mainly due to lower revenue and lower gross margins and higher operating expenses in the current period compared to the corresponding quarter one year ago.

### Derivative Gains (Losses)

Changes to the derivative warrant liability are recognized in the results of operations. A derivative gain of $0.68 million was recorded during three months ended March 31, 2011. Our warrants which were subject to derivative liability expired in May of 2011 and we had no derivative profit or loss in three months period ended March 31, 2012.

### Income Tax Expense

Income tax expense for the three months ended March 31, 2012 was $0.53 million, compared with $0.85 million in the same quarter a year ago. When our favorable income tax rate of 11% ended on December 31, 2010, our tax rate was going to increase to 24%. However, because we obtained the “National High-tech Enterprise” status, our tax rate will remain at 15% from 2011 through 2013.

### Net Income

Our net income for the three months ended March 31, 2012 was $2.81 million, a decrease of $2.30 million, or 45%, from $5.10 million for the three months ended March 31, 2011. The main reasons for the decrease in our net income are the decrease in sales revenue, falling gross margins and higher operating expenses. Our net income for the first quarter of 2011 also included a positive effect of $0.68 million derivative gains.

### Liquidity and Capital Resources

Our principal sources of liquidity are cash generated from operations and short-term bank loans. As of March 31, 2012, our cash and cash equivalents outstanding was $3.32 million, which represents 2.0% of our total assets, a decrease of $0.73 million from $4.05 million as of December 31, 2011. Of the $3.69 million of cash and cash equivalents and Banker’s Acceptances at March 31, 2012, a total of $3.66 million is considered to be reinvested indefinitely in Helpson and is not expected to be available for payment of dividends, or other payments to our parent company or to its shareholders. As of March 31, 2012, we had a principal balance of $3.96 million in short-term bank loans. The combination of cash flow generated from operating activities and cash flow from financing activities funded the new purchases of our intangible assets (drug formulas).

### Selected Cashflows for Three Months ended March 31, 2012 and 2011

| Cashflow from Operations | Three Months Ended March 31 2012 | 2011 |
| --- | ---: | ---: |
| Net Income | 2,806,359 | 5,103,622 |
| Depreciation & Amortization | 365,223 | 441,993 |
| Changes in Assets & Liabilities |  |  |
| Account Receivables | (5,154,644) | (1,464,957) |
| Advances to Suppliers | 944,949 | 794,570 |
| Inventory | (2,619,634) | (2,525,349) |
| Accounts Payable | 2,725,945 | (1,261,422) |
| **Net Cash Provided by Operations** | **119,706** | **1,386,476** |
| **Cashflow from Investing Activties** |  |  |
| Advances for purchases of property & equipment and intangible assets | (790,092) | (848,378) |
| **Net Cash Used by Investing Activities** | **(798,018)** | **(1,377,229)** |
| **Net Cash Provided by Financing Activities** | **-** | **67,919** |
| Effect of Exchange Rate change on Cash | (52,736) | 34,393 |
| **Total Change in Cash** | **(731,048)** | **111,559** |
| Cash & Equivalent Beginning Balance | 4,050,854 | 3,692,086 |
| Cash & Equivalent Ending Balance | $3,319,806 | $3,803,645 |

#### Operating Activities:

Net cash provided by operating activities was $0.12 million in the three months period ended March 31, 2012 compared to $1.39 million for the same period in 2011. The decrease in cash provided by operating activities was mainly due to lower net income in the period ended March 31, 2012 compared to the corresponding period in 2011.

At March 31, 2012, our accounts receivable was $73.5 million, an increase of $3.8 million from $69.7 million at December 31, 2011. Our receivables increased because our collection was not enough to offset account receivable increases as a result of new sales. For the first three months of fiscal 2012, $5.15 million was used to fund increases in Account Receivables, compared to $1.46 million for this category in the comparable period a year ago.

At March 31, 2012, total inventory was $34.3 million, an increase of $3.9 million from $30.4 million at December 31, 2011. Most of the inventory increase in the first three months of 2012 was due to increased purchase of raw material inventory while the inventory increase in the three months of 2011 was due to a rise in finished goods. Cash usage on Inventories for the three months period ended March 31, 2012 was $2.62 million as compared to $2.53 million in the comparable period for 2011.

For the period ending March 31, 2012, the increase in our accounts payable was responsible for a cash addition of $2.73 million while in the same period in 2011 an increase in accounts payable resulted in cash usage of $1.26 million.

#### Investing Activities:

Net cash used in investing activities in the three months ended March 31, 2012 was $0.8 million. The majority of the cash was used for our investments in new drug formulas during the period. This was a decrease of $0.58 million compared to the same period in 2011 of $1.38 million which also was used to purchase new drug formulas.

#### Financing Activities:

During the first three months of 2011, a related party lent our company $67,919 at an interest rate of 1% per annum and a term of six months.

We had no financing activities in three months period ended March 31, 2012.

“According to relevant PRC laws, companies registered in the PRC, including our PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of their after-tax net income, as determined under accounting standards and regulations in the PRC, to statutory surplus reserve accounts until the reserve account balances reach fifty percent (50%) of the companies’ registered capital prior to their remittance of funds out of the PRC. Allocations to these reserves and funds can only be used for specific purposes and are not transferrable to the parent company in the form of loans, advances or cash dividends. As of December 31, 2011 and 2010, the net assets of Helpson were $135,748,004 and $110,804,607, respectively. Due to the restriction on dividend distribution to overseas shareholders, the amount of Helpson’s net assets that were designated for general and statutory capital reserves, and thus could not be transferred to our parent company as cash dividends, were $7,863,490 and $7,562,237 (50% of registered capital) for the fiscal years ended December 31, 2011 and 2010. Since the amount that Helpson must set aside for the statutory surplus fund only accounts for 5.8% and 6.8%, respectively, of its total net assets, this reserve does not have a major impact on our liquidity.

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Our businesses and assets are primarily denominated in RMB. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form together with applicable invoices and signed contracts. These currency exchange control procedures imposed by the PRC government authorities may restrict the ability of Helpson, our PRC subsidiary, to transfer its net assets to our parent company through loans, advances or cash dividends.”

### Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements during the three-month periods ended March 31, 2012 or 2011.

### Commitments

At March 31, 2012 and 2011, we had no material commitments except for those expenditures incurred in the ordinary course of business.

### Critical Accounting Policies and Estimates

Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2011, for disclosures regarding our critical accounting policies and estimates. The interim financial statements follow the same accounting policies and methods of computations as those for the year ended December 31, 2011. There were no new accounting policies and estimates during the three-month period ended March 31, 2012 that affected us in any material respect.

## Market risk

As filed, 139 characters.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

## Controls and procedures

As filed, 2,848 characters.

### Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and interim Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on this evaluation, our Chief Executive Officer and interim Chief Financial Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

### Changes in Internal Controls over Financial Reporting

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. At December 31, 2011, our Chief Executive Officer and Chief Financial Officer determined that there existed a material weakness in our internal control over financial reporting with respect to our reporting of amortization of intangible assets. The material weakness occurred as a result of lack of technical training and education of our personnel. During the period covered by this report, we have undertaken steps to correct the material weakness by obtaining education and training in US GAAP for our accounting personnel regarding the proper accounting for and amortization of intangible assets. As a result, the material weakness has been remediated.

There were no other changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed May 14, 2012.
Source: SEC EDGAR, the filing index for accession 0001010549-12-000533. Last ingested by Listed: Oct 30, 2026, 16:51 ET. No prices; not investment advice.