UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT Of
1934
For the Quarterly Period Ended March 31, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Of 1934
For the Transition Period from _________ to _________
Commission file number: 000-29523
China Pharma Holdings, Inc.
(Exact name of registrant as specified on its charter)
Delaware 73-1564807
(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)
2nd Floor, No. 17, Jinpan Road, Haikou, Hainan Province, China
(Address of principle executive offices)
0086-898-66811730 (China) 858-776-8880 (USA)
(Registrant's telephone number, including area code)
Copies to:
Charles Law
King and Wood LLP
650 Page Mill Road,
Palo Alto, CA 94304
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: 34,723,056 shares of common
stock issued and outstanding as of March 31, 2006.
Transitional Small Business disclosure format: Yes [ ] No [ X ]
China Pharma Holdings, Inc.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements F-1thruF-8
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 1-6
ITEM 3 Controls and Procedures 6
PART II OTHER INFORMATION
ITEM 1 Legal proceedings 7
ITEM 2 Unregistered Sales of Equity Securities and use of proceeds 7
ITEM 3 Defaults upon senior securities 7
ITEM 4 Submission of matters to a vote of security holders 7
ITEM 5 Other information 8
ITEM 6 Exhibits and Reports on 8-K 8
SIGNATURES 9
EXHIBITS
================================================================================
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Page
----
TABLE OF CONTENTS
Condensed Consolidated Balance Sheets (unaudited), March 31, 2006
and December 31, 2005 F-1
Condensed Consolidated Statements of Operations (unaudited),
for the three months ended March 31, 2006 and from January 12, 2005
(Date of Inception) through March 31, 2005 F-2
Condensed Consolidated Statements of Cash Flows (unaudited), for
the three months ended March 31, 2006 and from January 12, 2005
(Date of Inception) through March 31, 2005 F-3
Notes to Condensed Consolidated Financial Statements (unaudited) F-4 thru F-8
Item 1. Financial Statements
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, 2006 December 31, 2005
ASSETS
Current assets
Cash and cash equivalents $ 74,924 $ 461,220
Trade accounts receivables, less allowance for doubtful
accounts of $1,168,385 and $1,412,353, respectively 8,251,166 5,709,762
Other non-trade receivables, less allowance for doubtful
accounts of $64,439 and $111,029, respectively 682,821 385,957
Advances to suppliers 1,722,661 2,123,729
Inventory 6,550,268 5,785,196
----------------- -----------------
Total current assets 17,281,840 14,465,864
----------------- -----------------
Non-current assets
Property and equipment, net 2,757,705 2,808,342
Intangible assets, net 86,597 96,406
Deferred tax assets 156,350 130,458
----------------- -----------------
Total non-current assets 3,000,652 3,035,206
----------------- -----------------
Total assets $ 20,282,492 $ 17,501,070
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 1,407,145 $ 679,104
Accrued expenses 32,090 15,625
Taxes payable 937,492 565,236
Other accounts payable 206,048 250,317
Advances from customers 50,491 50,755
Short-term notes payable 4,240,914 --
Dividends payable -- 4,209,889
----------------- -----------------
Total current liabilities 6,874,180 5,770,926
----------------- -----------------
Long-term liabilities
Research and development commitment 31,113 30,966
----------------- -----------------
Total long-term liabilities 31,113 30,966
----------------- -----------------
Shareholders' equity
Common shares - $0.001 par value; 60,000,000 shares
authorized; 34,723,056 shares issued and outstanding 34,723 34,723
Additional paid-in capital 7,764,979 7,764,979
Accumulated other comprehensive income 159,011 99,926
Retained earnings 5,418,486 3,799,550
----------------- -----------------
Total shareholders' equity 13,377,199 11,699,178
----------------- -----------------
Total liabilities and shareholders' equity $ 20,282,492 $ 17,501,070
================= =================
The accompanying notes are an integral part of the financial statements
F-1
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the period from
January 12, 2005
For the three (Date of Inception)
months ended through
March 31, 2006 March 31, 2005
------------------- -------------------
Revenues $ 4,732,991 $ --
Cost of revenues 2,526,020 --
------------------- -------------------
Gross profit 2,206,971 --
------------------- -------------------
Operating expenses
Selling expenses 88,030 --
General and administrative 264,200 --
------------------- -------------------
Total operating expenses 352,230 --
------------------- -------------------
Income from operations 1,854,741 --
------------------- -------------------
Non-operating income (expenses)
Interest income 147 --
Interest expense (23,799) --
Other income(expenses) 22,636 --
------------------- -------------------
Non-operating income (expenses) (1,016) --
------------------- -------------------
Income before taxes 1,853,725 --
Income tax expense 234,789 --
------------------- -------------------
Net income 1,618,936 --
------------------- -------------------
Comprehensive Income - currency translation adjustment 59,085 --
------------------- -------------------
Comprhensive Income $ 1,678,021 --
=================== ===================
Basic and diluted earnings per common share $ 0.05 $ --
=================== ===================
Weighted-average common shares outstanding 34,723,056 --
=================== ===================
The accompanying notes are an integral part of the financial statements
F-2
CHINA PHARMA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the period from
January 12, 2005
For the three (Date of Inception)
months ended through
March 31, 2006 March 31, 2005
------------------- -------------------
Cash flows from operating activities
Net income $ 1,618,936 $ --
Depreciation and amortization 85,140 --
Changes in assets and liabilities: --
Accounts receivable (2,541,404) --
Other receivable (296,864) --
Advances to suppliers 401,068 --
Inventory (765,072) --
Deferred tax asset (25,892) --
Trade accounts payable 728,040 --
Other accounts payable (44,269) --
Accrued expenses 16,465 --
Advances from customers (264) --
Accrued taxes payable 372,256 --
------------------- -------------------
Net cash used in operating activities (451,860) --
------------------- -------------------
Cash Flows from Investing Activities
Purchase of property and equipment (22,074) --
Purchase of intangible assets (2,472) --
------------------- -------------------
Net cash used by investing activities (24,546) --
Effect of exchange rate changes in cash 90,110 --
------------------- -------------------
Net decrease in cash (386,296) --
Cash and cash equivalents at beginning of period 461,220 --
------------------- -------------------
Cash and cash equivalents at end of period $ 74,924 $ --
=================== ===================
The accompanying notes are an integral part of the financial statements
F-3
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(unaudited)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of China
Pharma Holding, Inc. (the "Company"); formerly known as TS Electronics, Inc.,
and its subsidiaries were prepared pursuant to the rules and regulations of the
United States Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
Management of the Company ("Management") believes that the following disclosures
are adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Form 10-K report for the year ended December 31, 2005.
These unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) that, in the
opinion of Management, are necessary to present fairly the consolidated
financial position and results of operations of the Company for the periods
presented. Operating results for the three months ended March 31, 2006, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006.
Organization - Onny Investment Limited ("Onny") was incorporated in the British
Virgin Islands on January 12, 2005. Through June 15, 2005, Onny was a
development stage enterprise with no activities except for the acquisition of
Hainan Helpson Medical & Biotechnology Co., Ltd ("Helpson"), as discussed below.
Upon the acquisition of Helpson and its operations, Onny emerged from the
development stage. On June 16, 2005, Onny acquired all of the outstanding shares
of Helpson and emerged from the development stage.
On October 19, 2005, Onny was reorganized as a wholly-owned subsidiary of the
Company. The reorganization was accomplished through the exchange of 29,700
shares of Onny common stock for 20,555,329 shares of the Company's common stock
and for the commitment of the Company to issue an additional 4,723,056 shares
upon amending its articles of incorporation. The exchange of shares was a
851-for-1 exchange ratio. In addition, the prior Onny preferred shareholders
exchanged their 10,000 shares of Onny common stock for 6,944,611 shares of the
Company's common stock for a 694-for-1 exchange ratio. Additionally, the prior
Onny preferred shareholders converted their preferred stock into Onny common
F-4
shares. The reorganization of Onny into the Company was recognized as a stock
split of the common stock of Onny and the effective issuance by Onny of
2,500,060 shares of common stock to the Company's pre-reorganization
shareholders and the assumption of $4,473 of liabilities. The reverse
acquisition of the Company was recognized as a non-monetary exchange.
During the period ended March 31, 2006, the Company amended its articles of
incorporation to increase its authorized shares from 30,000,000 shares to
60,000,000 shares.
Nature of Operations - Helpson manufactures and markets several Western and
Chinese medicines sold mainly to hospitals and private retailers in The People's
Republic of China (PRC). The marketing department is in Hainan Province and
there are also nine offices with sales representative 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. There were no dilutive common shares outstanding
on March 31, 2006.
NOTE 2 - Acquisition
On May 25, 2005, Onny entered into an agreement with the shareholders of
Helpson, a privately held PRC joint venture, in which Onny agreed to acquire and
the shareholders of Helpson agreed to sell, all of the outstanding common shares
of Helpson in exchange for the assumption of obligations to make cash payments
to the Helpson shareholders in the form of common stock dividends from Helpson
of $4,154,041 the assumption of $4,646,409 of other liabilities and the issuance
of non-interest bearing promissory notes totaling $3,413,265 payable three
months after Helpson obtains a business license in the PRC as a wholly foreign
owned entity. Helpson obtained such license on June 16, 2005 and the shares of
Helpson were transferred to Onny on that date. Since June 16, 2005 was
recognized as the date of the acquisition, the promissory notes became due
September 16, 2005.
Since Helpson is an operating company and control of Helpson changed upon the
closing of the acquisition agreement, Onny is the accounting acquirer and has
recognized the acquisition of Helpson as a business combination in accordance
F-5
with Statements of Financial Accounting Standards No. 141, Business
Combinations. On April 25, 2005, Helpson declared a dividend to the selling
shareholders of $4,154,041 which equaled Helpson's retained earnings at March
31, 2005 less deferred income tax assets of $86,985 that are not considered part
of distributable profits under PRC law. The fair value of the net assets of
Helpson was determined by appraisal. The cost of the net assets exceeded the
fair value. That excess was allocated as a pro-rate reduction of the amounts
that otherwise would have been assigned to the non-current assets acquired.
NOTE 3 - Inventory
Inventory consisted of the following as of March 31, 2006:
Raw Materials $ 4,605,479
Work In Process 457,826
Finished Goods 1,486,963
-------------
$ 6,550,268
=============
NOTE 4 - Income Taxes
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and any tax credit carry forwards
available. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Helpson received tax benefits as a
result of a reduced tax rate from 30% to 15%, as a result of being in the first
five years of operations and a reduced tax of 7.5% as a result of operating in a
developing economic area in the PRC. The 7.5% enterprise income tax rate was
applied to the pre-tax income with the following result:
F-6
For the period from
January 12, 2005
For the three (Date of Inception)
months ended through
March 31, 2006 March 31, 2005
-------------------------------------- ------------------- -------------------
Tax at US Federal statutory rate (34%) $ 630,267 $ --
Non-deductible expenses (1,648) --
Change in temporary differences 79,826 --
Effect of lower foreign tax rates (473,656) --
-------------------------------------- ------------------- -------------------
Income tax provision $ 234,789 $ --
-------------------------------------- ------------------- -------------------
The Company has a deferred tax asset based upon the temporary differences from
the allowance for bad debt that equals $156,350. The Company has also incurred
various other taxes, primarily comprised of business tax, value-added tax, urban
construction tax, education surcharges and etc. Any unpaid amounts are reflected
on the balance sheets as other taxes payable.
NOTE 5 - Short Term Notes Payable
In January 2006, the Company reclassified its dividends payable as short term
notes and commenced accruing interest on the amount due at a rate of 2.25% per
annum, resulting in interest expense of $23,799 at March 31, 2006.
NOTE 6 - Stockholders' Equity
On October 19, 2005, the Company acquired all of the issued and outstanding
common stock of Onny; thus, Onny became a wholly owned subsidiary of the
Company. The reorganization of Onny into the Company was recognized as a stock
split of the common stock of Onny and the effective issuance by Onny of
2,500,060 shares of common stock to the Company's pre-reorganization
shareholders. The number of common shares issued and outstanding has been
restated in the accompanying condensed consolidated financial statements on a
retroactive basis for the effects of the stock split.
NOTE 7 - Contingencies
Economic environment - Significantly all of the Company's operations are
conducted in the PRC, and therefore the Company is subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and foreign currency exchange.
The Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other things.
F-7
In addition, all of the Company's revenue is denominated in the PRC's currency
of Renminbi ("RMB" or "(Y)"), 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.
F-8
Item 2.Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. In addition to historical information, the
following discussion and other parts of this document contain certain
forward-looking information. Our financial statements are prepared in accordance
with accounting principles generally accepted in the United States. When used in
this discussion, the words "believes," "anticipates," "expects," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected due to a number of factors beyond our
control.
We do not undertake to publicly update or revise any of the forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized. You are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. You
are also urged to carefully review and consider our discussions regarding the
various factors, which affect our business, included in this section and
elsewhere in this report.
Factors that might cause actual results, performance or achievements to differ
material, among other things: lay from those projected or implied in such
forward-looking statements include: (i) the impact of competitive products; (ii)
changes in law and regulations; (iii) adequacy and availability of insurance
coverage; (iv) limitations on future financing; (v) increases in the cost of
borrowings and unavailability of debt or equity capital; (vi) the effect of
adverse publicity regarding our products; (vii) our inability to gain and/or
hold market share; (viii) exposure to and expense of resolving and defending
product liability claims and other litigation; (ix) consumer acceptance of our
products; (x) managing and maintaining growth; (xi) customer demands; (xii)
market and industry conditions including pricing and demand for products, (xiii)
the success of product development and new product introductions into the
marketplace; (xiv) the departure of key members of management; (xv) our ability
to efficiently market our products; as well as other risks and uncertainties
that are described from time to time in our filings with the Securities and
Exchange Commission.
Notwithstanding the above, Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act expressly state that the safe harbor for forward
looking statements does not apply to companies that issue securities that meet
the definition of a penny stock, as such, the safe harbor for forward looking
statements does not apply to us.
1
Overview
On June 16, 2005, Onny Investment Limited ("Onny") acquired all of the
outstanding common shares of Hainan Helpson Medical Biotechnology Co., Ltd
("Helpson"), a privately held Chinese joint venture, in exchange for common
stock dividends payable to the Helpson shareholders of $4,154,041 and for
non-interest bearing promissory notes totaling $3,413,265 payable on September
16, 2005. The acquisition of Helpson was recognized as a business combination.
On October 19, 2005, Onny issued 10,000 preferred shares in exchange for
$4,313,000 in cash, net of offering costs and estimated registration costs, and
on that same date, those preferred shares were converted into 10,000 Onny common
shares. Also on October 19, 2005, Onny was reorganized as a wholly-owned
subsidiary of China Pharma Holdings, Inc. The reorganization was accomplished by
the original Onny common shareholder exchanging her 29,700 Onny common shares
for 20,555,329 common shares of China Pharma Holdings, Inc. and for the
commitment by China Pharma Holdings, Inc. to issue the original Onny common
shareholder 4,723,056 common shares following an amendment of the China Pharma
Holdings, Inc.. articles of incorporation increasing the number of common shares
authorized to 60,000,000 shares. In addition, the prior Onny preferred
shareholders exchanged their 10,000 Onny common shares for 6,944,611 common
shares of China Pharma Holdings, Inc.
We launched an anti-flu product named PuSenOK, which is the only anti flu
medicine in the market mixed with pseudo ephedrine hydrochloride, that has a
non-drowsy formula and a runny nose suppressant. We plan to expand our
biotechnology product series. Based on the foundation established by some of
Helpson's widely recognized medicine labels such as Neurotrophicpeptide, we will
launch several additional biological medicines, including the brain peptide
injection, injected hepatocyte growth-promoting factors, as well as new genetic
medicines, rh-CNTF and rha-FGF, which will give us a new growth following that
of Neurotrophicpeptide.
Our products have been sold in more than 20 provinces, sovereignties, and
autonomous regions. We have 16 sales offices and approximately 250 proxy agents
in the whole country. The main channels we use to deliver our products were as
follows: (1) Distribution system (Proxy Agency); (2) Direct sale system to
hospitals; (3) Direct representation in clinic hospitals through medical
representatives; and (4) Distribution of products to local medical companies
through logistics companies.
Our recent business activities include the following:
2005: Helpson launched a new anti-flu medicine: PusenOK.
2003: Helpson gained GMP authentication.
2003: Helpson named "the best enterprise for storing SARS medicine" by Hainan
Food and Drug Administration.
2000: Helpson awarded as one of 50 best enterprises in Hainan by Hainan Economic
and Trade Bureau and Hainan Statistical Bureau.
2
Buflomedil Hydrochloride (Raw material; injection; & troche)
o Received the best technology commercialization award in Hainan in 2004 by
Hainan Scientific and Technological Result Examination Committee.
o Received the national key new products certificate in 2003 by the State
Science and Technology Department, State Taxation Bureau, Ministry of
Commerce, State Bureau of Quality Supervision, Inspection and Quarantine,
and State Environmental Protection Bureau.
o Designated as the key technology project in Hainan in 2003 by Haikou
Municipality.
Operations Analysis For the three months ended
March 31, 2006
The following table presents the operation of the Company for the three months
ended March 31, 2006:
For the three months ended March
31,2006
Revenues $ 4,732,991
--------------------------------
Cost of revenues $ 2,526,020
Operating expenses $ 352,230
Income from operations $ 1,854,741
Interest expense $ 23,799
Net income $ 1,618,936
Basic and diluted earnings $ 0.05
per common share
Revenues
--------
Revenues were $4,732,991 for the three months ended March 31, 2006. During this
period, the revenues increased rapidly, the reasons of which mainly are as
follows:
Firstly, the promotion of products has obtained an apparent effect, which
resulted in that the new products have quickly entered the market. The above new
products primarily include Gastrodin injection and Naproxen Sodium and
Pesudophedrine Hydrochloride (or Pusen OK). Secondly, the sales network has
spread over the majority of provinces in China. Lastly, increased outputs of
products ensured a significant improvement in sales since the manufacturing
capacity of Helpson has been expanded.
Cost of Revenues
----------------
The cost of revenues was $2,526,020, which is 53% of the revenues.
3
The two new products, which have higher gross profit margins, were introduced
into the market. Thus, the cost of revenues was reduced during the period due to
an increased sale. The cost is expected to be further reduced due to economies
of scale caused by the expected rapid growth of the company, the effective cost
control and the improvement of the manufacturing process in the year 2006.
Operating expenses
------------------
The operating expenses for the three months ended March 31, 2006 were $352,230,
which is 18.99% of income from operations.
The selling expenses include the welfare and salaries of the sales person and
related transportation expenses. The selling expenses compared with revenue are
lower than the industry average level, the main reasons for that are its major
customers are hospitals and the selling network of the company is through
agents. However, the company incurred some advertising expenses to promote its
new product PuSen OK, which increased the percentage of selling expenses
compared to the revenues in 2006.
The general and administrative expenses include R&D, the welfare and salaries of
the administrative staff. Compared with the R&D expenditure in 2005, the amount
of the R&D expenditure for new products was decreased because the researchers
come from company personnel. Meanwhile, the reduced amortization of intangible
assets was another reason causes a decreased operating expense.
Income from operations was $1,854,741, which is 39% of the total revenues.
Interest expenses
-----------------
Interest expense for three months ended March 31, 2006 is $23,799 and net income
is $1,618,936. The Company just paid off two long-term loans in 2005, but the
Company had not applied for new loans up to March 31, 2006, which made a
significant decrease of interest expenses during the first quarter of 2006.
However, the Company plans to apply for a new loan of approximately $3,130,000
in May of 2006. The expected annual interest rate is 6% will cause an increase
in interest expenses later.
Helpson is now applying for a special tax policy, which is for the foreign
companies in China. The policy is that the qualified foreign companies do not
have to pay income taxes in the first two years of their operations in China.
From the third to the fifth year, the companies only need to pay half of the
income tax rate 15%, which is 7.5%. As a new foreign company, it is supposed to
be approved as tax exemption in the year 2006. Since the application was in
process, the Company still needed to pay income tax during the first quarter of
2006. However, the above income tax is anticipated to be paid back by Chinese
government as soon as the favorable tax policy is authorized in the late of year
2006.
4
Liquidity and capital resource for the three months ended March 31, 2006
The following table presents selected items from the balance sheets as of March
31, 2006, and December 31, 2005
As of March 31, 2006 As of December 31, 2005
2005 2006
cash and cash equivalents $ 74,924 $ 461,220
trade accounts receivable $ 8,251,166 $ 5,709,762
inventory $ 6,550,268 $ 5,785,196
Total current assets $ 17,281,840 $ 14,465,864
property and equipment, net $ 2,757,705 $ 2,808,342
total assets $ 20,282,492 $ 17,501,070
Total current liabilities $ 6,874,180 $ 5,770,926
long-term liabilities $ 31,113 $ 30,966
Total shareholder's equity $ 13,377,199 $ 11,699,178
Analysis of financial position
------------------------------
At March 31, 2006, cash and cash equivalents of $74,924, which were 4.34% of the
total current assets, were decreased by 83.76% compared to the same item at
December 31, 2005. The net value of property and equipment was $ 2,757,705,
13.6% of the total assets.
The trade accounts receivables were $8,251,166 and the valuation of inventory
was $6,550,268 at March 31, 2006. Trade accounts receivable and inventory
amounted to 40.7% and 32.3% respectively of the total assets. The dramatic
increase of sales revenues from the subsidiary of TS in China, Helpson, caused
the increase of the value of trade receivables. The long collection period of
accounts receivable also caused that the accounts receivable was increased by
44.51% compared with at December 31, 2005. Considering the slow collectibility,
the Company plans to pay more attention to collecting trade accounts receivable,
try to use cash-sales when selling products to new customers or small-sized
customers.
5
An increase of 13.22% in inventory was primarily due to the special geographical
location of Hainan Island, there is a long distance from other provinces causing
some difficulties of transportation of inventory, and the Company has to prepare
more materials in order to satisfy the production demands. Secondly, some of the
materials need to be produced by specific manufacturers; the company has to save
the materials to meet the demands of production. Moreover, a dramatically
increased sale resulted in a rise of inventory.
The total liabilities of $6,905,293 compared with total assets of $20,282,492,
results in a liability ratio of 34.05%. If the inventory of $6,550,268 is
excluded from total current assets of $17,281,840, compared with the current
liabilities of $6,874,180, result in a quick ratio of 1.56. This shows that the
Company has ability to pay its debts.
An increase of $1,678,021, 14.34% in the shareholder's equity compared to at
December 31, 2005 is primarily due to the increase of accumulated other
comprehensive income, and the increase of the retained earnings which was caused
by the increased sales revenue.
Operating activities
--------------------
As of March 31, 2006 we had cash and cash equivalents in the amount of $74,924,
which was decreased by 83.76%, in the amount of $386,296, compared to at
December 31, 2005. Net cash flow used in operating activities during the first
quarter of 2006 was $451,860. The main reason for the amount in cash utilized in
operating activities was an increase of trade accounts receivable in the amount
of $2,541,404, and an increase of inventory in the amount of $765,072 during the
period.
Investing activities
--------------------
Net cash utilized in investing activities was $24,546 during the first quarter
of 2006. The use of net cash was due to the purchase of PPE (Construction in
progress) and intangible assets which amounted to $22,074 and $2,472,
respectively.
In conclusion, cash utilized for the first quarter amounted to $386,296,
primarily due to the net cash used in operating activity in the amount of
$451,860, and the decrease of net cash flow in the purchase of long-term assets
in the amount of $24,546.
Item 3 - Control and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
6
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, the Company's President and Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 - Defaults upon Senior Securities
Not Applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
On March 28, 2006, the Company filed a form definitive 14C to effect the
followings:
7
o Change our corporate name from TS Electronics, Inc. to China
Pharma Holdings, Inc.;
o Increase the number of shares of common stock authorized to be
issued by the corporation from Thirty Million (30,000,000)
shares to Sixty Million (60,000,000) shares; and
o Set the number of directors constituting the entire Board of
Directors at between three and nine, with the specific number
to be fixed from time to time by a vote of the majority of the
entire Board of Directors.
The definitive 14C became effective on May 1, 2005 when the Company filed its
Amended Certificate of Incorporation with the Secretary of the State of
Delaware.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14
and Rule 15d-14(a) of the Exchange Act.
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14
and Rule 15d-14(a) of the Exchange Act.
32.1 - Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 - Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
8
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Pharma Holdings, Inc.
Dated: May 11, 2006 By: /s/ Zhilin Li
Chief Executive Officer,
President and Director
Dated: May 11, 2006 By: /s/ Xinhua Wu
Chief Financial Officer
and Director
9