UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended March 31, 2012
|
¨
|
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition
period from _____ to _____
Commission File Number:
000-53231
HUBEI
MINKANG PHARMACEUTICAL LTD.
(Exact name of registrant as specified in
its charter)
Nevada
|
|
26-24106855
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
55 Ubi Ave. 3, #03-01, Mintwell Building
|
|
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Singapore
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408864
|
(Address of principal executive offices)
|
|
(Zip Code)
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+65-6747-7883
Registrant’s telephone number, including
area code
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
of 1934 during the preceding 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
¨
No
x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
|
Accelerated filer
¨
|
|
|
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
x
State the number of shares outstanding of each of the issuer’s
classes of common equity, as of the latest practicable date. 44,177,439 shares of common stock as of May 9, 2012.
TABLE OF CONTENTS
USE OF NAMES
|
|
1
|
|
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|
|
1
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|
PART I – FINANCIAL INFORMATION
|
|
1
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Item 1. Financial Statements
|
|
1
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|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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3
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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9
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Item 4. Controls and Procedures.
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9
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PART II - OTHER INFORMATION
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10
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Item 1. Legal Proceedings
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10
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Item 1A. Risk Factors
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10
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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10
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Item 3. Defaults upon Senior Securities
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11
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Item 4. Mine Safety Disclosures
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11
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Item 5. Other Information
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11
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Item 6. Exhibits
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11
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USE OF NAMES
In this annual report, the terms “Hubei
Minkang,” “Company,” “we,” or “our,” unless the context otherwise requires, mean Hubei
Minkang Pharmaceutical Ltd. and its subsidiaries, if any.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this quarterly
report on Form 10-Q constitute “forward-looking statements” as that term is defined in applicable securities laws.
Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as “may,” “should,” “intend,” “expect,”
“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”
or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors, which may cause our or our industry’s actual results,
levels of activity or performance to be materially different from any future results, levels of activity or performance expressed
or implied by these forward-looking statements. These risks and uncertainties include: (1) a continued downturn in international
economic conditions; (2) any adverse occurrence with respect to our patented technology; (3) our ability to bring new products
to market; (4) market demand for our products; (5) shifts in industry capacity; (6) product development or other initiatives by
our competitors; (7) fluctuations in the availability and cost of materials required to produce our products; (8) potential negative
financial impact from claims, lawsuits and other legal proceedings or challenges; and (9) other factors beyond our control. Important
factors that you should also consider, include, but are not limited to, the factors discussed under “Risk Factors”
in our annual report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission
on April 16, 2012.
Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance.
These forward-looking statements speak only as of the date on which they are made, and except to the extent required by applicable
law, including the securities laws of the United States, we undertake no obligation to update any forward-looking statements to
reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking statements. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety
by the cautionary statements contained in this quarterly report.
PART I –
FINANCIAL INFORMATION
Item 1. Financial Statements
Our unaudited financial statements included in this Form 10-Q
are as follows:
F-2
|
|
Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011;
|
F-3
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Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011 (unaudited);
|
F-4
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Consolidated Statement of Stockholders’ Equity for the Year Ended December 31, 2011 and for the three months ended
March 31, 2012 (unaudited);
|
F-5
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Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited); and
|
F-6
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|
Notes to the Consolidated Financial Statements (unaudited).
|
It is the opinion of management that the
unaudited interim consolidated financial statements for the three months ended March 31, 2012 and 2011 include all adjustments
necessary in order to ensure that the unaudited interim consolidated financial statements are not misleading. These unaudited interim
financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial
position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally
accepted in the United States of America. Except where noted, these unaudited interim consolidated financial statements follow
the same accounting policies and methods of their application as our Company’s audited annual financial statements for the
year ended December 31, 2011. All adjustments are of a normal recurring nature. These unaudited interim consolidated financial
statements should be read in conjunction with our Company’s audited annual financial statements as of and for the year ended
December 31, 2011, which were attached to the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2012.
Hubei Minkang Pharmaceutical Ltd.
March 31, 2012 and 2011
Index to the Consolidated Financial Statements
Contents
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|
Page(s)
|
|
|
|
Consolidated Balance Sheets at March 31, 2012 (Unaudited) and December 31, 2011
|
|
F-2
|
|
|
|
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
|
|
F-3
|
|
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Consolidated Statement of Stockholders’ Equity for the Year Ended December 31, 2011 and for the Three Months Ended March 31, 2012 (Unaudited)
|
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F-4
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|
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Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
|
|
F-5
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|
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Notes to the Consolidated Financial Statements (Unaudited)
|
|
F-6
|
Hubei Minkang Pharmaceutical Ltd.
Consolidated Balance Sheets
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
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|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,922,271
|
|
|
$
|
3,104,846
|
|
Restricted cash, unearned government grant
|
|
|
465,714
|
|
|
|
468,009
|
|
Banker's acceptance notes receivable
|
|
|
1,738,351
|
|
|
|
1,639,353
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|
Accounts receivable, net
|
|
|
1,894,159
|
|
|
|
2,118,047
|
|
Advance on purchases
|
|
|
699,373
|
|
|
|
583,776
|
|
Inventories
|
|
|
2,900,329
|
|
|
|
2,461,454
|
|
Prepayments and other current assets
|
|
|
76,711
|
|
|
|
67,400
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
10,696,908
|
|
|
|
10,442,885
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
5,725,554
|
|
|
|
5,690,992
|
|
Accumulated depreciation
|
|
|
(1,038,859
|
)
|
|
|
(943,987
|
)
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
4,686,695
|
|
|
|
4,747,005
|
|
|
|
|
|
|
|
|
|
|
LAND USE RIGHTS
|
|
|
|
|
|
|
|
|
Land use rights
|
|
|
2,452,433
|
|
|
|
2,437,006
|
|
Accumulated amortization
|
|
|
(355,603
|
)
|
|
|
(341,181
|
)
|
|
|
|
|
|
|
|
|
|
LAND USE RIGHTS, net
|
|
|
2,096,830
|
|
|
|
2,095,825
|
|
|
|
|
|
|
|
|
|
|
PURCHASED FORMULAE
|
|
|
|
|
|
|
|
|
Purchased formulae
|
|
|
1,905,357
|
|
|
|
1,893,371
|
|
Accumulated amortization
|
|
|
(1,381,384
|
)
|
|
|
(1,325,360
|
)
|
|
|
|
|
|
|
|
|
|
PURCHASED FORMULAE, net
|
|
|
523,973
|
|
|
|
568,011
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
18,004,406
|
|
|
$
|
17,853,726
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Loans payable
|
|
$
|
3,165,308
|
|
|
$
|
3,145,396
|
|
Accounts payable
|
|
|
2,618,172
|
|
|
|
2,463,908
|
|
Customer deposits
|
|
|
1,002,568
|
|
|
|
1,030,445
|
|
Taxes payable
|
|
|
144,453
|
|
|
|
203,039
|
|
Advances from stockholders
|
|
|
378,152
|
|
|
|
505,480
|
|
Working capital advances
|
|
|
791,327
|
|
|
|
786,349
|
|
Deferred revenue from government grant
|
|
|
465,714
|
|
|
|
468,009
|
|
Due to related party
|
|
|
66,395
|
|
|
|
-
|
|
Accrued expenses and other current liabilities
|
|
|
1,757,831
|
|
|
|
1,721,133
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
10,389,920
|
|
|
|
10,323,759
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
10,389,920
|
|
|
|
10,323,759
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value: 10,000,000 shares authorized; none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value: 168,750,000 shares authorized; 43,047,169 shares issued and outstanding
|
|
|
43,047
|
|
|
|
43,047
|
|
Additional paid-in capital
|
|
|
3,439,480
|
|
|
|
3,439,480
|
|
Retained earnings
|
|
|
2,778,024
|
|
|
|
2,744,600
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
1,353,935
|
|
|
|
1,302,840
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
7,614,486
|
|
|
|
7,529,967
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
18,004,406
|
|
|
$
|
17,853,726
|
|
See accompanying notes to the Consolidated
Financial Statements.
Hubei Minkang Pharmaceutical Ltd.
Consolidated Statements of Income and Comprehensive
Income
|
|
For the Three Months
|
|
|
For the Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
2,687,939
|
|
|
$
|
2,818,413
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
1,464,304
|
|
|
|
1,537,929
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
1,223,635
|
|
|
|
1,280,484
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Advertising expenses
|
|
|
8,940
|
|
|
|
6,099
|
|
Selling expenses
|
|
|
346,890
|
|
|
|
416,833
|
|
Professional fees
|
|
|
65,849
|
|
|
|
-
|
|
Research and development
|
|
|
9,331
|
|
|
|
6,422
|
|
General and administrative expenses
|
|
|
654,901
|
|
|
|
482,075
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,085,911
|
|
|
|
911,429
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
137,724
|
|
|
|
369,055
|
|
|
|
|
|
|
|
|
|
|
OTHER (INCOME) EXPENSE:
|
|
|
|
|
|
|
|
|
Government grants - energy conservation
|
|
|
(5,265
|
)
|
|
|
-
|
|
Interest income
|
|
|
(4,236
|
)
|
|
|
(2,429
|
)
|
Interest expense
|
|
|
55,808
|
|
|
|
21,756
|
|
Other (income) expense
|
|
|
5,248
|
|
|
|
(9,569
|
)
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
|
51,555
|
|
|
|
9,758
|
|
|
|
|
|
|
|
|
|
|
Income before Income Tax Provision
|
|
|
86,169
|
|
|
|
359,297
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision
|
|
|
52,745
|
|
|
|
89,825
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
33,424
|
|
|
|
269,472
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
51,095
|
|
|
|
60,555
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
51,095
|
|
|
|
60,555
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
84,519
|
|
|
$
|
330,027
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share - Basic and Diluted
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
- basic and diluted
|
|
|
43,047,169
|
|
|
|
33,500,000
|
|
See accompanying notes to the Consolidated
Financial Statements.
Hubei Minkang Pharmaceutical Ltd.
Consolidated Statement of Stockholders'
Equity
For the Year Ended December 31, 2011 and
December 31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
Common Stock, $0.001 Par Value
|
|
|
Additional
|
|
|
|
|
|
Comprehensive Income
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Foreign Currency
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Translation Gain
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
33,500,000
|
|
|
$
|
33,500
|
|
|
$
|
3,586,500
|
|
|
$
|
754,214
|
|
|
$
|
768,296
|
|
|
$
|
5,142,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,204,431
|
|
|
|
|
|
|
|
2,204,431
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,991
|
|
|
|
230,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,435,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
33,500,000
|
|
|
|
33,500
|
|
|
|
3,586,500
|
|
|
|
2,958,645
|
|
|
|
999,287
|
|
|
|
7,577,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse acquisition adjustment
|
|
|
9,547,169
|
|
|
|
9,547
|
|
|
|
(147,020
|
)
|
|
|
|
|
|
|
|
|
|
|
(137,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214,045
|
)
|
|
|
|
|
|
|
(214,045
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303,553
|
|
|
|
303,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
43,047,169
|
|
|
|
43,047
|
|
|
|
3,439,480
|
|
|
|
2,744,600
|
|
|
|
1,302,840
|
|
|
|
7,529,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,424
|
|
|
|
|
|
|
|
33,424
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,095
|
|
|
|
51,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2012
|
|
|
43,047,169
|
|
|
$
|
43,047
|
|
|
$
|
3,439,480
|
|
|
$
|
2,778,024
|
|
|
$
|
1,353,935
|
|
|
$
|
7,614,486
|
|
See accompanying notes to the Consolidated
Financial Statements.
Hubei Minkang Pharmaceutical Ltd.
Consolidated Statements of Cash Flows
|
|
For the Three Months
|
|
|
For the Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,424
|
|
|
$
|
269,472
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
89,794
|
|
|
|
73,794
|
|
Amortization expense
|
|
|
59,519
|
|
|
|
57,690
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Banker's acceptance notes receivable
|
|
|
(88,062
|
)
|
|
|
(443,252
|
)
|
Accounts receivable
|
|
|
235,804
|
|
|
|
481,881
|
|
Advance on purchases
|
|
|
(111,197
|
)
|
|
|
-
|
|
Inventories
|
|
|
(420,629
|
)
|
|
|
(31,243
|
)
|
Prepayments and other current assets
|
|
|
(8,829
|
)
|
|
|
(78,962
|
)
|
Accounts payable
|
|
|
139,359
|
|
|
|
(280,623
|
)
|
Customer deposits
|
|
|
(34,184
|
)
|
|
|
1,256,279
|
|
Taxes payable
|
|
|
(58,581
|
)
|
|
|
(114,300
|
)
|
Deferred revenue from government grant
|
|
|
(5,224
|
)
|
|
|
-
|
|
Due to related party
|
|
|
66,395
|
|
|
|
-
|
|
Accrued expenses and other current liabilities
|
|
|
27,782
|
|
|
|
(466,913
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(74,629
|
)
|
|
|
723,823
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash acquired from acquisition
|
|
|
558
|
|
|
|
-
|
|
Release of restricted cash
|
|
|
5,224
|
|
|
|
-
|
|
Purchases of property, plant and equipment
|
|
|
-
|
|
|
|
(13,183
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
5,782
|
|
|
|
(13,183
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from loans payable
|
|
|
786,349
|
|
|
|
762,184
|
|
Repayment of loans payable
|
|
|
(786,349
|
)
|
|
|
-
|
|
Amounts received from (repayment made to) stockholders
|
|
|
(129,707
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(129,707
|
)
|
|
|
762,184
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
16,537
|
|
|
|
11,830
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(182,017
|
)
|
|
|
1,484,654
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of the period
|
|
|
3,104,288
|
|
|
|
1,394,805
|
|
|
|
|
|
|
|
|
|
|
Cash at end of the period
|
|
$
|
2,922,271
|
|
|
$
|
2,879,459
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
55,808
|
|
|
$
|
21,756
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
29,257
|
|
|
$
|
285,201
|
|
See accompanying notes to the Consolidated
Financial Statements.
Hubei Minkang Pharmaceutical Ltd.
March 31, 2012 and 2011
Notes to the Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Operations
Hubei Minkang Pharmaceutical Ltd.
(formerly Nexgen Petroleum Corp., Blackrock Petroleum Corp. or DGT Corp.)
Hubei Minkang Pharmaceutical
Ltd. (formerly Nexgen Petroleum Corp., Blackrock Petroleum Corp. or DGT Corp.) (“Hubei” or the “Company”)
was incorporated on April 17, 2006 under the laws of the State of Nevada. Through various acquisitions and name changes,
the Company engaged in the business of acquiring, exploring and developing oil and gas properties.
On October 20, 2010,
the Company changed to its current name, Hubei Minkang Pharmaceutical Ltd. to reflect its intended acquisition of HBMK Pharmaceutical
Limited (“HBMK”), a BVI corporation.
The Company discontinued
its oil and gas exploration business upon consummation of the share exchange agreement (“Share Exchange Agreement”)
with HBMK and all of the shareholders of HBMK on September 21, 2011.
HBMK Pharmaceutical Limited and subsidiary
HBMK Pharmaceutical Limited
HBMK Pharmaceutical
Limited was incorporated on June 29, 2010 under the laws of the Territory of the British Virgin Islands (“BVI”). HBMK
was formed by the stockholders of Sensori Holdings (S) Pte Ltd., the sole stockholder of Hubei Minkang Pharmaceutical Co., Ltd.
for the sole purpose of acquiring all of the registered and contributed capital of Hubei Minkang Pharmaceutical Co., Ltd.
Prior to October 12,
2010, the date of recapitalization, HBMK was inactive and had no assets or liabilities.
Hubei Minkang Pharmaceutical
Co., Ltd.
Hubei Minkang Pharmaceutical
Co., Ltd. (“Minkang”) was incorporated on December 18, 2003 under the laws of the People’s Republic of China
(“PRC”). Minkang engages in the research, development, manufacturing and distribution of traditional Chinese medicine.
Merger of Minkang
On October 12, 2010,
HBMK acquired all of the registered and contributed capital of Minkang from Sensori Holdings (S) Pte Ltd., Minkang’s then
sole stockholder in exchange for 3,620,000 shares of the HBMK’s common stock. The number of shares issued represented 100%
of the issued and outstanding common stock immediately after the consummation of the Minkang acquisition.
As a result of the
ownership interests of the former stockholder of Minkang, for financial statement reporting purposes, the merger between HBMK and
Minkang has been treated as a reverse acquisition with Minkang deemed the accounting acquirer and HBMK deemed the accounting acquiree
under the purchase method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The
reverse merger is deemed a capital transaction and the net assets of Minkang (the accounting acquirer) are carried forward to HBMK
(the legal acquirer and the reporting entity) at their carrying value before the acquisition. The acquisition process utilizes
the capital structure of HBMK and the assets and liabilities of Minkang which are recorded at historical cost. The equity of the
combined entity is the historical equity of Minkang retroactively restated to reflect the number of shares issued by HBMK in the
transaction.
Acquisition of HBMK Pharmaceutical
Limited and Subsidiary Recognized as a Reverse Acquisition
On July 8, 2011, Hubei
entered into a share exchange agreement (the “Share Exchange Agreement”) with HBMK and all of the shareholders of HBMK
and consummated the Share Exchange Agreement on September 21, 2011, with the HBMK stockholders representing 100% of then issued
and outstanding capital stock of HBMK. Pursuant to the terms of the Share Exchange Agreement, Hubei acquired all of the issued
and outstanding shares of capital stock of HBMK from HBMK’s then stockholders in exchange for 33,500,000 shares of the Hubei’s
common stock. The number of shares issued represented approximately 77.8% of the issued and outstanding common stock immediately
after the consummation of the Share Exchange.
As a result of the
ownership interests of the former stockholders of HBMK, for financial statement reporting purposes, the merger between Hubei and
HBMK has been treated as a reverse acquisition with HBMK deemed the accounting acquirer and Hubei deemed the accounting acquiree
under the purchase method of accounting in accordance with section 805-10-55 of the FASB Accounting Standards Codification. The
reverse merger is deemed a capital transaction and the net assets of HBMK (the accounting acquirer) are carried forward to Hubei
(the legal acquirer and the reporting entity) at their carrying value before the combination. The acquisition process utilizes
the capital structure of Hubei and the assets and liabilities of HBMK which are recorded at historical cost. The equity of the
combined entity is the historical equity of HBMK retroactively restated to reflect the number of shares issued by Hubei in the
transaction.
Note 2 – Summary of Significant
Accounting Policies
Basis of Presentation - Unaudited Interim Financial Information
The accompanying unaudited
interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations
of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The
unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results
are not necessarily indicative of the results for the full year. These unaudited interim consolidated financial statements
should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2011 and
notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2012.
Principles of Consolidation
The consolidated financial
statements include all accounts of the Company and its entities as of the reporting period ending date(s) and for the reporting
period(s) as follows:
Entity
|
|
Jurisdiction, Place of Incorporation
|
|
Attributable Interest
|
|
|
|
|
|
|
|
HBMK Pharmaceutical Limited
|
|
The Territory of the British Virgin Islands
|
|
|
100
|
%
|
|
|
|
|
|
|
|
Hubei Minkang Pharmaceutical Co., Ltd.
|
|
PRC
|
|
|
100
|
%
|
All inter-company balances
and transactions have been eliminated.
Reclassification
Certain amounts in
the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications
had no effect on reported losses.
Use of Estimates and Assumptions
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 disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period.
The Company’s
significant estimates and assumptions include the fair value of financial instruments; allowance for doubtful accounts, normal
production capacity, inventory valuation and obsolescence; the carrying value, recoverability and impairment of long-lived assets,
including the values assigned to and the estimated useful lives of property, plant and equipment, land use rights, and purchased
formulae; interest rates; revenue and government grant realized or realizable and earned; sales returns and allowances; value added
tax rate, income tax rate and related tax provision; foreign currency exchange rate and functional currency of foreign subsidiaries.
Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its
estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements
taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Management regularly
evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts
and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates
are adjusted accordingly.
Actual results could
differ from those estimates.
Fair Value of Financial Instruments
The Company follows
paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair
value of its financial instruments and paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about
fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements.
To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1
|
|
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
|
Level 2
|
|
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
|
|
Level 3
|
|
Pricing inputs that are generally observable inputs and not corroborated by market data.
|
Financial assets are
considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques
and at least one significant model assumption or input is unobservable.
The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority
to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described
above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The carrying amounts
of the Company’s financial assets and liabilities, such as cash, restricted cash – unearned government grants, banker’s
acceptance notes receivable, accounts receivable, advance on purchases, prepayments and other current assets, accounts payable,
customer deposits, taxes payable, deferred revenue from government grants, accrued expenses and other current liabilities approximate
their fair values because of the short maturity of these instruments.
The Company’s
loans payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that
would be available to the Company for similar financial arrangements at March 31, 2012 and December 31, 2011.
Transactions involving
related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market
dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party
transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations
can be substantiated.
It is not, however,
practical to determine the fair value of advances from stockholders due to their related party nature.
Fair Value of Non-Financial Assets
or Liabilities Measured on a Recurring Basis
The Company identifies
potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors. Excess quantities
are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides
lower of cost or market reserves for such identified excess and slow-moving inventories. The Company establishes a reserve for
inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.
Carrying Value, Recoverability and
Impairment of Long-Lived Assets
The Company has adopted
paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived
assets, which include property, plant and equipment, land use rights, and purchased formulae are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company assesses
the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related
long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally
determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived
assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally
estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
The Company considers
the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance
or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the
manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or
changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased
competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory
changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the
occurrence of such events.
The key assumptions
used in management’s estimates of projected cash flow deal largely with forecasts of sales levels, gross margins, and operating
costs of the manufacturing facilities. These forecasts are typically based on historical trends and take into account recent developments
as well as management’s plans and intentions. Any difficulty in manufacturing or sourcing raw materials on a cost effective
basis would significantly impact the projected future cash flows of the Company’s manufacturing facilities and potentially
lead to an impairment charge for long-lived assets. Other factors, such as increased competition or a decrease in the desirability
of the Company’s products, could lead to lower projected sales levels, which would adversely impact cash flows. A significant
change in cash flows in the future could result in an impairment of long lived assets.
The impairment charges,
if any, is included in operating expenses in the accompanying consolidated statements of income and comprehensive income (loss).
Cash Equivalents
The Company considers
all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Restricted Cash, Unearned Government
Grants
The Company follows
paragraph 210-10-45-4 of the FASB Accounting Standards Codification for restricted cash, unearned government grants. Restricted
cash, unearned government grants represents grants received from the City of Yichang government to be used in the Company’s
environmental protection and improvement projects.
Banker’s Acceptance Notes Receivable
The Company accepts
bankers’ acceptance notes in payment of accounts receivable with certain customers. These notes are usually of a short term
nature, approximately three to nine months in length. They are non-interest bearing, are due on the date of maturity; are paid
by the customers’ bank or credit worthy issuer upon presentation.
Accounts Receivable and Allowance
for Doubtful Accounts
Accounts receivable
are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company follows paragraph 310-10-50-9 of the
FASB Accounting Standards Codification to estimate the allowance for doubtful accounts. The Company performs on-going credit evaluations
of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined
by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off
experience, customer specific facts and economic conditions.
Outstanding account
balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate
of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in general
and administrative expenses, if any. Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances
are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered
remote. The Company has adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables
are past due or delinquent based on how recently payments have been received.
There was no allowance
for doubtful accounts at March 31, 2012 or December 31, 2011.
The Company does not
have any off-balance-sheet credit exposure to its customers.
Advance on Purchases
Advance on purchases
primarily represents amounts paid to vendors for future delivery of products ranging from three (3) months to nine (9) months,
all of which are fully or partially refundable depending upon the terms and conditions of the purchase agreements.
Inventories
Inventory Valuation
The Company values
inventories, consisting of raw materials, packaging material and finished goods, at the lower of cost or market. Cost is determined
on the first-in and first-out (“FIFO”) method for raw materials and packaging materials and the weighted average cost
method for finished goods. Cost of finished goods comprises direct labor, direct materials, direct production cost and an allocated
portion of production overhead. The Company reduces inventories for the diminution of value, resulting from product obsolescence,
damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated market
value. Factors utilized in the determination of estimated market value include (i) current sales data and historical
return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product
expiration dates, and (vi) component and packaging obsolescence.
Normal Capacity and Period
Costs of Underutilized or Idle Capacity of the Production Facilities
The Company follows
paragraph 330-10-30-3 of the FASB Accounting Standards Codification for the allocation of production costs and charges to inventories.
The Company allocates fixed production overhead to inventories based on the normal capacity of the production facilities expected
to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting
from planned maintenance. Judgment is required to determine when a production level is abnormally low (that is, outside the range
of expected variation in production). Factors that might be anticipated to cause an abnormally low production level include significantly
reduced demand, labor and materials shortages, and unplanned facility or equipment down time. The actual level of production may
be used if it approximates normal capacity. In periods of abnormally high production, the amount of fixed overhead allocated to
each unit of production is decreased so that inventories are not measured above cost. The amount of fixed overhead allocated to
each unit of production is not increased as a consequence of abnormally low production or idle plant and unallocated overheads
of underutilized or idle capacity of the production facilities are recognized as period costs in the period in which they are incurred
rather than as a portion of the inventory cost.
Inventory Obsolescence
and Markdowns
The Company evaluates
its current level of inventories considering historical sales and other factors and, based on this evaluation, classify inventory
markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting
Standards Codification to adjust inventories to net realizable value. These markdowns are estimates, which could vary significantly
from actual requirements if future economic conditions, customer demand or competition differ from expectations. Other significant
estimates include the allocation of variable and fixed production overheads. While variable production overheads are allocated
to each unit of production on the basis of actual use of production facilities, the allocation of fixed production overhead to
the costs of conversion is based on the normal capacity of the Company’s production facilities, and recognizes abnormal idle
facility expenses as current period charges. Certain costs, including categories of indirect materials, indirect labor and other
indirect manufacturing costs which are included in the overhead pools are estimated. The management of the Company determines its
normal capacity based upon the amount of operating hours of the manufacturing machinery and equipment in a reporting period.
Property, Plant and Equipment
Property, plant and
equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged
to operations as incurred. Depreciation of property, plant and equipment is computed by the straight-line method (after taking
into account their respective estimated residual values) over the assets estimated useful lives ranging from five (5) years to
twenty (20) years. Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in the statements of income and comprehensive income (loss). Leasehold
improvements, if any, are amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever
is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.
Construction in progress
represents direct costs of construction or the acquisition cost of long-lived assets. Under
U.S.
GAAP, all costs associated with construction of long-lived assets should be reflected as long-term as part of construction-in-progress.
Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially
all of the activities necessary to prepare the long-lived assets for their intended use are completed. No depreciation is provided
until the construction of the long-lived assets is complete and ready for their intended use.
Planned Major
Maintenance Activities
The Company follows
the guidance of paragraph 360-10-25-5 of the FASB Accounting Standards Codification (“Paragraph 360-10-25-5”), which
prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities. Paragraph 360-10-25-5
also requires disclosures regarding the method of accounting for planned major maintenance activities and the effects of implementing
the Paragraph 360-10-25-5. The guidance in Paragraph 360-10-25-5 affects the Company with regard to its manufacturing facility
requiring periodic major maintenance to meet the Certification of Good Manufacturing Practices (“GMP”) requirement
every five (5) years in connection with its pharmaceutical products manufacturing license as mandated by China State Food and Drug
Administration (“SFDA”). As a result, the Company has retroactively applied the required change in accounting, electing
the deferral method of accounting for planned major maintenance activities. The deferral method requires the capitalization of
planned major maintenance costs at the point they occur and the depreciation and amortization of these costs over their estimated
useful lives or the period until future maintenance activities of five (5) years are repeated, whichever is shorter.
Land Use Rights
Land use rights represent
the cost to obtain the rights to use certain parcels of land in the City of Yichang, Hubei Province, PRC. Land use rights are carried
at cost and amortized on a straight-line basis over the lives of the rights of fifty (50) years. Upon becoming fully amortized,
the related cost and accumulated amortization are removed from the accounts.
Purchased Formulae
The Company has adopted
paragraph 350-30-25-3 of the FASB Accounting Standards Codification for purchased formulae. Under the requirements, the Company
amortizes the costs of purchased formulae over their estimated useful lives of ten (10) years. Upon becoming fully amortized, the
related cost and accumulated amortization are removed from the accounts.
Customer Deposits
Customer deposits primarily
represent amounts received from customers for future delivery of products, all of which were fully or partially refundable depending
upon the terms and conditions of the sales agreements.
Related Parties
The Company follows
subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related
party transactions.
Pursuant to Section
850-10-20 the related parties include a. affiliates of the Company; b. entities for which investments in their equity
securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15,
to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension
and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management
of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing
its own separate interests; and g. other parties that can significantly influence the management or operating policies of
the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the
other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The financial statements
shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and
other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation
of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a. the
nature of the relationship(s) involved; b. description of the transactions, including transactions to which no amounts or
nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed
necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions
for each of the periods for which income statements are presented and the effects of any change in the method of establishing the
terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance
sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Commitment and Contingencies
The Company follows
subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist
as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only
be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against
the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings
or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of
a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates
that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would
be disclosed.
Loss contingencies
considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Management does not believe, based upon information available at this time, that these matters will have a material adverse effect
on the Company’s consolidated financial position, results of operations or cash flows. However, there is no assurance that
such matters will not materially and adversely affect the Company’s business, financial position, and results of operations
or cash flows.
Revenue Recognition
The Company follows
paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when
it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been
rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
The Company derives
the majority of its revenue from sales contracts with customers with revenues being generated upon the shipment of goods. Persuasive
evidence of an arrangement is demonstrated via invoice, product delivery is evidenced by warehouse shipping log as well as a signed
bill of lading from trucking or rail company and title transfers when the goods arrive at their destination, based on free on board
(“FOB”) destination; the sales price to the customer is fixed upon acceptance of the purchase order and there is no
separate sales rebate, discount, or volume incentive. When the Company recognizes revenue, no provisions are made for returns because,
historically, there have been very few sales returns and adjustments that have impacted the ultimate collection of revenues.
Net sales of products
represent the invoiced value of goods, net of value added taxes (“VAT”). The Company is subject to VAT which is levied
on all of the Company’s products at the rate of 17% on the invoiced value of sales. Sales or Output VAT is borne by customers
in addition to the invoiced value of sales and Purchase or Input VAT is borne by the Company in addition to the invoiced value
of purchases to the extent not refunded for export sales, if any.
Shipping
and Handling Costs
The Company accounts
for shipping and handling fees in accordance with paragraphs 605-45-45-19 through 605-45-45-23 of the FASB Accounting Standards
Codification. While amounts charged to customers for shipping products are included in revenues, the related costs are classified
in cost of goods sold as incurred.
Advertising
Costs
Advertising costs are
expensed as incurred.
Research
and Development
The Company follows
paragraph 730-10-25-1 of the FASB Accounting Standards Codification (formerly Statement of Financial Accounting Standards No. 2
“Accounting for Research and Development Costs”
) and paragraph 730-20-25-11 of the FASB Accounting Standards
Codification (formerly Statement of Financial Accounting Standards No. 68
“Research and Development Arrangements”
)
for research and development costs. Research and development costs are charged to expense as incurred. Research and development
costs consist primarily of remuneration for research and development staff, depreciation and maintenance expenses of research and
development equipment, material and testing costs for research and development as well as research and development arrangements
with unrelated third party research and development institutions. The research and development arrangements usually involve specific
research and development projects. Often times, the Company makes non-refundable advances upon signing of these research and development
arrangements. The Company adopted paragraph 730-20-25-13 and 730-20-35-1 of the FASB Accounting Standards Codification (formerly
Emerging Issues Task Force Issue No. 07-3
“Accounting for Nonrefundable Advance Payments for Goods or Services to be Used
in Future Research and Development Activities”
) for those non-refundable advances. Non-refundable advance payments for
goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such
amounts are recognized as an expense as the related goods are delivered or the related services are performed. The management continues
to evaluate whether the Company expect the goods to be delivered or services to be rendered. If the management does not expect
the goods to be delivered or services to be rendered, the capitalized advance payment are charged to expense.
Government Grants
Receipts of government
grants (i) to construct environmental protection and improvement projects and (ii) to encourage research and development and (iii)
to subsidize energy conservation activities which are non-refundable are credited to unearned government grants upon receipt. The
grants are used for purchases of assets, to subsidize the research and development and energy conservation expenses incurred, for
compensation expenses already incurred or for good performance of the Company.
Grants applicable to
the construction of the environmental protection and improvement projects are recorded as a credit to the total cost of pollution
prevention projects upon completion of the pollution prevention projects. For research and development expenses, the Company matches
and offsets the government grants with the expenses of the research and development activities as specified in the grant approval
document in the corresponding period when such expenses are incurred and records related government grants as credit to research
and development and pollution prevention project cost accordingly. For government grants received as compensation for expenses
already incurred are recognized as income in the period they become recognizable.
Foreign Currency Transactions
The Company applies
the guidelines as set out in Section 830-20-35 of the FASB Accounting Standards Codification (“Section 830-20-35”)
for foreign currency transactions. Pursuant to Section 830-20-35 of the FASB Accounting Standards Codification, foreign currency
transactions are transactions denominated in currencies other than U.S. Dollar, the Company’s reporting currency or Chinese
Yuan or Renminbi, the Company’s functional currency. Foreign currency transactions may produce receivables or payables that
are fixed in terms of the amount of foreign currency that will be received or paid. A change in exchange rates between the functional
currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency
cash flows upon settlement of the transaction. That increase or decrease in expected functional currency cash flows is a foreign
currency transaction gain or loss
that generally shall be included in determining net income for the period in which the
exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date
or the most recent intervening
balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction generally shall be included
in determining net income for the period in which the transaction is settled. The exceptions to this requirement for inclusion
in net income of transaction gains and losses pertain to certain intercompany transactions and to transactions that are designated
as, and effective as, economic hedges of net investments and foreign currency commitments. Pursuant to Section 830-20-25 of the
FASB Accounting Standards Codification, the following shall apply to all foreign currency transactions of an enterprise and its
investees: (a) at the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the
transaction shall be measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect
at that date as defined in section 830-10-20 of the FASB Accounting Standards Codification; and (b) at each balance sheet date,
recorded balances that are denominated in currencies other than the functional currency or reporting currency of the recording
entity shall be adjusted to reflect the current exchange rate.
Net gains and losses
resulting from foreign exchange transactions, if any, are included in the Company’s statements of income and comprehensive
income (loss).
Income
Tax Provision
The Company accounts
for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not
that the assets will not be realized. 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 the consolidated statements of income and comprehensive income
(loss) in the period that includes the enactment date.
The Company adopted
section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses
the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial
statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest
benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement. Section 740-10-25 also
provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and
requires increased disclosures.
The estimated future
tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated
balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred
tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management makes judgments
as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax
liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions.
In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax
jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Uncertain Tax Positions
The Company did not
take any uncertain tax positions and had no adjustments to the unrecognized tax liabilities or benefits pursuant to the provisions
of Section 740-10-25 for the interim period ended March 31, 2012 or 2011.
Foreign Currency Translation
The Company follows
Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”) for foreign currency translation
to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into
U.S. Dollars. Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of
a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary),
and characterizes transaction gains and losses. the assets, liabilities, and operations of a foreign entity shall be measured using
the functional currency of that entity. An entity’s functional currency is the currency of the primary economic environment
in which the entity operates; normally, that is the currency of the environment, or local currency, in which an entity primarily
generates and expends cash.
The functional currency
of each foreign subsidiary is determined based on management’s judgment and involves consideration of all relevant economic
facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency
upon the parent and the nature of the subsidiary’s operations must also be considered. If a subsidiary’s functional
currency is deemed to be the local currency, then any gain or loss associated with the translation of that subsidiary’s financial
statements is included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar,
then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional
currency would be included in the consolidated statements of income and comprehensive income (loss). If the Company disposes of
foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income
and comprehensive income (loss). If the Company determines that there has been a change in the functional currency of a subsidiary
to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement
of income and comprehensive income (loss).
Based on an assessment
of the factors discussed above, the management of the Company determined the relevant subsidiary’s local currency to be the
functional currency for its foreign subsidiary.
The financial records
of the Company are maintained in their local currency, the Renminbi (“RMB”), which is the functional currency. Assets
and liabilities are translated from the local currency into the reporting currency, U.S. dollars, at the exchange rate prevailing
at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate
translation at the exchange rates prevailing at the dates those elements are recognized in the financial statements. Foreign currency
translation gain (loss) resulting from the process of translating the local currency financial statements into U.S. dollars
are included in determining accumulated other comprehensive income in the statement of stockholders’ equity.
RMB is not a fully
convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of
China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for
the foreign exchange transactions are the rates of exchange quoted by the PBOC. Commencing July 21, 2005, China adopted a
managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The exchange
rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per U.S. dollar to approximately RMB 8.11 per
U.S. dollar on July 21, 2005. Since then, the PBOC administers and regulates the exchange rate of the U.S. dollar against
the RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.
Unless otherwise noted,
the rate presented below per U.S. $1.00 was the midpoint of the interbank rate as quoted by OANDA Corporation (
www.oanda.com
)
contained in its financial statements. Management believes that the difference between RMB vs. U.S. dollar exchange rate quoted
by the PBOC and RMB vs. U.S. dollar exchange rate reported by OANDA Corporation were immaterial. Translations do not imply that
the RMB amounts actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars. Translation of
amounts from RMB into U.S. dollars has been made at the following exchange rates for the respective periods:
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March 31, 2012
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December 31, 2011
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March 31, 2011
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December 31, 2010
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Balance sheets
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6.3185
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6.3585
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6.5601
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6.6118
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Statements of income and comprehensive income
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6.3088
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6.4640
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6.5804
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Comprehensive Income (Loss)
The Company has applied
section 220-10-45 of the FASB Accounting Standards Codification (“Section 220-10-45”) to present comprehensive income
(loss). Section 220-10-45 establishes rules for the reporting of comprehensive income (loss) and its components. Comprehensive
income (loss), for the Company, consists of net income and foreign currency translation adjustments and is presented in the Company’s
consolidated statements of income and comprehensive income (loss) and stockholders’ equity.
Net Income (Loss) per Common Share
Net income (loss) per
common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net income (loss) per
common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during
the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number
of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution
that could occur from common shares issuable through contingent share arrangements, stock options and warrants.
There were no potentially
dilutive common shares outstanding for the interim period ended March 31, 2012 or 2011.
Cash Flows Reporting
The Company adopted
paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments
according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and
uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting
Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow
from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals
of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating
cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current
exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported
as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides
information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph
830-230-45-1 of the FASB Accounting Standards Codification.
Subsequent Events
The Company follows
the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company
will evaluate subsequent events through
the date when the financial
statements are issued
. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer
considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.
Recently
Issued Accounting Pronouncements
FASB
Accounting Standards Update No. 2011-05
In June 2011, the FASB
issued the FASB Accounting Standards Update No. 2011-05 “
Comprehensive Income” (“ASU 2011-05”),
which
was the result of a joint project with the IASB and amends
the guidance in ASC 220,
Comprehensive Income,
by eliminating the option to present components of other comprehensive income
(OCI) in the statement of stockholders’ equity. Instead, the new guidance now gives entities the option to present all non-owner
changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive
statements. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two
separate but consecutive statements, the amendments require entities to present all reclassification adjustments from OCI to net
income on the face of the statement of comprehensive income.
The amendments in this
Update should be applied retrospectively and are effective for public entity for fiscal years, and interim periods within those
years, beginning after December 15, 2011.
FASB
Accounting Standards Update No. 2011-08
In September 2011,
the FASB issued the FASB Accounting Standards Update No. 2011-08 “
Intangibles—Goodwill and Other:
Testing Goodwill for Impairment” (“ASU 2011-08”).
This Update is to simplify how public and nonpublic
entities test goodwill for impairment. The amendments permit an entity to first assess qualitative factors to determine whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. Under the amendments in this Update,
an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than
not that its fair value is less than its carrying amount.
The guidance is effective
for interim and annual periods beginning on or after December 15, 2011.
Early adoption is permitted.
FASB
Accounting Standards Update No. 2011-10
In December 2011, the
FASB issued the FASB Accounting Standards Update No. 2011-10
“Property, Plant and Equipment: Derecognition of in Substance
Real Estate-a Scope Clarification” (“ASU 2011-09”).
This Update is to resolve the diversity in practice as
to how financial statements have been reflecting circumstances when parent company reporting entities cease to have controlling
financial interests in subsidiaries that are in substance real estate, where the situation arises as a result of default on nonrecourse
debt of the subsidiaries.
The amended guidance
is effective for annual reporting periods ending after June 15, 2012
for
public entities. Early adoption is permitted.
FASB
Accounting Standards Update No. 2011-11
In December 2011, the
FASB issued the FASB Accounting Standards Update No. 2011-11
“Balance Sheet: Disclosures about Offsetting Assets and Liabilities”
(“ASU 2011-11”).
This Update requires an entity to disclose information about
offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements
on its financial position.
The objective of this disclosure is to facilitate comparison between
those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial
statements on the basis of IFRS.
The amended guidance
is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.
FASB
Accounting Standards Update No. 2011-12
In December 2011, the
FASB issued the FASB Accounting Standards Update No. 2011-12
“Comprehensive Income: Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards
Update No. 2011-05” (“ASU 2011-12”).
This Update is a deferral of the effective date pertaining to reclassification
adjustments out of accumulated other comprehensive income in ASU 2011-05. FASB is to going to reassess the costs and benefits of
those provisions in ASU 2011-05 related to reclassifications out of accumulated other comprehensive income. Due to the time required
to properly make such a reassessment and to evaluate alternative presentation formats, the FASB decided that it is necessary to
reinstate the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in
place before the issuance of Update 2011-05.
All other requirements
in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single
continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements
for fiscal years, and interim periods within those years, beginning after December 15, 2011.
Other
Recently Issued, but Not Yet Effective Accounting Pronouncements
Management does not
believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect
on the accompanying financial statements.
Note 3 – Restricted Cash –
Unearned Government Grant
Restricted cash –
unearned government grant at March 31, 2012 and December 31, 2011 consisted of the following:
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March 31, 2012
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|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Restricted cash – unearned government grant
|
|
$
|
465,714
|
|
|
$
|
468,009
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
465,714
|
|
|
$
|
468,009
|
|
Management has estimated
that the Company will complete certain environmental protection and improvement projects and earn the entire grant currently held
in the restricted cash in 2012.
Note 4 – Inventories
Inventories at March
31, 2012 and December 31, 2011 consisted of the following:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
571,491
|
|
|
$
|
508,126
|
|
|
|
|
|
|
|
|
|
|
Packaging materials
|
|
|
134,784
|
|
|
|
184,801
|
|
|
|
|
|
|
|
|
|
|
Work in process
|
|
|
1,004,651
|
|
|
|
727,415
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
1,189,403
|
|
|
|
1,041,112
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,900,329
|
|
|
$
|
2,461,454
|
|
Slow-moving or
obsolescence markdowns
There were no slow-moving
or inventory obsolescence adjustments for the interim period ended March 31, 2012 or 2011.
Lower of cost
or market adjustments
There were no lower
of cost or market adjustments for the interim period ended March 31, 2012 or 2011.
Note 5 – Property, Plant and Equipment
Property, plant and
equipment, stated at cost, less accumulated depreciation at March 31, 2012 and December 31, 2011 consisted of the following:
|
|
Estimated Useful
Life (Years)
|
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
Buildings and leasehold improvements (i)
|
|
|
20
|
|
|
$
|
3,679,916
|
|
|
$
|
3,656,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress (ii)
|
|
|
|
|
|
|
179,922
|
|
|
|
180,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
7
|
|
|
|
1,577,824
|
|
|
|
1,564,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicles
|
|
|
5
|
|
|
|
176,079
|
|
|
|
174,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
|
5-8
|
|
|
|
111,813
|
|
|
|
113,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,725,554
|
|
|
|
5,690,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation (iii)
|
|
|
|
|
|
|
(1,038,859
|
)
|
|
|
(943,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,686,695
|
|
|
$
|
4,747,005
|
|
(i) Capitalized
Interest
For the interim period ended March
31, 2012 and 2011, Minkang did not capitalize any interest to fixed assets.
(ii) Construction-in-progress
Minkang is in the process of constructing
a pollution prevention station, which is recorded as construction in progress included in the consolidated balance sheets.
(iii) Depreciation
and Amortization Expense
Depreciation and amortization expense
for the period ended March 31, 2012and 2011 was $89,794 and $73,794, respectively.
Note 6 – Land Use Rights
Minkang
In 2004 and 2008, Minkang
entered into a series of agreements with the Chinese government, whereby the Company paid RMB 15,495,700 to acquire the rights
to use 37,919.86 square meters of land in the aggregate for approximately 50 years and obtained the land use right certificates
expiring from February 23, 2054 through November 5, 2058. The purchase price and related acquisition costs are being amortized
over the term of the right of approximately fifty (50) years.
Land use rights, stated
at cost, less accumulated amortization at March 31, 2012 and December 31, 2011, consisted of the following:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
2,452,433
|
|
|
$
|
2,437,006
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(355,603
|
)
|
|
|
(341,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,096,830
|
|
|
$
|
2,095,825
|
|
Amortization expense
Amortization expense
for the interim period ended March 31, 2012 and 2011 was $12,185 and $11,810, respectively.
Note 7 – Purchased Formulae
Purchased formulae,
stated at cost, less accumulated amortization at March 31, 2012 and December 31, 2011, consisted of the following:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Purchased formulae
|
|
$
|
1,905,357
|
|
|
$
|
1,893,371
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(1,381,384
|
)
|
|
|
(1,325,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
523,973
|
|
|
$
|
568,011
|
|
Amortization expense
Amortization expense
for the interim period ended March 31, 2012 and 2011 was $47,334 and $45,880, respectively.
Note 8 – Loans Payable
Loans payable at March
31, 2012 and December 31, 2011 consisted of the following:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Loan payable of RMB10,000,000 from Bank of Communications Limited, Yichang City Branch, collateralized by certain of Minkang’s buildings and land use rights, with interest at 110% of the bank’s benchmark rate, payable monthly, with principal due May 5, 2012 which was repaid in full on May 7, 2012.
|
|
$
|
1,582,654
|
|
|
$
|
1,572,698
|
|
|
|
|
|
|
|
|
|
|
Loan payable of RMB5,000,000 to Hubei Bank Corporation Limited, collateralized by certain of the Company’s buildings and land use rights, with interest at 110% of the bank’s benchmark payable monthly, with principal due January 20, 2012 which was repaid in full on January 10, 2012.
|
|
|
-
|
|
|
|
786,349
|
|
|
|
|
|
|
|
|
|
|
Loan payable of RMB5,000,000 to Hubei Bank Corporation Limited, collateralized by certain of the Company’s buildings and land use rights, with interest at 110% of the bank’s benchmark payable monthly, with principal due on January 11, 2013.
|
|
|
791,327
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan payable of RMB5,000,000 to Hubei Bank Corporation Limited, collateralized by certain of the Company’s buildings and land use rights, with interest at 110% of the bank’s benchmark payable monthly, with principal due April 7, 2012 which was repaid in full on April 1, 2012.
|
|
|
791,327
|
|
|
|
786,349
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,165,308
|
|
|
$
|
3,145,396
|
|
Note 9 – Related Party Transactions
Related parties
Related parties with whom the Company had
transactions are:
Related Parties
|
|
Relationship
|
|
|
|
KOH, SOCK HUA
|
|
Stockholder of the Company
|
|
|
|
LEE, TONG TAI
|
|
Chief Executive Officer and stockholder of the Company
|
|
|
|
KOH, CHEOH NGUAN
|
|
Stockholder of the Company
|
|
|
|
Sensori Holdings (S) Pte Ltd.
|
|
An entity owned and controlled by significant stockholders of the Company
|
Advances from Stockholders
From time to time,
stockholders of the Company advance funds to the Company for working capital purpose. Those advances are unsecured, non-interest
bearing and due on demand.
Advances from stockholders at
March 31, 2012 and December 31, 2011 consisted of the following:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Advances from stockholders
|
|
$
|
378,152
|
|
|
$
|
505,480
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
378,152
|
|
|
$
|
505,480
|
|
Note 10 – Working Capital Advances
On September 26, 2011,
Minkang received non-interest bearing working capital advances of RMB5 million (approximately $791,327 at March 31, 2012) from
an unrelated third party individual.
Note 11 – Unearned and Earned
Government Grants
Unearned government
grants at March 31, 2012 and December 31, 2011 and earned government grants for the interim period ended March 31, 2012 and 2011
were as follows:
|
|
Earned Government Grants
at
|
|
|
Unearned Government Grants
at
|
|
|
|
March 31,
2012
|
|
|
March 31,
2011
|
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy conservation
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pollution prevention projects
|
|
$
|
5,265
|
|
|
$
|
-
|
|
|
$
|
465,714
|
|
|
$
|
468,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,265
|
|
|
$
|
-
|
|
|
$
|
465,714
|
|
|
$
|
468,009
|
|
Note 12 – Stockholders’
Equity
Shares Authorized
Upon formation the
aggregate number of shares which the Corporation shall have authority to issue is one hundred million (100,000,000) shares, consisting
of two classes to be designated, respectively, “Common Stock” and “Preferred Stock,” with all of such shares
having a par value of $0.001 per share. The total number of shares of Common Stock that the Corporation shall have authority to
issue is ninety million (90,000,000) shares. The total number of shares of Preferred Stock that the Corporation shall have authority
to issue is ten million (10,000,000) shares.
On September 7, 2007,
the Company filed a Certificate of Change to the Certificate of Incorporation pursuant to NRS 78.209 with the Secretary of State
of Nevada, effective September 20, 2007, and changed its authorized capital from 90,000,000 shares of common stock with a par value
of $0.001 and 10,000,000 shares of preferred stock with a par value of $0.001 to 1,350,000,000 shares of common stock with a par
value of $0.001 and 10,000,000 shares of preferred stock with a par value of $0.001.
On September 29, 2010,
the Company filed a Certificate of Change to the Certificate of Incorporation pursuant to NRS 78.209 with the Secretary of State
of Nevada, effective October 20, 2010, and changed its authorized capital from 1,350,000,000 shares of common stock with a par
value of $0.001 and 10,000,000 shares of preferred stock with a par value of $0.001 to 168,750,000 shares of common stock with
a par value of $0.001 and 10,000,000 shares of preferred stock with a par value of $0.001.
Common Stock
Immediately prior to
the consummation of the Share Exchange Agreement on September 21, 2011, the Company had 9,547,169 common shares issued and outstanding.
Upon consummation of
the Share Exchange Agreement on September 21, 2011, the Company issued 33,500,000 shares of its common stock for the acquisition
of 100% of the issued and outstanding capital stock of HBMK.
Note 13 – Stamp Tax on Minkang’s
Change of Ownership
Minkang was billed
a one-time stamp tax of RMB2 million and RMB1,356,505.95 on August 31, 2011 and September 14, 2011, respectively, or RMB3,356,505.95
in aggregate in connection with its ownership change from Sensori Holdings (S) Pte Ltd. to HBMK.
Note 14 – Concentrations and Credit
Risk
Customer and Credit Concentrations
Customer concentrations
for the year ended March 31, 2012 and 2011 and credit concentrations at March 31, 2012 and December 31, 2011 are as follows:
|
|
Net Sales
for the Year Ended
|
|
|
Accounts Receivable
at
|
|
|
|
March 31,
2012
|
|
|
March 31,
2011
|
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer #0999
|
|
|
52.0
|
%
|
|
|
54.0
|
%
|
|
|
- %
|
|
|
|
19.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer #0579
|
|
|
16.5
|
%
|
|
|
14.6
|
%
|
|
|
7.9
|
%
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer #1162
|
|
|
1.9
|
%
|
|
|
4.3
|
%
|
|
|
12.1
|
%
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer #1212
|
|
|
9.0
|
%
|
|
|
5.4
|
%
|
|
|
15.1
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79.4
|
%
|
|
|
73.4
|
%
|
|
|
35.1
|
%
|
|
|
35.2
|
%
|
A reduction in sales
from or loss of such customers would have a material adverse effect on the Company’s results of operations and financial
condition.
Product Concentration
Product concentrations
for the year ended March 31, 2012 and 2011 are as follows:
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
Product # 1
|
|
|
53.9
|
%
|
|
|
54.0
|
%
|
|
|
|
|
|
|
|
|
|
Product # 2
|
|
|
14.6
|
%
|
|
|
23.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
68.5
|
%
|
|
|
77.4
|
%
|
Credit Risk
Financial instruments
that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents.
As of March 31, 2012,
substantially all of the Company’s cash was held by major financial institutions located in the PRC, none of which are insured.
However, the Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant
risks on such accounts.
Note 15 - Foreign Operations
Operations
Substantially all of
the Company’s operations are carried out and all of its assets are located in the PRC. Accordingly, the Company’s business,
financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC. The
Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency fluctuation and remittances and methods of taxation, among other things.
Interest Rate
The tight monetary
policy currently instituted by the PRC government and increases in interest rate would have a material adverse effect on the Company’s
results of operations and financial condition. In particular, the Company is exposed to fluctuations in interest rates due to the
fact that interest rates on all of Minkang’s borrowings were based on 110% of the banks’ benchmark rate, a 1% increase
in average interest rates on the Company’s borrowings would increase future interest expense by approximately RMB200,000
(approximately $32,000) per year based on the outstanding balances of RMB20 million (approximately $3.2 million) of loans payable
at March 31, 2012.
The Company is currently
not using any interest rate collars or hedges to manage or reduce interest rate risk. As a result, any increase in interest rates
on the variable rate borrowings would increase interest expense and reduce net income.
Foreign Currency Risk
The Company is exposed
to fluctuations in foreign currencies for transactions denominated in currencies other than RMB, the Company’s PRC subsidiary’s
functional currency.
The Company had no
foreign currency hedges in place at March 31, 2012 to reduce such exposure.
Note 16 – Subsequent Events
The Company has evaluated
all events that occurred after the balance sheet date through the date when the financial statements were issued. The Management
of the Company determined that there were certain reportable subsequent events to be disclosed as follows:
On April 1, 2012, Minkang
repaid a loan of RMB5,000,000 (approximately $791,327) to Hubei Bank Corporation Limited.
On April 5, 2012, Minkang
obtained a loan of RMB5,000,000 (approximately $791,327) from Hubei Bank Corporation Limited, collateralized by certain of the
Company’s buildings and land use rights, with interest at 110% of the bank’s benchmark rate, per annum (7.315%), payable
monthly, with principal due April 5, 2013.
On April
25, 2012, Minkang fully repaid the working capital advance from an unrelated third party in China in the amount of RMB 5,000,000 (approximately $791,189).
On April
27, 2012, the Company completed a private placement financing involving the sale of 1,130,270 restricted shares of common
stock of the Company (each a “Share”) to one individual at a subscription price of $0.70 per Share for gross
proceeds of $791,189.
On May 7, 2012, Minkang
repaid a loan of RMB10,000,000 (approximately $1,582,654) to Bank of Communications Limited, Yichang Branch.
On May 7, 2012, Minkang
obtained a loan of RMB10,000,000 (approximately $1,582,654) from Bank of Communications Limited, Yichang Branch, collateralized
by certain of the Company’s buildings and land use rights, with interest at 120% of the bank’s benchmark rate, per
annum (7.872%), payable monthly, with principal due May 7, 2013.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion of our financial
condition, changes in financial condition and results of operations for the three months ended March 31, 2012 and 2011 should be
read in conjunction with our unaudited interim consolidated financial statements and related notes for the three months ended March
31, 2012 and 2011. The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors,
including, but not limited to, a continued downturn in international economic conditions; any adverse occurrence with respect to
our patented technology; our ability to bring new products to market; market demand for our products; shifts in industry capacity;
product development or other initiatives by our competitors; fluctuations in the availability and cost of materials required to
produce our products; potential negative financial impact from claims, lawsuits and other legal proceedings or challenges; and
other factors beyond our control.
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. It is suggested that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company’s December 31, 2011 audited financial statements, which were attached
to our Annual Report on Form 10-K filed with the SEC on April 16, 2012. The results of operations for the periods ended March 31,
2012 and the same period last year are not necessarily indicative of the operating results for the full years.
Overview
We were incorporated in the State of Nevada
on April 17, 2006, under the name DGT Corp. and commenced operations shortly thereafter. We intended to provide professional digital
photo editing services for photo studios targeting potential customers in North America, with plans to expand globally.
In late 2007 we determined to change our
business plan from the professional digital photo editing services and intended to focus our activities on the oil and gas industry
as an exploration and development company.
However, as we were not as successful as
hoped at developing our oil and gas interests in Morgan County, Tennessee up to the time immediately prior to the closing of the
share exchange agreement as discussed below and had no sources of revenue from our business plan, we determined to seek out a new
business opportunity to increase value for our shareholders.
Our shares of common stock were quoted
for trading on the Over-the-Counter Bulletin Board (the “OTCBB”) on December 22, 2006, under the symbol “DGTR”.
On September 20, 2007, our Company and its wholly owned subsidiary, Blackrock Petroleum Corp. merged and our name changed to Blackrock
Petroleum Corp. Our trading symbol on the OTCBB was changed to “BRPC”. On May 21, 2008, we underwent another merger
with our wholly owned subsidiary Nexgen Petroleum Corp. At that time our name was changed to Nexgen Petroleum Corp. and our trading
symbol on the OTCBB was changed to “NXPE” effective June 9, 2008. On October 20, 2010, we merged with our wholly owned
subsidiary, Hubei Minkang Pharmaceutical Ltd., and as result of such merger our name changed to Hubei Minkang Pharmaceutical Ltd.
our trading symbol on the OTCBB was changed to “HBMK” effective October 21, 2010.
Effective September 20, 2007, a forward
stock split of our authorized, issued and outstanding common stock was undertaken on a fifteen (15) to one (1) basis. As a result,
our authorized capital increased from 90,000,000 shares of common stock with a par value of $0.001 and 10,000,000 shares of preferred
stock with a par value of $0.001 to 1,350,000,000 shares of common stock with a par value of $0.001 and 10,000,000 shares of preferred
stock with a par value of $0.001. Our issued and outstanding share capital increased from 9,000,000 shares of common stock to 135,000,000
shares of common stock.
On April 18, 2008, Mr. Hsien Loong Wong,
President, CEO and a director of the Company, who held in aggregate 94,500,000 post forward stock split shares of common stock
of the Company, voluntarily agreed to surrender for cancellation in aggregate 80,000,000 shares of common stock in order to encourage
equity investment into the Company. The cancellation of these 80,000,000 shares took place on April 18, 2008, resulting in Mr.
Wong reducing his share holdings to only 14,500,000 shares registered in his name at that time.
Effective October 20, 2010, a reverse stock
split of our authorized, issued and outstanding common stock was undertaken on a one (1) to eight (8) basis. As a result, our authorized
capital decreased from 1,350,000,000 shares of common stock with par value of $0.001 per share and 10,000,000 shares of preferred
stock with par value of $0.001 per share to 168,750,000 shares of common stock with par value of $0.001 per share and 10,000,000
shares of preferred stock with par value of $0.001 per share. Our issued and outstanding capital decreased from 64,765,941 shares
of common stock to 8,095,747 shares of common stock.
On July 8, 2011, we entered into a share
exchange agreement with HBMK Pharmaceutical Limited (“HBMK”), a BVI corporation, and all of the shareholders of HBMK
(the “Vendors”), which was disclosed in the Company's Current Report on Form 8-K filed with the SEC on July 11, 2011.
The closing of the share exchange agreement occurred on September 21, 2011. Pursuant to the terms of the share exchange agreement,
we acquired all of the issued and outstanding shares of capital stock of HBMK from the Vendors in exchange for the issuance of
33,500,000 shares of our common stock to the Vendors on a
pro rata
basis in accordance with each Vendor’s percentage
ownership in HBMK.
As a result of the closing of the share
exchange agreement, HBMK has become our direct wholly-owned subsidiary and Hubei Minkang Pharmaceutical Co., Ltd. (“Hubei
Minkang PRC”) has become our indirect wholly-owned subsidiary as HBMK is the sole owner of Hubei Minkang PRC, a company organized
under the laws of the People’s Republic of China.
Our current business is conducted through
Hubei Minkang PRC, which is a large-scale pharmaceutical company that mainly produces and markets Traditional Chinese Medicines
(“TCM”) and some chemical pharmaceuticals, which most are able to be purchased Over-the-Counter (“OTC”)
and some by prescription only. Hubei Minkang PRC
has three Good Manufacturing Practice (“GMP”)
certifications, with seven production lines capable of producing 10 different product types including pills, tablets, capsules,
granules, oral liquids, syrups, mixtures and injections, in more than 400 formulations and dosages.
We maintain our statutory registered agent’s
office at Nevada Agency & Transfer Company, 50 West Liberty Street, Suite 880, Reno, Nevada, 89501 and our business office
is located at 55 Ubi Ave. 3, #03-01, Mintwell Building, Singapore 408864. This is our mailing address as well.
Plan of Operations
We intend to focus on the business operations
of our subsidiary Hubei Minkang PRC.
Hubei Minkang PRC is a modern pharmaceutical company that is engaged
in the research, development, manufacture and marketing of
TCM and some chemical pharmaceuticals in the PRC as well as markets
its products to the US, Japan, Canada, Singapore, Malaysia, Thailand and Hong Kong among other countries.
During the next 12 months, management anticipates
proceeding with expansion plans to acquire at least a 51% interest of a sales distribution company for approximately $1.5 million
and to increase commercialization of Hubei Minkang PRC’s products including the marketing distribution of existing and potential
future products which is anticipated to cost approximately $700,000. However, if we are not able to raise the required funds for
such expansion plans, then we may have to delay some or all of our expansion plans.
Our strategy for executing our mission
of producing high quality TCM products in an environmentally friendly manner using advanced technology and techniques, and distributing
the products throughout China and the world is to:
|
·
|
focus production on its highest margin products;
|
|
·
|
continuously improve production facilities and process;
|
|
·
|
lower production costs while maintaining product quality;
|
|
·
|
increase direct sales while reducing distribution costs;
|
|
·
|
acquire control of raw material supply;
|
|
·
|
develop and acquire new products for manufacture; and
|
|
·
|
expand distribution throughout China and overseas.
|
Results of Operations
The following table sets forth our results
of operations for the three month periods ended March 31, 2012 and 2011.
|
|
Three months ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
$
|
2,687,939
|
|
|
$
|
2,818,413
|
|
|
|
|
|
|
|
|
|
|
Costs of Goods Sold
|
|
|
1,464,304
|
|
|
|
1,537,929
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
1,223,635
|
|
|
|
1,280,484
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Advertising expenses
|
|
|
8,940
|
|
|
|
6,099
|
|
Selling expenses
|
|
|
346,890
|
|
|
|
416,833
|
|
Professional fees
|
|
|
65,849
|
|
|
|
-
|
|
Research & development
|
|
|
9,331
|
|
|
|
6,422
|
|
General and administrative expenses
|
|
|
654,901
|
|
|
|
482,075
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,085,911
|
|
|
|
911,429
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations before Other (Income) Expense
|
|
|
137,724
|
|
|
|
369,055
|
|
|
|
|
|
|
|
|
|
|
Other (Income) Expense
|
|
|
|
|
|
|
|
|
Government grants – energy conservation
|
|
|
(5,265
|
)
|
|
|
-
|
|
Interest income
|
|
|
(4,236
|
)
|
|
|
(2,429
|
)
|
Interest expense
|
|
|
55,808
|
|
|
|
21,756
|
|
Other (income) expense
|
|
|
5,248
|
|
|
|
(9,569
|
)
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
|
51,555
|
|
|
|
9,758
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations before Income Tax Provisions
|
|
|
86,169
|
|
|
|
359,297
|
|
|
|
|
|
|
|
|
|
|
Income Tax Provision (Benefit)
|
|
|
52,745
|
|
|
|
89,825
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
33,424
|
|
|
|
269,472
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
51,095
|
|
|
|
60,555
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
51,095
|
|
|
|
60,555
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
$
|
84,519
|
|
|
$
|
330,027
|
|
Three Months Ended March 31, 2012
Compared to Three Months Ended March 31, 2011
Revenues
Hubei Minkang PRC had sales of $2,687,939
and total cost of goods sold of $1,464,304 for the three month period ended March 31, 2012 as compared to sales of $2,818,413 and
total cost of goods sold of $1,537,929 for the three month period ended March 31, 2011. The decrease in sales was due to decreased
sales of Yinxing Dame Zhusheye. Yinxing Dame Zhusheye accounted for $1,448,799 of sales revenue in the three month period ended
March 31, 2012 and $1,521,943 of sales revenue in the three month period ended March 31, 2011. An Ka Huangmin Jiaonang accounted
for $392,439 of sales revenue in the three month period ended March 31, 2012 and $659,509 of sales revenue in the three month period
ended March 31, 2011.
Expenses
Advertising Expenses
: Advertising
expenses were $8,940 and $6,099 for the three month periods ended March 31, 2012 and 2011, respectively.
Selling Expenses
: Selling expenses
were $346,890 and $416,833 for the three month periods ended March 31, 2012 and 2011, respectively.
Professional Fees
: Professional
fees were $65,849 and $Nil for the three month periods ended March 31, 2012 and 2011, respectively. This increase was due to the
professional fees associated with the reverse acquisition of HBMK Pharmaceutical Limited by the Company.
Research and Development
: Research
and Development expenses were $9,331 and $6,422 for the three month periods ended March 31, 2012 and 2011, respectively.
General and Administrative Expenses
:
General and Administrative expenses were $654,901 and $482,075 for the three month periods ended March 31, 2012 and 2011, respectively.
This increase was due to the increase in office expense and labour insurance during the three month period ended March 31, 2012.
Interest Expenses
: Interest expenses
were $55,808 and $21,756 for the three month periods ended March 31, 2012 and 2011, respectively. This increase was due to the
increase in loans in the three month period ended March 31, 2012 as compared to loans outstanding as at March 31, 2011, which increased
interest expenses.
Net Income
The net income was $33,424 and $269,472
for three month periods ended March 31, 2012 and 2011, respectively. The decrease in net income of $236,048 resulted primarily
from a decrease in sales of Yinxing Dame Zhusheye and An Ka Huangmin Jiaonang, increase in selling expenses, increase in professional
fees and an increase in general and administrative expenses. The sales of Yinxing Dame Zhusheye decreased by $73,144 for the three
month period ended March 31, 2012, compared to the three month period ended March 31, 2011. The sales of An Ka Huangmin Jiaonang
increased by $267,070 for the three month period ended March 31, 2011, compared to the three month period ended March 31, 2011.
Liquidity and Capital Resources
The financial records of the Company are
maintained in their local currency, the Renminbi (“RMB”), which is the functional currency. Assets and liabilities
are translated from the local currency into the reporting currency, U.S. dollars, at the exchange rate prevailing at the balance
sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at
the exchange rates prevailing at the dates those elements are recognized in the financial statements. Foreign currency
translation
gain (loss) resulting from the process of translating the local currency financial statements into U.S. dollars are included in
determining accumulated other comprehensive income in the statement of stockholders’ equity.
RMB is not a fully convertible currency.
All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”)
or other institutions authorized to buy and sell foreign exchange. The exchange rate adopted for the foreign exchange transactions
are the rates of exchange quoted by the PBOC. Commencing July 21, 2005, China adopted a managed floating exchange rate regime
based on market demand and supply with reference to a basket of currencies. The exchange rate of the US dollar against the RMB
was adjusted from approximately RMB 8.28 per U.S. dollar to approximately RMB 8.11 per U.S. dollar on July 21, 2005.
Since then, the PBOC administers and regulates the exchange rate of the U.S. dollar against the RMB taking into account demand
and supply of RMB, as well as domestic and foreign economic and financial conditions.
Unless otherwise noted, the rate presented
below per U.S. $1.00 was the midpoint of the interbank rate as quoted by OANDA Corporation (
www.oanda.com
) contained in
its financial statements. Management believes that the difference between RMB vs. U.S. dollar exchange rate quoted by the PBOC
and RMB vs. U.S. dollar exchange rate reported by OANDA Corporation were immaterial. Translations do not imply that the RMB amounts
actually represent, or have been or could be converted into, equivalent amounts in U.S. dollars. Translation of amounts from RMB
into U.S. dollars has been made at the following exchange rates for the respective periods:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheets
|
|
|
6.3185
|
|
|
|
6.3538
|
|
|
|
6.5601
|
|
|
|
6.6118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of income and comprehensive income
|
|
|
6.3088
|
|
|
|
6.4640
|
|
|
|
6.5804
|
|
|
|
6.7788
|
|
We had cash of $2,922,271 as of March 31,
2012.
As at March 31, 2012, Hubei Minkang PRC
had loans payable of $1,582,654 due to Bank of Communications Limited, Yichang Branch, collateralized by certain of Hubei Minkang
PRC’s buildings and land use rights, with interest at 110% of the bank’s benchmark rate, per annum, payable monthly,
which the principal is due and payable on May 5, 2012. On May 7, 2012, Hubei Minkang PRC repaid the loan payable to Bank of Communications
(Yichang Branch). In addition, as at March 31, 2012, Hubei Minkang PRC had a loan payable of $791,327 due to Yichang City Commercial
Bank (now Hubei Bank Co., Ltd. (Yichang Branch) due to the merger between Yichang City Commercial Bank and Hubei Bank Co., Ltd.
(Yichang Branch)), collateralized by certain of Hubei Minkang PRC’s buildings and land use rights, with interest at 110%
of the bank’s benchmark rate, per annum, payable monthly, with the principal due and payable on April 7, 2012. On April 1,
2012, Hubei Minkang PRC repaid the loan payable to Hubei Bank (Yichang Branch) that was due on April 7, 2012. Furthermore, as at
March 31, 2012, Hubei Minkang PRC had a loan payable of $791,327 due to Hubei Bank (Yichang Branch), collateralized by certain
of Hubei Minkang PRC’s buildings and land use rights, with interest at 7.315% per year, which is calculated and payable monthly,
with the principal due and payable on January 11, 2013.
In addition, as at March 31, 2012, Hubei
Minkang PRC received a working capital advance from an unrelated third party in China in the amount of $791,327, which bears no
interest and may be converted into shares of common stock of the Company at the same price per share as the Company’s future
equity financing via public offering or private placements. On April 25, 2012 Hubei Minkang PRC repaid this working capital advance.
Our primary source of funds for the interim
period ended March 31, 2012, included cash flow from operations, loans from the Bank of Communications, Yichang Branch and the
Hubei Bank, and a working capital advance from an unrelated third party. During the next 12 months, management anticipates proceeding
with expansion plans to acquire at least a 51% interest of a sales distribution company for approximately $1.5 million and to increase
commercialization of Hubei Minkang PRC’s products including the marketing distribution of existing and potential future products
which is anticipated to cost approximately $700,000. However, if we are not able to raise the required funds for such expansion
plans, then we may have to delay some or all of our expansion plans. There can be no assurance that further sources of debt or
equity will be available or on acceptable terms.
Statement of Cash Flows
During the three months ended March 31,
2012, our net cash decreased by $182,017, which included net cash used in operating activities of ($74,629), net cash provided
by investing activities of $5,782 and net cash used in financing activities of ($129,707) and effect of exchange rate changes on
cash of $16,537.
Cash Flow from
Operating Activities
Net
cash used in operating activities of ($74,629) was mainly comprised of (i) net income of $33,424; (ii) non-cash depreciation and
amortization expense adjustments of $149,313; and (iii) collection of accounts receivable of $235,804, increase in banker’s
acceptance notes receivable of $88,062, advance on purchases of $111,197, inventories of $420,629 and prepayments and other current
assets of $8,829 from operating assets, decreases in customer deposits of ($34,184), increase in accounts payable of $139,359,
taxes payable of $58,581, deferred revenue from government grant of $5,224, due to related party of $66,395 and accrued expenses
and other current liabilities of $27,782 from operating liabilities.
Cash Flow provided
by (used in) Investing Activities
During the three month period ended March
31, 2012, cash provided by investing activities of $5,782 consisted of (i) cash acquired from acquisition of $558, and (ii) release
of restricted cash of $5,224.
Cash Flow provided by (used in) Financing Activities
During the three month period ended March
31, 2012, cash used in financing activities of ($129,707) consisted of (i) proceeds from loans payable of $786,349, (ii) repayment
of loans payable of ($786,349), and (iii) repayments to stockholders of ($129,707).
Loan Obligations
As at March 31, 2012, Hubei Minkang PRC
had loans payable of $1,582,654 due to Bank of Communications Limited, Yichang Branch, collateralized by certain of Hubei Minkang
PRC’s buildings and land use rights, with interest at 110% of the bank’s benchmark rate, (6.6255%) per annum, payable
monthly, which the principal is due and payable on May 5, 2012. On May 7, 2012, Hubei Minkang PRC repaid the loan payable to Bank
of Communications (Yichang Branch). In addition, as at March 31, 2012, Hubei Minkang PRC had a loan payable of $791,327 due to
Hubei Bank (Yichang Branch), collateralized by certain of Hubei Minkang PRC’s buildings and land use rights, with interest
at 110% of the bank’s benchmark rate, per annum, payable monthly, with the principal due and payable on April 7, 2012. On
April 1, 2012, Hubei Minkang PRC repaid the loan payable to Hubei Bank (Yichang Branch) that was due on April 7, 2012. Furthermore,
as at March 31, 2012, Hubei Minkang PRC had a loan payable of $791,327 due to Hubei Bank (Yichang Branch), collateralized by certain
of Hubei Minkang PRC’s buildings and land use rights, with interest at 7.315% per year, which is calculated and payable monthly,
with the principal due and payable on January 11, 2013.
In addition, as at March 31, 2012, Hubei
Minkang PRC received a working capital advance from an unrelated third party in China in the amount of $791,327, which bears no
interest and may be converted into shares of common stock of the Company at the same price per share as the Company’s future
equity financing via public offering or private placements. On April 25, 2012 Hubei Minkang PRC repaid this working capital advance.
Subsequent Events
On April 1, 2012, Hubei Minkang PRC repaid
a loan of RMB 5,000,000 to Hubei Bank (Yichang Branch) that was due on April 7, 2012.
On April 5, 2012, Hubei Minkang PRC
and
Hubei Bank (Yichang Branch) executed a loan contract, where Hubei Minkang PRC loaned RMB 5,000,000.00 to be used as liquidity,
with a loan period from April 5, 2012 to April 5, 2013 and having an interest rate of 7.315% per year, which is calculated and
paid monthly, with the principal due on April 5, 2013. This loan has been secured by the same maximum pledge contract, dated December
23, 2010 between Hubei Minkang PRC and Yichang City Commercial Bank, however, Hubei Minkang PRC is required to renew the insurance
plan on the collateral for another 12 months.
On April
25, 2012, Hubei Minkang PRC fully repaid the working capital advance from an unrelated third party in China in the amount of RMB 5,000,000 (approximately $791,189).
On April 27, 2012, we completed a private
placement financing involving the sale of 1,130,270 restricted shares of our common stock (each a “Share”) to one individual
at a subscription price of $0.70 per Share for gross proceeds of $791,189.
On May 7, 2012, Hubei Minkang PRC repaid
a loan of RMB 10,000,000 to Bank of Communications (Yichang Branch) that was due on May 5, 2012.
On May 7, 2012, Hubei Minkang PRC and Bank
of Communications (Yichang Branch) executed a loan contract, where Hubei Minkang PRC loaned RMB 10,000,000 to be used as liquidity,
with a loan period from May 7, 2012 to May 7, 2013 and having an interest rate of 7.872% per year, which is calculated and paid
on the 20
th
of each month, with the principal due on May 7, 2013. This loan has been secured by the same two maximum
pledge contracts, dated January 13, 2011 and May 1, 2011, respectively, between Hubei Minkang PRC and Bank of Communications (Yichang
Branch) that take certain of Hubei Minkang PRC’s buildings and land use rights as collateral to secure the loans from Bank
of Communications (Yichang Branch).
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and are not required to provide the information required under this item.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, Lee
Tong Tai (being our principal executive officer), and our Chief Financial Officer, Loke Hip Meng (being our principal financial
and accounting officer), to allow for timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief
Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for our Company.
Our management has evaluated the effectiveness
of our disclosure controls and procedures as of March 31, 2012 (under the supervision and with the participation of the Chief Executive
Officer and the Chief Financial Officer), pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as
amended. As part of such evaluation, management considered the matters discussed below relating to internal control over financial
reporting. Based on this evaluation, our Company’s Chief Executive Officer and Chief Financial Officer have concluded that
our Company’s disclosure controls and procedures were not effective as of March 31, 2012.
Changes in Internal Control over Financial
Reporting
The term “internal control over financial
reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and
principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies
and procedures that:
|
·
|
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the registrant;
|
|
·
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
registrant are being made only in accordance with authorizations of management and directors of the registrant; and
|
|
·
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the registrant’s assets that could have a material effect on the financial statements.
|
A material weakness is defined in Public
Company Accounting Oversight Board Auditing Standard No. 5 as a significant deficiency, or a combination of significant deficiencies,
in internal control over financial reporting that results in there being more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected.
There have not been any changes in our
internal control over financial reporting that occurred during our fiscal quarter ended March 31, 2012 that have materially affected,
or are likely to materially affect, our internal control over financial reporting.
PART II
- OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending legal proceeding. We are not
aware of any pending legal proceeding to which any of our officers, directors, affiliates or any beneficial holders of 5% or more
of our voting securities are adverse to us or have a material interest adverse to us.
Item 1A. Risk Factors
We are a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and are not required to provide the information required under this item.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
On April 27, 2012, we completed a private
placement financing involving the sale of 1,130,270 restricted shares of our common stock (each a “Share”) to one individual
at a subscription price of $0.70 per Share for gross proceeds of $791,189. In connection with the issuance of the Shares, we relied
on the exemption from registration under the United States
Securities Act of 1933
, as amended, provided by Regulation S,
based on representations and warranties provided by the purchaser of the Shares in the subscription agreement entered into between
the purchaser and us.
The proceeds from the above transactions
have been or will be used for general corporate purposes.
Item 3. Defaults upon Senior
Securities
None.
Item
4.
MINE SAFETY DISCLOSURES
N/A.
Item 5. Other Information
On May 7, 2012, Hubei Minkang PRC repaid
a loan of RMB 10,000,000 to Bank of Communications (Yichang Branch) that was due on May 5, 2012.
On May 7, 2012, Hubei Minkang PRC and Bank
of Communications (Yichang Branch) executed a loan contract, where Hubei Minkang PRC loaned RMB 10,000,000 to be used as liquidity,
with a loan period from May 7, 2012 to May 7, 2013 and having an interest rate of 7.872% per year, which is calculated and paid
on the 20
th
of each month. This loan has been secured by the same two maximum pledge contracts, dated January 13, 2011
and May 1, 2011, respectively, between Hubei Minkang PRC and Bank of Communications (Yichang Branch) that take certain of Hubei
Minkang PRC’s buildings and land use rights as collateral to secure the loans from Bank of Communications (Yichang Branch).
Item 6. Exhibits
Exhibit
Number
|
|
Description of Exhibit
|
2.1
|
|
Share Exchange Agreement, dated July 8, 2011, among Hubei Minkang Pharmaceutical Ltd., HBMK Pharmaceutical Limited and all the shareholders of HBMK Pharmaceutical Limited. (1)
|
3.1
|
|
Articles of Incorporation (5)
|
3.2
|
|
Bylaws (5)
|
3.3
|
|
Certificate of Change Pursuant to NRS 78.209, filed with the Nevada Secretary of State on September 7, 2007 (5)
|
3.4
|
|
Articles of Merger, filed with the Nevada Secretary of State on September 7, 2007 (5)
|
3.5
|
|
Articles of Merger, filed with the Nevada Secretary of State on May 21, 2008 (5)
|
3.6
|
|
Certificate of Change Pursuant to NRS 78.209, filed with the Nevada Secretary of State on September 29, 2010 (5)
|
3.7
|
|
Articles of Merger, filed with the Nevada Secretary of State on September 29, 2010 (5)
|
10.1
|
|
Extension Agreement, dated August 1, 2011, among Hubei Minkang Pharmaceutical Ltd., HBMK Pharmaceutical Limited and all the shareholders of HBMK Pharmaceutical Limited. (2)
|
10.2
|
|
Extension Agreement #2, dated August 16, 2011, among Hubei Minkang Pharmaceutical Ltd., HBMK Pharmaceutical Limited and all the shareholders of HBMK Pharmaceutical Limited. (3)
|
10.3
|
|
Loan Contract, dated January 20, 2011, among Hubei Minkang Pharmaceutical Co., Ltd. and Yichang Commerce Bank Co., Ltd. for RMB 5,000,000. (4)
|
10.4
|
|
Loan Contract, dated April 8, 2011, among Hubei Minkang Pharmaceutical Co., Ltd. and Yichang Commerce Bank Co., Ltd. for RMB 5,000,000. (4)
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10.5
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Loan Contract, dated May 5, 2011, among Hubei Minkang Pharmaceutical Co., Ltd. and Bank of Communications Co., Ltd., Yichang Branch, for RMB 10,000,000. (4)
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10.6
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Maximum Pledge Contract, dated December 23, 2010, among Hubei Minkang Pharmaceutical Co., Ltd. and Yichang Commerce Bank Co., Ltd. (4)
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10.7
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Maximum Pledge Contract, dated January 13, 2011, among Hubei Minkang Pharmaceutical Co., Ltd. and Bank of Communications Co., Ltd., Yichang Branch. (4)
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10.8
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Maximum Pledge Contract, dated May 1, 2011, among Hubei Minkang Pharmaceutical Co., Ltd. and Bank of Communications Co., Ltd., Yichang Branch. (4)
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10.9
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Loan Contract, dated January 11, 2012, among Hubei Minkang Pharmaceutical Co., Ltd. and Hubei Bank Co., Ltd. for RMB 5,000,000. (6)
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10.10
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Loan Contract, dated April 5, 2012, among Hubei Minkang Pharmaceutical Co., Ltd. and Hubei Bank Co., Ltd. for RMB 5,000,000. (6)
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10.11
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Loan Contract, dated May 7, 2012, among Hubei Minkang Pharmaceutical Co., Ltd. and Bank of Communications Co., Ltd., Yichang Branch, for RMB 10,000,000. (7)
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31.1
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act. *
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31.2
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Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act. *
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32.1
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Certification of Chief Executive Officer and Chief Financial officer Under Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act. *
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99.1
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Certificates of Good Manufacturing Practices for Pharmaceutical Products issued by the State Food and Drug Administration to Hubei Minkang PRC. (4)
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99.2
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List of pharmaceutical product registration certificates received by Hubei Minkang PRC from the Food and Drug Administration Authority. (4)
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99.3
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List of pharmaceutical product registration certificates that have received re-registration in June 2011. (4)
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99.4
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List of pharmaceutical product registration certificates that are pending for re-registration. (4)
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99.5
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|
Free Sale Certificates obtained by Hubei Minkang PRC from Hubei Food and Drug Administration for the manufacture and free sale of 28 popular TCM products. (4)
|
99.6
|
|
Patent Certificates of Appearance Design for packaging received by Hubei Minkang PRC. (4)
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99.7
|
|
Notification of Granting Invention Patent, issued on May 19, 2011 having a patent definition of “a formula and Chinese medicine that prevents the reduction of platelet.” (4)
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99.8
|
|
Notifications of Receipts of Patent Applications received by Hubei Minkang PRC. (4)
|
|
(1)
|
Filed as an Exhibit to the Company’s current report on Form 8-K with the SEC on July 11,
2011, and incorporated by reference herein.
|
|
(2)
|
Filed as an Exhibit to the Company’s current report on Form 8-K with the SEC on August 9,
2011, and incorporate by reference herein.
|
|
(3)
|
Filed as an Exhibit to the Company’s current report on Form 8-K with the SEC on August 22,
2011, and incorporated by reference herein.
|
|
(4)
|
Filed as an Exhibit to the Company’s current report on Form 8-K with the SEC on September
26, 2011, and incorporated by reference herein.
|
|
(5)
|
Filed as an Exhibit to the Company’s current report on Form 8-K/A with the SEC on December
22, 2011, and incorporated by reference herein.
|
|
(6)
|
Filed as an Exhibit to the Company’s current report on Form 8-K with the SEC on April 26,
2012, and incorporated by reference herein.
|
|
(7)
|
Filed as an Exhibit to the Company’s current report on Form 8-K with the SEC on May 15, 2012,
and incorporated by reference herein.
|
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HUBEI MINKANG PHARMACEUTICAL LTD.
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|
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By:
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/s/ Lee Tong Tai
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Lee Tong Tai
|
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President, Chief Executive Officer and a director
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|
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Principal Executive Officer
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|
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Date: May 16, 2012
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|
|
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By:
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/s/ Loke Hip Meng
|
|
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Loke Hip Meng
|
|
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Chief Financial Officer
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|
|
Principal Financial Officer
|
|
|
Date: May 16, 2012
|
|
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