SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
(Amendment No. 1)
x
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the fiscal year ended December 31,
2006.
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o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934.
|
Commission
File No.: 0-26059
CHINA
SKY ONE MEDICAL, INC.
(Exact
name of Registrant as specified in its Charter)
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Nevada
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87-0430322
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(State
or other Jurisdiction of Incorporation or Organization)
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(IRS
Employer ID Number)
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Room
1706, No. 30 Di Wang Building, Gan Shui Road,
Nandang
District, Harbin, People’s Republic of China 150001
(Address
of Principal Executive Offices) (Zip Code)
No.38
Dingxin 3rd
Street,
Nangang District, Harbin,
Heilongjiang
Province, People’s Republic of China 150001
Former
name, former address and former fiscal year, if changed since last
report.
Registrant's
Telephone Number including Area Code: 86-451-53994073
(China)
Securities
Registered Under Section 12(b) of the Exchange Act: None.
Securities
Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value
$0.001
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act o
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x
No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
State
issuer’s revenues for its most recent fiscal year. $19,768,960.
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) On the basis of the last sale price on March 26,
2007, of $8.00, the aggregate market value of the voting and non-voting common
equity held by non-affiliates was $45,924,168.
As
of
March 30, 2007, the registrant had outstanding 12,036,696 shares of its common
stock.
Documents
incorporated by reference: None.
Transitional
Small Business Disclosure Format: Yes o
No
x
EXPLANATORY
NOTE
As
previously announced in a Current Report on Form 8-K filed by China Sky One
Medical, Inc. (the “Company”) with the Securities and Exchange Commission (the
“SEC”) on September 18, 2007 (as amended on September 26, 2007), on
approximately May 12, 2007, the Company’s management concluded that the
Company’s previously filed financial statements as of the fiscal year ended
December 31, 2006, and the interim periods ended March 31, 2006, June 30,
2006
and September 30, 2006, should no longer be relied upon due to certain
significant accounting errors.
This
Amendment No. 1 to the Annual Report on Form 10-KSB (the “10-KSB/A”), which
amends and restates certain items identified below with respect to the Form
10-KSB originally filed by the Company with the SEC on April 2, 2007 (the
“Original Filing”), is being filed to reflect the restatement of the Company’s
financial statements for the fiscal year ended December 31, 2006. Detailed
information regarding the accounting errors that have been corrected is provided
in Note 24 of the Notes to the Financial Statements included in this
10-KSB/A. As soon as practicable, the Company will file amended Form 10-QSBs
for
the interim periods ended March 31, 2006, June 30, 2006 and September 30,
2006.
The
Company has attached to this 10-KSB/A updated certifications executed as
of the
date of this Form 10-KSB/A by the Chief Executive Officer and Chief Financial
Officer as required by Sections 302 and 906 of the Sarbanes Oxley Act of
2002.
These updated certifications are attached as Exhibits 31.1, 31.2, 32.1 and
32.2
to this 10-KSB/A.
This
Form
10-KSB/A only amends and restates certain information in Item 6 (Management’s
Discussion and Analysis or Plan of Operation), Item 7 (Financial Statements)
and
Item 13 (Exhibits), and such amendment and restatement with respect to
Items 6
and 7 only reflect the restatement of the financial statements as described
above. Except for the foregoing amended and restated information, this
Form
10-KSB/A continues to describe conditions as of the date of the Original
Filing,
and the disclosures contained herein have not been updated to reflect events,
results or developments that have occurred after the Original Filing, or
to
modify or update those disclosures affected by subsequent events. Among
other
things, forward-looking statements made in the Original Filing have not
been
revised to reflect events, results or developments that have occurred or
facts
that have become known to us after the date of the Original Filing (other
than
the restatement), and such forward-looking statements should be read in
their
historical context. This Form 10-KSB/A should be read in conjunction with
the
Company’s filings made with the SEC subsequent to the Original Filing, including
any amendments to those filings.
TABLE
OF CONTENTS
ITEM
NUMBER AND CAPTION
PART
I |
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Page
No. |
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Item
1.
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Description
of Business
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2
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Item
2.
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Description
of Property
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31
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Item
3.
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Legal
Proceedings
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31
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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31
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PART
II
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Item
5.
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Market
for Common Equity and Related Stockholder Matters
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31
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Item
6.
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Management’s
Discussion and Analysis or Plan of Operation
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34
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Item
7.
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Financial
Statements
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F-1
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Item
8.
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
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43
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Item
8A.
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Controls
and Procedures
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43
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Item
8B.
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Other
Information
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44
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons;
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Compliance
With Section 16(a) of the Exchange Act
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44
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Item
10.
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Executive
Compensation
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46
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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50
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Item
12.
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Certain
Relationships and Related Transactions
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51
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Item
13.
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Exhibits
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52
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Item
14.
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Principal
Accountant Fees and Services
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54
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PART
I
ITEM
1. DESCRIPTION OF BUSINESS
All
of
the business of China Sky One Medical, Inc., is conducted through its
wholly-owned subsidiary, American California Pharmaceutical Group, Inc., a
California corporation (“ACPG”), which, in turn, conducts its business through
its wholly-owned subsidiary, Harbin Tian Di Ren Medical Science and Technology
Company (“TDR”), and TDR’s subsidiaries, described below. All references in this
Form 10-KSB/A, unless the context otherwise indicates, to “China Sky,” “the
“Company,” “we,” “us,” “our,” and the like, shall mean China Sky One Medical,
Inc., combined with ACPG, and its subsidiary, TDR, and TDR’s
subsidiaries.
ACPG
was
incorporated on December 16, 2003, in the State of California, under the name
“QQ Group, Inc.” It changed its name to “American California Pharmaceutical
Group, Inc.” in anticipation of the stock exchange transaction with China Sky
(then known as “Comet Technologies, Inc.”), described below. On December 8,
2005, ACPG completed a stock exchange transaction with TDR and TDR’s
subsidiaries. Under the terms of the agreement, ACPG exchanged 100% of its
issued and outstanding common stock for 100% of the capital stock of TDR and
its
subsidiaries, described below.
On
May
11, 2006, ACPG entered into a Stock Exchange Agreement (the “Exchange
Agreement”) with the shareholders of the Company (then known as “Comet
Technologies, Inc.”). The terms of the Exchange Agreement were consummated and
the transaction was closed on May 30, 2006. As a result of the transaction,
the
Company issued a total of 10,193,377 shares of its common voting stock to the
stockholders of ACPG, in exchange for 100% of the capital stock of ACPG. The
common shares were issued in reliance on the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933 as amended and Regulation
D
thereunder. As a result of the transaction, ACPG is now a wholly-owned
subsidiary of the Company, and the Company, which previously had no material
business operations, is a holding company for the business of ACPG and its
subsidiaries.
ACPG
is
only a holding company, and has no revenues (and relatively nominal expenses),
except those related to its ownership of TDR and its subsidiaries. TDR, formerly
known as “Harbin City Tian Di Ren Medical Co.,” was originally formed in 1994
and maintained its principal executive office in Harbin City of Heilongjiang
Province, in the People’s Republic of China (the “PRC”). TDR was reorganized and
incorporated as a limited liability company on December 29, 2000, under the
“Corporation Laws and Regulations” of the PRC with an authorized capital of
$l,330,314 (Renminbi (“RMB”) 11.015 million). TDR had two wholly-owned
subsidiaries, Harbin First Bio-Engineering Company Limited (“First”) and Kangxi
Medical Care Product Factory (“Kangxi”), until July, 2006, when Kangxi was
merged into First.
BUSINESS
OF TDR
GENERAL
We
are
engaged, through TDR and subsidiaries, in the development, manufacture,
marketing and sale of over-the-counter nutritional and medicinal products.
TDR’s
principal business is the manufacture and sale of branded nutritional
supplements and over-the-counter plant and herb based pharmaceutical and
medicinal products. We have evolved into an integrated manufacturer, marketer
and distributor of external use Chinese medicine products sold primarily to
and
through China domestic pharmaceutical chains. The Company sells both its own
manufactured products, and medicinal and pharmaceutical products manufactured
by
others in the PRC.
Our
manufacturing facilities are in the City of Harbin, Heilongjiang Province.
Our
principal products are external use Traditional Chinese Herbal Remedies/
Medicines (“TCM”). Using various formulas, we produce a number of TCM products
with several forms of delivery including creams and ointments, powders, sprays,
various medicated skin patch products, and herbs believed to have complimentary
effects.
Our
principal operations are through TDR in the PRC, where TDR has sales
distribution covering most of China and the Hong Kong Special Administration
Region. We also export our products to 11 other countries, including Germany,
Denmark,
Switzerland, Hungary, South Korea, Singapore, and the United States.
TDR
has
also established several long-term relationships with well-known universities
and enterprises in the PRC, as described below under “Current Research and
Development.” Through these relationships, TDR hopes to develop a number of
additional products it will be able to manufacture and market in the PRC and
in
other countries.
The
State
Food and Drug Administration of the government of the PRC (“SFDA”) issues the
licenses and petitions for permission to manufacture and market pharmaceutical
products in the PRC. TDR has been granted 9 product licenses and permits, which
have allowed TDR to commercialize a total of 36 products. TDR is undertaking
efforts to develop a series of 10 new products, and is planning to register
these products with the SFDA over the next 5 years. TDR has also registered
7
patents with the State Intellectual Property Rights Bureau of the PRC, which
includes packing design patents as well as product ingredients patents. TDR
plans to continue registering patents resulting from its ongoing product
research and development.
Harbin
First Bio-Engineering Company Limited
Harbin
First Bio-Engineering Company Limited (“First”) was formed in Heilongjiang
Province, in the PRC, on September 26, 2003 with an authorized capital of
$241,546 (RMB 2 million). First has been a wholly-owned subsidiary of TDR since
its inception. First focuses on research and development of the use of natural
medicinal plants and biological technology products, such as Endothelin-1.
First
is one of the first companies in Heilongjiang Province conducting
research and development of high technology biological products. First has
two
production lines: an enzyme immunity reagent kit production line, and a colloid
gold production line. First officially put its facility into production on
July
21, 2006.
In
July,
2006, Kangxi Medical Care Product Factory (“Kangxi”) was merged into First.
Kangxi was formed on July 20, 2001, in the City of Harbin, Heilongjiang
Province, in the PRC, with an authorized capital of $60,386 (RMB 500,000).
Kangxi manufactures and sells branded external use Chinese medicine and other
natural products under the registered trademark “Kangxi.” Kangxi produces and
sells its products to TDR for distribution and resale. It has four production
lines: spray, ointment and cream, powder, and patch.
PRODUCTS
We
manufacture over thirty-seven (37) branded products, which management believes
enables it to maintain better control over product quality and availability
while also reducing production costs. We also sell a total of eight (8) products
manufactured by other firms (See “Other Products,” below). Our manufacturing
operations are conducted in its facilities located in Harbin City, China. We
maintain a working relationship with a number of outside manufacturers,
including softgel manufacturers and packagers, and utilize these outside sources
from time to time.
We
sell
our products under three basic categories: cosmetics (4 items); medical devices
(4 items); and external use medicinal or pharmaceutical external use products
(over 22 items). TDR sells a variety of products in different forms, including
sprays, ointments and creams, powders, and patches.
Set
forth
below is a description of the principal products we manufacture.
Sumei
Slim Patch
The
Sumei
Slim Patch is marketed and sold in the PRC as a more natural way to lose weight.
The Sumei Slim Patch uses Saponin to regulate and restrain the excessive
secretion of certain hormones, while promoting others. The Sumei Slim Patch
is
believed to foster weight loss and prevent weight gain.
Pain
Killer Patch
A
pain
killer patch applied to the neck, shoulder and waist, this product is a
treatment to fend off fever, promote well-being and to relieve diarrhea. The
patch is used for a number of ailments, including fever, headache, dysentery
of
a heat type, diarrhea and stiffness and pain in the neck caused by hypertension.
Anti-Hypertension
Patch
The
anti-hypertension patch is based on five thousand years of Chinese herbal vein
therapy that has been adapted to a modern trans-dermal therapeutic system (TTS).
The product utilizes
a Body-Yong-Guan point technique, which is believed to maximize the
effectiveness of the medicinal ingredients. The product is believed to stimulate
blood capillaries, and is believed to be effective in improving circulation
and
in reducing blood pressure.
Dysmenorrheal
Patch
This
is a
soft patch, applied externally, for pain relief from dysmenorrheal (menstrual
cramps) that combines traditional Chinese point therapy and modern trans-dermal
technology. This product contains a pure herb formula selected from rare Chinese
herbs or plants which is refined to extract the effective ingredients. This
product is believed to be effective in regulating microcirculation, in balancing
the functions of the human body and in enhancing the immunity response of women.
It is believed to be effective in treating the dysmenorrheal (cramping) in
a
woman’s critical days, and in regulating pain and catamenia (menstruation
period).
Yin
Ke Psoriasis Spray
Psoriasis
is a disease that is difficult to treat. TDR’s scientists have focused their
efforts in finding treatments for this disease. This product contains a Chinese
herbal that is believed to be effective in killing pathogenic ringworms inside
or under the skin, causing scale-like skin to fall off, and allowing healthy
skin to grow.
Wart
Removing Spray
This
product has been developed to eliminate the virus in a tumor or wart. The
product is effective in removing warts, through a strong permeation and
sterilization process. The product is a highly concentrated washing liquid
that
is applied to the topical area.
Chilblain
Ointment
This
product contains Rhizoma Paridis, Rhizoina Bletilae and Camphor, and is refined
from Chinese herbal materials. It is believed to be effective in improving
blood
circulation, and in eliminating various symptoms of Chilblain (a cold injury
that appears as an inflamed swelling on the extremities), including itching
and
swelling.
Hemorrhoids
Ointment
This
product contains Acetate, Radix notoginseng, and Rhizoma coptidis. The product
is made in a soft ointment that is effective in sterilizing and relieving
hemorrhoid symptoms, including itching, distending pain, burning, and bleeding.
Tinea
Pedis Spray, Ointment and Powder
This
product contains Cortex Pseudolaricis and Cortex Phellodendri, and is a
treatment for killing various pathogens on the skin surface and subcutaneously,
such as mycete (a fungus), trichopytic, staphylococcal bacteria aureus, bacillus
coli, and candida albicans (thrush).
Dermatitis
Spray
This
product is effective in sterilization and in relieving itching in various kinds
of skin pruritis (intense itching condition) caused by eczema, urticaria
(hives), seborrheic dermatitis (flaking of skin, dandruff), herpes zoster
(shingles), neurodermitis and allergic dermatitis.
Dandruff
Treatment Herbal Shampoo
This
product has been specifically designed to treat dandruff, and is not intended
for use as an ordinary shampoo. The product is believed to be effective in
killing fungi and providing nutrition to pallium cells.
Runze
Eye Drop
This
product is refined from active ingredients extracted from natural herbs or
plants, and functions as a protection from infection, tiredness of optic nerves
and myopia.
Other
Products
TDR
offers a number of additional products made from Chinese herbs and plants,
including a leukoderma ointment, rheumatism spray, Coryza powder, Hircus
removing spray, gonorrheal cleaning spray, a snoring retardant, deodorants,
diet
tea, cough arresting patch, pharyngitis spray, and others.
The
Company has historically sold only products it manufacturers itself. However,
during the 2006 fiscal year, the Company began an initiative to sell medicinal
products manufactured by other companies under exclusive sales and marketing
arrangements. Set forth in the table below is information concerning these
products and the intended treatment applications.
Product
Name
|
|
Treatment
Applications
|
|
Main
Component
|
Ofloxacin
Eye Drops
|
|
Conjunctivitis,
keratitis
|
|
Ofloxacin
|
Ribavirin
Nasal Drops
|
|
Influenza
|
|
Ribavirin
|
Econazole
Nitrate Suppositories
|
|
Colpitis
(inflammation of the vagina)
|
|
Econazole
Nitrate
|
Qianliming
Nasal Drops
|
|
Coryza
(head cold)
|
|
Ethyl
ester hydroxybenzene, etc.
|
Terbinafine
Hydrochloride Liquor
|
|
Tinea
(scalp ringworm)
|
|
Terbinafine
Hydrochloride
|
Compound
Camphor Cream
|
|
Eczema,
dermatitis, etc.
|
|
Camphor,
menthol, methyl salicylate
|
Terbinafine
Hydrochloride Cream
|
|
Tinea
(scalp ringworm)
|
|
Terbinafine
Hydrochloride
|
Sulfasalazine
Suppositories
|
|
Colonitis
|
|
Sulfasalazine
|
Total
sales in 2006 from products manufactured by other companies under exclusive
sales arrangements totaled approximately $6,382,000, or approximately 32% of
total sales in the year, as compared to only nominal sales in 2005. The Company
markets and sells these products
through its existing distribution channels. The Company expects that its product
line under sales and manufacturing contracts with third-party manufacturers
will
continue to expand, and that sales revenue from current and new pharmaceutical
and medicinal products manufactured by other companies will continue to grow
rapidly in 2007 and beyond.
The
following table sets forth our principal product categories and the approximate
amount and percentage of revenue from each of such product categories, during
the fiscal year ended December 31, 2006:
|
|
Revenue
in 2006
|
|
Product
Category
|
|
Approx.
Amount
(U.S.$)
|
|
Approx.
%
of Revenue
|
|
Sprays
|
|
$
|
5,229,822
|
|
|
26.45
|
|
Patches
|
|
|
6,511,635
|
|
|
32.94
|
|
Ointments
|
|
|
1,485,797
|
|
|
7.52
|
|
Liquids,
Creams and Powders
|
|
|
936,186
|
|
|
4.73
|
|
Other
Products (manufactured by others)
|
|
|
6,382,737
|
|
|
32.29
|
|
Less:
sales allowance
|
|
|
(777,217
|
)
|
|
(3.93
|
)
|
Total
Gross Sales
|
|
$
|
19,768,960
|
|
|
100.00
|
|
RESEARCH
AND DEVELOPMENT
We
currently conduct all of our research and development (“R&D”) activities,
either directly or through collaborative arrangements with universities and
research institutions in the PRC. We have our own research, development and
laboratory facilities located at its principal headquarters in the city of
Harbin, Heilongjiang Province. TDR’s R&D team currently consists of
approximately 30 people, of which 18 people are full time researchers and 12
people are part time technical experts. Many of our team members are professors
affiliated with universities in the PRC.
We
have
established several long-term partnerships with well-known universities and
enterprises in the PRC. We have built a gene medicine laboratory through a
collaborative effort with Harbin Medical University; established a cell
laboratory with North East Agricultural University; and founded a monoclonal
antibody laboratory with Jilin University. As a result of one of these
collaborations with Harbin Medical University, a product known as “Endothelin-1”
is currently under development. As of the date of this Form 10-KSB, we have
completed oxicology and teratogenicity testing, and have established quality
standards, and further developments are underway to improve product quality.
At
such time as development and clinical testing is successfully completed, we
will
commence efforts to market Endothelin-1 as a new anti-cancer medicine. There
can
be no assurance, of course, that these development efforts, or that any
subsequent efforts to obtain SFDA approval of the product, will be successful.
In collaboration with Harbin Medical University, we have completed a laboratory
experimental study pertaining to Endothelin-1, which is required prior to
clinical trials, and is currently applying for approval to enter clinical
experiments. This medicine has been recognized by the PRC as the “Top Category
in New Medicine.” In order to qualify as the “Top Category in New Medicine,”
a company must have intellectual property rights, high technology involvement,
strong innovation, and the medicine must be the first of its kind to be
introduced to the PRC. TDR has ownership of the intellectual property rights
pertaining to this technology, and has obtained an invention patent in China.
Under our partnership arrangements with other universities and research
institutions, we will generally hold the intellectual property rights to any
developed technology. We expect that research and development and testing will
be completed for manufacturing in 2009.
PRODUCTS
UNDER RESEARCH AND DEVELOPMENT
At
present, our ongoing research is divided into five general areas: (1) the
development of an enzyme linked immune technique to prepare extraneous
diagnostic kits (see table below); (2) the development of an enzyme linked
gold
colloid technique to prepare extraneous rapid diagnostic test strip; (3) the
development of a gene recombination technique to prepare gene drug; (4) the
development of a biology protein chip for various tumor diagnostic applications;
and (5) the development of a cord blood stem cell bank described below.
Biological
Products
We
currently have ten biological products under development. The development of
these products will be completed as early as 2006 for some products, and is
expected to continue through 2009 or beyond for other products. A summary of
each of these products is set forth in the table below.
Testing
Kits Name
|
Clinical
Experiment and Status
|
Application
Area
|
Patent
or
Intellectual
Property (IP)
|
Urinate
Micro Albumin Examination Testing Kit
|
Finished
clinical experiment and approved by the State; production certificate
granted in 2006; preparing to manufacture.
|
Early
stage diagnosis for primary kidney disease, hypertension,
diabetes.
|
Patented
in the PRC
|
Cardiac
Arrest Early Examination Kit
|
Finished
clinical experiment; approved by the State; production certificate
granted
and preparing to manufacture.
|
Early
stage diagnosis for myocardial infarction
|
Applying
for patent
|
AIDS
Early Examination Kit
|
Completed
clinical testing; application for manufacturing certificate
submitted.
|
Early
stage diagnosis for AIDS
|
Method
of Anti-body preparation is our IP.
|
Carcinoma
Cervix Early Examination Kit
|
Research
completed and application for manufacturing certificate
submitted.
|
Early
stage diagnosis for Carcinoma Cervix
|
Anti-body
preparation is our IP.
|
Breast
Cancer Early Examination Kit
|
Research
on product formula completed; and application for production permit
submitted.
|
Early
stage diagnosis for Breast Cancer.
|
Anti-body
preparation is our IP.
|
Liver
Cancer Early Examination Kit
|
Research
on product formula completed; clinical experiment in
process.
|
Early
stage diagnosis for Liver Cancer.
|
Anti-body
preparation is our IP.
|
Rectal
Cancer Early Examination Kit
|
Research
on product formula completed; clinical experiment in
process.
|
Early
stage diagnosis for Rectal Cancer.
|
Anti-body
preparation is our IP.
|
Stomach
Cancer Early Examination Kit
|
Product
research completed; clinical experiment in process.
|
Early
stage diagnosis for Stomach Cancer.
|
Anti-body
preparation is our IP.
|
Multi-tumor
Marker Protein Chip Assay Kit
|
Product
research in process.
|
Early
stage diagnosis for multiple cancers.
|
Anti-body
preparation is our IP.
|
New
Endostatin
|
Toxicology
test, teratogenicity test and quality standard completed; product
research
in process.
|
Early
stage diagnosis for cancer.
|
Anti-body
preparation is our IP.
|
We
are
currently conducting toxicology experiments, quality standard measurement and
other experimentation for its products under development. It is estimated that
the experimental time takes about another seven to eight months for each
product. We cannot predict whether, and when, these efforts will be successful,
or the likelihood and/or timing of receiving SFDA approval of each
product.
Research
and Development for Cord Blood Stem Cell Bank
In
2006,
the Company began implementing a plan to establish a cord blood stem cell bank
in the PRC, for the treatment of various diseases such as leukemia, lymphoma
and
rebirth anemia. It is expected that these efforts will continue over the next
two years or more. This project will involve substantial expense and involve
numerous risks. We plan to expend Company resources in the research and
development of technology, applications and methodology for the establishment
of
a cord blood stem cell bank over the next few years, and the Company has applied
a portion of the net proceeds from its recently completed private offering
to
this project. It is anticipated that our efforts in this area will be in
partnership with major laboratories with substantial experience and resources
in
the area, and the Heilongjiang Provincial Red Cross out-patient department.
Cord
blood stem cells have been shown to be effective in treating a number of
diseases, including but not limited to: (a) various forms of blood diseases,
including Mediterranean anemia, Dresbach’s anemia, hypoplastic anemia, inborn
cell deficiency, Evan’s syndrome, Fanconi’s anemia, Kostmann’s syndrome, and
Blackfan-Diamond’s anemia; (b) various malignant diseases, including
encephaloma, lymphoma, acute and chronic leukemia, Ewing myoma, Neuoblastoma,
germ cell tumor, and multiple myeloma; (c) metabolism defects, including
congenital dyskeratosis, Gunter’s disease, and Lesch-Nyhan’s disease; (d)
immunodeficiency disease, including chronic granuloma disease and
Wiskott-Aldrich syndrome; and (e) various auto-immune diseases.
There
are
numerous advantages of cord blood stem cell banks over traditional marrow
transplants, including: a high success rate; low rejection rate; rich source
of
cord blood; absence of suffering of recipient; simple inspection and quick
application; and low matching requirements. We have concluded that the market
for this business in PRC is potentially very large. However, the entry into
this
business will require strict examination and approval by PRC and
local
governmental agencies, and will require close collaboration with medical
institutions and academies.
The
Company has recently organized Harbin Tian Qing Biotech Application Company
(“Harbin
Biotech”) as a wholly-owned subsidiary, to conduct research and development in
the areas of tissue and stem cell banks.
Research
in biotechnology areas such as tissue and stem cell banks has historically
been
controlled tightly by the government of the PRC. Recently, however,
the PRC government has altered its policies to allow one company per each
geographic area in China to become actively engaged in research in these areas,
with the result that many companies
have
applied to become engaged in this area of research and development, including
the Company.
In
August, 2006, the Company applied with the Ministry of Health of the PRC to
become engaged
in the
research and development of stem cell and tissue banks and related biotechnology
areas. Following an extensive review by the applicable local office
of the Health Department of Heilongjiang Province, the Company’s application was
approved on October 16, 2006, granting the Company the exclusive right and
license to become engaged in tissue and stem cell bank activities in the
Heilongjiang Province, PRC. The Company organized Harbin Biotech to
conduct these business operations, as required by Heilongjiang Province.
Blood
from umbilical cords—a
byproduct of normal childbirth—is
a good
source of potentially life-saving stem cells, called Hematopoietic progenitor
cells (HPCs), the type of stem cells also found in bone marrow and mobilized
peripheral blood that give rise to various kinds
of blood
cells. Transplants of these stem cells have been effective in
treating diseases of the blood and immune system, such as anemia and leukemia.
Consequently, in many parts of the world, cord blood, once seen as a waste
to be
discarded after a birth, is now viewed as a valuable resource.
Over
the
past decade, several public and private cord blood banks have been established
in other
parts of
the world to provide for the collection and preservation of these cells.
The PRC is now making these activities available to a limited number
of private enterprises in different parts of the PRC, including the Heilongjiang
Province where the Company conducts its principal operations. As
indicated, Harbin Biotech will have the exclusive right and license to establish
a research and development business in this area in northeast China.
Typically,
public cord blood banks collect and store umbilical cord blood donated by women
at the birth of a child. This blood is preserved and stored and made
available for a significant fee to anyone who needs it in the future.
The children of the donor may, in turn, be able to
use the
stored stem cells to fight various diseases, immune deficiencies and genetic
disorders. Storing the stem cells will come at a cost to the donor,
consisting of a sizable initial fee and an annual maintenance fee for each
year
of storage.
Through
Harbin Biotech, we are in the process of implementing a plan to establish a
cord
stem
cell and tissue bank at our newly established facility outside Harbin,
Heilongjiang Province, PRC, which is expected to be completed in 2008 or 2009.
Management estimates that the total expected
project costs to complete the project will be US$30 million. We have recently
completed a private offering of $3,000,000 of our equity securities, resulting
in net proceeds of approximately $2.715 million. A portion of the proceeds
of
the private offering have been or will be utilized to advance this project,
in
purchasing necessary cell bank equipment; undertaking research and development
and purchasing related research equipment; covering marketing and promotional
costs; and covering initial overhead and project costs.
This
project
is a
substantial commitment by the Company, and consequently involves a number of
significant risks, including:
(1) We
will
need to raise substantial additional capital to fund this project over the
next
two or more years, through borrowings, the sale of equity or from income from
operations. There can be no assurance we will be successful in
obtaining capital when needed, or on favorable terms. If we are not
successful in obtaining capital on a timely basis, the project could be severely
compromised.
(2) Our
ability to enter this area is subject to the laws and requirements of the PRC.
We have received approval from the government to engage in these
business operations in northeast China on an exclusive basis.
However, there can be no assurance the PRC government will not
restrict or cancel our rights, or allow other competitors to become engaged
in
this business in northeast China, which would make it more difficult for us
to
compete.
(3) Stem
cell
banking is still in its development stages, and there remain many technical
and
development challenges, including issues pertaining to the long-term viability
of cryogenically frozen cord blood.
(4) The
project will be managed by Liu Yan-Qing, the Company’s President.
The success of the project, therefore, will be dependent to a large
extent on the health and continuing involvement of Liu Yan-Qing.
While
we
do not expect that our research and development in this area will have a
negative impact
on its
current core business - the manufacture, marketing and sale of nutritional
and
medicinal products - the establishment of this business will require substantial
managerial, technical and financial resources.
During
the 2006 fiscal year, the Company had capital expenditures of over $1.15 million
for equipment and construction costs; investment on research and development;
and related costs in connection with initiating the stem cell bank
program.
Sales
approach of the biotech products
We
have
established a domestic marketing network for our products covering most of
the
PRC mainland, and have employed sales agents in these areas. Our target
customers are chain drug stores and hospitals in all cities. We use distributors
to sell products in those countries and remote regions where we do not have
sales agents.
We
have
established a marketing network through independent agents to develop an
international market. At present, we have established over 20 international
agents to sell our products.
MATERIALS
AND SUPPLIERS
We
employ
a purchasing staff with extensive knowledge of our products who work with
marketing, product development, and formulations and quality control personnel
to source raw materials for products and other items. Raw materials are sourced
principally in the PRC, and are generally available from a variety of suppliers.
No one supplier accounts for more than 20% of our total raw material purchases.
We seek to mitigate the risk of a shortage of raw materials, through
identification of alternative suppliers for the same or similar raw materials,
where available. We manufacture bulk branded products to allow more extensive
vertical integration and to improve the quality and consistency of raw
materials.
CUSTOMERS
AND DISTRIBUTION
Currently,
our products are sold primarily in the PRC and, to a lesser extent, in Hong
Kong
and in eleven other countries. Approximately 90% of our revenue is from the
sale
of products in China and Hong Kong.
Over
the
past several years, we have continuously expanded our distribution channels
for
our products. As a result, we have established representative sales offices
in
22 provinces and 125 municipalities, and deployed sales managers and
representatives in each of these markets.
Our
products are sold directly to retail stores, including pharmacies and drug
store
chains, and through independent distributors. We currently have approximately
900 customers, not including branches of retail and drug supply chains. No
single customer accounts for more than 5% of its total revenue.
As
a
means of accelerating our distribution into other countries, we expect that
we
will enter into strategic marketing arrangements with firms that have
distribution channels, brand name recognition or other unique marketing
strengths. The Company expects that under a typical arrangement it will grant
limited exclusivity to a sales agent or distributor to certain products in
a
specified territory(ies), subject to the agent meeting specified minimum monthly
or annual sales numbers. Consistent with this approach, in March, 2007, we
entered into an exclusive strategic agreement with Takasima Industries
(“Takasima”), under the terms of which Takasima has been engaged as the
exclusive sales agent of our patch products in Malaysia. Takasima will offer
our
Slim Patch products in Malaysia, under Takasima’s name brand. (See Item 6.
Management’s Discussion and Analysis - Overview).
We
also
export a number of its products to 11 countries, including the United States,
Germany, Denmark, and others, and utilizes agents and independent distributors
for these marketing and sales efforts.
We
will
continue efforts to expand our markets into other provinces and larger cities
in
the PRC, and to other markets worldwide.
COMPETITION
Competition
in the TCM, pharmaceutical, and over-the-counter nutraceutical business is
intense in China and throughout the world. We compete with various firms, many
of which produce and market products similar to our products, and many of which
have greater resources than us in terms of manufacturing and marketing
capabilities, management expertise and breadth, and financial
wherewithal.
Our
direct competitors are other domestic firms engaged in developing, manufacturing
and marketing TCM and nutraceutical products. There are many of these companies
in the PRC, in Heilongjiang Province, and even in the city of Harbin.
We
expect
that the competition for medicinal products in the PRC and other world markets
will become more intense over the next few years. We will also face competition
from foreign companies who may have established products, a strong proprietary
pipeline and strong financial resources. Our management believes our company
has
certain competitive advantages in introducing new products to market due to
our
existing distribution channels, research and development capabilities and our
relationship with certain universities and other research institutions. However,
there can be no assurance that we will be able to compete and continue to grow
in this highly competitive environment.
PRODUCTION
AND OTHER FACILITIES
We
have
two separate facilities, headquartered in the city of Harbin, Heilongjiang
Province. The older facility includes 3,000 square meters of production space,
and 1,000 square meters of warehouse. The facility also includes an extraction
workshop (approximately 1,200 square meters) and filling workshop (approximately
500 square meters) for traditional Chinese medicines; a patches production
line
(approximately 500 square meters), packing workshop (approximately 500 square
meters), testing workshop (approximately 50 square meters), examination
laboratory (approximately 100 square meters), sample laboratory (approximately
50 square meters), refining room (approximately 100 square meters), and a
work-in-process warehouse (approximately 300 square meters); finished product
warehouse (approximately 200 square meters), materials warehouse (approximately
100 square meters) and a packing warehouse (approximately 400 square meters).
The
newer
facility covers consists of a four floor office building (1,500 square meters
for office purpose, 1,200 square meters for R&D center, 800 square meters
for central examination lab, dormitory and eatery 1,000 square meters), total
4,500 square meters construction area, and a factory of 3,500 square meters.
The
facilities also include: an enzyme immunity reagent kit production workshop
(1,500 square meters) and a colloid gold production workshop (600 square
meters); a packing workshop (800 square meters); and an examination lab (500
square meters). The newer facility also includes a research center covering
approximately 1,200 square meters, for research pertaining to the development
of
various products, including traditional Chinese medicinals
(TCM), biological medicine, gene medicine, immune body research, and vitro
diagnosis reagent. These facilities also include an electricity room, heating
and boiler room and garage. Our enzyme immunity examination reagent kit
production workshop includes antigen and immune body areas, disinfection room,
aseptic clothes room, cushion room, weighing room, separation room, cleaning
equipment room, a Wan Ji flow cushion room, and antigen and immune body sign
room. The enzyme sign processing area has cushion room, cloth cleaning room,
cleaning equipment room, packing material temporary storage room, raw material
temporary storage room, equipment storage room, weighing room, seal protection
room, seal foster room, drying room, packing room, and middle cooler room.
The
work fluid separation loading room includes a disinfection clean room, storage
room, weighting room, loading room, and immune body purification room. The
colloid gold production workshop has a darkroom, sample room, seal room,
cementation room, cutting room, and a packing room. The packing workshop
includes a central equipment room, a cooler room, material relay room, label
and
temporary storage room, a packing material temporary storage room, two
examination cooler rooms, and two finished product cooler rooms.
The
Company also has a sales office in Beijing, which it acquired in December,
2006,
when the Company completed the acquisition of the products, dealership and
marketing network of Heilongjiang Tianlong Pharmaceutical Company (“Tianlong”).
(See “Item 6. Management’s Discussion and Analysis or Plan of
Operation—Overview”).
Our
production facilities are operated in accordance with “good manufacturing
practices” (“GMP”).
GOVERNMENT
REGULATION
Regulatory
Environment
Our
principal sales market is in the PRC. We are subject to the Pharmaceutical
Administrative Law of the PRC, which governs the licensing, manufacturing,
marketing and distribution of pharmaceutical products in the PRC, and sets
penalties for violations. In addition, our business is subject to various
regulations and permit systems of the government of the PRC.
The
governmental approval process in the PRC for a newly developed health product
can be lengthy and difficult. A product sample is first sent to a clinical
testing agent designated by the Ministry of Health, which conducts extensive
clinical testing and examinations of the product to verify if it has the
specified functions as stated by the company producing the product. A report
will then be prepared and issued by the clinical testing agent confirming or
negating such functions. It generally takes six months to one year for a report
to be issued by the testing agent, after submittal to the agent. The report
must
then be submitted to a provincial Health Management Commission for approval.
Following this submittal, a letter of approval issued by such commission will
be
submitted to the Ministry of Health for the issuance of a certificate that
authorizes sale and marketing of the product in the PRC.
This
entire process will generally take between eighteen months and two years. The
approval process will depend to a certain extent on whether a specified product
is a plant based pharmaceutical (“PBP”) or a plant based nutraceutical (“PBN”).
PBPs are products composed of herbs, roots and plants that do not use synthetic
chemicals, with certain medicinal functions for treatment of one or more
illnesses. PBPs are generally prescription-based but in some cases may be sold
over-the-counter. PBNs, also frequently known as “dietary supplements” or
“nutritional supplements,” are also composed of herbs, roots and plants, but are
essentially prophylactic or preventive in nature. All PBNs are available
over-the-counter without a prescription. In the PRC, PBPs require the approval
of the SFDA, and PBNs only require the approval of state and local governments
prior to manufacturing and sale. Obtaining the approval from the SFDA is
generally more complex and lengthy.
Because
our company and its subsidiaries are wholly-owned enterprises, we are subject
to
the law of foreign investment enterprises in the PRC, and the foreign company
provisions of the Company Law of China, which governs the conduct of our
wholly-owned subsidiaries and their officers and directors.
Compliance
with Environmental Law
We
comply
with the Environmental Protection Law of the PRC, as well as applicable local
regulations. In addition to compliance with the PRC law and local regulations,
we consistently undertake active efforts to ensure the environmental
sustainability of our operations. Because the manufacturing of herb and
plant-based products does not generally cause significant damage or pollution
to
the environment, the cost of complying with applicable environmental laws is
not
material. In the event we fail to comply with applicable laws, we may be subject
to penalties.
INTELLECTUAL
PROPERTY
We
regard
our service marks, trademarks, trade secrets, patents and similar intellectual
property (“IP”) as critical to our business. We have relied, and will rely, on
patent, trademark and trade secret law, as well as confidentiality and license
agreements with certain of our employees, consultants, customers and others,
to
protect our proprietary rights.
Under
the
PRC State Protection law, certain herbal medicine products which have received
approval from the SFDA, have automatic protected IP rights for a seven-year
period from the date of grant of such approval. An application can be submitted
to extend such protection for up to three consecutive seven-year periods. Once
this protection period has expired, an applicant may apply for patent protection
in the PRC. To a large extent, we rely on such State Protection law to protect
our IP rights with respect to our products. In addition, as of the date of
this
filing, we own a total of 7 patents in the PRC, pertaining to our TCMs and
biotech diagnostic kits and drugs, as follows:
(1) |
Package
foil bag design patent of Sumei slim
patch;
|
(2) |
Package
box design patent for all TCM
products;
|
(3) |
Arts
and crafts patent of Human Urinary Albumin Elisa
Kit;
|
(4) |
Arts
and crafts patent of Sumei slim
patch;
|
(5) |
Arts
and crafts design patent of Sumei slim
patch;
|
(6) |
Arts
and crafts patent of Suning cough removing patch; and
|
(7) |
Arts
and crafts patent of Endostatin.
|
We
have
received the following awards from the government of the PRC:
(1) High
Technology products certificates by Heilongjiang High Technology Products
Committee covering the following products:
(e) |
Gonorrhea
Cleaning Spray
|
(f) |
Wart-removing
liquid;
|
(h) |
Suning
Cough removing patch; and
|
(2) National
Class Torch Project (pertaining to the Sumei slim patch);
(3) Excellence
Products Award for Human Urinary Albumin Elisa Kit by The 6th New & High
Technology Fruits Fair Shen Zhen and National Commercial
Department;
(4)
100
important pre-phase projects in Heilongjiang Province covering various medical
diagnostics kits;
(5) Material
Medical Technology Research and Development Company (by Heilongjiang provincial
Science and Technology Bureau); and
(6) High
Technology Industrialized Base of Medical Area, by Heilongjiang Provincial
Development and Reform Committee (March of 2006).
We
have
registered “Kang Xi” as our trademark, which is used for all of our TCM
products.
EMPLOYEES
The
number of our employees has increased over the past two years, due to growth,
increased research and development and expanded marketing and distribution
of
products Currently we have a total of approximately 1,318 employees and
manufacturers’ representatives, generally falling into the following categories:
|
By
company:
|
|
|
|
|
|
|
|
Company |
|
Number
of
Employees
|
|
|
|
|
|
TDR |
|
1,179*
|
|
First |
|
139
|
|
TOTAL:
|
|
1,318
|
|
By nature of job (TDR
and First
combined): |
|
|
|
|
|
Type of Job |
|
Number
of
Employees
|
|
|
|
|
|
Executives and Managers |
|
24
|
|
Production and clerical |
|
145
|
|
Sales and Marketing |
|
1,119*
|
|
Research and Development,
Technology |
30
|
*Includes
manufacturers’ representatives.
We
have
employment agreements with a number of our higher level employees. None of
the
employees are covered by a collective bargaining agreement; however, we believe
our relationship with employees is good.
RISK
FACTORS
An
investment in our securities is highly speculative and subject to numerous
and
substantial risks. These risks include those set forth below and elsewhere
in
this Form 10-KSB/A. Readers are encouraged to review these risks carefully
before making any investment decision. Additional
risks and uncertainties not presently foreseeable to us may also impair business
operations. If any of the following risks occur, our business, financial
condition or operating results could be materially and adversely affected.
In
such case, the trading price of our Common Stock could decline, and an investor
could lose all or part of his investment.
Most
of
the risks set forth below pertain to the business of our wholly owned
subsidiary, American California Pharmaceutical Group, Inc. (“ACPG”), which owns
all of the issued and outstanding shares of registered capital of Harbin Tian
Di
Ren Medical Science and Technology Company (“TDR”), a limited liability company
organized in Heilongjiang Province in the People’s Republic of China (“PRC” or
“China”). Our business is conducted through ACPG and its subsidiary, TDR (and
its subsidiaries).
CHINA
RELATED RISKS
Our
business will be affected by the government regulation and Chinese economic
environment because most of our sales will be in the China market.
Although
we have started exporting products to other countries, most of our sales are
in
the PRC and Hong Kong. It is anticipated that our products in China will
continue to represent a significant portion of sales in the near future. As
a
result of our reliance on the China markets, our operating results and financial
performance could be affected by any adverse changes in economic, political
and
social conditions in China.
The
modernization of regulations for the pharmaceutical industry is relatively new
in the PRC, and the manner and extent to which it is regulated will continue
to
evolve. As a pharmaceutical company, we are subject to the Pharmaceutical
Administrative Law, which governs the licensing, manufacture, marketing and
distribution of pharmaceutical products in the PRC, and sets penalty provisions
for violations of provisions of the Pharmaceutical Administrative Law. In
addition as a “Foreign Owned Enterprise,” we will be subject to the Foreign
Company provisions of the Company Law of the PRC. Changes in these laws or
new
interpretations of existing laws may have a significant impact our methods
and
our cost of doing business. For example, if legislative proposals for
pharmaceutical product pricing, reimbursement levels, approval criteria or
manufacturing requirements should be proposed and adopted, such new legislation
or regulatory requirements may have a material adverse effect on our financial
condition, results of operations or cash flows. In addition, we are subject
to
varying degrees of regulation and licensing by governmental agencies in China.
At this time, we are unaware of any China legislative proposals that could
adversely affect our business. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on
our
operations, that regulators or third parties will not raise material issues
with
regard to compliance or non-compliance with applicable laws or regulations,
or
that any changes in applicable laws or regulations will not have a material
adverse effect on our business.
The
economy of the PRC has been transitioning from a planned economy to market
oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reforms, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in the PRC are still owned by the
Chinese government. For example, all lands are state owned and are leased to
business entities or individuals through governmental granting of State-owned
Land Use Rights. The granting process is typically based on government policies
at the time of granting and it could be lengthy and complex. This process may
adversely affect our future manufacturing expansion. The Chinese government
also
exercises significant control over the PRC’s economic growth through the
allocation of resources, controlling payment of foreign currency and providing
preferential treatment to particular industries or companies. Uncertainties
may
arise with changing of governmental policies and measures. At present, our
development of research and development technologies and products is subject
to
approvals from the relevant government authorities in China. Such governmental
approval processes are typically lengthy and complex, and never certain to
be
obtained.
There
are risks inherent
in doing business in China.
The
PRC
is a developing country with a young market economic system overshadowed by
the
state. Its political and economic systems are very different from the more
developed countries. China also faces many social, economic and political
challenges that may produce major shocks and instabilities and even crises,
in
both its domestic arena and in its relationship with other countries, including
but not limited to the United States. Such shocks, instabilities and crises
may
in turn significantly and adversely affect our performance.
Certain
political and economic considerations relating to the PRC could adversely affect
our business and operations.
While
the
PRC government has pursued economic reforms since its adoption of the open-door
policy in 1978, a large portion of the PRC economy is still operating under
five-year plans and annual state plans. Through these plans and other economic
measures, such as control on foreign exchange, taxation and restrictions on
foreign participation in the domestic market of various industries, the PRC
government exerts considerable direct and indirect influence on the economy.
Many of the economic reforms carried out by the PRC government are unprecedented
or experimental, and are expected to be refined and improved. Other political,
economic and social factors can also lead to further readjustment of such
reforms. This refining and readjustment process may not necessarily have a
positive effect on our operations or future business development. Our operating
results may be adversely affected by changes in the PRC’s economic and social
conditions as well as by changes in the policies of the PRC government, such
as
changes in laws and regulations (or the official interpretation thereof),
measures which may be introduced to control inflation, changes in the interest
rate or method of taxation, and the imposition of additional restrictions on
currency conversion.
The
recent nature and uncertain application of many PRC laws applicable to our
company create an uncertain environment for business operations and they could
have a negative effect on our business and operations.
The
PRC
legal system is a civil law system. Unlike the common law system, the civil
law
system is based on written statutes in which decided legal cases have little
value as precedents. In 1979, the PRC began to promulgate a comprehensive system
of laws and has since introduced many laws and regulations to provide general
guidance on economic and business practices in the PRC and to regulate foreign
investment. Progress has been made in the promulgation of laws and
regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation
of new laws, changes of existing laws and the abrogation of local regulations
by
national laws could have a negative impact on our business, business prospects
and operations. In addition, as these laws, regulations and legal requirements
are relatively recent, their interpretation and enforcement involve significant
uncertainty.
It
may be difficult to effect service of process and enforcement of legal judgments
upon our company and its officers and directors because they reside outside
the
United States.
As
our
operations are presently based in the PRC and our directors and officers reside
in the PRC, service of process on our company and such directors and officers
may be difficult to effect within the United States. Also, substantially all
of
our assets are located in the PRC and any judgment obtained in the United States
against our company may not be enforceable outside the United
States.
Our
business may be affected by unexpected changes in regulatory requirements in
the
jurisdictions in which we operate.
Our
company, and its subsidiaries, are subject to many general regulations governing
business entities and their behavior in China and in other jurisdictions in
which we and our subsidiaries have, or plan to have, operations and market
products. In particular, we are subject to laws and regulations covering food,
dietary supplements and pharmaceutical products. Such regulations typically
deal
with licensing, approvals and permits. Any change in product licensing may
make
our products more or less available on the market. Such changes may have a
positive or negative impact on the sale of our products and may directly impact
the associated costs in compliance and our operational and financial viability.
Such regulatory environment also covers any existing or potential trade barriers
in the form of import tariff and taxes that may make it difficult for us to
import our products to certain countries and regions, such as Hong Kong, which
would limit its international expansion.
We
may have difficulty attracting talent in foreign
countries.
Currently,
over 90% of our sales are in the PRC and in Hong Kong. We are in the process
of
attempting to establish marketing and sales presence in the United States and
other countries. We expect to establish an office in the United States for
investor relations. In the future, we may explore expanding its operations
in
the United States, as well as other countries throughout the world. Upon
effecting any such expansion, we may not be able to identify and retain
qualified personnel due to its lack of understanding of different cultures
and
lack of local contacts. This may impede international expansion.
We
may experience currency fluctuation and longer exchange rate payment
cycles.
The
local
currencies in the countries in which we sell products may fluctuate in value
in
relation to other currencies. Such fluctuations may affect the costs of our
products sold and the value of our local currency profits. While operations
in
countries other than China do not comprise a substantial portion of revenue
at
the present time, we intend to expand our business in other countries, which
would result in an increased risk of exposure of our business to currency
fluctuation.
FOREIGN
EXCHANGE CONTROL RISKS
Currency
conversion and exchange rate volatility could adversely affect our financial
condition.
The
PRC
government imposes control over the conversion of RMB into foreign currencies.
Under the current unified floating exchange rate system, the People’s Bank of
China publishes an exchange rate, referred to as the PBOC exchange rate, based
on the previous day’s dealings in the inter-bank foreign exchange market.
Financial institutions authorized to deal in foreign currency may enter into
foreign exchange transactions at exchange rates within an authorized range
above
or below the PBOC exchange rate according to market conditions.
Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC
which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of RMB into foreign exchange by Foreign Investment Enterprises, or FIE’s, for
use on current account items, including the distribution of dividends and
profits to foreign investors, is permissible. FIEs are permitted to convert
their after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in the PRC.
Conversion
of RMB into foreign currencies for capital account items, including direct
investment, loans, and security investment, is still subject to certain
restrictions. On January 14, 1997, the State Council amended the Foreign
Exchange Control Regulations and added, among other things, an important
provision, which provides that the PRC government shall not impose restrictions
on recurring international payments and transfers under current account items.
Enterprises
in the PRC (including FIEs) which require foreign exchange for transactions
relating to current account items, may, without approval of the State
Administration of Foreign Exchange, or SAFE, effect payment from their foreign
exchange account or convert and pay at the designated foreign exchange banks
by
providing valid receipts and proofs.
Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be sought.
Our
company is a FIE to which the Foreign Exchange Control Regulations are
applicable. There can be no assurance that we will be able to obtain sufficient
foreign exchange to pay dividends or satisfy other foreign exchange requirements
in the future.
Since
1994, the exchange rate for RMB against the United States dollars has remained
relatively stable, most of the time in the region of approximately RMB8.00
to
US$1.00. However, in 2005, the Chinese government announced that would begin
pegging the exchange rate of the Chinese RMB against a number of currencies,
rather than just the U.S. dollar. As our operations are primarily in China,
any
significant revaluation of the Chinese RMB may materially and adversely affect
cash flows, revenues and financial condition. For example, to the extent
that we need to convert United States dollars into Chinese RMB for operations,
appreciation of this currency against the United States dollar could have a
material adverse effect on our business, financial condition and results of
operations. Conversely, if we decide to convert Chinese RMB into United States
dollars for other business purposes and the United States dollar appreciates
against this currency, the United States dollar equivalent of the Chinese RMB
that we convert would be reduced.
REGULATORY
RISKS
Our
business is subject to many governmental regulatory and policy
risks.
Our
business must be conducted in compliance with various government regulations
and
in particular, the PRC State Food and Drug Administration (“SFDA”) regulations.
Government regulations may have material impact on our operations, increase
costs and could prevent or delay the manufacturing and selling of our products.
Research, development, testing, manufacturing and marketing activities are
subject to various governmental regulations in China, including health and
drug
regulations. Government regulations, among other things, cover the inspection
of
and controls over testing, manufacturing, safety and environmental
considerations, efficacy, labeling, advertising, promotion, record keeping
and
sale and distribution of pharmaceutical products. We will not be able to
license, manufacture, sell and distribute the vast majority of its products
without a proper approval from government agencies and in particular the SFDA.
There is no assurance that we will obtain such approvals.
In
addition, delays or rejections may be encountered based upon additional
government regulation from future legislation, administrative action or changes
in governmental policy and interpretation during the period of product
development and product assessment. Although we have, so far, obtained the
rights to sell our products in China, we may not continue to receive and
maintain regulatory approvals for the sales of these products. Our marketing
activities are also subject to government regulations with respect to the prices
that it intends to charge or any other marketing and promotional related
activities. Government regulations may substantially increase the costs for
developing, licensing, manufacturing and selling products, impacting negatively
our operations, revenue, income and cash flow.
There
could be changes in government regulations towards the pharmaceutical and
nutraceutical industries that may adversely affect our
business.
The
manufacture and sale of pharmaceutical and nutraceutical products in the PRC
is
heavily regulated by many state, provincial and local authorities. These
regulations significantly increased the difficulty and costs involved in
obtaining and maintaining regulatory approvals for marketing new and existing
products. Our future growth and profitability depends to a large extent on
our
ability to obtain regulatory approvals.
The
SFDA
of China implemented new guidelines for licensing of pharmaceutical products.
All existing manufacturers with licenses, which are currently valid under the
previous guidelines, are required to apply for the Good Manufacturing Practices
(“GMP”) certifications by June 30, 2004, and to receive approvals by December
31, 2004. We received certifications for
our
current products. However, should we fail to maintain the GMP certifications
under the new guidelines in the future, or for new products, our businesses
would be materially and adversely affected.
Moreover,
the laws and regulations regarding acquisitions of the pharmaceutical and
nutraceutical industries in the PRC may also change and may significantly impact
our ability to grow through acquisitions.
BUSINESS
RISKS
Certain
officers and directors have significant control over our company.
Dr.
Liu
Yan-qing and Ms. Han Xiao-yan, who are officers and directors of China Sky,
also
serve as officers and directors of ACPG and TDR. Dr. Liu and Ms. Han own, in
the
aggregate, 50.4% of the issued and outstanding shares of our common stock.
As a
result, these shareholders are effectively able to control certain corporate
governance matters requiring shareholders’ approval. Such matters may include
the approval of significant corporate transactions such as increasing the
authorized number of our shares to complete the acquisition, if necessary,
and
any other transactions requiring a majority vote without seeking other
shareholders’ approval. They have the ability to control other matters requiring
shareholder approval including our election of directors which could result
in
the entrenchment of management.
We
are subject to market and channel risks.
Over
90%
of our sales are made in the PRC, where we primarily sell our products through
drug chain stores. Because of this, we are dependent to a large degree upon
the
success of that distribution channel as well as the success of specific
retailers in the distribution channel. Many of the drug stores are
individual stores or very small chains, and only a few are large chain drug
stores. We rely on these distribution channels to purchase, market, and sell
our
products. Our success is dependent, to a large degree, on the growth and success
of the drug stores, which may be outside our control. There can be no assurance
that the drug store distribution channels will be able to grow or prosper as
it
faces price and service pressure from other channels, including the mass market.
There can be no assurance that retailers in the drug store distribution channel,
in the aggregate, will respond or continue to respond to our marketing
commitment in these channels.
We
are highly dependent upon the public perception and quality of our
products.
We
are
highly dependent upon consumers’ perception of the safety and quality of our
products as well as similar products distributed by other companies. Thus,
the
mere publication of reports asserting that such products may be harmful could
have a material adverse effect on our business, regardless of whether these
reports are scientifically supported. Adverse publicity may have a material
adverse effect on our business, financial condition, and results of operations.
There can be no assurance of future favorable scientific results and media
attention or of the absence of unfavorable or inconsistent
findings.
Our
expansion plan may not be successful.
We
are
implementing a strategy to expand the sales of our existing products in the
PRC
and other countries, and to introduce additional products under development
into
these markets. This expansion strategy may be based on incorrect assumptions
and
may be flawed, and may even damage our performance, competitive position in
the
market and ultimately even our ability to survive in the marketplace. Even
if
the strategy is correct, we may never be able to successfully implement our
strategy.
There
are many safety risks involved in our products and
services.
Our
products and services involve direct or indirect impact on human health and
life. The drugs, products and services we manufacture and sell may be flawed
and
cause dangerous side effects and even fatality in certain cases, and lead to
major business losses and legal and other liabilities and damages to our
company.
Significant
competition from existing and new entities could adversely affect revenues
and
profitability.
We
compete with other companies, many of which are offering and/or developing,
or
can be expected to develop and offer, products similar to ours. Our market
is a
large market with many competitors. Many of our competitors are more established
than our company, and have significantly greater financial, technical, marketing
and other resources than our company. Some of our competitors have greater
name
recognition and a larger customer base. These competitors may be able to respond
more quickly to new or changing opportunities and customer requirements and
may
be able to undertake more extensive promotional activities, offer more
attractive terms to customers, and adopt more aggressive pricing policies.
We
cannot assure investors that we will be able to compete effectively with current
or future competitors or that the competitive pressures we face will not harm
our business.
Our
plan to develop and introduce new products and technologies may not be readily
accepted or meet the need in the marketplace.
Newly
developed products and technologies may not be compatible with market needs.
Because markets for various products differ geographically inside the PRC,
our
challenge will be to develop and manufacture products to accurately target
specific markets to enhance product sales. If we fail to take necessary steps,
including market research, to understand the health needs of consumers in
different geographic areas, we may face limited market acceptance of our
products, which could have a material adverse effect on sales and
earnings.
Our
success will depend on our research and the ability to develop new
products.
Our
growth depends on our ability to consistently discover, develop and
commercialize new products and find new and improve on existing technologies,
platforms and products. As such, if we fail to make sufficient investments
in
research, to be attentive to consumer needs, or fail
to
focus on the most advanced technologies, our current and future products could
be surpassed by more effective or advanced products of other
companies.
We
may have difficulty in defending intellectual property rights from
infringement.
Our
success depends, in large part, on our ability to protect current and future
technologies and products and to defend our intellectual property rights. If
we
fails to protect our intellectual property adequately, competitors may
manufacture and market similar products. A number of patents covering our
products have been issued, and we have filed, and expect to continue to file,
patent applications seeking to protect newly developed technologies and products
in various countries, particularly in the PRC. Some patent applications in
the
PRC are maintained in secrecy until the patent is issued. Because the
publication of discoveries tends to follow their actual discovery by many
months, we may not be the first to invent, or file patent applications on any
of
its discoveries. Patents may not be issued with respect to any of our patent
applications and existing or future patents issued to or licensed by us may
not
provide competitive advantages for its products. Patents that are issued may
be
challenged, invalidated or circumvented by competitors. Furthermore, our patent
rights may not prevent our competitors from developing, using or commercializing
products that are similar or functionally equivalent to our products.
To
the
extent that we market products in other countries, we may have to take
additional action to protect our intellectual property. The measures we take
to
protect our proprietary rights may be inadequate, and we cannot provide any
assurance that our competitors will not independently develop formulations
and
processes that are substantially equivalent or superior to our products or
copy
our products.
We
also
rely on trade secrets, non-patented proprietary expertise and continuing
technological innovation that we seek to protect, in part, by entering into
confidentiality agreements with licensees, suppliers, employees and consultants.
These agreements may be breached and there may not be adequate remedies in
the
event of a breach. Disputes may arise concerning the ownership of intellectual
property or the applicability of confidentiality agreements. Moreover, trade
secrets and proprietary technology may otherwise become known or be
independently developed by competitors. If patents are not issued with respect
to products arising from research, we may not be able to maintain the
confidentiality of information relating to these products.
We
will be subject to risks relating to third parties that may claim that we
infringe on their proprietary rights and may prevent us from manufacturing
and
selling certain of our products.
There
has
been substantial litigation in the pharmaceutical and nutraceutical industries
with respect to the manufacturing, use and sale of new products. These lawsuits
relate to the validity and infringement of patents or proprietary rights of
third parties. We may be required to commence or defend against charges relating
to the infringement of patent or proprietary rights. Any such litigation could
involve or result in:
· |
the
incurrence of substantial expense, even if we are successful in the
litigation;
|
· |
a
diversion of significant time and effort of technical and management
personnel;
|
· |
the
loss of our rights to develop or make certain products;
and
|
· |
the
payment of substantial monetary damages or royalties in order to
license
proprietary rights from third
parties.
|
Although
patent and intellectual property disputes within these industries have often
been settled through licensing or similar arrangements, costs associated with
these arrangements may be substantial and could include the long-term payment
of
royalties. These arrangements may be investigated by regulatory agencies and,
if
improper, may be invalidated. Also, the required licenses may not be made
available to our company on acceptable terms. Accordingly, an adverse
determination in a judicial or administrative proceeding or a failure to obtain
necessary licenses could prevent our company from manufacturing and selling
some
of our products or increase costs to market these products.
In
addition, when seeking regulatory approval for some of our products, we are
required to certify to regulatory authorities, including the SFDA that such
products do not infringe upon third party patent rights. Filing a certification
against a patent gives the patent holder the right to bring a patent
infringement lawsuit against our company. Any lawsuit would delay regulatory
approval by the SFDA. A claim of infringement and the resulting delay could
result in substantial expenses and even prevent us from manufacturing and
selling certain of our products.
The
launch of a product prior to a final court decision or the expiration of a
patent held by a third party may result in substantial damages to our company.
Depending upon the circumstances, a court may award the patent holder damages
equal to three times their loss of income. If our company is found to infringe
a
patent held by a third party and become subject to such treble damages, these
damages could have a material adverse effect on our results of operations and
financial condition.
Our
failure to comply with accounting policies and regulations in making reasonable
estimates and judgments could negatively impact our financial position and
results of operation.
We
will
be subject to critical accounting policies and actual results may vary from
estimates. We have followed, and will continue to follow, generally accepted
accounting principles for the United States in preparing financial statements.
As part of this work, we must make many estimates and judgments concerning
future events. These affect the value of the assets and liabilities, contingent
assets and liabilities, and revenue and expenses reported in such financial
statements. We believe that these estimates and judgments are reasonable, and
we
have made them in accordance with accounting policies based on information
available at the time. However, actual results could differ from estimates,
and
this could require us to record adjustments to expenses or revenues that could
be material to our financial position and results of operations in the
future.
We
do not plan to declare or pay any dividends to our shareholders in the near
future.
We
have
not declared any dividends in the past, and we do not intend to distribute
dividends in the near future. The declaration, payment and amount of any future
dividends will be made at the discretion of the board of directors, and will
depend upon, among other things, the results of operations, cash flows and
financial condition, operating and capital requirements, and other factors
as
the board of directors considers relevant. There is no assurance that future
dividends will be paid, and if dividends are paid, there is no assurance with
respect to the amount of any such dividend.
We
are required to be in compliance with the registered capital requirements of
the
PRC.
Under
the
Company Law of the PRC, our company will be required to contribute a certain
amount of “registered capital” to our wholly owned subsidiary. By law, our
subsidiaries are required to contribute at least 10% of after tax net income
(as
determined in accordance with Chinese GAAP) into a statutory surplus reserve
until the reserve is equal to 50% of the Company and its subsidiaries’
registered capital, and between 5% and 10% of its after tax net income, as
determined by our board of directors, into a public welfare fund. These reserve
funds are recorded as part of shareholders’ equity but are not available for
distribution to shareholders other than in the case of liquidation. As a result
of this requirement, the amount of net income available for distribution to
shareholders will be limited.
Since
most of our assets are located in the PRC, any dividends or proceeds from
liquidation are subject to the approval of the relevant PRC government
agencies.
Because
our assets are predominantly located inside the PRC, we will be subject to
the
law of the PRC in determining dividends. Under the laws governing foreign
invested enterprises in the PRC, dividend distribution and liquidation are
allowed but subject to special procedures under the relevant laws and rules.
Any
dividend payment will be subject to the decision of the board of directors
and
subject to foreign exchange rules governing such repatriation. Any liquidation
is subject to both the relevant government agency’s approval and supervision as
well the foreign exchange control. This may generate additional risk for
investors in case of dividend payment and liquidation.
We
need to manage growth in operations to maximize our potential growth and achieve
our expected revenues.
Our
success depends on our ability to achieve continued growth. In order to maximize
potential growth in current and potential markets, we believe that we must
expand our manufacturing and marketing operations. This expansion will place
a
significant strain on management and operational, accounting, and information
systems. We expect that our company will need to continue to improve financial
controls, operating procedures, and management information systems. We will
also
need to effectively train, motivate, and manage our employees. A failure to
manage our growth could disrupt operations and ultimately prevent us from
generating the revenues we expect.
We
cannot assure an investor that our growth strategy will be successful.
Part
of
our strategy is to grow through increasing the distribution and sales of our
products by penetrating existing markets in the PRC and Hong Kong, and entering
new geographic markets in the PRC as well as Asia, the United States and other
countries. However, many obstacles to entering such new markets exist,
including, but not limited to, international trade and tariff barriers,
regulatory constraints, shipping and delivery costs, costs associated with
marketing efforts abroad and maintaining attractive foreign exchange ratios.
We
cannot, therefore, assure an investor that we will be able to successfully
overcome such obstacles and establish our products in any additional markets.
Our inability to implement this growth strategy successfully may have a negative
impact on growth, future financial condition, results of operations or cash
flows.
We
may need additional capital to fund growing operations, and we may not be able
to obtain sufficient capital and may be forced to limit the scope of our
operations.
We
may
require substantial capital, in addition to the funds from this offering, to
fund future operations and to fund growth. Our capital needs will depend on
numerous factors, including (1) profitability; (2) the release of competitive
products by our competition; (3) the level of our investment in research and
development; and (4) the amount of our capital expenditures. We cannot assure
an
investor that we will be able to obtain capital in the future to meet our needs.
If
we
cannot obtain additional funding, we may be required to:
· |
reduce
our investments in research and
development;
|
· |
limit
our marketing efforts in the PRC and other countries;
and
|
· |
decrease
or eliminate capital expenditures.
|
Such
reductions could materially adversely affect our business and our ability to
compete.
Even
if
we are successful in finding a source(s) of additional capital, we may not
be
able to negotiate terms and conditions for receiving the additional capital
that
are acceptable to management. Any future capital investments could dilute or
otherwise materially and adversely affect the holdings or rights of our
shareholders. In addition, new equity or convertible debt securities issued
by
our company to obtain financing could have rights, preferences and privileges
senior to the common stock. There can be no assurance that any additional
financing will be available, or if available, will be on terms favorable to
our
company.
Our
products could expose our company to substantial liability.
We
face
an inherent business risk of exposure to product liability claims in the event
that the use of our products is alleged to have resulted in adverse side
effects. Side effects or marketing or manufacturing problems pertaining to
any
of our products could result in product liability claims or adverse publicity.
These risks will exist for those products in clinical development
and with respect to those products that have received regulatory approval for
commercial sale. To date, we have not experienced any product liability claims.
However, that does not mean that it will not have any such claims with respect
to its products in the future. We do not currently carry product liability
insurance. The lack of product liability insurance may expose our company to
enormous risks associated with potential product liability claims.
We
depend on our key management personnel and the loss of their services could
adversely affect our business.
We
place
substantial reliance upon the efforts and abilities of our executive officers,
Liu Yan-qing, Chief Executive Officer and Chairman of the Board, Han Xiao-yan,
Chief Financial Officer, and Wang Hai-feng, Secretary/Treasurer. The loss of
the
services of any of these executive officers could have a material adverse effect
on our business, operations, revenues or prospects. We do not maintain key
man
life insurance on the lives of these individuals.
International
operations require our company to comply with a number of U.S. and international
regulations.
We
are
required to comply with a number of international regulations in countries
outside of the United States. In addition, we must comply with the Foreign
Corrupt Practices Act, or FCPA, which prohibits U.S. companies or their agents
and employees from providing anything of value to a foreign official for the
purposes of influencing any act or decision of these individuals in their
official capacity to help obtain or retain business, direct business to any
person
or
corporate entity or obtain any unfair advantage. Any failure to adopt
appropriate compliance procedures and ensure that our employees and agents
comply with the FCPA and applicable laws and regulations in foreign
jurisdictions could result in substantial penalties and/or restrictions in
our
ability to conduct business in certain foreign jurisdictions. The U.S.
Department of The Treasury's Office of Foreign Asset Control, or OFAC,
administers and enforces economic and trade sanctions against targeted foreign
countries, entities and individuals based on U.S. foreign policy and national
security goals. As a result, we are restricted from entering into transactions
with certain targeted foreign countries, entities and individuals except as
permitted by OFAC which may reduce our future growth.
We
may incur significant costs to ensure compliance with U.S. corporate governance
and accounting requirements.
We
are a
public reporting company, and, as such, we will incur significant costs
associated with public company reporting requirements, costs associated with
newly applicable corporate governance requirements, including requirements
under
the Sarbanes-Oxley Act of 2002 and other rules implemented by the U.S.
Securities and Exchange Commission. All of these applicable rules and
regulations can be expected to increase legal and financial compliance costs
and
to make some activities more time consuming and costly. Management also expects
that these applicable rules and regulations may make it more difficult and
more
expensive to obtain director and officer liability insurance and we may be
required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a
result,
it may be more difficult for our company to attract and retain qualified
individuals to serve on our board of directors or as executive officers.
We
may have difficulty raising necessary capital to fund operations as a result
of
market price volatility for our shares of common stock.
In
recent
years, the securities markets in the United States have experienced a high
level
of price and volume volatility, and the market price of securities of many
companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects
of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business development plans are successful,
we may require additional financing to continue to develop and exploit existing
and new technologies and to expand into new markets. The exploitation of
existing and new technologies may, therefore, be dependent upon our ability
to
obtain financing through debt and equity or other means.
RISKS
RELATED TO COMMON STOCK
There
are substantial risks of lack of liquidity and volatility
risks.
Our
common stock is quoted in the OTC Bulletin Board market under the symbol “CSKI.”
The liquidity of our common stock may be very limited and affected by its
limited trading market. The OTC Bulletin Board market is an inter-dealer market
much less regulated than the major exchanges, and is subject to abuses and
volatilities and shorting. There is currently no broadly followed and
established trading market for our common stock. An established trading market
may never develop or be maintained. Active trading markets generally result
in
lower price volatility and more efficient execution of buy and sell orders.
Absence of an active trading market reduces the liquidity of the shares traded
there.
The
trading volume of our common stock may be limited and sporadic. As a result
of
such trading activity, the quoted price for our common stock on the OTC Bulletin
Board may not necessarily be a reliable indicator of its fair market value.
In
addition, if our shares of common stock cease to be quoted, holders would find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, our common stock and as a result, the market value of our
common stock likely would decline.
We
may be subject to the risks inherent in a penny stock.
Our
common stock may be subject to regulations prescribed by the SEC relating to
“Penny Stock.” The SEC has adopted regulations that generally define a penny
stock to be any equity security that has a market price (as defined in such
regulations) of less than $5.00 per share, subject to certain exceptions. If
our
common stock meets the definition of a penny stock, as it currently does, we
will be subject to these regulations, which impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors—generally institutions with
assets in excess of $5,000,000 and
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 (individually) or $300,000 (jointly with their spouse).
ITEM
2. DESCRIPTION OF PROPERTY
Our
facilities are located on approximately 92,000 square meters of land, including
two buildings in the city of Harbin, Heilongjiang Province. (See “Item 1.
Business—Production and Other Facilities”). We also have a sales and marketing
facility in Beijing, PRC.
Under
Chinese law, the government owns all of the land in the PRC and companies and
individuals are authorized to use the land only through land use rights granted
by the PRC government. The PRC has granted TDR a land use grant covering the
land and facilities in which its headquarters are located in downtown Harbin
City, which expires in 2046. The PRC has granted land use rights on TDR’s two
production and warehouse facilities, expiring in 2048 and 2053, respectively.
TDR’s two buildings contain GMP production certified facilities, and are used
for manufacturing office, warehousing and staff operations.
ITEM
3. LEGAL PROCEEDINGS
The
Company is not a party to any material pending legal proceedings, and to the
best of its knowledge, no such proceedings by or against the Company have been
threatened.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During
the quarter ended December 31, 2006, there were no matters submitted to a vote
of our stockholders.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY AND
RELATED
STOCKHOLDER MATTERS
Market
Information - Common Stock
Our
common stock (“Common Stock”) is traded on the OTC Bulletin Board under the
symbol “CSKI.” The range of high and low sales prices for each quarter during
the last two fiscal years, as quoted on the OTC Bulletin Board for the periods
discussed above, is set out in the table that follows. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission and may
not necessarily represent actual transactions.
|
|
Year
Ended December 31, 2006
|
|
Year
Ended December 31, 2005
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
1st
Quarter
|
|
$
|
5.50
|
|
$
|
1.81
|
|
$
|
2.72
|
|
$
|
1.20
|
|
2nd
Quarter
|
|
$
|
3.50
|
|
$
|
3.50
|
|
$
|
1.60
|
|
$
|
1.28
|
|
3rd
Quarter
|
|
$
|
7.55
|
|
$
|
3.40
|
|
$
|
2.64
|
|
$
|
1.60
|
|
4th
Quarter
|
|
$
|
8.50
|
|
$
|
4.25
|
|
$
|
2.56
|
|
$
|
1.60
|
|
*All
numbers give effect to a 1-for-8 reverse split effective as of March 9,
2006.
As
of
March 30, 2007, the closing bid price for our Common Stock was $8.00.
Since
its
inception, no dividends have been paid on our Common Stock. We intend to retain
any earnings for use in our business, so it is not expected that any dividends
on the Common Stock will be declared and paid in the foreseeable future. We
do
not currently have any restrictions that would limit our ability to pay
dividends, and we are not currently aware of any restrictions that are likely
to
limit our ability to pay dividends in the future.
At
March
23, 2007, there were approximately 214 holders of record of the Company's common
stock.
Sales
of Unregistered Securities
On
May
11, 2006, ACPG entered into a Stock Exchange Agreement (the “Exchange
Agreement”) with the shareholders of the Company (then known as “Comet
Technologies, Inc.”). The terms of the Exchange Agreement were consummated and
the transaction was closed on May 30, 2006. As a result of the transaction,
the
Company issued a total of 10,193,377 shares of its common voting stock to the
stockholders of ACPG, in exchange for 100% of the capital stock of ACPG. In
connection with the transaction, a total of 219,212 shares was issued to the
two
former officers under a consulting agreement and an option was granted to one
of
the former officers, Jack M. Gertino, entitling him to purchase a total of
50,000 shares, at any time before December 20, 2008, at a price of $3.00 per
share. (See “Item 12. Certain Relationships and Related Transactions”). The
common shares were issued in reliance on the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933 as amended and Regulation
D
thereunder.
As
reported in a Current Report on Form 8-K dated October 17, 2006, and
incorporated herein by reference, the Company closed a private offering to
U.S.
purchasers under Rule 506 of Regulation D, and a separate offering to foreign
investors pursuant to Regulation S, resulting in the sale of a total of
$3,000,000 in Units, consisting of common stock and warrants. The Company sold
a
total of 200 Units at a price of $15,000 per Unit, each Unit consisting of
5,000
shares at a price of $3.00 per share, and 2,500 common stock purchase warrants
(the “Warrants’). As a result, the Company sold a total of 1,000,000 shares of
the Company’s common stock, and issued Warrants to purchase up to an aggregate
of 500,000 additional shares of common stock at any time before October 10,
2008, at a price of $3.50 per share. The Warrants
have a “call” provision entitling the Company to call for the exercise of the
Warrants at any time after January 10, 2008, if the bid price of the Company’s
common stock averages over $6.00 per share for any consecutive one week period.
The private offerings commenced on or about August 10, 2006. At the time of
commencement of the private offering, the bid price of the common stock of
the
Company was $3.75. American Eastern Securities, Inc., acted as placement agent
of the securities, and received a commission of 9% from the gross proceeds
of
the private offerings, or a total of $270,000 in cash. The Placement Agent
also
received warrants to purchase up to 10% of the Units sold in the offering,
or
a
warrant
to purchase a total of 100,000 shares at a price of $3.00 per share, and
warrants to purchase an additional 50,000 shares at a price of $3.50 per share
on or before October 10, 2008. All of the warrants involved in the private
offerings are unexercised as of December 31, 2006, and as of the date of this
Report.
The
sale
of Units in the private offering described above was made in the United States
to only accredited investors, as defined by Rule 501(a) of Regulation D
promulgated under the Securities Act of 1933, as amended (the “Securities Act”).
The private offering was made in the United States in reliance upon an exemption
from registration under Section 4(2) of the Securities Act and Rule 506 of
Regulation D thereunder. The Company also sold to only accredited investors
outside the United States in reliance upon Regulation S under the Securities
Act.
On
October 3, 2006, Luminus Capital Management, Ltd. (“Luminus”) converted a
convertible promissory note from the Company dated August 3, 2006 in the
principal amount of $200,000, together with interest at 6.5% per annum (the
“Note”), into a total of 102,166 shares of restricted shares of common stock, at
a price of $2.00 per share. This was a private transaction and was entered
into
in reliance upon an exemption from the registration provisions of the Securities
Act, under Section 4(2), as a transaction not involving a public offering.
In
October, 2006, the Company granted warrants to two advisors, American Eastern
Group, Inc., and Shenzhen DRB Investment Consultant Limited, previously agreed
to under a service agreement, entitling them to each purchase up to 500,000
shares on or before July 31, 2009, at a price of US$2.00 per share. One-half
of
the warrants were considered earned at the time the Company completed the
Exchange Agreement, and the remaining one-half of the warrants were considered
earned upon completion of the Company’s public offering. The fair value of the
warrants was determined to be $1,469,190, under applicable accounting rules,
of
which the amount of $734,595 was deducted as expenses, and $734,595 was deducted
against equity. (See Notes to the Financial Statements, Note 5).
On
January 3, 2007, an unaffiliated party exercised an outstanding warrant granted
in March, 1999, to purchase a total of 6,250 shares, using the cashless exercise
provision of the warrant, resulting in the issuance of a total of 5,160 shares.
This was a private transaction and was entered into in reliance upon an
exemption from the registration provisions of the Securities Act, under Section
4(2), as a transaction not involving a public offering.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR
PLAN OF OPERATION
FORWARD
LOOKING STATEMENTS
This
Amendment No. 1 to the Annual Report on Form 10-KSB contains “forward-looking
statements” that involve substantial risks and uncertainties. You
can identify such statements by forward looking words such as “may,” “expect,”
“plans,” “intends,” “anticipate,” “believe,” “estimate,” and “continue” or
similar words. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance
or
achievements of China Sky One Medical, Inc. (the “Company”) to be materially
different from any future results, performance or achievements expressed
or
implied by such forward-looking statements. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. The Company's plans and objectives are based, in part,
on
assumptions involving the continued growth and expansion of the Company’s
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions
and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although
the
Company believes its assumptions underlying the forward-looking statements
are
reasonable, any of the assumptions could prove inaccurate and, therefore,
there
can be no assurance the forward-looking statements included in this Report
will
prove to be accurate. In light of the significant uncertainties inherent
in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
OVERVIEW
The
following management’s discussion and analysis (“MD&A”) is intended to
assist the reader in understanding the business of China Sky One Medical,
Inc,
including its subsidiaries (referred to as “CSKI,” “we,” “our” and “us”).
MD&A is provided as a supplement to, and should be read in conjunction
with, our consolidated financial statements and accompanying notes.
References below to the “Company,” “we,” “our” and “us,” refer to the
Company and its subsidiaries combined.
We
primarily generate revenues and income and generate cash from sales of products
in the areas of external-Chinese medicine and over-the counter non-prescription
health care products in the People’s Republic of China (“PRC”). Our
principal products include six (6) product lines: spray, ointment, powder,
patch, cream, and miscellaneous health and beauty products.
The
Company achieved continuing growth on the sale of both our own product line
and
a contract service line of manufacturer’s products which we sell through our
distribution channel. For the year ended December 31, 2006, total
revenue was $19,881,715, a 158% increased over 2005, and 2006 net income
was
$624,415, or $0.05 per share on a diluted basis compared to net income of
$2,088,828, or $0.19 per share on a diluted basis in 2005. Net income for
the year ended December 31, 2006, included expenses of $1.8 million related
to
cash, warrants and securities issued to advisors and consultants in connection
with our reverse merger with Comet. These adjustments were made pursuant
to Statement of Financial Accounting Standards No. 123R, pertaining to
Share-Based Compensation (SFAS 123R).
The
adoption of SFAS 123R had the following impact on our consolidated
statement of operations for the year ended December 31, 2006:
Share-based
compensation-decrease in net income (net of deferred taxes
benefit)
|
|
$
|
2,744,755
|
|
Decrease
in basic and diluted net income per share :
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.21
|
|
In
addition to growth in our product sales, revenue increased significantly
during
the year as a result of a new contract service sales line of other manufactured
brands that we sell through our distribution channel. We recognized $6.37
million in contract service revenue in year 2006.
Effective
May 30, 2006 and pursuant to a plan of reorganization, American California
Pharmaceutical Group, Inc. (“ACPG”) completed a stock change agreement with
Comet Technologies, Inc., ("Comet"). Under the terms of the agreement, all
of
the ACPG's outstanding stock was exchanged for 10,193,377 shares of Comet
common
stock. The closing of the Exchange Agreement (“Closing”),
resulted in a change in voting control of Comet. The original shareholders
of ACPG hold approximately 93% of the outstanding common stock of Comet,
and the former Comet shareholders hold a total of 735,993 shares of common
stock, or 7% of the outstanding common stock, including stock granted under
a
consulting agreement to Comet’s two current officers, who resigned as officers
and directors at the closing. The common shares were issued in reliance on
the exemption from registration set forth in Section 4(2) of the Securities
Act
of 1933 as amended and Regulation D thereunder. The transaction is
treated as a reverse merger for accounting purposes.
On
July
26, 2006, the change in the name of the reporting company from “Comet
Technologies, Inc.” to “China Sky One Medical, Inc.,” became effective. The name
change was previously disclosed through an Information Statement distributed
to
the stockholders of the reporting company pursuant to Regulation 14C adopted
under the Securities Exchange Act of 1934. At the time of the name change,
the
trading symbol of the reporting company on the OTC Bulletin Board changed
to
“CSKI.”
Our
Company, a Nevada corporation, is a holding company that conducts its principal
operations through its subsidiaries, which are engaged in the manufacture,
marketing and distribution of over-the-counter pharmaceutical and medicinal
products. Our subsidiaries are American California Pharmaceutical Group,
Inc. (“ACPG”), a wholly-owned California corporation; Harbin Tian Di Ren Medical
Science and Technology Company (“TDR”), Harbin First Bio-Engineering Company
Limited (“First”) and Harbin Tian Qing Biotech Application Company (“Tian Qing
Biotech”), subsidiaries of ACPG.
ACPG,
a
wholly-owned subsidiary of the Company, operates as a holding company for
the
other subsidiaries. TDR’s principal business is the manufacture and sale
of branded nutritional supplements and over-the-counter plant and herb-based
medicinal products. Its manufacturing facilities are in the City of Harbin,
in
Heilongjiang Province. It has evolved into an integrated manufacturer,
marketer, and distributor of external use natural Chinese medicinal products
sold primarily to and through domestic pharmaceutical chain stores in China
through its subsidiary, First (formerly “Kangxi Medical Care Product Factory”
(“Kangxi”)). First’s principal business activity is to manufacture and
sell branded external use Chinese medicine and other natural products under
the
registered trademark “Kangxi.” First has six (6) product lines: spray,
ointment, powder, patch, cream, and miscellaneous health and beauty products.
First has become one of the leading external use Chinese medicine
factories with a full range of product lines and development capacity.
First is also engaged in the research and development of natural medicinal
plants and biological technology products such as New Endothelin-1. First
is one of the first companies in Heilongjiang Province conducting research
and
development of high technology biological products. Its facility is now under
final inspection by the Chinese State Food and Drug Administration (“SFDA”) for
the qualification as a certified GMP production facility. On July
31, 2006, Kangxi merged with First, with Kangxi’s existing business activities
continuing under First.
In
October, 2006, we entered into the field of research and development of tissue
and stem cell banks, with the establishment of Harbin Tian Qing Biotech (“Harbin
Biotech”), as a wholly-owned subsidiary. The Health Department of
Heilongjiang Province, on the basis of the evaluation of results from experts,
issued a document approving and authorizing Harbin Biotech to enter into
the
above-mentioned development areas, and precluding other companies from entering
the same fields in the Heilongjiang Province.
In
December, 2006, we acquired all of the products, dealership, and marketing
network of the Beijing office of Heilongjiang Tianlong Pharmaceutical Company
(“Tianlong”), and the Beijing office staff for US$381,700. We have
historically been competitors with Tianlong. We had certain sales
advantages over Tianlong in most cities in China, except in Beijing.
Facing the continuous increase of sales power of our company in China,
including Beijing, Tianlong changed its strategy and decided to close its
branches in all areas of China except its Beijing office, and plans to focus
on
the research and manufacturing of drugs. In contrast, we have devoted our
efforts to realizing the maximum utilization of our sales network by selling
drugs from domestic and overseas suppliers as well as the development of
pharmaceuticals with the ownership of the related intellectual property.
The two companies entered into the agreement as a means of combining
the efforts, resources and product offerings of both companies.
Tianlong’s
Beijing office had revenues of approximately US$1.5 million from January
to
November of 2006, with 20% in net profits. We expect sales to increase by
30% in 2007, which means the purchase of Tianlong would increase 2007 sales
to
approximately US$1.98 million.
Through
our subsidiaries, we have established several long term partnerships with
well-known universities and enterprises in the PRC. We have built a gene
medicine laboratory through a collaborative effort with Harbin Medical
University; established a cell laboratory with North East Agricultural
University; and founded a monoclonal antibody laboratory with Jilin University.
As a result of one of these collaborations with Harbin Medical University,
a product known as "Endothelin-1" is currently under development. At such
time
as development is successfully completed, we will commence efforts to market
Endothelin-1 as a new anti-cancer medicine. There can be no assurance, of
course, that these development efforts, or that any subsequent efforts to
obtain
SFDA approval of the product, will be successful.
In
collaboration with Harbin Medical University, we have completed a laboratory
experimental study pertaining to Endothelin-1, which is required prior to
clinical trials, and we are currently applying for approval to enter clinical
experiments. This medicine has been recognized by the PRC as the “Top
Category in New Medicine.” In order to qualify as the “Top Category in New
Medicine,” a company must have intellectual property rights, high technology
involvement, strong innovation, and the medicine must be the first of its
kind
to be introduced to the PRC. We hold the intellectual property rights
pertaining to this technology, and we have obtained an invention patent to
this
intellectual property in the PRC. Under our partnership arrangements with
other universities and research institutions, we will generally hold the
intellectual property rights to any developed technology.
At
present, our ongoing research is divided into four areas: (1) the development
of
an enzyme-linked immune technique to prepare extraneous diagnostic kits;
(2) the
development of an enzyme linked gold colloid technique to prepare an extraneous
rapid diagnostic test strip; (3) the development of a gene recombination
technique to prepare gene drug; and (4) the development of a biology protein
chip for various tumor diagnostic applications. In 2006, we became engaged
in research and development related to tissue and stem cell banks, as described
under “Item 1 - Business.”
We
currently have ten biological products under development: a human urinary
albumin elisa kit; an AMI detection kit; HIV detection kit; a uterus cancer
diagnostic kit; a breast cancer diagnostic kit; a liver cancer diagnostic
kit; a
rectum cancer diagnostic kit; a gastric cancer diagnostic kit; a gene
recombination drug; and a multi-tumor marker protein chip detection kit.
The development of these products will be completed as early as 2007 for
some products, and is expected to continue through 2008 or beyond for other
products. We are also working to establish two sales networks and cell
banks covering domestic and international markets.
Our
AMI
Diagnostic Kit, Human Urinary Albumin Elisa Kit and Early Pregnancy Diagnostic
Kit have passed the final stages of national inspection. These diagnostic
kits
will be issued new drug certificates and sold through drug stores, hospitals,
examination stations and independent sales agents throughout the PRC. We
also plan to market these products in Vietnam, Indonesia, Philippines and
eventually in Africa.
Our
AMI
Diagnostic Kit is used for early diagnosis of Myocardial Infarction (MI),
also
known as heart disease. All the test kits require users to place a blood
or
urine sample on the marker and a positive (+) or negative (-) reaction signal
will result, showing if a user should consult his or her doctor for further
testing. According to the China Medical Newspaper, Several million people
die from MI every year. MI often occurs to people who are, but not limited
to, smokers, over-weight and diabetic. There are approximately 8 million
new MI patients in China every year. Recent medical studies have shown
that heart failure or heart attacks are increasing among younger people in
China. This is a result from a more modern life style, the fast pace of
city life and increased pressure from work or school. The use of AMI
Diagnostic Kits will help in early detection that can help in reducing these
statistics.
Our
Human
Urinary Albumin Elisa Kit is used for early diagnosis of nephropathy, or
kidney
problems. According to the China Medical Newspaper, early kidney
impairment does not present obvious symptoms, but causes irreversible
impairments to the kidney. There are billions of people who suffer from
diabetes, hypertension, cardiovascular disease and nephritis all over the
world.
We developed this diagnostic kit to inform users of any major changes
their kidney may be experiencing.
Our
Early
Pregnancy Diagnostic Kit uses monoclonal antibody technology to inform users
if
they are pregnant. With this type of technology, a monoclonal antibody is
created to specifically bind to a hormone, Human Chorionic Gonadotropin (HCG),
that a pregnant woman produces after conception. This process allows for
the
detection of pregnancy. The ability to determine early pregnancy is
important in avoiding the absorption of harmful chemicals or drugs that can
directly affect an infant.
In
March,
2007, we entered into a strategic agreement with Takasima Industries
(“Takasima”). As a result of this agreement, Takasima has been engaged as the
sole agent of China Sky One's patch products in Malaysia. Takasima has
commenced marketing and sales efforts of China Sky One's Slim Patch product
line. The Slim Patch is a weight loss product that is currently sold in China
under the "Tian Di Ren" brand. The Slim Patch will be repackaged and sold
in
Malaysia under the "Takasima" brand name. The strategic agreement also requires
that Takasima will generate sales revenue of approximately US$1.0 million
per
month. Since the signing of the agreement, Takasima has fulfilled its monthly
obligation. Management anticipates that this strategic agreement could result
in
up to US$12 million in additional annual sales revenue in 2007, with a net
profit margin of approximately 20%. The agreement also provides that Takasima
has a first right of refusal to become the sole distributor of the Slim Patch
in
all of Southeast Asia.
Significant
Accounting Estimates and Policies
The
discussion and analysis of our financial condition and results of operations
is
based upon our financial statements which have been prepared in accordance
with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments
that
affect the reported amounts of assets and liabilities. On an on-going basis,
we
evaluate our estimates including the allowance for doubtful accounts, the
salability and recoverability of our products, income taxes and contingencies.
We base our estimates on historical experience and on other assumptions that
we
believes to be reasonable under the circumstances, the results of which form
our
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from
these estimates under different assumptions or conditions.
Property
and equipment are evaluated for impairment whenever indicators of impairment
exist. Accounting standards require that if an impairment indicator is present,
we must assess whether the carrying amount of the asset is unrecoverable
by
estimating the sum of the future cash flows expected to result from the asset,
undiscounted and without interest charges. If the recoverable amount is less
than the carrying amount, an impairment charge must be recognized, based
on the
fair value of the asset.
As
part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes. This process involves estimating our
current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income, and, to the extent we believe that recovery is not likely,
we
must establish a valuation allowance. To the extent that we establish a
valuation allowance or increase this allowance in a period, we must include
a
tax provision or reduce our tax benefit in the statements of operations.
We use
our judgment to determine our provision or benefit for income taxes, deferred
tax assets and liabilities and any valuation allowance recorded against our
net
deferred tax assets. We believe, based on a number of factors including
historical operating losses, which we will not realize the future benefits
of a
significant portion of our net deferred tax assets and we have accordingly
provided a full valuation allowance against our deferred tax assets. However,
various factors may cause those assumptions to change in the near
term.
We
cannot
predict what future laws and regulations might be passed that could have
a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update
the
assumptions and estimates used to prepare our financial statements when we
deem
it necessary.
We
have
determined the significant principles by considering accounting policies
that
involve the most complex or subjective decisions or assessments. Our most
significant accounting policies are those related to intangible assets and
research and development.
Intangible
assets - Intangible
assets consist patents, distribution rights and customer lists. Patent costs
are
being amortized over the remaining term of the patent. Distribution rights
and
customer lists are being amortized over 10 years.
Intangible
assets are accounted for in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill
and Other Intangible Assets
(“SFAS
142”). Intangible assets with finite useful lives are amortized while
intangible assets with indefinite useful lives are not amortized. As prescribed
by SFAS 142, goodwill and intangible assets are tested periodically for
impairment. The Company adopted SFAS No. 144, "Accounting for the Impairment
or
Disposal of Long- Lived Assets," effective January 1, 2002. Accordingly,
the
Company reviews its long-lived assets, including property and equipment and
finite-lived intangible assets for impairment whenever events or changes
in
circumstances indicate that the carrying amount of the assets may not be
fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be
less
than the carrying amount of the assets. Impairment costs, if any, are measured
by comparing the carrying amount of the related assets to their fair
value.
Research
and development—Research
and development expenses include the costs associated with the Company’s
internal research and development as well as research and development conducted
by third parties. These costs primarily consist of salaries, clinical trials,
outside consultants, and materials. All research and development costs discussed
above are expensed as incurred.
Third-party
expenses were reimbursed under non-refundable research and development
contracts, and are recorded as a reduction to research and development expense
in the statement of operations.
The
Company recognizes in-process research and development in accordance with
FASB
Interpretation No. 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method and
the AICPA
Technical Practice Aid, Assets Acquired in a Business Combination to be used
in
Research and Development Activities: A Focus on Software, Electronic
Devices, and Pharmaceutical Industries. Assets to be used in research and
development activities, specifically, compounds that have yet to receive
new
drug approval and would have no alternative use, should approval not be given,
are immediately charged to expense when acquired.
For
the
year ended December 31, 2006, the Company incurred $2,026,788 in research
and
development expenditures, and $63,749 for year 2005.
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair
Value Measurements
(“Statement No. 157”). The standard provides enhanced guidance for using
fair value to measure assets and liabilities and also responds to investors’
requests for expanded information about the extent to which company’s measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. While the
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, it does not expand the use of fair
value in any new circumstances. Statement No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007,
and interim periods within those fiscal years. Management of the Company
is
evaluating the impact of this standard, but does not anticipate that it will
have a significant impact on its financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB No. 108”). This bulletin expresses
the Staff’s views regarding the process of quantifying financial statement
misstatements. The interpretations in this bulletin were issued to address
diversity in practice in quantifying financial statement misstatements and
the
potential under current practice for the accumulation of improper amounts
on the
balance sheet. SAB No. 108 is effective for annual financial statements
starting with the year ending December 31, 2006. The Company is evaluating
the impact of this bulletin and based on current information, the Company
does
not believe that it will have a material impact on its financial
statements.
In
July
2006, the FASB issued Financial Accounting Standards Board Interpretation
No.
48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109,
Accounting for Income Taxes
(“FIN
No. 48”). This interpretation creates a single model to address uncertainty in
tax positions. FIN 48 clarifies the accounting for income taxes by prescribing
the minimum recognition threshold a tax position is required to meet before
being recognized in the financial statements. The interpretation also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 is
effective for years beginning after December 15, 2006. Management of the
Company
is evaluating the impact of this pronouncement, but does not anticipate that
it
will have a significant impact on its financial statements.
In
September 2006, the FASB issued Statement No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans”
(“SFAS No. 158”), an amendment of FASB Statements No. 87, 88, 106
and 132(R). SFAS No. 158 requires (a) recognition of the funded
status (measured as the difference between the fair value of the plan assets
and
the benefit obligation) of a benefit plan as an asset or liability in the
employer’s statement of financial position, (b) measurement of the funded
status as of the employer’s fiscal year-end with limited exceptions, and
(c) recognition of changes in the funded status in the year in which the
changes occur through comprehensive income. The requirement to recognize
the
funded status of a benefit plan and the disclosure requirements are effective
as
of the end of the fiscal year ending after December 15, 2006. The
requirement to measure the plan assets and benefit obligations as of the
date of
the employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. This Statement has no current
applicability to the Company’s financial statements. Management plans to adopt
this Statement on December 31, 2006 and it is anticipated the adoption of
SFAS No. 158 will not have a material impact to the Company’s
financial position, results of operations, or cash flows.
RESULTS
OF OPERATIONS
Year
Ended December 31, 2006 as compared to Year Ended December 31,
2005
Our
principal business operations are conducted through our wholly owned subsidiary,
Harbin Tian Di Ren Medical Science and Technology Company (“TDR”), and TDR’s
subsidiaries. The results of operations of TDR have been included in the
below financial statements since the acquisition date.
|
|
December
31
|
|
|
|
2006
|
|
|
|
2005
|
|
REVENUES
|
|
|
|
|
|
Variance
|
|
|
|
|
Product
Sales (net of sales allowance)
|
|
$
|
13,386,223
|
|
|
78.42
|
%
|
$
|
7,502,682
|
|
Contract
Sales
|
|
|
6,382,737
|
|
|
101975
|
%
|
|
6,253
|
|
Government
Grant
|
|
|
112,755
|
|
|
-44.38
|
%
|
|
202,706
|
|
Total
revenues
|
|
|
19,881,715
|
|
|
|
|
|
7,711,641
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOOD SOLD
|
|
|
|
|
|
|
|
|
|
|
Cost
of good sold
|
|
|
5,063,084
|
|
|
129
|
%
|
|
2,213,667
|
|
Gross
Profit
|
|
$
|
14,818,631
|
|
|
170
|
%
|
$
|
5,497,974
|
|
Total
sales increased by 158% in 2006 compared to 2005. The $12.17 million
increase in sales is attributable to strong performances from our sales
distribution channel, as well as the addition of a new line of contract sale
service in 2006 to sell other manufactured brands through our distribution
channel.
Product
sales increased by 78.42% in the year ended December 31, 2006, to $13,386,233
from $7,502,682 in 2005. This growth in sales is attributable to volume
and continuing efforts to develop our distribution channels by hiring direct
territory managers and sales agents to assure that our products and their
associated benefits are seen by those making or influencing the purchasing
decisions.
Government
grant was recognized of $112,755 in 2006 compared to $202,706 in 2005. The
government grant was issued to support our research and development, and
the
production of new medicines. The grant is recognized as income over the
period necessary to match the related costs. This decrease in government
grant received was also due to the expansion in our size and an increase
in
revenue and capital which made us less qualified for certain government grant
that are issued to small businesses.
Contract
and Other Revenue
The
following table summarizes the period over period changes in our contract
and
other revenues:
|
|
2006
|
|
Change
|
|
2005
|
|
Contract
and other revenue
|
|
$
|
6,382,737
|
|
|
101975
|
%
|
$
|
6,253
|
|
Contract
and other revenue was $6,382,737 in 2006, or a significant increase of
$6,376,484 over nominal sales of $6,253 in 2005. In 2006, contract and other
revenue increased primarily due to net product distribution service revenue
from
sales of other manufactured brands through our distribution channel, which
constitutes approximately 32% of total sales in 2006.
Cost
of Goods Sold and Product Gross Margin
The
following table summarizes the period over period changes in our product
sales
and cost of goods sold and product gross margin:
|
|
2006
|
|
Variance
|
|
2005
|
|
Total
sales
|
|
$
|
19,881,715
|
|
|
158
|
%
|
$
|
7,711,641
|
|
Cost
of goods sold
|
|
$
|
5,063,084
|
|
|
129
|
%
|
$
|
2,213,667
|
|
Product
gross margin
|
|
|
75
|
%
|
|
|
|
|
71
|
%
|
Our
product gross margin for 2006 was 75%, compared to 71% for 2005. The lower
gross
margin was primarily due to the launch of a new sales line of other manufactured
brands through our distribution channel, the gross margin for this contract
service line is around 80% with a corresponding impact to our product gross
profit.
Selling,
General and Administrative Expenses.
The
following table summarizes the period over period changes in our selling,
general and administrative (SG&A) expenses over the last two years:
|
|
December
31
|
|
|
|
2006
|
|
Variance
|
|
2005
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
R&D
Expenses
|
|
|
2,026,788
|
|
|
3079
|
%
|
|
63,749
|
|
General,
administrative and selling expenses
|
|
$
|
10,738,303
|
|
|
268
|
%
|
$
|
2,914,190
|
|
Depreciation
and amortization
|
|
|
121,522
|
|
|
|
|
|
57,563
|
|
Total
operating expenses
|
|
|
12,886,595
|
|
|
|
|
|
3,035,502
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(Income) Expenses
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
227,857
|
|
|
1197
|
%
|
|
17,563
|
|
Total
other ( income) expenses
|
|
$
|
227,857
|
|
|
|
|
$
|
17,563
|
|
Gross
sales increased approximately $12.17 million in 2006, and corresponding,
selling, general and administrative expenses (“SG&A”) for 2006 increased by
$7,824,095 over 2005. Higher expenses were primarily driven by higher headcount
which increased compensation and benefits by $1.12 million including employee
stock-based compensation expense of $65,604 from our adoption of SFAS 123R
on
January 1, 2006. In addition, this increase is attributable to an increase
in advertising costs of $648,225; $2.5 million related to a general expansion
of
our sales and marketing activities; our promotional program relating to our
business growth; business development activities; and the sales force expansion
planned for the anticipated launch in our new contract service line. The
increase in SG&A was also impacted by the inclusion of approximately of $1.8
million in professional and advisory fees related to the reverse merger with
Comet.
Research
and development (“R&D”) expenses were $2,026,788 for 2006 compared to
$63,749 for 2005. We anticipate R&D expenses will increase as we
conduct additional clinical trials and seek out additional patents and claims
for our products.
Finance
costs increased by $210,299 from 2005, associated with bank loans of $511,642
and preferential conversion feature expense of $177,803.
LIQUIDITY
AND CAPITAL RESOURCES
The
following table summarizes our cash, cash equivalents and marketable securities,
our working capital, and our cash flow activity as of the end of, and for
each
of, the last two years:
|
|
2006
|
|
2005
|
|
As
of December 31:
|
|
|
|
|
|
Cash,
cash equivalents and marketable securities
|
|
$
|
6,586,800
|
|
$
|
2,937,333
|
|
Working
capital
|
|
|
7,797,928
|
|
|
2,935,221
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31:
|
|
|
|
|
|
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
5,182,539
|
|
|
1,089,769
|
|
Investing
activities
|
|
|
(4,596,507
|
)
|
|
(776,488
|
)
|
Financing
activities
|
|
|
2,930,832
|
|
|
590,635
|
|
As
of
December 31, 2006, cash and cash equivalents were $6,586,800, an increase
of 124% over December 31, 2005. The increase of $3,649,467 in 2006 was
primarily due to: an approximately $5.18 million was generated from
operations in China tax jurisdictions; net proceeds generated from a private
common stock issuance of $2,715,000, and notes of $215,832. These
increases were partially offset by capital expenditures of $4.23 million
in
2006.
The
Company’s current ratio at December 31 was 4.29, and quick ratio was 4.17.
Its primary sources of funds include cash balances, cash flow from
operations, and potentially the proceeds of borrowing and sales of equity.
Management endeavors to ensure that funds are available to take advantage
of new investment opportunities and that funds are sufficient to meet future
liquidity and capital needs. Management considers current working capital
and borrowing capabilities adequate to cover the Company's current operating
and
capital requirements.
There
was
no restrictive bank deposit pledged as of December 31, 2006. Therefore, the
Company did not have to maintain any minimum balance in the relevant deposit
account as security.
Our
total
outstanding liabilities were $2.37 million as of December 31, 2006.
Cash
flows provided by operating activities were $5.18 million for the year
ended December 31, 2006 compared to cash provided by operating activities
of $1.09 million for the comparable 2005 period. The increase in cash
provided by operating activities of $4 million was attributable primarily
to sales growth, which is also enhanced by a $1.94 million increase in accounts
receivable, and offset by increased inventories of approximately $103,000
plus
an increase of approximately $0.7 million increase in accounts payable and
accrued expenses.
Working
capital at December 31, 2006 was $7.8 million, compared to $2.94 million at
December 31, 2005. Significant factors that resulted in an increase in 2006
working capital were: a $3.65 million increase in cash, cash equivalents; a
$1.70 million of non cash share-based compensation; and a $1.94 million increase
in accounts receivable primarily due to increased sales of $12.26 million
in
2006, offset by higher collection activity.
These
increases were partially offset by: a $420,795 increase in income taxes
payable primarily due to higher profitability; a $1,688,896 increase in
liabilities reflecting the share-based compensation pursuant to the requirement
of SFAS 123R; a $519,531 increase in accounts payable, and other accrued
liabilities including increases in accruals in wages.
Accounts
receivables increased by $1,940,913 or 154% to $3,199,026 as of December
31,
2006, compared to $1,258,113 as of December 31, 2005. This increase is
primarily due to an increase in sales of $12,260,025. More than ninety
percent of the Company’s receivables are aged less than 90 days.
Inventories
decreased by $102,578 to $278,562 as of December 31, 2006, from $381,140
as of
December 31, 2005. The Company has a small inventory on hand primarily due
to the enhanced productivity of newly purchased equipment and machinery,
and the
popularity of Company products in the market.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that are currently material or
reasonably likely to be material to our financial position or results of
operations.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
of
December 31, 2006, the Company had no material derivative instruments. The
Company may enter into derivative financial instrument transactions in order
to
mitigate its interest rate risk on a related financial instrument in the
future.
The
Company’s balance sheet includes amount of assets and liabilities whose fair
values are subject to market risk. Market risk is the risk of loss arising
from
adverse changes in market prices or interest rates. Generally, the Company’s
borrowing is short to medium term in nature and therefore approximates fair
value. The Company currently has interest rate risk as it relates to its
fixed
maturity mortgage participation interest. The Company seeks to limit the
impact
of interest rate changes on earnings and cash flows and to lower its overall
borrowing costs by closely monitoring its interest rate debt.
The
Company has certain equity risks as it relates to its marketable equity
securities, and foreign currency risks as it relates to investments denominated
in foreign currencies. The Company and its subsidiaries are mainly located
in
China, and there were no significant changes in exchange rates, during the
reported periods. However, unforeseen developments may cause a significant
change in exchange rates. The Company is subject to commodity price risks
arising from price of construction materials.
The
Company is subject to market and channel risks. Over 90% of the Company’s sales
are made in the PRC, where the Company primarily sells its products through
drug
chain stores. Because of this, the Company is dependent to a large degree
upon
the success of that distribution channel as well as the success of specific
retailers in the distribution channel. Many of the drug stores are individual
stores or very small chains, and only a few are large chain drug stores.
The Company relies on these distribution channels to purchase, market, and
sell its products. The Company’s success is dependent, to a large degree,
on the growth and success of the drug stores, which may be outside its control.
There can be no assurance that the drug store distribution channels will
be able
to grow or prosper as it faces price and service pressure from other channels,
including the mass market. There can be no assurance that retailers in the
drug store distribution channel, in the aggregate, will respond or continue
to
respond to the Company’s marketing commitment in these channels.
The
Company is highly dependent upon the public perception and quality of its
products, consumers’ perception of the safety and quality of its products, as
well as similar products distributed by other companies. Thus, the mere
publication of reports asserting that such products may be harmful could
have a
material adverse effect on the Company, regardless of whether these reports
are
scientifically supported. Adverse publicity may have a material adverse
effect on the Company’s business, financial condition, and results of
operations. There can be no assurance of future favorable scientific
results and media attention, or of the absence of unfavorable or inconsistent
findings.
ITEM
7. FINANCIAL STATEMENTS
China
Sky One Medical, Inc.
Table
of contents
|
|
|
Page
|
|
Independent
Auditors’ Report
|
|
|
F-2
|
|
Consolidated
Balance Sheets
|
|
|
F-3
|
|
Consolidated
Statements of Operations
|
|
|
F-4
|
|
Consolidated
Statements of Shareholders’ Equity
|
|
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
|
|
F-6
|
|
Notes
to the Consolidated Financial Statements
|
|
|
F-7
to F-17
|
|
E-FANG
ACCOUNTANCY CORP., & CPA
17800
CASTLETON ST., SUITE 208, CITY OF INDUSTRY, CA 91748
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
China
Sky One Medical, Inc. and Subsidiaries
(Incorporated
in the State of Nevada, USA)
We
have audited the accompanying consolidated balance sheets of China Sky One
Medical, Inc. and its subsidiaries (the “Company”) as of December 31, 2006 and
the related consolidated statements of income, retained earnings and cash
flows
for the years ended December 31, 2006 and 2005. These financial statements
are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with generally accepted auditing standards
as
established by the Auditing Standards Board (United States) and in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of
material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate
in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of China Sky One
Medical, Inc. and its subsidiaries as of December 31, 2006 and the Company’s
results of its operations and cash flows for the years ended December 31,
2006
and 2005 in conformity with accounting principles generally accepted in the
United States of America.
As
more fully disclosed in Note 18, the Company changed its financial reporting
regarding certain significant accounting errors to conform to accounting
principles generally accepted in the United States of America. Our report
date
remains the same but the financial statements, as presented herein, are
different from that expressed in our previous report.
e-Fang
Accountancy Corp. & CPA
Certified
Public Accountant
/s/
e-Fang Accountancy Corp. & CPA
City
of Industry, California
March
19, 2007
(November
7, 2007 for Note 18 with respect to correction of errors)
China
Sky One Medical, Inc. and Subsidiaries
Consolidated
Balance Sheet
December
31, 2006
Current
Assets
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,586,800
|
|
Accounts
receivable, net
|
|
|
3,199,026
|
|
Other
receivables
|
|
|
-
|
|
Inventories
|
|
|
278,562
|
|
Prepaid
expenses
|
|
|
103,734
|
|
Total
current assets
|
|
|
10,168,122
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,503,397
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
2,009,517
|
|
|
|
|
|
|
|
|
$
|
16,681,036
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
822,786
|
|
Wages
payable
|
|
|
260,290
|
|
Welfare
payable
|
|
|
141,489
|
|
Taxes
Payable
|
|
|
566,416
|
|
Deferred
revenue
|
|
|
67,541
|
|
Notes
payble
|
|
|
511,672
|
|
Total
current liabilities
|
|
|
2,370,194
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
Preferred
stock ($0.001 par value, 5,000,000 shares authorized,
|
|
|
|
|
none
issued and outstanding)
|
|
|
-
|
|
Common
stock ($0.001 par value, 20,000,000 shares authorized,
|
|
|
|
|
12,031,536
issued and outstanding)
|
|
|
12,032
|
|
Additional
paid-in capital
|
|
|
8,821,502
|
|
Accumulated
other comprehensive income
|
|
|
422,119
|
|
Retained
earnings
|
|
|
5,055,189
|
|
Total
stockholders' equity
|
|
|
14,310,842
|
|
|
|
|
|
|
|
|
$
|
16,681,036
|
|
The
accompanying notes are an integral part of these financial
statements.
China
Sky One Medical, Inc. and Subsidiaries
Consolidated
Statements of Operations
For
the Year Ended December 31, 2006 and 2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
19,881,715
|
|
$
|
7,711,641
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
5,063,084
|
|
|
2,213,667
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
14,818,631
|
|
|
5,497,974
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
Research
and development
|
|
|
2,026,788
|
|
|
63,749
|
|
Selling,
general and administrative
|
|
|
10,738,285
|
|
|
2,914,190
|
|
Amortization
|
|
|
121,522
|
|
|
57,563
|
|
Total
operating expenses
|
|
|
12,886,595
|
|
|
3,035,502
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(227,857
|
)
|
|
(17,563
|
)
|
Total
other income (expense)
|
|
|
(227,857
|
)
|
|
(17,563
|
)
|
|
|
|
|
|
|
|
|
Net
Income Before Provision for Income Tax
|
|
|
1,704,179
|
|
|
2,444,909
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
|
|
|
|
|
Current
|
|
|
764,462
|
|
|
356,081
|
|
Deferred
|
|
|
315,302
|
|
|
-
|
|
|
|
|
1,079,764
|
|
|
356,081
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
624,415
|
|
$
|
2,088,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$
|
0.05
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
12,031,536
|
|
|
10,929,370
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$
|
0.05
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
Diluted
Weighted Average Shares Outstanding
|
|
|
12,941,283
|
|
|
10,929,370
|
|
|
|
|
|
|
|
|
|
The
Components of Other Comprehensive Income
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
624,415
|
|
$
|
2,088,828
|
|
Foreign
currency translation adjustment
|
|
|
364,565
|
|
|
57,554
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
988,980
|
|
$
|
2,146,382
|
|
The
accompanying notes are an integral part of these financial
statements.
China
Sky One Medical, Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Equity
For
the Years Ended December 31, 2006 and 2005
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Par
Value
|
|
Additional
Paid-in Capital
|
|
Retained
Earnings (Deficit)
|
|
Accumulated
Other Comprehensive Income
|
|
Total
Stockholers'
Equity
|
|
Balance
at December 31, 2004
|
|
|
10,929,370
|
|
$
|
10,929
|
|
$
|
2,847,438
|
|
$
|
2,341,946
|
|
$
|
-
|
|
$
|
5,200,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,554
|
|
|
57,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
2,088,828
|
|
|
|
|
|
2,088,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
10,929,370
|
|
|
10,929
|
|
|
2,847,438
|
|
|
4,430,774
|
|
|
57,554
|
|
|
7,346,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of notes payable
|
|
|
102,166
|
|
|
103
|
|
|
204,229
|
|
|
-
|
|
|
-
|
|
|
204,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of addition common stock
|
|
|
1,000,000
|
|
|
1,000
|
|
|
2,978,853
|
|
|
|
|
|
|
|
|
2,979,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense for warrants
|
|
|
|
|
|
|
|
|
2,547,575
|
|
|
|
|
|
|
|
|
2,547,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferential
conversion feature of note
|
|
|
|
|
|
|
|
|
177,803
|
|
|
|
|
|
|
|
|
177,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
|
|
|
|
|
|
65,604
|
|
|
|
|
|
|
|
|
65,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
364,565
|
|
|
364,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
624,415
|
|
|
-
|
|
|
624,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
12,031,536
|
|
|
12,032
|
|
|
8,821,502
|
|
|
5,055,189
|
|
|
422,119
|
|
|
14,310,842
|
|
The
accompanying notes are an integral part of these financial
statements.
China
Sky One Medical, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2006 and 2005
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
Income
|
|
$
|
624,415
|
|
$
|
2,088,828
|
|
Adjustments
to reconcile net cash provided by
|
|
|
|
|
|
|
|
operating
activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
246,556
|
|
|
98,779
|
|
Share-based
compensation expense
|
|
|
2,878,031
|
|
|
-
|
|
Preferential
conversion feature of note
|
|
|
177,803
|
|
|
-
|
|
Net
change in assets and liabilities
|
|
|
|
|
|
|
|
Accounts
receivables and other receivables
|
|
|
(1,994,678
|
)
|
|
(153,163
|
)
|
Inventories
|
|
|
105,655
|
|
|
269,686
|
|
Construction
in progress
|
|
|
2,517,215
|
|
|
(45,158
|
)
|
Prepaid
expenses and other
|
|
|
(87,979
|
)
|
|
4,737
|
|
Accounts
payable and accrued liabilities
|
|
|
101,698
|
|
|
(1,255,005
|
)
|
Related
party payable
|
|
|
(18,540
|
)
|
|
(38,601
|
)
|
Wages
payable
|
|
|
141,776
|
|
|
40,378
|
|
Welfare
payable
|
|
|
45,056
|
|
|
28,554
|
|
Taxes
payable
|
|
|
433,419
|
|
|
94,919
|
|
Deferred
revenue
|
|
|
12,112
|
|
|
(44,185
|
)
|
Advances
by customers
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
5,182,539
|
|
|
1,089,769
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
(3,022,448
|
)
|
|
(367,555
|
)
|
Purchase
of intangible assets
|
|
|
(1,574,059
|
)
|
|
(408,933
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) investing activities
|
|
|
(4,596,507
|
)
|
|
(776,488
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Sale
of common stock for cash
|
|
|
2,715,000
|
|
|
94,795
|
|
Issuance
of convertiable notes
|
|
|
200,000
|
|
|
-
|
|
Proceeds
from short-term loan
|
|
|
15,832
|
|
|
495,840
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
2,930,832
|
|
|
590,635
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate
|
|
|
132,603
|
|
|
22,986
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
3,649,467
|
|
|
926,902
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
2,937,333
|
|
|
2,010,431
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
6,586,800
|
|
$
|
2,937,333
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
36,429
|
|
$
|
17,563
|
|
Taxes
paid
|
|
$
|
767,701
|
|
$
|
288,533
|
|
Share-based
compensation expense
|
|
$
|
2,878,049
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these financial
statements.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
1. |
Description
of Business
|
China
Sky One Medical, Inc. ("China Sky One"), a Nevada corporation, was formed
on
February 7, 1986, and formerly known as Comet Technologies, Inc. (“Comet”).
On July 26, 2006, the change in the name of the reporting company from
"Comet Technologies, Inc." to "China Sky One Medical, Inc.," became effective.
Effective
May 30, 2006 and pursuant to a plan of reorganization, American California
Pharmaceutical Group, Inc. (“ACPG”) completed a stock change agreement with
Comet Technologies, Inc., ("Comet"). Under the terms of the agreement,
all of
the ACPG's outstanding stock was exchanged for 10,193,377 shares of Comet
common
stock. The closing of the Exchange Agreement (“Closing”),
resulted in a change in voting control of Comet. The original shareholders
of ACPG hold approximately 93% of the outstanding common stock of Comet,
and the former Comet shareholders hold a total of 735,993 shares of common
stock, or 7% of the outstanding common stock, including stock granted under
a
consulting agreement to Comet’s two current officers, who resigned as officers
and directors at the closing. The common shares were issued in reliance on
the exemption from registration set forth in Section 4(2) of the Securities
Act
of 1933 as amended and Regulation D thereunder. The transaction is
treated as a reverse merger for accounting purposes.
American
California Pharmaceutical Group, Inc. (“ACPG”) was incorporated in the State of
California on December 16, 2003. On December 8, 2005, ACPG completed its
merger
with Harbin TDR Medical Science & Technology Developing CO., Ltd (“TDR”) by
exchanging 100% of its issued and outstanding common stock for 100% of
the
issued and outstanding shares of common stock of TDR and its subsidiaries.
TDR, formerly known as “Harbin City Tian Di Ren Medical Co.,” was
originally formed in 1994 and maintained its principal executive office
in
Harbin City of Heilongjiang Province, the People’s Republic of China (“PRC”).
TDR was reorganized and incorporated as a limited liability company on
December
29, 2000 pursuant to the “Corporation Laws and Regulations” of the People’s
Republic of China. Originally it has two wholly-owned subsidiaries, Harbin
First Bio-Engineering Company Limited (“First”) and Kangxi Medical Care Product
Factory (“Kangxi”). Kangxi merged with First on July 31, 2006.
On
October 16, 2006, the Company successfully entered into the field of research
and development of tissue and stem cell banks, with the establishment of
Harbin
Tian Qing Biotech Application Company (“Harbin Biotech”). The Health
Department of Heilongjiang Province, on the basis of the evaluation of
results
from experts, issued a document approving and authorizing the Company to
enter
into the above-mentioned development areas. Harbin Biotech, now a
wholly-owned subsidiary of the Company, obtained legal operation rights
in these
fields, which prevents other companies from entering the same fields in
Heilongjiang Province.
TDR
and First are leading producers and distributors of external-Chinese medicine
products in China. The principal activities of TDR and First are
the research, manufacture and sale of over-the counter non-prescription
health care products. TDR commenced its business in the sale of
branded nutritional supplements and over-the-counter pharmaceutical products
in
Heilongjiang Province. TDR has subsequently evolved into an integrated
manufacturer, marketer, and distributor of external use natural Chinese
medicine
products sold primarily to and through China domestic pharmaceutical chain
stores.
China
Sky One is a holding company whose principal operations are through its
subsidiaries; it has no revenues separate from its subsidiaries, and has
nominal
expenses related to its status as a public reporting company and to its
ownership interest in ACPG, TDR and TDR’s subsidiaries.
2. |
Basis
of Preparation of Financial
Statements
|
Principles
of Consolidation - The consolidated financial statements include the accounts
of
the Company and its subsidiaries, ACPG, TDR, First and Harbin Biotech.
All
inter-company transactions and balances were eliminated.
These
financial statements are stated in U.S. Dollars and have been prepared
in
accordance with accounting principles generally accepted in the United
States of
America. This basis of accounting differs from that used under applicable
accounting requirements in the PRC. No material adjustment was required.
Certain amounts in prior years have been reclassified to conform to current
year's classification.
3. |
Summary
of Significant Accounting
Policies
|
Use
of estimates
- The preparation of these 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, disclosure of contingent assets and liabilities
at the
dates of the financial statements, and the reported amounts of revenues
and
expenses during the reported periods.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
Significant
estimates included values and lives assigned to acquire intangible assets,
reserves for customer returns and allowances, uncollectible accounts receivable,
and slow moving and/or obsolete/damaged inventory. Actual results may differ
from these estimates.
Earnings
per share - The
Company computes net income per share in accordance with Statement of Financial
Accounting Standards No. 128, Earnings
per Share.
Net income per share is based upon the weighted average number of common
shares
outstanding during the period. Diluted income per share is equivalent to
basic
net income per share for all periods presented herein because common equivalent
shares from unexercised stock options.
Cash
and cash equivalents - The Company
considers all highly liquid debt instruments purchased with maturity period
of
three months or less to be cash equivalents. The carrying amounts reported
in
the accompanying consolidated balance sheet for cash and cash equivalents
approximate their fair value.
Accounts
receivable - Accounts
receivable are stated at net realizable value, net of an allowance for
doubtful
accounts. Provision of allowance is made for estimated bad debts based
on a
periodic analysis of individual customer balances including an evaluation
of
days of sales outstanding, payment history, recent payment trends, and
perceived
credit worthiness.
Prepaid
Account -
The Company records the balance of the amortized slotting fee not used
in the
current period as prepaid expenses. Prepaid account as well includes
advances to employees that include cash prepaid to employees for their
travel, entertainment
and transportation expenditures.
Inventories
- Inventories were accounted for using the first-in, first-out method and
included finished goods, raw materials, freight-in, packing materials,
labor,
and overhead costs. Values stated were at the lower of cost or market while
cost
was determined by a moving weighted average. Provisions were made for slow
moving, obsolete and/or damaged inventory based on a periodic analysis
of
individual inventory items including an evaluation of historical usage
and/or
movement, age, expiration date, and general conditions.
Property
and equipment
- Property and equipment are stated at the historical cost less accumulated
depreciation. Depreciation on property, plant, and equipment is provided
using
the straight-line method over the estimated useful lives of the assets.
An
estimated residual value of 5% of cost or valuation was made for each items
for
both financial and income tax reporting purposes. The estimated lengths
of
useful lives are as follows:
Buildings
|
30
years
|
Land
use rights
|
50
years
|
Furniture
& Equipments
|
5
to 7 years
|
Motor
vehicles
|
5
to 15 years
|
Machineries
|
7
to 14 years
|
Expenditures
for renewals and betterments were capitalized while repairs and maintenance
costs were normally charged to the statement of operations in the year
in which
they were incurred. In situations where it can be clearly demonstrated
that the
expenditure has resulted in an increase in the future economic benefits
expected
to obtain from the use of the asset, the expenditure is capitalized as
an
additional cost of the asset. Upon sale or disposal of an asset, the historical
cost and related accumulated depreciation or amortization of such asset
were
removed from their respective accounts, and any gain or loss was recorded
in the
Consolidated Statements of Operations.
Property
and equipment are evaluated for impairment in value annually or whenever
an
event or change in circumstances indicates that the carrying values may
not be
recoverable. If such an event or change in circumstances occurs and potential
impairment is indicated because the carrying values exceed the estimated
future
undiscounted cash flows of the asset, the Company would measure the impairment
loss as the amount by which the carrying value of the asset exceeds its
fair
vale.
Construction-in-progress
- Properties currently under development are accounted for as
construction-in-progress. Construction-in-progress is recorded at acquisition
cost, including land rights cost, development expenditure, professional
fees,
and the interest expenses for the purpose of financing the project capitalized
during the course of construction.
Upon
completion and readiness for use of the project, the cost of
construction-in-progress is to be transferred to the facility. In the case
of
construction-in-progress, management takes into consideration the estimated
cost
to complete the project when making the lower of cost or market
calculation.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
Intangible
assets - Intangible
assets consist patents, distribution rights and customer lists. Patent
costs are
being amortized over the remaining term of the patent. Distribution rights
and
customer lists are being amortized over 10 years.
Intangible
assets are accounted for in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill
and Other Intangible Assets
(“SFAS 142”). Intangible assets with finite useful lives are amortized
while intangible assets with indefinite useful lives are not amortized.
As
prescribed by SFAS 142, goodwill and intangible assets are tested periodically
for impairment. The Company adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long- Lived Assets," effective January 1, 2002. Accordingly,
the
Company reviews its long-lived assets, including property and equipment
and
finite-lived intangible assets for impairment whenever events or changes
in
circumstances indicate that the carrying amount of the assets may not be
fully
recoverable. To determine recoverability of its long-lived assets, the
Company
evaluates the probability that future undiscounted net cash flows will
be less
than the carrying amount of the assets. Impairment costs, if any, are measured
by comparing the carrying amount of the related assets to their fair
value.
Foreign
currency translation -These
financial statements have been prepared in U.S. dollars. China Sky One is
only a holding company; it has no revenues and only nominal expenses, which
are
related to its status as a public reporting company and its ownership interest
in TDR and subsidiaries. The functional currency for TDR and its subsidiaries
is
denominated in “Renminbi” (“RMB”) or “Yuan”. TDR maintains its books and
accounting records in Renminbi ("RMB"), the currency of the primary economic
environment in which the entities operate. FASB Statement of Financial
Accounting Standards No. 52, “Foreign Currency Translation” requires
differentials to be calculated and allocated using the current rate method
if
the foreign entity’s functional and local currencies are the same.
Non-monetary assets and liabilities are translated at historical exchange
rates. Monetary assets and liabilities are translated at the exchange
rates in effect at the end of the year. The income statement accounts are
translated at average exchange rates. The conversion gains and losses are
not recognized in the income statement under the functional currency approach.
They are accumulated in a separate account in stockholders’ equity (i.e., the
cumulative foreign exchange translation adjustments account). This treatment
is
based on the FASB’s view that translation gains or losses are not directly
related to the foreign entities’ operating cash flows.
Revenue
recognition
- Revenue is recognized in accordance with Staff Accounting Bulletin
No. 104, Revenue Recognition, which states that revenue should be
recognized when the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) the product has been shipped and the customer
takes ownership and assumes the risk of loss; (3) the selling price is
fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied
upon
shipment from its facilities. Revenue is reduced by provisions for estimated
returns and allowances as well as specific known claims, if any, which
are based
on historical averages that have not varied significantly for the periods
presented.
The
Company occasionally applies to various government agencies for research
grants.
Revenue from such research grants is recognized when earned. In situations
where
TDR receives payment in advance for the performance of research and development
services, such amounts are deferred and recognized as revenue as the related
services are performed.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable.
Research
and development—Research
and development expenses include the costs associated with the Company’s
internal research and development as well as research and development conducted
by third parties. These costs primarily consist of salaries, clinical trials,
outside consultants, and materials. All research and development costs
discussed
above are expensed as incurred.
Third-party
expenses were reimbursed under non-refundable research and development
contracts, and are recorded as a reduction to research and development
expense
in the statement of operations.
The
Company recognizes in-process research and development in accordance with
FASB
Interpretation No. 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method and
the AICPA
Technical Practice Aid, Assets Acquired in a Business Combination to be
used in
Research and Development Activities: A Focus on Software, Electronic
Devices, and Pharmaceutical Industries. Assets to be used in research and
development activities, specifically, compounds that have yet to receive
new
drug approval and would have no alternative use, should approval not be
given,
are immediately charged to expense when acquired.
For
the year ended December 31, 2006, the Company incurred $2,026,788 in research
and development expenditures, and $63,749 for year 2005.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
Advertising—The
Company expensed advertising costs the first time the respective advertising
took place. The total advertising expenses incurred for the years ended
December 31, 2006 and 2005 was $1,576,781 and $1,007,748,
respectively.
Slotting
fees—
From time to time, the Company enters into arrangements with customers
in
exchange for obtaining rights to place our products on customers' shelves
for
resale at retail. The Company also engages in promotional discount
programs in order to enhance sales in specific channels. These payments,
discounts and allowances reduce our reported revenue in accordance with
the
guidelines set forth in EITF 01-9 and SEC Staff Accounting Bulletin No.
104
The
Company records its obligations under each arrangement at inception and
amortizes the total required payments using the straight-line method over
a term
of time, which is normally the minimum time that we are allowed to sell
our
products in given retail outlets. The Company records the balance of the
amortized slotting fee not used in the current period as prepaid expenses.
As
the Company applies the amortized slotting fee as contra revenue, it
reduces the reported gross revenue by an amount equal to the reduction
in
prepaid expenses. The slotting fees incurred for the year 2006 was $777,217
and
$7,840 for 2005
Taxation
- The Company uses the asset and liability method of accounting for deferred
income taxes. The Company’s provision for income taxes includes income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities.
The Company records liabilities for income tax contingencies based on our
best estimate of the underlying exposures.
The
Company periodically estimates its probable tax obligations using historical
experience in tax jurisdictions and informed judgments. There are inherent
uncertainties related to the interpretation of tax regulations in the
jurisdictions in which the Company transacts business. The judgments and
estimates made at a point in time may change based on the outcome of tax
audits,
as well as changes to, or further interpretations of, regulations. The
Company adjusts income tax expense in the period in which these events
occur.
Provision
for the PRC’s enterprise income tax is calculated at the prevailing rate based
on the estimated assessable profits less available tax relief for losses
brought
forward.
Enterprise
income tax
Under
the Provisional Regulations of The People’s Republic of China Concerning Income
Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises
at a rate of 33% of their taxable income. Preferential tax treatment may,
however, be granted pursuant to any law or regulations from time to time
promulgated by the State Council.
According
to “Enterprise Income Tax and Certain Preferential Policies Notice” published by
the Ministry of Finance and the National Tax Affairs Bureau, if the enterprise
is authorized by the State Council as a special entity, the enterprise
income
tax rate is reduced to 15%. The income tax rate for TDR is 15% based on
State
Council approval.
The
High-Tech Industrial Development District was established in China to accelerate
the development and industrialization of high-tech industries in some economic
zones of the PRC. In order to create unique incentives for companies to
locate
in the High-Tech Industrial Development District, favorable corporate income
tax
rates have been established.
First
has chosen to locate in the High-Tech Industrial Development District is
levied
at 15 percent annually.
Enterprise
income tax (“EIT”) is provided on the basis of the statutory profit for
financial reporting purposes, adjusted for income and expense items, which
are
not assessable or deductible for income tax purposes.
Value
added tax
The
Provisional Regulations of The People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994.
Under
these regulations and the Implementing Rules of the Provisional Regulations
of
the PRC Concerning Value Added Tax, value added tax is imposed on goods
sold in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.
Value
added tax payable in the PRC is charged on an aggregated basis at a rate
of 13%
or 17% (depending on the type of goods involved) on the full price collected
for
the goods sold or, in the case of taxable services provided, at a rate
of 17% on
the charges for the taxable services provided, but excluding, in respect
of both
goods and services, any amount paid in respect of value added tax included
in
the price or charges, and less any deductible value added tax already paid
by
the taxpayer on purchases of goods and services in the same financial
year.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
According
to “Agriculture Product Value Added Tax Rate Adjustment and Certain Items’ Value
Added Tax Waiver” published by the Ministry of Finance and the National Tax
Affairs Bureau, the value added tax for agriculture related products is
to be
taxed at 13%. Furthermore, traditional Chinese medicine and medicinal plant
are
by definition agriculture related products.
Contingent
liabilities and contingent assets -
A contingent liability is a possible obligation that arises from past events
and
whose existence will only be confirmed by the occurrence or non-occurrence
of
one or more uncertain future events not wholly within the control of the
Company. It can also be a present obligation arising from past events that
is
not recognized because it is not probable that outflow of economic resources
will be required or the amount of obligation cannot be measured
reliably.
A
contingent liability is not recognized but is disclosed in the notes to
the
financial statements. When a change in the probability of an outflow occurs
so
that the outflow is probable, they will then be recognized.
A
contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of
one or
more uncertain events not wholly within the control of the Company.
Contingent
assets are not recognized but are disclosed in the notes to the financial
statements when an inflow of economic benefits is probable. When inflow
is
virtually certain, an asset is recognized.
Related
companies -
A related company is a company in which the director has beneficial interests
in
and in which the Company has significant influence.
Retirement
benefit costs
- According to the PRC regulations on pension plans, the Company contributes
to
a defined contribution retirement plan organized by municipal government
in the
province in which the Company was registered and all qualified employees
are
eligible to participate in the plan.
Contributions
to the pension or retirement plan are calculated at 23.5% of the employees’
salaries above a fixed threshold amount. The employees contribute 2% to 8%
to the pension plan, and the Company contributes the balance contribution
of
21.5% to 15.5%. The Company has no other material obligation for the payment
of
retirement benefits beyond the annual contributions under this
plan.
Fair
value of financial instruments - The
carrying amounts of certain financial instruments, including cash, accounts
receivable, commercial notes receivable, other receivables, accounts payable,
commercial notes payable, accrued expenses, and other payables approximate
their
fair values as at December 31, 2006 because of the relatively short-term
maturity of these instruments.
Recent
accounting pronouncements
- In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair
Value Measurements
(“Statement No. 157”). The standard provides enhanced guidance for using
fair value to measure assets and liabilities and also responds to investors’
requests for expanded information about the extent to which company’s measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. While the
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, it does not expand the use of
fair
value in any new circumstances. Statement No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007,
and interim periods within those fiscal years. Management of the Company
is
evaluating the impact of this standard, but does not anticipate that it
will
have a significant impact on its financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements
in
Current Year Financial Statements (“SAB No. 108”). This bulletin expresses
the Staff’s views regarding the process of quantifying financial statement
misstatements. The interpretations in this bulletin were issued to address
diversity in practice in quantifying financial statement misstatements
and the
potential under current practice for the accumulation of improper amounts
on the
balance sheet. SAB No. 108 is effective for annual financial statements
starting with the year ending December 31, 2006. The Company is evaluating
the impact of this bulletin and based on current information, the Company
does
not believe that it will have a material impact on its financial
statements.
In
July 2006, the FASB issued Financial Accounting Standards Board Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109,
Accounting for Income Taxes
(“FIN No. 48”). This interpretation creates a single model to address
uncertainty in tax positions. FIN 48 clarifies the accounting for income
taxes
by prescribing the minimum recognition threshold a tax position is required
to
meet before being recognized in the financial statements. The interpretation
also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure, and transition.
FIN 48 is effective for years beginning after December 15, 2006. Management
of
the Company is evaluating the impact of this pronouncement, but does not
anticipate that it will have a significant impact on its financial
statements.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
In
September 2006, the FASB issued Statement No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans”
(“SFAS No. 158”), an amendment of FASB Statements No. 87, 88, 106
and 132(R). SFAS No. 158 requires (a) recognition of the funded
status (measured as the difference between the fair value of the plan assets
and
the benefit obligation) of a benefit plan as an asset or liability in the
employer’s statement of financial position, (b) measurement of the funded
status as of the employer’s fiscal year-end with limited exceptions, and
(c) recognition of changes in the funded status in the year in which the
changes occur through comprehensive income. The requirement to recognize
the
funded status of a benefit plan and the disclosure requirements are effective
as
of the end of the fiscal year ending after December 15, 2006. The
requirement to measure the plan assets and benefit obligations as of the
date of
the employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. This Statement has no current
applicability to the Company’s financial statements. Management plans to adopt
this Statement on December 31, 2006 and it is anticipated the adoption of
SFAS No. 158 will not have a material impact to the Company’s
financial position, results of operations, or cash flows.
We
have applied SFAS No. 128, “Earnings Per Share” in its calculation and
presentation of earnings per share - “basic” and “diluted”. Basic earnings per
share are computed by dividing income available to common shareholders
(the
numerator) by the weighted average number of common shares (the denominator)
for
the period. The computation of diluted earnings per share is similar to
basic
earnings per share, except that the denominator is increased to include
the
number of additional common shares that would have been outstanding if
the
potentially dilutive common shares had been issued.
Stock
warrants and options to purchase 1,813,500 shares of common stock, all
but
113,500 of which were exercisable during the three months ended March 31,
2007, were included in the computation of diluted earnings per share
because the option exercise prices were more than the average market price
of
our common stock during these periods.
The
following table sets forth our computation of basic and diluted net income
(loss) per share:
|
|
Years
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income (loss) used in calculation of basic earnings (loss) per
share
|
|
$
|
624,415
|
|
$
|
2,088,828
|
|
|
|
|
|
|
|
|
|
Net
income (loss) used in calculation of diluted earnings (loss)
per
share
|
|
|
624,415
|
|
|
2,088,828
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding used in calculation of basic earnings
(loss) per
share
|
|
|
12,031,536
|
|
|
10,929,370
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Stock
options and equivalents
|
|
|
909,747
|
|
|
-
|
|
Weighted-average
common shares used in calculation of diluted earnings (loss)
per
share
|
|
|
12,941,283
|
|
|
10,929,370
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
0.05
|
|
|
0.19
|
|
Diluted
|
|
|
0.05
|
|
|
0.19
|
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
5. |
Share-based
Compensation
|
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
No. 123R, Share-Based Payment (“SFAS No. 123R”), for options granted
to employees and directors, using the modified prospective transition method,
and therefore have not restated results from prior periods. Compensation
cost
for all stock-based compensation awards granted after December 31, 2005 is
based on the grant date fair value estimated in accordance with the provisions
of SFAS No. 123R. Under the fair value recognition provisions of SFAS
No. 123R, we recognize stock-based compensation net of an estimated
forfeiture rate and only recognize compensation cost for those shares expected
to vest on a straight-line prorated basis over the requisite service period
of
the award. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”)
No. 107, Share-Based Payment (“SAB No. 107”), regarding the SEC’s
guidance on SFAS No. 123R and the valuation of share-based payments for
public companies. We have applied the provisions of SAB No. 107 in the
adoption of SFAS No. 123R. The Company uses the Black-Scholes model to
value stock-based compensation expense. The risk-free interest rate is
based on
the U.S. Treasury zero coupon issues with an equivalent remaining term
at the
time of the option grant. Expected volatility is based on the historical
volatility of the Company’s stock price and the volatility of public companies
that the Company considered comparable. The effect of adoption of the new
standard for the year ended December 31, 2006 related to stock options to
employees were additional non-cash expenses of $65,604. As of
December 31, 2006, stock options to acquire 113,500 shares
of common stock are held by employees and begin to vest in June, 2007.
None of these options have been exercised.
Options
or stock awards issued to non-employees and consultants are recorded at
their
fair value as determined in accordance with SFAS No. 123R and EITF
No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, and
recognized over the related vesting or service period. In connection with
closing of the Stock Exchange Agreement, the Company agreed to grant warrants
to
advisors for the services they already performed for reverse merger, entitling
them to purchase up to 500,000 shares on or before July 31, 2009, at a
price of
US$2.00 per share and options to purchase up to 50,000 shares on or before
December 20, 2008 at a price of US$3.00 per share. The fair value of these
warrants and options were determined to be $772,275 and deducted as expenses
using the Black-Scholes option-pricing model with the following assumptions:
no dividends; risk-free interest rate of 4%; the contractual life of
2.5-3.5 years and volatility of 39%. The Company based its estimate of
expected
volatility on the historical, expected or implied volatility of similar
entities
whose share or option prices are publicly available. In addition, on May
11, 2006, a total of 219,212 shares were issued to the two former officers
of
Comet, under a consulting agreement for a two year term, in connection
with the
merger transaction, the fair value of these shares as of December 31, 2006,
were
determined to be $657,618 and deducted as expenses during the year ended
December 31, 2006.
On
October 17, 2006, the Company paid the placement agent and its sub-agents
$270,000 (9%) in cash as fees for services performed in conjunction with
the
private placement that was completed on October 17, 2006. The Company also
issued a warrant to purchase 150,000 shares of common stock of the Company
at an
exercise price of $3.00 per share for 100,000 shares and $3.50 per share
for
50,000 shares to the placement agent and its sub-agents in the private
placement. The warrants at $3.50 per share are not exercisable, and will
expire, unless the warrants at $3.00 are first exercised. The warrants
issued to
the placement agent are exercisable commencing on October 17, 2006, and
ending
on October 10, 2008. In addition to the 500,000 warrants awarded for
the reverse merger services, described above, the Company granted to two
advisors an additional 500,000 warrants in connection with services performed
for the private placement, entitling the advisor and agent to purchase
up to
500,000 shares on or before July 31, 2009, at a price of US$2.00 per share.
The
fair value of above warrants were computed as $916,622 as of December 31,
2006
based on the Black-Scholes option-pricing model..
As
of December 31, 2006, stock options and warrants to acquire approximately
1,700,000 shares of common stock are held by non-employee consultants and
remained unexercised.
Information
related to outstanding warrants at December 31, 2006:
Exercise
Price
|
Outstanding
December
31, 2005
|
Granted
|
Expired
or Exercised
|
Outstanding
December
31, 2006
|
Expiration
Date
|
$1.50
|
25,000
|
-0-
|
-0-
|
25,000
|
|
$2.00
|
-0-
|
1,000,000
|
-0-
|
1,000,000
|
7/31/2009
|
$3.00
|
-0-
|
100,000
|
-0-
|
100,000
|
10/10/2008
|
$3.50
|
-0-
|
550,000
|
-0-
|
550,000
|
10/10/2008
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
Information
related to outstanding options at December 31, 2006:
Exercise
Price
|
Outstanding
December
31, 2006
|
Granted
|
Expired
or Exercised
|
Outstanding
June
30, 2007
|
Expiration
Date
|
$3.65
|
-0-
|
113,500
|
-0-
|
113,500
|
|
$3.00
|
-0-
|
50,000
|
-0-
|
50,000
|
12/20/2008
|
6. |
Concentrations
of Business and Credit
Risk
|
Substantially
all of the Company’s bank accounts are in banks located in the PRC and are not
covered by any type of protection similar to that provided by the FDIC
on funds
held in U.S banks. The Company places its cash in high credit quality financial
institutions.
The
Company obtains detailed credit evaluations of customers generally without
requiring collateral, and establishes credit limits as required. Exposure
to
losses on receivables is principally dependent on each customer’s financial
condition. The Company continuously monitors collections and payments from
its
customers and maintains an allowance for estimated credit losses based
on the
creditworthiness of each customer as well as any specific customer collection
issues are identified. Concentration of credit risk with respect to trade
receivables is limited due to the Company's large number of diverse customers
in
different locations in China. Ninety percent (90%) of the Company’s accounts
receivable are less than 60 days in arrears. While such credit issues have
not
been significant, there can be no assurance that the Company will continue
to
experience the same level of credit losses in the future. The Company is
operating in China, which may give rise to significant foreign currency
risks
from fluctuations and the degree of volatility of foreign exchange rates
between
U.S. dollars and the Chinese currency RMB.
7. |
Cash
and Cash Equivalents
|
As
of December 31, 2006, Cash and Cash Equivalents consist of the
following:
|
|
|
|
Cash
and Cash Equivalents
|
|
|
|
Cash
on Hand
|
|
$
|
2,499
|
|
Bank
Deposits
|
|
|
4,944,286
|
|
Restricted
Cash
|
|
|
1,640,015
|
|
Total
Cash and Cash Equivalents
|
|
$
|
6,586,800
|
|
The
amount of US$1,640,015 of restricted cash was temporarily held by the China
State Administration of Foreign Exchange as of December 31, 2006 as a result
of
additional regulations announced in 2006 aimed at further strengthening
China's
anti-money laundering efforts. The amount of $744,380 was released to TDR
on January 22, 2007; the rest of amount will be released to TDR by the
end of
March, 2007.
As
of December 31, 2006, Accounts Receivable totaled $3,199,026, net of Provisions
for Doubtful Accounts. All the accounts receivable aging is less than 180
days; fifty two percent (52%) of the Company’s receivable are less than 30 days
and total ninety five percent (95%) is less than 90 days in
arrears.
|
|
|
|
Accounts
Receivable
|
|
|
|
|
Trade
receivables
|
|
$
|
3,199,026
|
|
Allowance
for doubtful accounts
|
|
|
-
|
|
Total
Accounts Receivable
|
|
$
|
3,,199,026
|
|
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
The
Company values its inventories at the lower of cost and market method.
Inventories are accounted for using the first-in, first-out method. Inventories
in the balance sheet include packing materials, raw materials, supplemental
materials, work-in-process, and finished products.
As
of December 31, 2006, inventories consist of the following:
Inventory
|
|
|
|
|
Raw
Material
|
|
$
|
59,067
|
|
Supplemental
Material
|
|
|
108,394
|
|
Work-in-Process
|
|
|
78,770
|
|
Finished
Products
|
|
|
32,330
|
|
Total
Inventory
|
|
$
|
278,562
|
|
10. |
Property
and Equipment
|
All
of TDR and its subsidiaries’ buildings and fixed assets are located in the PRC
and the land is used pursuant to a land use right granted by the PRC for
50
years commencing in 2004. As of December 31, 2006, Property and Equipment
consist of the following:
Property
and Equipment
|
|
|
|
|
Buildings
|
|
$
|
2,632,973
|
|
Machinery
and equipment
|
|
|
1,432,986
|
|
Land
use rights
|
|
|
510,886
|
|
Automobiles
|
|
|
264,641
|
|
Furniture
and Equipments
|
|
|
4,382
|
|
Total
Property and Equipment
|
|
|
4,845,868
|
|
Less:
Accumulated Depreciation
|
|
|
(342,471
|
)
|
Property
and Equipment, Net
|
|
$
|
4,503,397
|
|
For
the year ended December 31, 2006 depreciation expense totaled
$125,034.
As
of December 31, 2006, the Company’s intangible assets consist of:
|
|
|
|
Intangible
Assets
|
|
|
|
|
Patents
|
|
$
|
1,878,842
|
|
Distribution
rights and customer lists
|
|
|
353,262
|
|
Less
amortization
|
|
|
222,587
|
|
Total
Intangible Assets
|
|
$
|
2,009,517
|
|
For
the year ended December 31, 2006 amortization expense totaled
$121,522.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
12. |
Accounts
Payable and Accrued
Expense
|
As
of December 31, 2006, Accounts Payable and Accrued Expense consist of the
following:
|
|
|
|
Accounts
Payable and Accrued Expense
|
|
|
12/31/2006
|
|
Accounts
Payable and Accrued Expense
|
|
$
|
423,425
|
|
Other
Accounts Payable
|
|
|
399,361
|
|
Total
Accounts Payable & Accrued Expenses
|
|
$
|
822,786
|
|
Other
Accounts Payable includes advance customer deposits which represents the
collections of cash in advance to ensure the future delivery of goods or
services. Advances customer deposits are classified as current liabilities
if the goods and services are to be delivered within the next year (or
the
operating cycle, if longer). The other accounts payable also included
$200,000 payable due to an agent in connection with the reverse merger
with
Comet.
TDR
has secured a loan with a bank in the amount of $516,796, which bears monthly
interest at a rate of 0.6825%, and is secured by real property that has
an
estimated value of $619,988. The loan is also personally guaranteed by
Yanqing Liu, the Company’s President and a principal shareholder. The loan
is due on its maturity date on June 22, 2007. TDR incurred $48,933 of
interest expense associated with this loan for the year ended December
31,
2006.
14. |
Promissory
Note Conversion
|
On
August 3, 2006, ACPG signed a convertible promissory note (the “Note”) with
Luminus Capital Management, Ltd. (“Luminus”), in the amount of $200,000.
The Note bears interest at 6.5% per annum with a maturity date of August
3, 2007, and is payable upon maturity or conversion of the Note. The
preferential conversion feature of this note was valued at $177,803 and
charged
against interest expense for the year ended December 31, 2006. On October
3,
2006, the Company announced that Luminus served notice to convert the Note
into
common shares at a price of $2.00 per share. The note (including accrued
interest) was converted on October 3, 2006, into a total of 102,166 shares
of
common stock.
As
of December 31, 2006, taxes payable consists of the following:
|
|
|
|
Taxes
Payable
|
|
|
|
|
Value
Added Tax
|
|
$
|
236,605
|
|
Enterprise
Income Tax
|
|
|
320,750
|
|
City
Tax
|
|
|
4,426
|
|
Payroll
Tax
|
|
|
4,635
|
|
Total
Taxes Payable
|
|
$
|
566,416
|
|
TDR
was incorporated in the PRC which is governed by the Income Tax Law of
the PRC
concerning Enterprises and various local income tax laws (the “Income Tax
Laws"). Under the Income Tax Laws, enterprises generally are subject to
an
income tax at an effective rate of 33% (30% state income taxes plus 3%
local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments unless the enterprise is located in specially
designated regions or cities for which more favorable effective rates apply.
First
elected to locate in the province designated as the High-Tech Industrial
Development District, which is levied at 15 percent annually.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
As
of December 31, 2006, TDR has attained profitable operations for tax purposes.
TDR and First are the enterprises authorized by the State Council as special
entities; consequently, the enterprise income tax rate is reduced to
15%.
We
record a full valuation allowance to reduce our deferred tax assets to
the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were
to
determine that we would be able to realize our deferred tax assets in the
future
in excess of its net recorded amount, an adjustment to the deferred tax
asset
would increase income in the period such determination was made.
A
portion of the deferred tax assets related to net operating loss carryforwards
of China Sky One US operation as of December 31, 2006 include amounts
related to share-based stock option deductions. Pursuant to Sections 382
and 383 of the Internal Revenue Code (“IRC”), annual use of the Company’s net
operating losses and tax credit carryforwards may be limited because of
cumulative changes in ownership of more than 50% that have
occurred.
Significant
components of the Company’s deferred tax assets are shown below. Nil
valuation allowance has been established to offset the deferred tax assets,
as
realization of such assets is certain per the management valuation. The
tax benefit has been reported in the December 31, 2006 consolidated financial
statements since the potential tax benefit is not offset by a valuation
allowance.
Net
deferred tax assets consist of the following components as of December
31,
2006:
Deferred
tax assets:
|
|
|
|
|
NOL
Carryover from China Sky One (formerly known as Comet)
|
|
$
|
223,430
|
|
Share-based
compensation expenses based on 123R
|
|
|
1,878,583
|
|
Deferred
Tax at 15% tax rate
|
|
|
315,302
|
|
Deferred
tax liabilities:
|
|
|
|
|
Valuation
allowance
|
|
|
315,302
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
17. |
Deferred
Revenue - Government Grant
|
The
Company received several federal government grants supporting the facility
construction, research, development, and production of medicines. These
grants were nonrefundable to the State once awarded as long as the grants
are
used in the areas requested by the grants. First used these federal grants
to fund research and development projects, build infrastructure for development
and/or manufacturing of medicines, and other activities that are within
the
scope of grants. The remainder of the grants is deferred to the following
years for qualified research and development activities. All the completed
projects and activities funded by the government grants were reported to
and
approved by the funding agencies for qualification of future grants.
For the year ended December 31, 2006, the Company has recognized
$112,755 federal grant, with the balance $67,541 deferred. For the year
ended December 31, 2005, the Company has recognized $202,706 federal grant,
with
the balance $55,782 deferred.
18. |
Employee
Retirement Benefits and Post Retirement
Benefits
|
According
to the Heilongjiang Provincial regulations pertaining to State pension
plans,
both employees and employers have to contribute to a pension plan. The
pension
contributions include an 8% contribution by individuals (employees) and
contributions from the Company to the state retirement plan based on 20%
of the
employees’ monthly basic salaries. TDR’s employees in the PRC are entitled to
retirement benefits calculated with reference to their basic salaries on
retirement and their years of service in accordance with a government managed
benefits plan.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
19. |
Stock
Compensation Plan
|
In
July 2006, the Company’s stockholders approved the 2006 Stock Incentive Plan
(the “2006 Plan”). The 2006 Plan, provides for the grant of stock options,
restricted stock awards, and performance shares to qualified employees,
officers, directors, consultants and other service providers. The 2006
Plan
originally authorized the Company to grant options and/or rights to purchase
up
to an aggregate of 1,500,000 shares of common stock. As of March 31,
2007, non-qualified options to purchase a total of 113,500 shares were
granted
and reserved for issuance under the 2006 Stock Incentive Plan.
20. |
Acquisition
of assets from Heilongjiang Tianlong Pharmaceutical
Company
|
In
December, 2006, we acquired all of the products, dealership, and marketing
network of the Beijing office of Heilongjiang Tianlong Pharmaceutical Company
(“Tianlong”) for $381,700. Tianlong also agreed to a non-compete agreement in
which Tianlong agreed to withdrawl from the Bejing market forever. The
values
assigned to the assets in the acquisition are as follows:
Fixed
Assets
|
|
$
|
28,438
|
|
Non-compete
agreement
|
|
|
353,262
|
|
|
|
$
|
381,700
|
|
The
non-compete agreement is being amortized over a 10 year estimated useful
life.
21. |
Foreign
Currency Translation
Adjustment
|
We
consider the local currency for all of our foreign subsidiaries to be the
functional currency for that subsidiary. Assets and liabilities are translated
at current rates of exchange. Income and expense items are translated at
the
average exchange rates for the year. Adjustments resulting from the translation
of the financial statements of our foreign operations into U.S. dollars are
excluded from the determination of net income and are accumulated in a
separate
component of shareholders’ equity. As a result, we include translation
adjustments for these subsidiaries in stockholders’ equity. Our stockholders’
equity includes net cumulative foreign currency translation gains of $422,119
at
December 31, 2006 and $57,554 at December 31, 2005.
Gains
and losses on all other foreign currency transactions, including gains
and
losses attributable to foreign currency forward contracts, are included
in
income statement as our results of operations and were a net gain of $1,977
at
December 31, 2006 and nil in 2005.
22. |
Commitments
and Contingencies
|
The
formulation, manufacturing, processing, packaging, labeling, advertising,
distribution and sale of external use Chinese medicine such as those sold
by the
Company are subject to regulations by one or more federal agencies. The
principal federal agencies include the State Food and Drug Administration
of the
Government of the Peoples Republic of China, the Food and Drug Administration
(the “FDA”), Heilongjiang Provincial Food and Drug Administration of the
People's Republic of China (PFDA), National Biology Products Inspection
Institute (NBPI) and the National Food and Drug Administration (NFDA) of
the
People's Republic of China and, to a lesser extent, the Consumer Product
Safety
Commission. These activities are also regulated by various governmental
agencies
for the countries, states and localities in which the Company’s products are
sold.
Although
management believes that the Company is in material compliance with the
statutes, laws, rules and regulations of every jurisdiction in which it
operates, no assurance can be given that the Company’s compliance with the
applicable statutes, laws, rules and regulations will not be challenged by
governing authorities or private parties, or that such challenges will
not lead
to material adverse effects on the Company’s financial position, results of
operations, or cash flows.
The
Company, like any other distributor or manufacturer of products that are
designed to be ingested, exposes the Company to the inherent risk of product
liability claims in the events of possible injuries caused by the use of
its
products. The Company does not have liability insurance with respect to
product
liability claims; the insurance environment of China is neither sufficient
nor
mature. Inadequate insurance or lack of contractual indemnification from
parties
supplying raw materials or marketing its products, and product liabilities
related to defective products could have material adverse effects on the
Company.
The
Company is not involved in any legal matters arising in the normal course
of
business. While incapable of estimation, in the opinion of the management,
the
individual regulatory and legal matters in which it might involve in the
future
are not expected to have a material adverse effect on the Company’s financial
position, results of operations, or cash flows.
China
Sky One Medical, Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
As
of December 31, 2006
The
amount of US$1,640,015 of restricted cash that was temporarily held by
the China
State Administration of Foreign Exchange as of December 31, 2006 as result
of
the additional regulations were announced in 2006 aimed at further strengthening
China's anti-money laundering efforts. The amount of $744,380 was released
to TDR on January 22, 2007; the rest of amount will be released to TDR
on the
ended of Mach, 2007.
During
the process of preparing the financial statements of China Sky One Medical,
Inc.
(“Registrant” or the “Company”) for the quarter ended March 31, 2007, management
determined that certain significant accounting errors had been made in
prior
quarters. These financial statements have been restated to account for
these
changes.
The
correction of errors included in these financials are:
|
|
Effect
on December 31, 2006 Earnings
|
|
Effect
on prior years earnings
|
|
Cumulative
effect on Retained Earnings
|
|
Capitalization
of research and development costs which should have been charged
to
operations when incurred
|
|
$
|
(1,879,885
|
)
|
$
|
|