Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
x
Annual
Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the
fiscal year ended December 31, 2007.
o Transition
Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
CHINA
SKY ONE MEDICAL, INC.
(Exact
name of Registrant as specified in its Charter)
Nevada
|
|
87-0430322
|
(State
or other Jurisdiction of
Incorporation
or Organization)
|
|
(IRS
Employer
ID
Number)
|
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 Pursuant to Section 12(b) of the Act:
Securities
Registered Pursuant to Section 12(g) of the Act: Common
Stock, par value $.001 per share.
Check
whether the
issuer
is not required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act.
Yes o
No x
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
whether there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is contained herein, and will not 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.
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
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:
The
market value of a Common Stock held by non
affiliates as of March 20, 2008 was $105,464,544.
At
March
20, 2008, 14,852,214
shares
of the registrant’s Common Stock, $0.001 were outstanding.
TABLE
OF CONTENTS
ITEM
NUMBER AND CAPTION
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Page
No.
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PART
I
|
|
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Item
1.
|
Description
of Business
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4
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|
Risk
Factors
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19
|
Item
2.
|
Properties
|
27
|
Item
3.
|
Legal
Proceedings
|
27
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
27
|
|
|
|
PART
II
|
|
|
|
|
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
27
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|
|
|
Item
6.
|
Management’s
Discussion and Analysis or
Plan of Operation and Results of Operations
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29
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|
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Item
73
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Financial
Statements and Supplementary Data
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40
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PART
III
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|
|
|
|
|
|
Changes
In And Disagreements With Accountants On Accounting And Financial
Disclosures
|
40
|
Item 8A(T).
|
Controls
and Procedures
|
|
Item
8B.
|
Other
Information
|
41
|
Item
9.
|
Directors,
Executive Officers and Corporate Governance
|
42
|
Item
10.
|
Executive
Compensation
|
47
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
47
|
Item
12.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
|
Item
13.
|
Exhibits
|
49
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Item
14.
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Principal
Accountant Fees and Services
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50
|
This
Annual Report on Form 10-KSB
(the “Annual Report”) of China Sky One Medical, Inc., a Nevada corporation,
includes forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements, including, but
not
limited to, statements regarding our development, regulatory approval and sale
of new products, the acceptance of these products, our ability to expand sales
in China and throughout the world, our general business disclosure and the
Management Discussion and Analysis, our ability to raise capital if and as
needed, currency exchange rates, business strategy and plans and objectives
of
management for future operations. When used in this Annual Report, the words
“believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”
“expect” and similar expressions are intended to identify forward-looking
statements.
We
have
based these forward-looking statements largely on our current expectations
and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy, short-term
and long-term business operations and objectives, and financial needs. These
forward-looking statements are subject to certain risks and uncertainties that
could cause our actual results to differ materially from those reflected in
the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the risks discussed under the
heading “Risk Factors”. Except as required by law, we assume no obligation to
update these forward-looking statements publicly or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the future.
In
light
of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this Annual Report may not occur and actual results
could differ materially and adversely from those anticipated or implied in
the
forward-looking statements. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements.
All
revenue amounts are stated in U.S. dollars as converted from PRC Yuan (“RMB”) at
recent exchange rates of 7.006 RMB for each dollar, rounded to the nearest
dollar.
PART
I
Item
1. Description of Business.
All
of
our business is conducted through our wholly-owned subsidiary, American
California Pharmaceutical Group, Inc., a California corporation (“ACPG”), which,
in turn, wholly owns Harbin Tian Di Ren Medical Science and Technology Company
(“TDR”) a company organized in the People’s Republic of China (the “PRC” or
“China”), and TDR’s subsidiaries, described below. All references in this Annual
Report to “China Sky One” refers to the parent company, China Sky One Medical,
Inc., a Nevada corporation formerly known as Comet Technologies, Inc. All
references in this Annual Report, unless the context otherwise indicates, to
“the “Company,” “we,” “us,” “our,” and the like, shall mean China Sky One,
combined with ACPG, and its operating and research subsidiary, TDR, and TDR’s
operating subsidiaries on a consolidated basis.
We
are
engaged, through our China based indirect subsidiaries described below, in
the
development, manufacture, marketing and sale of over-the-counter, branded
nutritional supplements and over-the-counter plant and herb based pharmaceutical
and medicinal products. Our principal products are external use
Traditional Chinese Herbal Remedies/ Medicines commonly referred to in the
industry as “TCM.” We have evolved into an integrated manufacturer, marketer and
distributor of external use Chinese medicine products sold primarily in China
and through PRC domestic pharmaceutical chains and have been expanding our
worldwide sales effort as well. We sell both our own manufactured
products, as well as medicinal and pharmaceutical products manufactured by
others in the PRC.
Corporate
History
ACPG,
our
non operating United States holding company subsidiary, 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 Agreement with China Sky One (then known
as
“Comet Technologies, Inc.”) and TDR, described herein. On December 8, 2005, ACPG
completed a stock exchange transaction with TDR and TDR’s subsidiaries (the “TDR
Acquisition”), each of which were fully operating companies. 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 China Sky One. 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. As a result of this 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 PRC based operating 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 PRC. TDR was reorganized and incorporated as
a
limited liability company on December 29, 2000, under the “Corporation Laws and
Regulations” of the PRC. At the time of the TDR Acquisition by ACPG in December
of 2005, TDR had two wholly-owned subsidiaries, Harbin First Bio-Engineering
Company Limited and Kangxi Medical Care Product Factory, until July, 2006,
when
the two were merged, with Harbin First Bio-Engineering Company Limited as the
surviving subsidiary of TDR.
We
have
also recently organized Harbin Tian Qing Biotech Application Company as a
wholly-owned PRC subsidiary of TDR, to conduct research and development in
the
areas of tissue and stem cell banks, which is described in more detail below.
On
February 22, 2008, TDR entered into an Equity Transfer Agreement with
Heilongjiang Tianlong Pharmaceutical, Inc., a corporation organized under the
laws of the PRC (“Heilongjiang”), which is in the business of manufacturing
external-use pharmaceuticals. Our TDR subsidiary previously acquired the Beijing
sales office of Heilongjiang in mid 2006. Pursuant to the Equity Transfer
Agreement, TDR acquired 100% of the issued and outstanding capital stock of
Heilongjiang from Heilongjiang’s sole stockholder in consideration for an
aggregate of approximately (i) $8,000,000 in cash, and (ii) shares of common
stock of the parent company, China Sky One with a dollar value of $300,000.
The
acquisition, which is subject to the our due diligence review of Heilongjiang,
as well as approval by the appropriate regulatory authorities in the PRC, is
expected to close on or before March 31, 2008. While we have not completed
this
acquisition, we have begun oversight of its operations pending completion.
Principal
Products and Markets
We
are
engaged, through TDR and its respective subsidiaries in the PRC, in the
development, manufacture, marketing and sale of over-the-counter, 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 and sales facilities are in the City of Harbin, Heilongjiang
Province and we have sales offices in Beijing.
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. We intend to concentrate many of our efforts during the next several
years on development, production and sales of TCM products and biological test
kits and in particular, tissue and our stem cell research as described more
fully below.
Our
principal operations are in China, where TDR and its subsidiaries have sales
distribution covering most of China and the Hong Kong Special Administration
Region. Our overall revenues in 2007 was $49,318,308, most of which
was from sales in China, of which, export sales for our main countries of
export (in order of revenues during the year ended 2007) were as follows:
Export
Country
|
|
2007
Revenues
|
|
Malaysia
|
|
|
93,016,227
RMB
|
|
United
Kingdom
|
|
|
540,364
RMB
|
|
Hong
Kong
|
|
|
319,064
RMB,
|
|
United
Arab Emirates
|
|
|
46,215
RMB
|
|
United
States
|
|
|
45,884
RMB
|
|
Russia
|
|
|
20,160
RMB
|
|
Sweden
|
|
|
4,458
RMB
|
|
Ireland
|
|
|
3,346
RMB
|
|
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, we hope to develop a number of
additional products that we will be able to manufacture and market both in
the
PRC and in other countries.
Below
is
a chart depicting the corporate organization of the Company and all related
subsidiaries.
SFDA
Licenses
The
State
Food and Drug Administration of the government of Heilongjiang, China (“SFDA”)
issues the licenses and petitions for permission to manufacture and market
pharmaceutical products in the PRC. Our licenses relate primarily to
medical machine producing licenses which are needed mainly for topical products,
ointments and external test kits. TCM products also require a permit for sales,
which permits are generally granted on a non-exclusive basis for four to five
years depending on the TCM. TDR has been granted 11 product licenses and
permits, inclusive of our recently approved Cardiac Arrest Early Examination
and
kidney disease testing kits, which have allowed TDR to commercialize a total
of
38 products. TDR is undertaking efforts to develop a series of 8 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.
Our
TDR Owns the Following Subsidiaries in China
Harbin
Bio-Engineering; Enzyme Immunity and Colloid Gold Production
Harbin
First Bio-Engineering Company Limited (often referred to herein as “Harbin
Bio-Engineering”), was formed in Heilongjiang Province, in the PRC by TDR as its
wholly owned subsidiary, on September 26, 2003 with an authorized capital of
$241,546 (RMB 2 million). Harbin Bio-Engineering focuses on research and
development of the use of natural medicinal plants and biological technology
products, such as Endothelin-1. Harbin Bio-Engineering is one of the first
companies in Heilongjiang Province conducting research and development of high
technology biological products. Harbin Bio-Engineering has two production
lines: an enzyme immunity reagent kit production line, and a colloid gold
production line. Harbin Bio-Engineering officially put its facility into
production on July 21, 2006.
Kangxi
Medical; Topical Applications
Kangxi
Medical Care Product Factory (referred to herein as “Kangxi Medical”) 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 Medical
manufactures and sells branded external use Chinese medicine and other natural
products under the registered trademark “Kangxi.” Our Kangxi Medical
division has four production lines: spray, ointment and cream, powder, and
patch. In July 2006 Kangxi Medical was merged into Harbin Bio-Engineering
with Harbin Bio-Engineering as the surviving subsidiary of TDR.
Harbin
Tian Qing Biotech Application Company; Research and
Development
We
have
also recently organized Harbin Tian Qing Biotech Application Company as a
wholly-owned PRC subsidiary of TDR, to conduct research and development in
the
areas of tissue and stem cell banks, which is described in more detail below.
(See “Research and Development” below.)
Heilongjiang
Pharmaceuticals; External Use Pharmaceuticals
On
February 22, 2008, our TDR subsidiary entered into an Equity Transfer Agreement
with Heilongjiang Tianlong Pharmaceutical, Inc., a corporation organized under
the laws of the PRC (referred to herein as “Heilongjiang Pharmaceuticals”),
which is in the business of manufacturing external-use pharmaceuticals. TDR
previously, in 2006, acquired the Beijing office of this company. Additional
information about the terms of this acquisition and the business of Heilongjiang
Pharmaceuticals is contained in “Recent Developments” below. No assurance can be
made that we will complete this acquisition.
Product
Line
We
manufacture over thirty-eight (38) branded products, which management believes
enables us 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 our indirect subsidiaries’
facilities located in Harbin City, China. Additionally, 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). We sell these products in four main
different forms, including, without limitation, sprays, ointments and creams,
powders, and
patches. A description of our main product lines follows.
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, believed to regulate and restrain the
excessive secretion of certain hormones, while promoting others. The Sumei
Slim
Patch is also 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 skin disease that is difficult to treat. Our research scientists have
focused their efforts in finding treatments for this disease. Yin Ke
Psoriasis Spray is a spray that contains Chinese herbal ingredients that are
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 viruses in a tumors or warts.
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 topically to the affected 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.
Testing
Kits Approved and Brought to Market in 2007
Cardiac
Arrest Early Examination Kit
This
product is used for early stage diagnosis of myocardial infarction (heart
attacks). We completed SFDA clinical testing of the Cardiac Arrest Early
Examination Kit and began sales of this product in 2007. This kit is patented
in
PRC.
Kidney
Disease Testing Kit
The
Urinate
Micro Albumin Examination Testing Kit is used in connection with early stage
diagnosis for primary kidney disease, hypertension and diabetes. We completed
SFDA clinical testing for the Urinate Micro Albumin Examination Testing Kit
and
commenced sales of this product in 2007. This kit is patented in
PRC.
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.
Historically
we have sold only products that we manufactured. However, during the 2007 fiscal
year, we 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 2007 from products manufactured by other companies under exclusive
sales arrangements totaled approximately $12,998,000 or approximately 26% of
total sales in the year ended December 31, 2007, as compared to $6,383,000,
for
the year ended December 31, 2006. We market and sell these products
through our existing distribution channels to our customers throughout the
world
and primarily in China. We intend to expand our product line
under sales and manufacturing contracts with third-party manufacturers with
a
goal of increasing sales revenue from current and new pharmaceutical and
medicinal products manufactured by other companies.
Revenues
by General Product Lines
Management
believes that the most accurate benchmark of revenue breakdown is based on
the
method of application as different applications have different sales channels.
Below is a breakdown of revenues for 2007 based on application and application
usage.
Revenues
based on Application Category
Our
revenues during 2007 were $49,318,308.
The following table sets forth our principal product categories based on
application type and the approximate amount and percentage of revenue from
each
of such product categories, during the fiscal year ended December 31,
2007:
|
|
Revenue
in 2007
|
|
Product
Category
|
|
Approx.
Amount
(U.S.$)
|
|
Approx.
%
of Revenue
|
|
Sprays
|
|
$
|
|
|
|
18
|
%
|
Patches
|
|
|
1,402,736
|
|
|
3
|
%
|
Ointments
|
|
|
|
|
|
7
|
%
|
Liquids,
Creams and Powders
|
|
|
1,704,979
|
|
|
3
|
%
|
Miscellaneous
Health and Beauty and Products Manufactured by others (43
items)
|
|
|
34,198,773
|
|
|
69 |
% |
|
|
|
|
|
|
|
|
Total
Gross Sales From
Above Categories
|
|
$
|
|
|
|
100
|
%
|
Research
and Development
We
currently conduct all of our research and development (“R&D”) activities,
either internally or through collaborative arrangements with universities and
research institutions in the PRC. We have our own research,
development and laboratory facilities located at TRD’s principal headquarters in
the city of Harbin, Heilongjiang Province. We have also recently
organized Harbin Tian Qing Biotech Application Company (“Harbin Biotech”) as a
wholly-owned PRC subsidiary of TDR, to conduct research and development in
the
areas of tissue and stem cell banks, which is described in more detail below.
In all, our internal R&D team currently consists of
approximately 35 people, of which 25 are full time researchers and
10 are
part
time technical experts. Many of our team members are professors affiliated
with
universities in the PRC.
Additionally,
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. Under our
partnership arrangements with other universities and research institutions,
we
will generally hold the intellectual property rights to any developed
technology. As a result of one of these collaborations with Harbin
Medical University, a product known as “Endothelin-1” is currently under
development as a cancer suppressing product. Additional information relating
to
this product and other products being developed is set forth under “Products
Under Development” below and under the general product descriptions throughout
this Annual Report.
During
the year ended December 31, 2007 we invested $3,158,351 in our own internal
R&D with approximately $2,707,679 (18,970,000 RMB) (unaudited) invested by
our R&D partners. Our R&D investment in 2006 was $2,026,788.
Additional information about our R&D investments is included in the
financial statements to this Annual Report (and notes thereto) and our
“Management Discussion and Analysis on Financial Condition and Results of
Operations” section below.
Products
Under 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 - Examination and Diagnosis Kits
We
currently have various biological products under development at various stages
of clinical testing and development. The development of some of these
products
are
expected to be completed as early as 2008 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)
|
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.
|
New
Products
We
are
currently conducting toxicology experiments, quality standard measurement and
other experimentation for our products under development. It is estimated
that the experimental time takes about another seven to eight months for each
product. We also hope to commence with clinical testing of 8 testing kit
products in 2008 for: Uterine cancer, cervical cancer, ovulatory cancer, liver
cancer, breast cancer and neisseria gonorrhea. 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 Endothelin-1
One
of
our various products under development is Endothelin-1. As of the date of this
Annual Report, we have completed oxicology and teratogenicity testing, and
have
established quality standards, and further developments are underway to improve
the product quality of Endothelin-1. 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. At such time as development
and clinical testing is successfully completed, we will commence efforts to
market Endothelin-1 in the PRC and where legal, 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 (or other foreign drug
regulatory authority approval where we may wish to market this drug) of the
product, will be successful. We hope to develop Endothelin-1 as a cancer
treatment drug that works by “starving” cancer cells by restricting the
generation of blood vessels around cancer lesions, thereby inhibiting, to a
degree, the source of nutrients upon which the cancer cells survive.
Endothelin-1 has been recognized by the PRC medical industry as a “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 for Endothelin-1. We expect that research and development
and testing will be completed for manufacturing in 2009. To date we have
expensed over approximately $2,278,047 (15,690,000 RMB) (unaudited) on research
and development for Endothelin-1.
Research
and Development for Cord Blood Stem Cell Bank
In
2006,
we 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. We are now in the process of perfecting our cultivation methods
and freezing/storage of stem cells. It is expected that these efforts will
continue over the next two years or more in particular in the research and
development of technology, applications and methodology for the establishment
of
a cord blood stem cell bank. We have recently organized Harbin Tian Qing
Biotech Application Company (referred to herein as “Harbin Biotech”) as a
wholly-owned subsidiary, to conduct research and development in the areas of
tissue and stem cell banks. This project will involve substantial
expense and involve numerous risks. We entered into a development
agreement with the Heilongjiang Provincial Red Cross out-patient department
for
purposes of defraying the costs of developing and marketing this product and
are
seeking additional R&D partners with laboratories having substantial
experience in this area for this purpose as well.
Exclusive
Regional License for Stem Cell Research
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, we 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,
our
application was approved on October 16, 2006, granting us, through our
subsidiary, the exclusive right and license to become engaged in tissue and
stem
cell bank activities in the Heilongjiang Province of the PRC, through December
2010 and currently intend to renew this license from time to time as
necessary.
The
Company organized Harbin Biotech to conduct these business operations, as
required by Heilongjiang Province. 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.
Our
Stem Cell Research
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. While we are not aware
of a method to calculate the size of the stem cell market, management believes
that the market for this business in PRC and elsewhere is potentially very
large. 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.
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, our Harbin Biotech subsidiary will have the exclusive
right and license to establish a research and development business in this
area
in northeast China through 2010.
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.
This
project is a substantial commitment by the Company, and consequently involves
a
number of significant risks, including, without limitation:
|
·
|
our
need to raise substantial additional capital to fund our stem cell
R&D
project over the next two or more years, through borrowings, the
sale of
equity or from income from operations, which, if not obtained on
a timely
basis, the could severely compromise this project and our rights,
|
|
·
|
our
continued compliance with laws and requirements of the PRC and reliance
on
a license from the PRC government to engage in these research and
business
operations in northeast China on an exclusive basis,
|
|
· |
the developing nature of stem cell banking and research,
and numerous technical and development challenges, including issues
pertaining to the long-term viability of cryogenically frozen cord
blood,
and |
|
·
|
our
reliance on the efforts of management, in particular Liu Yan-Qing,
our
President to continue to manage our stem sell research.
|
There
can
be no assurance we will be successful in obtaining capital when needed, or
on
favorable terms or that 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.
While
we
do not expect that our research and development in this area will have a
negative impact on our current core business - the manufacture, marketing and
sale of nutritional and medicinal products - the development of this business
will require substantial managerial, technical and financial resources.
During
the 2007 fiscal year, the Company had capital expenditures of over $10,671,398
(74,763,814RMB) on equipment and construction; $3,427,979 (24,016,420 RMB)
on
R&D and $256,922 (1,800,000RMB) on initiating and continuing the stem cell
bank program as well as additional costs in previous periods on equipment,
construction and R&D as described in this Annual Report.
Sales
Approach
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, while
our primary initial growth focus remains mainland PRC, we have also established
over 20 international agents to sell our products, and are expanding our
overseas sales efforts.
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 as listed above. Approximately 75% of
our
revenues in 2007 were from the sale of products in China and Hong Kong with
Malaysia marking our largest country of export.
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
943
customers, not including branches of retail and drug supply chains. Only two
customers accounted for more than 5%
of our
total revenues in 2007.
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. Under a typical arrangement we expect to 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").
We
also
export a number of its products to various countries, including Malaysia, United
Arab Emirates, United Kingdom, Hong Kong, the United States, and others, and
utilize 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.
Some of these competitors are far larger, have more resources then us and
have stronger sales and distribution networks.
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 both from existing competitors
and new market entrants. We will also face competition from foreign
companies who may have established products, a strong proprietary pipeline
and
strong financial resources. Our management believes that we have
certain competitive advantages in introducing new products to market due to
key
focus areas for development, 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 in the Heilongjiang
Province of China. 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 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.
We
also
have a sales office in Beijing, which TDR acquired in December of 2006, when
it
completed the acquisition of the products, dealership and marketing network
of
Heilongjiang. We have recently entered into an agreement to acquire the
remaining interests of Heilongjiang. (See “Corporate History” above and “Recent
Developments” and “Management’s Discussion and Analysis or Plan of Operation”
below).
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. Our business is subject to
various regulations and permit systems of the government of the PRC.
Additionally, we are subject to government licensing rights and regulations,
which relating to our stem cell R&D license. Permits we attain for TCM
products are granted on a non-exclusive basis and one limited for four to five
years.
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
we and our 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, and also limits
our
ability to pay dividends.
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
continue to 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 which lasts for up to 20 years for
traditional medicines depending on the type of patent, and is renewable for
indefinite number of times. Patents for arts and crafts and packaging have
10
year patent protection periods which are also renewable. 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 6 patents and one patent application (Endothelin-1) in the PRC,
pertaining to our TCMs and biotech diagnostic kits and drugs, as
follows:
|
·
|
Package
foil bag design patent of Sumei slim patch, registered December 4,
2001;
|
|
·
|
Package
box design patent for all TCM products, registered December 4,
2001;
|
|
·
|
Arts
and crafts patent of Human Urinary Albumin Elisa Kit, registered
August
24, 2004;
|
|
·
|
Arts
and crafts patent of Sumei slim patch, registered in
2001;
|
|
·
|
Arts
and crafts design patent of myocardial infarction testing kit, registered
March 16, 2004;
|
|
·
|
Arts
and crafts patent of Suning cough removing patch, initially registered
December 4, 2001; and
|
|
·
|
Endothelin-1
patent relating to anti-tumor technology (application for public
instruction made), registered October 4, 2006;
|
We
have
received awards and grants from the government of the PRC for R&D in 2007
for the below listed products, resulting in a total amount of $2,141,022
(15,000,000 RMB) of which $42,492 (300,000 RMB) has been paid with the remaining
amount anticipated to be available to us in 2008:
|
·
|
High
Technology products certificates by Heilongjiang High Technology
Products
Committee covering the following
products:
|
|
|
Gonorrhea
Cleaning Spray;
|
|
|
Suning
Cough removing patch; and
|
|
·
|
National
Class Torch Project (pertaining to the Sumei slim
patch);
|
|
·
|
Excellence
Products Award for Human Urinary Albumin Elisa Kit by The 6th New
&
High Technology Fruits Fair Shen Zhen and National Commercial
Department;
|
|
·
|
100
important pre-phase projects in Heilongjiang Province covering various
medical diagnostics kits;
|
|
·
|
Material
Medical Technology Research and Development Company (by Heilongjiang
provincial Science and Technology Bureau);
and
|
|
·
|
High
Technology Industrialized Base of Medical Area, by Heilongjiang Provincial
Development and Reform Committee (March of
2006).
|
Trademarks
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 1,443 full time
employees and manufacturers’ representatives, generally falling into the
following categories:
By
subsidiary company:
Company |
|
|
Number
of
Employees
|
|
TDR
(includes Harbin Biotech)
|
|
|
1,269*
|
|
Harbin
Bio-Engineering
|
|
|
174
|
|
TOTAL:
|
|
|
1,443
|
|
By
nature
of job (TDR and Harbin Bio-Engineering combined):
Type
of Job
|
|
|
Number
of Employees
|
|
Executives
and Managers
|
|
|
26
|
|
Production
and clerical
|
|
|
170
|
|
Sales
and Marketing
|
|
|
1,222
|
|
Research
and Development, Technology
|
|
|
25
|
|
TOTAL:
|
|
|
1,443
|
|
*
Includes manufacturers’ representatives.
**
Does
not include 10 part time technical researchers.
We
do not
have employment agreements in place with our executive management. None of
the employees are covered by a collective bargaining agreement, however, we
believe our relationship with employees is good.
Recent
Developments
On
January 31, 2008 China Sky One entered into a Securities Purchase Agreement
with
certain accredited investors, for the purchase and sale of 2,500,000 units
of
securities at $10.00 per unit, pursuant to which we sold an aggregate of
(i) 2,500,000 shares of common stock, and (ii) Class A Warrants to purchase
750,000 additional shares of common stock, at an exercise price of $12.50 per
share, for an aggregate purchase price prior to expenses and fees of
$25,000,000. Holders of the 2,500,000 shares of common stock sold in this
offering have certain put rights and rights to receive additional shares from
certain key shareholders in the event that certain thresholds are not met.
Additional information relating to the securities sold in this offering and
to
the put or make whole rights of the investors may be found in the Risk Factors
of this Annual Report, in the section under the caption “Item 5. Market for
Common Equity and Related Stockholder Matters” and in the section titled “Item
6.
Management’s Discussion and Analysis or
Plan
of Operation” and other sections below and are incorporated by
reference.
As
of
February 22, 2008, the board of directors of China Sky One authorized an
increase in the number of directors on the Board from three (3) to seven (7),
and appointed Song Chun Fan, Jiang Qi Feng, Zhao Jie and Qian Xu Feng to fill
the vacancies created as a result of such increase, to serve until such time
as
their successors shall be duly elected, unless they resign, are removed from
office, or are otherwise disqualified from serving as directors of the
Corporation. The biographies of Song Chun Fan, Jiang Qi Feng, Zhao Jie and
Qian
Xu Feng as well as additional information relating to these committees is also
provided below in the section captioned “Item 9. Directors, Executive Officers
and Corporate Governance”.
On
February 22, 2008, TDR entered into an Equity Transfer Agreement with
Heilongjiang Tianlong Pharmaceutical, Inc., a corporation organized under the
laws of the PRC (“Heilongjiang”), which is in the business of manufacturing
external-use pharmaceuticals. Our TDR subsidiary previously acquired the Beijing
sales office of Heilongjiang in mid 2006. Pursuant to the Equity Transfer
Agreement, TDR acquired 100% of the issued and outstanding capital stock of
Heilongjiang from Heilongjiang’s sole stockholder in consideration for an
aggregate of approximately (i) $8,000,000 in cash, and (ii) shares of common
stock of the parent company, China Sky One with a dollar value of $300,000.
The
acquisition, which is subject to the our due diligence review of Heilongjiang,
as well as approval by the appropriate regulatory authorities in the PRC, is
expected to close on or before March 31, 2008. While we have not completed
this
acquisition, we have begun oversight of its operations pending completion.
Our
business and financial condition is subject to numerous and substantial risks
including, without limitation, risks relating to our forward looking statements.
A description of theses forward looking statements is contained in the forepart
of this Annual Report and incorporated by reference herein. These risks include
those set forth below and elsewhere in this Annual Report. 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, ACGP which in turn, owns all of the issued and
outstanding shares of registered capital of TDR.
BUSINESS
RISKS
Certain
officers and directors have significant control over our company, and we do
not
have employment agreements with them.
Dr.
Liu
Yan-qing and Ms. Han Xiao-yan, who are officers and directors of China Sky
One,
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 transactions in which they have an
interest other than as a shareholder of the Company, the approval of significant
corporate transactions such as increasing the authorized number of our shares
to
complete acquisitions or raise capital, if necessary, and any other transactions
requiring a majority vote without seeking other shareholders’ approval. These
persons also have the ability to control other matters requiring shareholder
approval including our election of directors which could result in the
entrenchment of management.
Additionally,
we do not have employment agreements with such management. Accordingly, if
any
of these persons should leave the Company we would have no remedy or protections
in place and would not be able to prevent them from competing with us or working
for competitors.
Our
expansion plan may not 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, product liability concerns, shipping and delivery costs,
costs associated with marketing efforts abroad and maintaining attractive
foreign exchange ratios. Moreover, our 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. We cannot, therefore, assure shareholders
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.
There
are many safety risks involved in our products and services that could expose
us
to liability or inhibit our ability to secure
insurance.
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. In the event that any of our products are alleged to have adverse
side
effects, we could be subject to product liability claims. In addition to the
threat of liability, there may be insurance costs if we enter into certain
markets or may not be able to obtain insurance for certain products in some
countries. Some distributors may refuse to sell our products in certain
countries if they perceive such products to have a high risk or to be
uninsurable.
We
are highly dependent upon the public perception and quality of our
products.
Additionally, anti-corruption measures taken by the government to correct
corruptive practices in the pharmaceutical industry could adversely affect
our
sales and reputation.
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.
The
government has recently taken anti-corruption measures to correct corrupt
practices. In the pharmaceutical industry, such practices include, among others,
acceptance of kickbacks, bribery or other illegal gains or benefits by the
hospitals and medical practitioners from pharmaceutical distributors in
connection with the prescription of a certain drug. Substantially all of our
sales to our ultimate customers are conducted through third-party distributors.
We have no control over our third-party distributors, who may engage in corrupt
practices to promote our products. While we maintain strict anti-corruption
policies applicable to our internal sales force and third-party distributors,
these policies may not be effective. If any of our third-party distributors
engage in such practices and the government takes enforcement action, our
products may be seized and our own practices, and involvement in the
distributors’ practices may be investigated. If this occurs, our sales and
reputation may be materially and adversely affected.
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.
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 we are, 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.
We
may not be able to obtain sufficient financing, and may not be able to develop
our product candidates.
We
may
need to incur debt or issue equity in order to fund research and
other expenditures as well as to make acquisitions and other investments.
We cannot assure you that debt or equity financing will be available to us
on
acceptable terms or at all. If we cannot or are limited in the ability to incur
debt, issue equity or enter in strategic collaborations, we may be unable to
fund discovery and development of our product candidates, address gaps in our
product offerings or improve our technologies.
We
anticipate that we will need to raise substantial amounts of money to fund
a
variety of future activities integral to the development of our business, which
may include but are not limited to the following:
|
|
obtaining
regulatory approval for our products and conducting research and
development to successfully develop our stem cell and other
technologies,
|
|
|
filing
and prosecuting patent applications and defending and assessing patents
to
protect our technologies,
|
|
|
retaining
qualified employees, particularly in light of intense competition
for
qualified scientists,
|
|
|
manufacturing
products ourselves or through third
parties,
|
|
|
marketing
our products, either through building our own sales and distribution
capabilities or relying on third parties, and
|
|
|
acquiring
new technologies, licenses or
products.
|
We
cannot
assure you that any needed financing will be available to us on acceptable
terms
or at all. If we cannot obtain additional financing in the future, our
operations may be restricted and we may ultimately be unable to continue to
develop and potentially commercialize our product candidates.
We
are subject to market and channel risks.
Over
75%
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 our PRC based 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
may have difficulty in defending intellectual property rights from
infringement.
Our
TCM
products are generally not protected by patents but by trade secrets. Certain
TCM license agreements are made on a non-exclusive basis. 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 fail to
protect our intellectual property adequately, competitors may manufacture and
market similar products. We continually 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.
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, were 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.
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 and will require substantial additional capital. We
will need to continue to improve financial controls, operating procedures,
and
management information systems if and as we grow. 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.
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.
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.
The
manufacture and sale of pharmaceutical products in China is heavily regulated
by
many state, provincial and local authorities. The State Food and Drug
Administration of China requires pharmaceutical manufacturers to obtain Good
Manufacturing Practices, or GMP, certifications. We currently have the
certifications needed for our current operations. However, should we fail to
receive or maintain the GMP certifications in the future, we would no longer
be
able to manufacture pharmaceuticals in China, and our businesses would be
materially and adversely affected. These regulations significantly increase
the
difficulty and costs involved in obtaining and maintaining regulatory approvals
for marketing new and existing products. Our future growth and profitability
depend to a large extent on our ability to obtain regulatory approvals.
Additionally, the law could change so as to prohibit the use of certain
pharmaceuticals. If one of our products becomes prohibited, this change would
cease the productivity of that product. The China National Development and
Reform Commission, or CNDRC, has recently implemented price adjustments on
many
marketed pharmaceutical products. We have no control over such governmental
policies, which may impact the pricing and profitability of our products.
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.
Certain
political and economic considerations relating to China could adversely affect
our company.
China
is
transitioning from a planned economy to a market economy. While the PRC
government has pursued economic reforms since its adoption of the open-door
policy in 1978, a large portion of the Chinese 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 China’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, 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.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
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 under heavy regulation and scrutiny. 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.
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 75% 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.
Currency
conversion and exchange rate volatility could adversely affect our financial
condition, by making acquisitions in China or of Chinese products ore
expensive.
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.
These rules are subject to change.
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. Currently, exchange rates are
approximately RMB 7.006 to US$1.00 resulting in the increase in price of Chinese
products to U.S purchasers. 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.
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.
We are not likely to declare dividends in the near
future.
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.
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
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 for
the
subject to PRC law, 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.
Sales
of our common stock may have an adverse effect on the market price of our common
stock. Additionally, we may issue shares upon exercise of outstanding warrants
that are exercisable at prices that are below current market prices which will
be dilutive to the common stock.
As
of
March 20, 2008, there were 14,852,214 shares of common stock outstanding, which
includes 2,500,000 shares of our common stock we sold in January 2008
private offering, many of which will become freely transferable under Rule
144
in July 2008. Moreover we are required to register 2,500,000 shares and (among
other securities) 750,000 shares underlying warrants exercisable at various
exercise prices in a registration statement. The sale of these shares may have
an adverse effect on the market price for our common stock.
The
exercise of options and warrants at prices below market price of our common
stock could adversely affect the price of our common stock and on our ability
to
obtain future private or public financings. Additional dilution may result
from
the issuance of shares of our capital stock in connection with outstanding
warrants or shares issued in connection with financing or other share for
service arrangements.
Specifically,
the following shares underlying warrants are outstanding which include:
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100,000
shares of common stock issuable upon exercise of warrants at $3.00
per
share, issued to American
Eastern Securities, Inc. and its assigns, and expiring on March 31,
2008,
as
partial consideration for acting as placement agent in connection
with the
foregoing offering in October of 2006 and if these warrants are fully
exercised
(which we have been informally advised will occur),
warrants to purchase an additional 50,000 shares of common stock
will be
issued to American Eastern Securities, Inc. (and its assigns), exercisable
at $3.50 per share and expiring on October 10,
2008,
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1,500,000
shares of common stock issuable upon exercise of warrants at $2.00
per
share, issued to American
Eastern Group, Inc.
as
partial consideration for consulting and investment banking services,
and
to various other advisors in connection with our reverse merger in
October
2006, all of which expire July 31, 2009,
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·
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239,165
shares of common stock issuable upon exercise of remaining warrants
at
$3.50 per share (originally, 500,000 warrants, many of which have
been
exercised), expiring October 10, 2008, issued to certain investors
in our
private offering of securities in October of 2006,
and
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·
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Class
A Warrants to purchase 750,000 additional shares of common stock,
at an
exercise price of $12.50 per share, issued to investors in connection
with
our private offering in January 2008, exercisable between July 31,
2008
and July 31, 2011.
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The
Company is required to register for re-sale all of the common stock issued
in
our January 2008 offering as well as all shares otherwise issuable upon exercise
of certain of the above warrants. If a registration statement is not deemed
effective many of the foregoing warrants will become exercisable via cashless
exercise.
Certain
Protective Provisions Relating to 2,500,000 shares issued in our January 2008
private offering may have an adverse effect on the price of our common stock.
In
addition to the above mentioned registration rights, holders of the 2,500,000
shares of common stock sold in our recently completed private offering (January
2008) have certain put rights and rights to receive additional shares from
certain key shareholders in the event that certain earnings thresholds are
not
met. Specifically, these investors have:
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The
right to receive additional shares from us in the event that we issue
shares (or convertible securities or warrants convertible into or
exercisable for common stock) prior to January 31, 2009 at per share
price
(or conversion or exercise price) of less than $10.00, in such amount
so
as to reduce the average price paid by such shareholder to the price
per
share being paid by the new investors,
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The
right to receive up to 3,000,000 shares deposited into escrow by
our
principal shareholder, in the event that the Company fails to attain
Earnings Per Share, as adjusted of at least (i) $1.05 per share for
fiscal
year ended December 31, 2007 based on fully diluted shares outstanding
before the January 2008 offering (an aggregate of 13,907,696), and/or
(ii)
$1.75 per share for fiscal year ending December 31, 2008 based on
fully
diluted shares outstanding after the January 2008 Offering (an aggregate
of 16,907,696 shares). While the Company has satisfied the criterion
of
(i) above for 2007, no assurance can be made that we will satisfy
our
earnings goal next year.
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The
occurrence of either of the above would result in the issuance of additional
shares to these investors and would have a material adverse effect on the market
price or liquidity of our common stock.
Item
2. Properties.
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” above, the provisions of which
are incorporated herein). 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.
Additional
details of these facilities is contained in the “Production and other
Facilities” subsection of “Item 1. Description of Business,” above, the
provisions of which are incorporated by reference herein.
Item
3. Legal Proceedings.
We
are
not a party to any material pending legal proceedings, and to the best of our
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, 2007, there were no matters submitted to a vote
of our stockholders.
PART
II
ITEM
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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.
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Year
Ended December 31, 2007
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Year
Ended December 31, 2006
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High
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Low
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High
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Low
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1st
Quarter
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$
|
10.00
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$
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7.00
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$
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5.50
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$
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1.81
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2nd
Quarter
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$
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14.20
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$
|
6.00
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$
|
3.50
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|
$
|
3.50
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3rd
Quarter
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$
|
14.35
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$
|
10.00
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$
|
7.55
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$
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3.40
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4th
Quarter
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$
|
15.50
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$
|
9.00
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$
|
8.50
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$
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4.25
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As
of
March 26, 2008, the closing bid price for our Common Stock was $10.20.
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
20, 2008, there were approximately 431 holders of record of the Company's Common
Stock, with 14,852,214 shares outstanding.
Sales
of Unregistered Securities
On
January 31, 2008 China Sky One entered into a Securities Purchase Agreement
(the
“Purchase Agreement”) with certain accredited investors, for the purchase and
sale of units consisting of: (i) one (1) share of the Company’s common stock,
$.001 par value per share (“Common Stock”); and (ii) 750,000 Class A Warrants
exercisable at $12.50 per share, and expiring on July 31, 2011 (the “Class A
Warrants”), for a purchase price of $10.00 per Unit (the “January 2008
Offering”), and gross offering proceeds of $25,000,000.
Holders
of the 2,500,000 shares of common stock sold in our January 2008 Offering have
certain put rights and rights to receive additional shares from certain key
shareholders in the event that certain thresholds are not met in addition to
registration rights. Specifically, these investors have:
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The
right to receive additional shares from China Sky One in the vent
that we
sell shares (or convertible securities or warrants convertible into
or
exercisable for common stock) prior to January 31, 2009 at per share
price
(or exercise or conversion price) of less than $10.00, in such amount
so
as to reduce the average price paid by such shareholder to the price
per
share being paid by the new investors,
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The
right to receive up to 3,000,000 shares deposited into escrow by
our
principal shareholder, in the event that the Company fails to attain
Earnings Per Share, as adjusted (“Adjusted EPS”) of at least (i) $1.05 per
share for fiscal year ended December 31, 2007 based on fully diluted
shares outstanding before the January 2008 offering (an aggregate
of
13,907,696), and/or (ii) $1.75 per share for fiscal year ending December
31, 2008 based on fully diluted shares outstanding after the January
2008
Offering (an aggregate of 16,907,696 shares). While the Company has
satisfied the criterion of (i) above for 2007, no assurance can be
made
that we will satisfy our earnings goal next year.
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The
Class
A Warrants represent the right to purchase an aggregate of 750,000 shares of
Common Stock, at an exercise price of $12.50 per share, and have the following
additional characteristics:
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·
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The
Class A Warrants are exercisable beginning on the six-month anniversary
of
the closing of the January 2008 Offering and will expire July 31,
2011.
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Commencing
on one-year anniversary of the Closing Date, in the event the Warrant
Shares may not be freely sold by the holders of the Class A
Warrants due to the Company’s failure to satisfy its registration
requirements, and an exemption for such sale is not otherwise available
to
the Warrant-holders under Rule 144, the Class A Warrants will be
exercisable on a cashless basis.
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·
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The
Exercise Price and number of Warrant Shares will be subject to adjustment
for standard dilutive events, including the issuance of Common Stock,
or
securities convertible into or exercisable for shares of Common Stock,
at
a price per share, or conversion or exercise price per share less
than the
Class A Warrant exercise price of $12.50 per
share.
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At
anytime following the date a Registration Statement covering the
Warrant
Shares is declared effective, we will have the ability to call the
Class A
Warrants at a price of $0.01 per Class A Warrant, upon thirty (30)
days
prior written notice to the holders of the Class A Warrants, provided
(i)
the closing price of the Common Stock exceeded $18.75 for each of
the ten
(10) consecutive trading days immediately preceding the date that
the call
notice is given by the Company, and (ii) the Company has attained
an
Adjusted EPS of at least $1.75 per share for the fiscal year ending
December 31, 2008, as set forth in our audited financial statements
of the
Company.
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If,
among other things, we fail to cause a Registration Statement covering
the
Warrant Shares to be declared effective prior to the applicable dates
set
forth in the Registration Rights Agreement, the expiration date of
the
Class A Warrants shall be extended one day for each day beyond the
Effectiveness Deadlines.
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If
a Warrant-holder exercises its Put Right under the Put Agreement
(defined
in Item 1.01 above), such Warrant-holder’s right to exercise the Class A
Warrants shall be suspended, pending the satisfaction of our obligations
to pay the Warrant-holder the applicable Repurchase Price. Upon receipt
of
the Repurchase Price in full by the Warrant-holder, the Warrant-holder’s
right to exercise the Class A Warrants shall automatically and permanently
terminate and expire, and the Class A Warrants shall be immediately
cancelled on the books of the
Company.
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Item 6.
Management’s Discussion and Analysis or
Plan of Operation.
FORWARD
LOOKING STATEMENTS
The
following discussion should be read in conjunction with the information
contained in the consolidated financial statements of the Company and the notes
thereto appearing elsewhere herein and in the risk factors and “Forward Looking
Statements” summary set forth in the forepart of this Annual Report as well as
the “Risk Factors” section above and are afforded the safe harbor provisions of
Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended. Readers should carefully review the risk
factors disclosed in this Annual Report and other documents filed by us with
the
SEC.
DISCUSSION
We
primarily generate revenues and income and generate cash from sales by our
PRC
based subsidiaries, of products in the areas of external-Chinese medicine and
over-the counter non-prescription health care products in the PRC. Our
principal products include spray, ointment, powder, patch, cream, and
miscellaneous health and beauty products. Our principal products are categorized
as external use Traditional Chinese Herbal Remedies/ Medicines commonly referred
to in the industry as “TCM.” We have evolved into an integrated manufacturer,
marketer and distributor of external use Chinese medicine products sold
primarily in China and through PRC domestic pharmaceutical chains and have
been
expanding our worldwide sales effort as well. We sell both our own
manufactured products, as well as medicinal and pharmaceutical products
manufactured by others in the PRC.
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, 2007, total
revenue was $49,318,308, a 148% increased over 2006, and 2007 net income
was $15,332,945,
or $1.15 per share on a diluted basis compared to net income of $624,415, or
$0.05 per share on a diluted basis in 2006.
All
of
our business is conducted through our wholly-owned subsidiary, ACPG which,
in
turn, wholly owns Harbin Tian Di Ren Medical Science and Technology Company
(referred to herein as “TDR”) a company organized in the PRC and TDR’s
subsidiaries, described above and below.
On
May
11, 2006, ACPG entered into a Stock Exchange Agreement (the “Exchange
Agreement”) with the shareholders of China Sky One (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. As
a
result of this 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 PRC operating subsidiary,
TDR.
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 PRC. TDR was reorganized and incorporated as
a
limited liability company on December 29, 2000, under the “Corporation Laws and
Regulations” of the PRC. At the time of the TDR Acquisition by ACPG in December
of 2005, TDR had two wholly-owned subsidiaries, Harbin First Bio-Engineering
Company Limited and Kangxi Medical Care Product Factory, until July, 2006,
when
the two were merged, with Harbin First Bio-Engineering Company Limited as the
surviving subsidiary of TDR.
We
have
also recently organized Harbin Tian Qing Biotech Application Company as a
wholly-owned PRC subsidiary of TDR, to conduct research and development in
the
areas of tissue and stem cell banks, which is described in more detail below.
On
February 22, 2008, TDR entered into an Equity Transfer Agreement with
Heilongjiang Tianlong Pharmaceutical, Inc., a corporation organized under the
laws of the PRC (“Heilongjiang”), which is in the business of manufacturing
external-use pharmaceuticals. Our TDR subsidiary previously acquired the Beijing
sales office of Heilongjiang in mid 2006. Pursuant to the Equity Transfer
Agreement, TDR acquired 100% of the issued and outstanding capital stock of
Heilongjiang from Heilongjiang’s sole stockholder in consideration for an
aggregate of approximately (i) $8,000,000 in cash, and (ii) shares of common
stock of the parent company, China Sky One with a dollar value of $300,000.
The
acquisition, which is subject to the our due diligence review of Heilongjiang,
as well as approval by the appropriate regulatory authorities in the PRC, is
expected to close on or before March 31, 2008. While we have not completed
this
acquisition, we have begun oversight of its operations pending completion.
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.
We
currently conduct all of our research and development (“R&D”) activities,
either internally or through collaborative arrangements with universities and
research institutions in the PRC. We have our own research, development and
laboratory facilities located at TRD’s principal headquarters in the city of
Harbin, Heilongjiang Province. In all, our internal R&D team currently
consists of approximately 35 people, of which 25 are full time researchers
and
10 are part time technical experts. Many of our team members are professors
affiliated with universities in the PRC.
Additionally,
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. Under our partnership arrangements
with other universities and research institutions, we will generally hold the
intellectual property rights to any developed technology. As a result of one
of
these collaborations with Harbin Medical University, a product known as
“Endothelin-1” is currently under development as a cancer suppressing product.
Additional information relating to this product and other products being
developed is set forth under “Products Under Development” below and under the
general product descriptions in the “Description of Business” section above,
which is incorporated by reference herein .
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 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, as described under
“Item
1. Description of Business.”
We
currently have eight biological products under development: 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. We are also working to establish two sales networks and
cell banks covering domestic and international markets.
In
addition, we also have three products: AMI Diagnostic Kit, Human Urinary Albumin
Elisa Kit and Early Pregnancy Diagnostic Kit that have passed the final stages
of national inspection in 2006 or 2007. These diagnostic kits are being 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. (See “Item 1.
Description of Business - Biological Products - Examination and Diagnosis
Kits”)
Our
AMI
Diagnostic Kit, which entered markets in 2007, 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. 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.
During
the second quarter of 2007, TDR entered into an agreement with the Development
and Construction Administration Committee of Harbin Song Bei New Development
district to purchase the land use rights for 50 years for development of a
new
biotech engineering project. Terms of the agreement called for a deposit of
30%
of the total land price within 15 days after signing the agreement, 40% payment
7 days prior to the start of construction and the balance 7 days after getting
the formal land use right.
The
project consists of two phases:
(1)
|
Main
workshop, R&D center and office using land area of 30,000 square
meters, construction started in May 2007 projected to be completed
by June
2008.
|
(2)
|
Second
workshop and show room using land area of 20,000 square meters,
Construction starting in September 2008 to be completed by December
2009.
|
TDR
has
committed to the Development and Construction Administration Committee of Harbin
Song Bei New Development District that the minimum investment per square meter
will be $394.
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, 2007, the Company incurred $3,158,351 in research
and
development expenditures, and $2,026,788 for year 2006.
RESULTS
OF OPERATIONS
Year
Ended December 31, 2007 as compared to Year Ended December 31,
2006
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
|
|
|
|
2007
|
|
|
|
2006
|
|
REVENUES
|
|
|
|
|
|
|
|
Product
Sales (net of sales allowance)
|
|
$
|
36,320,156
|
|
|
171
|
%
|
$
|
13,386,223
|
|
Contract
Sales
|
|
|
12,998,152
|
|
|
104
|
%
|
|
6,382,737
|
|
Government
Grant
|
|
|
-
|
|
|
|
|
|
112,755
|
|
Total
revenues
|
|
|
49,318,308
|
|
|
148
|
%
|
|
19,881,715
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOOD SOLD
|
|
|
|
|
|
|
|
|
|
|
Cost
of good sold
|
|
|
10,939,531
|
|
|
116
|
%
|
|
5,063,084
|
|
Gross
Profit
|
|
$
|
38,378,777
|
|
|
159
|
%
|
$
|
14,818,631
|
|
Total
sales increased by 148% in 2007 compared to 2006. The $29,436,593 million
increase in sales is attributable to strong performances from our sales
distribution channel.
Product
sales increased by 171% in the year ended December 31, 2007, to $36,320,156
from
$ 13,386,223
in 2006.
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. A new series named
Bio-Chemical Products were launched on 2007. It increased the sales amount
by $3
million for the year ended December 31, 2007. The company opened the overseas
market on this year and the unit selling price is higher than local market.
The
overseas market generated sales amount of $12.4 million in this
year.
Contract
and Other Revenue
The
following table summarizes the period over period changes in our contract and
other revenues:
|
|
2007
|
|
Change
|
|
2006
|
|
Contract
and other revenue
|
|
$
|
12,998,152
|
|
|
104
|
%
|
$
|
6,382,737
|
|
Contract
and other revenue was $12,998,152 in 2007, or a significant increase of $
6,615,415 over sales of $6,382,737
in 2006. In 2007, 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 22% of total
sales in 2007.
Cost
of Goods Sold and Product Gross Margin
|
|
2007
|
|
|
|
2006
|
|
Total
sales
|
|
$
|
49,318,308
|
|
|
148
|
%
|
$
|
19,881,715
|
|
Cost
of goods sold
|
|
$
|
10,939,531
|
|
|
116
|
%
|
$
|
5,063,084
|
|
Product
gross margin
|
|
|
78
|
%
|
|
|
|
|
75
|
%
|
Our
product’s gross margin for 2007 was 78%, compared to 75% for 2006. The increased
gross margin was primarily due to the overseas sales that had a profit margin
around 80%. The profit margin of local sales was stable compared to last
year’s.
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
|
|
|
|
2007
|
|
Variance
|
|
2006
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
R&D
Expenses
|
|
$
|
3,158,351
|
|
|
56
|
%
|
$
|
2,026,788
|
|
General,
administrative and selling expenses
|
|
|
|
|
|
51
|
%
|
|
|
|
Depreciation
and amortization
|
|
|
443,063
|
|
|
265
|
% |
|
121,522
|
|
Total
operating expenses
|
|
|
|
|
|
53
|
%
|
|
12,886,595
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(Income) Expenses
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
(48,889
|
)
|
|
|
|
|
-
|
|
Interest
expense
|
|
|
10,557
|
|
|
|
|
|
(227,857
|
) |
Total
other ( income) expenses
|
|
$
|
(38,332
|
)
|
|
|
|
$
|
(227,857
|
) |
Gross
sales increased approximately $29,436,593 million in 2007 and corresponding,
selling, general and administrative expenses (“SG&A”) for 2007 increased by
$5,425,292
over 2006. Selling expenses increased significantly due to the increase
of sales. Advertising expenses increased by $2,808,264 to $4,385,045, or 178%,
in 2007 from $1,576,781 in 2006. Salaries, commissions, and incentives paid
to
sales persons increased 122% in 2007 compared to 2006. General and
administrative expenses increased 50% compare to 2006.
Research
and development (“R&D”) expenses were $3,158,351 for 2007 compared to
$2,026,788 for 2006. 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 decreased by $217,300 from 2006, primary due to the paid off of the short
term notes in 2007.
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:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
As
of December 31:
|
|
|
|
|
|
|
|
Cash,
cash equivalents and marketable securities
|
|
$ |
9,190,870
|
|
$
|
6,586,800
|
|
Working
capital
|
|
$ |
15,447,162
|
|
|
7,797,928
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31:
|
|
|
|
|
|
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
11,601,480
|
|
$ |
5,182,539
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
$ |
(10,260,933)
|
|
$ |
|
) |
Financing
activities
|
|
$ |
(32,516)
|
|
$ |
|
|
As
of
December 31, 2007, cash and cash equivalents were $9,190,870, an increase
of 40% over December 31, 2006. The increase of $2,604,070 in 2007 was
primarily due to: an increase net income of $14.7 million, and increase of
accounts payable balance of $2.0 million and effect of the foreign currency
translation of $1.3 million. The increase was partially offset by an increase
of
accounts receivable of $7.5 million and land deposit prepayment of $8.0 million.
The
Company’s current ratio at December 31 was 4.06, and quick ratio was 3.99.
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, 2007. Therefore, the
Company did not have to maintain any minimum balance in the relevant deposit
account as security.
Cash
flows provided by operating activities were $11.6 million for the year ended
December 31, 2007 compared to cash provided by operating activities of
$5.18 million for the comparable 2006 period. The increase in cash provided
by operating activities of $6.74 million was attributable primarily to the
longer accounts receivable collection period compared to year ended December
31,
2006.
Working
capital at December 31, 2007 was $15.4 million, compared to $7.8 million at
December 31, 2006. Significant factors that resulted in an increase in 2007
working capital were: a $2.6 million increase in cash, cash equivalents,
and a $7.5 million increase in accounts receivable primarily due to increased
sales of $40.5 million in 2007.
These
increases were partially offset by: a $ 1.0 million increase in income
taxes payable primarily due to higher profitability; a $2.0 million increase
in
accounts payable, and other accrued liabilities including increases in accruals
in wages.
Inventories
increased by $93,110 to $371,672 as of December 31, 2007, from $278,562 as
of
December 31, 2006. 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.
Year
Ended December 31, 2006 as compared to Year Ended December 31,
2005
|
|
December
31
|
|
|
|
2006
|
|
Variance
|
|
2005
|
|
REVENUES
|
|
|
|
|
|
|
|
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
|
|
$
|
10,738,285
|
|
|
268
|
%
|
$
|
2,914,190
|
|
Depreciation
and amortization
|
|
|
121,522
|
|
|
111 |
%
|
|
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.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
of
December 31, 2007, 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.
Our 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.
Currency
Exchange Fluctuations
All
of
Company’s revenues and majority of the expenses in 2007 were denominated
primarily in Renminbi (“RMB”), the currency of China, and was converted into US
dollars at the exchange rate of 7.006 RMB to 1 U.S. Dollar. In the third quarter
of 2005, the Renminbi began to rise against the US dollar. There could be no
assurance that RMB-to-U.S. dollar exchange rates will remain stable. A
devaluation of RMB relative to the U.S. dollar would adversely affect our
business, financial condition and results of operations. We do not engage in
currency hedging.
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.
The
information required by Item 7 appears below prior to the
signature page to this report.
As
reported in a Current Report on Form 8-K dated April 16, 2007, and incorporated
herein by reference, effective April 12, 2007, e-Fang Accountancy Corp.
(“e-Fang”), the firm that audited the financial statements of China Sky One
Medical, Inc. and its subsidiaries (the “Company”) for the year ended December
31, 2007, was dismissed by the Company as its independent registered accounting
firm, due to the engagement of the new auditors, as described below.
Effective
April 12, 2007, we engaged Murrell, Hall, McIntosh & Co., PLLP (“Murrell”),
as our independent registered accounting firm to audit the financial statements
of the Company and our subsidiaries for the fiscal year ended December 31,
2007.
The decision to change the Company’s independent accountants was made by
the Company’s board of directors.
As
reported in a Current Report on Form 8-K dated December 18, 2007, and
incorporated herein by reference, effective as of December 18, 2007, the Company
dismissed Murrell, Hall, McIntosh & Co., PLLP as our independent registered
public accounting firm. Murrell, Hall, McIntosh & Co., PLLP had not audited
any of the Company’s consolidated financial statements, having replaced our
previous independent registered public accounting firm, e-Fang Accountancy
Corp.
& CPA, on April 12, 2007. The decision to change accountants was approved by
the Company’s Board of Directors on December 17, 2007.
Prior
to
the dismissal of Murrell, Hall, McIntosh & Co., PLLP, the firm reviewed the
Company’s unaudited interim reports for the fiscal quarters ended March 31,
2007, June 30, 2007 and September 30, 2007. In connection with such review,
there were no disagreements with Murrell, Hall, McIntosh & Co., PLLP on any
matter of accounting principles or practices, financial statement disclosure,
or
auditing scope or procedure which, if not resolved to the satisfaction of
Murrell, Hall, McIntosh & Co., PLLP, would have caused it to make reference
to the matter in connection with its reports. In addition, there were no
“reportable events” as that term is described in Item 304(a)(1)(v) of Regulation
S-B.
As
of
December 18, 2007, Sherb & Co., LLP was engaged as the Company’s new
independent registered public accountants. During the Company’s two most recent
fiscal years, and the subsequent interim periods through December 18, 2007
(the
date of engagement of Sherb & Co., LLP), the Company did not consult Sherb
& Co., LLP regarding either: (a) the application of accounting principles to
a specific completed or contemplated transaction, or the type of audit opinion
that might be rendered on the Company’s financial statements; or (ii) any matter
that was the subject of a disagreement as defined in Item 304(a)(1)(iv) of
Regulation S-B.
Our
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) that is designed to ensure that information required
to
be disclosed by the Company in the reports that the Company files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in
the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer’s management, including its principal executive
officer or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
Accordingly,
we
have
made a self assessment of internal control over financial reporting in 2007.
Our
assessment has been focused on the controls in the following areas of our
financial reporting:
Based
on
the result of our own assessment, which is as of the year ended December 31,
2007, we have concluded that our controls over financial reporting during 2007
were in place, and we were in compliance with the requirement under Section
404
of the Sarbanes-Oxley Act of 2002. We have not identified any, current material
weaknesses considering the nature and extent of our current operations and
any
risks or errors in financial reporting under current operations.However, we
haven’t started our tests on these controls. It is our plan that we will engage
external accounting consultants to assess and test our controls in 2008.
We
realize that effective internal controls are necessary for the Company to
provide reliable financial reports, prevent fraud and operate successfully
as a
public company.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting
is a
process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and implemented by the Company’s
Board of Directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of
the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This
Annual Report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
There
was
no change in our internal control over financial reporting that occurred during
the fiscal quarter ended December 31, 2007, that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
Item
8B. Other Information
Not
applicable.
PART
III
Item
9. Directors, Executive Officers and Corporate Governance.
Directors
and Officers
As
of
February 22, 2008, the board of directors of the Company authorized an increase
in the number of directors on the Board from three (3) to seven (7), and
appointed Song Chun Fan, Jiang Qi Feng, Zhao Jie and Qian Xu Feng to fill the
vacancies created thereby each of which newly appointed persons also serve
on
certain committees of the board, to serve until such time as their successors
shall be duly elected, unless they resign, are removed from office, or are
otherwise disqualified from serving as directors of the Company. The biographies
of all directors are provided below.
The
following table sets forth certain information regarding our directors and
executive officers during the fiscal year ended December 31, 2007 and through
March of 2008:
Name
|
|
Age
|
|
Positions
|
Liu
Yan-qing
|
|
43
|
|
Chief
Executive Officer, President and Director
|
Han
Xiao-yan
|
|
40
|
|
Chief
Financial Officer and Director
|
Wang
Hai-feng
|
|
31
|
|
Secretary/Treasurer
and Director
|
Song
Chun Fan
|
|
68
|
|
Director
|
Jiang
Qi Feng
|
|
25
|
|
Director
|
Zhao
Jie
|
|
45
|
|
Director
|
Qian
Xu Feng
|
|
40
|
|
Director
|
The
following information reflects the business background and experience of each
director and officer.
Liu
Yan-qing
is our
Chief Executive Officer and President, and Director of TDR and the General
Manager of our Harbin Bio-Engineering subsidiary. He graduated from
Prophylactic Department of Harbin Medicine University, where he obtained his
bachelor’s degree. In 2005, he studied at Tsing Hua University and earned
an Executive Masters of Business. Before establishing his own company, he
had 8 years of experience as a reporter of Family Health Newspaper, and has
10
years of experience in drug marketing, research and development of new drugs
and
enterprise management. Mr. Yan-qing has been instrumental in establishing
TDR’s sales program and sales network covering the PRC.
Han
Xiao-yan
is our
Chief Financial Officer, and the General Manager of TDR and the Vice Director
of
Harbin Bio-Engineering. She received a master of business administration
at Harbin Industrial University. She had five years of hygiene and medical
media experience before becoming employed by TDR, and has been instrumental
in
developing and marketing TDR’s products and expanding its sales. She
serves as senior marketing manager and administrative manager. She has 10 years
of financial management experience. In 2004, she was appointed the general
manager of TDR, with responsibility for financing, production, quality control
and purchasing. In 2003, she was appointed vice director of Harbin
Bio-Engineering.
Wang
Hai-feng,
our
Secretary/ Treasurer, graduated from Heilongjiang University where he majored
in
English Literature and received two bachelors’ degrees in English and
International Trade. Mr. Hai-feng joined TDR in 2003 and has served as the
manager of the international business department, and the assistant to the
president and the secretary of the board of directors since such time. He
has been instrumental in the establishment of our international business
department and the expansion of foreign trade. In 2005, he assisted in
product innovation and branding for international markets. Through the
efforts of Mr. Wang, we have established strategic relationships with several
foreign partners. Before his employment by TDR, Mr. Wang had experience in
product exporting, translating and project operations in foreign companies.
Song
Chun Fan,
joined
our board of directors on February 22, 2008. From 1964 to the present, Song
Chun
Fan has been employed by the First Clinical College of Harbin Medical University
in Heilongjiang, China, where he has served as the Director of the Surgery
Research Room and the Director of graduate students of the Surgery Department
since 1996. From 1998 to the present, Song Chun Fan has been the acting Director
of the Heilongjiang Professional Surgery Committee, the Commissary of the Degree
Commission of China, the Director of the Key Laboratory of Cell Transplantation
of the Ministry of Public Health of China, the Vice-Chairman of the Heilongjiang
Medicine Association, the Vice-Chairman of the Heilongjiang Physician
Association, and the Director of Heilongjiang (Special) Medical Treatment
Application Administration Committee. Song Chun Fan received a Bachelor’s Degree
in Medical Treatment from Harbin Medical University in 1964.
Jiang
Qi Feng,
joined
our board of directors on February 22, 2008. From September 2006 to the present,
Jiang Qi Feng has served as a Teaching Assistant and a Research Assistant at
Simon Fraser University in Canada, where he specializes in biology statistics,
biology research and probability. Jiang Qi Feng received a Masters Degree in
Computer Science from Simon Fraser University in 2006, and Bachelor’s Degrees in
Bio-Statistics and Mathematics from the University of British Columbia in
2005.
Zhao
Jie,
joined
our board of directors on February 22, 2008. From 1999 to the present, Zhao
Jie
has served as the Tissue Specialist of the Replant Department of Capital Health
Transplant Services in Alberta, Canada, responsible for various aspects of
tissue transplantation, including determining donee acceptability, processing
and preserving tissue, performing surgical procedures, and quality control.
In
addition, Zhao Jie has written and published several books and articles
regarding tissue transplantation. Zhao Jie has received awards from Capital
Health for Quality and Safety (2006), Recognition of Excellence and Achievement
(2002), and Teamwork (2002). Zhao Jie received a Bachelor’s Degree in Medicine
from Harbin Medical University in 1988.
Qian
Xu Feng,
joined
our board of directors on February 22, 2008. From March 2005 to the present,
Qian Xu Feng has been employed by Moody’s Investors Service; from May 2007 to
the present, as the Vice President and Senior Analyst, from May 2006 to May
2007, as the Assistant Vice President and Quantitative Analyst, and from March
2005 to April 2006, as the Quantitative Analyst. Prior to that, from June 2004
until February 2005, Qian Xu Feng was the Research Fellow of the Furman Center
for Real Estate and Urban Policy of New York University, where she conducted
empirical quantitative research in various aspects of commercial and residential
properties. From September 1990 to July 1996, Qian Xu Feng was an Assistant
Professor of Economics at the Beijing Normal University. Qian Xu Feng received
a
Ph.D. in Economics from Rutgers University in 2004, a Masters Degree in
Economics from Rutgers University in 2001, a Masters Degree in Accounting from
City University of New York in 1999, and a Bachelor’s Degree in Economics from
Beijing Normal University in 1990
(b)
Significant
Employees.
Wen
Chao Zhang
has been
the Director of Scientific and Technological Development of the Company since
2005. Mr. Zhang graduated with a PhD in biology pharmaceuticals from South
China
University of Technology in 1997. Mr. Zhang has been employed in various R&D
roles since his graduation. Mr. Zhang completed our gene recombination medicine
independently and has been responsible for researching and developing various
products that have been launched by the Company since 2005.
Involvement
in Certain Legal Proceedings. There
have been no events under any bankruptcy act, no criminal proceedings and no
judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any director, executive officer, promoter or control
person of Registrant during the past five years.
Board
of Directors
We
have 7
members serving on our Board of Directors. Each board member is nominated for
election at our annual meeting to serve until the next annual meeting of
stockholders and until their successors are duly elected and qualified.
Board
Committees
The
Board
of Directors has an Audit Committee, Nominating and Governance Committee,
Executive Committee, a Finance Committee and a Compensation Committee, all
of
which were created on February 22, 2008. A description of each committee
follows.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors, executive
officers and persons who own more than ten percent of a registered class of
our
equity securities, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of our common stock.
Based on the Company’s review of copies of such forms received by
it, the Company believes all such filing requirements applicable to officers,
directors and 10% owners of its common stock have been complied
with.
Code
of Ethics
We
have
adopted a Code of Ethics that applies to our principal chief executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, as well as other employees (the “Code of
Ethics”). A copy of the Code of Ethics is appended as an exhibit to our
Amended Report on Form 10-KSB for the year ended December 31, 2006. The Code
of
Ethics is being designed with the intent to deter wrongdoing, and to promote
the
following:
|
· |
Honest
and ethical conduct, including the ethical handling of actual or
apparent
conflicts of interest between personal and professional
relationships,
|
|
· |
Full,
fair, accurate, timely and understandable disclosure in reports and
documents that a small business issuer files with, or submits to,
the
Commission and in other public communications made by the small business
issuer,
|
|
· |
Compliance
with applicable governmental laws, rules and
regulations,
|
|
· |
The
prompt internal reporting of violations of the code to an appropriate
person or persons identified in the
code,
|
|
· |
Accountability
for adherence to the code,
|
Director
Independence
While
our
securities are not trading on a national securities exchange or Nasdaq, our
Board believes in good faith that four of our directors, that Song Chun Fan,
Jiang Qi Feng, Zhao Jie and Qian Xu Feng would all qualify as independent
directors under the rules of the American Stock Exchange Company Guide (the
“AMEX Company Guide”), because they (i) do not currently own a significant
percentage of our shares, (ii) are not currently employed by us, (iii) have
not
been actively involved in the management of the Company, and (iv) do not fall
into any of the enumerated categories of people who cannot be considered
independent directors under the AMEX Company Guide.
Audit
Committee
The
Company has a separately designated standing Audit Committee and adopted an
Audit Committee Charter on February 22, 2008. The purpose of the Audit Committee
is to recommend to the board of directors the annual engagement of a firm of
independent accountants and reviews with the independent accountants the scope
and results of audits, our internal accounting controls and audit practices
and
professional services rendered to us by our independent accountants. The Audit
Committee has been created after the appointment of the auditors however, have
approved the inclusion of their report herewith. The Audit Committee also
reviews and discusses with management and the board of directors, such matters
as accounting policies, internal accounting controls and procedures for
preparation of financial statements. The Audit Committee is required, at all
times to be composed exclusively of directors who, in the opinion of our board
of directors, are free from any relationship that would interfere with the
exercise of independent judgment as a committee member and who posses an
understanding of financial statements and generally accepted accounting
principles. The Audit Committee is comprised
of solely independent directors, Messrs. Jiang Qi Feng, Zhao Jie and Qian Xu
Feng. Management believes, in good faith, that each
of
these members are considered “independent” under Section 303A.02 of the
listing standards of American Stock Exchange, as determined by our board of
directors. and that Jiang
Qi
Feng qualifies as an “audit committee financial expert” as defined under Item
401(c) of Regulation S-B. A copy of the Audit Committee Charter is filed as
an
exhibit to this Annual Report and can be made available in print free of charge
to any shareholder who requests it.
Compensation
Committee
The
Company has designated a Compensation Committee of Board of Directors and
adopted a Compensation Committee Charter on February 22, 2008. The Compensation
Committee is responsible for (a) reviewing and recommending to the board of
directors on matters relating to employee compensation and benefit plans, and
(b) assisting the board in determining the compensation of the CEO and
other executives and make recommendations to the board with respect to the
compensation of the CFO, other executive officers of the Company and independent
directors. The Compensation Committee is comprised independent directors,
Messrs. Jiang Qi Feng, Qian Xu Feng and Song Chun Fan.
Nominating
and Governance Committee
We
created a Nominating and Governance Committee and adopted a Nominating and
Governance Committee Charter on February 22, 2008. The purpose of this committee
is to assist the board of directors in identifying qualified individuals to
become board members, in determining the composition of the board of directors
and in monitoring the process to assess Board effectiveness. The Nominating
and Governance Committee of the board of directors comprised of independent
directors Zhao Jie, Qian Xu Feng and Song Chun Fan. A
copy of
the Nominating and Governance Committee Charter is filed as an exhibit to this
Annual Report and can be made available in print free of charge to any
shareholder who requests it.
Executive
Committee
We
have
created an Executive Committee of the Board of Directors, comprised solely
of
independent directors. Song Chun Fan, Zhao Jie and Jiang Qi Feng serve as
members of the Executive Committee.
Finance
Committee
We
have
created a Finance Committee of the Board of directors, comprised solely of
independent directors. Qian Xu Feng, Jiang Qi Feng and Song Chun Fan serve
as
members of the Finance Committee.
Family
Relationships
There
are no family relationships among our executive officers and directors.
Item
10. Executive Compensation.
The
following table sets forth the cash compensation paid by the Company to its
President and all other executive officers who earned annual compensation
exceeding $100,000 for services rendered during the fiscal years ended December
31, 2007 and December 31, 2006.
SUMMARY
COMPENSATION TABLE
Name
and principal position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards ($)(1)
|
|
Option
Awards ($)
|
|
|
|
Non-Equity
Incentive Plan Compensation
|
|
Nonqualified
Deferred Compensation Earnings ($)
|
|
All
Other Compensation ($)
|
|
|
|
Total
($)
|
|
Liu
Yan-Qing
Principal
Executive Officer and Director
|
|
|
2007
2006
|
|
|
68,512
19,500
|
|
|
—
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,877
|
|
Han
Xiao-Yan
Principal
Financial Officer and Director
|
|
|
2007
2006
|
|
|
54,810
16,500
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,002
|
|
Wang
Hai-Feng
Secretary/Treasurer
|
|
|
2007
2006
|
|
|
40,793
13,500
|
|
|
|
|
|
|
|
|
1,124
|
|
(1)
|
|
|
|
--
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
B. Stuart(2)
former
Principal Executive Officer and Director
|
|
|
2007
2006
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,200
|
|
(2)
|
|
|
|
28,200
|
|
Jack
M. Gertino(2)
former
Principal Financial Officer and Director
|
|
|
2007
2006
|
|
|
N/A
|
|
|
—
—
|
|
|
—
—
|
|
|
—
—
|
|
|
|
|
|
—
—
|
|
|
—
—
|
|
|
56,325
|
|
(2)
|
|
|
|
56,325
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,314 |
|
(1)
Option Awards represent the aggregate grant date fair value of options to
purchase 10,000 common shares for Dr Liu, 8,000 common shares for Ms. Han,
and
5,000 common shares for Mr. Wang, computed in accordance with FAS 123R.
The grant, vesting and forfeiture information and assumption made in
valuation may be found in Note 5 to our financial statements for the year ended
December 31, 2007, which are attached hereto, beginning on Page F-1, and in
the
notes following the table below.
(2)
Mr.
Stuart and Mr. Gertino are former officers and directors of the publicly traded
company, China Sky One, and have resigned from all positions and ceased
receiving any form of compensation in May 2006 at the time of the reverse merger
of ACPG into China Sky One. We recorded compensation expense for Richard B.
Stuart and Jack M. Gertino, computed on an hourly basis, in the amounts
indicated, for their efforts in reviewing specific business opportunities for
a
possible business combination during the fiscal year, participating in meetings
and conference calls in connection with such opportunities, and undertaking
related activities.
Summary
of Employment Agreements and Arrangements
The
Company does not have formal employment agreements with management at this
time.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
Outstanding
Equity Awards at Fiscal Year-end
Name
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Unexercised Unearned
Options
(#)
|
|
Option
Exercise Price
($)
|
|
Option
Expiration Date
|
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
|
Market
Value of Shares or Units of Stock That Have Not
Vested
($)
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
($)
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
(i)
|
|
(j)
|
|
Liu
Yan-Qing
Principal
Executive Officer and Director
|
|
|
0
|
|
|
0
|
|
|
10,000
|
(1)
|
$
|
3.65
|
|
|
October
26, 2011
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Han
Xiao-Yan
Principal
Financial Officer and Director
|
|
|
0
|
|
|
0
|
|
|
8,000
|
(2)
|
$
|
3.65
|
|
|
October
26, 2011
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Wang
Hai-Feng, Secretary/Treasurer
|
|
|
0
|
|
|
0
|
|
|
5,000
|
(3)
|
$
|
3.65
|
|
|
October
26, 2011
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
(1)
On
October 26, 2006, we issued to Liu Yan-Qing under our 2006 Incentive Stock
Plan
(the “Plan”), options to purchase 10,000 shares of common stock, 6,000 options
vesting June 30, 2007, and the remaining 4,000 options vesting on June 30,
2008.
These options are exercisable for a five-year period from the date of
grant at an exercise price of $3.65 per share.
(2)
On
October 26, 2006, we issued to Han Xiao-Yan under our Plan, options to purchase
8,000 shares of common stock, 4,800 options vesting June 30, 2007, and the
remaining 3,200 options vesting on June 30, 2008. These options are
exercisable for a five-year period from the date of grant at an exercise price
of $3.65 per share.
(3)
On
October 26, 2006, we issued to Wang Hai-Feng under our Plan, options to purchase
5,000 shares of common stock, 2,000 options vesting December 31, 2007, 2,000
options vesting December 31, 2008, and the remaining 1,000 options vesting
on
December 31, 2009. These options are exercisable for a five-year period
from the date of grant at an exercise price of $3.65 share.
Equity
Compensation Plan Information
The
Company’s board of directors adopted a 2006 Stock Incentive Plan (the “Plan”),
to be effective on July 31, 2006. The Plan was approved by the
shareholders on July 31, 2006. The Plan authorizes the granting of incentive
stock options and nonqualified stock options to purchase common stock, stock
appreciation rights (“SARs”), restricted stock, performance stock and bonus
stock, to key executives and other key employees and consultants of the Company,
including officers of the Company and its subsidiaries. The purpose of the
Plan is to attract and retain key employees, to motivate key employees to
achieve long-range goals and to further identify the interests of key employees
with those of the other shareholders of the Company. The Plan authorizes
the award of 1,500,000 shares of Common Stock to be used for stock, SARs,
restricted stock and performance and bonus stock. If an award made under
the Plan expires, terminates or is forfeited, canceled or settled in cash,
without issuance of shares covered by the award, those shares will be available
for future awards under the Plan. The Plan will terminate on July 31,
2017. The Plan is intended to qualify for favorable treatment under
Section 16 of the Exchange Act, as amended, pursuant to Rule16b-3 promulgated
thereunder (“Rule 16b-3”). The Plan provides for the grant of “incentive
stock options,” as defined in Section 422 of the Internal Revenue Code (“Code”)
and nonqualified stock options.
The
Plan
designates a Stock Option Committee appointed by the Board of Directors (which
may be the Compensation Committee) and authorizes the Stock Option
committee to grant or award to eligible participants of the Company and its
subsidiaries and affiliates, stock options, SARs, restricted stock performance
stock awards and Bonus Stock awards for up to 1,500,000 shares of common stock
of the Company. The initial members of the Stock Option Committee are the Board
of Directors.
On
October 26, 2006, the Company granted a total of 113,500 non-qualified options
under the Plan to key employees, including its officers. These options are
exercisable at a price of $3.65 per share, or 85% of the fair market value
of
the Shares covered by the options as of the date of grant. The options begin
to
vest in June, 2007, and typically vest in increments over either a two-year
or
three year period, and expire in October, 2011, unless earlier terminated by
their terms. The outstanding options include a total of 23,000 options held
by
current officers and directors.
The
following table provides certain information with respect to the Company’s
equity compensation plans in effect as of December 31, 2007.
Plan Category
|
|
(a)
Number of
securities to
be issued
upon exercise of
outstanding options,
warrants and rights
|
|
(b)
Weighted-average
exercise
price of
outstanding
options,
warrants and rights
|
|
(c)
Number of
securities
remaining
available for
future issuance
under
equity
compensation plans
(excluding securities
reflected in
column a)
|
|
Equity
compensation plans approved by security holders
|
|
|
113,500
|
|
$
|
3.65
|
|
|
1,386,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
113,500
|
|
|
|
|
|
1,386,500
|
|
|
|
|
|
|
|
|
|
|
|
|
DIRECTOR
COMPENSATION
We
do not currently pay any cash fees to our directors.
Item
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
following table sets forth as of March 20, 2008, the number and percentage
of
the outstanding shares of Common Stock which, according to the information
supplied to the Company, were beneficially owned by (i) each person who is
currently a director of the Company, (ii) each executive officer, (iii) all
current directors and executive officers of the Company as a group and (iv)
each
person who, to the knowledge of the Company, is the beneficial owner of more
than 5% of the outstanding common stock. The below chart is based on 14,852,214
shares issued and outstanding as of March 20, 2008. In computing the number
of
shares beneficially owned by a person or a group and the percentage ownership
of
that person or group, shares of our common stock subject to options or warrants
currently exercisable or exercisable within 60 days after the date of this
prospectus are deemed outstanding, but are not deemed outstanding for the
purpose of computing the percentage of ownership of any other person. Except
as
otherwise indicated, the persons named in the table have sole voting and
dispositive power with respect to all shares beneficially owned, subject to
community property laws where applicable.
Name
and Address of
Beneficial
Owner
|
|
Common
Stock
(1)
|
|
Percent
of
Class
|
|
Liu
Yan-qing (2)
|
|
|
|
(3) |
|
31.4
|
%
|
Han
Xiao-yan (2)
|
|
|
|
(4) |
|
9.4
|
%
|
Wang
Hai-feng (2)
|
|
|
|
(5) |
|
*
|
|
Song
Chun Fan
|
|
|
-0-
|
|
|
*
|
|
Jiang
Qi Feng
|
|
|
-0-
|
|
|
*
|
|
Zhao
Jie
|
|
|
-0-
|
|
|
*
|
|
Qian
Xu Feng
|
|
|
-0-
|
|
|
*
|
|
All
Officers and Directors as a group (7 persons):
|
|
|
|
|
|
40.9
|
% |
Non
Executive Principal Shareholders:
|
|
|
|
|
|
|
|
Trang
Chong “Charles” Hung (6)
|
|
|
|
(4) |
|
*
|
|
American
Eastern Group, Inc. (7)
|
|
|
600,285
|
|
|
4.0
|
% |
American
Eastern Securities, Inc. (8)
|
|
|
74,803
|
(6) |
|
1.4
|
% |
Charles
Hung, Jr. (9)
|
|
|
94,803
|
(7) |
|
|
|
*
Indicates under 1%.
(1)
All
shares are held of record and beneficially.
(2)
The
mailing address for each shareholder is the principal executive offices of
the
Company, Room 1706, No. 30 Di Wang Building, Gan Shui Road, Nandang District,
Harbin, People’s Republic of China 150001.
(3)
Includes
6,000 shares issuable upon currently exercisable options at $3.65 per share
issued pursuant to the company’s 2006 Incentive Stock Plan and expiring on
October 26, 2011, but does not include 4,000 shares issuable upon exercise
of
options vesting on June 30, 2008. Also includes
3,000,000 shares
deposited
into
escrow pursuant to the Make Good Agreement with investors in our January 2008
Offering pursuant to which such shares may be distributed to such investors
if
the Company does not attain $1.75 earnings per share for the fiscal year ending
in December 31, 2008, based on fully diluted shares outstanding (16,907,696)
excluding warrants issued in such offering.
(4)
Includes
3,800 shares issuable upon currently exercisable options at $3.65 per share
issued pursuant to the company’s 2006 Incentive Stock Plan and expiring on
October 26,2011, but does not include 3,200 shares issuable upon exercise of
options vesting on June 30, 2008.
(5)
Includes 2,000 shares issuable upon currently exercisable options at $3.65
per
share issued pursuant to the company’s 2006 Incentive Stock Plan and expiring on
October 26,2011, but does not include 2,000 shares issuable upon exercise of
options vesting on December 31, 2008 or 1,000 options vesting on December 31,
2009.
(6)
The
address for each of Mr. Hung and these two entities and for Mr. Charles Hung,
Jr. is 865 South Figueroa Street, #3340, Los Angeles, CA 90017. Mr. Hung is
a
principal of both American Eastern Group, Inc. and American Eastern Securities,
Inc., and has voting and dispositive power over all of the listed shares in
addition to those held in his name. Includes 67,685 shares and 40,000 shares
issuable upon exercise of warrants. Does not include shares of American Eastern
Group, Inc., American Eastern Securities, Inc. and Charles Hung Jr. and EIC
Investments, which shares are deemed owned as part of a group in which Mr.
Hung
is a part (see notes 5 and 6 below).
(6)
Includes 100,285 shares and 500,000 shares of the Common Stock issuable upon
exercise of warrants at $2.00 per share, expiring on July 31, 2009. Both Mr.
Hung and Charles Hung Jr. are officers and control persons of this entity (See
“Item 13. Certain Relationships and Related Transactions, and Director
Independence”).
(8)
Includes 54,803 shares and 20,000 shares of the common stock of the Company
issuable upon exercise of warrants exercisable at $3.00, expiring March 31,
2008, and 10,000 warrants exercisable at $3.50 , expiring on October 10, 2008.
(See “Item 13. Certain Relationships and Related Transactions, and Director
Independence”). Mr. Hung has indicated his intent to exercise all such warrants.
(9)
Includes 40,000 shares of common stock issuable upon exercise of warrants held
by Mr. Charles Hung Jr., as well as 54,803 shares of common stock held by EIC
Investments, LLC, an entity in which Mr. Charles Hung Jr. is a manager.
Item
12. Certain Relationships and Related Transactions, and Director Independence.
Effective
May 30, 2006, we acquired 100% of ACPG in a stock-for-stock exchange. The
transaction was treated as a reverse merger and a recapitalization of ACPG
for
financial reporting purposes. As part of the exchange, Liu Yan-qing and Han
Xiao-yan, officers and directors of ACPG and TDR, received 4,660,595 and
1,402,907 shares, respectively, of the common stock of China Sky One in exchange
for their ownership interest in ACPG. The other shareholders of ACPG received
a
total of 4,129,875 shares of common stock of China Sky One for their ownership
interest in ACPG, including American Eastern Group, Inc., American Eastern
Securities, Inc., and its principal, Trang Chong (Charles) Hung, who received
87,685 shares, 54,803 shares, and 87,685 shares of the Company, respectively,
in
connection with the transaction.
In
connection with the closing of the stock exchange described above, the Company
entered into a consulting agreement with former officers of China Sky One
dated
May 11, 2006, with Jack M. Gertino and Richard B. Stuart, officers and directors
who resigned at closing, providing for their services as consultants. For
such
services, China Sky One and ACPG agreed to compensate Messrs. Gertino and
Stuart
as follows: (a) the sum of $3,000 per month for a period of two years; (b)
the
issuance of a total of 219,212 shares of restricted common stock (or 109,606
shares each) of the Company. In addition, under this arrangement, the Company
granted to Mr. Gertino an option to purchase a total of 50,000 shares at
a price
of $3.00 per share at any time before December 20, 2008.
China
Sky
One has incurred fees to American Eastern Group, Inc. (“AEG”), and Shenzhen DRB
Investment Consultant Limited (“DRB”), in the amount of $200,000 in cash for
services rendered in connection with the Exchange Agreement. In addition,
in
October, 2006, we granted to AES and DRB warrants to each purchase a total
of
500,000 shares of common stock exercisable at any time before July 31, 2009,
at
a price of $2.00 per share. One-half of such warrants were deemed to be earned
as of the completion of the Exchange Agreement, and the other one-half was
deemed earned after completion of our private offering in October, 2006.
The
fair value of the above warrants was calculated as $1,469,190 as of December
31,
2006, based on the Black-Scholes model of accounting, and the total value
of
compensation to AES and DRB has been determined to be $2,317,128.
American
Eastern Securities, Inc., acted as placement agent for the Company in connection
with its private offering completed in October, 2006. The Company sold a
total
of 200 Units in the private offering, at a price of $15,000 per Unit, for
total
gross proceeds of $3,000,000 and net cash proceeds of approximately $2,745,000.
Each Unit in the private offering consisted of a total of 5,000 shares of
common
stock and a warrant to purchase an additional 2,500 shares of common stock
at
any time prior to October 10, 2008, at a price of $3.50 per share. As a result,
the Company sold a total of 1,000,000 shares of common stock, and issued
warrants to purchase an additional 500,000 shares of common stock. As placement
agent, American Eastern Securities earned a placement fee of $270,000 or
9% of
the total proceeds from the private offering, and was granted a warrant to
purchase Units equivalent to 10% of the Units sold in the offering in October
2006, or a total of 100,000 shares at a price of $3.00 per share, and, subject
to exercising the $3.00 Warrants in full, a warrant for an additional 50,000
shares exercisable at $3.50 per share. All of the warrants described above
have
an expiration date of October 10, 2008. None of the warrants described in
this
paragraph have been exercised.
On
January 31, 2008, and in order to facilitate the January 2008 Offering, Liu
Yan-qing deposited 3,000,000 shares into escrow pursuant to an Escrow Agreement.
These shares may be released from escrow and issued to the investors in the
January 2008 Offering in the event that the Company fails to attain Earnings
Per
Share, as adjusted of at least (i) $1.05 per share for fiscal year ended
December 31, 2007 based on fully diluted shares outstanding before the January
2008 offering (an aggregate of 13,907,696), and/or (ii) $1.75 per share for
fiscal year ending December 31, 2008 based on fully diluted shares outstanding
after the January 2008 Offering (an aggregate of 16,907,696 shares). While
the
Company has satisfied the criterion of (i) above for 2007, no assurance can
be
made that we will satisfy our earnings goal next year.
Item
13. Exhibits.
(a)
Exhibits. Copies of the following documents are included as exhibits to
this report pursuant to Item 601 of Regulation S-B.
3.1
|
|
Articles
of Incorporation, as amended (incorporated by reference to Exhibit
3.1 to
the Company’s Registration Statement on Form 10-SB, as filed with the
Securities and Exchange Commission on May 13, 1999).
|
|
|
|
3.2
|
|
By-Laws
of the Company (incorporated by reference to Exhibit 3.2 to the
Company’s
Registration Statement on Form 10- SB, as filed with the Securities
and
Exchange Commission on May 13, 1999).
|
|
|
|
3.3
|
|
Finance
Committee Charter
|
|
|
|
3.4
|
|
Audit
Committee Charter
|
|
|
|
3.5
|
|
Compensation
Committee Charter
|
|
|
|
3.6
|
|
Nominating
and Governance Committee Charter
|
|
|
|
3.7
|
|
Executive
Committee Charter
|
|
|
|
4.1
***
|
|
Form
of Class A Warrant exercisable at $12.50 per share issued to
investors in
connection with offering of 2,500,000 shares of common stock
and 750,000
Class A Warrants on January 31, 2008 (the “January 2008
Offering”).
|
|
|
|
10.1
|
|
Option
granted to Richard B. Stuart dated March 11, 1999 (incorporated
by
reference to Exhibit 10.1 to the Company’s Registration Statement on Form
10-SB, as filed with the Securities and Exchange Commission on
May 13,
1999).
|
|
|
|
10.2
|
|
Option
granted to Philip C. Gugel dated March 11, 1999 (incorporated
by reference
to Exhibit 10.2 to the Company’s Registration Statement on Form 10-SB, as
filed with the Securities and Exchange Commission on May 13,
1999).
|
|
|
|
10.3
|
|
Option
granted to Jack M. Gertino dated March 11, 1999 (incorporated
by reference
to Exhibit 10.3 to the Company’s Registration Statement on Form 10-SB, as
filed with the Securities and Exchange Commission on May 13,
1999).
|
10.4
|
|
Warrant
granted to Mark E. Lehman dated March 11, 1999 (incorporated
by reference
to Exhibit 10.4 to the Company’s Registration Statement on Form 10-SB, as
filed with the Securities and Exchange Commission on May 13,
1999).
|
|
|
|
10.5*
|
|
Warrant
granted to American Eastern Group, Inc., dated October 10,
2006.
|
|
|
|
10.6*
|
|
Warrant
granted to American Eastern Securities, Inc., dated October 24,
2006.
|
|
|
|
10.7***
|
|
Form
of Securities Purchase Agreement between Company and investors,
dated as
of January 31, 2008, relating to January 2008 Offering.
|
|
|
|
10.8***
|
|
Form
of Registration Rights Agreement between Company and investors,
dated as
of January 31, 2008, relating to January 2008 Offering.
|
|
|
|
10.9***
|
|
Form
of Make Good Agreement between Pope Asset Management LLC, as
the
authorized agent of the investors, the Company and Liu
Yan-Qing.
|
|
|
|
10.10***
|
|
Form
of Make Good Escrow Agreement between Pope Asset Management LLC,
as the
authorized agent of the investors, the Company and Liu
Yan-Qing.
|
|
|
|
10.11***
|
|
Form
of Put Agreement between Company and investors, dated as of January
31,
2008, relating to January 2008 Offering.
|
|
|
|
14.1*
|
|
Code
of Ethics.
|
|
|
|
21.1*
|
|
Subsidiaries
of the Company.
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley
Act of 2002.
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
|
* |
Incorporated
by reference from exhibits filed with Annual Report on Form 10-KSB
for
year ended December 31, 2007, originally
filed April 2, 2007.
|
** |
Incorporated
by reference from exhibits filed with Annual Report of Form 10-KSB/A
for
year ended December 31, 2007, filed
on November 8, 2007.
|
*** |
Incorporated
by reference from exhibits filed with Current Report on Form 8-K,
Date of
Event of January 31, 2008.
|
Item
14. Principal Accountant Fees and Services.
The
aggregate fees billed by our principal accountants for fiscal years ended
December 31, 2007 are as follows:
Accountant
Name
|
|
|
Audit
Fees
|
|
|
Audit
Related
Fees
|
|
|
Tax
Fees
|
|
|
All
Other
Fees
|
|
Sherb
& Co., Inc.
|
|
$
|
65,000
|
|
|
|
|
|
|
|
$ |
|
|
Murrell,
Hall McIntosh & Co. LLP
|
|
$
|
-0-
|
|
$
|
43,119
|
|
$
|
6,195
|
|
|
|
|
e-Fang
Accountancy Corp. & CPA (Year End December 2006 Audit)
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
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-20
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders
and Directors
China
Sky One Medical, Inc.
We
have audited the accompanying consolidated balance sheets of China Sky One
Medical, Inc.
and
its Subsidiaries as of December 31, 2007 and the related consolidated statements
of operations, stockholders’ equity and cash flows for the year ended December
31, 2007. These consolidated financial statements are the responsibility
of the
company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with generally accepted auditing standards
as
established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
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, and 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 purposes of expressing an opinion on the effectiveness of
the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of China Sky One Medical, Inc.
as of
December 31, 2007 and the results of its operations and its cash flows for
the
year ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States.
|
|
|
|
|
/s/
Sherb & Co., LLP |
|
Certified
Public Accountants |
|
|
Boca
Raton, Florida
March
25, 2008
|
|
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)
The
independent auditing firm of e-Fang Accountancy Corp & CPA. has audited the
financial
statements of China Sky One Medical, Inc. for the fiscal years ended December
31,
2006. e-Fang Accountancy Corp & CPA’s reports on China Sky One Medical
Inc.’s financial
statements for the fiscal years ended December 31, 2006 did not contain
an
adverse
opinion or a disclaimer of opinion; nor were such reports qualified or
modified
as to
uncertainty, audit scope or accounting principles. During China Sky One
Medical,
Inc.’s most recent fiscal year and subsequent interim periods preceding the
date
of
this report, there were no disagreements with e-Fang Accountancy Corp & CPA.
on any
matter of financial statement disclosure, or auditing scope or procedure
except
some minor
accounting issues that have already been resolved.
Dated:
March 31, 2008
/s/
e-Fang Accountancy Corp., & CPA
e-Fang
Accountancy Corp., & CPA
China
Sky
One Medical, Inc. and Subsidiaries
Consolidated
Balance Sheet
December
31, 2007
ASSETS
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,190,870
|
|
Accounts
receivable
|
|
|
10,867,106
|
|
Other
receivables
|
|
|
40,200
|
|
Inventories
|
|
|
371,672
|
|
Prepaid
expenses
|
|
|
17,707
|
|
Total
current assets
|
|
|
20,487,555
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
6,861,432
|
|
Land
Deposit
|
|
|
8,003,205
|
|
Intangible
assets, net
|
|
|
1,933,014
|
|
|
|
|
|
|
|
|
$
|
37,285,206
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,845,308
|
|
Wages
payable
|
|
|
381,482
|
|
Welfare
payable
|
|
|
221,911
|
|
Taxes
payable
|
|
|
1,567,188
|
|
Deferred
revenues
|
|
|
24,504
|
|
Total
current liabilities
|
|
|
5,040,393
|
|
|
|
|
|
|
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, 12,228,363
issued
and outstanding)
|
|
|
12,228
|
|
Additional
paid-in capital
|
|
|
9,572,608
|
|
Accumulated
other comprehensive income
|
|
|
2,271,843
|
|
Retained
earnings
|
|
|
20,388,134
|
|
Total
stockholders' equity
|
|
|
32,244,813
|
|
|
|
|
|
|
|
|
$
|
37,285,206
|
|
See
accompanying summary of accounting policies and notes to the consolidated
financial statements.
China
Sky
One Medical, Inc. and Subsidiaries
Consolidated
Statements of Operations
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
49,318,308
|
|
$
|
19,881,715
|
|
Cost
of Goods Sold
|
|
|