10-Q 1 cpdu_2014mar31-10q.htm MARCH 31, 2014 QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

 

ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

 

ACT OF 1934

 

For the transition period from

 

Commission file number: 000-52007

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 Nevada    20-2718075
(State or other jurisdiction of incorporation or organization)    (IRS Employer identification No.)

 

9th Floor, No. 29 Nanxin Street

 Xi'an, Shaanxi Province

People’s Republic of China 710004

(Address of principal executive offices) (zip code)

 

86-29-8727-1818

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x Noo

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filero Accelerated filer o  Non-accelerated filer o Smaller reporting company x
    (Do not check if a smaller reporting company)    

 

                                                                                    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes o Nox.

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

 

As of March 31, 2014 and May 17, 2014, there were 44,556,104 shares of the registrant’s common stock outstanding.

 


 
 

TABLE OF CONTENTS

 

      Page
  PART I    
Item 1. Financial Statements.   F-1
    Consolidated Balance Sheets (unaudited and audited)   F-2
    Consolidated Statements of Income and Comprehensive Income (unaudited)   F-3
    Consolidated Statements of Cash Flows (unaudited)   F-4
    Consolidated Statements of Stockholders’ Equity (unaudited)   F-5
    Notes to Consolidated Financial Statements (unaudited)   F-6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.   3
Item 3. Quantitative and Qualitative Disclosures About Market Risk.   6
Item 4. Controls and Procedures.   6
  PART II    
Item 1. Legal Proceedings.   8
Item 1A. Risk Factors.   8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.   8
Item 3. Defaults Upon Senior Securities.   8
Item 4. (Removed and Reserved).   8
Item 5. Other Information.   8
Item 6. Exhibits.   8
SIGNATURES   9

 

2


 
 

 

Item 1. Financial Statements

 

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

 CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

 

 

Consolidated Balance Sheets F-2
   
Consolidated Statements of Operations and Comprehensive Income F-3
   
Consolidated Statements of Cash Flows F-4
   
Consolidated Statements of Stockholders’ Equity F-5
   
Notes to Consolidated Financial Statements F-6

 

 

F-1


 
 

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2014 AND DECEMBER 31, 2013

 

   March 31, 2014  December 31, 2013
   (Un-audited)  (Audited)
ASSETS      
       
Current Assets      
Cash and cash equivalents  $1,042,707   $76,431 
Accounts receivable, net of provision for doubtful accounts of $6,462,504 (December 31,2013: $5,255,663) - note 3)   1,312,286    6,774,271 
Other receivables (note 4)   92,306    93,976 
Loan receivable (note 4)   4,889,668    1,985,537 
Inventories (note 5)   32,751    32,599 
Prepaid expenses (note 6)   1,231,097    623,753 
Prepaid income taxes   214,583    216,374 
Total Current Assets  $8,815,398   $9,802,941 
           
Property, plant and equipment, net (note 7)   695,636    724,328 
Intangible assets, net (note 8)   649,083    1,208,421 
           
Total Assets  $10,160,117   $11,735,690 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current Liabilities          
Accounts payable  $9,965   $10,049 
Accrued expenses and other payables   459,300    453,485 
Trade deposit received   6,998    7,056 
VAT tax payable   65,938    38,560 
Total Current Liabilities  $542,201   $509,150 
           
Stockholders' Equity          
Common stock, $0.001 par value, 75,000,000 share authorized, 44,556,104 shares issued and outstanding at March 31, 2014 and December 31, 2013 (note 10)  $44,556   $44,556 
Additional paid in capital   14,102,507    14,102,507 
Statutory reserve (note 12)   810,540    810,540 
Accumulated other comprehensive income   3,478,345    3,559,970 
Accumulated (deficit)   (8,818,032)   (7,291,033)
Total Stockholders' Equity  $9,617,916   $11,226,540 
           
Total Liabilities and Stockholders' Equity  $10,160,117   $11,735,690 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

F-2


 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

(UNAUDITED)

 

   Three months ended March 31,
   2014  2013
       
Sales  $1,790,681   $1,003,714 
Sales rebates   (209,510)   (121,231)
Sales, net of  rebates   1,581,171    882,483 
Cost of sales   980,506    503,446 
Gross profit   600,665    379,037 
           
Advertising expense   183,893    796,001 
Selling, general and administrative expense   386,823    481,999 
Provision for doubtful accounts   1,259,178    3,240,731 
(Recovery of) Impairment loss on prepaid expenses   (66,746)   604,272 
Impairment of intangible assets   482,207    —   
(Loss) from operations   (1,644,690)   (4,743,966)
           
Interest income   117,691    —   
Total Other Income   117,691    —   
           
Net (Loss)   (1,526,999)   (4,743,966)
           
Other Comprehensive (loss) income - Foreign currency translation adjustment   (81,625)   58,373 
           
Comprehensive (loss)  $(1,608,624)  $(4,685,593)
           
Net (loss)  per common share          
    - basic and diluted  $(0.03)  $(0.11)
           
Weighted average common shares outstanding - basic and diluted   44,556,104    44,556,104 

 

 

 

The accompanying notes are an integral part of these financial statements

 

F-3


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

(UNAUDITED)

    Three months ended March 31,
    2014   2013
         
CASH FLOWS FROM OPERATING ACTIVITIES    
Net (loss)   $ (1,526,999 )   $ (4,743,966 )
Adjustments to reconcile net (loss) to net cash provided by operating activities                
Accrued interest     (117,691 )     —    
Depreciation and amortization of property, plant and equipment and intangible assets     94,083       92,206  
Provision for doubtful accounts     1,259,178       3,240,731  
(Recovery) Impairment of advance to suppliers     (66,746 )     604,272  
Write down of advances to employees     —         55,700  
Impairment of intangible assets     482,207       —    
                 
(Increase) decrease in current assets                
Accounts receivable     4,186,957       (292,064 )
Inventory     (425 )     349,889  
Prepaid expense     (550,316 )     866,891  
Other receivable     900       —    
Increase (decrease) in current liabilities                
Accounts payable     —         64,374  
Accrued expenses and other payables     9,639       19,576  
Value-added tax payable     27,903       33,849  
Net cash provided by operating activities     3,798,690       291,458  
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Cash advances to employees     —         (56,985 )
Repayment of loan principal and interest by an arm's length party     2,079,213       —    
Provision of loan to an arm's length party     (4,903,804 )     —    
Net cash (used in) investing activities     (2,824,591 )     (56,985 )
                 
Effect of exchange rate changes on cash and cash equivalents     (7,823 )     6,333  
                 
Net change in cash and cash equivalents     966,276       240,806  
Cash and cash equivalents, beginning balance     76,431       1,102,349  
Cash and cash equivalents, ending balance   $ 1,042,707     $ 1,343,155  
                 
SUPPLEMENTAL DISCLOSURES:                
Cash paid during the year for:                
Income tax payments   $ —       $ —    
Interest payments   $ —       $ —    
                 

 

The accompanying notes are an integral part of these financial statements

 

F-4


 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

Description  Common Shares  Amount  Additional Paid-in Capital  Accumulated Other Comprehensive Income  Statutory Reserves  (Accumulated Deficit)  Total Stock-holders' Equity
Balance, December 31, 2012 (Audited)   44,556,104   $44,556   $14,102,507   $3,196,765   $810,540   $(6,534,904)  $11,619,464 
Foreign currency translation adjustments   —      —      —      363,205    —      —      363,205 
Loss for the year   —      —      —      —      —      (756,129)   (756,129)
Balance, December 31, 2013 (Audited)   44,556,104    44,556    14,102,507    3,559,970    810,540    (7,291,033)   11,226,540 
Foreign currency translation adjustments   —      —      —      (81,625)   —      —      (81,625)
Loss for the three months   —      —      —      —      —      (1,526,999)   (1,526,999)
Balance, March 31, 2014 (Un-audited)   44,556,104   $44,556   $14,102,507   $3,478,345   $810,540   $(8,818,032)  $9,617,916 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

F-5


 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED STATEMENTS

MARCH 31, 2014

(UNAUDITED)

 

NOTE 1 - GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $1,526,999 and $4,743,966 for the three months ended March 31, 2014 and 2013. Further, the Company had accumulated deficit of $8,818,032 and $7,291,033 as at March 31, 2014 and December 31, 2013. These create an uncertainty about the Company’s ability to continue as a going concern. In this regard, the Company’s Chairman has issued a letter of undertaking that he will provide financial support to the Company (Note 14). These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

NOTE 2 – ORGANIZATION

 

China Pediatric Pharmaceuticals, Inc. ("the Company") was incorporated on April 20, 2005 in the state of Nevada.  The Company was originally incorporated under the name Belford Enterprises, Inc. and changed its name to Lid Hair Studios International Inc. on August 15, 2005.  Asia-Pharm Holding Inc. ("Asia-Pharm") was incorporated in British Virgin Islands on June 20, 2008.  China Children Pharmaceuticals Co. Limited ("China Children") a wholly owned subsidiary of Asia-Pharm Holdings Inc. was formed on June 27, 2008 under the laws of Hong Kong.  Xi'an Coova Children Pharmaceuticals Co., Ltd. ("Xi'an Coova" or "WOFE") is a "wholly owned foreign enterprise" incorporated in People's Republic of China ("PRC").  Xi'an Coova is a wholly owned subsidiary of China Children.

 

On September 30, 2009 the Company completed its merger with China Children; a Hong Kong based pharmaceutical manufacturer company in accordance with the Share Exchange Agreement.  The Share Exchange Transaction is being accounted for as a reverse acquisition.  In accordance with the Accounting and Financial Reporting Interpretations and Guidance prepared by the staff of the U.S. Securities and Exchange Commission, the Company (the legal acquirer) is considered the accounting acquiree and China Children (the legal acquiree) is considered the accounting acquirer for accounting purposes.  Subsequent to the Share Exchange Transaction, the financial statements of the combined entity will in substance be those of China Children.  The assets, liabilities and historical operations prior to the share exchange transaction will be those of China Children.  Subsequent to the date of Share Exchange Transaction, China Children is deemed to be a continuation of the business of the Company.  Therefore post-exchange financial statements will include the combined balance sheet of the Company and China Children, the historical operations of China Children and the operations of the Company and China Children from the closing date of the Share Exchange Transaction forward.

 

On August 4, 2008, an Entrustment Management Agreement was entered into between Xi'an Coova and Shaanxi Jiali Pharmaceuticals Co., Ltd. ("Shaanxi Jiali") to which China Children exercises control over the operations and business of Shaanxi Jiali through Xi'an Coova.  Pursuant to the Entrustment Management Agreement, China Children shall receive all net profits and assume all operational losses of Shaanxi Jiali through Xi'an Coova.

 

Xi'an Coova entered into a Management Entrustment Agreement with Shaanxi Jiali and the shareholders of Shaanxi Jiali (the "Management Entrustment Agreement"), in which Shaanxi Jiali and its shareholders agreed to transfer control, or entrust, the operations and management of its business to Xi'an Coova.  Under the agreement, Xi'an Coova manages the operations and assets of Shaanxi Jiali, controls all of the cash flows of Shaanxi Jiali through a bank account controlled by Xi'an Coova, is entitled to 100% of earnings before tax of Shaanxi Jiali, a management fee, and is obligated to pay all payables and loan payments of Shaanxi Jiali.  In addition, under the terms of the Management Entrustment Agreement, Xi'an Coova has been granted certain rights which include, in part, the right to appoint and terminate members of Shaanxi Jiali's Board of Directors, hire management and administrative personnel and control decisions relating to entering and performing customer contracts and other instruments.  We anticipate that Shaanxi Jiali will continue to be the contracting party under its customer contracts, bank loans and certain other instruments unless Xi'an Coova exercises its option.  The agreement does not terminate unless the business of Shaanxi Jiali is terminated or Xi'an Coova exercises its option to acquire all of the assets or equity of Shaanxi Jiali under the terms of the Exclusive Option Agreement.

 

F-6


 
 

The contractual arrangements completed in August 4, 2008 provide Xi'an Coova with controlling interest in Shaanxi Jiali as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation”, Section 10-15, “Variable Interest Entities”, which requires the Company to consolidate the financial statements of Shaanxi Jiali. The Company, as an entity that consolidates a Variable Interest Entity is called the primary beneficiary of the VIE. Accordingly, the Company is the primary beneficiary of Shaanxi Jiali.

 

The outstanding stock of the Company prior to the Share Exchange Transaction was accounted for at their net book value and no goodwill was recognized.  

 

The Company, through its subsidiary, and exclusive contractual arrangement with Shaanxi Jiali, is engaged in the business of manufacturing and marketing over-the-counter ("OTC") and prescription pharmaceutical products for the Chinese marketplace as treatment for a variety of diseases and conditions.

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.  The Company's functional currency is the Chinese Yuan (“Renminbi”, “RMB”); however the accompanying consolidated financial statements have been translated and presented in United States Dollars (“$”).

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the China Pediatric Pharmaceuticals, Inc., its wholly owned subsidiaries, China Children Pharmaceuticals Co. Limited, and Xi'an Coova Children Pharmaceuticals Co., Ltd. as well as Shaanxi Jiali Pharmaceuticals Co., Ltd., a variable interest entity (“VIE”) for which the Company is the primary beneficiary.  All inter-company accounts and transactions have been eliminated in consolidation.  

 

Unaudited Interim Financial Information

 

These unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. Therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2014.

 

The consolidated balance sheets and certain comparative information as of December 31, 2013 are derived from the audited consolidated financial statements and related notes for the year ended December 31, 2013 (“2013 Annual Financial Statements”), included in the Company’s 2013 Annual Report on Form 10-K. These unaudited interim consolidated financial statements should be read in conjunction with the 2013 Annual Financial Statements.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

F-7


 
 

Accounts Receivable

 

Management periodically reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate potential credit losses on accounts receivable. The Company grants 90 days payment terms to all credit sales customers.

 

Provision for doubtful accounts is estimated as follows: i) 50% on accounts that are outstanding between 91 and 180 days, ii) 75% on accounts that are outstanding between 181 to 365 days, and iii) 100% on accounts that are outstanding for over 365 days.

 

Segment Reporting

 

ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related information” requires us of the “management approach” model for segment reporting.  The management approach model is based on the way a Company’s management organizes segments within the company for making operating decisions and assessing performance.  Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.  The Company operates in one segment during the three months ended March 31, 2014 and 2013.

 

Recent Accounting Pronouncements

 

In February 2013, the FASB issued ASU No. 2013-02, which amends the authoritative accounting guidance under ASC Topic 220 “Comprehensive Income.” The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under generally accepted accounting principles in the United States of America (“GAAP”) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this update are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.

 

On March 4, 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon De-recognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This guidance resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This guidance is effective for interim and annual periods beginning after December 15, 2013. Adoption of this update is not expected to have a material effect on the Company’s consolidated results of operations or financial condition.

 

In July of 2013 the Financial Accounting Standards Board, or FASB issued Accounting Standards Update, or ASU, No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward exists. This guidance provide that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry-forward, except to the extent that carry-forwards are not available to settle any additional income taxes that would result from disallowance of a tax position. The unrecognized tax benefit should be presented as a liability. This guidance is applicable for fiscal years and interim periods beginning after December 15, 2013. The Company is evaluating the potential impact of adopting this standard on its consolidated financial statements.

 

As of March 31, 2014, there are no recently issued accounting standards not yet adopted that would have a material effect on the Company’s financial statements.

 

F-8


 
 

 

NOTE 4 – LOAN AND OTHER RECEIVABLES

 

On December 15, 2013, the Company provided a loan of $1,937,265 (RMB 12,000,000) to an arm’s length party.  The loan was unsecured, interest bearing at 2% per month, principal and interest totaling $2,079,213 was repaid in full on March 14, 2014. During the three months ended March 31, 2014, the Company recognized interest income of $95,460 with respect to this loan.

 

On March 25, 2014, the Company provided a loan of $4,903,804 (RMB 30,000,000) to the same arm’s length party.  The loan is unsecured, interest bearing at 2% per month, principal and interest are to be repaid in full in August, 2014. During the three months ended March 31, 2014, the Company recognized interest income of $22,231 with respect to this loan.

 

Other receivables mainly consist of cash advances to employees.  As of March 31, 2014 and December 31, 2013, other receivables were $92,306 and $93,976, respectively. During the three months ended March 31, 2014 and 2013, $nil and $55,700, respectively was written off.

 

 

NOTE 5 - INVENTORIES

 

As at March 31, 2014 and December 31, 2013, inventories consist of the following:

 

   3/31/2014  12/31/2013
Raw materials  $28,828   $29,068 
Finished goods   3,923    3,531 
   Total  $32,751   $32,599 

 

 

 

NOTE 6 - PREPAID EXPENSES

 

Prepaid expenses

 

Prepaid expenses as at March 31, 2014 and December 31, 2013 represent the following components:

 

  1. Advance payments to OEM manufacturers for goods purchased: the Company is normally required by its vendors to pay 40% of the consigned processing contract in advance and these payments are recorded as "prepaid expenses" accordingly. They are reclassified to "Inventory-finished goods" when purchases are completed, and then charged to COGS as revenue is recognized.
  2. Advance payments to suppliers for raw materials and packing materials: the Company is normally required to pay 30% down payment in accordance with the terms of the purchasing agreements in advance, and these payments are recorded as "prepaid expenses". They are reclassified to "Inventory-raw materials" when the procurement of materials are completed and then included in the "production cost" when these raw materials are utilized to produce finished goods, which will finally be charged to COGS at the time when revenue is recognized.
  3. Advance payments to advertising companies for promotion: the Company’s advertising contracts are normally for up to twelve months. Payment terms require the Company to make two to four payments during the first several months of contractual period. These payments are recorded as "prepaid expense" when made and charged against "Selling and Distribution expenses" when advertisement first takes place.

F-9


 
 

  Payee   Nature   3/31/2014   12/31/2013
Advance advertising payments Advertising companies (c)   Advance payments to advertising companies for promotion   $ 436,055   $ 623,753
Advance payment to suppliers Suppliers (a), (b)   Advance payments to OEM manufactures for goods purchased & suppliers for raw Materials and packing materials     795,042      -  
Total         $ 1,231,097   $ 623,753

 

During the three months ended March 31, 2014, the Company recognized a recovery of $66,746; during the three months ended March 31, 2013, the Company recognized an impairment loss of $604,272, on advances to certain suppliers.

 

 

NOTE 7 - PROPERTY, PLANT AND EQUIPMENT

As of March 31, 2014 and December 31, 2013, Property, Plant and Equipment consist of the following:

 

   3/31/2014  12/31/2013
Buildings  $584,028   $588,901 
Plant and equipment   1,125,755    1,135,149 
Transportation equipment   7,348    7,409 
Office equipment   56,377    56,847 
   Total   1,773,508    1,788,306 
Accumulated depreciation   (1,077,872)   (1,063,978)
   $695,636   $724,328 

 

Depreciation expense for the three months ended March 31, 2014 and 2013 were $22,866 and $22,845, respectively.

 

NOTE 8 - INTANGIBLE ASSETS

The Company has four proprietary technologies: propriety technology for antioxidant technique, proprietary technology for “liren” capsule, patent-Chinese medicine and production method for skin and gynecology disease and patent: Chinese medicine and production method for tracheitis.  Propriety technology for antioxidant technique was contributed by a shareholder in exchange for shares of the Company’s common stock.  Proprietary technology for “liren” capsule was purchased from third party at the price agreed by the Company and the third party.  Two patents were purchase from the shareholders at the prices determined by an independent appraiser.  These proprietary technologies were acquired for the future use of the Company.  We capitalized them as intangible assets as acquired. Land use rights will expire in 2056 and 2058.  The components of finite-lived intangible assets are as follows:

 

   3/31/2014  12/31/2013
Land use right  $346,642   $349,534 
Proprietary technologies   2,070,515    2,905,828 
   Total   2,417,157    3,255,362 
Accumulated amortization   (1,768,074)   (2,046,941)
   $649,083   $1,208,421 

 

Amortization expense for the three months ended March 31, 2014 and 2013 were $71,217 and $69,361, respectively.

 

F-10


 
 

During the three months ended March 31, 2014, the Company has recognized impairment on certain proprietary technologies with carrying amount totaling $482,207 (three months period ended March 31, 2013 : $Nil), relating to products that the Company no longer plans to sell or produce or with reduced future profitability.

 

The estimated future amortization expenses related to intangible asset as of March 31, 2014 are as follows:

 

Years ending December 31,    
2014 (9 months) $ 98,710
2015   131,613
2016   131,613
2017   58,885
2018   6,933
Thereafter   221,329
Total $ 649,083

 

 

NOTE 9 - INCOME TAXES

 

The Company was incorporated in the United States of America (“USA”) and has operations in one tax jurisdiction, i.e. the PRC. The Company generated substantially all of its net income from its operations in the PRC for the three months ended March 31, 2014 and 2013, and has recorded income tax provision for the periods. Deferred tax asset which may arise as a result of net operating losses and temporary differences has been offset by a valuation allowance due to the uncertainty surrounding their realization.

 

Uncertain Tax Positions

 

Interest associated with unrecognized tax benefits are classified as income tax, and penalties are classified in selling, general and administrative expenses in the statements of operations.

 

For the three months ended March 31, 2014 and 2013, the Company had no unrecognized tax benefits and related interest and penalties expenses.  Currently, the Company is not undergoing examination by major tax jurisdictions. However, the Company is subject to examination by major tax jurisdictions for all prior years.

 

 

NOTE 10 - SHARE CAPITAL

 

Common Shares

 

The total authorized capital is 75,000,000 common shares with a par value of $0.001 per share. On December 19, 2011, the Company declared a 7 to 2 forward stock split, effective February 29, 2012. The number of shares, income (loss) per share presented elsewhere in these consolidated financial statements has been adjusted to reflect the result of the stock split.

 

The Company did not issue any common stock during the three months ended March 31, 2014 and the year ended December 31, 2013. As at March 31, 2014 and December 31, 2013, total issued and outstanding common stock was 44,556,104.

 

F-11


 
 

 

NOTE 11 - STATUTORY RESERVE

 

In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund.  Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund.  The public welfare fund reserve was limited to 50 percent of the registered capital.  Effective January 1, 2006, there is now only one fund requirement.  The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.

 

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company.  Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees.  These reserves are not transferable to the Company in the form of cash dividends, loans or advances.  These reserves are therefore not available for distribution except in liquidation.  As at March 31, 2014 and December 31, 2013, the Company had allocated $810,540 to these non-distributable reserve funds.

 

NOTE 12 - CONCENTRATION AND CREDIT RISK

 

Two customers, each accounted for more than 10%, and individually accounted for 13% and 10% of accounts receivable totaling 23% as at March 31, 2014. There was no customer that accounted for more than 10% of accounts receivable at December 31, 2013. As of March 31, 2014 and December 31, 2013, two vendors, each accounted for more than 10%, and individually accounted for 30%, and 25% of accounts payable totaling 55%.

 

Three customers, each accounted for more than 10%, and individually accounted for 34%, 27% and 26% of total sales for the three months ended March 31, 2014, totaling 87%. Three customers, each accounted for more than 10%, and individually accounted for 27%, 21% and 11% of total sales for the three months ended March 31, 2013, totaling 59%. Two vendors, each accounted for more than 10%, and individually accounted for 48% and 45% of purchases during the three months ended March 31, 2014, totaling 93%. Two vendors each accounted for more than 10%, and individually accounted for 35% and 21% of purchases during the three months ended March 31, 2013, totaling 56%.

 

 

NOTE 13 – COMMITMENT

 

The Company is committed to pay $81,127 for advertising through December 2014.

 

 

NOTE 14 – CHAIRMAN FINANCIAL UNDERTAKING

 

On December 27, 2013, the Chairman issued an undertaking that the Chairman will give his every endeavor and effort to obtain necessary and adequate funding to meet the Company’s financial obligations as when required. There are no assurances that the Chairman will be successful in this endeavor.

 

 

NOTE 15 - SUBSEQUENT EVENT

 

The Company has evaluated subsequent events for potential recognition and disclosure. No significant events occurred subsequent to the March 31, 2014, to the date these consolidated financial statements are filed with the Securities Exchange Commissions that would have a material impact on the Company’s consolidated financial statements.

 

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Item 2.             Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of financial condition as at March 31, 2014 and December 31, 2013, and results of operation of the Company for the three months ended March 31, 2014 and 2013, should be read in conjunction with the consolidated financial statements and the notes to those statements are included elsewhere in this Quarterly Report.

 

Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (“Report”) contains forward-looking statements. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements, including any statements relating to future actions and outcomes including but not limited to prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expense trends, future interest rates, outcome of contingencies and their future impact on financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “contemplates,” “predicts,” “potential,” or “continue” or variations and/or the negative of these similar terms. Forward-looking statements are based on current expectations, estimates, forecasts and projections about the Company, us, our future performance, our beliefs and our Management’s assumptions. All forward-looking statements made in this Report, including any future written or oral statements made by us or on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

 

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. Any assumptions, upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this Report. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash.    Please also refer to our other filings with the Securities and Exchange Commission. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.

 

Overview

 

We are engaged in the business of manufacturing and marketing of over-the-counter and prescription pharmaceutical products for the Chinese marketplace as treatment for a variety of disease and conditions.

 

Critical Accounting Policies

 

We believe that the critical accounting policies and estimates discussed below involve the most complex management judgments due to the sensitivity of the methods and assumptions necessary in determining the related asset, liability, revenue and expense amounts. In consultation with our Board of Directors, we have identified the following critical accounting policies that require management’s most difficult subjective judgment:

 

Accounts receivable

 

We periodically reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate potential credit losses on accounts receivable. We grant 90 days payment terms to all credit sales customers.

 

Provision for doubtful accounts is estimated as follows: i) 50% on accounts that are outstanding between 91 and 180 days, ii) 75% on accounts that are outstanding between 181 to 365 days, and iii) 100% on accounts that are outstanding for over 365 days.

 

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Inventories

  

Inventories are valued at the lower of cost (determined on a weighted average basis) or market value. We compare the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if lower.

 

Intangible assets

 

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years.  We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.  

 

Results of Operations for the Three months Ended March 31, 2014 and 2013

 

Net sales

 

During the three months ended March 31, 2014, our gross sales have increased by 78% to $1,790,681 from $1,003,714 for the three months ended March 31, 2013. The increase was due the implementation of a new sales model. For the three months ended March 31, 2014, sales rebate was $209,510 or 12% of gross sales, compared to $121,231 or 12% for the same periods in 2013. Our net sales for the three months ended March 31, 2014 and 2013 were $1,581,171 and $882,483.

 

As we make improvements to our sales model, our sales has improved during the three months ended March 31, 2014, despite the previous disappointing result since we began implementing a new sales model in the 4th quarter of 2011. Management is optimistic that our sales will continue to improve.

 

 Cost of sales

 

For the three months ended March 31, 2014 and 2013, our costs of sales were $980,506 and $503,446 respectively, representing an increase of 95% or $477,060. This increase is consistent with the increase in sales. During the three months ended March 31, 2014, our costs of sales were 55% of our gross sales, as compared to 50% for the same period in 2013.

 

Gross profit

 

Gross profit for the three months ended March 31, 2014 and 2013 were $600,665 and $379,037, respectively. The increase was due to increase in sales volume.

 

Advertising expense

 

During the three months ended March 31, 2014 and 2013, we incurred $183,893 and $796,001 as advertising expense. We spent less on advertising to conserve cash.

 

Impairment loss on accounts receivables

 

Bad debt expense was $1,259,178 and $3,240,731 for the three months ended March 31, 2014 and 2013.

 

Our current average accounts receivable turnover is over 300 days as at March 31, 2014. Before September 30, 2011, we did not make any provision for bad debt as all our accounts receivable were collected within 90 days. Provision for doubtful accounts is now estimated as follows: i) 50% on accounts that are outstanding between 91 and 180 days, ii) 75% on accounts that are outstanding between 181 to 365 days, and iii) 100% on accounts that are outstanding for over 365 days.

 

During the year ended December 31, 2012, as part of the implementation of our new sales model, we have terminated our relationships with certain customers and distributors, as such, these customers and distributors were not as motivated to settle their outstanding amounts.

 

4


 
 

Selling, general and administrative expenses

 

Total selling, general and administrative expenses consist of salaries and wages, sales commission and other selling, general and administrative expenses. It decreased by 20% to $386,823 for the three months ended March 31, 2014 from $481,499 for the same period in 2013, and represents 22% and 48%, respectively, of our sales before sales rebate. The decrease in salary and wages, sales commission, and other selling, general and administrative expenses were due to improved efficiency.

 

Liquidity and Capital Resources

As at March 31, 2014, we have cash and cash equivalents of $1,042,707 and net working capital of $8,273,197.  We incurred a net loss of $1,526,999 for the three months ended March 31, 2014.  Further, we had accumulated deficit of $8,818,032 as at March 31, 2014.  These create an uncertainty as to our ability to maintain operations at the present level for at least the next twelve months.  In this regard, our Chairman has issued a letter of undertaking that will give his every endeavor and effort to obtain necessary and adequate funding to meet our financial obligations as when required.  

 

Cash flows from operating activities

 

During the three months ended March 31, 2014, net cash generated by operating activities was $3,798,690.  This is due to our net loss of $1,526,999, adjusted for non-cash expenses, which includes accrued interest of $117,691, depreciation and amortization of $94,083, provision for doubtful accounts of $1,259,178, recovery of advance to suppliers of $66,746, impairment of intangible assets of $482,207 and a net increase in working capital of $3,674,658.  

 

Cash flows from investing activities

 

On December 15, 2013, the Company provided a loan of $1,937,265 (RMB 12,000,000) to an arm’s length party.  The loan was unsecured, interest bearing at 2% per month, principal and interest totaling $2,079,213 were repaid in full on March 14, 2014.

 

On March 25, 2014, the Company provided a loan of $4,903,804 (RMB 30,000,000) to an arm’s length party.  The loan is unsecured, interest bearing at 2% per month, principal and interest are to be repaid in full in August, 2014.

 

Contractual Obligations

 

We are committed to pay $81,127 for advertising through December, 2014.

 

Off-Balance Sheet Commitments and Arrangements

 

We do not have any financial undertaking or any other guarantee responsible for third party obligations and commitments.  We have not entered into any derivative products contracts linking the Company’s equity that have not been reflected in the consolidated Pro Forma financial statements.  Furthermore, in passing our assets to those Bodies providing credits, clearing, or market risk support services, we have not reserved any rights or undefined rights on the passing of assets.  The Company does not have any benefits from Bodies providing finance, clearing, market risk or credit support services or with Bodies engaged by us for leasing, hedging or research and development services.

 

 

5


 
 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not required under Regulation S-K for “smaller reporting companies.”

 

Item 4. Controls and Procedures.

 

a) Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of March 31, 2014. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on our evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of March 31, 2014, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  The material weaknesses, which relate to internal control over financial reporting, that were identified are: 

 

  a) We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures.  As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis; and
   
  b) Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process.  The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis.

 

We are committed to improving our financial organization. As part of this commitment, we will look to increase our personnel resources and technical accounting expertise within the accounting function by the end of 2013 to resolve non-routine or complex accounting matters. In addition, when funds are available, which we expect to occur by the end of 2013, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel with technical accounting expertise to further support our current accounting personnel. As necessary, we will engage consultants or an outside accounting firm in order to ensure proper accounting for our consolidated financial statements.

 

Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weakness: insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements.

 

Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our internal accounting staff consists of only a small number of people, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turn over issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

 

6


 
 

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

(b) Changes in internal control over financial reporting.

 

 We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.  There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

 

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are currently not a party to any material legal proceedings or claims

 

Item 1A. Risk Factors.

   

Not required under Regulation S-K for “smaller reporting companies.”

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.

 

On February 16, 2011, the Company issued 50,000 shares of common stock to an employee.

 

On February 16, 2011, the Company issued 50,000 shares of common stock to a consulting company as consideration of the services provided to the Company and its affiliates within one year valued at $187,500.

 

The issuances of the above-mentioned shares were exempt from registration, in part pursuant to Regulation S under the Securities Act of 1933 (the “Act”) and in part pursuant to Section 4(2) of the Act. We made this determination based on the representations of the investors which included, in pertinent part, that such shareholders were not a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the Act, and that such shareholders were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the investors understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. (Removed and Reserved).

 

 

Item 5. Other Information.

 None.

 

Item 6. Exhibits.

 

31.01 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.02 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.01 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
EX 101.INS XBRL INSTANCE DOCUMENT
   
EX-101.SCH XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
   
EX-101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
   
EX-101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
   
EX-101.LAB XBRL TAXONOMY EXTENSION LABELS LINKBASE
   
EX-101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

 

 8


 
 

 

 

SIGNATURES

 

 

    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CHINA PEDIATRIC PHARMACEUTICALS, INC.
       
Dated: May 20, 2014    By: /s/ Jun Xia  
    Name: Jun Xia  
    Title: Chief Executive Officer  
    (principal executive officer)  
       
 Dated: May 20, 2014       
  By: /s/ Minggang Xiao  
    Name: Minggang Xiao  
    Title: Chief Financial Officer  
    (principal financial and accounting officer)  

 

 

 

 

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