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BASIS OF PRESENTATION
 9 Months Ended
Sep. 30, 2011
BASIS OF PRESENTATION  
BASIS OF PRESENTATION

NOTE 1 - BASIS OF PRESENTATION

 

Organization and Nature of Operations – China Pharma Holdings, Inc., a Delaware corporation, owns 100% of Onny Investment Limited (“Onny”), a British Virgin Islands corporation, that in turn owns 100% of Hainan Helpson Medical & Biotechnology Co., Ltd (“Helpson”), which is organized under the laws of The People's Republic of China (the “PRC”). China Pharma Holdings, Inc. and its subsidiaries are referred to herein as the Company.

 

The Foreign Investment Industrial Catalogue (the “Catalogue”) jointly issued by the China’s Ministry of Commerce and the National Development and Reform Commission (as the latest version is the year 2007 version) classified various industries/businesses into three different categories: (i) encouraged for foreign investment; (ii) restricted to foreign investment; and (iii) prohibited from foreign investment. For any industry/business not covered by any of these three categories, they will be deemed industries/businesses permitted for foreign investment. A typical foreign investment ownership restriction in the pharmaceutical industry is that a foreign investment enterprise (the “FIE”) shall not have the whole or majority of its equity interests owned by a foreign owner if the FIE establishes more than 30 branch stores and distributes a variety of brands in those franchise stores, which is not our case. Helpson manufactures and markets generic and branded

pharmaceutical products as well as biochemical products primarily to hospitals and private retailers located throughout the PRC. The Company believes Helpson’s business is not subject to any ownership restrictions prescribed under the Catalogue. Onny acquired 100% of the ownership in Helpson from Helpson’s three former shareholders on May 25, 2005 by entry into an Equity Transfer Agreement with such three parties on May 25, 2005. The transaction was approved by the Commercial Bureau of Hainan Province on June 12, 2005 and Helpson received the Certificate of Approval for Establishing of Enterprises with Foreign Investment in the PRC on the same day and its business license evidencing its WFOE (Wholly Foreign Owned Enterprise) status on June 21, 2005.

 

Through Helpson, the Company manufactures and markets generic and branded pharmaceutical products as well as biochemical products primarily to hospitals and private retailers located throughout the PRC. The Company has and continues to acquire well-accepted medical formulas to a diverse portfolio of Western and Chinese medicines.

 

Consolidation and Basis of Presentation – The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and are expressed in United States dollars. The accompanying consolidated financial statements include the accounts and operations of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Helpson’s functional currency is the Chinese Renminbi. Helpson’s revenue and expenses are translated into United States dollars at the average exchange rate for the period. Assets and liabilities are translated at the exchange rate as of the end of the reporting period. Gains or losses from translating Helpson’s financial statements are included in accumulated other comprehensive income, which is a component of stockholders’ equity. Gains and losses arising from transactions denominated in a currency other than the functional currency of the entity that is a party to the transaction are included in the results of operations.

 

Condensed Financial Statements – The accompanying unaudited condensed consolidated financial statements were prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Management of the Company (“Management”) believes the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2010.

 

These unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of Management, are necessary to present fairly the consolidated financial position and results of operations of the Company for the periods presented. Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

 

Accounting Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Basic and Diluted Earnings per Common Share - Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated to give effect to potentially issuable dilutive common shares.

 

The following table is a presentation of the numerators and denominators used in the calculation of basic and diluted earnings per share:

 

 

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

2011

2010

2011

2010

(As restated)

(As restated)

Net income

 $      4,974,883

 $      5,914,614

 $    15,147,575

 $    16,851,026

Basic weighted-average common shares outstanding

43,529,557

43,393,642

43,463,165

43,306,075

Effect of dilutive securities:

Warrants

                      -  

                      -  

                      -  

            186,203

Options

                      -  

              13,533

                      -  

              11,052

Diluted weighted-average common shares outstanding

43,529,557

43,407,175

43,463,165

43,503,330

Basic earnings per share

 $               0.11

 $               0.14

 $               0.35

 $               0.39

Diluted earnings per share

 $               0.11

 $               0.14

 $               0.35

 $               0.39

 

 

 

 

 

The following potential common shares were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive:

 

 

For the Nine Months

For the Nine Months

Ended September 30,

Ended September 30,

2011

2010

2011

2010

Warrants with exercise prices of $3.00 to $3.80 per share

            166,666

         1,916,666

            166,666

            736,111

Options with an exercise price of $2.54 to $3.47 per share

            310,000

            200,000

            310,000

            133,333

Total

            476,666

         2,116,666

            476,666

            869,444

 

 

Recently Announced Accounting Standards - In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements. The guidance requires the disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective for the Company as of January 1, 2011 and did not have a material impact on the condensed consolidated financial statements.

 

In April 2010, the FASB issued guidance to clarify classification of an employee stock-based payment award when the exercise price is denominated in the currency of a market in which the underlying equity security trades. The guidance became effective for the Company as of January 1, 2011 and did not have a material impact on the condensed consolidated financial statements.

 

Reclassifications – The Company has reclassified certain 2010 amounts to conform to the 2011 presentation. The principal item was the reclassification of $25,501,003 from intangible assets to advances for purchases of intangible assets on the accompanying condensed consolidated balance sheet at December 31, 2010. The reclassifications had no effect on net income.

 

Restatements of Condensed Consolidated Financial Statements – As the Company explained under Note 4 to the condensed consolidated financial statements contained in its original quarterly report on Form 10-Q for the period ended September 30, 2011, the Company had classified payments made for medical formulas and patents that had not obtained the State Food and Drug Administration's (the "SFDA") production approval as intangible assets and had recognized $2,066,041 of amortization expense on them at September 30, 2011. The reason is that the Company believed it had obtained defensive assets at the dates they were acquired, and therefore the Company decided to start amortizing them from the dates acquired rather than the dates they were placed into production. However, the Company has subsequently reassessed the classification of these payments and has determined, based on the analysis further discussed in Note 5, that $29,209,776 of these payments at September 30, 2011 should have been classified as advances for the purchase of intangible assets rather than intangible assets because the amounts were for medical formulas and patents that have not been approved by the SFDA and they are refundable if SFDA production approval is not received. As a result of this reclassification, the $2,066,041 of amortization expense previously recognized on these payments has been reversed in the accompanying restated condensed consolidated financial statements for the three and nine months ended September 30, 2011. The results of the restatement were as follows:

 

As Previously

As

Balance Sheet Amounts

Reported

Adjustment

Restated

September 30, 2011

Advances for purchases of property and equipment and

intangible assets

 $         6,133,655

 $       29,209,776

 $       35,343,431

Intangible assets, net of accumulated amortization

          30,330,505

        (27,111,431)

            3,219,074

Long term deferred tax assets

               274,157

             (274,157)

                        -  

Total assets

        149,119,249

            1,824,188

        150,943,437

Long-term deferred tax liability

                        -  

               114,772

               114,772

Total liabilities

          13,199,874

               114,772

          13,314,646

Retained earnings

          98,481,501

            1,683,098

        100,164,599

Accumulated other comprehensive income

          14,002,919

                 26,318

          14,029,237

Total stockholders' equity

        135,919,375

            1,709,416

        137,628,791

Total liabilities and stockholders' equity

        149,119,249

            1,824,188

        150,943,437

 

 

Statement of Operations and

As Previously

As

Comprehensive Income Amounts

Reported

Adjustment

Restated

For the nine months ended September 30, 2011

General and administrative expenses

 $         4,591,270

 $       (2,066,040)

 $         2,525,230

Total operating expenses

            6,816,323

          (2,066,040)

            4,750,283

Income from operations

          14,996,608

            2,066,040

          17,062,648

Income before income taxes

          15,751,650

            2,066,040

          17,817,690

Income tax expense

          (2,287,173)

             (382,942)

          (2,670,115)

Net income

          13,464,477

            1,683,098

          15,147,575

Comprehensive income

          17,843,127

            1,709,416

          19,552,543

Basic earnings per share

 $                  0.31

 $                  0.04

 $                  0.35

Diluted earnings per share

 $                  0.31

 $                  0.04

 $                  0.35

 

 

Statement of Operations and

As Previously

As

Comprehensive Income Amounts

Reported

Adjustment

Restated

For the three months ended September 30, 2011

General and administrative expenses

 $         2,687,376

 $       (2,066,040)

 $            621,336

Total operating expenses

            3,618,004

          (2,066,040)

            1,551,964

Income from operations

            3,897,885

            2,066,040

            5,963,925

Income before income taxes

            3,836,688

            2,066,040

            5,902,728

Income tax expense

             (544,903)

             (382,942)

             (927,845)

Net income

            3,291,785

            1,683,098

            4,974,883

Comprehensive income

            4,822,446

            1,709,416

            6,531,862

Basic earnings per share

 $                  0.08

 $                  0.03

 $                  0.11

Diluted earnings per share

 $                  0.08

 $                  0.03

 $                  0.11

 

 

As Previously

As

Statement of Cash Flows Amounts

Reported

Adjustment

Restated

For the nine months ended September 30, 2011

Net income

 $       13,464,477

 $         1,683,098

 $       15,147,575

Depreciation and amortization

            3,147,930

          (2,066,040)

            1,081,890

Deferred taxes

             (315,153)

               382,942

                 67,789

Net Cash Provided by Operating Activities

            5,410,267

                        -  

            5,410,267