Attached files
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EX-99.3 - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v204666_ex99-3.htm |
EX-99.2(B) - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v204666_ex99-2b.htm |
EX-99.1(B) - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v204666_ex99-1b.htm |
EX-99.1(A) - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v204666_ex99-1a.htm |
EX-99.2(A) - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v204666_ex99-2a.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K/A
(Amendment
No. 1)
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
September 15, 2010
|
Date
of Report (Date of earliest event
reported)
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First China Pharmaceutical Group,
Inc.
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(Exact
Name of Registrant as Specified in
Charter)
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Nevada
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333-151212
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74-3232809
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||
(State
or Other Jurisdiction of Incorporation)
|
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(Commission
File Number)
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(IRS
Employer Identification No.)
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Number
504, West Ren Min Road,
Kunming
City, Yunnan Province
People’s Republic of China,
650000
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(Address
of Principal Executive
Offices)
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852-2138-1668
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(Registrant’s
telephone number, including area
code)
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800 Bellevue Way, Suite 400, Bellevue, Washington
98004
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(Former
Name or Former Address, if Changed Since Last
Report.)
|
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
¨
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
¨
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
|
¨
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Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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EXPLANATORY
NOTE
First
China Pharmaceutical Group, Inc. (the “Company”) is filing this Amendment No. 1
to its Current Report on Form 8-K which was originally filed with the Securities
and Exchange Commission (“SEC”) on September 21, 2010 (the “Original Form 8-K”)
to incorporate the Company’s revisions and responses to a letter of comment from
the staff of the SEC dated as of October 21, 2010.
Except
for the amended disclosures made in response to the letter of comment from the
staff of the SEC, the information in this Form 8-K/A has not been updated to
reflect events that occurred after September 21, 2010, the filing date of the
Original Form 8-K. Accordingly, this Form 8-K/A should be read in
conjunction with the Company’s filings made with the SEC subsequent to the
filing of the Original Form 8-K, including any amendments to those filings. The
following sections have been amended, without limitation:
Item
2.01.
|
Completion
of Acquisition or Disposition of
Assets.
|
|
·
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Description
of Business
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|
·
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Risk
Factors
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·
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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|
·
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Directors
and Executive Officers
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|
·
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Executive
Compensation
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Item
3.02
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Unregistered
Sale of Equity Securities
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Item
9.01.
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Financial
Statements and Exhibits.
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·
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Exhibit
99.1(a)
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|
·
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Exhibit
99.1(b)
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·
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Exhibit
99.2(a)
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·
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Exhibit
99.2(b)
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·
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Exhibit
99.3
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Except as
set forth above, all other information in the Company’s Original Form 8-K
remains unchanged. The Company has re-filed the entire Form 8-K in order to
provide more convenient access to the amended information in
context.
Cautionary
Notice Regarding Forward-Looking Statements
This
Current Report on Form 8-K (“Form 8-K”) and other reports filed by the
Registrant from time to time with the Securities and Exchange Commission
(collectively the “Filings”) contain or may contain forward-looking statements
and information that are based upon beliefs of, and information currently
available to, the Registrant’s management as well as estimates and assumptions
made by the Registrant’s management. When used in the filings the words
“anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the
negative of these terms and similar expressions as they relate to the Registrant
or the Registrant’s management identify forward-looking statements. Such
statements reflect the current view of the Registrant with respect to future
events and are subject to risks, uncertainties, assumptions and other factors
(including the risks contained in the section of this report entitled “Risk
Factors”) relating to the Registrant’s industry, the Registrant’s operations and
results of operations and any businesses that may be acquired by the Registrant.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended or
planned.
1
Although
the Registrant believes that the expectations reflected in the forward-looking
statements are reasonable, the Registrant cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, the
Registrant does not intend to update any of the forward-looking statements to
conform these statements to actual results. The following discussion should be
read in conjunction with the Registrant’s financial statements and pro forma
financial statements and the related notes filed with this Form
8-K.
Unless
otherwise indicated, in this Form 8-K, references to “we,” “our,” “us,” the
“Company,” “FCPG” or the “Registrant” refer to First China Pharmaceutical Group,
Inc., a Nevada corporation and its wholly owned subsidiaries, First China
Pharmaceutical Group Limited, a Hong Kong company, and Kun Ming Xin Yuan Tang
Pharmacies Co. Ltd., a company organized under the laws of the People’s Republic
of China.
Section
2 - Financial Information
Item
2.01.
|
Completion
of Acquisition or Disposition of
Assets.
|
On
September 15, 2010, First China Pharmaceutical Group, Inc., a Nevada corporation
(the “Registrant” or “FCPG”), closed a voluntary share exchange transaction with
First China Pharmaceutical Group Limited, a Hong Kong company (“FCPG HK”)
pursuant to a Share Exchange Agreement dated August 23, 2010 (the “Exchange
Agreement”) by and among FCPG, FCPG HK, and Kun Ming Xin Yuan Tang Pharmacies
Co. Ltd., a company organized under the laws of the People’s Republic of China
(“PRC”) and wholly owned subsidiary of FCPG HK (“XYT”).
FCPG HK
acquired all of the outstanding stock of XYT on June 25, 2010. XYT is
engaged in drug logistics and distribution in China through XYT drug stores,
clinics and hospitals, as well as the wholesale distribution of medicine
products, chemical agents, antibiotics, biochemistry drugs and biological
preparations to hospitals and XYT stores. XYT has a sales network that covers
the entire Yunnan Province of China. XYT’s strategy is to build a
nationwide pharmaceutical distribution network throughout China.
Prior to
the voluntary share exchange under the Exchange Agreement (“Exchange
Transaction”), we were a public reporting “shell company,” as defined in Rule
12b-2 of the Securities Exchange Act of 1934, as
amended. Accordingly, pursuant to the requirements of Item 2.01(a)(f)
of Form 8-K, set forth below is the information that would be required if the
Registrant were filing a general form for registration of securities on Form 10
under the Exchange Act for the Registrant’s common stock, which is the only
class of its securities subject to the reporting requirements of Section 13 or
Section 15(d) of the Exchange Act upon consummation of the Exchange
Transaction.
As a
result of the Exchange Transaction, the sole stockholder of FCPG HK acquired
approximately 25% of our issued and outstanding common stock, FCPG HK and XYT
became our wholly owned subsidiaries, and the Company acquired the business and
operations of FCPG HK and XYT.
The
Exchange Agreement contains customary representations, warranties, and
conditions to closing. The following description of the terms and
conditions of the Exchange Agreement and the transactions contemplated
thereunder that are material to the Company does not purport to be complete and
is qualified in its entirety by reference to the full text of the Exchange
Agreement, a copy of which was filed as Exhibit 2.1 to a Current Report on Form
8-K on August 24, 2010 and is incorporated by reference into this
Item 2.01.
There
were no material relationships between the Registrant or its affiliates and any
of the parties to the Exchange Agreement, other than in respect of the Exchange
Agreement.
2
From and
after the Closing Date, our primary operations will consist of the business and
operations of FCPG HK and XYT. Therefore, we disclose information
about the business, financial condition, and management of FCPG HK and XYT in
this Form 8-K.
Issuance of Common
Stock. At the closing of the Exchange Transaction (the
“Closing”), the Company issued a total of 15,000,000 shares of its common stock
to the sole stockholder of FCPG HK (the “FCPG HK Stockholder”) in exchange for
100% of the issued and outstanding capital stock of FCPG
HK. Immediately prior to the Exchange Transaction, the Company had
45,000,000 shares of common stock issued and outstanding. Immediately
after the Exchange Transaction, the Company had 60,000,000 shares of common
stock issued and outstanding.
Change in Management.
As a condition to closing the Exchange Agreement, effective September 15,
2010, Mr. Zhen Jiang Wang was appointed to the Company’s board of directors as
Chairman, Mr. Aidan Hwuang resigned as the Company’s President, Chief Financial
Officer and Secretary, and Mr. Roderick Macutay resigned from the Company’s
board of directors.
The
following persons consist of the Company’s new executive officers and directors
subsequent to the closing of the Exchange Transaction:
Name
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Age
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Position
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||
Mr.
Zhen Jiang Wang
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53
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Chairman
and Chief Executive Officer
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Ms.
Jing Gong
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37
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President
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Mr.
Yong Kang Chen
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73
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Senior
Vice President, Quality Control
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||
Ms.
Yi Jia Li
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41
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Chief
Financial Officer
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The
Company previously filed and mailed the Information Statement required under
Rule 14(f)-1 to its stockholders on or about August 9, 2010, and the ten-day
period prior to the change in the majority of the Company’s directors as
required under Rule 14(f)-1 expired on August 20, 2010. Additional
information regarding the above-mentioned directors and/or executive officers is
set forth below under the section titled “Management.”
For
accounting purposes, the Exchange Transaction has been accounted for as a
purchase of FCPG HK by the Registrant under the purchase method for business
combinations. Consequently, the historical financial statements of the
Registrant included in the Registrant’s periodic filings with the SEC continue
as the historical financial statements of the Registrant. The
consolidated financial statements of FCPG HK are set forth in Exhibit 99.1 of
this report. Pro forma information is only presented for the balance
sheet, as on the date of the Exchange Agreement, the Registrant was considered a
public shell and accordingly, the transaction was not considered a business
combination. For pro forma financial information, see Exhibit 99.2 of this
report.
DESCRIPTION
OF BUSINESS
Except as
otherwise indicated by the context, references to “we”, “us” or “our”
hereinafter in this Form 8-K are to the consolidated business of FCPG HK
and XYT, except that references to “our common stock”, “our shares of common
stock” or “our capital stock” or similar terms shall refer to the common stock
of the Registrant.
3
Overview
Kun Ming
Xin Yuan Tang Pharmacies Co. Ltd (“XYT”), was founded in November 2002 and has
its head office and warehouse at Number 504, West Ren Min Road, Kunming, City,
Yunnan Province, PRC. XYT is engaged in drug logistics and
distribution in Yunnan Province, China through drug stores, medical clinics and
hospitals. XYT is a provincial pharmaceutical distributor that offers
approximately 5,000 drugs, of which approximately 1,000 are over-the-counter
drugs, approximately 1,000 are prescription drugs, approximately 2,000 are
prepared Chinese medicines and approximately 1,000 are supplements. Currently,
XYT has approximately 4,700 customers and supplies approximately 10% of such
customers’ inventories.
First
China Pharmaceutical Group Limited, a Hong Kong company (“FCPG HK”) acquired all
of the outstanding stock of XYT on June 25, 2010. Subsequently, the
sole stockholder of FCPG HK sold 100% of the outstanding shares of FCPG HK to
Mr. Zhen Jiang Wang, who also owned 95% of the outstanding stock of XYT prior to
its acquisition by FCPG HK.
Background
Prior to
the Exchange Transaction, the Company was known as E-Dispatch, Inc. and was a
development stage company and was engaged in the development of a cellular
phone-based taxi dispatch system. As a result of the current
difficult economic environment and the Company’s lack of funding to implement
its business plan, in early 2010, the Company’s Board of Directors began to
analyze strategic alternatives available to the Company to continue as a going
concern. Such alternatives include raising additional debt or equity financing
or consummating a merger or acquisition with a partner that may involve a change
in its business plan. However, the Company was unable to raise
capital in order to develop or deploy its taxi dispatch
system. Therefore, the Company, in consultation with its advisors,
identified FCPG HK as a potential strategic acquisition that the Board of
Directors believed to be in the best interest of the Company and its
shareholders. FCPG HK through its operating subsidiary, XYT, was
attractive to the Company because it is in a growing pharmaceutical industry,
has a strong presence in Yunnan Province and has plans to grow its business
throughout China. XYT and FCPG HK believed the Company to be an
attractive business combination partner, due in part, to the perceived benefits
of being a publicly registered company, allowing for increased access to capital
raising. Accordingly, the parties entered into a letter of intent
with respect to the Exchange Transaction on May 14, 2010, executed the Exchange
Agreement on August 23, 2010, and closed the Exchange Transaction on September
15, 2010. With the exception of bonus payments based on two percent
of the quarterly gross sales of XYT to be paid to Mr. Zhen Jiang Wang, the
Exchange Agreement does not contemplate any material payments or benefits to be
received by the parties thereto. In addition, the Exchange Agreement
contemplates that the Company will use its best efforts to conduct a financing
of between $3,000,000 to $10,000,000 within 30 to 90 days of the closing of the
Exchange Transactions; such efforts are currently in progress.
4
Corporate
Structure
As a
result of the Exchange Transaction, the organizational structure of the
Registrant is as follows:
This
corporate structure was created to establish XYT as a Wholly Foreign Owned
Enterprise (“WFOE”). A WFOE is a limited liability company operating
in China that is wholly owned by the foreign investors, in this case FCPG
HK. FCPG HK was established on April 29, 2010 and the purpose of
setting up FCPG HK is investment and holding. On May 13, 2010, FCPG
HK entered into share transfer agreements with Mr. Zhen Jiang Wang and Ms. Jing
Gong, respectively, under which FCPG HK acquired all of the outstanding stock of
XYT at a total consideration of RMB 2 million. On June 25, 2010, XYT
received its new business license and became a WFOE under the PRC
laws. Under the PRC Enterprise Income Tax Law, effective January 1,
2008 and its implementing rules, the profits of a foreign invested enterprise
which are distributed to its immediate holding company outside the PRC will be
subject to a withholding tax rate of 10%. Pursuant to a special arrangement
between Hong Kong and the PRC, FCPG HK may qualify for a lower rate, 5%, for the
profits distributed by XYT. For additional discussion, please refer to the
section entitled “Risk Factors.”
The
unique feature of a WFOE is that it can avoid certain problematic issues which
can potentially result from dealing with a domestic joint venture partner in
China. Under PRC law, as a WFOE, our PRC subsidiary may pay dividends
only out of its accumulated after-tax profits, if any, determined in accordance
with PRC accounting standards and regulations and tax law. In
addition, our PRC subsidiary is required to set aside at least 10% of its
after-tax profit based on PRC accounting standards each year to its statutory
surplus reserve fund until the accumulative amount of such reserve reaches 50%
of its respective registered capital. These reserves are not
distributable as cash dividends. The board of directors of a wholly
foreign-owned enterprise has the discretion to allocate a portion of its
after-tax profits to its staff welfare and bonus funds. After the
allocation of relevant welfare and funds, the equity owners can distribute the
rest of the after-tax profits provided that all the losses of the previous
fiscal year have been made up. FCPG
HK may be required to
repay the distributed profits if the
distribution is made without the allocation of relevant welfare and funds
and losses made-up. In
addition, according to PRC law on WFOEs, companies may be subject to a fine up
to RMB5,000 as a result of non-compliance with the above rules. However, the
Company believes that it has compiled with relevant rules about its statutory
reserve fund.
5
The
registered capital of XYT is US$260,100. The shareholders of XYT have
not determined the proportion of reserve funds and bonus and welfare funds for
workers and staff members, and XYT has not previously distributed any profits.
If the shareholders of XYT decide to distribute profits in the future, XYT will
comply with the relevant rules to withdraw statutory reserve funds to no lower
than 10% of the total amount of profits after payment of tax. Therefore, there
would be no penalty applicable to XYT.
Despite
the extensive regulatory framework related to WFOE’s, the advantages of
establishing a WFOE generally include:
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·
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Independence
and freedom to implement the worldwide strategies of its parent company
without having to consider the involvement of Chinese
law;
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·
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Ability
to formally carry out business and the ability to issuing invoices to
customers in RMB and receive revenues in
RMB;
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·
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Capable
of converting RMB profits to US dollars or other foreign currency for
remittance to their parent company outside China;
and
|
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·
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Greater
protection of intellectual property rights, know-how and technology since
no partner required and therefore more control of
IP.
|
Strategy
XYT
believes it has a strategic advantage over certain of its competitors in Yunnan
Province as it has obtained government approval to fill orders over the
internet. XYT received the License of Internet Drug Information Service issued
by the Yunnan Food and Drug Administration in October 2009. This
license enables XYT to bypass municipal and county pharmaceutical distributors,
market XYT’s product line, provide pricing information and provide products
directly to XYT customers. Bypassing these layers of distribution
enables XYT to offer products to its customers at a significantly lower price
than its major competitors while maintaining its margins.
Through
their own industry research and documents from the Yunnan Food and Drug
Administration, XYT’s management believes that there are currently 491 drug
distribution companies in Yunnan Province and that 42 of these companies also
possess the License of Internet Drug Information Service. However,
XYT is in the process of applying for a second internet license, the Internet
Transaction Service License, which is offered by the Yunnan Food and Drug
Administration. This license provides for the license holder
to provide secured access to XYT's proprietary computer fulfillment
system, advertise, list inventories, take orders, provide shipping confirmation,
invoice the customer and accept payment over the internet. Through
its own industry research and documents from the Yunnan Food and Drug
Administration, XYT management believes that there are currently only two drug
manufacturing companies in Yunnan Province that possess the Internet Transaction
Service License. If XYT is successful in obtaining this license,
management believes it will be the only drug distribution company in Yunnan
province that will possess the Internet Transaction Service
License.
Products
and Distribution
XYT
currently distributes Chinese patent drugs, herbs, pharmaceutical
chemicals, biological products, antibiotics, biochemical drugs and
small medical instruments. These products are purchased by licensed
pharmaceutical users and retailers such as hospitals, medical clinics and
pharmacies. Small licensed drug distributors also purchase these
products to distribute.
6
The short
term objective of XYT is to broaden its product line to 30,000
products. Management believes that by expanding its product line
six-fold and offering products at a lower price than its major competitors, XYT
will be able to supply its current customers with over 80% of the pharmaceutical
products they require and become their primary supplier. In
addition to selling significantly more products to its approximately 4,700
existing customers, XYT also plans to aggressively attract 5,000 new primary
customers. Over the next 12 months XYT plans to expand its customer
base by 5,000 through the use of the following tactics: broadening of the
current product line will attract more large customers that currently do not
utilize XYT and benefit from internet ordering and the lower prices
that XYT offers; providing computers to customers will also attract new
customers as XYT’s management is unaware of any other pharmaceutical
distribution company providing this benefit; supplementing XYT’s
current sales force with the addition of at least two additional sales teams
that will make calls directly to hospitals, medical clinics and
pharmacies. XYT anticipates that each sales team will be composed of
a sales manager and 10 sales people.
XYT’s
Internet Drug Information Service License enables XYT to use the internet to
market XYT's product line, display the inventory it holds, provide pricing
information, conduct live "chats" with customers and receive orders through
email. Customers access XYT's website at www.kmxyt.com. Access
to the website is only provided to customers that are screened to be authentic
licensed hospitals, medical clinics, pharmacies and drug distribution
companies. Customers must provide XYT with the appropriate government
licenses prior to being issued a user ID and password to the
site. Once on the site, customers can review products by drug type,
manufacturer, price and other criteria. Customers can use a VOIP
system built into the software to talk to XYT customer representatives and can
place orders directly with them, by email or through the traditional
telephone.
XYT
estimates that only 10% to 15% of its current customers have access to a
personal computer. As such, the vast majority of its customers cannot
utilize XYT’s internet ordering system. XYT plans to leverage its
internet ordering system by providing personal computers to its
customers. XYT anticipates that over the next 12 months,
approximately 60% of its current 4,700 customers (approximately 2,800) will be
provided a personal computer and that such customers will purchase at least 60%
of their drugs from XYT. XYT reserves the right to obtain full
payment for the personal computers provided to their customers if
they do not purchase at least 60% of their pharmaceutical orders from XYT or if
XYT determines it cannot verify the total pharmaceutical orders of its
customers. These XYT high volume customers will become XYT “members”
that will be granted special recognition and benefits, including:
|
·
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more
favorable payments terms;
|
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·
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free
personal computers for order
placement;
|
|
·
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access
to specialty drugs; and
|
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·
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discount
pricing, through volume purchases.
|
Part of
what will differentiate XYT from other pharmaceutical distributors is the
creation of a brand image for the company. Once XYT has broadened its
product line and commenced offering customers personal computers to facilitate
online ordering, it will begin to establish itself as a unique
brand. Customers will be offered attractive signs to be displayed in
their premises to indicate that XYT/FCPG is their pharmaceutical supplier of
choice and to indicate to their customers that they deal with a credible
pharmaceutical supplier.
Currently,
XYT owns an over 3,000 square meter warehouse, which includes GSP certified room
temperature storeroom, cool storeroom, cold storage, hazardous materials storage
and gamy materials storage. By forming an alliance with the largest
national logistics company - Deppon Logistics - we can utilize its local
sub-branch network that can deliver our products timely and
economically.
XYT has a
proprietary Enterprise Resource Planning (“ERP”) system that is integrated with
its internet ordering process, which enables XYT to directly procure
pharmaceutical products from drug manufacturers and from the large national
distributor, Anhui Huayuan Pharmaceutical Co. This enables XYT to
execute a direct sales model, where some products can be shipped from the
manufacturer or national distributor to XYT’s customers. We expect
this strategic use of technology to significantly enhance profits of both XYT
and its direct customers.
7
XYT does
not possess any patents or trademarks. However, XYT possesses a
computer software system that has been developed exclusively for XYT that
permits customers to access the company's inventory, marketing and ordering
systems through the internet. The Company considers this computer
software system, as well as the XYT brand name and Internet Drug Information
Service License, to be valuable assets.
Industry
The PRC
pharmaceutical distribution industry has evolved in the past 30 years from a
complex, multi-tiered system that was subject to strict control at every
governmental level to a competitive and increasingly market-oriented industry.
From 1950 to 1979, all Chinese pharmaceutical distributors were state-owned and
categorized into national, provincial and municipal-level distributors. The
price markup at each level, from pharmaceutical manufacturer to end-consumer,
was subject to a total markup cap of 28%. During the 1 980s, the rigid
three-level distribution system gave way to a more open and decentralized
network. Driven by increasing demand for pharmaceutical products in the past
three decades, the PRC pharmaceutical industry has experienced rapid growth. The
numbers of pharmaceutical manufacturers and distributors have also increased
significantly until recent years, when competition and government regulations
and policies started to drive consolidation in the industry. As a result of
these developments, the market volume of the PRC pharmaceutical distribution
market has steadily increased.
Market
Drivers
The
significant growth of China’s population aged 60 or above is expected to drive
demand for healthcare and pharmaceutical products in China. According
to the PRC National Bureau of Statistics, the proportion of the population aged
60 or above in China has increased from 11.9% in 2003, or approximately 150.0
million people, to 13.6%, or approximately 162.2 million people in
2007. Rising life expectancy is also expected to contribute to the
growth of China’s aging population, both as an absolute number and as a
percentage of the total population. We believe that the aging
population in China, which historically spends the most on healthcare, will
drive the growth of the PRC healthcare and pharmaceutical
industries. The prevalence of chronic health problems, such as
arthritis, cardiovascular diseases and cancer, is expected to increase with the
growth of China’s population aged 60 or above. In addition, as living standards
continue to improve and health consciousness grows in China, many
lifestyle-related diseases are also increasing and becoming more
widespread. For example, Business Monitor International estimates
that sales of prescription cardiovascular medicines increased by 87% from ¥19.0
billion, or approximately US$2.8 billion, in 2003 to ¥35.3 billion, or
approximately US$5.2 billion, in 2007, primarily as a result of the rising
prevalence of heart disease in an aging population and increasingly unhealthy
lifestyles in the population at large.
According
to the China Statistical Yearbook 2008 (the “Yearbook”), from 2003 to 2007, the
average per capita annual disposable income of China’s urban residents increased
from approximately ¥8,472, or approximately US$1,250, to ¥13,785, or
approximately US$2,025, representing a compound annual growth rate (“CAGR”) of
approximately 12.9%. According to the Yearbook, China’s GDP grew at a
CAGR of 16.4% from 2003 to 2007, and its per capita GDP grew from ¥10,542, or
approximately US$1,550, in 2003 to approximately ¥18,934, or approximately
US$2,780, in 2007, representing a CAGR of 15.8%. During this period, national
income and disposable income levels increased significantly.
8
With
rising living standards and increasing disposable income, people in China have
become more health conscious. These developments have resulted in both Chinese
urban and rural residents spending more on healthcare. According to the PRC
National Bureau of Statistics, consumer expenditures on healthcare in China’s
urban and rural areas increased from approximately ¥476.0, or approximately
US$70, and ¥117.8, or approximately US$17, per person in 2003, respectively, to
approximately ¥699.0, or approximately US$100, and ¥210.2, or approximately
US$30, per person in 2007, respectively.
National
Medical Insurance Program
The
National Medical Insurance Program (“National Program”), which was introduced in
1999, is the largest medical insurance program in China. The National Program is
funded with varying levels of contributions from the PRC Government, individual
program participants and their employers.
In 1999,
the National Program was originally launched as the Urban Worker Basic Medical
Insurance Program (“Urban Worker Program”), a mandatory scheme covering urban
workers and their minor children. In 2007, a voluntary component
called the Urban Resident Basic Medical Insurance Program (“Urban Resident
Program”) was further implemented as part of the National Program, to cover the
rest of the urban residents that are not covered by the Urban Workers
Program. The National Program provides guidance on which prescription
and over-the-counter medicines are included in the National Program and to what
extent the purchases of these medicines are reimbursable. See the
section headed “Government Regulation — Reimbursement Under the National Medical
Insurance Program” below for further information.
We
believe that only a small percentage of the Chinese population can afford
commercial insurance plans. Therefore, the National Program coverage is expected
to expand in the future. According to the PRC National Bureau of Statistics, the
percentage of PRC urban residents grew from approximately 37.7% of the total
population to 44.9% from 2001 to 2007. The number of people covered by the
National Program increased from approximately 37.9 million in 2000 to 180.2
million in 2007, representing a CAGR of 25%. This trend is anticipated to
continue as the Eleventh Five-Year Plan government development initiative
projects that the PRC urban population will increase from 45% to 47% of China’s
total population between 2007 to 2010. Furthermore, the provincial and municipal
authorities who are responsible for administering social medical insurance funds
to cover such reimbursements have been gradually increasing funding in recent
years. According to the PRC Ministry of Labor and Social Security, total funding
under the national insurance program reached ¥225.7 billion, or approximately
US$28.9 billion, in 2008, representing an increase of 29.2% from 2007. The
availability of funding is expected to increase significantly in the near
future, primarily as a result of increased financial and policy support from
various levels of the PRC government.
Access
to Healthcare in Rural Areas
At the
fifth meeting of the tenth National People’s Congress held in March 2007, the
PRC Government announced its goal to accelerate the reform and development of
healthcare services in the PRC and focus on building a basic healthcare system
that covers both rural and urban areas. The PRC Government’s plans include
providing expanded healthcare services for its rural citizens and establishing
comprehensive community healthcare service centers that would provide basic
medical treatment and pharmaceutical services, as well as upgrading existing
class-two hospitals and state owned medical facilities. The public health
service centers would be allocated based on demand and population.
In
addition, the PRC Government has actively promoted the implementation of the New
Rural Cooperative Medical Insurance Scheme (“New Rural Insurance Scheme”), which
seeks to provide healthcare services to the vast rural areas of China. The
program extends to cover approximately 2,729 counties in the PRC, which account
for 95.4% of the total number of counties in the PRC. In addition, the program
covers approximately 814 million rural residents, which accounts for
approximately 91.5% of the total population engaged in the agricultural industry
in China as of December 31, 2008. We believe that the New Rural
Insurance Scheme will have a positive impact on the demand for our products in
Yunnan Province, which is relatively underdeveloped with a large rural
population.
9
PRC
Healthcare Reform
In
September 2008, the State Council published a draft plan to ease the
difficulties and minimize the costs for PRC citizens to obtain proper healthcare
treatment. On March 17 2009, the PRC Government issued the Opinion on Deepening
the Healthcare System Reform (the “Opinion”). The State Council subsequently
released the Notice on Important Implementing Plans for the Healthcare System
Reform 2009-2011 (the “Implementing Plan”). The goal of the healthcare reform
plan is to establish a basic, universal healthcare framework to provide Chinese
citizens with safe, efficient, convenient and affordable healthcare. The Opinion
calls for healthcare reform to be carried out in two steps:
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Step
One, which will be completed by 2011, aims to increase the accessibility
while reducing the cost of healthcare. During this phase, the PRC
Government will build up a network of basic healthcare facilities, expand
coverage of the public medical insurance system to cover 90% or more of
the population, and reform the drug supply and public hospital
system.
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Step
Two, which will take place between 2011 and 2020, envisions the
establishment of a universal healthcare system. The entire population
should be covered by public medical insurance; drugs and medical services
should be accessible and affordable to citizens in all public healthcare
facilities.
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While the
PRC Government has neither provided a concrete timetable nor steps to implement
certain tasks, such as the public hospital reform, it has released execution
guidance for other tasks. Most notably, the PRC Government has announced it will
spend an additional approximately RMB 850 billion, or US$125 billion from 2009
to 2011 on the healthcare industry. A significant portion will be expended to
establish a basic healthcare medical insurance regime, which aims to cover over
90% of the national population by 2011, mainly through the Urban Worker Program,
Urban Resident Program and the New Rural Insurance Scheme. The PRC Government
further announced that the annual subsidy for each participant will be increased
from approximately RMB 40, or US$5.90 to approximately RMB120, or US$17.60 for
Urban Resident Program participants, and from approximately RMB 80, or US$11.76
to approximately RMB120 RMB, or US$17.60 for New Rural Insurance Scheme
participants, starting from 2010. The reform plan will also raise the cap on
claim payments from four times the local average annual income to six times such
income. Another significant part of the spending plan focuses on healthcare
facilities. The PRC Government plans to build 29,000 rural clinics in 2009. In
the next three years, the PRC government plans to build an additional 5,000
rural clinics, 2,000 county-level hospitals and 2,400 urban community clinics in
under-developed areas. This substantial increase in healthcare spending is
expected to expedite the growth of the healthcare industry in
China.
Under the
healthcare reform plan, the additional funding for the healthcare industry will
primarily target four fundamental healthcare systems in China:
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The
public health services system. This system focuses on preventing disease
and promoting health as a complementary alternative to medical treatment.
The public health services system will provide services such as
immunizations, regular physical check-ups (for senior citizens over 65
years of age and children under three years of age), pre-natal and
post-natal check-ups for women, prevention of infectious or chronic
diseases and other preventative and fitness
activities.
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The
public medical insurance system. This system covers drugs and medical
treatments for the majority of the population. The healthcare reform plan
will retain the framework of the current public medical insurance schemes
under the National Program, but will expand them to cover more of the
population and increase the scope of treatments, raise the cap on claim
payments and cover more claims at higher
percentages.
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The
public healthcare delivery system. One of the primary goals of the
Implementing Plan is to build more healthcare facilities and to improve
the training of healthcare professionals. Beyond additional public
wellness centers, the reform plan aims to place a medical clinic in every
village and a hospital in every county by 2011. In addition, the PRC
Government will encourage private investors to establish public non-profit
hospitals.
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The
drug supply system. This system regulates pricing and how drugs will be
procured prescribed and dispensed in healthcare facilities. The healthcare
reform plan will focus on pricing, procurement, prescription and
dispensing of essential drugs.
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The
Opinion and the Implementing Plan direct relevant governmental authorities,
including the Ministry of Health, SFDA and the National Development Reform
Commission, or NDRC, to adopt implementing regulations for the reforms outlined
in the healthcare reform plan.
We
believe the PRC healthcare reform plan will benefit our pharmaceutical
distribution and other business operations, although the full impact of PRC
healthcare reform on our operations is uncertain.
Industry
Consolidation
XYT plans
to rapidly expand from a provincial pharmaceutical distributor in Yunnan
Province to a national distributor servicing many provinces. We
believe that our ordering, fulfillment and logistics network will enable us to
attract and acquire other provincial, county and municipal pharmaceutical
distributors over the next 24 to 48 months.
The
pharmaceutical distribution industry in China is currently highly fragmented.
There were more than 9,000 Good Supply Practice (“GSP”) certified pharmaceutical
distributors as of 2007 according to the South Medicine Economics Research
Institute, an affiliate of the State Food and Drug Administration (“SFDA”). This
fragmentation of the pharmaceutical industry has resulted in an inefficient
supply chain for the distribution of most pharmaceutical products without the
advanced logistics services featured in more developed markets. Given the level
of fragmentation in the pharmaceutical distribution industry, we believe that
only large distributors with effective nationwide distribution capabilities,
value-added supply chain services and large-scale operations will
thrive.
Due to
competitive pressures caused by the fragmentation of the industry, the
introduction of GSP requirements and other increased PRC regulatory
requirements, as well as continuing price controls imposed by the PRC Government
and the centralization of tender and bidding processes among public hospitals,
there has been a trend towards consolidation of the pharmaceutical distribution
industry in recent years. According to CAPC, the combined market
share of the top three pharmaceutical distributors in China increased from 12.7%
in 2003 to approximately 20.0% in 2008. The market share of the top
20 pharmaceutical distributors in the industry increased from 36.5% to 43.0% in
the same period. Furthermore, the data suggest that the largest
distributors benefit more from consolidation. The total market share
of the ten largest distributors grew from 26.1% in 2003 to 34.5% in 2008, while
that of the 11 to 20 largest companies decreased from 10.4% to 8.5% over the
same period.
11
Consolidation
has also occurred in the pharmaceutical distribution industries of other
countries as a natural part of their evolution and development into a mature
market. According to the Kaiser Foundation, a non-profit private foundation
focusing on healthcare issues, between 1975 and 2000, the number of
pharmaceutical distributors in the United States declined from approximately 200
to fewer than 50. Similarly, according to Booz Allen Hamilton, an international
consulting firm, between 1979 and 2005, the number of pharmaceutical
distributors decreased from 25 to 10 in France, from 32 to 12 in the United
Kingdom, from 41 to 16 in Germany, and from 279 to 138 in Italy. The three
largest pharmaceutical distributors in the U.S. held 90% of the U.S. market in
terms of their share of total revenues in 2005, and the three largest European
pharmaceutical distributors had 73%, 68%, 47% and 43% of the market in the
United Kingdom, France, Germany, and Italy, respectively, in 2005. Overall,
these three leading European pharmaceutical distributors held a market share of
64% of the pharmaceutical distribution industry in Europe in 2005.
We expect
that, over time, the PRC pharmaceutical distribution industry will experience
consolidation in the manner experienced in North America and Europe, as
distributors seek to achieve economies of scale and optimize their resources.
The trend towards consolidation in the PRC pharmaceutical industry has also been
intensified by increased regulatory requirements and policies imposed by the PRC
government on market participants in order to implement uniform quality control
criteria for the distribution of pharmaceuticals and ensure a stable supply of
safe, effective medicines throughout the country. For example, in
2003 the SFDA adopted and strictly enforced GSP certification as the relevant
standard for quality control in pharmaceutical distribution. A number of smaller
distributors were forced to exit the market due to the associated higher
compliance costs following the adoption of GSP certification and other
regulatory standards. We believe that the more rigorous regulatory standards and
policies imposed by the PRC government will accelerate the trend towards
consolidation in the pharmaceutical industry, and favor the continued growth of
pharmaceutical distributors with large-scale, nationwide pharmaceutical
distribution operations and effective quality controls that are positioned to
benefit from the changes in PRC regulatory requirements and policies. In
addition, the imposition of price controls imposed by the PRC government, the
centralization of tender and bidding processes among public hospitals and
consolidation among drug manufacturers are additional factors that will also
contribute to the trend towards consolidation in the industry.
Business
Model
Upon the
closing of the Exchange Transaction, FCPG HK and XYT became wholly owned
subsidiaries of the Registrant, and our business and operations will be
conducted solely through XYT.
XYT’s
business model leverages our ability to take and fulfill orders over the
internet. We believe this provides XYT competitive advantage over
other provincial distributors as we can order directly from some manufacturers
as well as bypass several layers in the traditional Chinese pharmaceutical
distribution model that utilizes county and municipal distributors and provide
our product line directly to hospitals, clinics, pharmacies, drug stores and
other health care institutions, as shown in the diagram below.
12
With
appropriate funding, XYT anticipates its business model will change to leverage
the efficiencies of internet ordering and fulfillment. We intend to
expand our product line from approximately 5,000 products to approximately
30,000 products by the end of 2010. Management believes that over a
six month period, the Company can expand its product line to 30,000 products at
a cost of US$2 to US$2.5 million. The bulk of these funds will be
utilized to purchase inventory, which will be on a cash basis until a track
record is established and net 30 day terms can be negotiated. The
broader product line will include significantly more Western drugs as well as
additional traditional Chinese drugs and herbs. We estimate that the
broader product line will ensure that our customers will be able to order 80% to
90% of the products they carry directly from XYT.
The
foreign made drugs that XYT distributes are imported into China by drug
importers that are licensed by the Chinese government. XYT is not licensed to
import drugs from outside of China. In the event that trade
protectionist policies are implemented by countries currently supplying Western
drugs to China, such activities would adversely affect all pharmaceutical
distribution companies in China, including XYT.
XYT will
leverage its ability to fulfill orders over the internet by bypassing two levels
of distributors and approximately 40% in total pricing mark-up. By
bypassing city and county distributors, XYT will be able to achieve higher
margins while providing pharmaceuticals to pharmacies, hospitals and clinics at
costs below the traditional distribution model. We believe this will
provide us with a competitive pricing advantage over our competitors as well as
maintaining profit margins.
13
We
believe that numerous provincial, county and municipal pharmaceutical
distributors will be displaced by our business model. We believe that
this also represents a tremendous opportunity for XYT as we may be able to
acquire these companies and their customers and expand rapidly in Yunnan and
other provinces, utilizing our corporate sales network that currently covers
over 15 regions in Yunnan Province.
XYT
Online Pharmaceutical Permit
The
Interim Regulations on the Examination and Approval of Providing Drug
Transaction Services on the internet became effective in China on
December 1, 2005 and establishes the parameters and qualifications required
for providing drug transaction services on the internet, including online drug
transactions between a wholesale pharmaceutical distribution company and
unrelated third parties using the website of the distribution
company. These transactions are subject to inspection by, and the
pharmaceutical distribution company must obtain a qualification certificate
from, the provincial food and drug administration. The qualification
certificate is valid for five years and may be renewed by filing for an
extension at least six months prior to its expiration date and undergoing a
reexamination by the relevant authority.
The
Measures regarding the Administration of Drug Information Service Over the
Internet which became effective on July 8, 2004 define the delivery of free
publicly available drug information services over the Internet as a non-profit
online drug information service. This service requires a
qualification certificate from the provincial food and drug
administration. The provincial food and drug administration must file
its approval with the SFDA for records and make a public
announcement. The qualification certificate is valid for five years
and may be renewed by filing for an extension at least six months prior to its
expiration date and undergoing a reexamination by the relevant
authority.
XYT was
certified to provide internet drug transaction services from the Yunnan Food and
Drug Administration in October 2009 when it obtained an Internet Drug
Information Service License. XYT can also utilize the internet
fulfillment system licensed in Yunnan Province in other provinces, thereby
creating an immediate advantage over competitors throughout
China. Through their own industry research and documents from the
Yunnan Food and Drug Administration, XYT’s management believes that there are
currently 491 drug distribution companies in Yunnan Province and that 42 of
these companies also possess the Internet Drug Information Service
License. XYT management has also determined that in June 2009 the
Yunnan Food and Drug Administration stopped accepting applications for Internet
Drug Information Service Licenses due to misleading advertising by some
licensees. XYT management has learned that this moratorium on
Internet Drug Information Licenses was lifted during 2010 and new applications
can now be submitted to the Yunnan Food and Drug Administration.
XYT is
also in the process of applying for a second internet license, the Internet
Transaction Service License, which is offered by the Yunnan Food and Drug
Administration. This license provides for the license holder
to provide secured access to XYT's proprietary computer fulfillment
system, advertise, list inventories, take orders, provide shipping confirmation,
invoice the customer and accept payment over the internet. Through
its own industry research and documents from the Yunnan Food and Drug
Administration, XYT management believes that there are currently only two drug
manufacturing companies in Yunnan Province that possess the Internet Transaction
Service License. If XYT is successful in obtaining this license,
management believes it will be the only drug distribution company in Yunnan
Province that will possess the Internet Transaction Service
License.
14
Competition
The
pharmaceutical distribution industry in China is intensely competitive,
rapidly evolving and highly fragmented. In many large cities in China, we need
to not only compete with other retail drugstores, but also face increasing
competition pressure from discount stores, convenience stores and
supermarkets. In order to maintain our competitive position in the
market, we have increasingly diversified products and services by offering some
non-drug products that are provided in regular convenience
stores. These products include cosmetics, diapers, tissues, health
drinks and small medical instruments like tweezers and
scissors. Convenience stores in China are not yet licensed to carry
any pharmaceutical products. In addition, we also increased our
competitiveness through careful selection of store location, merchandise, and
services.
With the
continuous consolidation of the pharmaceutical industry and opening of new
drugstore chains in large cities, we will face more competition in the industry.
However, in many of our targeted second- and third- tier cities and rural areas,
we are facing less competition because major drugstore chains have not entered
into the market. We are in a good position to establish our standing
and reputation in these targeted markets. In addition, the
pharmaceutical industry has entrance barriers for new entrants due to the
requirements for capital, brand name, management expertise,
etc. Further, PRC laws and regulations limit a foreign investor’s
ownership in retail drugstores to the maximum of 49.0% if such investor holds
ownership interest in more than 30 drug stores that sell a variety of branded
drugs sourced from different suppliers. This limitation, together
with the complexity of the Chinese market, creates a barrier for foreign retail
drugstore chain operators to enter into the PRC market. As a result, currently
we do not face notable competition from foreign owned drugstore
chains.
Because
our network covers many cities and areas, and many of drugstores are regional,
our competitors vary from region to region. Each region can have its own, among
others, distinct demographics, local regulations and shopping
style. We do not consider any individual regional drugstore as our
major competitor, but we compete with them on an aggregate basis.
Given the
fragmentation in the Chinese pharmaceutical distribution industry, distributors
are under intense pressure to compete for business and maintain their profits,
and must focus on a number of competitive issues, including:
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Scale. Given
the low margins of the distribution business, achieving economies of scale
is crucial for distributors to maintain a sustainable and profitable
business.
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Quality
and range of services. Customers and suppliers of
pharmaceutical distributors increasingly value pharmaceutical distributors
that are able to deliver one-stop shop pharmaceutical distribution
services, which comprise high-quality traditional distribution services
and logistics and other value-added
services.
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Geographic
coverage. China’s vast territory presents significant
geographical challenges that require manufacturers and distributors to
develop their distribution networks and penetrate as many local markets as
possible to take advantage of the growth of the Chinese
market.
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Product
portfolio. The breadth of products that distributors offer is
an important factor for their customers. For example, a large
hospital typically needs thousands of different types of prescribed drugs.
As such, distributors with an extensive portfolio are generally
preferred.
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Creditworthiness
and financial stability. To minimize supply disruptions and bad
debt, customers and suppliers generally select pharmaceutical distributors
that are reliable commercial partners with strong financial capabilities
and proven track records.
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Price.
Price competition is intense in the pharmaceutical distribution
industry. However, customers and suppliers generally do not
make purchasing decisions solely based on price, as they will consider the
foregoing factors as well. As a result, the leading and
established distributors are able to leverage their strengths to obtain
better pricing terms than their weaker
competitors.
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Some of
XYT’s key competitors are:
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Yun
Nan Hong Xiang Pharmacy Co., Ltd. is a provincial bulk seller and chain
store that owns over 1,000 chain stores in middle, west and south of Yun
Nan.
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Yun
Nan Provincial Pharmacy Co., Ltd. is a designated supplier to many
state-run hospitals.
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Yun
Nan Tong Feng Pharmacy Co., Ltd has substantial experience in selling a
wide range of products to end
users.
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Suppliers
XYT
purchases approximately 70% of its products from the following five drug
manufacturers and national distributors:
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Jilin
Xiuzhen Drugs Co., Ltd.
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Tonghua
Gold Horse Drugs Co., Ltd.
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Jilin
Jian Yishen Drugs Co., Ltd.
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Jilin
Dongfeng Drugs Co., Ltd.
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Anhui
Huayuan Medicine Co., Ltd. (national
distributor)
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XYT
believes it has excellent relationships with these suppliers.
Customers
XYT
currently has approximately 4,700 customers, with annual sales of approximately
¥140 million. These include pharmacies (drug stores), hospitals,
distribution companies and clinics. In urban areas, XYT typically
services customers directly, utilizing internet orders and local bonded
couriers. Rural areas are predominantly serviced by local
sub-distributors. XYT’s approximately 3,800 long-term downstream
customers, include:
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approximately
1650 independents directly serviced by
internet;
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approximately
550 serviced by sub-distributors;
and
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approximately
1100 hospital, clinics and other medical
institutions.
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XYT’s top
five customers listed below accounted for approximately 65% of the Company’s
sales in 2009:
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Chuxiong
Jiayuan Medicine Co
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Yunnan
Hongxiang Drugs Co, Ltd.
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Yunnan
Bai Medicine Drugstore Chains
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Baoshan
Hongyuan Medicine Company
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16
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Yunnan
Dragon-Horse Drugs Co, Ltd.
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Government
Regulation
As a
distributor and retailer of pharmaceutical products, we are subject to
substantial regulation and oversight by different levels of the food and drug
administration in China, in particular, the SFDA. The Law of the PRC
on the Administration of Pharmaceutical Products, as amended, provides the basic
legal framework for the administration of the production and sale of
pharmaceutical products in China and governs the manufacturing, distributing,
packaging, pricing and advertising of pharmaceutical products in
China. The corresponding implementation regulations set out detailed
rules with respect to the administration of pharmaceuticals in
China. We are also subject to other PRC laws and regulations that are
applicable to business operators, retailers and foreign-invested companies, as
described below.
Distribution
of Pharmaceutical Products
A
distributor of pharmaceutical products must obtain a distribution permit from
the relevant provincial, designated municipal, or county-level food and drug
administration. The grant of such permit is subject to an inspection
of the distributor’s facilities, warehouses, hygienic environment, quality
control systems, personnel and equipment. The distribution permit is
valid for five years, and the holder must apply for renewal of the permit within
six months prior to its expiration. In addition, a pharmaceutical product
distributor needs to obtain a business license from the relevant administration
for industry and commerce prior to commencing its business. XYT has
obtained necessary pharmaceutical distribution permits, and we anticipate a
routine renewal of these permits and certifications at this time.
In
addition, under the Supervision and Administration Rules on Pharmaceutical
Product Distribution promulgated by the SFDA on January 31, 2007, and effective
May 1, 2007, a pharmaceutical product distributor is responsible for its
procurement and sales activities and is liable for the actions of its employees
or agents in connection with their conduct of distribution on behalf of the
distributor. A retail distributor of pharmaceutical products is not
allowed to sell prescription pharmaceutical products, or Tier A OTC
pharmaceutical products, listed in the national or provincial medical insurance
catalogs without the presence of a certified in-store pharmacist. See
“Reimbursement under the National Medical Insurance Program” below. XYT believes it
is in full compliance with applicable governmental regulations.
Operations
of pharmaceutical distributors shall be conducted in accordance with the
Pharmaceutical Operation Quality Management Rules and shall be granted a GSP
certificate under such rules by the SFDA.
Pharmaceutical
distributors must keep true and complete records of any pharmaceutical products
purchased, distributed or sold with the generic name of such products,
specification, approval code, term, manufacturer, purchasing or selling party,
price and date of purchase or sale. A pharmaceutical distributor must
keep such record at least until one year after the expiration date of such
products and in any case, such record must be kept for no less than three years.
Penalties may be imposed for any recordkeeping violations.
Pharmaceutical
distributors can only distribute pharmaceutical products obtained from those
with a Pharmaceutical Manufacturing Permit and a Pharmaceutical Distribution
Permit.
17
Good
Supply Practice Standards
China has
strengthened its enforcement of GSP standards since adopting it at the end of
December 2004. As a result, many smaller drugstore chains or independently
operated drugstores may find it difficult to meet these enhanced quality
requirements for the operations of pharmacies.
GSP
standards regulate wholesale and retail pharmaceutical product distributors to
ensure the quality of distribution of pharmaceutical products in China. The
current applicable GSP standards require pharmaceutical product distributors to
implement strict controls on the distribution of medicine products, including
standards regarding staff qualifications, distribution premises, warehouses,
inspection equipment and facilities, management and quality control. The GSP
certificate is usually valid for five years.
XYT
possesses a GSP certificate, and we anticipate a routine renewal of these
certifications upon their expiration at this time.
Prescription
Administration
Under the
Rules on Administration of Prescriptions promulgated by the SFDA, effective May
1, 2007, doctors are required to include the chemical ingredients of the
medicine they prescribe in their prescription and are not allowed to include
brand names in their prescription. This regulation is designed to provide
consumers with choices among different pharmaceutical products that contain the
same chemical ingredients.
Advertisement
of Pharmaceutical Products
The PRC
government has adopted a series of measures regulating the advertising of
pharmaceutical products. Consumers typically become familiar with a
medicine through advertising and word-of-mouth recommendations by XYT
salespeople. With increased restrictions on advertising of pharmaceutical
products, pharmaceutical product manufacturers are expected to increasingly rely
on retail pharmacies to build brand familiarity among the general
public.
In order
to prevent misleading advertising of pharmaceutical products, the State
Administration for Industry and Commerce (“SAIC”) and the SFDA jointly
promulgated the Standards for Examination and Publication of Advertisements of
Pharmaceutical Products and Rules for Examination of Advertisement of
Pharmaceutical Products in March 2007. Under these regulations, there are
prohibitions on the advertising of certain pharmaceutical products, and
advertisement of prescription pharmaceutical products may only be made in
authorized medical magazines. In addition, an approval must be obtained from the
provincial level of food and drug administration before a pharmaceutical product
may be advertised. Such approval, once obtained, is valid for one
year.
XYT’s
Internet Drug Information Service License, issued by the Yunnan Food and Drug
Administration enables XYT to use the internet to advertise and market XYT’s
product line, display the inventory it holds, provide pricing information,
conduct live “chats” with customers and receive orders through
email. The only advertising restrictions with this license are that
license holders cannot advertise drugs they do not carry in their inventory or
advertise on behalf of another company.
Product
Liability and Consumer Protection
Product
liability claims may arise if the products sold have any harmful effect on the
consumers. The injured party may claim for damages or compensation. The General
Principles of the Civil Law of the PRC, which became effective in January 1987,
state that manufacturers and sellers of defective products causing property
damage or injury shall incur civil liabilities for such damage or
injuries.
18
The
Product Quality Law of the PRC was enacted in 1993 and amended in 2000 to
strengthen the quality control of products and protect consumers’ rights and
interests. Under this law, manufacturers and distributors who produce
or sell defective products may be subject to confiscation of earnings from such
sales, revocation of business licenses and imposition of fines, and in severe
circumstances, may be subject to criminal liability.
The Law
of the PRC on the Protection of the Rights and Interests of Consumers was
promulgated on October 31, 1993 and became effective on January 1, 1994 to
protect consumers’ rights when they purchase or use goods or
services. All business operators must comply with this law when they
manufacture or sell goods and/or provide services to customers. In
extreme situations, pharmaceutical product manufacturers and distributors may be
subject to criminal liability if their goods or services lead to the death or
injuries of customers or other third parties.
Price
Controls
The
retail prices of some pharmaceutical products sold in China, primarily those
included in the national and provincial medical insurance catalogs and those
pharmaceutical products whose production or distribution are deemed to
constitute monopolies, are subject to price controls in the form of fixed prices
or price ceilings. Manufacturers or distributors cannot freely set or change the
retail price for any price-controlled product above the applicable price ceiling
or deviate from the applicable fixed price imposed by the PRC government. The
prices of medicines that are not subject to price controls are determined freely
at the discretion of the respective pharmaceutical companies, subject to
notification to the provincial pricing authorities.
The
retail prices of medicines that are subject to price controls are administered
by the Price Control Office of the National Development and Reform Commission
(“NDRC”), and provincial and regional price control authorities. The
retail price, once set, also effectively determines the wholesale price of that
medicine. From time to time, the NDRC publishes and updates a list of medicine
that are subject to price controls. Fixed prices and price ceilings on medicine
are determined based on profit margins that the relevant government authorities
deem reasonable, the type and quality of the medicine, its production costs, the
prices of substitute medicine and the extent of the manufacturer’s compliance
with the applicable Good Manufacturing Practices (“GMP”)
standards. The NDRC directly regulates the pricing of a portion of
the medicine on the list, and delegates to provincial and regional price control
authorities the authority to regulate the pricing of the rest of the medicine on
the list. Provincial and regional price control authorities have
discretion to authorize price adjustments based on the local conditions and the
level of local economic development. Currently, approximately 1,500
pharmaceutical products, or approximately 10.0% of the pharmaceutical products
available in China, are subject to price control. Of those, the price
controls for the retail prices of approximately 600 pharmaceutical products are
administered by the NDRC and the rest are administered by provincial and
regional price control authorities.
Only the
manufacturer of a medicine may apply for an increase in the retail price of the
medicine, and it must either apply to the provincial price control authorities
in the province where it is incorporated, if the medicine is provincially
regulated, or to the NDRC, if the medicine is NDRC-regulated. For a
provincially-regulated medicine, in cases where provincial price control
authorities approve an application, manufacturers must file the newly approved
price with the NDRC for record and thereafter the newly approved price will
become binding and enforceable across China.
19
Since May
1998, the PRC government has ordered reductions in the retail prices of various
pharmaceutical products 24 times. The latest price reduction occurred
in May 2007 and affected 1,245 different pharmaceutical products, of which 524
are sold in our stores. As of December 31 of the following years,
approximately the following percentages of the pharmaceutical products we
offered were subject to price controls: 2004 - 1.5%; 2005 -
2.0%; 2006 - 7.5%; and 2007-2009 - 16.0%.
Reimbursement
under the National Medical Insurance Program
The PRC
government has increased the availability of funding under the National Program
and included more pharmaceutical products in the China’s national medical
insurance scheme. Eligible participants in the National Program,
mainly consisting of urban residents, are entitled to purchase medicine when
presenting their medical insurance cards in an authorized XYT store, provided
that the medicine they purchase has been included in the national or provincial
medical insurance catalogs. Depending on relevant local regulations,
authorized pharmacies either sell medicine on credit and obtain reimbursement
from relevant government social security bureaus on a monthly basis, or receive
payments from the participants at the time of their purchases, and the
participants in turn obtain reimbursement from relevant government social
security bureaus.
Medicine
included in the national and provincial medical insurance catalogs is divided
into two tiers. Purchases of Tier A pharmaceutical products are generally
fully reimbursable, except that certain Tier A pharmaceutical products are
only reimbursable to the extent the medicines are used for specifically stated
purposes in the medical insurance catalogs. Purchasers of Tier B pharmaceutical
products, which are generally more expensive than Tier A pharmaceutical
products, are required to make a certain percentage of co-payments, with the
remaining amount being reimbursable. The percentage of reimbursement
for Tier B OTC pharmaceutical products varies in different regions in the
PRC. Factors that affect the inclusion of medicine in the medical
insurance catalogs include whether the medicine is consumed in large volumes and
commonly prescribed for clinical use in China and whether it is considered to be
important in meeting the basic healthcare needs of the general
public.
The PRC
Ministry of Labor and Social Security, together with other government
authorities, has the power to determine every two years which pharmaceutical
products are included in the national medical insurance catalog, under which of
the two tiers the included pharmaceutical products fall, and whether an included
pharmaceutical product should be removed from the catalog. Provincial
governments are required to include all Tier A pharmaceutical products listed on
the national Medical Insurance Catalog in their provincial medical insurance
catalogs. For Tier B pharmaceutical products listed in the
national medical insurance catalog, provincial governments have the discretion
to adjust upwards or downwards by no more than 15% from the number of Tier B
pharmaceutical products listed in the national medical insurance catalog that
are to be included in the provincial medical insurance catalogs. The
amount in a participant’s individual account under the program varies, depending
on the amount of contributions from the participant and his or her
employer. Generally, participants under the National Program who are
from relatively wealthier parts and metropolitan centers of China have greater
amounts in their individual accounts than those from other parts of the
country. Different regions in China have different requirements
regarding the caps of reimbursements in excess of the amounts in the individual
accounts.
Sales
of Nutritional Supplements and other Food Products
According
to the PRC Food Hygiene Law and Rules on Food Hygiene Certification, a
distributor of nutritional supplements and other food products must obtain a
food hygiene certificate from relevant provincial or local health regulatory
authorities. The grant of such certificate is subject to an
inspection of the distributor’s facilities, warehouses, hygienic environment,
quality control systems, personnel and equipment. The food hygiene
certificate is valid for four years, and the holder must apply for renewal of
the certificate within six months prior to its expiration. XYT’s
certification expires in June 2011, and we anticipate a routine renewal for this
certification.
20
Foreign
Exchange Regulation
Pursuant
to the Foreign Currency Administration Rules promulgated in 1996 and amended in
1997 and various regulations issued by the State Administration of Foreign
Exchange (“SAFE”), and other relevant PRC government authorities, the Renminbi
is freely convertible only to the extent of current account items, such as
trade-related receipts and payments, interest and dividends. Capital
account items, such as direct equity investments, loans and repatriation of
investments, require the prior approval from the SAFE or its local counterpart
for conversion of Renminbi into a foreign currency, such as U.S. dollars, and
remittance of the foreign currency outside the PRC.
Payments
for transactions that take place within the PRC must be made in Renminbi. Unless
otherwise approved, PRC companies must repatriate foreign currency payments
received from abroad. Foreign-invested enterprises may retain foreign exchange
in accounts with designated foreign exchange banks subject to a cap set by the
SAFE or its local counterpart. Unless otherwise approved, domestic
enterprises must convert all of their foreign currency receipts into
Renminbi.
Pursuant
to the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents to Engage in Financing and Inbound Investment
via Overseas Special Purpose Vehicles, or the SAFE Circular No. 75, issued on
October 21, 2005:
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(i)
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a
PRC citizen residing in the PRC, or PRC resident, shall register with the
local branch of the SAFE before it establishes or controls an overseas
special purpose vehicle (“overseas SPV”), for the purpose of overseas
equity financing (including convertible debts
financing);
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(ii)
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when
a PRC resident contributes the assets of or its equity interests in
a domestic enterprise into an overseas SPV, or engages in
overseas financing after contributing assets or equity interests into an
overseas SPV, such PRC resident shall register his or her interest in the
overseas SPV and the change thereof with the local branch of the SAFE;
and
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(iii)
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when
the overseas SPV undergoes a material event outside of China, such as
change in share capital or merger and acquisition, the PRC resident shall,
within 30 days from the occurrence of such event, register such change
with the local branch of the
SAFE.
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On May
29, 2007, the SAFE issued relevant guidance to its local branches for the
implementation of the SAFE Circular No. 75. This guidance standardizes more
specific and stringent supervision on the registration requirement relating to
the SAFE Circular No. 75 and further requires PRC residents holding any equity
interests or options in SPVs, directly or indirectly, controlling or nominal, to
register with the SAFE.
Our
beneficial owner is a PRC resident who has registered with the local branch of
the SAFE as required under SAFE Circular No. 75.
Under the
Implementing Rules of Measures for the Administration of Individual Foreign
Exchange, or the Implementation Rules, issued by the SAFE on January 5, 2007,
PRC citizens who are granted shares or share options by an overseas listed
company according to its share incentive plan are required, through a qualified
PRC agent or the PRC subsidiary of such overseas listed company, to register
with the SAFE and complete certain other procedures related to the share
incentive plan. Foreign exchange income received from the sale of shares or
dividends distributed by the overseas listed company must be remitted into a
foreign currency account of such PRC citizen or be exchanged into
Renminbi.
21
In
addition, domestic wages and salaries of foreign employees outside of the PRC,
as well as other rightful earnings, such as dividends, bonuses and profits, of
shareholders outside of the PRC may be remitted freely out of the PRC after
taxes have been paid in accordance with the provisions of the Chinese tax law
with a tax certificate. Since we do not have any debt that is
generated outside the PRC and do not have any employees located outside PRC,
management is not aware of any material risk of paying in foreign currency in
respect of those employee-related and debt-settlement amounts due to any other
party located outside PRC.
Liquidation
According
to the bankruptcy law of the PRC, XYT, as a WFOE, needs to have its debt to
creditors settled in the priority as set forth in the relevant Bankruptcy law in
China and its immediate equity holder, FCPG HK, located in Hong Kong, would be
the last party to be entitled to any residual interest of the
entity. Such priority of payment and distribution in the case of the
liquidation of XYT does not have any different priority in respect of PRC
nationals or foreigners. The priority is based on the status of being a creditor
and other requirements as set forth in the bankruptcy law in China, which does
not have any discrimination or preference in respect of whether the party is a
PRC national or foreigner.
Taxation
Under the
Enterprise Income Tax Law (“EIT”), effective January 1, 2008, China will adopt a
uniform tax rate of 25.0% for all enterprises (including foreign-invested
enterprises) and revoke the current tax exemption, reduction and preferential
treatments applicable to foreign-invested enterprises. However, there will be a
transition period for enterprises, whether foreign-invested or domestic, that
are currently receiving preferential tax treatment granted by relevant tax
authorities. Enterprises that are subject to an enterprise income tax
rate lower than 25.0% may continue to enjoy the lower rate and gradually
transition to the new tax rate within five years after the effective date of the
EIT Law. Enterprises that are currently entitled to exemptions or reductions
from the standard income tax rate for a fixed term may continue to enjoy such
treatment until the fixed term expires. However, the two-year exemption from
enterprise income tax for foreign-invested enterprise will begin from January 1,
2008 instead of from when such enterprise first becomes profitable. Preferential
tax treatments will continue to be granted to industries and projects that are
strongly supported and encouraged by the state, and enterprises otherwise
classified as “new and high technology enterprises strongly supported by the
state” will be entitled to a 15.0% enterprise income tax rate even though the
EIT Law does not currently define this term.
Provisions
Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors
On August
8, 2006, six PRC regulatory agencies, including the Chinese Securities
Regulatory Commission (“CSRC”), promulgated a rule entitled Provisions Regarding
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“the new
M&A rule”) to regulate foreign investment in PRC domestic enterprises. The
new M&A rule provides that the Ministry of Commerce must be notified in
advance of any change-of-control transaction in which a foreign investor takes
control of a PRC domestic enterprise and any of the following situations
exists:
(i)
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the
transaction involves an important industry in
China;
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(ii)
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the
transaction may affect national “economic security;”
or
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(iii)
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the
PRC domestic enterprise has a well-known trademark or historical Chinese
trade name in China.
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22
The new
M&A rule also contains a provision requiring overseas SPVs, formed for
listing purposes through acquisitions of PRC domestic companies and controlled
by PRC individuals, to obtain the approval of the CSRC prior to publicly listing
their securities on an overseas stock exchange.
On
September 21, 2006, the CSRC issued a clarification that sets forth the criteria
and process for obtaining any required approval from the CSRC. To
date, the application of this new M&A rule is unclear.
Government
Support of the Pharmaceutical Industry.
The PRC
government has supported the growth of the drugstore industry with a series of
initiatives.
Active
PRC Government support
As part
of its Eleventh Five-Year Plan (2006-2010), the PRC Government has actively
supported the PRC healthcare industry by providing a number of incentives and
enacting programs, including increased funding for building additional
hospitals, research centers and other healthcare facilities, enacting healthcare
reforms and standards and subsidizing healthcare services for its citizens. The
PRC Government has announced it will spend an additional RMB850 billion on
healthcare programs from 2009 to 2011, which will significantly bolster the PRC
healthcare market.
Anti-Corruption.
The
substantial majority of hospitals in China are owned and operated by the
government, and revenue from hospital pharmacies constitutes a significant
portion of hospitals’ revenue. Hospitals procure their supplies of
pharmaceutical products in bulk from manufacturers or distributors of
pharmaceutical products, and generally decide whether to include a particular
medicine on their formulary based upon a number of factors, including doctors’
preference in prescribing the medicine, the cost of the medicine, the perceived
efficacy of the medicine and the hospital’s budget. Decisions by hospitals
regarding whether to include a particular medicine in their pharmacies could be
affected by corrupt practices, including illegal kickbacks and other benefits
offered by manufacturers or distributors of pharmaceutical products. These
corrupt practices may also affect doctors’ decisions regarding which types of
medicine to prescribe.
The PRC
government has strengthened its anti-corruption measures and has organized a
series of government-sponsored anti-corruption campaigns in recent years. In
particular, China amended its criminal code in 2006, increasing the penalties
for corrupt business practices. The amendment of the criminal code is expected
to make pharmaceutical product suppliers compete for the hospitals’ business on
fair and equal terms, and thus is expected to result in more growth
opportunities for drugstores that are not affiliated with
hospitals.
Pharmaceutical
Product Labeling and Prescription Management
The PRC
SFDA promulgated pharmaceutical product labeling regulations in March 2006,
which require that pharmaceutical product labels state the generic ingredients
of the pharmaceutical products and which bar the registration of any brand name
for any pharmaceutical product which does not contain active ingredients. In
addition, effective May 1, 2007, doctors are not permitted to include brand
names in their prescriptions and required to specify the chemical ingredients of
the medicines they prescribe in their prescription. These requirements are
expected to have the following positive impacts on the business of non-hospital
drugstores:
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help
curb corrupt practices by pharmaceutical product manufacturers and
doctors;
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ensure
that patients are given better information on the medicines they purchase;
and
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23
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weaken
the hospitals’ monopoly on prescriptions and prescription pharmaceutical
products.
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Equal
Opportunity for Non-Hospital Drugstores.
The PRC
Ministry of Health has promulgated prescription regulations requiring hospitals
to allow prescriptions to be filled at non-hospital drugstores. The
implementation of this regulation is expected to increase drug sales, especially
prescription drug sales, in drugstore chains and independent drugstores that are
not affiliated with hospitals.
Employees
XYT
currently employs 54 individuals at its headquarters, located at Number 504,
West Ren Min Road, Kunming, City, Yunnan Province, PRC.
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this Form 8-K before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this Form 8-K that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following events described in these risk
factors actually occurs, our business, financial condition or results of
operations could be harmed. In that case, the trading price of our common stock
could decline, and you may lose all or part of your investment.
Risks Related to Our
Business and Industry
Our
operating results are difficult to predict, and we may experience significant
fluctuations in our operating results.
Our
operating results may fluctuate significantly. As a result, you may not be able
to rely on period to period comparisons of our operating results as an
indication of our future performance. Factors causing these fluctuations
include, among others:
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our
ability to maintain and increase sales to existing customers, attract new
customers and satisfy our customers’
demands;
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the
frequency of customer visits to pharmacies and drugstores and the quantity
and mix of products our customers
purchase;
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the
price we charge for our products or changes in our pricing strategies or
the pricing strategies of our
competitors;
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timing
and costs of marketing and promotional programs organized by us and/or our
suppliers, including the extent to which we or our suppliers offer
promotional discounts to our
customers;
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our
ability to acquire merchandise, manage inventory and fulfill
orders;
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technical
difficulties, system downtime or interruptions of our computer system,
which we use for product selection, procurement, pricing, distribution and
retail management processes;
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the
introduction by our competitors of new
products;
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the
effects of strategic alliances, potential acquisitions and other business
combinations, and our ability to successfully and timely integrate them
into our business;
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changes
in government regulations with respect to pharmaceutical and retail
industries; and
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economic
and geopolitical conditions in China and
elsewhere.
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24
In
addition, a significant percentage of our operating expenses are fixed in the
short term. As a result, a delay in generating or recognizing revenue for any
reason could result in substantial operating losses.
Moreover,
our business is subject to seasonal variations in demand. In particular,
traditional retail seasonality affects the sales of certain pharmaceuticals and
other non-pharmaceutical products. Sales of our pharmaceutical products benefit
in the fourth quarter from the winter cold and flu season, and are lower in the first
quarter of each year because Chinese New Year falls into the first quarter of
each year and our customers generally pay fewer visits to drugstores during this
period. In addition, sales of some health products are driven, to some extent,
by seasonal purchasing patterns and seasonal product changes. Failure to manage
the increased sales effectively in the high sale season, and increases in
inventory in anticipation of sales increase could have a material adverse effect
on our financial condition, results of operations and cash flow.
The
commercial success of our products depends upon the degree of their market
acceptance among the medical community. If our products do not attain market
acceptance among the medical community, our operations and profitability would
be adversely affected.
The
commercial success of our products depends, in large part, upon the degree of
market acceptance they achieve among the medical community, particularly among
physicians, pharmacists, administrators of hospitals, clinics and other health
care institutions. Physicians may not prescribe or recommend our products to
patients and pharmacies, procurement departments of hospitals, clinics and other
health care institutions may not purchase our products if physicians or
pharmacists do not find our products attractive. The acceptance and use of our
products among the medical community will depend upon a number of factors
including:
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perceptions
by physicians, pharmacists, patients and others in the medical community
about the safety and effectiveness of our
products;
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the
prevalence and severity of any side
effects;
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pharmacological
benefit of our products relative to competing products and products under
development;
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the
efficacy and potential advantages relative to competing products and
products under development;
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relative
convenience and ease of
administration;
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effectiveness
of our education, marketing and distribution
efforts;
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publicity
concerning our products or competing products and treatments;
and
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the
price for our products and competing
products.
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If our
products fail to attain market acceptance among the medical community, or if our
currently marketed products cannot maintain market acceptance, our results of
operations and profitability would be adversely affected.
Our
success is dependent upon our ability to maintain our relationships with
hospitals, clinics, pharmacies, drugstores and other health care institutions,
to expand such relationships and develop new relationships.
Our
business depends significantly on our relationships with hospitals, clinics,
pharmacies, drugstores and other health care institutions. No
assurance can be given that any such distribution channels will continue their
relationships with us, and the loss of one or more of these distribution channel
partners could have a material adverse effect on our business, results of
operations and financial condition. Our ability to grow our business will
therefore depend to a significant degree upon our ability to develop new
relationships with such distribution channel partners and to expand existing
relationships. No assurance can be given that new partners will be
found, that any such new relationships will be successful when they are in
place, or that business with current distribution channel partners will
increase. Failure to develop and expand such relationships could have a material
adverse effect on our business, results of operations and financial
condition.
25
We
may not be able to timely identify or otherwise effectively respond to changing
customer preferences, and we may fail to optimize our product offering and
inventory position.
The
pharmaceutical industry in China is rapidly evolving and is subject to rapidly
changing customer preferences that are difficult to predict. We believe that our
success depends on our ability to anticipate and identify customer preferences
and adapt our product selection to these preferences. In particular, we believe
that we must optimize our product selection and inventory positions based on
sales trends. No assurances can be given that our product selection, especially
our selections of nutritional supplements and food products, will accurately
reflect customer preferences at any given time. If we fail to anticipate
accurately either the market for our products or customers’ purchasing habits or
fail to respond to customers’ changing preferences promptly and effectively, we
may not be able to adapt our product selection to customer preferences or make
appropriate adjustments to our inventory positions, which could significantly
reduce our revenue and have a material adverse effect on our business, financial
condition and results of operations.
We
face significant competition, and if we do not compete successfully against
existing and new competitors, our revenue and profitability would be materially
and adversely affected.
The
pharmaceutical industry in China is highly competitive, and we expect
competition to intensify. In addition there is a trend towards
consolidation of the pharmaceutical industry in the future. Our primary
competitors are other provincial pharmaceutical distributors. We
compete for customers and revenue primarily on the basis of product selection,
price, and timely delivery of products. Moreover, we may be subject to
additional competition from new entrants to the drugstore industry in China. If
the PRC government removes the barriers for foreign companies to operate
majority-owned pharmaceutical distributors in China, we could face increased
competition from foreign companies. Some of our larger competitors may enjoy
competitive advantages, such as:
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greater
financial and other resources;
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larger
variety of products;
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more
extensive and advanced supply chain management
systems;
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greater
pricing flexibility;
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larger
economies of scale and purchasing
power;
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more
extensive advertising and marketing
efforts;
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greater
knowledge of local market
conditions;
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larger
sales and distribution networks.
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As a
result, we may be unable to offer products similar to, or more desirable than,
those offered by our competitors, market our products as effectively as our
competitors or otherwise respond successfully to competitive pressures. In
addition, our competitors may be able to offer larger discounts on the same or
competing products, and we may not be able to profitably match those discounts.
Furthermore, our competitors may offer products that are more attractive to our
customers or that render our products uncompetitive. Our failure to compete
successfully could materially and adversely affect our business, financial
condition, results of operation and prospects.
26
Our
reliance on third-party manufacturers to supply our products may result in
disruptions to our distribution network.
We rely
on third-party manufactures to supply our products. Reliance on such third-party
manufacturers involves a number of risks, including a lack of control over the
manufacturing process and the potential absence or unavailability of adequate
capacity. If any of our third-party manufacturers cannot or will not manufacture
our products in required volumes in compliance with applicable regulations, on a
cost-effective basis, in a timely manner, or at all, we will have to secure
alternative manufacturers. Maintaining relationships with existing
manufacturers and replacing such manufacturers may be difficult and time
consuming. Any disruption of our network of manufacturers, including failure to
renew existing distribution agreements with desired manufacturers, could
negatively affect our product selection and our ability to effectively sell our
products and could materially and adversely affect our business, financial
condition and results of operations.
Failure
to maintain optimal inventory levels could increase our inventory holding costs
or cause us to lose sales, either of which could have a material adverse effect
on our business, financial condition and results of operations.
We need
to maintain sufficient inventory levels to operate our business successfully as
well as meet our customers’ expectations. However, we must also prevent
accumulating excess inventory. We are exposed to increased inventory risks due
to our increased offering of private label products, rapid changes in product
life cycles, changing consumer preferences, uncertainty of success of product
launches, seasonality, and manufacturer backorders and other vendor-related
problems. No assurances can be given that we can accurately predict these trends
and events and avoid over-stocking or under-stocking products. In addition,
demand for products could change significantly between the time product
inventory is ordered and the time it is available for sale. When we begin
selling a new product, it is particularly difficult to forecast product demand
accurately. The purchase of certain types of inventory may require significant
lead-time. As we carry a broad selection of products and maintain significant
inventory levels for a substantial portion of our merchandise, we may be unable
to sell such inventory in sufficient quantities or during the relevant selling
seasons. Carrying too much inventory would increase our inventory holding costs,
and failure to have inventory in stock when orders are received could cause us
to lose such orders or customers, either of which could have a material adverse
effect on our business, financial condition and results of
operations.
The
retail prices of some of our products are subject to control, including periodic
downward adjustment, by PRC governmental authorities which may have an adverse
effect on our profitability.
An
increasing percentage of our products, primarily those included in the national
and provincial Medical Insurance Catalogues, are subject to price controls in
the form of fixed retail prices or retail price ceilings. In addition, the
retail prices of these products are also subject to periodic downward
adjustments as the PRC governmental authorities seek to make pharmaceutical
products more affordable to the general public. Any future price controls or
government mandated price reductions may have a material adverse affect on our
financial condition and results of operations, including significantly reducing
our revenue, margins and profitability.
27
Reimbursement
may not be available for our products, which could diminish our sales or affect
our ability to sell our products profitably.
Market
acceptance and sales of our products also depend to a large extent on the
reimbursement policies of the PRC government. The Ministry of Labor and Social
Security of the PRC or provincial or local labor and social security
authorities, together with other government authorities, review the inclusion or
removal of drugs from the national Medical Insurance Catalog or provincial or
local medical insurance catalogs for the National Medical Insurance Program
every other year, and the tier under which a drug will be classified, both of
which affect the amounts reimbursable to program participants for their
purchases of those medicines. These determinations are made based on a number of
factors, including price and efficacy. Depending on the tier under which a drug
is classified in the provincial medicine catalog, a National Medical Insurance
Program participant residing in that province can be reimbursed for the full
cost of Tier 1 medicine and for 80% to 90% of the cost of a Tier 2 medicine.
Decisions by the relevant government authorities not to include our products in
the medicine catalogs may reduce the affordability of our products relative to
other products included in the medicine catalogs and negatively affect the
public perception regarding our products which in turn would adversely affect
the sales of these products and reduce our net revenue.
Adverse
publicity associated with our company or our products or similar products
manufactured by our competitors could have a material adverse effect on our
results of operations.
We are
highly dependent upon market perceptions of the safety and quality of our
products. Concerns over the safety of pharmaceutical products manufactured in
China could have an adverse effect on the sale of such products, including
products distributed by us. We could be adversely affected if any of our
products or any similar products distributed by other companies prove to be, or
are alleged to be, harmful to patients. Any negative publicity associated with
severe adverse reactions or other adverse effects resulting from patients’ use
or misuse of our products or any similar products manufactured by other
companies could also have a material adverse impact on our results of
operations. If in the future we become involved in incidents of the type
described above, such problems could severely and adversely impact our product
sales and reputation.
The
continued penetration of counterfeit products into the retail market in China
may damage our brand and reputation and have a material adverse effect on our
business, financial condition, results of operations and prospects.
There has
been continued penetration of counterfeit products into the pharmaceutical
retail market in China. Counterfeit products are generally sold at lower prices
than the authentic products due to their low production costs, and in some cases
are very similar in appearance to the authentic products. Counterfeit
pharmaceuticals may or may not have the same chemical content as their authentic
counterparts, and are typically manufactured without proper licenses or
approvals as well as fraudulently mislabeled with respect to their content
and/or manufacturer. Although the PRC government has been increasingly active in
combating counterfeit pharmaceutical and other products, there is not yet an
effective counterfeit pharmaceutical product regulation control and enforcement
system in China. Although we have implemented a series of quality control
procedures in our procurement process, no assurances can be given that we would
not be selling counterfeit pharmaceutical products inadvertently. Any
unintentional sale of counterfeit products may subject us to negative
publicities, fines and other administrative penalties or even result in
litigation against us. Moreover, the continued proliferation of counterfeit
products and other products in recent years may reinforce the negative image of
retailers among consumers in China, and may severely harm the reputation and
brand name of companies like us. The continued proliferation of counterfeit
products in China could have a material adverse effect on our business,
financial condition, results of operations and prospects.
28
Our
geographic concentration in Yunnan Province presents certain risks that could
adversely affect us.
We
conduct our logistics and distribution business in Yunnan Province,
China. Therefore, we are subject to risks specifically related to
such region, including adverse economic effects on this region, natural
disasters, local laws and regulations, including the discretion of provincial
and regional price control authorities to authorize price adjustments for our
products. Because of our geographic concentration, these risks could
have a material adverse effect on our business and could result in significant
disruptions to our business or increased operating expenses. In addition, we
rely on our warehouse located in Kunming, City, Yunnan Province, to ship our
products to our customers. If our warehouse was destroyed or shut down for any
reason, we would incur significantly higher costs and delays associated with
distribution of products during the time it takes us to reopen or replace our
warehouse.
We
rely on computer software and hardware systems in managing our operations, the
capacity of which may restrict our growth and the failure of which could
adversely affect our business, financial condition and results of
operations.
We are
dependent upon our integrated information management system to monitor daily
operations of our drugstores and to maintain accurate and up-to-date operating
and financial data for compilation of management information. In addition, we
rely on our computer hardware and network for the storage, delivery and
transmission of data. Any system failure which causes interruptions to the
input, retrieval and transmission of data or increase in the service time could
disrupt our normal operation. Although we believe that our disaster recovery
plan is adequate in handling the failure of our computer software and hardware
systems, no assurances can be given that we can effectively carry out this
disaster recovery plan and that we will be able to restore our operation within
a sufficiently short time frame to avoid our business being disrupted. Any
failure in our computer software and/or hardware systems could have a material
adverse effect on our business, financial condition and results of
operations. In addition, if the capacity of our computer software and
hardware systems fails to meet the increasing needs of our expanding operations,
our ability to grow may be constrained.
Our
dependence on the development and maintenance of the internet infrastructure
could result in disruptions to our business.
We
believe that our ability to fill orders over the internet provides us a
competitive advantage over certain other provincial distributors as we can order
directly from some manufacturers as well as bypass several layers in the
traditional Chinese pharmaceutical distribution model that utilizes county and
municipal distributors and provide our product line directly to hospitals,
clinics, pharmacies, drug stores and other health care
institutions. Therefore, we believe the success our business will
depend largely on the development and maintenance of the internet
infrastructure. This includes maintenance of a reliable network
backbone with the necessary speed, data capacity, and security, as well as
timely development of complementary products, for providing reliable internet
access and services. XYT's Kunming headquarters are supplied high
speed internet capacity by China Telecom and China Netcom. Hosting of
the XYT website is provided by Jian Wang Technology Co. Ltd at a cost of
$90.00 per year. To protect against XYT’s website going down, the
corporate servers utilize dual line server connections to both China
Telecom and China Netcom. However, the internet has experienced, and
is likely to continue to experience, significant growth in the numbers of users
and amount of traffic. The internet infrastructure may be unable to
support such demands. In addition, increasing numbers of users,
increasing bandwidth requirements, or problems caused by “viruses,” “worms,” and
similar programs may harm the performance of the internet. The
backbone computers of the internet have been the targets of such
programs. The internet has experienced a variety of outages and other
delays as a result of damage to portions of its infrastructure, and it could
face outages and delays in the future. These outages and delays could
reduce the level of internet usage generally resulting in lower fulfillment of
orders for our products over the internet, which may have a negative impact on
our revenues.
29
Increasing
government regulation of the internet could affect our business.
We are
subject not only to regulations applicable to businesses generally but also to
laws and regulations directly applicable to electronic commerce. The PRC
government may adopt new laws and regulations applicable to electronic commerce.
Any such legislation or regulation could dampen the growth of the internet and
decrease its acceptance. If such a decline occurs, customers may decide in the
future not to use the internet to fulfill their orders for our products. Any new
laws or regulations in the following areas could affect our
business:
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user
privacy;
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the
pricing and taxation of products offered over the
internet;
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the
content of websites;
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copyrights;
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the
online distribution of specific material or content over the internet;
and
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the
characteristics and quality of services offered over the
internet.
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If
we are unable to detect and prevent unauthorized use of confidential
information, we could be subject to financial liability, our reputation could be
harmed and customers may be reluctant to purchase products from us.
We rely
to a large extent upon our information technology systems and infrastructure
which are potentially vulnerable to breakdown, malicious intrusion and random
attack. Likewise, data privacy breaches by employees and others with permitted
access to our systems may pose a risk that sensitive data may be exposed to
unauthorized persons or to the public. While we have taken measures for the
protection of data and information technology, no assurances can be given that
our efforts will prevent breakdowns or breaches in our systems that could
adversely affect our business.
We expect
to rely on encryption and authentication technology to provide secure
transmission of confidential information over the internet, including
confidential customer information. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments could
result in a compromise or breach of the technologies used to protect sensitive
transaction data. If any such compromise of our security, or the security of our
customers, were to occur, it could result in misappropriation of proprietary
information or interruptions in operations and have an adverse impact on our
reputation and our business could suffer. Additionally, we might be
required to expend significant capital and other resources to protect against
security breaches or to rectify problems caused by any security
breach.
Uninsured
claims and litigation could adversely impact our operating results.
The
distribution of drugs, including medicine products, chemical agents,
antibiotics, biochemistry drugs and biological preparations entails an inherent
risk of harm to the patient and, therefore, product liability. In extreme
situations, pharmaceutical product manufacturers and distributors may be subject
to criminal liability if their goods or services lead to the death or injuries
of customers or other third parties. If a product liability claim is
brought against us, it may, regardless of merit or eventual outcome, result in
damage to our reputation, breach of contract with our customers, decreased
demand for our products, costly litigation, product recalls, loss of revenue,
and the inability to commercialize some products. Although we have general
business insurance coverage, to the extent deemed prudent by our management and
to the extent insurance is available, no assurances can be given that the nature
and amount of the insurance coverage will be sufficient to fully indemnify us
against liabilities arising out of pending and future claims and litigation. Our
insurance coverage is subject to deductibles or self-insured retentions and
contain certain coverage exclusions. The insurance does not cover damages from
breach of contract by us, alleged fraud or deceptive trade practices. Insurance
and customer agreements do not provide complete protection against losses and
risks, and our results of operations could be adversely affected by unexpected
claims not covered by insurance.
30
The
decision of the Yunnan Food and Drug Administration to issue licenses to fill
orders over the internet to our competitors would have an adverse effect on our
business and diminish our competitive advantage over such
competitors.
We have
obtained government approval to fill orders over the internet in Yunnan
Province, thereby bypassing municipal and county pharmaceutical distributors and
provide products directly to retailers and in some cases,
customers. We believe that our ability to fill orders over the
internet provides us a competitive advantage over certain of our
competitors. Bypassing the additional layers of distribution enables
us to offer products to our customers at a significantly lower price than our
major competitors while maintaining our margins. In 2010, the Yunnan
Food and Drug Administration lifted a moratorium and began accepting new
applications for these licenses. If the Yunnan Food and Drug
Administration issues licenses to fill orders over the internet to our
competitors, we would lose our competitive advantage resulting from our license
to fill orders over the internet.
Our
certificates, permits, and licenses related to our business are subject to
governmental control and renewal and failure to obtain renewal will cause all or
part of our operations to be terminated.
We are
subject to various PRC laws and regulations pertaining to the pharmaceutical
industry. We have attained certificates, permits, and licenses required for the
operation of our business. Our distribution permit is valid for five years and
renewal of such permit is subject to an inspection of our facilities, warehouse,
hygienic environment, quality control systems, personnel and
equipment. In addition, we possess an Internet Drug Information
Service License in Yunnan Province issued by the Yunnan Food which enables us to
provide internet drug transaction services. Such license is valid for five years
and will expire in November 2014 and in order to renew the license, we must
undergo reexamination. Additionally, as a distributor of nutritional supplements
and other food products we must also have a food hygiene certificate from
relevant provincial or local health regulatory authorities which is valid for
four years. We have Good Supply Practice Standards certificates which currently
have expiration dates of nearly five years. We intend to apply for renewal of
our licenses, permits and certificates, but no assurances can be given that we
will be successful in obtaining such renewals. In the event that
trade protectionist policies are implemented by countries currently supplying
Western drugs to China, such activities would adversely affect all
pharmaceutical distribution companies in China, including XYT. In the
event that we are not able to import Western drugs due to trade protection
measures or to meet any new requirements imposed on our business by the
appropriate regulatory authorities or are unable to renew our certificates,
permits and licenses, all or part of our operations may be terminated.
Furthermore, if escalating compliance costs associated with governmental
standards and regulations restrict or prohibit any part of our operations, it
may adversely affect our operation and profitability.
Our
failure to retain and attract qualified personnel could harm our
business.
We
believe that our success depends in part on our ability to attract, train and
retain qualified personnel, including sales personnel. Competition
for qualified personnel is intense and we may not be able to hire sufficient
personnel to achieve our goals or support the anticipated growth in our
business. If we fail to attract and retain qualified personnel, our business
will suffer.
31
If
we are unable to protect our intellectual property from infringement, our
business and prospects may be harmed.
As sales
of our private label products increasingly account for a substantial portion of
our revenue, we consider our brand name and trade names to be valuable assets.
Although we currently have no trademarks, under PRC law, we would have the
exclusive right to use a trademark for products for which such trademark has
been registered with the PRC Trademark Office of State Administration for
Industry and Commerce (“SAIC”). In addition, no assurances can be given that we
will be able to obtain any trademarks for which we may apply in the
future.
Moreover,
we may be unable to prevent third parties from using our brand name without
authorization and we may not have adequate remedies for such violations.
Unauthorized use of our brand name by third parties may adversely affect our
business and reputation, including the perceived quality and reliability of our
products.
We also
rely on trade secrets to protect our know-how and other proprietary information,
including pricing, purchasing, promotional strategies, customer lists and/or
suppliers lists. However, trade secrets are difficult to protect. While we use
reasonable efforts to protect our trade secrets, our employees, consultants,
contractors or advisors may unintentionally or willfully disclose our
information to competitors. In addition, confidentiality agreements, if any,
executed by the foregoing persons may not be enforceable or provide meaningful
protection for our trade secrets or other proprietary information in the event
of unauthorized use or disclosure. If we were to enforce a claim that a third
party had illegally obtained and was using our trade secrets, our enforcement
efforts could be expensive and time-consuming, and the outcome is unpredictable.
In addition, if our competitors independently develop information that is
equivalent to our trade secrets or other proprietary information, it will be
even more difficult for us to enforce our rights and our business and prospects
could be harmed.
Litigation
may be necessary in the future to enforce our intellectual property rights or to
determine the validity and scope of the intellectual property rights of others.
However, because the validity, enforceability and scope of protection of
intellectual property rights in the PRC are uncertain and still evolving, we may
not be successful in prosecuting these cases. In addition, any litigation or
proceeding or other efforts to protect our intellectual property rights could
result in substantial costs and diversion of our resources and could seriously
harm our business and operating results. Furthermore, the degree of future
protection of our proprietary rights is uncertain and may not adequately protect
our rights or permit us to gain or keep our competitive advantage. If we are
unable to protect our trade names, trade secrets and other propriety information
from infringement, our business, financial condition and results of operations
may be materially and adversely affected.
We
may be exposed to intellectual property infringement and other claims by third
parties which, if successful, could disrupt our business and have a material
adverse effect on our financial condition and results of
operations.
Our
success depends, in large part, on our ability to use our proprietary
information and know-how without infringing third party intellectual property
rights. As we increase our sales of private label products, and as litigation
becomes more common in China, we face a higher risk of being the subject of
claims for intellectual property infringement, invalidity or indemnification
relating to other parties’ proprietary rights. Our current or potential
competitors, many of which have substantial resources, may have or may obtain
intellectual property protection that may prevent, limit or interfere with our
ability to make, use or sell our products in China. Moreover, the defense of
intellectual property suits, including trademark infringement suits, and related
legal and administrative proceedings can be both costly and time consuming and
may significantly divert the efforts and resources of our management personnel.
Resolving intellectual property infringement claims may also require us to enter
into license agreements. No assurances can be given that we would be able to
obtain license agreements on commercially reasonable terms. A successful claim
of intellectual property infringement could subject us to significant damages
and may prevent us from manufacturing or selling the affected
product. Any of these events could have a material adverse effect on
our profitability and financial condition.
32
We
depend substantially on the continuing efforts of our executive officers, and
our business and prospects may be severely disrupted if we lose their
services.
Our
future success is dependent on the continued services of the key members of our
management team, including Mr. Zhen Jiang Wang, our Chairman and Chief Executive
Officer, Ms. Jing Gong, our President, Mr. Yong Kang Chen, our Senior Vice
President, Quality Control and Ms. Yi Jia Li, our Chief Financial
Officer. We do not maintain key man life insurance on any of our
executive officers and directors. If one or more of our executive
officers are unable or unwilling to continue in their present positions, we may
not be able to replace them readily, if at all. Therefore, our
business may be severely disrupted, and we may incur additional expenses to
recruit and retain new management. The process of hiring suitably
qualified personnel is also often lengthy. If our recruitment and retention
efforts are unsuccessful in the future, it may be more difficult for us to
execute our business strategy.
Changes
in economic conditions and consumer confidence in China may influence the
industry in which we operate, consumer preferences and spending
patterns.
Our
business and revenue growth primarily depend on the size of the retail market of
pharmaceutical products in China. As a result, our revenue and profitability may
be negatively affected by changes in national, regional or local economic
conditions and consumer confidence in China. We are susceptible to changes in
economic conditions, consumer confidence and customer preferences of the Chinese
population. External factors beyond our control that affect consumer confidence
include unemployment rates, levels of personal disposable income, national,
regional or local economic conditions, natural disasters, extreme weather
conditions, disease outbreaks and acts of war or terrorism. Changes in economic
conditions and consumer confidence could adversely affect consumer preferences,
purchasing power and spending patterns. In addition, natural
disasters, extreme weather conditions, disease outbreaks and acts of war or
terrorism may cause damage to our facilities, disrupt the supply of the products
we offer or adversely impact consumer demand. Any of these factors could have a
material adverse effect on our business, financial condition and results of
operations.
We
are subject to critical accounting policies and actual results may vary from our
estimates.
We follow
generally accepted accounting principles in the United States in preparing our
financial statements. As part of the preparation of such financial reports, we
must make many estimates and judgments concerning future events, which affect
the value of the assets and liabilities, contingent assets and liabilities, and
revenue and expenses reported in our financial statements. We believe that these
estimates and judgments are reasonable, and we make them in accordance with our
accounting policies based on information available at the time. However, actual
results could differ from our 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.
33
We
may not be able to manage our expansion of operations effectively and failure to
do so could strain our management, operational and other resources, which could
materially and adversely affect our business and growth potential.
We have
grown rapidly since our inception and we anticipate continued expansion of our
business to address growth in demand for our products, as well as to capture new
market opportunities. The continued growth of our business has resulted in, and
will continue to result in, substantial demands on our management, operational
and other resources. In particular, we believe that the management of our growth
will require, among other things:
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our
ability to expand our market reach in China beyond the Yunnan
Province;
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our
ability to continue to identify new
customers;
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our
ability to optimize product offerings and increase sales of private label
products;
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our
ability to control procurement cost and optimize product
pricing;
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our
ability to control operating
expenses;
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our
ability to improve reporting systems and
procedures;
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information
technology system enhancement;
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strengthening
of financial and management
controls;
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increased
marketing, sales and sales support activities;
and
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hiring,
training and managing of new personnel, including sales
personnel.
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If we are
not able to manage our growth successfully, our business and prospects would be
materially and adversely affected.
We
may acquire other businesses, license rights to products or form alliances with
third-parties, which could cause us to incur significant expenses and could
negatively affect our profitability.
We may
pursue acquisitions, licensing arrangements, and strategic alliances, as part of
our business strategy. We may not complete these transactions in a timely
manner, on a cost-effective basis, or at all, and may not realize the expected
benefits. If we are successful in making an acquisition, the products that are
acquired may not be successful or may require significantly greater resources
and investments than originally anticipated. We may not be able to integrate
acquisitions successfully into our existing business and could incur or assume
significant debt and unknown or contingent liabilities. This may result in
increased borrowing costs and interest expense.
We
may need additional capital and may not be able to obtain it on acceptable terms
or at all, which could adversely affect our liquidity and financial position;
the issuance of additional equity would result in dilution to our
shareholders.
We may
need to raise additional capital if our expenditures exceed our current
expectations due to changed business conditions or other future developments.
Our future liquidity needs and other business reasons may require us to sell
additional equity or debt securities or obtain a credit facility. The sale of
additional equity securities or securities convertible or exchangeable to our
equity securities would result in additional dilution to our stockholders. The
incurrence of additional indebtedness would result in increased debt service
obligations and could result in operating and financing covenants that restrict
our operational flexibility. Our ability to raise additional funds in the future
is subject to a variety of uncertainties, including:
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our
future financial condition, results of operations and cash
flows;
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general
market conditions for capital-raising activities by pharmaceutical
companies; and
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34
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economic,
political and other conditions in China and
elsewhere.
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No
assurances can be given that we will be able to obtain additional capital in a
timely manner or on commercially acceptable terms or at all.
Future
acquisitions are expected to be a part of our growth strategy, and could expose
us to significant business risks.
One of
our strategies is to grow our business through acquisition of other
pharmaceutical distributor companies. However, no assurances can be given that
we will be able to identify and secure suitable acquisition opportunities. Our
ability to consummate and integrate effectively any future acquisitions on terms
that are favorable to us may be limited by the number of attractive acquisition
targets, internal demands on our resources and, to the extent necessary, our
ability to obtain financing on satisfactory terms for larger acquisitions, if at
all.
Moreover,
if an acquisition candidate is identified, the third parties with whom we seek
to cooperate may not select us as a potential partner or we may not
be able to enter into arrangements on commercially reasonable terms or at all.
The negotiation and completion of potential acquisitions, whether or not
ultimately consummated, could also require significant diversion of management’s
time and resources and potential disruption of our existing business.
Furthermore, no assurances can be given that the expected synergies from future
acquisitions will actually materialize. In addition, future acquisitions could
result in the incurrence of additional indebtedness, costs, and contingent
liabilities. Future acquisitions may also expose us to potential risks,
including risks associated with:
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the
integration of new operations, services and
personnel;
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unforeseen
or hidden liabilities;
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the
diversion of financial or other resources from our existing
businesses;
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our
inability to generate sufficient revenue to recover costs and expenses of
the acquisitions; and
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the
potential loss of, or harm to, relationships with employees or
customers.
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Any of
the above could significantly disrupt our ability to manage our business and
materially and adversely affect our business, financial condition and results of
operations.
Risks Related to Our
Corporate Structure
Transactions
among our affiliates are subject to scrutiny by the PRC tax authorities and a
finding that we or any of our consolidated entities owe additional taxes could
have a material adverse impact on our net income and the value of an investment
in our common stock.
Under PRC
law, arrangements and transactions among related parties may be subject to audit
or challenge by the PRC tax authorities. If any of the transactions we have
entered into among our consolidated entities are challenged by the PRC tax
authorities to be not on an arm’s-length basis, or to result in an unreasonable
reduction in our PRC tax obligations, the PRC tax authorities have the authority
to disallow our tax deduction claims, adjust the profits and losses of our
respective PRC consolidated entities and assess late payment fees and other
penalties. Our net income may be materially reduced if our tax liabilities
increase or if we are otherwise assessed late payment fees or other
penalties.
35
Risks Related to Doing
Business in China
Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially and adversely affect our
competitive position.
All of
our business operations are conducted in China and all of our sales are made in
China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The Chinese economy differs from the economies of most
developed countries in many respects, including:
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the
degree of government involvement;
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the
level of development;
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the
growth rate;
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the
control of foreign exchange;
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access
to financing; and
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the
allocation of resources.
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While the
Chinese economy has grown significantly in the past 25 years, the growth has
been uneven, both geographically and among various sectors of the
economy. The PRC government has implemented various measures to
encourage economic growth and guide the allocation of resources. Some of these
measures benefit the overall Chinese economy, but may also have a negative
effect on us. The Chinese government may not continue to pursue these
policies or may significantly alter them to our detriment from time to time with
little, if any, prior notice. Changes in policies, laws and
regulations or in their interpretation or the imposition of confiscatory
taxation, restrictions on currency conversion, restrictions or prohibitions on
dividend payments to stockholders, governmental control over capital investments
or changes in tax regulations applicable to us, devaluations of currency or the
nationalization or other expropriation of private enterprises could have a
material adverse effect on our business.
The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although the PRC government has in recent years
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the PRC
government. The continued control of these assets and other aspects of the
national economy by the PRC government could materially and adversely affect our
business. The PRC government also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Since late 2003,
the PRC government implemented a number of measures, such as raising bank
reserves against deposit rates to place additional limitations on the ability of
commercial banks to make loans and raise interest rates, in order to decrease
the growth rate of specific segments of China’s economy which it believed to be
overheating. These actions, as well as future actions and policies of the PRC
government, could materially affect our liquidity and access to capital and our
ability to operate our business. Nationalization or expropriation could even
result in the total loss of our investment in China and in the total loss of our
stockholders’ investment.
36
New
labor laws in the PRC may adversely affect our results of
operations.
On
January 1, 2008, the PRC government promulgated the Labor Contract Law of
the PRC, or the New Labor Contract Law. The New Labor Contract Law imposes
greater liabilities on employers and significantly impacts the cost of an
employer’s decision to reduce its workforce. Further, it requires certain
terminations to be based upon seniority and not merit. In the event we decide to
significantly change or decrease our workforce, the New Labor Contract Law could
adversely affect our ability to enact such changes in a manner that is most
advantageous to our business or in a timely and cost effective manner, thus
materially and adversely affecting our financial condition and results of
operations.
If
political relations between the United States and China worsen, our stock price
may decrease and we may have difficulty accessing U.S. capital
markets.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could adversely affect the market price of our common
stock and our ability to access U.S. capital markets.
Uncertainties
with respect to the PRC legal system could limit the protections available to
you and us.
The PRC
legal system is a civil law system based on written statutes. Unlike the common
law system in the United States, prior court decisions may be cited for
reference but have limited precedential value. Since 1979, PRC legislation and
regulations have significantly enhanced the protections afforded to various
forms of foreign investments in China. We conduct all of our business through
our subsidiary established in China. Thus we are generally subject to laws and
regulations applicable to foreign investment in China and, in particular, laws
applicable to wholly foreign-owned enterprises. However, since many laws, rules
and regulations are relatively new and the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to us. For example,
we may have to resort to administrative and court proceedings to enforce the
legal protection that we enjoy either by law or contract. However, since PRC
administrative and court authorities have significant discretion in interpreting
and implementing statutory and contractual terms, it may be more difficult to
evaluate the outcome of Chinese administrative and court proceedings and the
level of legal protection we enjoy in China than in more developed legal
systems. These uncertainties may impede our ability to enforce the contracts we
have entered into with our business partners, customers and suppliers. In
addition, such uncertainties, including the inability to enforce our contracts,
could materially and adversely affect our business and operations. Furthermore,
intellectual property rights and confidentiality protections in China may not be
as effective as in the United States or other countries. Accordingly, we cannot
predict the effect of future developments in the PRC legal system, particularly
with regard to the Chinese pharmaceutical industry and retail industry,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement thereof, or the preemption of local regulations by
national laws. These uncertainties could limit the legal protections available
to us and our investors. In addition, any litigation in China may be protracted
and result in substantial costs and diversion of our resources and management
attention.
The
fluctuation of foreign currency exchange rates could materially impact our
financial results.
Since we
conduct our operations in China, our business is subject to foreign currency
risks, including currency exchange rates fluctuations and difficulties in
converting Renminbis into U.S. dollars. The exchange rates between
the Renminbi and the U.S. dollar, Euro and other foreign currencies is affected
by, among other things, changes in China’s political and economic conditions. On
July 21, 2005, the PRC government changed its decade-old policy of pegging the
value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
permitted to fluctuate within a narrow and managed band against a basket of
foreign currencies. There remains significant international pressure on the PRC
government to adopt a more flexible currency policy, which could result in a
further and more significant appreciation of the Renminbi against the U.S.
dollar. In addition, appreciation or depreciation in the value of the Renminbi
relative to the U.S. dollar would affect our financial results reported in U.S.
dollar terms without giving effect to any underlying change in our business,
financial condition and results of operations.
37
Because
our assets are located outside of the United States and all of our directors and
officers reside outside of the United States, it may be difficult for investors
to enforce their rights based on United States federal securities laws or any
United States court judgments against us and our officers and
directors.
Our
operating company and all of our assets are located in the PRC. In
addition, all of our directors and officers reside outside of the United States.
It may therefore be difficult for investors in the United States to enforce
their legal rights based on the civil liability provisions of the United States
federal securities laws against us in the courts of either the United States or
PRC and, even if civil judgments are obtained in United States courts, to
enforce such judgments in PRC courts. Further, it is unclear if
extradition treaties now in effect between the United States and the PRC would
permit effective enforcement against us or our officers and directors of
criminal penalties, under the United States federal securities laws or other
United States laws.
Restrictions
under PRC law on our PRC operating subsidiary’s ability to make dividends and
other distributions could materially and adversely affect our ability to grow,
make investments or complete acquisitions that could benefit our business, pay
dividends to, and otherwise fund and conduct our businesses.
Substantially
all of our revenues are earned by our PRC operating subsidiary,
XYT. However, PRC regulations restrict the ability of our PRC
subsidiary to make dividends and other payments to its offshore parent
company. PRC legal restrictions permit payments of dividend by our
PRC subsidiary only out of its accumulated after-tax profits, if any, determined
in accordance with PRC accounting standards and regulations. Our PRC
subsidiary is also required under PRC laws and regulations to allocate at least
10% of our annual after-tax profits determined in accordance with PRC GAAP to a
statutory general reserve fund until the amounts in said fund reaches 50% of our
registered capital. Allocations to these statutory reserve funds can
only be used for specific purposes and are not transferable to us in the form of
loans, advances or cash dividends. Any limitations on the ability of
our PRC subsidiary to transfer funds to us could materially and adversely limit
our ability to grow, make investments or acquisitions that could be beneficial
to our business, pay dividends and otherwise fund and conduct our
business.
Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.
All of
XYT’s sales revenue and expenses are denominated in RMB. Under PRC
law, the RMB is currently convertible under the “current account,” which
includes dividends and trade and service-related foreign exchange transactions,
but not under the “capital account,” which includes foreign direct investment
and loans. Currently, our PRC operating subsidiary may purchase
foreign currencies for settlement of current account transactions, including
payments of dividends to the Company, without the approval of the State
Administration of Foreign Exchange, or SAFE, by complying with certain
procedural requirements. However, the relevant PRC government
authorities may limit or eliminate our ability to purchase foreign currencies in
the future. Since a significant amount of our future revenue will be
denominated in RMB, any existing and future restrictions on currency exchange
may limit our ability to utilize revenue generated in RMB to fund our business
activities outside China that are denominated in foreign
currencies.
38
Foreign
exchange transactions by our PRC operating subsidiary under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including
SAFE. In particular, if our PRC operating subsidiary borrows foreign
currency through loans from us or other foreign lenders, these loans must be
registered with SAFE, and if we finance the subsidiary by means of additional
capital contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce, or MOFCOM, or their
respective local counterparts. These limitations could affect their
ability to obtain foreign exchange through debt or equity
financing.
There
are significant uncertainties under the EIT relating to the withholding tax
liabilities of XYT, and dividends payable by XYT to FCPG HK may not qualify to
enjoy the treaty benefits.
Under the
EIT and its implementing rules, the profits of a foreign invested enterprise
which are distributed to its immediate holding company outside the PRC will be
subject to a withholding tax rate of 10%. Pursuant to a tax arrangement between
Hong Kong and the PRC, such rate may be lowered to 5% if a Hong Kong resident
enterprise owns over 25% of a PRC company. XYT is currently wholly-owned by FCPG
HK. However, the 5% withholding tax rate does not automatically apply and
approvals from competent local tax authorities are required before an enterprise
can enjoy any benefits under the relevant taxation treaties. Moreover, according
to the Notice of the State
Administration of Taxation on Issues regarding the Administration of the
Dividend Provision in Tax Treaties promulgated on February 20, 2009,
for a tax treaty to be applicable, certain requirements must be satisfied,
including: (1) the taxpayer must be the beneficial owner of the relevant
dividends; (2) for corporate recipients to enjoy the favorable tax
treatment under the tax treaty as direct owners of a PRC enterprise, such
corporate recipients must satisfy the direct ownership thresholds at all times
during the 12 consecutive months preceding the receipt of the dividends. On
August 24, 2009, the State Administration of Taxation issued the Administrative Measures for
Non-resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial
Implementation), which became effective on October 1, 2009,
requiring non-resident enterprises to obtain an approval from the competent tax
authority in order to enjoy the treatments under tax treaties. Further, the
State Administration of Taxation promulgated the Notice on How to Understand and
Recognize the “Beneficial Owner” in Tax Treaties on October 27,
2009, which limits the “beneficial owner” to individuals, enterprises or other
organizations normally engaged in substantive operations, and set forth certain
adverse factors on the recognition of such “Beneficial Owner.” XYT has not yet
applied for such approvals because it has not declared or paid dividends, and
does not intend to declare or pay dividends. XYT will apply for such approvals
when it intends to declare and pay dividends. There is no assurance that the PRC
tax authorities will approve the 5% withholding tax rate on dividends received
by FCPG HK from XYT.
Risks Relating to our Common
Stock and our Status as a Public Company
The
relative lack of public company experience of our management team may put us at
a competitive disadvantage.
Our
management team lacks public company experience and is generally unfamiliar with
the requirements of the United States securities laws and U.S. Generally
Accepted Accounting Principles, which could impair our ability to comply with
legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of
2002. The individuals who now constitute our senior management team have never
had responsibility for managing a publicly traded company. Such
responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. Our senior management may not be able to
implement programs and policies in an effective and timely manner that
adequately responds to such increased legal, regulatory compliance and reporting
requirements. Our failure to comply with all applicable requirements could lead
to the imposition of fines and penalties and distract our management from
attending to the growth of our business.
39
We
will continue to incur significant costs as a result of operating as a public
company, and our management will be required to devote substantial time to new
compliance requirements.
As a
public company we incur significant legal, accounting and other expenses under
the Sarbanes-Oxley Act of 2002, together with rules implemented by the
Securities and Exchange Commission and applicable market regulators. These rules
impose various requirements on public companies, including requiring certain
corporate governance practices. Our management and other personnel will need to
devote a substantial amount of time to these new compliance requirements.
Moreover, these rules and regulations will increase our legal and financial
compliance costs and will make some activities more time-consuming and
costly.
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular, we must perform system and process evaluations and
testing of our internal controls over financial reporting to allow management
and our independent registered public accounting firm to report on the
effectiveness of our internal controls over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by
our independent registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material
weaknesses. Compliance with Section 404 may require that we incur substantial
accounting expenses and expend significant management efforts. If we are not
able to comply with the requirements of Section 404 in a timely manner, or if
our accountants later identify deficiencies in our internal controls over
financial reporting that are deemed to be material weaknesses, the market price
of our stock could decline and we could be subject to sanctions or
investigations by the SEC or other applicable regulatory
authorities.
Our
common stock is not listed on any stock exchange and there is no established
market for shares of our common stock. Even if a market for our
common stock develops, our common stock could be subject to wide
fluctuations.
Our
common stock is not listed on any stock exchange. Although our common
stock is quoted on the OTCQB marketplace, there is no established public market
for shares of our common stock, and no trades of our common stock have taken
place on the OTCQB. Even if the shares of our common stock may in the
future trade on the OTCQB, the liquidity and price of our common stock is
expected to be more limited than if such securities were quoted or listed on a
national exchange. No assurances can be given that an active public
trading market for our common stock will develop or be sustained. If
trading of our securities commences on the OTCQB, the trading volume we will
develop may be limited by the fact that many major institutional investment
funds, including mutual funds, as well as individual investors follow a policy
of not investing in bulletin board stocks and certain major brokerage firms
restrict their brokers from recommending bulletin board stocks because they are
considered speculative, volatile and thinly traded. Lack of liquidity will limit
the price at which stockholders may be able to sell our common
stock.
Even if
our common stock will in the future trade on the OTCQB, the price of such common
stock could be subject to wide fluctuations, in response to quarterly variations
in our operating results, announcements by us or others, developments affecting
us, and other events or factors. In addition, the stock market has experienced
extreme price and volume fluctuations in recent years. These fluctuations have
had a substantial effect on the market prices for many companies, often
unrelated to the operating performance of such companies, and may adversely
affect the market prices of the securities. Such risks could have an
adverse affect on the stock’s future liquidity.
40
We
do not anticipate paying any dividends in the foreseeable future. If
and when we decide to pay dividends, any dividends or proceeds from liquidation
will be subject to the approval of the relevant Chinese government
agencies.
We
currently intend to retain any future earnings for funding growth. We do not
anticipate paying any dividends in the foreseeable future. As a result,
stockholders should not rely on an investment in our securities if they require
dividend income. Our assets are located inside China. Under the laws governing
foreign-invested enterprises in China, dividend distribution and liquidation are
allowed but subject to special procedures under the relevant laws and rules. If
and when made, any dividend payment will be subject to the decision of the board
of directors of our Chinese operating company, XYT, 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 our investors in case of
dividend payment and liquidation.
We
may be subject to risks related to penny stocks because of special regulations
prescribed by the SEC.
Our
common stock may be subject to regulations prescribed by the SEC relating to
“penny stocks.” The SEC has adopted regulations that generally define a penny
stock to be any equity security that has a market price (as defined in such
regulations) of less than $5.00 per share, subject to certain exceptions. When
and if trading of our common stock is established, such stock may meet the
definition of a penny stock and be subject to these regulations, which impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and “accredited
investors” (generally institutions with assets in excess of $5,000,000 and
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 (individually) or $300,000 (jointly with their spouse)).
FINRA sales
practice requirements may also limit a stockholder’s ability to buy and sell our
stock.
In
addition to the “penny stock” rules described above, the Financial Industry
Regulatory Authority (“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
A
large number of shares may be eligible for future sale and may depress our stock
price.
We may be
required, under terms of future financing arrangements, to offer a large number
of common shares to the public, or to register for sale by future private
investors a large number of shares sold in private sales to them. Sales of
substantial amounts of common stock, or a perception that such sales could
occur, and the existence of options or warrants to purchase shares of common
stock at prices that may be below the then-current market price of our common
stock, could adversely affect the market price of our common stock and could
impair our ability to raise capital through the sale of our equity securities,
either of which would decrease the value of any earlier investment in our common
stock.
41
Shares
of our common stock that have not been registered under the Securities Act of
1933, as amended, regardless of whether such shares are restricted or
unrestricted, are subject to resale restrictions imposed by Rule 144, including
those set forth in Rule 144(i) which apply to a “shell company.” In addition,
any shares of our common stock that are held by affiliates, including any
received in a registered offering, will be subject to the resale restrictions of
Rule 144(i).
Pursuant
to Rule 144 of the Securities Act of 1933, as amended (“Rule 144”), a “shell
company” is defined as a company that has no or nominal operations; and, either
no or nominal assets; assets consisting solely of cash and cash equivalents; or
assets consisting of any amount of cash and cash equivalents and nominal other
assets. As such, we were a “shell company” pursuant to Rule 144 prior to the
consummation of the Exchange Transaction, and as such, sales of our securities
pursuant to Rule 144 are not able to be made until a period of at least twelve
months has elapsed from the date that this Current Report on Form 8-K has been
filed with the Commission reflecting the Company’s status as a non-”shell
company.” Therefore, any restricted securities we sell in the future or issue to
consultants or employees, in consideration for services rendered or for any
other purpose will have no liquidity until and unless such securities are
registered with the Commission and/or until a year after the date of the filing
of this Current Report on Form 8-K and we have otherwise complied with the other
requirements of Rule 144. As a result, it may be harder for us to
fund our operations and pay our consultants with our securities instead of cash.
Furthermore, it will be harder for us to raise funding through the sale of debt
or equity securities unless we agree to register such securities with the
Commission, which could cause us to expend additional resources in the future.
Our previous status as a “shell company” could prevent us from raising
additional funds, engaging consultants, and using our securities to pay for any
acquisitions (although none are currently planned), which could cause the value
of our securities, if any, to decline in value or become worthless. Lastly, any
shares held by affiliates, including shares received in any registered offering,
will be subject to the resale restrictions of Rule 144(i).
DESCRIPTION
OF PROPERTY
FCPG HK’s
and XYT’s headquarters are located at Number 504, West Ren Min Road, Kunming
City, Yunnan Province, People’s Republic of China, 650000. In
addition to the head office located at this address, the XYT’s 3,000 square
meter warehouse is also located here. This property is leased for a
ten year term, commencing April 1, 2005 and ending March 31, 2015, with a total
rental and property management fee of RMB580,000 (approximately
US$85,000). See Exhibit 10.3 of this report for the lease relating to
this property.
The
Company also maintains an executive office at Room 1301, 13th Floor,
CRE Building, 303 Hennessy Road Wanchai, Hong Kong.
42
SUMMARY
SELECTED CONSOLIDATED FINANCIAL DATA
The
following tables summarize selected consolidated financial data regarding the
business of XYT and should be read together with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the consolidated
pro forma financial statements of the Company and the related notes included
with those financial statements. The summary consolidated financial
information as of and for the six months ended June 30, 2010 for XYT have
been derived from the unaudited consolidated financial statements for FCPG
HK. All monetary amounts are expressed in U.S. dollars unless
otherwise indicated.
Historical
Financial Performance of XYT
The
following represents the past financial performance for XYT as of and for the
years ended December 31, 2009, 2008 and 2007 and for the six months ended
June 30, 2010 and 2009.
Six Months Ended
June 30,
2010
|
Six Months Ended
June 30,
2009
|
Year Ended
December 31,
2009
|
Year Ended
December 31,
2008
|
Year Ended
December 31,
2007
|
||||||||||||||||
Income
Statement Data:
|
||||||||||||||||||||
Sales
|
$ | 13,878,888 | $ | 11,983,956 | $ | 25,285,526 | $ | 17,154,331 | $ | 10,838,041 | ||||||||||
Cost
of sales
|
(11,444,144 | ) | (10,347,899 | ) | (20,726,221 | ) | 14,243,436 | (9,250,629 | ) | |||||||||||
Gross
profit
|
2,434,744 | 1,636,057 | 4,559,305 | 2,910,895 | 1,587,412 | |||||||||||||||
Selling,
general and administrative expenses, and others
|
(180,741 | ) | (82,874 | ) | (969,622 | ) | (917,581 | ) | (735,896 | ) | ||||||||||
Income
from operations
|
2,254,003 | 1,553,183 | 3,589,683 | 1,993,314 | 851,516 | |||||||||||||||
Interest
income
|
4,951 | 7,856 | 13,057 | 17,593 | 11,710 | |||||||||||||||
Other
income
|
– | – | 48,543 | 4,190 | 2,366 | |||||||||||||||
Interest
expense
|
(21,585 | ) | – | (1,513 | ) | (54 | ) | (3,154 | ) | |||||||||||
Income
before tax
|
2,237,369 | 1,561,039 | 3,649,770 | 2,015,043 | 862,438 | |||||||||||||||
Income
tax
|
559,369 | 390,260 | 906,274 | (502,720 | ) | (284,602 | ) | |||||||||||||
Net
income
|
$ | 1,678,000 | $ | 1,170,779 | $ | 2,743,496 | $ | 1,512,323 | $ | 577,836 |
As of
|
As of December 31,
|
|||||||||||||||
June 30, 2010
|
2009
|
2008
|
2007
|
|||||||||||||
Balance
Sheet Data:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 19,417 | $ | 37,906 | $ | 80,857 | $ | 9,462 | ||||||||
Working
capital
|
6,781,433 | 5,068,299 | 2,323,257 | 559,175 | ||||||||||||
Total
assets
|
20,099,152 | 15,591,863 | 8,248,994 | 4,477,356 | ||||||||||||
Total
long-term debt
|
– | – | – | – | ||||||||||||
Total
stockholders’ equity
|
6,787,539 | 5,075,573 | 2,334,411 | 581,025 |
Six Months Ended
June 30,
|
Six Months Ended
June 30,
|
Year ended
December 31,
|
Year ended
December 31,
|
Year ended
December 31,
|
||||||||||||||||
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
Cash
Flow Data:
|
||||||||||||||||||||
Net
cash (used in) provided by operating activities
|
$ | (952,394 | ) | $ | (42,546 | ) | $ | (746,284 | ) | $ | 188,193 | $ | (239,948 | ) | ||||||
Net
cash provided by (used in) investing activities
|
– | (2,892 | ) | (2,892 | ) | – | (4,607 | ) | ||||||||||||
Net
cash provided by (used in) financing activities
|
933,762 | (26,367 | ) | 706,263 | (119,881 | ) | 145,047 | |||||||||||||
Net
(decrease) increase in cash and cash equivalents
|
$ | (18,489 | ) | $ | (71,862 | ) | $ | (42,951 | ) | $ | 71,395 | $ | (95,695 | ) |
43
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
The
following discussion and analysis of the results of operations and financial
condition of XYT for the fiscal years ended December 31, 2009, 2008
and 2007 should be read in conjunction with the Summary Selected Consolidated
Financial Data, the FCPG HK and XYT financial statements, and the notes to those
financial statements that are included elsewhere in this Form 8-K. Our
discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including those set forth under the Risk
Factors, Cautionary Notice Regarding Forward-Looking Statements and Business
sections in this Form 8-K. We use words such as “anticipate,” “estimate,”
“plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” and similar expressions to identify
forward-looking statements.
Overview
First
China Pharmaceutical Group, Inc., formerly known as E-Dispatch Inc., was
incorporated under the laws of the State of Nevada on July 31,
2007. On September 15, 2010, FCPG closed a voluntary share exchange
transaction pursuant to the Exchange Agreement dated August 23, 2010 (the
“Exchange Transaction”) by and among FCPG, First China Pharmaceutical Group
Limited, a Hong Kong company (“FCPG HK”), and Kun Ming Xin Yuan Tang Pharmacies
Co. Ltd., a company organized under the laws of the PRC and wholly owned
subsidiary of FCPG HK (“XYT”). Prior to the Exchange Transaction, we
were a development stage company engaged in developing a cell phone-based taxi
dispatch system, and a public reporting “shell company,” as defined in Rule
12b-2 of the Securities Exchange Act of 1934, as amended. As a result
of the Exchange Transaction, the FCPG HK stockholder acquired approximately 25%
of our issued and outstanding common stock, FCPG HK and XYT became our wholly
owned subsidiaries, and we acquired the business and operations of FCPG HK and
XYT.
FCPG HK
acquired all of the outstanding stock of XYT on June 25, 2010. XYT is
engaged in drug logistics and distribution in China through XYT drug stores,
clinics and hospitals, as well as the wholesale distribution of medicine
products, chemical agents, antibiotics, biochemistry drugs and biological
preparations to hospitals and XYT stores. XYT has a sales network that covers
the entire Yunnan Province of China. XYT’s strategy is to build a
nationwide pharmaceutical distribution network throughout China.
Our
management’s discussion and analysis of our financial condition and results of
operations are only based on XYT’s current drug logistics and distribution
business in China. Our previous shell company’s results of operations
are immaterial and will not be included in the discussion below. Key
factors affecting our results of operations include revenues, cost of revenues,
operating expenses and income and taxation.
As a
result of the Exchange Transaction, the Registrant ceased being a shell company
as such term is defined in Rule 12b-2 under the Exchange Act. See Item 5.06 of
this Current Report on Form 8-K.
Comparison
of the Six Months Ended June 30, 2010 and 2009
Sales
XYT’s
sales of Chinese patent drugs, antibiotics, bio-chemicals, chemical preparations
and biologicals for the six months ended June 30, 2010 totaled US$13,878,888, an
increase of 15.8% from US$11,983,956 for the six months ended June 30,
2009. This increase in sales was primarily due to the growth of XYT’s
business, sales of higher priced products, and increased selling
efforts. However, the key reason for the improvement was XYT’s
ability to fulfill orders over the internet in 2010. In November
2009, XYT received government approval to accept and fulfill orders over the
internet and began to realize the benefits of internet orders in the first
quarter of 2010.
44
Cost
of sales
Cost of
sales for the six months ended June 30, 2010 were US$11,444,144 and consist
primarily of material cost, labor cost, and related expenses which are directly
attributable to the selling of pharmaceutical products. Cost of sales
increased US$1,096,245, or 10.6%, from the six months ended June 30, 2009, and
is relatively consistent with the percentage increase in sales as described
above. In addition, more efficient order processing and fulfillment
using the internet has increased productivity and enabled XYT to order larger
inventories and realize volume discounts.
Gross
profit
Gross
profit for the six months ended June 30, 2010 was US$2,434,744, an increase of
US$798,687, or 48.8%, from US$1,636,057 for the six months ended June 30,
2009. The increase in gross profit reflects increased overall sales
as described above, as well as the sale of an increased amount of certain higher
margin products coupled with a lower percentage increase in cost of
sales.
Selling,
general and administrative expenses, and others
XYT’s
selling, general and administrative expenses for the six months ended June 30,
2010 increased by US$97,867, or 118.1%, from the comparable prior period to
US$180,741. This percentage increase reflects the growth of XYT’s
business as compared to the same period in 2009 and the corresponding increases
in administrative and operating expenses.
Net income
Net
income increased to US$1,678,000 for the six months ended June 30, 2010 from
US$1,170,779 for the six months ended June 30, 2009, an increase of US$507,221,
or 43.3%. This increase was primarily due to the increase in sales
described above, as well as the corresponding smaller percentage increases in
cost of sales, offset in part by increases in selling, general and
administrative expenses.
Effects
of foreign currency translation conversion
XYT
recognized a gain of US$32,684 on the effects of foreign currency conversion for
the six months ended June 30, 2010, compared to a gain of US$26,270 during the
comparable prior year period. This change is due to differences in
exchange rates used during the periods for converting from XYT’s functional
currency of Renminbi to U.S. dollars for financial reporting
purposes.
Comprehensive
income
XYT’s
comprehensive income increased by 42.9% from US$1,197,049 for the six month
period ended June 30, 2009 to US$1,710,684 for the six months ended June 30,
2010. The increase is attributable to the above-mentioned increases
in sales and gross profits, in addition to the increase in gain recognized on
the effects of foreign currency conversion.
45
Comparison
of the Years Ended December 31, 2009 and 2008
Sales
XYT’s
sales were comprised of its bulk sales of Chinese patent drugs, antibiotics,
bio-chemicals, chemical preparations, and biologicals. Sales for the
year ended December 31, 2009 were US$25,285,526, an increase of 47.4% from
US$17,154,331 for the year ended December 31, 2008. This increase in
sales was primarily due to the growth of XYT’s business, sales of higher priced
products, and increased selling efforts.
Cost
of sales
Cost of
sales consists primarily of material cost, labor cost, and related expenses
which are directly attributable to the selling of pharmaceutical
products. Cost of sales for the year ended December 31, 2009
increased by 45.5% to US$20,726,221 from US$14,243,436 for the year ended
December 31, 2008. This increase in cost of sales percentage from the
prior year is relatively consistent with XYT’s percentage increase in sales
described above, reflecting its increased selling efforts.
Gross
profit
Gross
profit for the year ended December 31, 2009 was US$4,559,305, an increase of
US$1,648,410, or 56.6%, from US$2,910,895 for the year ended December 31,
2008. The increase in gross profit reflects increased overall sales
as described above, as well as the sale of certain higher margin
products.
Selling,
general and administrative expenses, and others
Selling,
general and administrative expenses increased by 5.7% from US$917,581 for the
year ended December 31, 2008 to US$969,622 for the year ended December 31,
2009. The increase is largely due to increased sales commissions
resulting from XYT’s increased sales described above, from US$514,732 for the
year ended December 31, 2008 to US$758,601 for the year ended December 31, 2009,
offset by decreases in advertising and promotion fees, salary and benefits,
entertainment, travelling, and utilities expenses.
Net
income
XYT’s net
income for the year ended December 31, 2009 was US$2,743,496, an increase of
US$1,231,173, or 81.4%, from the year ended December 31, 2008. This
increase was primarily due to the increase in sales described above, as well as
the corresponding smaller percentage increase in selling, general and
administrative expenses.
Effects
of foreign currency translation conversion
XYT
recognized a loss of US$2,334 on the effects of foreign currency conversion for
the year ended December 31, 2009, as compared to a gain of US$95,777 for the
year ended December 31, 2008. This change is due to differences in
exchange rates used during the years for converting from XYT’s functional
currency of Renminbi to U.S. dollars for financial reporting
purposes.
Comprehensive
income
XYT’s
comprehensive income increased by 70.5% from US$1,608,100 for the year ended
December 31, 2008 to US$2,741,162 for the year ended December 31,
2009. The increase is attributable to the above-mentioned increases
in sales and gross profits, offset in part by the loss recognized on the effects
of foreign currency conversion.
46
Comparison
of the Years Ended December 31, 2008 and 2007
Sales
XYT’s
sales were comprised of its bulk sales of Chinese patent drugs, antibiotics,
bio-chemicals, chemical preparations, and biological. Sales for the
year ended December 31, 2008 were US$17,154,331, an increase of 58.3% from
US$10,838,041 for the year ended December 31, 2007. This increase in
sales was primarily due to the growth of XYT’s business, sales of higher priced
products, and increased selling efforts.
Cost
of sales
Cost of
sales consists primarily of material cost, labor cost, and related expenses
which are directly attributable to the trading of pharmaceutical
products. Cost of sales for the year ended December 31, 2008
increased by 54.0% to US$14,243,436 from US$9,250,629 for the year ended
December 31, 2007. This increase in cost of sales percentage from the
prior year is relatively consistent with XYT’s percentage increase in sales
described above, reflecting its increased selling efforts.
Gross
profit
Gross
profit for the year ended December 31, 2008 was US$2,910,895, an increase of
US$1,323,483, or 83.4%, from US$1,587,412 for the year ended December 31,
2007. The increase in gross profit reflects increased overall sales
as described above, as well as the sale of certain higher margin
products.
Selling,
general and administrative expenses, and others
Selling,
general and administrative expenses increased by 24.7% from US$735,896 for the
year ended December 31, 2007 to US$917,581 for the year ended December 31,
2008. This increase is largely due to increased sales commissions
resulting from XYT’s increased sales described above, offset by certain
decreases in other operating expenses.
Net
income
XYT’s net
income for the year ended December 31, 2008 was US$1,512,323, an increase of
US$934,487, or 161.7%, from the year ended December 31, 2007. This
increase was primarily due to the increase in sales described above, as well as
the corresponding smaller percentage increase in selling, general and
administrative expenses.
Effects
of foreign currency translation conversion
XYT
recognized a gain of US$95,777 on the effects of foreign currency conversion for
the year ended December 31, 2008, as compared to a gain of US$18,810 for the
year ended December 31, 2007. This change is due to differences in
exchange rates used during the years for converting from XYT’s functional
currency of Renminbi to U.S. dollars for financial reporting
purposes.
Comprehensive
income
XYT’s
comprehensive income increased by 169.5% from US$596,646 for the year ended
December 31, 2007 to US$1,608,100 for the year ended December 31,
2008. The increase is attributable to the above-mentioned increases
in sales and gross profits, in addition to an increase in gain recognized on the
effects of foreign currency conversion.
47
Liquidity
and Capital Resources
Overview
As of
June 30, 2010, FCPG HK and XYT had cash and equivalents on hand of
US$19,417, and working capital of US$6,781,433. XYT believes that its
cash on hand and working capital will be sufficient to meet its anticipated cash
requirements through December 31, 2010. If XYT does not meet its
revenue objectives over that period, the Company may need to sell additional
equity securities, which could result in dilution to current stockholders, or
seek additional loans. The incurrence of indebtedness would result in
increased debt service obligations and could require the Company to agree to
operating and financial covenants that would restrict its operations. Financing
may not be available in amounts or on terms acceptable to the Company, if at
all. Any failure by us to raise additional funds on terms favorable
to us, or at all, could limit our ability to expand our business operations and
could harm our overall business prospects.
Substantially
all of our revenues are earned by XYT, our PRC subsidiary. However,
PRC regulations restrict the ability of our PRC subsidiary to make dividends and
other payments to their offshore parent company. Pursuant to the law
of PRC on foreign-capital enterprises, when XYT decides to distribute profits,
reserve funds and bonus and welfare funds for workers and staff members shall be
withdrawn from the profits after a foreign-capital enterprise has paid income
tax in accordance with the provisions of the Chinese tax law. The
proportion of reserve funds to be withdrawn shall not be lower than 10% of the
total amount of profits after payment of tax; the withdrawal of reserve funds
may be stopped when the total cumulative reserve has reached 50% of the
registered capital. The proportion of bonus and welfare funds for
workers and staff members to be withdrawn shall be determined by the
foreign-capital enterprise of its own accord. Companies may be subject to a fine
up to 5,000 RMB as a result of non-compliance of such rules. The
registered capital of XYT is US$260,100. Shareholders of XYT had not
determined the proportion of reserve funds and bonus and welfare funds for
workers and staff members, and XYT had not distributed any profits
previously. If we decide to distribute profits in the future, XYT
will comply with the relevant rules to withdraw statutory reserve funds which
will be no lower than 10% of the total amount of profits after payment of
tax.
Our cash
needs are primarily for working capital to support our operations, the purchase
of inventory and future strategic acquisitions. We presently finance our
operations through revenue from the sale of our products and services, the
private placement of equity and debt securities and short-term bank
borrowings. As of June 30, 2010, we had outstanding bank loans from
Kunming Wuhua Branch of Fudian Bank in the amounts of US$123,518 and US$736,279,
with annual interests rates of 7.97% and 5.31%, respectively, and maturity dates
of April 26, 2011 and December 6, 2010, respectively. We believe that
our existing capital resources are sufficient to meet our current obligations
and operating requirements, but will not be sufficient to meet our more
aggressive growth and acquisition plans and that we will need to raise
additional capital in the next 12 months. In order to meet our planned
strategic acquisitions, we estimate requiring US$6 million in capital. We
will consider debt or equity offerings or institutional borrowing as potential
means of financing, however, there are no assurances that we will be successful
or that we will obtain terms that are favorable to us.
In
addition, XYT will require financing to expand its product line from 5,000 to
30,000 products. Management believes that over a six month period,
the Company can expand its product line to 30,000 products at a cost of US$2 to
US$2.5 million. The bulk of these funds will be utilized to purchase
inventory, which will be on a cash basis until a track record is established and
net 30 day terms can be negotiated.
48
Net
cash provided by (used in) operating activities
Net cash
used in operating activities for the six months ended June 30, 2010 was
US$952,394, compared to net cash used in operating activities of US$42,546 for
the six months ended June 30, 2009. This increase in cash used in
operating activities was primarily due to increases in amounts due to a related
party and inventories from the comparable prior year period, partially offset by
the increase in net income from US$1,170,779 to US$1,678,000 and an increase in
other payables and accrued liabilities. Net cash used in operating activities
for the year ended December 31, 2009 was US$746,284, compared to net cash
provided by operating activities of US$188,193 for the year ended December 31,
2008. This increase was largely due to an increase in other
receivables of US$9,305,535, offset in part by an increase in net income of
US$1,231,173, as well as a decrease in inventory of US$1,934,742 and an increase
in other accrued liabilities of US$4,412,854.
Net
cash provided by (used in) investing activities
Net cash
used in investing activities was US$0 and US$2,892 for the six months ended June
30, 2010 and 2009, respectively, and was attributable in 2009 to purchases of
plant and equipment. Net cash used in investing activities for the
year ended December 31, 2009 was US$2,892, related to the purchase of property,
plant and equipment. XYT undertook no investing activities during the
year ended December 31, 2008.
Net
cash provided by financing activities
Net cash
provided by financing activities was US$933,762 for the six months ended June
30, 2010 and was comprised of borrowings received from a bank loan from Kunming
Wuhua Branch of Fudian Bank and decrease in restricted cash. Net cash
used in financing activities during the six months ended June 30, 2009 was
US$26,367 and related to an increase in restricted cash. Net cash
provided by financing activities for the year ended December 31, 2009 was
US$706,263, consisting primarily of US$732,638 of proceeds received from the
bank loan from Kunming Wuhua Branch of Fudian Bank. Cash used in
financing activities for the year ended December 31, 2008 was US$119,881 and
related primarily to an increase in restricted cash, offset in part by capital
contributions from stockholders.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
As of
December 31, 2009, XYT did not have any long-term debt or purchase
obligations. XYT leases its office and warehouse pursuant to a lease
with a term from April 1, 2005 to March 31, 2015, for a total rental rate
and property management fee of RMB580,000 (approximately US$250,000) per
year.
Off-Balance
Sheet Arrangements
XYT has
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. XYT has not entered into
any derivative contracts that are indexed to its shares and classified as
shareholder’s equity or that are not reflected in its consolidated financial
statements. Furthermore, XYT does not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity. XYT does not have any variable
interest in any unconsolidated entity that provides financing, liquidity, market
risk or credit support to it or engages in leasing, hedging or research and
development services with it.
49
Critical
Accounting Estimates
XYT’s
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”), and this requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the related disclosure
of contingent assets and liabilities at the dates of the consolidated financial
statements as well as the reported amounts of revenues and expenses during the
reporting periods. XYT bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions. Significant
estimates include:
Valuation
of accounts receivable
An
allowance for impairment of trade and other receivables is established when
there is objective evidence that the Company will not be able to collect all
amounts due according to the original terms of receivables. The amount of the
allowance is the difference between the receivables’ carrying amount and the
present value of estimated future cash flows, discounted at the effective
interest rate computed at initial recognition. The amount of the allowance is
recognised in the income statement.
Inventories
Net
realisable value of inventories is the estimated selling price in the ordinary
course of business, less the estimated costs of completion and the estimated
costs necessary to make the sale. For the years ended December 31,
2009 and 2008, the Company recorded no allowance for slow-moving and obsolete
inventories.
Deferred
income taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry-forwards. Deferred tax assets are reduced by a
valuation allowance to the extent management concludes it is more likely than
not that the assets will not be realised. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the statements of income and comprehensive income in the
periods that includes the enactment date.
Useful
lives of plant and machinery
Depreciation
of property, plant and equipment is calculated to write off the cost, less their
estimated residual value, if any, using the straight-line method over their
estimated useful lives. The principal annual rates are as follows:
Machinery
|
5
years
|
Motor
Vehicles
|
4
years
|
Office
equipment
|
3
years
|
Recently
Issued Accounting Pronouncements
In March
2008, the FASB issued SFAS No. 161, Disclosures About Derivative
Instruments And Hedging Activities (an amendment to SFAS No. 133). This
statement is effective for financial statements issued for fiscal year and
interim periods beginning after November 15, 2008 and requires enhanced
disclosures with respect to derivative and hedging activities. XYT will comply
with the disclosure requirements of this statement if it utilizes derivative
instruments or engages in hedging activities upon its
effectiveness.
50
In April
2008, the FASB issued FASB Staff Position No. 142-3, Determination Of The Useful Life Of
Intangible Assets (“FSP No. 142-3”) to improve the consistency between
the useful Iife of a recognized intangible asset (under SFAS No. 142) and the
period of expected cash flows used to measure the fair value of the intangible
asset (under SEAS No. 141(R)). FSP No. 142-3 amends the factors to be considered
when developing renewal or extension assumptions that are used to estimate an
intangible asset’s useful life under SFAS No. 142. The guidance in the new staff
position is to be applied prospectively to intangible assets acquired after
December 31, 2008. In addition, FSP No.142-3 increases the disclosure
requirements related to renewal or extension assumptions. XYT does not believe
implementation of FSP No. 142-3 have a material impact on its financial
statements.
In May
2008, the FASB issued statement No. 162, The Hierarchy Of Generally Accepted
Accounting Principles. This statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles”.
In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible Debt
Instruments That May Be Settled In Cash Upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis. As XYT
does not have convertible debt at this time, XYT currently believes the adoption
of FSP APB 14-1 will have no effect on its combined results of operations and
financial condition.
In May
2008, the FASB issued Statement No. 163, Accounting for Finance Guarantee
Insurance Contracts - An Interpretation of FASB Statement No. 60. The
premium revenue recognition approach for a financial guarantee insurance
contract links premium revenue recognition to the amount of insurance protection
and the period in which it is provided. For purposes of this statement, the
amount of insurance protection provided is assumed to be a function of the
insured principal amount outstanding, since the premium received requires the
insurance enterprise to stand ready to protect holders of an insured financial
obligation from loss due to default over the period of the insured financial
obligation. This Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2008.
In June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No.
03-6-1, Determining Whether
Instruments Granted In Share-Based Payment Transactions Are Participating
Securities (“FSP EITF No. 03-6-1”). Under FSP EITF No. 03-6-1, unvested
share-based payment awards that contain rights to receive nonforfeitable
dividends (whether paid or unpaid) are participating securities, and should be
included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those years, and is not expected to have a significant impact on
the financial statements.
51
In April
2009, the FASB issued FSP 157-4, Determining Fair Value When The
Volume And Level Of Activity For The Asset Or Liability Have Significantly
Decreased And Identifying Transactions That Are Not Orderly (“FSP
157-4”). FSP 157-4 provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased. FSP 157-4 also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FSP 157-4
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. FSP
157-4 does not require disclosures for earlier periods presented for comparative
purposes at initial adoption. In periods after initial adoption, FSP 157-4
requires comparative disclosures only for periods ending after initial adoption.
The adoption of the provisions of FSP 157-4 is not anticipated to materially
impact on XYT’s results of operations or the fair values of its assets and
liabilities.
In May
2009, the FASB issued FSP SFAS 165 “Subsequent Events”. The objective of this
Statement is to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS 165 is effective for the interim
and annual periods ending after June 15, 2009, which is now codified as FASB ASC
855 “Subsequent Events”. The adoption of FASB ASC 855 did not have a material
impact on XYT’s financial position, results of operations and cash flows.
Effective February 24, 2010, XYT adopted Accounting Standards Update (“ASU”) No.
2010-09, “Subsequent Events
(Topic 855): Amendments
to Certain Recognition and Disclosure Requirements”, which removes the
requirement to disclose the date through which subsequent events have been
evaluated. The adoption of the ASU did not have a material impact on XYT’s
financial position, results of operations and cash flows.
In June
2009, the FASB issued SFAS No. 166 Accounting For Transfers Of
Financial Assets (“SFAS 166”). This statement is intended to improve the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial reports about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement in
transferred financial assets. This Statement must be applied as of the beginning
of each reporting entity’s first annual reporting period that begins after
November 15, 2009, and is required to be adopted by XYT in the first quarter of
fiscal year 2011. Earlier application is prohibited. This Statement must be
applied to transfers occurring on or after the effective date. XYT does not
expect the adoption of SFAS 166 to have a material impact on its financial
position, results of operations and cash flows.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” which is codified as ASC 810. ASC 810 amends FASB
Interpretation No. 46(R), “Variable Interest Entities”
for determining whether an entity is a variable interest entity (“VIE”) and
requires an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a VIE. Under ASC 810, an enterprise has a controlling financial
interest when it has a) the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance and b) the obligation to
absorb losses of the entity or the right to receive benefits from the entity
that could potentially be significant to the VIE. ASC 810 also requires an
enterprise to assess whether it has an implicit financial responsibility to
ensure that a VIE operates as designed when determining whether it has power to
direct the activities of the VIE that most significantly impact the entity’s
economic performance.
ASC 810
also requires ongoing assessments of whether an enterprise is the primary
beneficiary of a VIE, requires enhanced disclosures and eliminates the scope
exclusion for qualifying special-purpose entities. ASC 810 shall be effective as
of the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter.
Earlier application is prohibited. ASC 810 is effective for XYT in the first
quarter of fiscal 2011. XYT is currently evaluating the effect of ASC 810 on its
financial statements and results of operation and is currently not yet in a
position to determine such effects.
52
In June
2009, the FASB issued SPAS 168, “The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles - a
replacement of FASB Statement No 162”, which supersedes all existing
non-SEC accounting and reporting standards. The codification does not change
GAAP but rather organizes it into a new hierarchy with two levels; authoritative
and non-authoritative. All authoritative GAAP carries equal weight and is
organized in a topical structure. The adoption of SPAS 168 did not have a
material impact on XYT’s financial position, results of operations and cash
flows.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair
Value”, which is codified as ASC 820, “Fair Value Measurements and
Disclosures”. This Update provides amendments to ASC 820-10, Fair Value Measurements and
Disclosures –Overall, for the fair value measurement of liabilities. This
Update provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using a valuation technique that uses
the quoted price of the identical liability when traded as an asset, quoted
prices for similar liabilities or similar liabilities when traded as assets, or
that is consistent with the principles of ASC 820. The amendments in this Update
also clarify that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents transfer of the
liability.
The
amendments in this Update also clarify that both a quoted price in an active
market for the identical liability at the measurement date and the quoted price
for the identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the assets are required are Level 1 fair
value measurements. ASC 820 is effective for the first reporting period
(including interim periods) beginning after August 28, 2009. The adoption of
this Update did not have a significant impact to XYT’s financial
statements.
In
September 2009, the FASB issued ASU No. 2009-06, “Income Taxes (Topic
740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities”, and it provides
implementation guidance on accounting for uncertainty in income taxes effective
for interim and annual reporting period ending on or after September 15, 2009.
The adoption of ASU No. 2009-06 did not have any impact on XYT’s financial
position, results of operations and cash flows.
In
December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”)”.
ASU 2009-17 amends the variable-interest entity guidance in FASB ASC 810-10-05-8
to clarify the accounting treatment for legal entities in which equity investors
do not have sufficient equity at risk for the entity to finance its activities
without financial support. ASU 2009-17 shall be effective as of the beginning of
each reporting entity’s first annual reporting period that begins after November
15, 2009. ASU 2009-17 is effective for XYT in the first quarter of fiscal 2011.
XYT is currently evaluating the effect of ASU 2009-17 on its consolidated
financial statements and results of operation and is currently not yet in a
position to determine such effects.
None of
the above new pronouncements has current application to XYT, but may be
applicable to XYT’s future financial reporting.
53
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security
Ownership Prior To Exchange Transaction
The
Company has only one class of stock outstanding, its common
stock. The following table sets forth certain information as of
September 14, 2010 prior to the closing of the Exchange Transaction, with
respect to the beneficial ownership of our common stock for (i) each director
and officer, (ii) all of our directors and officers as a group, and (iii) each
person known to us to own beneficially five percent (5%) or more of the
outstanding shares of our common stock. As of September 14, 2010,
there were 45,000,000 shares of common stock outstanding.
To our
knowledge, except as indicated in the footnotes to this table or pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to the shares of common stock
indicated.
Name and Address of
Beneficial Owner(1)
|
Shares Beneficially
Owned
|
Percentage
Beneficially Owned
|
||||||
Directors
and Executive Officers
|
||||||||
Aidan
Hwuang(2)
President,
Chief Financial Officer and Director
10E,
Building 7
Xi
Hai Wan Garden
Shen
Zhen 518000
|
― | ― | ||||||
Gregory
D. Tse
Director
1155
Yu Yuan Road
Building
4, Suite 103
Shanghai,
China 200050
|
― | ― | ||||||
Roderick
C. Macutay(3)
Director
#78
N. Cuevas St.
Calawaan
Sur
Pasig
City
Philippines
|
12,500,000 | 27.78 | % | |||||
All
Officers and Directors as a Group
|
12,500,000 | 27.78 | % | |||||
5%
Stockholders
|
||||||||
Tina
Suava(4)
B3
L11 Kristina Homes Brgy
Sta
Cruz
Antipolo
City, Rizal
Philippines
|
12,500,000 | 27.78 | % |
54
(1)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the
Exchange Act. Pursuant to the rules of the SEC, shares of
common stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be beneficially owned and
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table.
|
(2)
|
On
June 7, 2010, Mr. Aidan Hwuang was appointed to the Company’s Board of
Directors, and on June 8, 2010, Mr. Hwuang was appointed as the Company’s
President, Chief Financial Officer, and Secretary. Mr. Hwuang
resigned as the Company’s President, Chief Financial Officer and Secretary
on September 15, 2010 as a condition to the closing of the Exchange
Agreement, but continues to serve as a member of the Company’s Board of
Directors.
|
(3)
|
On
June 8, 2010, Mr. Macutay resigned as President and Treasurer of the
Company. Mr. Macutay continued to serve as a member of the
Company’s Board of Directors until his resignation on September 15, 2010
as a condition to the closing of the Exchange
Agreement.
|
(4)
|
Ms. Suava
resigned as our Secretary and Director on June 8,
2010.
|
Security
Ownership After Exchange Transaction
The
following table sets forth certain information as of September 15, 2010, after
giving effect to the Closing of the Exchange Transaction, with respect to the
beneficial ownership of our common stock for (i) each director and officer, (ii)
all of our directors and officers as a group, and (iii) each person known to us
to own beneficially five percent (5%) or more of the outstanding shares of our
common stock. As of September 15, 2010, after giving effect to the
Closing of the Exchange Transaction, there were 60,000,000 shares of common
stock outstanding.
To our
knowledge, except as indicated in the footnotes to this table or pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to the shares of common stock
indicated.
55
Name and Address of
Beneficial Owner(1)
|
Shares Beneficially Owned
|
Percentage
Beneficially Owned
|
||||||
Directors
and Executive Officers
|
||||||||
Zhen
Jiang Wang
Chairman
and Chief Executive Officer
People
West Road 504, Room 819
West
Ren Min Road
Kunming
Yunnan
Province
|
15,000,000 | 25.00 | % | |||||
Jing
Gong
President
People
West Road 504, Room 819
West
Ren Min Road
Kunming
Yunnan
Province
|
― | ― | ||||||
Yong
Kang Chen
Senior
Vice President, Quality Control
West
Circle Road 291
Block
B, 2403
Wuhua
District
Kunming
Yunnan
Province
|
― | ― | ||||||
Yi
Jai Li
Chief
Financial Officer
News
Road No. 447
Kunming
Yunnan
Province
|
― | ― | ||||||
Aidan
Hwuang(2)
Director
10E,
Building 7
Xi
Hai Wan
Garden
Shen
Zhen 518000
|
― | ― | ||||||
Gregory
D. Tse
Director
1155
Yu Yuan Road
Building
4, Suite 103
Shanghai,
China 200050
|
― | ― | ||||||
All
Officers and Directors as a Group
|
15,000,000 | 25.00 | % | |||||
5%
Stockholders
|
||||||||
Roderick
C. Macutay(3)
#78
N. Cuevas St.
Calawaan
Sur
Pasig
City
Philippines
|
12,500,000 | 20.83 | % | |||||
Tina
Suava(4)
B3
L11 Kristina Homes Brgy
Sta
Cruz
Antipolo
City, Rizal
Philippines
|
12,500,000 | 20.83 | % |
56
(1)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the
Exchange Act. Pursuant to the rules of the SEC, shares of
common stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be beneficially owned and
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table.
|
(2)
|
On
June 7, 2010, Mr. Aidan Hwuang was appointed to the Company’s Board of
Directors, and on June 8, 2010, Mr. Hwuang was appointed as the Company’s
President, Chief Financial Officer, and Secretary. Mr. Hwuang
resigned as the Company’s President, Chief Financial Officer and Secretary
on September 15, 2010 as a condition to the closing of the Exchange
Agreement, but continues to serve as a member of the Company’s Board of
Directors.
|
(3)
|
On
June 8, 2010, Mr. Macutay resigned as President and Treasurer of the
Company. Mr. Macutay continued to serve as a member of the
Company’s Board of Directors until his resignation on September 15, 2010
as a condition to the closing of the Exchange
Agreement.
|
(4)
|
Ms. Suava
resigned as our Secretary and Director on June 8,
2010.
|
DIRECTORS
AND EXECUTIVE OFFICERS
Our
executive officers and directors are:
Name
|
Age
|
Position
|
||
Zhen
Jiang Wang
|
53
|
Chairman
and Chief Financial Officer
|
||
Aidan
Hwuang
|
37
|
Director
|
||
Gregory
D. Tse
|
51
|
Director
|
||
Jing
Gong
|
37
|
President
|
||
Yong
Kang Chen
|
73
|
Senior
Vice President, Quality Control
|
||
Yi
Jia Li
|
41
|
Chief
Financial Officer
|
57
Zhen
Jiang Wang
Mr. Wang
founded XYT in 2002, served as its general manager until 2009, and is currently
serving as its Executive Director. Prior to establishing XYT, Mr.
Wang served as Vice President of the Sales Department of Yun Nan Provincial
Pharmacies Co., Ltd from 1998 to 2001, general manager of Yun Nan Tuo Xin
Equipments and Electronics Trading Co. Ltd from 1994 to 1997, and prior to that,
as Executive Director of Kun Ming Feng Ning Department Store. Mr. Wang is a 1994
graduate from He Bei Architecture Institute in the People’s Republic of China,
majoring in Architecture Engineering. Mr. Wang was appointed to the
Company’s Board of Directors due to his tremendous knowledge of the
pharmaceutical industry in China, as well as his corporate leadership experience
in China. The Company believes that Mr. Wang’s knowledge of the
pharmaceutical business environment of the PRC will be an invaluable resource as
the Company seeks to expand its business in the PRC.
Aidan
Hwuang
Mr.
Hwuang is currently a partner at the Guang He Law Firm, a position he has held
since April 2010. Previously, Mr. Hwuang served as a senior partner
and the Shenzhen office manager with V&T Law Firm from August 2008 to March
2010, specializing in corporate law, acquisitions and
litigation. From June 2003 to July 2008, Mr. Hwuang served as senior
attorney and Shenzhen Office Manager of Lehman, Lee & Xu Law
Firm. Mr. Hwuang also currently serves as the Chief Executive
Officer, Chief Financial Officer, and a Director of Bakhu Holdings Corp., a
publicly traded company quoted on the Over-the-Counter Bulletin Board (OTCBB:
BKUH). Mr. Hwuang is a member of the National Bar
Association in the People’s Republic of China (“PRC”) and has over 15 years
experience practicing law in the PRC. In addition to his Chinese law
degree, Mr. Hwuang also has earned a LL.M from the University of Aberdeen School
of Law in Scotland. Mr. Hwuang was appointed to the Company’s Board
of Directors due to his over 16 years of experience practicing law in the PRC,
as well as his public company leadership experience. The Company
believes that Mr. Hwuang’s knowledge of the legal and business environment of
the PRC will be an invaluable resource as the Company seeks to expand its
business in the PRC.
Gregory
D. Tse
Mr. Tse
has over 25 years of international finance, marketing, media, PR and advertising
experience with an extensive brand management track record in North America,
Hong Kong and China. In China, Mr. Tse has helped many
international brands to enter into the marketplace before moving on to become
one of China’s first communications/media M&A specialists. Mr.
Tse most recently served as Head of China Advisory for Calneva Financial Group
from July 2004 to the present date, providing investment banking services for
merger and acquisitions in the information technology, media, energy,
infrastructure and natural resources areas. Previously, Mr. Tse’s media and
marketing communications career included heading up several multinational
advertising and PR agencies, including from May 1997 to June 2004, when Mr. Tse
served as Managing Director at Publicis China, a communications group, were he
managed the China national offices. Mr. Tse has also served as a
member of the Board of Directors of i-Level Media Group Incorporated (PK: ILVL)
from July 2008 to January 2009. Mr. Tse has also traveled extensively
in China as the Chief Communications Officer for CORA (China’s Old Revolution
Area), a NGO with a mandate to develop China’s rural areas, and started many
humanitarian projects to fund education there. Mr. Tse graduated from
the School of Architecture at University of Waterloo, Canada. Mr. Tse
was appointed to the Company’s Board of Directors due to his over 25 years of
experience, primarily in China, as well as his public company board and
management experience. The Company believes that Mr. Tse’s knowledge
of investment banking services and mergers and acquisitions will be an
invaluable resource as the Company may seek additional capital to expand its
business in the PRC subsequent to the closing of the Exchange Transaction,
described on the Company’s Current Report on Form 8-K, dated August 23,
2010. The Company also believes that Mr. Tse’s knowledge of brand
management and marketing will aid the Company in expanding the brand awareness
of its pharmaceutical distribution operations subsequent to the closing of the
Exchange Transaction.
58
Jing
Gong
Ms. Jing
Gong is the General Manager of FCPG HK and XYT. She is one of the founding
shareholders of XYT and has broad experience in retailing and the pharmaceutical
industry. She was the General Manager of Kun Ming Feng Ning Department Store and
the sales manager of Yun Nan Tuo Xin Equipments and Electronics Trading Co. Ltd
prior to helping establish XYT. Ms. Gong is a graduate from He Bei
University, PRC in 1999, majoring in Economic Management.
Yong
Kang Chen
Mr. Yong
Kang Chen is the Senior Vice President, Quality Control of FCPG HK and
XYT. Mr. Chen has been involved in the pharmaceutical industry for
over 47 years. He has been the General Manager of XYT since 2002. He
has also held the following positions within the pharmaceutical industry in
China:
• Director
of pharmaceutical section of No. 1 People’s Hospital of Dong Chuan
City.
• Director
of Pharmaceutical Inspection Department of Dong Chuan City.
• Vice
Director of Dong Guan Bureau of Hygiene.
• Director
of Dong Guan Science and Technology Committee.
• Director
of Kun Ming Pharmaceutical Inspection Department.
• Chief
Supervisor of Kun Ming Municipal Pharmacies Co., Ltd.
Mr. Chen
Graduated from Nan Jing Pharmaceutical College in 1963, majoring in
Pharmacy.
Yi
Jia Li
Ms. Yi
Jia Li is the Chief Financial Officer of XYT and FCPG HK. Ms. Li
joined XYT in 2009 after working as the financial manager for Yun Nan Rui Ming
Audio and Video Equipments Co., Ltd. from 2005 to 2009 and the accounting
manager for Yun Nan Bai Feng Real Estate Co., Ltd. from 2000 to 2005. Ms. Li
Graduated from Yun Nan University in 1999, majoring in Accounting and Auditing.
Ms. Li is a certified Accounting Professional in the PRC, receiving this
designation in 2002.
Terms
of Office
The
Company’s directors are appointed for a one-year term to hold office until the
next annual general meeting of the Company’s stockholders or until removed from
office in accordance with the Company’s bylaws and the provisions of the Nevada
Revised Statutes. The Company’s directors hold office after the
expiration of his or her term until his or her successor is elected and
qualified, or until he or she resigns or is removed in accordance with the
Company’s bylaws and the provisions of the Nevada Revised Statutes.
The
Company’s officers are appointed by the Company’s Board of Directors and hold
office until removed by the Board.
Involvement
in Certain Legal Proceedings
Our
Directors and Executive Officers have not been involved in any of the following
events during the past ten years:
1. any
bankruptcy petition filed by or against such person or any business of which
such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
59
2. any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);
3. being
subject to any order, judgment, or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining him from or otherwise limiting his involvement in any type of
business, securities or banking activities or to be associated with any person
practicing in banking or securities activities;
4. being
found by a court of competent jurisdiction in a civil action, the Securities and
Exchange Commission or the Commodity Futures Trading Commission to have violated
a federal or state securities or commodities law, and the judgment has not been
reversed, suspended, or vacated;
5. being
subject of, or a party to, any federal or state judicial or administrative
order, judgment decree, or finding, not subsequently reversed, suspended or
vacated, relating to an alleged violation of any federal or state securities or
commodities law or regulation, any law or regulation respecting financial
institutions or insurance companies, or any law or regulation prohibiting mail
or wire fraud or fraud in connection with any business entity; or
6. being
subject of or party to any sanction or order, not subsequently reversed,
suspended, or vacated, of any self-regulatory organization, any registered
entity or any equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a
member.
Committees
of the Board
Our Board
of Directors held no formal meetings during the 12 month period ended March 31,
2010. All proceedings of the Board of Directors were conducted by
resolutions consented to in writing by the directors and filed with the minutes
of the proceedings of the directors. Such resolutions consented to in
writing by the directors entitled to vote on that resolution at a meeting of the
directors are, according to the Nevada Revised Statutes and the bylaws of our
company, as valid and effective as if they had been passed at a meeting of the
directors duly called and held. We do not presently have a policy
regarding director attendance at meetings.
We do not
currently have standing audit, nominating or compensation committees, or
committees performing similar functions. Due to the size of our
board, our Board of Directors believes that it is not necessary to have standing
audit, nominating or compensation committees at this time because the functions
of such committees are adequately performed by our Board of
Directors. We do not have an audit, nominating or compensation
committee charter as we do not currently have such committees. We do
not have a policy for electing members to the board. Neither our
current nor proposed directors are independent directors as defined in the NASD
listing standards.
After the
change in the Board of Directors, it is anticipated that the Board of Directors
will form separate compensation, nominating and audit committees, with the audit
committee including an audit committee financial expert.
Audit
Committee
Our Board
of Directors has not established a separate audit committee within the meaning
of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Instead, the entire Board of Directors acts as the
audit committee within the meaning of Section 3(a)(58)(B) of the Exchange Act
and will continue to do so upon the appointment of the proposed directors until
such time as a separate audit committee has been established.
60
Section
16(a) Beneficial Ownership Reporting Compliance
Based
solely upon a review of Forms 3, 4 and 5 delivered to us as filed with the
Securities Exchange Commission, our executive officers and directors, and
persons who own more than 10% of our Common Stock timely filed all required
reports pursuant to Section 16(a) of the Securities Exchange Act.
Nominations
to the Board of Directors
Our
directors take a critical role in guiding our strategic direction and oversee
the management of the Company. Board candidates are considered based
upon various criteria, such as their broad-based business and professional
skills and experiences, a global business and social perspective, concern for
the long-term interests of the stockholders, diversity, and personal integrity
and judgment.
In
addition, directors must have time available to devote to Board activities and
to enhance their knowledge in the growing business. Accordingly, we
seek to attract and retain highly qualified directors who have sufficient time
to attend to their substantial duties and responsibilities to the
Company.
In
carrying out its responsibilities, the Board will consider candidates suggested
by stockholders. If a stockholder wishes to formally place a
candidate’s name in nomination, however, he or she must do so in accordance with
the provisions of the Company’s Bylaws. Suggestions for candidates to
be evaluated by the proposed directors must be sent to the Board of Directors,
c/o First China Pharmaceutical Group, Inc., 800 Bellevue Way,
Suite 400, Bellevue, Washington 98004.
Board
Leadership Structure and Role on Risk Oversight
Aidan
Hwuang currently serves as the Company’s principal executive officer and a
director. The Company determined this leadership structure was
appropriate for the Company due to our small size and limited operations and
resources. The Board of Directors will continue to evaluate the
Company’s leadership structure and modify as appropriate based on the size,
resources and operations of the Company.
Subsequent
to the closing of the Exchange Transaction, it is anticipated that the Board
of Directors will establish procedures to determine an appropriate
role for the Board of Directors in the Company’s risk oversight
function.
Compensation
Committee Interlocks and Insider Participation
No
interlocking relationship exists between our board of directors and the board of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
EXECUTIVE
COMPENSATION
Board
Compensation
We have
no standard arrangement to compensate directors for their services in their
capacity as directors. Directors are not paid for meetings
attended. However, we intend to review and consider future proposals
regarding board compensation. All travel and lodging expenses
associated with corporate matters are reimbursed by us, if and when
incurred.
Executive
Compensation - Former Executive Officers
No
director, officer or employee received compensation during the last fiscal
year.
61
Executive
Compensation - New Executive Officers
The
following summary compensation table indicates the cash and non-cash
compensation earned from XYT during the fiscal years ended December 31, 2009 and
2008 by the executive officers of XYT and each of the other two highest paid
executives or directors, if any, whose total compensation exceeded $100,000
during those periods.
Summary
Compensation Table
Name and Principal
Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan
Compensation
|
All Other
Compensation
|
Total
|
||||||||||||
Zhen
Jiang Wang (1)
Chairman
|
2009
2008
|
US$
US$
|
8,825
8,825
|
nil
nil
|
nil
nil
|
nil
nil
|
nil
nil
|
nil
nil
|
US$
US$
|
8,825
8,825
|
||||||||||
Jing
Gong
President
|
2009
2008
|
US$
US$
|
8,825
8,825
|
nil
nil
|
nil
nil
|
nil
nil
|
nil
nil
|
nil
nil
|
US$
US$
|
8,825
8,825
|
||||||||||
Yi
Jia Li
Chief
Financial Officer
|
2009
2008
|
US$
US$
|
6,000
6,000
|
nil
nil
|
nil
nil
|
nil
nil
|
nil
nil
|
nil
nil
|
US$
US$
|
6,000
6,000
|
||||||||||
Yong
Kang Chen
Senior
Vice President, Quality Control
|
2009
2008
|
US$
US$
|
4,600
4,600
|
nil
nil
|
nil
nil
|
nil
nil
|
nil
nil
|
nil
nil
|
US$
US$
|
4,600
4,600
|
(1) Pursuant
to the Exchange Agreement, the Company has agreed that, beginning with the
quarter ending September 30, 2010, the Company will pay to Mr. Wang a bonus
payment based on two percent (2%) of the quarterly gross sales of XYT, as
calculated and disclosed in the financial statements included in the Company’s
filings with the Commission. Such agreement shall provide that the
bonus payment shall be made on a quarterly basis, within fifteen (15) days after
the filing of a Form 10-K or Form 10-Q with the Commission containing financial
statements of the Company.
None of
our executive officers or directors received, nor do we have any arrangements to
pay out, any bonus, stock awards, option awards, non-equity incentive plan
compensation, or non-qualified deferred compensation.
Potential
Payments Upon Termination or Change-in-Control
SEC
regulations state that we must disclose information regarding agreements, plans
or arrangements that provide for payments or benefits to our executive officers
in connection with any termination of employment or change in control of the
company. We currently have no employment agreements with any of our executive
officers, nor any compensatory plans or arrangements resulting from the
resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control. As a result, we have omitted
this table.
Employment
Agreements
The
Company is party to employment agreements with two of its executive officers,
Yong Kang Chen and Yi Jia Li, providing for monthly salaries of RMB2,600
(approximately US$385) and RMB3,400 (approximately US$500),
respectively. Each employment agreement commenced on June 1, 2009 and
will terminate on May 31, 2011. The employment agreements each
provide for the Company to arrange social insurance for the executive officers
and the termination by the Company or executive officer upon 30 days notice upon
the occurrence of a limited number of circumstances. The employment
agreements for Mr. Chen and Ms. Li are attached hereto as Exhibits 10.1 and
10.2, respectively, and are incorporated herein by reference.
62
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
AND
DIRECTOR INDEPENDENCE
Certain
Relationships and Transactions
There are
no family relationships between any of our former directors or executive
officers and new directors or new executive officers. Except for
Aidan Hwuang, the new directors and executive officers were not directors or
executive officers of the Company prior to the Closing of the Exchange
Transaction, did not hold any position with the Company prior to the Closing of
the Exchange Transaction nor have been involved in any material proceeding
adverse to the Company or any transactions with the Company or any of its
directors, executive officers, affiliates or associates that are required to be
disclosed pursuant to the rules and regulations of the SEC.
Although
we have not adopted a Code of Ethics, we rely on our board to review related
party transactions on an ongoing basis to prevent conflicts of interest. Our
board reviews a transaction in light of the affiliations of the director,
officer or employee and the affiliations of such person’s immediate family.
Transactions are presented to our board for approval before they are entered
into or, if this is not possible, for ratification after the transaction has
occurred. If our board finds that a conflict of interest exists, then it will
determine the appropriate remedial action, if any. Our board approves or
ratifies a transaction if it determines that the transaction is consistent with
the best interests of the Company. These policies and procedures are
not evidenced in writing.
Related
Party Transactions
As of
June 30, 2010, there is a balance owing to one of our stockholders in the amount
of US$12,752. This balance is unsecured, non-interest bearing and has
no specific terms of repayment.
Director
Independence
During
the year ended March 31, 2010, we did not have any independent directors on our
board. We evaluate independence by the standards for director
independence established by applicable laws, rules, and listing standards
including, without limitation, the standards for independent directors
established by The New York Stock Exchange, Inc., the NASDAQ National Market,
and the Securities and Exchange Commission.
Subject
to some exceptions, these standards generally provide that a director will not
be independent if (a) the director is, or in the past three years has been, an
employee of ours; (b) a member of the director’s immediate family is, or in the
past three years has been, an executive officer of ours; (c) the director or a
member of the director’s immediate family has received more than $120,000 per
year in direct compensation from us other than for service as a director (or for
a family member, as a non-executive employee); (d) the director or a member of
the director’s immediate family is, or in the past three years has been,
employed in a professional capacity by our independent public accountants, or
has worked for such firm in any capacity on our audit; (e) the director or a
member of the director’s immediate family is, or in the past three years has
been, employed as an executive officer of a company where one of our executive
officers serves on the compensation committee; or (f) the director or a member
of the director’s immediate family is an executive officer of a company that
makes payments to, or receives payments from, us in an amount which, in any
twelve-month period during the past three years, exceeds the greater of
$1,000,000 or two percent of that other company’s consolidated gross
revenues.
63
LEGAL
PROCEEDINGS
None.
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY
AND
RELATED SHAREHOLDER MATTERS
Market
Information
Our
common stock is not listed on any stock exchange. Although our common
stock is currently quoted on the OTCQB under the symbol “FCPG,” there is no
established public market for shares of our common stock, and no trades of our
common stock have taken place on the OTCQB.
Holders
Prior to
the Exchange Transaction, there were approximately 34 shareholders of record of
our common stock based upon the shareholders’ listing provided by our transfer
agent. Our transfer agent is Routh Stock Transfer,
Inc. The transfer agent’s address is 6860 North Dallas Parkway,
Suite 200, Plano, Texas 75024, and its phone number is
(972) 381-2782
After the
Closing of the Exchange Transaction, there were approximately 35 shareholders of
record of our common stock.
Dividends
We have
never paid cash dividends on our common stock. We intend to keep
future earnings, if any, to finance the expansion of our business, and we do not
anticipate that any cash dividends will be paid in the foreseeable
future. Our future payment of dividends will depend on our earnings,
capital requirements, expansion plans, financial condition and other relevant
factors that our board of directors may deem relevant. Our retained
earnings deficit currently limits our ability to pay dividends.
Securities
Authorized for Issuance Under Equity Compensation Plans
None.
RECENT
SALES OF UNREGISTERED SECURITIES
Reference
is made to Item 3.02 of this Form 8-K for a description of recent sales of
unregistered securities, which is hereby incorporated by reference.
DESCRIPTION
OF SECURITIES
The
following information describes our capital stock and provisions of our articles
of incorporation and our bylaws, all as in effect upon the Closing of the
Exchange Transaction. This description is only a
summary. You should also refer to our articles of incorporation and
bylaws which have been incorporated by reference or filed with the Securities
and Exchange Commission as exhibits to this Form 8-K.
General
Our
authorized capital stock consists of 200,000,000 shares of common stock at a par
value of $0.001 per share, of which 60,000,000 shares are issued and outstanding
subsequent to the Closing of the Exchange Transaction.
64
Common
Stock
Holders
of common stock are entitled to one vote for each share on all matters submitted
to a shareholder vote. Holders of common stock do not have cumulative
voting rights. Subject to preferences that may be applicable to any
then-outstanding preferred stock, holders of common stock are entitled to share
in all dividends that the board of directors, in its discretion, declares from
legally available funds. In the event of our liquidation, dissolution
or winding up, subject to preferences that may be applicable to any
then-outstanding preferred stock, each outstanding share entitles its holder to
participate in all assets that remain after payment of liabilities and after
providing for each class of stock, if any, having preference over the common
stock.
Holders
of common stock have no conversion, preemptive or other subscription rights, and
there are no redemption or sinking fund provisions applicable to the common
stock. The rights of the holders of common stock are subject to any
rights that may be fixed for holders of preferred stock, when and if any
preferred stock is authorized and issued. All outstanding shares of
common stock are duly authorized, validly issued, fully paid and
non-assessable.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
As
previously disclosed on a Current Report on Form 8-K filed with the SEC on
August 7, 2009, Moore and Associates, Chartered was dismissed as our independent
accountant on August 7, 2009. On August 7, 2009, we engaged Seale and
Beers, CPAs as our new independent registered public accounting
firm. As previously disclosed on a Current Report on Form 8-K filed
with the SEC on October 23, 2009, on October 18, 2009, we dismissed Seale and
Beers, CPAs, which had not provided any services to our company from the period
between its engagement and dismissal. On October 8, 2009, our Board
of Directors approved the appointment of Li & Company, PC as our independent
registered public accounting firm. As previously disclosed on a
Current Report on Form 8-K filed with the SEC on August 26, 2010, on August
24, 2010, Li & Company, PC resigned as our independent registered public
accounting firm, and our Board of Directors approved the appointment of Parker
Randall CF (H.K.) CPA Limited as our independent registered public accounting
firm, effective August 25, 2010. In connection with each of these
changes in accountants, there were no disagreements (as that term is used in
Item 304(a)(1)(iv) of Regulation S-K) or reportable events (as described in Item
304(a)(1)(v) of Regulation S-K).
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Nevada
Law
Section
78.7502 of the Nevada Revised Statutes permits a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the right
of the corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys’ fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or
proceeding if he:
|
(a)
|
is
not liable pursuant to Nevada Revised Statute 78.138,
or
|
|
(b)
|
acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful.
|
65
In
addition, Section 78.7502 permits a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys’ fees actually and
reasonably incurred by him in connection with the defense or settlement of the
action or suit if he:
|
(a)
|
is
not liable pursuant to Nevada Revised Statute 78.138;
or
|
|
(b)
|
acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the
corporation.
|
To the
extent that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to above, or in defense of any claim, issue or matter, the
corporation is required to indemnify him against expenses, including attorneys’
fees, actually and reasonably incurred by him in connection with the
defense.
Section
78.752 of the Nevada Revised Statutes allows a corporation to purchase and
maintain insurance or make other financial arrangements on behalf of any person
who is or was a director, officer, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise for any liability asserted against him and liability and expenses
incurred by him in his capacity as a director, officer, employee or agent, or
arising out of his status as such, whether or not the corporation has the
authority to indemnify him against such liability and expenses.
Other
financial arrangements made by the corporation pursuant to Section 78.752 may
include the following:
|
(a)
|
the
creation of a trust fund;
|
|
(b)
|
the
establishment of a program of
self-insurance;
|
|
(c)
|
the
securing of its obligation of indemnification by granting a security
interest or other lien on any assets of the corporation;
and
|
|
(d)
|
the
establishment of a letter of credit, guaranty or
surety
|
No
financial arrangement made pursuant to Section 78.752 may provide protection for
a person adjudged by a court of competent jurisdiction, after exhaustion of all
appeals, to be liable for intentional misconduct, fraud or a knowing violation
of law, except with respect to the advancement of expenses or indemnification
ordered by a court.
Any
discretionary indemnification pursuant to NRS 78.7502, unless ordered by a court
or advanced pursuant to an undertaking to repay the amount if it is determined
by a court that the indemnified party is not entitled to be indemnified by the
corporation, may be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances. The determination must be
made:
|
(a)
|
by
the stockholders;
|
66
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(b)
|
by
the board of directors by majority vote of a quorum consisting of
directors who were not parties to the action, suit or
proceeding;
|
|
(c)
|
if
a majority vote of a quorum consisting of directors who were not parties
to the action, suit or proceeding so orders, by independent legal counsel
in a written opinion, or
|
|
(d)
|
if
a quorum consisting of directors who were not parties to the action, suit
or proceeding cannot be obtained, by independent legal counsel in a
written opinion.
|
Charter
Provisions and Other Arrangements of the Registrant
Pursuant
to the provisions of Nevada Revised Statutes, the Registrant has adopted the
following indemnification provisions in its Bylaws for its directors and
officers:
The
Company shall indemnify, to the maximum extent permitted by the law, any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, except an action by or in the right of the
Company, by reason of the fact that such person is or was a director, officer,
employee, or agent of the Company, or is or was serving at the request of the
Company as a director, officer, employee, or agent of another Company,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorneys’ fees, judgments, fines, and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit, or proceeding if such person acted in good faith and in a manner which
such person reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person’s conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of no lo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which such person reasonably believed to be in
or not opposed to the best interests of the Company, and that, with respect to
any criminal action or proceeding, such person had reasonable cause to believe
that his conduct was unlawful.
The
Company shall indemnify, to the maximum extent permitted by the law, any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the Company to procure
a judgment in its favor by reason of the fact that such person is or was a
director, officer, employee, or agent of the Company, or is or was serving at
the request of the Company as a director, officer, employee or agent of another
Company, partnership, joint venture, trust, or other enterprise against
expenses, including attorneys’ fees, actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner which such person reasonably
believed to be in or not opposed to the best interests of the Company, but no
indemnification shall be made in respect of any claim, issue or matter as to
which such person has been adjudged to be liable for negligence or misconduct in
the performance of such person’s duty to the Company unless and only to the
extent that the court in which such action or suit was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
To the
extent that a director, officer, employee or agent of the Company has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in the prior two paragraphs, or in defense of any claim,
issue or matter therein, such person shall be indemnified by the Company against
expenses, including attorneys’ fees, actually and reasonably incurred by such
person in connection with such defense. Any indemnification under the
prior two paragraphs, unless ordered by a court, shall be made by the Company
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because such person has met the applicable standard of conduct set
forth in the prior two paragraphs. Such determination shall be
made:
67
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(i)
|
by
the stockholders;
|
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(ii)
|
by
the board of directors by majority vote of a quorum consisting of
directors who were not parties to such act, suit or
proceeding;
|
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(iii)
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if
such a quorum of disinterested directors so orders, by independent legal
counsel in a written opinion; or
|
|
(iv)
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if
such a quorum of disinterested directors cannot be obtained, by
independent legal counsel in a written
opinion.
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Expenses
incurred in defending a civil or criminal action, suit or proceeding may be paid
by the Company in advance of the final disposition of such action, suit or
proceeding as authorized by the board of directors unless it is ultimately
determined that such director, officer, employee or agent is not entitled to be
indemnified by the Company as authorized in the Bylaws or as provided by
law.
The
indemnification provided by the Bylaws:
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(i)
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does
not exclude any other rights to which a person seeking indemnification may
be entitled under any bylaw, agreement, vote of stockholders, or
disinterested directors or otherwise, both as to action in such person’s
official capacity and as to action in another capacity while holding such
office; and
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(ii)
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shall
continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
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(g) The
Company may purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Company, or is or as serving
at the request of the Company as a director, officer, employee, or agent of
another Company, partnership, joint venture, trust, or other enterprise against
any liability asserted against such person and incurred by such person in any
such capacity, or arising out of such person’s status as such, whether or not
the Company would have the power to indemnify such person against such liability
under the provisions of the Bylaws.
Section
3 - Securities and Trading Markets
Item 3.02.
|
Unregistered
Sale of Equity Securities
|
As more
fully described in Item 2.01 above, in connection with the Exchange Agreement,
on the Closing Date, we issued a total of 15,000,000 shares of our common stock
to Mr. Zhen Jiang Wang (the “FCPG HK Stockholder”) in exchange for 100% of the
capital stock of FCPG HK. Reference is made to the disclosures set
forth under Items 1.01 and 2.01 of this Form 8-K, which disclosures are
incorporated herein by reference. The issuance of the common stock to
the FCPG HK Stockholder pursuant to the Exchange Agreement was exempt from
registration under the Securities Act pursuant to Section 4(2) and Regulation D
and Regulation S thereof. We made this determination based on
the representations of the FCPG HK Stockholder which included, in pertinent
part, that such shareholder was an “accredited investor” within the meaning of
Rule 501 of Regulation D promulgated under the Securities Act, and that such
shareholder was acquiring our common stock, for investment purposes for his own
account and not as nominee or agent, and not with a view to the resale or
distribution thereof, and that such shareholder 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.
68
Section
5 - Corporate Governance and Management
Item 5.02.
|
Departure
of Directors or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers.
|
The
disclosure in Item 2.01 with respect to our new executive officers and directors
subsequent to the closing of the Exchange Transaction is incorporated herein by
reference.
Item 5.06.
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Change
in Shell Company Status.
|
Reference
is made to the voluntary share exchange transaction under the Exchange
Agreement, as described in Item 1.01, which is incorporated herein by
reference. From and after the Closing of the transactions under these
agreements, our primary operations consist of the business and operations of
FCPG HK and XYT. Accordingly, we are disclosing information about
FCPG HK and XYT’s business, financial condition, and management in this Form
8-K.
Section
9 - Financial Statements and Exhibits
Item 9.01.
|
Financial
Statements and Exhibits.
|
Reference
is made to the voluntary share exchange transaction under the Exchange
Agreement, as described in Item 1.01, which is incorporated herein by
reference. As a result of the closing of the voluntary share exchange
transaction, our primary operations consist of the business and operations of
FCPG HK and XYT. Accordingly, we are presenting the financial
statements of XYT, the operating subsidiary, as of and for the years ended
December 31, 2009, 2008 and 2007 and the consolidated financial statements
of FCPG HK as of June 30, 2010, after giving effect to the acquisition of
XYT by FCPG HK.
|
(a)
|
Financial
Statements of the Business Acquired
|
The
audited consolidated financial statements of XYT for the years ended December
31, 2009, 2008, and 2007, and the unaudited consolidated financial statements of
FCPG HK as of and for the six months ended June 30, 2010, including the notes to
such financial statements, are incorporated herein by reference to Exhibits
99.1(a) and 99.1(b) of this Form 8-K.
|
(b)
|
Pro
Forma Financial Information
|
The pro
forma financial statements of the Registrant and XYT for the years ended
March 31, 2010 and December 31, 2009, respectively, and the pro forma
financial statements of the Registrant and FCPG HK for the six months ended
June 30, 2010, including the notes to such financial statements, are
incorporated by reference to Exhibits 99.2(a) and 99.2(b) of this Form
8-K.
|
(c)
|
Shell
Company Transactions
|
Reference
is made to Items 9.01(a) and 9.01(b) above and the exhibits referred to therein,
which are incorporated herein by reference.
69
|
(d)
|
Exhibits
|
Exhibit
Number
|
Description
|
||
2.1
|
Share
Exchange Agreement, dated August 23, 2010 (incorporated by reference to
Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on August
24, 2010)
|
||
3.1
|
Articles
of Incorporation of the Registrant, dated July 31, 2007, including all
amendments to date
|
||
3.2
|
Amended
and Restated Bylaws of the Registrant, as amended, dated June 1, 2010
(incorporated by reference to Exhibit 3.2 of the Registrant’s Current
Report on Form 8-K filed on June 30, 2010)
|
||
4.1
|
Form
of Stock Specimen Certificate (incorporated by reference to Exhibit 4.1 of
the Registrant’s Registration Statement on Form S-1 filed on May 28,
2008)
|
||
10.1
|
Labour
Contract, commencing June 1, 2009, by and between Yun Nan Xin Yuan Tang
Pharmacies Co. Ltd. and Yong Kang Chen
|
||
10.2
|
Labour
Contract, commencing June 1, 2009, by and between Yun Nan Xin Yuan Tang
Pharmacies Co. Ltd. and Yi Jia Li
|
||
10.3
|
Lease
Agreement, commencing April 1, 2005, by and between Kun Ming Xin Yuan Tang
Pharmaceuticals Co., Ltd. and No. 1 Residents Group of Liang Yuan
Community
|
||
16.1
|
Letter
from Moore and Associates, Chartered, dated August 7, 2009 (incorporated
by reference to Exhibit 16.1 of the Registrant’s Current Report on Form
8-K filed on August 7, 2009)
|
||
16.2
|
Letter
from Moore and Associates, Chartered, dated September 1, 2009
(incorporated by reference to Exhibit 16.1 of the Registrant’s Current
Report on Form 8-K/A filed on September 2, 2009)
|
||
16.3
|
Letter
from Seale and Beers, CPAs, dated October 19, 2009 (incorporated by
reference to Exhibit 16.1 of the Registrant’s Current Report on Form 8-K
filed on October 23, 2009)
|
||
16.4
|
Letter
from Li & Company, PC, dated August 25, 2010 (incorporated by
reference to Exhibit 16.1 of the Registrant’s Current Report on Form 8-K
filed on August 26, 2010)
|
||
21
|
First
China Pharmaceutical Group Limited, a Hong Kong company; Kun Ming Xin Yuan
Tang Pharmacies Co. Ltd., a company organized under the laws of the
People’s Republic of China
|
||
99.1(a)*
|
XYT
Audited Financial Statements for the years ended December 31, 2009,
2008 and 2007
|
||
99.1(b)*
|
FCPG
HK Unaudited Financial Statements for the six months ended June 30,
2010
|
70
99.2(a)*
|
Pro
Forma Financial Statements of the Registrant and XYT as of and for the
year ended March 31, 2010
|
||
99.2(b)*
|
Pro
Forma Financial Statements of the Registrant and FCPG HK as of and for the
periods ended June 30, 2010
|
||
99.3*
|
|
License
of Internet Drug Information
Service
|
*Filed
Herewith
71
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
First
China Pharmaceutical Group, Inc.
|
||
Dated:
December 6, 2010
|
By:
|
/s/ Zhen Jiang Wang
|
Zhen
Jiang Wang
Chairman
and Chief Executive Officer
|
72