Attached files
file | filename |
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8-K/A - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v208453_8ka.htm |
EX-99.4 - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v208453_ex99-4.htm |
EX-10.4 - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v208453_ex10-4.htm |
EX-99.1B - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v208453_ex99-1b.htm |
EX-99.1C - FIRST CHINA PHARMACEUTICAL GROUP, INC. | v208453_ex99-1c.htm |
Exhibit
99.1 (a)
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
FINANCIAL
STATEMENTS
DECEMBER
31, 2009, 2008 and 2007
(Stated
in US Dollars)
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
INDEX TO
FINANCIAL STATEMENTS
Pages
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
1
|
BALANCE
SHEETS
|
2
|
STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME
|
3
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY
|
4
|
STATEMENTS
OF CASH FLOWS
|
5
|
NOTES
TO THE FINANCIAL STATEMENTS
|
6 -
17
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Equity holders of
Kun Ming
Xin Yuan Tang Pharmacies Co. Ltd.
We have
audited the accompanying balance sheets of Kun Ming Xin Yuan Tang Pharmacies Co.
Ltd. (“the Company”) as of December 31, 2009, 2008 and 2007, and the related
statements of income and comprehensive income, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2009. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2009, 2008 and 2007, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
Parker
Randall CF (H.K.) CPA Limited
Certified
Public Accountants
Hong
Kong
November
19 2010
1
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
BALANCE
SHEETS
(Stated
in US Dollars)
As of December 31,
|
||||||||||||||||
Notes
|
2009
|
2008
|
2007
|
|||||||||||||
$
|
$
|
$
|
||||||||||||||
ASSETS
|
||||||||||||||||
Current
Assets
|
||||||||||||||||
Cash
and cash equivalents
|
37,906 | 80,857 | 9,462 | |||||||||||||
Restricted
cash
|
9 | 808,439 | 782,565 | 474,500 | ||||||||||||
Due
from a related party
|
3 | 11,799,953 | 2,498,924 | - | ||||||||||||
Inventories
|
4 | 2,938,291 | 4,875,494 | 3,971,544 | ||||||||||||
Total
Current Assets
|
15,584,589 | 8,237,840 | 4,455,506 | |||||||||||||
Plant
and equipment, net
|
5 | 4,271 | 7,196 | 17,516 | ||||||||||||
Intangible
assets, net
|
6 | 3,003 | 3,958 | 4,334 | ||||||||||||
TOTAL
ASSETS
|
15,591,863 | 8,248,994 | 4,477,356 | |||||||||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||||||||
Current
Liabilities
|
||||||||||||||||
Short-term
borrowings
|
7 | 732,408 | - | - | ||||||||||||
Other
payable and accrued liabilities
|
8 | 7,728,348 | 3,318,973 | 890,579 | ||||||||||||
Notes
payable
|
9 | 314,935 | 1,760,473 | 1,195,935 | ||||||||||||
Income
tax payable
|
1,740,599 | 835,137 | 294,387 | |||||||||||||
Due
to a related party
|
3 | - | - | 1,515,430 | ||||||||||||
Total
Current Liabilities
|
10,516,290 | 5,914,583 | 3,896,331 | |||||||||||||
TOTAL
LIABILITIES
|
10,516,290 | 5,914,583 | 3,896,331 | |||||||||||||
COMMITMENTS
AND CONTINGENCIES
|
13 | - | - | - | ||||||||||||
STOCKHOLDERS’
EQUITY
|
||||||||||||||||
Paid-in
capital
|
10 | 266,101 | 266,101 | 120,815 | ||||||||||||
Retained
earnings
|
4,692,321 | 1,948,825 | 436,502 | |||||||||||||
Accumulated
other comprehensive income - foreign currency translation
adjustments
|
117,151 | 119,485 | 23,708 | |||||||||||||
TOTAL
STOCKHOLDERS’ EQUITY
|
5,075,573 | 2,334,411 | 581,025 | |||||||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
15,591,863 | 8,248,994 | 4,477,356 |
See
accompanying notes to the financial statement
2
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME
(Stated
in US Dollars)
Year ended December 31,
|
||||||||||||||||
Notes
|
2009
|
2008
|
2007
|
|||||||||||||
$
|
$
|
$
|
||||||||||||||
Net
sales
|
25,285,526 | 17,154,331 | 10,838,041 | |||||||||||||
Cost
of sales
|
(20,726,221 | ) | (14,243,436 | ) | (9,250,629 | ) | ||||||||||
Gross
profit
|
4,559,305 | 2,910,895 | 1,587,412 | |||||||||||||
Selling
expenses
|
(784,622 | ) | (644,910 | ) | (557,635 | ) | ||||||||||
Administrative
expenses
|
(170,788 | ) | (250,091 | ) | (157,499 | ) | ||||||||||
Depreciation
and amortization
|
(6,769 | ) | (11,820 | ) | (11,202 | ) | ||||||||||
Other
operating expense
|
(7,443 | ) | (10,760 | ) | (9,560 | ) | ||||||||||
Income
from operations
|
3,589,683 | 1,993,314 | 851,516 | |||||||||||||
Interest
income
|
13,057 | 17,593 | 11,710 | |||||||||||||
Other
income
|
48,543 | 4,190 | 2,366 | |||||||||||||
Interest
expense
|
(1,513 | ) | (54 | ) | (3,154 | ) | ||||||||||
Income
before tax
|
3,649,770 | 2,015,043 | 862,438 | |||||||||||||
Income
tax
|
12 | (906,274 | ) | (502,720 | ) | (284,602 | ) | |||||||||
Net
income
|
2,743,496 | 1,512,323 | 577,836 | |||||||||||||
Other
comprehensive income -
foreign currency translation adjustments
|
(2,334 | ) | 95,777 | 18,810 | ||||||||||||
Comprehensive
income
|
2,741,162 | 1,608,100 | 596,646 |
See
accompanying notes to the financial statements
3
KUN
MING XIN YUAN TANG PHARMACIES CO., LTD.
STATEMENTS
OF STOCKHOLDERS’ EQUITY
(Stated
in US Dollars)
Paid-in
Capital
|
Retained
earnings
|
Accumulated
other
comprehensive
income
|
Total
|
|||||||||||||
$
|
$
|
$
|
$
|
|||||||||||||
Balance,
January 1, 2007
|
120,815 | (141,334 | ) | 4,898 | (15,621 | ) | ||||||||||
Net
income
|
- | 577,836 | - | 577,836 | ||||||||||||
Foreign
currency translation adjustments
|
- | - | 18,810 | 18,810 | ||||||||||||
Balance,
December 31, 2007
|
120,815 | 436,502 | 23,708 | 581,025 | ||||||||||||
Capital
contributions
|
145,286 | - | - | 145,286 | ||||||||||||
Net
income
|
1,512,323 | - | 1,512,323 | |||||||||||||
Foreign
currency translation adjustments
|
- | - | 95,777 | 95,777 | ||||||||||||
Balance,
December 31, 2008
|
266,101 | 1,948,825 | 119,485 | 2,334,411 | ||||||||||||
Net
income
|
- | 2,743,496 | - | 2,743,496 | ||||||||||||
Foreign
currency translation adjustments
|
- | - | (2,334 | ) | (2,334 | ) | ||||||||||
Balance,
December 31, 2009
|
266,101 | 4,692,321 | 117,151 | 5,075,573 |
See
accompanying notes to the financial statements
4
KUN
MING XIN YUAN TANG PHARMACIES CO., LTD.
STATEMENTS
OF CASH FLOWS
(Stated
in US Dollars)
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
$
|
$
|
$
|
||||||||||
Cash
Flows from Operating Activities
|
||||||||||||
Net
income
|
2,743,496 | 1,512,323 | 577,836 | |||||||||
Adjustments to reconcile net
income to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
6,769 | 11,820 | 11,202 | |||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Due
from (to) a related party
|
(9,305,535 | ) | (3,980,791 | ) | 1,928,656 | |||||||
Inventories
|
1,934,742 | (602,037 | ) | (2,478,230 | ) | |||||||
Other
payables and accrued liabilities
|
4,412,854 | 2,281,026 | 107,721 | |||||||||
Notes
payable
|
(1,444,884 | ) | 463,648 | (669,427 | ) | |||||||
Income
tax payable
|
906,274 | 502,204 | 282,294 | |||||||||
Net
cash provided by (used in) operating activities
|
(746,284 | ) | 188,193 | (239,948 | ) | |||||||
Cash
Flows from Investing Activities
|
||||||||||||
Purchase
of plant and equipment
|
(2,892 | ) | - | (4,210 | ) | |||||||
Purchase
of intangible assets
|
- | - | (397 | ) | ||||||||
Net
cash used in investing activities
|
(2,892 | ) | - | (4,607 | ) | |||||||
Cash
flows from financing activities
|
||||||||||||
Capital
contributions from stockholders
|
- | 145,286 | - | |||||||||
New
borrowings raised
|
732,638 | - | - | |||||||||
Repayment
of borrowings
|
- | - | (101,906 | ) | ||||||||
Decrease
(increase) in restricted cash
|
(26,375 | ) | (265,167 | ) | 246,953 | |||||||
Net
cash provided by (used in) financing activities
|
706,263 | (119,881 | ) | 145,047 | ||||||||
Effect
of foreign currency translation on cash and cash
Equivalents
|
(38 | ) | 3,083 | 3,813 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
(42,951 | ) | 71,395 | (95,695 | ) | |||||||
Cash
and cash equivalents - beginning of year
|
80,857 | 9,462 | 105,157 | |||||||||
Cash
and cash equivalents - end of year
|
37,906 | 80,857 | 9,462 | |||||||||
Supplemental
disclosures for cash flow information:
|
||||||||||||
Cash
paid for:
|
||||||||||||
Interest
|
1,513 | 54 | 3,154 | |||||||||
Income
taxes
|
- | 516 | 8 |
See
accompanying notes to the financial statements
5
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
Kun Ming
Xin Yuan Tang Pharmacies Co. Ltd. (the “Company”) was established in the
People’s Republic of China (“PRC”) on November 12, 2002. The principal
activities of the Company are the sales of Chinese patent drug, antibiotics,
bio-chemicals, chemical preparations and biological in Yun Nan Province, the
PRC.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Basis
of Preparation
|
The
Company’s financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America.
(b)
|
Use
of Estimates
|
In
preparing of the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. These accounts and estimates include, but are not
limited to, the valuation of due from a related party, inventories and the
estimation on useful lives of plant and machinery and intangible assets. Actual
results could differ from those estimates.
(c)
|
Concentration
of Credit Risk
|
Financial
instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash and cash equivalents, restricted cash and due from a
related party. The Company places its cash with financial institutions with
high-credit ratings and quality. The Company conducts periodic reviews of the
related party financial conditions and payment practices.
Other
than the set forth below, no single external customer exceeded 10% of the
Company’s total revenue for the years presented.
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Customer
A
|
- | 14.9 | % | 14.9 | % | |||||||
Customer
B
|
- | 11.8 | % | 14.2 | % | |||||||
Customer
C
|
- | - | 10.7 | % |
The
Company relies on supplies from numerous vendors. The Company had one vendor
that accounted for approximately 17.2% and 16.5% of total purchases for the year
ended December 31, 2008 and 2009 respectively.
(d)
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid investments with initial maturities of three
months or less to be cash equivalents. The Company maintains bank accounts in
the PRC only.
6
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(e)
|
Restricted
Cash
|
Deposits
in banks for securities of notes payable that are restricted in use are
classified as restricted cash under current assets.
(f)
|
Trade
and Other Receivables
|
Trade and
other receivables are recognised initially at fair value and subsequently
measured at amortised cost using the effective interest method, less allowance
for impairment. 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 receivable’s 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 statement of income and comprehensive
income.
(g)
|
Inventories
|
Inventories
are stated at the lower of cost and net realisable value. Cost is determined
using the weighted average basis. The cost of inventories, principally
comprising purchase cost and other costs incurred in bringing the inventories to
their present location and condition. Net realisable value 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.
During
the reporting years, the Company did not make any allowance for slow-moving or
defective inventories.
(h)
|
Plant
and Equipment
|
Plant and
equipment are stated at cost less depreciation and accumulated impairment loss.
Cost represents the purchase price of the asset and other costs incurred to
bring the asset into its existing use. Maintenance, repairs and betterments,
including replacement of minor items, are charged to expense; major
additions to physical properties are capitalized.
Depreciation
of plant and equipment is calculated to written 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:
Office
equipment
|
33⅓ | % | ||
Other
equipment
|
20 | % | ||
Motor
vehicles
|
25 | % |
(i)
|
Intangible
Assets
|
Intangible
assets are stated at cost less amortization and accumulated impairment loss. The
intangible assets of the Company represent software in used. The
intangible assets are amortized over their estimated useful lives of 10 years
using the straight-line method.
7
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(j)
|
Impairment
of Long-lived Assets
|
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The
Company recognizes impairment of long-lived assets in the event that the net
book values of such assets exceed the future undiscounted cashflows attributable
to such assets. No impairment of long-lived assets was recognized for any of the
periods presented.
(k)
|
Revenue
Recognition
|
Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time of
delivery and the sales price is fixed or determinable and collection is
reasonably assured.
(l)
|
Advertising
expenses
|
Advertising
expenses are charged to expense as incurred. Advertising expenses amounted to
$88, $62,586 and $1,618 during 2009, 2008 and 2007 respectively and are included
in selling expenses.
(m)
|
Income
taxes
|
The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the asset
and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statements carrying amounts of existing assets and
liabilities and loss carry forwards and their respective tax bases.
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.
(n)
|
Comprehensive
Income
|
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. The Company’s current component of other
comprehensive income is the foreign currency translation
adjustments.
8
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(o)
|
Foreign
Currency Translation
|
The
Company maintains its financial statements in the functional currency. The
functional currency of the Company is the Renminbi (“RMB”). Monetary assets and
liabilities denominated in currencies other than the functional currency are
translated into the functional currency at rates of exchange prevailing at the
balance sheet dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchanges
rates prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination of
net income for the respective periods.
For
financial reporting purposes, the financial statements of the Company which are
prepared using the functional currency have been translated into United States
dollars (“US$”). Assets and liabilities are translated at the exchange rates at
the balance sheet dates and revenue and expenses are translated at the average
exchange rates and stockholders’ equity is translated at historical exchange
rates. Any translation adjustments resulting are not included in determining net
income but are included in foreign exchange adjustment to other comprehensive
income, a component of stockholders’ equity.
Exchange
rates applied for the foreign currency translation during the years are as
follows:
US$1 to RMB
|
2009
|
2008
|
2007
|
|||||||||
Closing
rate
|
6.8268 | 6.8225 | 7.3046 | |||||||||
Average
rate
|
6.8247 | 7.0636 | 7.5560 |
RMB is
not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.
(p)
|
Financial
instruments
|
The
carrying amounts of all financial instruments approximate fair value. The
carrying amounts of cash and cash equivalents, restricted cash, due from (to) a
related party, notes payable, other payable and accrued liabilities and income
tax payable approximate their fair values due to the short-term nature of these
items. The carrying amounts of short-term borrowings approximate the fair value
based on the Company’s expected borrowing rate for debt with similar remaining
maturities and comparable risk.
It is
management’s opinion that the Company is not exposed to significant interest,
price or credit risks arising from these financial instruments.
9
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(q)
|
Recent
Accounting Pronouncements
|
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 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.
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 disclosures 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 the Company’s financial position, results of operations and cash
flows. Effective February 24, 2010, the Company 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.
In June
2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets
– an amendment of FASB Statement No. 140”. 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 the Company 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.
10
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(q)
|
Recent
Accounting Pronouncements (cont’d)
|
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 the Company in the
first quarter of fiscal 2011.
In June
2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM 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.
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.
11
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(q)
|
Recent
Accounting Pronouncements (cont’d)
|
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.
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.
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 the Company in the
first quarter of fiscal 2011.
The
Company does not anticipate that the adoption of the above recent accounting
pronouncements will have a material impact on these financial
statements.
3.
|
DUE
FROM (TO) A RELATED PARTY
|
The
amount due from (to) a related party, Mr. Zhen Jiang Wang who is the major
equity holder of the Company as of December 31, 2009, is interest free,
unsecured and repayable on demand.
Refers to
SAB Topics 4E and 4G, the scenario and background described therein, which is
related to capital contribution or unpaid equity of an enterprises, is not
applicable in the item as presented under 'Amount due from Shareholder' as
presented in the financial statements due to the different nature and background
that give rise to such amount.
The
amount as appeared in an item " Amount due from shareholders’ here, It is mainly
related to those cash sales customers with C.O.D. terms but not settle on
delivery. Mr. Wang, then, follows XYT instructions to go to collect the amounts
accordingly.
Per the
Authorization Agreement, Kun Ming Xin Yuan Tang Pharmacies Ltd (“XYT”) hereby
authorizes Mr. Zhen Jiang Wang to collect certain trade receivables on behalf of
XYT, while XYT conducts business in China, whereas also Mr. Wang has the
obligation to settle certain trade payables to suppliers, expenses, purchases of
XYT by using the cash collected from the trade receivables.
Rationale
of Authorization Agreement as follows:
l o XYT was a private
company in PRC when it established. A culture in PRC for private company is that
they prefer to run their business through cash sales. Cash sales become a need
because that cash sales promote liquid and convenience. When purchase from
suppliers, settle the receivables by paying cash could help to obtain discounts
and favorable prices, while sales will deal faster when then fixed by cash. Both
customers and suppliers are partial to paying cash.
12
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
l o With the prevailing
cash paying, due to keep the cash more safely and maintain liquidity position,
shareholders of companies preferred personally collected the receivables for
company is a common case in PRC. Also, the business bank account had some
restrictions in daily withdraw amount that not satisfied the daily transaction
of the company. Shareholders would open a personal bank account which is
specifically set aside for keeping the cash collected from customers and to make
payment on behalf of company, which is a solution to reduce cash flow
problems.
l o Mr. Wang, who had a
better relationship with customers and suppliers, was authorized by the board of
the XYT to collect certain trade receivables on behalf of XYT, while XYT
conducts business in China, whereas also Mr. Wang has the obligation to settle
certain trade payables to suppliers, expenses, purchases of XYT by using the
cash collected from the trade receivables to promote liquidity position and
reduce cash flow problems.
|
Per
the authorization agreement, there is no fee arrangement with Mr. Wang to
compensate him for the collection service. Per understanding the business,
Mr. Wang was pleased to help the company at the elementary
stage.
|
Per
communication with the board of XYT, the company will reduce such amount
collected by Mr. Wang gradually after they are listed on OCTBB, which could
settle the amount of “due from a related party”.
4.
|
INVENTORY
|
As of December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
$
|
$
|
$
|
||||||||||
Finished
goods
|
2,9838,291 | 4,875,494 | 3,971,544 |
13
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
5.
|
PLANT
AND EQUIPMENT, NET
|
As of December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
$
|
$
|
$
|
||||||||||
Cost
|
||||||||||||
Office
equipment
|
9,887 | 7,000 | 6,538 | |||||||||
Other
equipment
|
29,717 | 29,735 | 27,773 | |||||||||
Motor
vehicles
|
21,709 | 21,723 | 20,289 | |||||||||
61,313 | 58,458 | 54,600 | ||||||||||
Accumulated
depreciation
|
(57,042 | ) | (51,262 | ) | (37,084 | ) | ||||||
Plant
and equipment, net
|
4,271 | 7,196 | 17,516 |
Depreciation
charged for the years ended December 31, 2009, 2008 and 2007 were $5,815,
$11,162 and $10,492 respectively.
6.
|
INTANGIBLE
ASSET, NET
|
As of December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
$
|
$
|
$
|
||||||||||
Cost
|
8,174 | 8,179 | 7,639 | |||||||||
Accumulated
amortization
|
(5,171 | ) | (4,221 | ) | (3,305 | ) | ||||||
Intangible
asset, net
|
3,003 | 3,958 | 4,334 |
Amortization
recognized in the administrative expenses for the years ended December 31, 2009,
2008 and 2007 were $954, $658 and $710 respectively.
14
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
6.
|
INTANGIBLE
ASSET, NET (CONT’D)
|
The
estimated aggregate amortization expenses for each of the five succeeding years
are as follows:
Year ending December 31
|
$
|
|||
2010
|
817 | |||
2011
|
817 | |||
2012
|
817 | |||
2013
|
373 | |||
2014
and thereafter
|
179 | |||
3,003 |
7.
|
SHORT-TERM
BORROWINGS
|
The
details of short-term borrowings as of December 31, 2009 are as
follows:
Nature
|
Annual
Interest
Rate
|
Loan period
|
Outstanding
loan
amount
|
Collateral
|
||||||||||
$
|
||||||||||||||
Bank
loan
|
5.31 | % |
07/12/2009
– 06/12/2010
|
732,408 | N/A |
Interest
expense charged to operations for the short-term borrowings was $1,513 for the
year ended December 31, 2009. There was no default of bank loan or interest
payments during the year.
8.
|
OTHER
PAYABLE AND ACCRUED LIABILITIES
|
As of December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
$
|
$
|
$
|
||||||||||
Rental
payable
|
58,592 | - | - | |||||||||
Other
payables
|
146,482 | - | - | |||||||||
Staff
costs payable
|
133,420 | 95,787 | 59,681 | |||||||||
Value
added tax payable
|
7,388,582 | 3,221,702 | 828,373 | |||||||||
Other
accrued expenses
|
1,272 | 1,484 | 2,525 | |||||||||
7,728,348 | 3,318,973 | 890,579 |
9.
|
NOTES
PAYABLE
|
The notes
payable which were issued by the Company with bank guarantees are secured by the
restricted cash.
15
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
10.
|
PAID-IN
CAPITAL
|
As of December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
$
|
$
|
$
|
||||||||||
Registered
and fully paid-up
|
RMB | 2,000,000 | RMB | 2,000,000 | RMB | 1,000,000 | ||||||
Translate
at historical rate
|
266,101 | 266,101 | 120,815 |
During
2008, the registered capital was increased from RMB1 million to RMB2 million. In
December 2008, capital contribution of RMB1 million (equivalent to $145,286) was
made. The purpose of increase in registered capital was to provide additional
working capital.
11.
|
PENSION
PLANS
|
The
Company contributes on a monthly basis to various defined contribution
retirement benefit plans organized by relevant municipal and provincial
governments in the PRC. The municipal and provincial governments undertake
to assume the retirement benefit obligations payable to all existing and future
retired employees under these plans and the Company has no further obligation
for post-retirement benefits beyond the contributions made. Contributions to
these plans are expensed as incurred.
During
the years ended December 31, 2009, 2008 and 2007, total pension costs recognized
were $17,754, $14,194 and $12,487 respectively.
12.
|
INCOME
TAX
|
Income
tax expense for the years ended December 31, 2009, 2008 and 2007 represents the
provision for current income tax expenses in the PRC.
A
reconciliation of the tax expense applicable to income before tax using the
statutory rate of 25% (2007: 33%) to the tax expense at the effective tax rate
is as follows:
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
$
|
$
|
$
|
||||||||||
Income
before tax
|
3,649,770 | 2,015,043 | 862,438 | |||||||||
Tax
at the statutory rate
|
912,443 | 503,761 | 284,605 | |||||||||
Others
|
(6,169 | ) | (1,041 | ) | (3 | ) | ||||||
Effective
income tax expense
|
906,274 | 502,720 | 284,602 |
There was
no unprovided deferred tax in respect of the years and as at the balance sheet
dates.
16
KUN
MING XIN YUAN TANG PHARMACIES CO. LTD.
NOTES
TO THE FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 AND 2007
(Stated
in US Dollars)
13.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company leases the office and warehouse under non-cancelable operating lease
agreement that expire in 2018. Leases are on a fixed repayment basis. None of
the leases includes contingent rentals. Minimum future commitments under the
agreement payable as of December 31, 2009 are as follows:
Year ending December 31
|
$
|
|||
2010
|
36,643 | |||
2011
|
36,643 | |||
2012
|
36,643 | |||
2013
|
36,643 | |||
2014
and thereafter
|
155,735 | |||
302,307 |
14.
|
RELATED
PARTY TRANSACTIONS
|
Apart
from the transactions and balances disclosed elsewhere in the financial
statements, the Company had no material transactions with its related parties
during the years presented.
15.
|
SEGMENT
INFORMATION
|
No
segment information is disclosed as the Company is engaged in the sales of
Chinese patent drug, antibiotics, bio-chemicals, chemical preparations and
biological. The nature of the products, the type of their customers and their
distribution methods are substantially similar. The Company operates in a single
segment in the PRC. All of long-lived assets are located in the
PRC.
16.
|
POST
BALANCE SHEET EVENTS
|
On June
25, 2010, the Company became the wholly-owned subsidiary of First China
Pharmaceutical Group Limited (“FCPG-HK”), a company incorporated in Hong Kong
with limited liability.
On August
23, 2010, First China Pharmaceutical Group, Inc., a Nevada corporation
(“FCPG-US”) which stocks trade on the Over-The-Counter Bulletin Board, entered
into a voluntary share exchange transaction with FCPG-HK pursuant to a Share
Exchange Agreement (the “Exchange Agreement”) by and among FCPG-US, on the one
hand, and FCPG-HK, the Company and Mr. Zhen Jiang Wang (the “Selling
Shareholder”), on the other hand.
Following
the Exchange Transaction, the Selling Shareholder will own approximately 25% of
FCPG-US’s issued and outstanding common stock, FCPG-HK and the Company will
become FCPG-US’s wholly owned subsidiaries, and FCPG-US will acquire the
business and operations of FCPG-HK and the Company.
17