UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

 

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

 

ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

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

 

ACT OF 1934

 

For the transition period from

 

Commission file number: 000-52007

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

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

 

9th Floor, No. 29 Nanxin Street

 Xi'an, Shaanxi Province

People’s Republic of China 710004

(Address of principal executive offices) (zip code)

 

86-29-8727-1818

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

                                                                                    

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

 Yes o Nox.

 

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

 

As of September 30, 2013 and November 18, 2013, there were 44,556,104 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

 

				PAGE
	PART I
Item 1.	Condensed Consolidated Financial Statements (unaudited).			F-1
		Condensed Consolidated Balance Sheets (unaudited and audited)		F-2
		Condensed Consolidated Statements of Income and Comprehensive Income (unaudited)		F-3
		Condensed Consolidated Statements of Cash Flows (unaudited)		F-4
		Consolidated Statements of Stockholders’ Equity (unaudited)		F-5
		Notes to Condensed Consolidated Financial Statements (unaudited)		F-6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.			3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.			6
Item 4.	Controls and Procedures.			6
	PART II			7
Item 1.	Legal Proceedings.			7
Item 1A.	Risk Factors.			7
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.			7
Item 3.	Defaults Upon Senior Securities.			7
Item 4.	(Removed and Reserved).			8
Item 5.	Other Information.			8
Item 6.	Exhibits.			8
SIGNATURES				8

 

 

 

PART I - FINANCIAL INFORMATION

 

 

Item 1.    Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

 

 

 

 

 

 

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2013				December 31, 2012
		(Unaudited)				(Audited)
ASSETS
Current Assets
Cash and cash equivalents		$	2,163,082			$	1,102,349
Accounts receivable, net of provision for doubtful accounts of $10,854,399 (December 31,2012: $7,818,798)			1,910,322				4,673,315
Other receivable (note 4)			149,298				140,760
Inventories (note 5)			81,535				472,274
Prepaid expenses (note 6)			211,950				3,270,543
Prepaid income taxes			215,257				209,637
VAT tax refundable			—				12,183
Total Current Assets		$	4,731,444			$	9,881,061
Property, plant and equipment, net (note 7)			743,359				791,405
Intangible assets, net (note 8)			1,273,099				1,447,046
Total Assets		$	6,747,902			$	12,119,512
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	10,112			$	84,373
Accrued expenses and other payables (note 9)			1,018,931				408,838
Trade deposit received			7,020				6,837
VAT tax payable			47,617				—
Total Current Liabilities		$	1,083,680			$	500,048
Stockholders' Equity
Common stock, $0.001 par value, 75,000,000 share authorized, 44,556,104 shares issued and outstanding at September 30, 2013 and December 31, 2012		$	44,556			$	44,556
Additional paid in capital			14,102,507				14,102,507
Statutory reserve (note 12)			810,540				810,540
Accumulated other comprehensive income			3,434,265				3,196,765
Accumulated (deficit)			(12,727,646	)			(6,534,904	)
Total Stockholders' Equity		$	5,664,222			$	11,619,464
Total Liabilities and Stockholders' Equity		$	6,747,902			$	12,119,512

 

 

The accompanying notes are an integral part of these financial statements

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2013				2012				2013				2012
Sales		$	890,137			$	2,177,886			$	2,953,041			$	15,017,870
Sales rebates			(104,162	)			(217,442	)			(349,342	)			(2,062,393	)
Sales, net of  rebates			785,975				1,960,444				2,603,699				12,955,477
Cost of sales			528,211				981,490				1,653,946				7,894,782
Gross profit			257,764				978,954				949,753				5,060,695
Advertising expense			807,778				947,859				2,406,189				3,877,809
Selling, general and administrative expense			299,019				711,332				1,177,992				2,868,158
Impairment (recovery) loss on accounts receivable			(686,940	)			2,900,192				2,792,639				4,132,574
Write-down of other receivables			238				—				56,275				—
Write-down of prepaid expense (note 6)			107,228				—				709,389				—
(Loss) from operations			(269,559	)			(3,580,429	)			(6,192,731	)			(5,817,846	)
Interest income (expense)			(3	)			—				(11	)			44
Other (expense)			—				(32	)			—				(211	)
Total Other (Expense)			(3	)			(32	)			(11	)			(167	)
(Loss) before income taxes			(269,562	)			(3,580,461	)			(6,192,742	)			(5,818,013	)
Provision for income taxes			—				—				—				—
Net (loss)		$	(269,562	)			(3,580,461	)		$	(6,192,742	)			(5,818,013	)
Foreign currency translation adjustment			57,428				(32,267	)			237,500				111,918
Comprehensive (loss)		$	(212,134	)		$	(3,612,728	)		$	(5,955,242	)		$	(5,706,095	)
Net (loss) per common share
(Loss) per share - basic and diluted		$	(0.01	)		$	(0.08	)		$	(0.14	)		$	(0.13	)
Weighted average common shares outstanding - basic and diluted			44,556,104				44,556,104				44,556,104				44,556,104

 

 

 

The accompanying notes are an integral part of these financial statements

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine months ended September 30,
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)		$	(6,192,742	)		$	(5,818,013	)
Adjustments to reconcile net (loss) to net cash used in operating activities
Depreciation and amortization of property, plant and equipment and intangible assets			278,670				276,400
Provision for doubtful accounts			2,792,639				4,132,574
Write down due to impairment of advance to suppliers			709,389				—
Write off of other receivable			56,275				—
Recognition of stock based compensation expense			—				15,625
(Increase) decrease in current assets
Accounts receivable			61,533				(1,112,751	)
Inventory			398,637				(484,738	)
Prepaid expense			2,399,733				2,488,987
Increase (decrease) in current liabilities
Accounts payable			(75,619	)			(282,924	)
Accrued expenses and other payables			592,060				583,591
Value-added tax payable			59,417				(329,028	)
Net cash provided by (used in) operating activities			1,079,992				(530,277	)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash advances to employees			(60,983	)			(681,557	)
Net cash (used in) investing activities			(60,983	)			(681,557	)
Effect of exchange rate changes on cash and cash equivalents			41,724				12,624
Net change in cash and cash equivalents			1,060,733				(1,199,210	)
Cash and cash equivalents, beginning balance			1,102,349				2,186,650
Cash and cash equivalents, ending balance		$	2,163,082			$	987,440
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Income tax payments		$	—			$	—
Interest payments		$	—			$	—

 

The accompanying notes are an integral part of these financial statements

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

Description		Common Shares				Amount				Additional Paid-in Capital				Accumulated Other Comprehensive Income
Balance, December 31, 2011 (Audited)			44,556,104				44,556				14,102,507				3,038,258
Foreign currency translation adjustments			—				—				—				158,507
Stock-based compensation			—				—				—				—
Loss for the year			—				—				—				—
Balance, December 31, 2012 (Audited)			44,556,104				44,556				14,102,507				3,196,765
Foreign currency translation adjustments			—				—				—				237,500
Loss for nine months			—				—				—				—
Balance, September 30, 2013 (Unaudited)			44,556,104			$	44,556			$	14,102,507			$	3,434,265
Description			Statutory Reserves				Retained Earnings				Deferred Compensation				Total Stock-holders' Equity
Balance, December 31, 2011 (Audited)		$	810,540			$	2,617,414			$	(15,625	)		$	20,597,650
Foreign currency translation adjustments			—				—				—				158,507
Stock-based compensation			—				—				15,625				15,625
Loss for the year			—				(9,152,318	)			—				(9,152,318	)
Balance, December 31, 2012 (Audited)			810,540				(6,534,904	)			—				11,619,464
Foreign currency translation adjustments			—				—				—				237,500
Loss for nine months			—				(6,192,742	)			—				(6,192,742	)
Balance, September 30, 2013 (Unaudited)		$	810,540			$	(12,727,646	)		$	—			$	5,664,222

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 (Unaudited)

 

NOTE 1 – GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $269,592 and $3,580,461 for the three months ended September 30, 2013 and 2012; $6,192,742 and $5,818,013 for the nine months ended September 30, 2013 and 2012. Further, the Company had accumulated deficit of $12,727,646 and $6,534,904 as at September 30, 2013 and December 31, 2012. These create an uncertainty about the Company’s ability to continue as a going concern. In this regard, the Company’s Chairman has issued a letter of undertaking that he will provide financial support to the Company (Note 14). These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

NOTE 2 – ORGANIZATION

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 

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

 

Principles of Consolidation

 

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

 

Unaudited Interim Financial Information

 

These unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. Therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2013.

 

The consolidated balance sheets and certain comparative information as of December 31, 2012 are derived from the audited consolidated financial statements and related notes for the year ended December 31, 2012 (“2012 Annual Financial Statements”), included in the Company’s 2012 Annual Report on Form 10-K. These unaudited interim consolidated financial statements should be read in conjunction with the 2012 Annual Financial Statements.

 

Use of Estimates

 

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

 

Accounts Receivable

 

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

 

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

 

Segment Reporting

 

ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related information” requires us of the “management approach” model for segment reporting.  The management approach model is based on the way a Company’s management organizes segments within the company for making operating decisions and assessing performance.  Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.  The Company operates in one segment during the three and nine months ended September 30, 2013 and 2012.

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

As of September 30, 2013, there are no recently issued accounting standards not yet adopted that would have a material effect on the Company’s financial statements.

 

 

NOTE 4 – OTHER RECEIVABLES

 

Other receivables mainly consist of cash advances to employees.  As of September 30, 2013 and December 31, 2012, other receivables were $149,298 and $140,760, respectively. During the three and nine months ended September 30, 2013, $56,275was written off. No amounts were written off during the three and nine months ended September 30, 2012.

 

 

NOTE 5 – INVENTORIES

 

As at September 30, 2013 and December 31, 2012, inventories consist of the following:

 

		9/30/2013				12/31/2012
Raw materials		$	69,272			$	218,019
Finished goods			12,263				594,998
Provision for obsolescence			—				(340,743	)
Total		$	81,535			$	472,274

 

 

NOTE 6 – PREPAID EXPENSES

 

Prepaid expenses

 

Prepaid expenses as at September 30, 2013 and December 31, 2012 represent the following components:

 

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

		Payee		Nature		9/30/2013				12/31/2012
Advance advertising payments		Advertising companies (c)		Advance payments to advertising companies for promotion		$	—			$	1,862,537
Advance payment to suppliers		Suppliers (a), (b)		Advance payments to OEM manufactures for goods purchased and suppliers for raw Materials and packing materials			211,950				1,408,006
Total						$	211,950			$	3,270,543

 

During the three and nine months ended September 30, 2013, the Company recognized an impairment loss of $107,228 and $709,389, respectively on advances to certain suppliers. No impairment loss was recognized during the three and nine months ended September 30, 2012.

 

 

NOTE 7 – PROPERTY, PLANT AND EQUIPMENT

As of September 30, 2013 and December 31, 2012, Property, Plant and Equipment consist of the following:

 

		9/30/2013				12/31/2012
Buildings		$	585,863			$	570,568
Plant and equipment			1,129,292				1,099,809
Transportation equipment			7,370				7,179
Office equipment			56,554				55,077
Total			1,779,079				1,732,633
Accumulated depreciation			(1,035,720	)			(941,228	)
		$	743,359			$	791,405

 

Depreciation expense for the three months ended September 30, 2013 and 2012 were $22,500 and $22,902, respectively; for the nine months ended September 30, 2013 and 2012 were $68,443 and $69,524 respectively.

 

NOTE 8 – INTANGIBLE ASSETS

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

 

		9/30/2013				12/31/2012
Land use right		$	347,731			$	338,652
Proprietary technologies			2,890,835				2,815,363
Total			3,238,566				3,154,015
Accumulated amortization			(1,965,467	)			(1,706,969	)
		$	1,273,099			$	1,447,046

 

Amortization expense for the three months ended September 30, 2013 and 2012 were $70,076 and $68,875, respectively; for the nine months ended September 30, 2013 and 2012 were $210,227 and $206,878, respectively.

 

The estimated future amortization expenses related to intangible asset as of September 30, 2013 are as follows:

 

Years ending December 31,
2013 (3 months)		$	70,913
2014			283,652
2015			283,652
2016			283,652
2017			283,652
Thereafter			67,578
Total		$	1,273,099

 

 

NOTE 9 – ACCRUED EXPENSES AND OTHER PAYABLES

 

Included in accrued expenses and other payables were $522,469 (December 31, 2012: $Nil) in TV advertising expenses under two contracts payable and accrued sales commission and salesmen expenses totaling $384,632 (December 31, 2012: $310,550) at September 30, 2013.

 

 

NOTE 10 – INCOME TAXES

 

The Company was incorporated in the United States of America (“USA”) and has operations in one tax jurisdiction, i.e. the PRC. The Company generated substantially all of its net income from its operations in the PRC for the three and nine months ended September 30, 2013 and 2012, and has recorded income tax provision for the periods. Deferred tax asset which may arise as a result of net operating losses and temporary differences has been offset by a valuation allowance due to the uncertainty surrounding their realization.

 

Uncertain Tax Positions

 

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

 

For the three and nine months ended September 30, 2013 and 2012, the Company had no unrecognized tax benefits and related interest and penalties expenses.  Currently, the Company is not undergoing examination by major tax jurisdictions. However, the Company is subject to examination by major tax jurisdictions for all prior years.

 

NOTE 11 – SHARE CAPITAL

 

Common Shares

 

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

 

The Company did not issue any common stock during the nine months ended September 30, 2013 and the year ended December 31, 2012. As at September 30, 2013 and December 31, 2012, total issued and outstanding common stock was 44,556,104.

 

 

NOTE 12 – STATUTORY RESERVE

 

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

 

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company.  Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees.  These reserves are not transferable to the Company in the form of cash dividends, loans or advances.  These reserves are therefore not available for distribution except in liquidation.  As at September 30, 2013 and December 31, 2012, the Company had allocated $810,540 to these non-distributable reserve funds.

 

 

NOTE 13 – CONCENTRATION AND CREDIT RISK

 

There was no customer that accounted for more than 10% of accounts receivable at September 30, 2013 and December 31, 2012. As of September 30, 2013, two vendors, each accounted for more than 10%, and individually accounted for 30%, and 25% of accounts payable totaling 55%. As of December 31, 2012, three vendors, each accounted for more than 10%, and individually accounted for 35%, 29% and 19% of accounts payable, totaling 83%.

 

Three customers, each accounted for more than 10%, and individually accounted for 35%, 29% and 27% of total sales for the three months ended September 30, 2013, totaling 91%. No customer accounted for more than 10% total sales for the three months ended September 30, 2012. Four vendors, each accounted for more than 10%, and individually accounted for 21%, 19%, 18% and 12% of total purchase during the three months ended September 30, 2013, totaling 70%. Four vendors, each accounted for more than 10%, and individually accounted for 25%, 23%, 21% and 17% of total purchase for the three months ended September 30, 2012, totaling 86%

 

Four customers, each accounted for more than 10%, and individually accounted for 15% 14% 13% and 11% of total sales for the nine months ended September 30, 2013, totaling 53%. No customer accounted for more than 10% total sales for the nine months ended September 30, 2012. Five vendors each accounted for more than 10%, and individually accounted for 19%, 17%, 15%, 14%, and 10% of total purchase during the nine months ended September 30, 2013, totaling 75%. Three vendors, each accounted for more than 10%, and individually accounted for 23%, 22% and 21% of total purchase for the nine months ended September 30, 2012, totaling 66%.

 

 

NOTE 14 – COMMITMENT

 

The Company is committed to pay $1.1 million for advertising through December 2013.

 

 

NOTE 15 – CHAIRMAN FINANCIAL UNDERTAKING

 

On November 15, 2013, the Chairman issued an undertaking that the Chairman will give his every endeavor and effort to obtain necessary and adequate funding to meet the Company’s financial obligations as when required. There are no assurances that the Chairman will be successful in this endeavor.

 

 

NOTE 16 – SUBSEQUENT EVENT

 

The Company has evaluated subsequent events for potential recognition and disclosure. No significant events occurred subsequent to the September 30, 2013, to the date these consolidated financial statements are filed with the Securities Exchange Commissions that would have a material impact on the Company’s consolidated financial statements.

 

 

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

 

The following discussion of financial condition as at September 30, 2013 and December 31, 2012, and results of operation of the Company for the three and nine months ended September 30, 2013 and 2012, should be read in conjunction with the consolidated financial statements and the notes to those statements are included elsewhere in this Quarterly Report.

 

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

 

Cautionary Note Regarding Forward-Looking Statements

 

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

 

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

 

Overview

 

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

 

Critical Accounting Policies

 

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

 

Accounts receivable

 

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

 

Inventories

 

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

 

Intangible assets

 

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

 

Results of Operations for the Three and Nine months Ended September 30, 2013 and 2012

 

Net sales

 

During the three months ended September 30, 2013, our gross sales have decreased by 59% to $890,137 from $2,177,886 for the three months ended September 30, 2012. During the nine months ended September 30, 2013, our gross sales have decreased by 80% to $2,953,041 from $15,017,870 for the nine months ended September 30, 2012. The decrease was in parts due to increased competition and our failure to implement a new sales model. For the three and nine months ended September 30, 2013, sales rebate was $104,162 and $349,342 or 12% of gross sales, compared to $217,442 and $2,062,393 or 10% and 14% for the same periods in 2012. Our net sales for the three months ended September 30, 2013 and 2012 were $785,975 and $1,960,444; nine months ended September 30, 2013 and 2012 were $2,603,699 and $12,955,477.

 

We began implementing a new sales model in the 4^th quarter of 2011. It is now apparent that our planned sales model has not been successful because of our lack of expertise in certain areas of sales and marketing management. As a result, our products have lost substantially all its market share.

 

Our sales has declined significantly over the last four quarters. If we are not able to improve our sales, we may not be able to continue as a going concern.

 

Cost of sales

For the three months ended September 30, 2013 and 2012, our costs of sales were $528,211 and $981,490 respectively, representing a decrease of 46% or $453,279. For the nine months ended September 30, 2013 and 2012, our costs of sales were $1,653,946 and $7,894,782 respectively, representing a decrease of 79% or $6,240,836. This decreases are consistent with the decline in sales. During the three months ended September 30, 2013, our costs of sales were 59% of our gross sales, as compared to 45% for the same period in 2012. During the nine months ended September 30, 2013, our costs of sales were 56% of our gross sales, as compared to 53% for the same period in 2012.

 

Gross profit

 

Gross profit for the three months ended September 30, 2013 and 2012 were $257,764 and $978,954, respectively; for the nine months ended September 30, 2013 and 2012 were $949,753 and $5,060,695 The decreases were due to decrease in sales volume.

 

Advertising expense

 

During the three months ended September 30, 2013 and 2012, we incurred $807,778 and $947,859; nine months ended September 30, 2013 and 2012, we incurred $2,406,189 and $3,877,809 as advertising expense. We spent less on advertising during the three and nine months ended September 30, 2013 to conserve cash.

 

Impairment loss on accounts receivables

 

We have recorded a bad debt expense recovery of $686,940 during the three months ended September 30, 2013, while bad debt expense was $2,900,192 during the same period in 2012. Bad debt expense was $2,792,639 and $4,132,574 for the nine months ended September 30, 2013 and 2012.

 

Our current accounts receivable turnover is over 300 days as at September 30, 2013. Provision for doubtful accounts is estimated as follows: i) 50% on accounts that are outstanding between 91 and 180 days, ii) 75% on accounts that are outstanding between 181 to 365 days, and iii) 100% on accounts that are outstanding for over 365 days.

 

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

 

Selling, general and administrative expenses

 

Total selling, general and administrative expenses consist of salaries and wages, sales commission and other selling, general and administrative expenses. It decreased by 58% to $299,019 for the three months ended September 30, 2013 from $711,332 for the same period in 2012, and represents 34% and 33%, respectively, of our sales before sales rebate; decreased by 59% to $1,177,992 for the nine months ended September 30, 2013 from $2,868,158 for the same period in 2012, and represents 40% and 19%, respectively, of our sales before sales rebate. The decrease in salary and wages, sales commission, and other selling, general and administrative expenses were consistent with the decrease of our sales.

 

Liquidity and Capital Resources

As at September 30, 2013, we have cash and cash equivalents of $2,163,082 and net working capital of $3,647,764. We incurred a net loss of $269,562 and $6,192,742 for the three and nine months ended September 30, 2013. Further, we had accumulated deficit of $12,727,646 as at September 30, 2013. These create an uncertainty as to our ability to maintain operations at the present level for at least the next twelve months. In this regard, our Chairman has issued a letter of undertaking that will give his every endeavor and effort to obtain necessary and adequate funding to meet our financial obligations as when required. There are no assurances that the Chairman will be successful in this endeavor.

 

Cash flows from operating activities

 

During the nine months ended September 30, 2013, net cash generated by operating activities was $1,079,992. This is due to our net loss of $6,192,742, adjusted for non-cash expenses, which includes depreciation and amortization of $278,670, provision for doubtful accounts of $2,792,639, write down of advance to suppliers of $709,389 and write down of other receivables of $56,275 and a net increase in working capital of $3,435,761.

 

Contractual Obligations

 

We are committed to pay $1.1 million for advertising through December, 2013.

 

Off-Balance Sheet Commitments and Arrangements

 

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

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

a) Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of September 30, 2013. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on our evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of September 30, 2013, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  The material weaknesses, which relate to internal control over financial reporting, that were identified are: 

 

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

 

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

 

 

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

 

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

 

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

 

(b) Changes in internal control over financial reporting.

 

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

  

 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

Item 1A. Risk Factors.

   

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

 

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

 

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

 

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

 

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

 

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. (Removed and Reserved).

 

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

31.01

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

 

31.02

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

 

32.01	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES

 

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

 

	CHINA PEDIATRIC PHARMACEUTICALS, INC.
Dated: November 18, 2013	By:	/s/ Jun Xia
		Name: Jun Xia
		Title: Chief Executive Officer
		(principal executive officer)
Dated: November 18, 2013
	By:	/s/ Minggang Xiao
		Name: Minggang Xiao
		Title: Chief Financial Officer
		(principal financial and accounting officer)