China Pharmaceuticals (OTC BB:CFMI)

In the three months ended March 31, 2012, we had sales of $1,580,229, a decrease of 79% as compared to $7,687,217 in the same period of 2011. This decrease was primarily due to decrease in production volume starting from the second quarter of 2011as a result of our preparation for GMP certification. In order to meet the requirements of GMP certification, we had to upgrade our machinery and equipment and provide training to our employees, which interrupted our production. We expect our sales will gradually increase as our production capacity is restored to normal level after the GMP certification.

This decrease was primarily due to decreased production volume in the third quarter of 2011. From the third quarter of 2011, we started to prepare for the Good Manufacture Practice (“GMP”) certification process starting in January 2011. In order to meet the GMP requirements, we have to upgrade our machine and equipment and provide trainings to our employees which caused decrease in production in the third quarter of 2011. We expect our sales will gradually increase as our production capacity is restored to normal level after the GMP certification.

On September 6, 2011, China Pharmaceuticals, Inc. (the “Company”) was notified that its principal independent accountant, Acquavella, Chiarelli, Shuster, Berkower & Co., LLP (“ACSB”), had resigned its engagement with the Company, effective immediately.

No report of ACSB on the Company’s financial statements for the fiscal years ended December 31, 2009 and 2010 and through September 6, 2011 contained an adverse opinion or disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles.

ValueRich, Inc. (“ValueRich”) commenced a private arbitration against the Company in Florida asserting breach of contract, conversion, and unjust enrichment claims arising out of a Consulting Agreement between ValueRich and Xi’an Qinba Pharmaceuticals Co. Ltd. (“Qinba”), which is the operating entity that a Company’s wholly owned subsidiary has a contractual Entrust Management Relationship. ValueRich asserts that the Company breached and circumvented the Consulting Agreement by terminating it and becoming a public entity through other means. ValueRich seeks specific performance to obtain 20% of the Company’s outstanding shares, or, in the alternative, unspecified monetary damages equal to the value of 20% of the Company’s outstanding shares, attorneys’ fees, arbitration costs, and interest. On March 11, 2011, the Company filed its Answer and Counterclaims.

ValueRich has filed its Reply to the Company’s Counterclaims. As this matter is at its inception, it is difficult to estimate the likelihood of an adverse award. The Company’s management has indicated that it intends to vigorously defend the claim. No arbitration hearing dates have yet been scheduled.

First Quarter Results:

• The Company recorded $7,687,217 in total revenue and net income of $2,888,013 for the quarter ended March 31, 2011, representing increases of 9% and 86.6%, respectively, as compared to the same quarter in 2010.

"We continue to be very pleased with our operating results. We are confident that our exceptionally strong working capital position will provide us with the flexibility to both continue our current organic growth as well as capitalize on potential acquisition opportunities that may be available in 2011," stated Mr. Guozhu Wang, Chairman and Chief Executive Officer of China Pharmaceuticals, Inc.

• Gross profit for the first quarter ended March 31, 2011 increased by 2% to $4,319,687, as compared to $4,233,021 for the first quarter ended March 31, 2010.
• Operating income for the first quarter ended March 31, 2011 increased by 57.8% to $3,344,322 from $2,118,935 for the first quarter ended March 31, 2010.
• Net income for the first quarter ended March 31, 2011 increased to $2,888,013, an 86.6% increase as compared to net income of $1,547,876 for the first quarter ended March 31, 2010

2010 Year End

• Total net sales increased to $34,184,906 from $26,708,285 in fiscal 2009, an increase of $7,476,621 or approximately 28%.

• Gross profit increased to $19,436,665 from $14,300,250 in fiscal 2009, an increase of approximately 36%.
• Diluted earnings per share of $0.75, compared to $8,907,379, or diluted earnings per share of $0.95 in fiscal 2009.

Mr. Guozhu Wang, Chairman and Chief Executive Officer of China Pharmaceuticals, commented, “We are pleased that our company continues its rapid growth annually while at the same time maintaining a strong balance sheet with no long term debt. For fiscal 2011, we are strongly positioned to accelerate our current expansion rate through continued organic sales and distribution growth combined with anticipated potential acquisition opportunities.”

This decrease in sales was primarily due to shrinkage of market’s overall demand for our products. We expect that demand will increase in the remainder of the year as we have been strengthening our sales force.

We will begin tracking China Pharmaceuticals: 

• On April 20, 2009 China Pharmaceuticals reported 2009 financial results:
  
  
  • Sales grew 46.7% to $26.7 million
  • Non-gaap EPS grew 30.4% to $0.30
  • Management stated that 2010 would be a transitional year. Optimism did not take into account new drug approvals. 

• On May 17, 2010 China Pharmaceuticals reported first quarter 2010 financial results:

• Sales grew 21.9% to $8.9 million
• Non-gaap EPS grew 66.7% to $0.10 (GAAP EPS was only $0.05, which may be throwing some investors off this trail)
  
• Adjusted trailing P/E is 4.71

What we need to know:

• Capital requirements:(Will stock be issued)?
  
  
  • "To date, our business has been dependent upon short- to mid-term bank loans."
  • Dilution risk: The company has not yet tapped the equity market since its reverse merger on February 12, 2010.
  • What is the current manufacturing capacity? Becomes a factor, especially if new drugs are introduced.
    
• CFMI has close to full province coverage and an extensive distribution network. How dramatic can growth be from its current its product portfolio and market presence?
  
• How mature are its product lines?
  
• How many drugs are in the pipeline?
  
• Why no press release for the 2010 first quarter?

"Fiscal 2010 is expected to be a transitional year for China Pharmaceuticals, Inc. as we prepare for the introduction of new drugs, and pursue additional opportunities for both organic growth and potential strategic acquisitions. Our current outlook reflects only the drugs that we have in hand today and will be subject to update as we execute strategic initiatives to expand our market position and profitability in the future. We remain very confident regarding our future growth prospects and look forward to sharing further details with our shareholders as our expansion plans reach a definitive stage," concluded Mr. Wang.

Source: Business Wire (April 20, 2010)

Became public via a reverse merger transaction on February 12, 2010.

Company Snapshot:

China Pharmaceuticals is in the business of manufacturing, marketing and sales of pharmaceuticals in China

Post Merger Share Calculation:

•   9,950,000: Pre reverse merger outstanding shares  
•   5,100,000: Shares cancelled as part of the Share Exchange
• 33,600,000: Newly issued shares of Common Stock

GeoTeam® best effort calculation of total post reverse merger outstanding shares assuming full conversions:  38,450,000