UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date
of
Report (Date of earliest event reported): September 8, 2006
Renhuang
Pharmaceuticals, Inc.
(Exact
name of registrant as specified in its charter)
Nevada
(State
or
Other Jurisdiction of Incorporation)
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0-24512
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88-1273503
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|
(Commission
File Number)
|
(IRS
Employer Identification Number)
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No.
281, Taiping Road, Taiping District,
Harbin,
Heilongjiang Province, 150050
P.
R. China
(Address
of Principal Executive Offices)
+86-451-5762-0378
(Registrant’s
Telephone Number, Including Area Code)
c/o
Viking Investments
65
Broadway, Suite 888
New
York, NY 10006
(Former
Name or Former Address, if Changed Since Last Report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
o Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14-12)
o Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o Pre-commencement
communications pursuant to Rule 13-e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item
1.01.
Entry
into a Material Definitive Agreement.
On
August
28, 2006, Renhuang Pharmaceuticals, Inc., a Nevada corporation (the
‘‘Company’’)
and
Harbin Renhuang Pharmaceutical Company Limited, a
Corporation incorporated under the laws of the British Virgin Island,
(the
“BVI”) entered
into a Share Exchange Agreement (the “Agreement”) pursuant to which the Company
acquired all of the outstanding capital stock of BVI in exchange for issuing
29,750,000 shares of the Company’s common
stock, par value $0.001 per share (the ‘‘Common Stock’’) to BVI’s stockholders,
representing 85% of the Company’s capital stock on a fully diluted basis after
taking into account the contemplated transaction. BVI is a holding company
and
owns 100% of Harbin Renhuang Pharmaceutical Co. Ltd., incorporated under the
laws of the Peoples Republic of China (“Renhuang
China”).
This transaction is referred to throughout this report as the “Merger”.
Item
2.01.
Completion
of Acquisition or Disposition of Assets.
On
September 7, 2006, the Merger described in Item 1.01 was completed.
Upon
closing of the Merger, BVI became a wholly owned subsidiary of the Company.
In
exchange for all of the issued and outstanding shares of BVI, the Company issued
to the former shareholders of BVI 29,750,000 unregistered and restricted shares
of Common Stock, par value $0.001 of the Company. After giving effect to the
Merger, the Company has 35,000,000 shares issued and outstanding and the former
stockholders of BVI own approximately 85% of the issued and outstanding Common
Stock of the Company. Accordingly, the Merger represents a change in control
of
the Company.
Shares
of
the Company’s Common Stock are trading on the Over the Counter (OTC) Bulletin
Board Market under the symbol RHGP.
For
accounting purposes, the Merger has been accounted for as a reverse acquisition
with the Company as the accounting acquirer and the BVI as the accounting
acquiree. Upon effectiveness of the Merger, Renhuang China’s business plan
became the business plan of the Company.
The
Merger agreement was filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on August 29, 2006
and is incorporated herein by reference. The foregoing description of the Merger
and the transactions contemplated thereby do not purport to be complete and
are
qualified in their entireties to the Merger agreement.
On
August
31, 2006, the Company’s Board of Directors approved the Merger.
Unless
otherwise provided in this current report, all references in this current report
to “we”, “us”, “our company”, “our”, or the “Company” refer to the combined
Renhuang Pharmaceuticals, Inc. entity.
Changes
Resulting From the Merger
The
Company intends to carry on Renhuang China’s business as its sole line of
business. Renhuang BVI is a holding company and owns 100% of Harbin Renhuang
Pharmaceutical Co., Ltd., incorporated under the laws of the Peoples Republic
of
China (“Renhuang PRC”). Renhuang PRC is based in Harbin, Heilongjiang
Province,
Peoples
Republic of China and is a Biotechnology company focusing on products and
services related to Pharmaceuticals. The Company has relocated its principal
executive offices to those of Renhuang PRC at No. 281, Taiping Road, Taiping
District, Harbin, Heilongjiang Province, 150050 P. R. China,
and its
telephone number is +86-451-5762-0378.
The
Company maintains a representative office at 65 Broadway, Suite 888, New York,
NY 10006. Telephone (212) 430 6548. Telefax (646) 356 7034.
The
Merger and its related transactions were approved by the requisite number of
Renhuang Pharmaceuticals’ stockholders by written consent in lieu of a meeting
on August 30, 2006 and to:
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·
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ratify
all actions taken by the Board of the Company prior to closing, in
connection with the Merger; and
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·
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take
such other action as is necessary or appropriate to consummate the
transactions consisting of the Merger and related
transactions.
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Company
History of Renhuang Pharmaceuticals, Inc., (the “Company”)
Renhuang
Pharmaceuticals, Inc., (“Renhuang”) or the ("Company") was incorporated in the
State of Nevada on August 18, 1988 as Solutions, Incorporated. Since that time,
we have undergone a series of name changes as follows: Suarro Communications,
Inc., e-Net Corporation, e-Net Financial Corp., e-Net.Com Corporation, e-Net
Financial.Com Corporation, Anza Capital, Inc. and finally on July 28, 2006
we
changed our name to Renhuang Pharmaceuticals, Inc.
On
March
3, 2006, we completed the disposition of substantially all of our assets and
discontinued our operations, including but not limited to, all of our ownership
interest in our subsidiary, American Residential Funding, Inc., a Nevada
corporation ("AMRES") to AMRES Holding, LLC, a Nevada limited liability company
("AMRES Holding") under control of Vince Rinehart, a shareholder and, at that
time, our sole officer and director ("Rinehart"). Effective on September 30,
2005, the disposition was approved by written consent of a majority of our
stockholders.
In
exchange for substantially all of our assets, including but not limited to,
all
of our ownership interest in AMRES, (i) Rinehart delivered a majority of his
ownership interest in Anza, consisting of 831,375 shares of common stock and
1,880,000 shares of our common stock acquired upon the conversion of 18,800
shares of Series F Convertible Preferred Stock, to Viking Investments USA,
Inc.,
a Delaware corporation ("Viking"). Rinehart kept 156,900 shares of our common
stock; (ii) Rinehart terminated that certain Employment Agreement dated June
1,
2001, by and between Rinehart and Anza; (iii) AMRES assumed all obligations
under that certain real property lease by and between Anza and Fifth Street
Properties-DS, LLC; (iv) AMRES delivered to Viking its ownership interest in
Anza, consisting of 4,137,500 shares of our common stock; and (v) AMRES Holding
delivered warrants to acquire 250,000 shares of our common stock to Viking.
The
foregoing description of the disposition of our assets and discontinuation
of
our operations, and the transactions contemplated thereby do not purport to
be
complete and are qualified in their entireties to the Common Stock Purchase
Agreement and the Securities Purchase Agreement that were filed as Exhibit
10.1
and Exhibit 10.2 respectively in our Current Report Form 8-K with the Commission
on September 23, 2005 and is hereby incorporated by reference.
On
August
11, 2006, our outstanding common stock underwent a thirty-for-one stock split
reversal resulting in a decrease in our outstanding common stock at that time
from 13,355,181 shares to approximately 445,240 shares as further described
in
our Current Report 14 C filed with the Commission on April 25,
2006.
Company
History of Harbin Renhuang Pharmaceutical Co. Ltd. and Harbin Renhuang
Pharmaceutical Stock Co. Ltd.
Harbin
Renhuang Pharmaceutical Stock Co. Ltd. was incorporated in 1996 in the Peoples
Republic of China (“Old Renhuang”). Harbin Renhuang Pharmaceutical Co. Ltd. was
incorporated in February 2006 in the Peoples Republic of China (“Renhuang
China”). On March 3, 2006 Renhuang Medicine for Animals, a company controlled by
Mr. Li Shaoming, invested 25 million RMB ($3.3 million) in cash in Renhuang
China. On March 3, 2006 Old Renhuang transferred the majority of its operating
assets, except buildings, to Renhuang China.
As
a
result, as of May 1, 2006, nearly 100% of revenue producing activities in Old
Renhuang have been migrated to Renhuang China.
Description
of Business of Renhuang China
Forward
Looking Statements
This
Current Report on Form 8-K contains forward-looking information. Forward-looking
information includes statements relating to future actions, future performance,
costs and expenses, outcome of contingencies, financial condition, results
of
operations, liquidity, business strategies, objectives of management, and other
such matters of the Company. The Private Securities Litigation Reform Act of
1995 provides a "safe harbor" for forward-looking information to encourage
companies to provide prospective information about themselves without fear
of
litigation so long as that information is identified as forward-looking and
is
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those projected in
the
information. Forward-looking information may be included in this Current Report
on Form 8-K or may be incorporated by reference from other documents filed
with
the Securities and Exchange Commission the "SEC") by the Company. You can find
many of these statements by looking for words including, for example,
"believes," "expects," "anticipates," "estimates" or similar expressions in
this
Current Report on Form 8-K or in documents incorporated by reference in this
Report. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
The
Company has based the forward-looking statements relating to the Company’s
operations on management's current expectations, estimates, and projections
about the Company and the industry in which it operates. These statements are
not guarantees of future performance and involve risks, uncertainties, and
assumptions that the Company cannot predict. In particular, The Company has
based any of these forward-looking statements on assumptions about future events
that may prove to be inaccurate. Accordingly, the Company's actual results
may
differ materially from those contemplated by these forward-looking statements.
Any differences could result from a variety of factors, including, but not
limited to, failure to effectuate its business plan, inability to maintain
costs, loss of customers, regulatory issues, general economic and business
conditions, competition, and other factors.
Description
of Business of Harbin Renhuang Pharmaceutical Co. Ltd. and Harbin Renhuang
Pharmaceutical Stock Co. Ltd.
Harbin
Renhuang Pharmaceutical Stock Co. Ltd., incorporated in 1996 in the Peoples
Republic of China, is a venture capital backed pharmaceutical company, located
in the capital of the province of Heilongjiang Province, in the northeastern
corner of China. Renhuang is mainly engaged in the fields of research,
manufacturing and distribution of Chinese medical products and
bio-pharmaceutical products in Mainland China. Our niche market is traditional
Chinese medical products and bio-pharmaceutical products, and our goal is to
become the dominant entity within a few carefully selected groups of
products.
Renhuang
is a high-tech company with its niche market in Greater China area. It
differentiates from its peers with the most advanced monoclonal antibody
technology and a few carefully selected groups of products dominant in the
market.
Renhuang
has the ability to produce more than 100 types of products. The product sales
have reached more than 50 provinces and cities in China.
In
the
beginning of 2003, Renhuang purchased 100,000 square meters (about 1 million
square feet) of land and has built “City Biotech Medicine Park" located in the
City of "A" in the Province of Heilongjiang. The project was called "Renhuang
City Bio-tech Medicine Construction Project", which has been supported by the
China government. Renhuang obtained a zero percent interest rate three-year
loan
in the amount of 30 million RMB (about US $3.7 million). The whole project
was
finished in 2004, and "City Bio-tech Medicine Park" received “Good Manufacturing
Practice” (GMP) certification on Dec. 30, 2004. In the park, Renhuang produces
enzyme engineering series products, including SOD (Super Oxide Dismutase),
Lysozyme enzyme; Shark Power health care products and some other traditional
medicine.
In
2003,
Renhuang acquired DongFangHong (“DFH”) Pharmaceutical Co., which controls
70% of all Acanthopanax wild resource (commonly known as “Siberian Ginseng”) in
the Heilongjiang Province. About 90% of all wild Acanthopanax resource in
China grows in Heilongjiang. Additionally, the acquisition came
with 73 GMP approved medicines from DHF. Due to the insufficient
resource of Acanthopanax and increased demand, Acanthopanax resource is
expected to generate substantial profit and cash flow to
Renhuang.
Products
The
company’s medical product portfolio can be divided into three different
categories:
1. Acanthopanax
medical products - 45%*
2. Shark
Power Healthcare products, and - 25%
3. Traditional
medical products. - 30%
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Chart
is based on numbers of 2005
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*
Percentage of the total revenue of 2005
Acanthopanax
Acanthopanax
(also known as Siberian Ginseng) referred to as Eleutherococcus in Soviet
sources, comes from the northernmost province of China, Heilongjiang, which
is a
frigid area adjacent to Soviet Siberia, has become one of the most popular
and
widely respected herbal tonics in the world containing chemical components
proven to promote good health in humans. The plant is common in Heilongjiang,
but does not grow in any abundance elsewhere in China.
Acanthopanax
has been used regularly as a tonic by the people of far northern China for
over
two thousand years. Because of its profound adaptogenic functions, Acanthopanax
has grown enormously in reputation, importance and popularity in the Chinese
and
Western herbal systems in the last few decades.
It
is now
routinely used by people required to engage in high stress, high
energy-demanding activities such as high altitude flying, long-distance sailing,
working in high or low temperature environments or in deep water. Acanthopanax
is used by all Russian (cosmonauts) astronauts. The use of the extract of this
herb in these endeavors has been reported to increase physical strength, sharpen
concentration, improve various parameters of mental power, increase visual
acuity, improve color vision and promote healing power.
Acanthopanax
is especially popular among athletes or physical workers who require substantial
sources of adaptive energy and endurance, such as long distance runners, rock
climbers, bicyclists, scuba divers, dancers, tennis players and by others
seeking to enhance physical and mental performance, endurance and
adaptability.
Dongfanghong
acquisition
As
a
result of its acquisition of Dongfanghong Pharmaceutical in 2003, the company
now controls around 70% of China’s natural supply of Acanthopanax.
From
this
plant, the company has developed a line of Acanthopanax-based products: the
company’s sale of these products account for 25% of the 400 million RMB (US $50
million dollars) market for Acanthopanax-based products and could reach 50%
of
the Acanthopanax-based medical product market over the next three to five years.
Acanthopanax
Revenue
During
the fiscal year of 2005, Acanthopanax medical products have generated 45% of
the
total revenue and profit of the company. Due to the company’s dominating
position of Acanthopanax wild resource, and its cutting-edge technology, the
company will, within the next 3-5 years, control more than 50% share of the
market of Acanthopanax medical products in China. It is further anticipated
that
the market for Acanthopanax products will grow with an average annual rate
of
30% and thereby becoming the dominating profit center of the company.
Shark
Power Healthcare Products
Shark
Power Healthcare products, are made from Squalene, the scientific name for
'Nose
Oil', a low density compound stored in the liver of
sharks.
These
medicines contain extracts of shark liver oil and are used to improve oxygen
level of human blood. Squalene,
when taken into the body, removes animal fat and various waste materials whilst
circulating in the blood so that it cleans blood vessels and blood. It is good
for the treatment and prevention of arteriosclerosis, improving the function
of
the kidneys and livers.
Squalene
is an extract from sharks that habitat in frolics in cool, clean deep-sea of
southern ocean waters fully derived. Squalene manufactured and processed in
Australia is known for its purity and high quality, and also found to be
extremely low in heavy metals. These products are becoming increasingly popular
in Japanese and Chinese markets, where premium quality and purity are of utmost
importance.
It
is
widely believed that the human consumption of Squalene may be of assistance
in:
· improving
the function of kidneys and livers
· keeping
skin moist with a healthier complexion
· healing
of wounds
· reducing
stress and heart disease
· maintaining
cholesterol
· arthritis
suffers
· gastritis
suffers
· maintaining
healthy eyesight
· maintaining
memory capacity
This
segment of the company’s business grew more than 30% as compared to 2004.
Through a unique production and raw materials resource, the company’s production
cost is 30% lower than its competition’s cost, which savings is partly passed on
to the consumer, which in turn results in higher volumes and increased profit
for the company.
Acanthopanax
and Shark Power Expansion
The
company will, for both the above segments, continue its expansion with increased
market activities, which will have a significant impact on the
sales.
Traditional
Medical Products
Traditional
medical products provide the company with low risk and stable cash flow. Among
them, the company produces three market-leading products, which all achieved
more than 100% growth rate in the fiscal year of 2005, and will do in 2006.
Such
products include:
· Tianma
pills (treating headaches)
· Tornado
pills (treating headaches)
· Shengmai
granulate (treating female venereal diseases)
Lysozyme
Enzyme Products
In
2007,
the company plans to launch Lysozyme Enzyme Products in the food antiseptic
area, the largest potential market for Lysozyme. The company is able to achieve
up to 80% of cost savings compared with competitive products, produced outside
of China. The company’s products from this group have proved to be 60% more
reliable with 50% lower production costs than competitive products. With a
huge
potential market, management conservatively estimates the company will achieve
annual 100% revenue growth rate in the next 5 years.
Monoclonal
Antibody Reagent Box Series Products
The
company also plans to launch Monoclonal Antibody Reagent Box series products.
More than five Monoclonal Antibody Reagent Box products from the company are
estimated to receive GMP certificates and to be launched at the end of 2006
or
at the beginning of 2007. These products are 60% more reliable than those from
its competitors. Moreover, the company is on the process of building its own
monoclonal antibody center, the necessary raw material for the products.
Therefore, the company is able to achieve 50% of cost savings compared with
most
of its competitors, who have to purchase their raw materials from third parties.
With
high
and sustained demand in China, and insufficient supply, the company believes
that the Monoclonal Antibody Reagent Box segment has a substantial upside
potential. Management conservatively estimates that the products will achieve
100% annual growth rate in sales over the next 5 years.
Sales
The
company’s sales network is very big. With more than 70 sales centers organized
under 24 districts with more than 2000 sales people, the company’s product sales
offices of Renhuang cover 50% of the Great China area and an estimated 80%
of
its geographical target area.
Research
& Development Centers
The
company owns its R&D centers, including Information Center, Cooperation
Center, Research Center, and Harbin Renhuang Marine Healthcare Medicine Center.
The company also owns and runs a Post-doctor Research Working Station, which
is
set up by the company and approved by the government, where post PhD students
conduct research.
The
R&D centers simulate real assembly lines, have advanced equipment, and
substantial and advanced examination analysis instruments. A number of well
recognized and respected pharmaceutical professors and research scientists
in
China are employed in the R&D centers. Over 50% of the employees in the
centers have an advanced degree.
Products
Acanthopanax
(Siberian Ginseng)
Overview:
Acanthopanax,
which is known in the United States as Siberian Ginseng, has been used for
centuries in China and Russia. Although a distant relative of American and
Asian
ginsengs (Panax
sp.),
with
some overlap in its uses, Acanthopanax is a distinct plant with different active
chemical components. Known for its ability to restore vigor, increase longevity,
enhance overall health, and stimulate both a healthy appetite and a good memory,
it is widely used in Russia to help the body adapt to stressful conditions
and
to enhance productivity.
In
Chinese medicine, it is valued for its beneficial effects on "qi" (Qi’s
definition: The Chinese term for vital energy or life force. It is pronounced
“chee.”.)
and its
ability to treat "yang" (Yang’s
definition: One of the two fundamental forces, Yang represents the male or
active force.)
deficiency in the spleen (Spleen’s
definition: As distinct from the Western medical concept of Spleen, this concept
from Traditional Chinese Medicine is more a way of describing a set of
interrelated parts than an anatomical organ.)
and
kidney. Like the panax ginsengs, Acanthopanax is considered to be an adaptogen,
which means it helps in stressful circumstances and returns the body to a normal
balance. For example, an adaptogen might lower blood pressure in someone who
has
high blood pressure, but raise it in another person who has low blood pressure.
The active ingredients in Acanthopanax, eleutherosides (similar to ginsenosides
in the panax species), are thought to increase stamina and to stimulate the
immune system.
Until
recently, most scientific research on Acanthopanax took place in Russia. This
research has largely supported its use to maintain health and strengthen the
system rather than to treat particular disorders. Acanthopanax may help the
body
deal with physically and mentally stressful exposures such as heat, cold,
physical exhaustion, viruses, bacteria, chemicals, extreme working conditions,
noise, and pollution. By strengthening the system, it may also help prevent
illness.
Research
on Acanthopanax has included studies on the following:
Immune
System
A
4-week
study in healthy subjects found that those who received Acanthopanax extract
had
improvements in a number of measures that reflect the functioning of the immune
system.
Mental
Performance
A
3-month
human study of Acanthopanax among middle-aged volunteers found that there was
a
significant improvement in memory and concentration as compared to a placebo.
Another
popular but unproven use of Acanthopanax is to maintain or restore mental
alertness.
Physical
Performance
Although
Acanthopanax is frequently used to enhance physical stamina and increase muscle
strength, studies have shown mixed results for these purposes.
Male
Fertility
Acanthopanax
has a long history of folkloric use for male infertility. Animal studies suggest
that Acanthopanax may be helpful in increasing reproductive capacity.
Viral
Infection
In
a
laboratory study, an extract of Acanthopanax slowed the replication of certain
viruses, including influenza A (which causes the flu) as well as human
rhinovirus and respiratory syncytial virus (both of which cause symptoms of
the
common cold). It had no effect, however, in test tubes on adenovirus (another
cause of the common cold and other respiratory infections) or herpes simplex
virus type 1 (which generally causes oral herpes lesions). But, a 6-month study
of 93 people with herpes simplex virus type 2 (which generally causes genital
herpes lesions) found that Acanthopanax reduced frequency, severity, and
duration of outbreaks.
Market
analysis on Acanthopanax in China:
Wild
Acanthopanax grows in some provinces in North and North-Eastern China,
especially in Heilongjiang Province, where 90% of all wild Acanthopanax
resources in China are located. In 1980s, the annual production level was around
10,000 tons. Due to excessive harvesting and damage, the production of
Acanthopanax has significantly decreased. At the end of 1990s, the production
of
wild Acanthopanax was around 2,000 tons and declining. In 2004, the production
decreased
to 1,000
tons.
The
resources for Acanthopanax medicine are mostly derived from wild Acanthopanax.
Due to favorable conditions and temperature in the Heilongjiang Province, where
Renhuang is located, 90% of the wild Acanthopanax suitable for medicine comes
from Heilongjiang Province. (Note: human cultivated Acanthopanax in other areas
does not reach the same drug efficacy as wild Acanthopanax). Therefore, most
of
the pharmaceutical companies producing Acanthopanax are located in the
Heilongjiang Province. Due to the limited supply of wild Acanthopanax, and
increased recognition of its medical benefits, the demand for Acanthopanax
is
higher than the supply. It is estimated that the demand for Acanthopanax
worldwide increased tenfold in
the
next
five
years. As a result, the price of raw Acanthopanax has gradually
increased.
In
2000,
the price of a kilogram of raw Acanthopanax was around 0.5 RMB (around US
$0.062), which increased to 2.5 RMB (around US $0.31) 2004. It is estimated
that
the price for Acanthopanax will continue to increase.
Due
to
its increasing popularity in United States, Japan and European countries,
exporting Acanthopanax medicine is expected to generate additional revenue
for
Renhuang in the near future.
The
Dongfanghong Acquisition:
In
2003,
Renhuang acquired Dongfanghong Pharmaceutical Co. (DFH), a previously
state-owned pharmaceutical company, located in Harbin, Heilongjiang Province,
which owns 70% of all wild Acanthopanax resources in China. In 2004, one year
after the acquisition, Renhuang increased efficiency and production capabilities
to generate US $3.75 million in revenue in a 10% market share.
In
the
fiscal year of 2005, the plant generated US $8.8 million in revenue, at a growth
rate of more than 200%. In the first six months of the fiscal year of 2006,
the
plant generated US $9.6 million in revenue, which is more than the total revenue
from the full previous year. Renhuang expects to obtain a market share of 50%
of
Acanthopanax products in China within 3-5 years.
Competitive
Advantages of Renhuang:
In
addition to the resource advantage, Renhuang has the following competitive
edges
related to Acanthopanax:
Farm
Production
Wild
Acanthopanax resources might not be able to fulfill the rapid growing demand.
Therefore, Renhuang has started to cultivate Acanthopanax manually with 60
million square feet cultivation area. Cultivated Acanthopanax from Renhuang
achieves in all material respects
the
same effects as wild, mainly due to Renhuang’s use of wild Acanthopanax seeds
and other production methods as well as its extraordinarily favorable climate
conditions in Heilongjiang Province.
Lower
Production Costs
Renhuang
has successfully developed new withdrawing technology during the process of
Acanthopanax that lowers the production cost by 30% compared to its competitors.
Regulatory bodies have granted the right to Renhuang to set the standards for
new Acanthopanax medicine, which will enhance the industry quality standard.
There are a number of smaller unregulated companies in the industry that, due
to
the increased regulation and standards, we believe will not be able to comply
with the new requirements. As a consequence, Renhuang will likely see its market
share increase.
Future
development plan for Acanthopanax products in Renhuang
With
its
resource
dominating position, Renhuang plans to capitalize on its increased brand
recognition. By a controlled expansion plan, Renhuang plans to expand its market
shares in local provinces and eventually in all of China. Renhuang plans to
be
identified as the leading manufacturer of Acanthopanax products.
Through
increased market awareness, it is further anticipated that Renhuang's unique
edge in Acanthopanax will be recognized outside of China. In doing so, Renhuang
anticipates entering into strategic foreign partnership, which Renhuang expects
will result in increased international sale of Acanthopanax medicine in the
near
future.
Shark
Power Healthcare Products
Shark
Power Healthcare products are made from squalene, an
extract of shark liver oil from the Aizame shark whose natural Pacific habitat
is in unpolluted ocean depths of 3,000 feet in 35 degree waters.
The
R&D center of Renhuang has developed a pure natural marine biology medicine
-- Shark Power Healthcare Series. It is the only medicine in China approved
for
use in treating secondary health problems due to oxygen deficit. It was awarded
the "special golden prize at Ninth Chinese Patent Technology New Product
Exhibition", and "Golden metal at London International Patent Technology
Exhibition".
Clinical
research has proven that this medicine can improve the carrying and transporting
oxygen ability of blood, enhance the oxygen absorption and utilization factor
of
the organism organs, dredge the blood vessels, increase the speed of blood's
oxygen transportation, and specially supply oxygen to heart, brain, lung and
liver. It is able to effectively cure all kinds of symptoms caused by secondary
health problem like dizzy, insomnia and forgetfulness, low energy and immunity,
back pain, easy to get tired, caught cold. The effect is stable and
safe.
Competitive
Advantages of Renhuang:
Renhuang’s
Shark Power Healthcare Products have the following major advantages compared
with its competition.
State
Drug Administration (SDA) Approval
Renhuang’s
Shark Power Healthcare Products has received Good Manufacturing Practice (“GMP”)
certificates from the State Drug Administration (“SDA”). As most healthcare
products produced in China have not obtained GMP certificates, our Shark Power
Healthcare Products have a very strong competitive advantage. Our
Shark
Power Products are also distributed through hospital channels, which is not
the
case for most of other health care products.
Lower
production Costs
The
retail price of Shark Power Healthcare products has historically been lower
than
the price of competitors’ products, because Renhuang’s raw material costs are
lower. This means Renhuang can pass the savings on to the customers. Renhuang
purchases raw materials directly from Australia at prices which are 20% lower
than those from coastal areas in China, where most competitors purchase their
materials.
In
2005,
the revenue from Shark Power Healthcare products has accounted for approximately
25% of the total revenue of Renhuang, which represented a 20% of market share
for equivalent products. With increased promotion and improved marketing
strategy, Renhuang believes that it can increase its market share to over 50%
in
the next 3 to 5 years.
Traditional
medicine
In
addition to Acanthopanax medical and Shark Power Healthcare products, Renhuang
produces traditional medicine products, such as medicine for cold, flu,
headache, etc. Revenue from traditional medical products accounted for 30%
of
the total revenue of Renhuang in the fiscal year of 2005, and 36% in the first
half of fiscal year of 2006. Renhuang owns 40 medical products with GMP
certificates, of which some "Star" products reach top sales among the same
products and most of the others generate a stable stream of revenue.
Three
“Star” products
"Tianma
pills" and "Tornado pills" are the "Star" Chinese traditional medicines for
treating headache in China. Although western headaches medicines have larger
market share in China, they have also been showing to have larger side effects.
Research reveals that most other Chinese traditional medicines have fewer side
effects, but cannot reach the same curative effects as western medicines.
Renhuang's “Tianma” and “Tornado” are not only superior with strong visible
curative effects, but with little or no side effects.
In
the
fiscal year of 2005, with more than 100% growth rate from the fiscal year of
2004, revenue from sale of “Tianma pills” reached more than US $2.1 million, and
that of “Tornado pills” reached US $2 million; and in the first half of fiscal
year of 2006, revenue from sale of “Tianma pills” reached more than US $2.45
million, and that of “Tornado pills” reached US $2.07 million.
Another
"Star" medicine is "Shengmai" granulate, with sales of US $1.04 million dollars
in 2004 and US $1.16 million dollars in 2005, which was higher than any of
its
competitors for the same period; in the first half of fiscal year of 2006,
the
revenue has reached US $1.65 million.
Renhuang
produces several additional traditional medical products that each accounts
for
lesser amounts. These products, through brand recognition, generate stable
and
risk free revenue for the company. When Renhuang expands its product offerings,
it is anticipated that these additional products will be replaced by higher
margin products.
Products
in the developing stage
Lysozyme
Enzyme Products
Lysozyme
is an enzyme occurring naturally in egg white, human tears, saliva, and other
body fluids, capable of destroying the cell walls of certain bacteria and
thereby acting as a mild antiseptic. Lysozyme protects us from the ever-present
danger of bacterial infection. It is a small enzyme that attacks the protective
cell walls of bacteria. Bacteria build a tough skin of carbohydrate chains,
interlocked by short peptide strands, that braces their delicate membrane
against the cell's high osmotic pressure. Lysozyme breaks these carbohydrate
chains, destroying the structural integrity of the cell wall. The bacteria
then
burst under their own internal pressure.
Alexander
Fleming discovered lysozyme during a deliberate search for medical antibiotics.
Over a period of years, he added everything that he could think of to bacterial
cultures, looking for anything that would slow their growth. He discovered
lysozyme by chance. One day, when he had a cold, he added a drop of mucus to
the
culture and, much to his surprise, it killed the bacteria. He had discovered
one
of our own natural defenses against infection. Unfortunately, lysozyme is a
large molecule that is not particularly useful as a drug. It can be applied
topically, but cannot rid the entire body of disease, because it is too large
to
travel between cells. Fortunately, Fleming continued his search, finding a
true
antibiotic drug five years later: penicillin.
Hen
egg
white has a high content of lysozyme which protects the integrity of the
delicate yolk, thus making egg white (albumen), the preferred raw material
for
industrial production of the Lysozyme enzyme.
Currently,
there is no company in China with the ability to produce Lysozyme on a large
scale, despite the fact that it has a big potential market. Lysozyme can be
used
in food antiseptic, which will alter sterilization effects with 40% compared
with chemistry antiseptic at a cost of 80% lower than similar products produced
outside of China. The large-scale production of Lysozyme products will speed
the
development of cultivation industry.
The
major
uses of Lysozyme products are as follows:
1)
Lysozyme compound biology antiseptic (food packing coating, food bag,
etc)
2)
Lysozyme drug preparation (troche, oral liquid etc)
3)
Lysozyme Biotech Pesticide
4)
Lysozyme home-using disinfect series products (paper tower, detergent,
etc)
5)
Lysozyme biotech Veterinary medicine
6)
Lysozyme biotech preparation
Monoclonal
Antibody Reagent Box series products
According
to statistics, the total sales volume of China's biotechnology products was
about 20 billion RMB (US $2.42 billion) in 2000, among which the sales volume
of
medicine and health-care products including medicine of gene products, vaccines,
diagnosis reagents, some antibiotics, amino acids for medical use, vitamins,
blood products, bio-chemical medicines and some functional food was 9 billion
RMB (US $1.09 billion), accounting for 45 percent of the total sales volume.
The
sales volume of diagnosis reagent products was 3 billion RMB (US $0.36 billion),
one third of above volume.
Renhuang
believes that the Monoclonal Antibody Reagent Box segment has a huge upside
potential. Chinese companies in the Monoclonal Antibody Reagent Box industry
are
small to mid sized privately-owned enterprises without any government support.
The production scale in China is still very small. The estimated production
ability is around 185 million dollars in 2004, which is a niche market when
compared with other developed countries. Due to the huge population and
potential market in China, this area is already being pursued by some
pharmaceutical companies.
Renhuang
has recently hired a competent team of research scientists, who are graduates
of
top universities in the United States and therefore trained on the most advanced
technology in this field. Troponin T Diagnostic Kit and some other products
from
this group have proved to be 60% more effective at 50% less production cost
when
compared with other products.
Of
an
estimated ten new products under development, Renhuang plans to launch all
of
them during 2007 and 2008. Renhuang conservatively estimates that Monoclonal
Antibody Reagent Box series will achieve a growth rate of 100% annually in
the
next five years.
Market
Analysis Summary
Traditionally,
the pharmaceutical market is defined based on the different medical usage
prescription drug market and non-prescription medicine market
(OTC).
The
annual revenue of the medicine market in China is estimated to be 500 billion
RMB (US$ 62.5 billion), of which 440 billion RMB (88 %) is derived from
the
prescription medicine market and the balance, 60 billion RMB (around US$ 7.5
billion) relates
to the non-prescription medicine market which constitutes 12% of
the
whole medical sales market.
There
are
7,600 pharmaceutical companies in China, of which only 2,700 have received
GMP
Certificates. Renhuang is one of them. Renhuang’s annual
production capacity is currently 1.5 billion RMB (almost US $200 million),
which
equals to a market share of 3%. As Renhuang approaches full capacity, the
company anticipates increased production volume by acquisitions and / or added
additional production facilities.
The
company’s first and primary target market is China, where a growing middle class
with demand for improved healthcare has created a sustainable need for quality
healthcare products. Our secondary market within the long-term future is the
United States and the rest of the world.
Renhuang
focuses on three market segments:
1.Over
The Counter - OTC market.
2.Other
drug stores located across the nation.
3.Hospitals,
clinics and other medical institutions.
Industry
Analysis
World
Trade Organization
Due
in
part to the relaxation of trade barriers and China’s access to the World Trade
Organization (“WTO”) in January 2002, Renhuang believes that China will become
one of the world's largest pharmaceutical markets by the middle of the
twenty-first century. As a result, the Chinese market presents a significant
opportunity for both domestic and foreign drug manufacturers.
The
State Drug Administration (“SDA”)
The
State
Drug Administration ("SDA") of China has set up a classification administrative
system in 1999 for prescription and OTC drugs. Since then, the SDA has issued
a
series of guidelines on the interpretation of the new classification system
for
labeling, usage instructions and packaging of OTC products. The SDA currently
requires that pharmaceutical manufacturers clearly label drugs for OTC sales
and
distinguish them from those to be sold in hospitals as ethical drugs. Renhuang
has instituted this policy as required by the SDA.
The
Current Chinese Pharmaceutical Market
The
introduction of the Chinese pharmaceutical industry
Most
of
the recognized brands in China are manufactured by multi-national drug companies
with higher market share than domestic brands. Based on statistics, there are
a
total of 2,700 drug companies approved by GMP producing a variety of traditional
and modern Chinese medical products. The total productivity is about 370
thousand tons of 8000 different types of finished products. Furthermore, Chinese
drug companies produce 300 different types biotech products including vaccine,
toxoid, antiserum, blood products, diagnosing reagent for internal and external
use. Chinese drug companies are producing more than 11,000 types of medical
instruments, including X-ray fault scanning imagery equipments and magnetic
resonance equipments.
--Market
Shares of various pharmaceutical products
The
current problems in the Chinese pharmaceutical industry
| · |
Most
drug companies in China produce low quantities of a large number
of
products. Therefore, many big companies are producing similar drugs.
Many
of those products are based on low technology and obsolete production
methods. It is common that companies have minimal R&D departments, and
therefore, do not bring new drugs into the market. As a result, many
of
these companies with inefficient management have lower productivity.
|
| · |
Many
drug companies do not qualify to reach approval by GMP, which prevent
those companies from reaching the national and international drug
markets.
|
| · |
Patents
and other intellectual property are not well protected well in
China.
|
| · |
Limited
access to financial markets makes it difficult to obtain financing
for
drug companies.
|
| · |
The
competition in drug industry has growth space.
|
The
development trend in the Chinese drug market
| · |
The
pharmaceutical market will continue to grow at a stable
pace.
|
| · |
The
net growth of the aging population supports the demand for drug
consumption.
|
| · |
The
rising living standard improves the demand for drugs. Average drug
consumption per capita in China is 50% lower than other mid-developed
countries. Therefore, following the development of rural areas, it
is
anticipated that the Chinese drug market offers great opportunities.
|
| · |
Habitual
changes inside the drug consuming
population.
|
| · |
More
reasonable drug consuming habits.
|
| · |
Non-prescription
drugs will enter the fast development
phase.
|
| · |
Drug
prices on the market will be more
rational.
|
| · |
There
will be fewer drug companies, but with large
capacity.
|
| · |
More
advanced circulation of medical
products.
|
| · |
More
competition in China’s drug market
|
The
current state of the biotech industry in China
Introduction
of biotech industry in China
The
biotech industry in China has undergone fundamental improvements. The biotech
industry started in 1980s, and the sales in 2000 reached US $2.5 billion with
the average growth rate of 33.58% and have since then developed dramatically.
In
1996, the sales of gene engineering drugs and vaccines reached US $26 million,
which increased to US $90 million in 1998 and reached US $270 million in 2000.
The average growth rate has been 79.42%.
Biotech
R&D has achieved big successes. In order to accelerate the development of
the biotech industry, which is one of the most supported industries, the
government has invested in biotech R&D. Biotech engineering and bio-drugs
are making great progress and a series of key technologies has been built.
The
gene transfer technology between zoology and botany is mature. The hybrid rice
has been promoted in large scale, and anti-gene cotton and tomato have become
a
reality. Tens of gene drugs are fast approaching the area of practical use.
Therefore, the Chinese biotech R&D industry is rapidly becoming more mature
and competitive.
Some
common problems in the Chinese biotech industry
Compared
with the development of the international biotech industry, the domestic Chinese
industry is still immature.
· Insufficient
self-owned Intellectual property rights and limited competing
ability.
· In
the
United States, it is common that founders of bio-tech companies control more
than 50% of equity and technology during the first and second stage of financing
and the Venture Capital firms control less. With the expansion, including
additional financing, the initial founders start to lose the control position.
In China, intangible assets usually represent less than 35% of the total value.
· Essential
key technologies and equipments such as important laboratories equipments,
instruments and dosage etc are still lagging in biotech industry and most users
rely on import. Companies who have the ability to produce those special
equipments and instruments have earned international market recognition.
Renhuang owns substantial intangible assets.
Insufficient
Capital investment and very limited R&D capability
· Biotech
industry is a high-tech investment in a high-risk and a high-reward industry.
Therefore, insufficient capital is the most important problem which needs to
be
solved. At present, there are only six ways to provide capital to bio-tech
companies: (i) founders' own money; (ii) public company investment (iii) third
party investment; (iv) government venture capital; (v) mid to small-size company
security fund from state science administration; and (vi) mid to small-size
technology venture capital. The United States, which has the most advanced
bio-tech development and bio-tech companies provides more financing
opportunities to this industry. Despite this problem in the industry Renhuang
successfully obtain capital and build a new state of the art R&D facility.
Insufficient
educated human resources cause a gap between research and practical
areas.
· Due
to
the long training period of R&D personnel staffs, high quality research
scientists stay outside of China. Therefore, there are not sufficient highly
qualified research scientists available, especially those in combination of
research and management skills. Renhuang has United States educated research
scientists.
Competitors
Acanthopanax
product series
· Wusuli
River Pharmacy Group
Main
Acanthopanax products are fluid acupuncture; secondary one is Acanthopanax
pills, with 15 million RMB (about US $7.8 million) revenue from
Acanthopanax.
· Heilongjiang
Wandashan Pharmacy
Main
Acanthopanax products are fluid acupuncture, powder acupuncture and Acanthopanax
drinks, with 50 million RMB (about US $6.2 million) revenue from fluid
acupuncture, and 30 million RMB (about US $3.8 million) revenue from powder
acupuncture, and both of which have been built their brand names.
· Heilongjiang
Zhenbaodao Pharmacy
Main
Acanthopanax products are fluid acupuncture and Acanthopanax drop pill (waiting
for its GMP approval), with 12 million RMB (about US $1.5 million) revenue
from
Acanthopanax products.
· Heilongjiang
Tielihongye Pharmacy
Main
Acanthopanax products are Acanthopanax pills, and Acanthopanax syrup, with
6
million RMB (about US $750 thousand) revenue from Acanthopanax
products
Monoclonal
Antibody Reagent Box series products
· Beijing
BGI-GBI Bio-tech Co., Ltd
· Shanghai
Shisheng Cell Bio-tech Co., Ltd
· Beijing
Wantai Biological Pharmacy Enterprise Co., Ltd.
At
present, none of the competitors have large-scale production ability. Speed
Monoclonal Antibody Reagent Box for Muscle Calcium Protein Myocardial Infarction
of Renhuang is very competitive in the market because of its advance technology.
The core technology is from Chinese research scientists educated in United
States, and Renhuang will build antigen antibody store base with self-owned
intellectual property rights, therefore the product will become more reliable,
and the price will be 50% lower than that from its competitors with 60%
improvement in effects. This product is easy to use.
Lysozyme
Products
There
are
few companies with the ability to produce in large scale. It has big potential
market. Lysozyme can be used in food antiseptic, which will 40% higher
sterilization effects than chemistry antiseptic with 80% lower costs than same
kind products produced outside of China. The large-scale production of Lysozyme
products will speed the development of cultivation industry.
Shark
Power Healthcare Series
· Sirio
Pharma Co., LTD
· Shanghai
Jonya Marine Biological Engineering Co., LTD
· Guangzhou
Xingqun Pharmaceutical Co., LTD
Renhuang’s
raw materials for Shark Power Healthcare products are directly imported from
Australia at a price which is 20% lower than that what the competitors pay,
whose raw materials are from coastal areas in China.
Competitive
Edge
General
Renhuang
has a top level and stable management team with a proven track record that
generated around
100%
annual growth rate on both sales and profits over the past years.
Acanthopanax
Through
the acquisition of Dongfanghong during 2003, Renhuang controls 70% of the wild
resources of Acanthopanax, which product group has increased to account for
45%
of Renhuang’s revenue in
2005.
The demand for products derived from Acanthopanax is at all time high.
Renhuang’s current market share is 10% and its goal is to increase the market
share to 50% within 3-5 years. Of the total wild resource of Acanthopanax in
China, 94% is located in the Heilongjiang Province, most of which are controlled
by Dongfanghong in the Wanda Mountain. Renhuang develops Acanthopanax products
in its plant and benefits from its relative dominant position through its
resource control. Renhuang has reduced the cost of absorbing and producing
Acanthopanax with 50%. Current comparisons show that Renhuang's cost of
production is 30% lower than the competition.
Other
Advantages over the competition
In
addition to advantages related specifically to Acanthopanax, Renhuang’s business
possesses the following advantages:
· The
ability to upgrade our products by using our follow-up research projects enables
Renhuang to continue
its product developments.
· Renhuang
has developed a unique independent innovation system, which will provide a
powerful support
to the R&D of new products.
· Renhuang
has excellent relations with provincial, city and regional our government and
have been awarded
outstanding levels of status.
· Renhuang
owns a state of the art research and production facility.
· Renhuang’s
credit rating is AAA by the major banks in China
· Renhuang
has United States educated research scientists.
· Through
efficiency and state of the art production facilities, its production costs,
is
as an average, 30- 50%
lower
then competition.
· Renhuang
owns more then 70 regional sales offices, covering 50% of Mainland China staffed
with a sales
force of more then 2,000.
· Renhuang
has a top-level management team, which will lead the company into higher levels
of revenue
and profitability.
Research
& Development
Renhuang
has constructed a strong independent innovation system, which will provide
a
powerful support to the R&D of new products as follows:
Through
Renhuang’s research control and relative dominant position related to the
Acanthopanax products, Renhuang is on its verge to position Acanthopanax as
an
independent segment in the Chinese drug industry. In order to achieve this
goal,
Renhuang will build an Acanthopanax base including six parts: (1) Wild
Acanthopanax protection; (2) research; (3) seeding; (4) cultivating; (5)
processing; and (6) exporting. Pursuant to plan, this will become the largest
Good Manufacturing Practice (“GMP”) approved Acanthopanax base in
China.
Renhuang
plans to continually upgrade its products by using its follow-up research
project. This continued development will be focusing on the following three
areas; (1) The development of biotech products. The focus will be for practical
applications of Lysozyme and Hyperoxide mutase, and the research and development
of gene engineering drugs just to mention a few; (2) The research and
development of Chinese traditional medicine products, including but not limited
to additional use of Acanthopanax and Shizandra Berry; and (3) Research and
development of Western drugs for generic production, where Renhuang is able
to
complete the generation replacement of traditional drugs shortly.
Information
center
Renhuang
utilizes the marketing network system and direction oriented information system
to provide fixed period and in-fixed period market feedback information, market
demand information, evaluation of new products inside and outside of China,
domestic and foreign authority research topic and product technology feedback
information.
Teamwork
Center
Renhuang
has contracted and hired specialists comprising a group of reputable professors
and research scientists from the marine biotech drug segment, the natural
biotech drug segment and the gene engineering area to evaluate and support
research topics and results. Renhuang has also formed long-term strategic
partnerships and other research and work related relationships with some of
the
most prominent research organizations with the purpose of researching and
developing new products together.
Currently,
Renhuang have partnerships or are in other way closely related to the National
Navy Pharmaceutical Research Center located in Shanghai, China bio-tech drug
research center (Shanghai Research Base), Second Military Medicine University
in
Shanghai, and Beijing Ellionbio Research Center, Beijing to mention a few.
Furthermore, Renhuang has research topic cooperation with Russia Academic School
Far-east division and Australia Scientific Research Center.
Research
Center and Mid-testing Base
Formed
by
different labs, these research and mid-testing facilities are simulating the
assembly lines.
Renhuang
Bio-tech drugs and healthcare products research center
This
facility is mainly focused R&D on bio-tech drugs and healthcare products,
and medicine intermediates.
Post-doc
Research Workstation
The
major
task is to do R&D on Acanthopanax and other North-China medical products and
to develop medicine qualified to international standard. This unit also performs
R&D on gene engineering drugs, like tumor Chalone.
Official
accomplishments
| · |
Renhuang
has a well-established and excellent working relationship with the
government on various levels. For example, Renhuang has obtained
support
from different level governments including provincial, city and regional
government, which enabled Renhuang’s rapid development. Renhuang
undertakes various research projects on a national level, where the
government has appraised Renhuang’s
accomplishments.
|
| · |
Government
has appraised Renhuang as “The Best Quality and Credit Company”, “The
Company with The Best Social Image”, and “The Most Trustful Consumer
Products Company”.
|
| · | The bank credit rating of Renhuang is AAA. |
| · | Lysozyme and Hyperoxide mutase projects from Renhuang have been included into the most important nation level project in State Scientific Administration. |
| · | Biotech drug garden has been included into the national transforming projects of North Eastern China heavy industry base, and in the projects which can get zero interests loan from government. |
| · | Renhuang has been appraised by State Scientific Administration as national high-tech company, which enables it to obtain tax-free benefits. |
Marketing
Strategy
Renhuang
addresses the market through four business segments: OTC Market, Direct Sales,
Wholesale and Raw Material. Renhuang is a highly technology oriented niche
company that has developed name recognition for its quality products. Its
products are being sold by more than 2,000 sales people divided into 70 sales
offices in 24 regions across Mainland China. Furthermore, Renhuang has strong
alliances with distributors who have powerful channel relationships but lack
manufacturing or product development capabilities.
Renhuang
is using a four-pronged approach to achieve its market
goals
First,
the
goal is to build brand names for products, which is well under way. In non-urban
areas, 90% of the Chinese population lives is in the countryside with lower
income. Due to a variety of strategy, adjusted to the lower income consumer,
Renhuang's traditional drugs will have a relatively high level of penetration
in
those areas. Distribution to end-consumers is obtained through Renhuang’s own
sales personnel without middlemen cost.
Second,
Renhuang is using key cities like Beijing and Shanghai as geographical sales
centers with the purpose to establish its brands with the established
distribution centers that distribute to major drug chain stores in the urban
and
suburban areas around the city. Renhuang approach is to use selected cities
as
sample target, supported by initial promotion and investments enabling the
products entry into the well-known drug chain stores. In addition, Renhuang
is
exploring multiple sales channels.
Third,
Renhuang focuses on top-level hospitals in the country, which has the highest
quality standard and stringent approval procedures for new products and brands.
Traditionally, hospitals in China are divided into different levels due to
different functions. Junior level hospital only take care small areas, mid-level
one will take care several areas combination, and senior level one will handle
different regions. By focusing on the top tier of the hospital industry,
Renhuang’s strategy is to work from top down and gain access to mid and low
level hospitals when it brands and products have been established in the higher
ranks.
Fourth,
Renhuang use its exclusive technology and absolute resource control
(Acanthopanax) to promote itself in the domestic media, including TV, Radio,
newspaper, magazine and trade publications. At a more mature stage of Renhuang’s
domestic coverage, it is anticipated that Renhuang will have a substantial
impact of Lysozyme and Hyperoxide mutase, through innovations and core
technology, developed and owned by Renhuang have been appraised by established
specialists as the primary technology and innovations in the world related
thereto. The biggest advantages are cost and quality when compared to
traditional products.
Sales
Strategy
Renhuang’s
sales network is very big. With more than 70 sales centers organized under
24
districts and more than 2,000 sales people, its product sales offices of
Renhuang covers 50% of the greater China and an estimated 80% of its
geographical target area. Due to less populated and rural areas in the western
part of China, Renhuang has chosen to concentrate its main efforts on the
eastern China.
Sales
Team
Renhuang’s
sales team uses quantity targets to realize the management of sales of products,
from where the sales team is rewarded. Each sales office is organized with
full
time managerial and financial functions organized under a general representative
officer. The vast majority of the regular sales force is commission based.
The
products from Renhuang will reach drug stores, hospitals and end consumer across
China through the sales network.
| n |
The
Location of Renhuang’s Sales Offices in China.
|
Conjunction
with the general sales managers, provincial managers and regional managers,
the
company sets the sales target at the beginning of every year. Based on monthly
sales reports and general control mechanisms, budget is thereafter revised
as
needed.
Sales
channels related to leading products
|
Marketing
Model
|
Share
of revenues
|
Products
selling
|
Payment
Time Frame
|
|||
|
Raw
Materials
|
7%
of total revenue
|
Acanthopanax
raw materials
|
Payment
schedule, between 1 - 5 months.
|
|||
|
OTC
|
48%
of total revenue
|
Acanthopanax
final products,
“Tianmai
Pills” and “Shengmai” granulate.
|
Payment
for first shipment in conjunction with second delivery, 1 - 3 months.
|
|||
|
Direct
Selling method
|
30%
of total revenue
|
Shark
Power health care products,
Acanthopanax
final products.
|
Cash
Payment
|
|||
|
Whole
Sale products
|
15%
of total revenue
|
Acanthopanax
final products and “Tornodo Pills”.
|
Payment
similar to consignment, calculated and paid monthly when products
sold.
|
Corporate
Information
Employees
The
Company employs approximately 371 full time individuals, which include 36 people
in managerial positions, 22 individuals as sales managers at the company’s
various sales offices across China, 52 people in R&D department, and 261
workers. The company also has approximately 2,217 commission based sales staff
at the various sales offices that work as independent contractors.
Properties
According
to Chinese legislation, the government owns all the land in China. The
government grants Land Use Rights to individuals and legal entities, which
holders of Land Use Rights have the right to build and erect
constructions.
Renhuang
owns the following constructions on Land Use Rights in China:
1. Headquarters
of Renhuang.
Location:
No. 281, Peach Avenue, Daowai District, Harbin, Heilongjiang Province,
China.
Size
of
Property: 21,000 Square feet
2. Biotech
Medicine Park of “A” City
Location:
No. 16, Renhuang Road, A City, Heilongjiang Province, China
Size
of
Property: 150,000 square feet
Size
of
Land: 1 million square feet
3. Dongfanghong
Branch
Location:
No. 2, Red Flag Road, Dongfanghong Town, Heilongjiang Province,
China
Size
of
Property: 100,000 square feet
Size
of
Land: 206,630 square feet
All
properties are being used as offices and production.
On
May
1st,
2006,
at which time Harbin Renhuang Pharmaceutical Co. Ltd. (Renhuang China) commenced
its operations, Renhuang China entered into lease agreements with Harbin
Renhuang Pharmaceutical Stock Co. regarding the above properties on below market
price and favorable conditions to the Company.
Government
Regulation
The
Pharmaceutical industry is a strong emerging area with the highest growth rate
in output value. However, all government regulation is still on the improving
stage. The Ministry of Public Health used to oversee drug approval and
registration, but the SFDA (which is modeled from the US Food and Drug
Administration) was specially set up to streamline this process. However, it
has
a relatively inexperienced staff and got off to a rather low start, and the
resulting regulatory gap might cause potential problems.
Renhuang
successfully passed all GMP (Good Manufacturing Practice) certificates
investigation by SFDA, and got the approval. In September 2005, Renhuang got
the
investigation for exporting products certificates by Entry-Exit Inspection
and
Quarantine Administration, and received the self-reporting inspection
registration certificates.
Sept
30th,
2005,
Renhuang Pharmaceutical Stock Co. obtained 30 million RMB (US $3.75 million)
zero-interest rate loan from state government that was mainly used for
construction purposes of the buildings leased by Renhuang
China.
Renhuang
has also been titled to “high-tech” company in Heilongjiang Province, so the
company will enjoy three-year zero-tax support from Provincial government.
Legal
Proceedings
Neither,
the Company nor its subsidiaries are a party to any pending or potential legal
proceedings.
Cautionary
Note Regarding Forward-Looking Statements
This
report contains certain statements that are “forward-looking statements,”
including, among other things, discussions of our business strategies, future
operations and capital resources. Words such as, but not limited to, “may,”
“likely,” ”anticipate,” “expect and “believes” indicate forward-looking
statements.
Forward-looking
statements are included in the section of this report entitled “Description of
Business”. Although we believe that the expectations reflected in such
forward-looking statements are generally reasonable, we cannot assure you that
such expectations will ultimately prove to he correct. Generally, these
statements relate to our business plans and strategies, projected or anticipated
benefits or other consequences of market conditions and opportunities, business
plans or strategies, projections involving anticipated sales and revenues,
expenses, projected future earnings and other aspects of operational results.
All phases of our operations are subject to a number of uncertainties, risks
and
other influences, most of which are outside our control, and any one or
combination of which could materially and adversely affect the results of our
operations, and also, could affect whether any such forward-looking statements
contained herein ultimately prove to be accurate.
RISK
FACTORS
We
will need to raise additional capital to expand our
business
For
the
foreseeable future, we will fund all of our operations and capital expenditures
from cash on hand and potential future internally generated cash flow.
Currently, we believe we have cash on hand to fund our operations and planned
expansions. However, changes may occur that would consume our available capital
before that time, including changes in and progress of our development
activities, acquisitions of additional candidates and changes in regulation.
We
will then need to seek additional sources of financing, which may not be
available on favorable terms, if at all. If we do not succeed in raising
additional funds on acceptable terms, we may be unable to complete our expansion
and future growth. In addition, we could be forced to discontinue product
development, reduce or forego sales and marketing efforts and forego attractive
business opportunities. Any additional sources of financing will likely involve
the issuance of our equity securities, which will have a dilutive effect on
our
stockholders.
Our
profitability is limited
We
will
need to generate significant revenues in order to achieve and maintain
profitability. We may not be able to generate these revenues or achieve
profitability in the future. Our failure to achieve or maintain profitability
could negatively impact the value of our securities.
We
have a limited operating history as a publicly company, upon which to base
an
investment decision
Prior
to
being a publicly listed company in the United States, we were a privately held
corporation in the Peoples Republic of China and we have not demonstrated an
ability to perform the functions necessary for the successful listing. The
successful listing will require us to perform a variety of functions, including
but not limited to the following:
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·
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continuing
to efficiently manage our business domestically and in any new
markets;
|
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·
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disclose
and report information in a timely manner to the Securities and Exchange
Commission and to the general public about our company and our business;
and
|
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·
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communicate
with our shareholders.
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We
need to obtain and maintain the necessary Chinese or worldwide regulatory
approvals to commercialize our products
To
commercialize some
of
our current and future products, we require approvals from SFDA and any
FDA-equivalent regulatory authorities in foreign jurisdictions to commercialize
our product candidate in those jurisdictions. Currently, we do not sell our
products to the United States, but if we in the future plan to commercialize
our
products to the U.S. we will need FDA approval for some of our products. To
apply for approval, we must submit to the FDA a New Drug Application, or NDA,
demonstrating that the product candidate is safe for humans and effective for
its intended use. This demonstration requires significant research and animal
tests, which are referred to as pre-clinical studies, as well as human tests,
which are referred to as clinical trials. Satisfaction of the FDA’s regulatory
requirements typically takes many years, depends upon the type, complexity
and
novelty of the product candidate and requires substantial resources for
research, development and testing. We cannot predict whether our research and
clinical approaches will result in drugs that the FDA or FDA-equivalent in
other
jurisdictions, consider safe for humans and effective for indicated uses. The
FDA has substantial discretion in the drug approval process and may require
us
to conduct additional pre-clinical and clinical testing or to perform
post-marketing studies. The approval process may also be delayed by changes
in
government regulation, future legislation or administrative action or changes
in
FDA policy that occur prior to or during our regulatory review. Delays in
obtaining regulatory approvals may:
|
·
|
delay
commercialization of, and our ability to derive product revenues
from, our
product candidate;
|
|
·
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impose
costly procedures on us; and
|
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·
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diminish
any competitive advantages that we may otherwise
enjoy.
|
In
foreign jurisdictions, we must receive approval from the appropriate regulatory
authorities before we can commercialize any drugs. Foreign regulatory approval
processes generally include all of the risks associated with the FDA approval
procedures described above.
We
cannot
guarantee that we will maintain and receive the approvals necessary to
commercialize our current and future products for sale in China, United States
or elsewhere.
Clinical
trials are very expensive, time-consuming and difficult to design and
implement.
Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process is also time consuming. We estimate that clinical trials of our
product candidate will take at least several years to complete. Furthermore,
failure can occur at any stage of the trials, and we could encounter problems
that cause us to abandon or repeat clinical trials. The commencement and
completion of clinical trials may be delayed by several factors,
including:
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·
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unforeseen
safety issues;
|
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·
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determination
of dosing issues;
|
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·
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lack
of effectiveness during clinical
trials;
|
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·
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slower
than expected rates of patient
recruitment;
|
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·
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inability
to monitor patients adequately during or after treatment;
and
|
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·
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inability
or unwillingness of medical investigators to follow our clinical
protocols.
|
In
addition, we, SFDA (State FDA), FDA or FDA-equivalent in foreign jurisdictions,
may suspend our clinical trials at any time if it appears that we are exposing
participants to unacceptable health risks or if the regulatory bodies find
deficiencies in our Investigational New Drug, or IND, submissions or the conduct
of these trials. Therefore, we cannot predict with any certainty the schedule
for future clinical trials.
The
results of our clinical trials may not support our product candidate
claims
Even
if
our clinical trials are completed as planned, we cannot be certain that their
results will support our product candidate claims. Success in pre-clinical
testing and early clinical trials does not ensure that later clinical trials
will be successful, and we cannot be sure that the results of later clinical
trials will replicate the results of prior clinical trials and pre-clinical
testing. The clinical trial process may fail to demonstrate that our product
candidates are safe for humans and effective for indicated uses. This failure
would cause us to abandon a product candidate and may delay development of
other
product candidates.
Physicians,
patients and other end consumer may abandon existing or chose not to accept
and
use our new drugs
Physicians
and patients may not accept and use our products. Acceptance and use of our
product will depend upon a number of factors including:
|
·
|
perceptions
by members of the health care community, including physicians, about
the
safety and effectiveness of our
products;
|
|
·
|
cost-effectiveness
of our product relative to competing products;
and
|
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·
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effectiveness
of marketing and distribution efforts by us and our licensees and
distributors, if any.
|
Because
we expect sales of our current and future products to generate substantially
all
of our product revenues for the foreseeable future, the failure to find market
acceptance would harm our business and could require us to seek additional
financing.
Our
drug-development program depends upon third-party research scientists who are
out of our control
We
depend
upon independent investigators and collaborators, such as universities and
medical institutions, to conduct our pre-clinical and clinical trials under
agreements with us. These collaborators are not our employees and we cannot
control the amount or timing of resources that they devote to our programs.
These investigators may not assign as great a priority to our programs or pursue
them as diligently as we would if we were undertaking such programs ourselves.
If outside collaborators fail to devote sufficient time and resources to our
drug-development programs, or if their performance is substandard, the approval
of our applications, if any, and our introduction of new drugs, if any, will
be
delayed. These collaborators may also have relationships with other commercial
entities, some of whom may compete with us. If our collaborators assist our
competitors at our expense, our competitive position would be
harmed.
We
need to increase our selling, marketing and distributing
network
We
need
significant capital expenditures, time and management resources to market our
products and to establish and develop an in-house marketing and sales force
with
technical expertise. There can be no assurance that we will be able to
establish, maintain or develop in-house sales and distribution capabilities.
To
the extent that we depend on third parties for marketing and distribution,
any
revenues we receive will depend upon the efforts of such third parties, and
there can be no assurance that such efforts will be successful.
If
we cannot compete successfully for market share against other similar product
oriented companies, we may not achieve sufficient product revenues and our
business will suffer
The
market for our product candidates is characterized by intense competition and
rapid technological advances. We will compete with a number of existing and
future drugs and therapies developed, manufactured and marketed by others.
Existing or future competing products may provide greater therapeutic
convenience or clinical or other benefits for a specific indication than our
products, or may offer comparable performance at a lower cost. If our products
fail to capture and maintain market share, we may not achieve sufficient product
revenues and our business will suffer.
We
will
compete against fully integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have either alone or together with
their collaborative partners, operate larger research and development programs
or have substantially greater financial resources than we do, as well as
significantly greater experience in:
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·
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developing
drugs;
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·
|
undertaking
pre-clinical testing and human clinical
trials;
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·
|
obtaining
regulatory approvals of drugs;
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·
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formulating
and manufacturing drugs; and
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·
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launching,
marketing and selling drugs.
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Developments
by competitors may render our products or technologies obsolete or
non-competitive
The
biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. A large number of
companies are pursuing the development of pharmaceuticals that target the same
diseases and conditions that we are targeting. We face competition from
pharmaceutical and biotechnology companies in China and other countries. In
addition, companies pursuing different but related fields represent substantial
competition. Many of these organizations competing with us have substantially
greater capital resources, larger research and development staffs and
facilities, longer drug development history in obtaining regulatory approvals
and greater manufacturing and marketing capabilities than we do. These
organizations also compete with us to attract qualified personnel and parties
for acquisitions, joint ventures or other collaborations.
If
we fail to adequately protect or enforce our intellectual property, the value
of
our intellectual property rights would diminish
Our
success, competitive position and future revenues will depend in part on our
ability and the abilities of our licensors to obtain and maintain patent
protection for our products, methods, processes and other technologies, to
preserve our trade secrets, to prevent third parties from infringing on our
proprietary rights and to operate without infringing the proprietary rights
of
third parties.
Our
success is partly dependent upon the skills, knowledge and experience of our
scientific and technical personnel, our consultants and advisors as well as
our
licensors and contractors. To help protect our proprietary know-how and our
inventions for which patents may be unobtainable or difficult to obtain, we
rely
on trade secret protection and confidentiality agreements. To this end, it
is
our policy to require all of our employees, consultants, advisors and
contractors to enter into agreements which prohibit the disclosure of
confidential information and, where applicable, require disclosure and
assignment to us of the ideas, developments, discoveries and inventions
important to our business. These agreements may not provide adequate protection
for our trade secrets, know-how or other proprietary information in the event
of
any unauthorized use or disclosure or the lawful development by others of such
information. If any of our trade secrets, know-how or other proprietary
information is disclosed, the value of our trade secrets, know-how and other
proprietary rights would be significantly impaired and our business and
competitive position would suffer.
We
may not successfully manage our growth
Our
success will depend upon the expansion of our operations and the effective
management of our growth, which will place a significant strain on our
management and on our administrative, operational and financial resources.
To
manage this growth, we must expand our facilities, augment our operational,
financial and management systems and hire and train additional qualified
personnel. If we are unable to manage our growth effectively, our business
would
be harmed.
We
rely on key executive officers and scientific advisors, and their knowledge
of
our business and technical expertise would be difficult to
replace
We
are
highly dependent on our principal scientific, regulatory and medical advisors.
We do not have “key person” life insurance policies for any of our officers. The
loss of the technical knowledge and management and industry expertise of any
of
our key personnel could result in delays in product development, loss of
customers and sales and diversion of management resources, which could adversely
affect our operating results.
Item
3.01 Management Discussion and Analysis or Plan of
Operation
Overview
The
following discussion of the financial condition and results of operation of
Renhuang Pharmaceuticals, Inc. should be read in conjunction with the financial
statements and the notes to those statements included in this 8-K. This
discussion includes forward-looking statements that involve risk and
uncertainties. As a result of many factors, such as those set forth under “Risk
Factors”, actual results may differ materially from those anticipated in the
forward-looking statements.
Renhuang
Pharmaceuticals, Inc., (“Renhuang”) or the ("Company") was incorporated in the
State of Nevada on August 18, 1988 as Solutions, Incorporated. Since that time,
we have undergone a series of name changes as follows: Suarro Communications,
Inc., e-Net Corporation, e-Net Financial Corp., e-Net.Com Corporation, e-Net
Financial.Com Corporation, Anza Capital, Inc. and finally on August 28, 2006
we
changed our name to Renhuang Pharmaceuticals, Inc.
On
March
3, 2006, we discontinued our operations and completed the disposition of
substantially all of our assets, including but not limited to, all of our
ownership interest in our subsidiary, American Residential Funding, Inc., a
Nevada corporation ("AMRES") to AMRES Holding, LLC, a Nevada limited liability
company ("AMRES Holding") under control of Vince Rinehart, a shareholder and,
at
that time, our sole officer and director ("Rinehart"). Effective on September
30, 2005, the disposition was approved by written consent of a majority of
our
stockholders.
On
September 7, 2006 the Company acquired 100% of the issued and outstanding shares
of Harbin Renhuang Pharmaceutical Company Limited, a corporation incorporated
under the laws of the British Virgin Island, (‘‘Renhuang BVI’’), whose only
assets are 100% of Harbin Renhuang Pharmaceutical Co. Ltd, incorporated under
the laws of the Peoples Republic of China (“Renhuang China”) involved in the
research, production and sales of traditional Chinese and Western medical
products in China. On May 1st
2006,
Harbin Renhuang Pharmaceutical Stock Co. Ltd., (founded in 1996) transferred
all
its business operations, to Renhuang China. The products are distributed through
more then 60 sales offices with more then 2,000 commission-based sales people.
Upon the effectiveness of the Merger, the Company succeeded to the business
of
Renhuang China, which will be continued as its sole line of
business.
Upon
closing of the Merger, Renhuang BVI became a wholly owned subsidiary of the
Company. The former stockholders of BVI own approximately 85% of the issued
and
outstanding Common Stock of the Company.
As
the
Company will operate Renhuang China as its sole line of business, the following
discussion and analysis is of the financial condition and results of operations
for the twelve months ended on October 31, 2005 and the six months ended on
April 30, 2006 is the operation of Harbin Renhuang Pharmaceutical Stock Co.
Ltd., the predecessor of Renhuang China. The following discussion and analysis
should be read in conjunction with the financial statements, including
footnotes, and other information presented in this report Form 8-K.
For
purposes of the following discussion and analysis, references to ‘‘we’’,
‘‘our’’, ‘‘us’’ refers to Renhuang Pharmaceuticals, Inc., (the “Company”). An
analysis of the Company’s financial condition and the results of operations for
the 12 months ended April 30, 2006 was reported on Form 10-KSB on August 14,
2006 and is incorporated herein by reference.
Our
acquisition of the Renhuang BVI company was accounted for as a reverse merger,
because, after giving effect to the share exchanges, the former stockholders
of
Renhuang BVI hold a majority of our outstanding common stock on a voting and
fully diluted basis. As a result of the share exchanges, Renhuang was deemed
to
be the acquirer for accounting purposes. Accordingly, the financial statements
presented are those of Renhuang China for all periods prior to our acquisition
of the Renhuang BVI company on September 7, 2006, and the financial statements
of the consolidated companies from the acquisition date forward.
Research
and development expenses consist primarily of salaries and related personnel
costs, fees paid to consultants and outside service providers for regulatory
and
quality assurance support and other expenses relating to the manufacture,
development, testing, enhancement, sales, marketing, warehousing and
distribution of our products. We expense our research and development costs
as
they are incurred.
General
and administrative expenses consist primarily of salaries and related expense
for executive, finance and other administrative personnel, professional fees,
business insurance, rent, general legal activities, and other corporate
expenses.
Result
of Operations
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
US GAAP. The preparation of these consolidated financial statements requires
us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and on various other assumptions that are believed to
be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We
follow
the guidance of the Securities and Exchange Commission’s Staff Accounting
Bulletin 104 for revenue recognition. In general, we record revenue when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. We have identified
the policy below as critical to our business operations and understanding of
our
financial results:
A.
CASH AND CASH EQUIVALENTS
The
Company considers cash and cash equivalents to include cash on hand and demand
deposits with banks with an original maturity of three months or less.
B.
INVENTORIES
Inventories
are stated at the lower of cost and net realizable value. Cost is calculated
on
the weighted average basis and includes all costs to acquire and other costs
incurred in bringing the inventories to their present location and condition.
The Company evaluates the net realizable value of its inventories on a regular
basis and records a provision for loss to reduce the computed weighted average
cost if it exceeds the net realizable value.
C.
LAND USE RIGHTS
According
to the law of China, the government owns all the land in China. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. Land use rights are being amortized
using the straight-line method over the lease term of 40 to 50
years.
D.
PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are carried at cost. The cost of repairs and maintenance
is
expensed as incurred; major replacements and improvements are capitalized.
When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included in
income in the year of disposition.
Depreciation
is calculated on a straight-line basis over the estimated useful lives of the
assets. The useful lives for property, plant and equipment are as follows:
|
Buildings
and leasehold improvement
|
20
years
|
|
|
Plant
and machinery
|
10
years
|
|
|
Office
equipment and furnishings
|
5
to10 years
|
|
|
Motor
vehicles
|
5
to10 years
|
E.
CONSTRUCTION IN PROGRESS
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use.
F.
ACCOUNT RECEIVABLES
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts
is
made when collection of the full amount is no longer probable. Bad debts are
written off as incurred. An
account is considered past due after sixty (60) days from the invoice date.
The
allowance on the doubtful accounts was $656,685 and $765,078 as at April 30,
2006 and October 31, 2005, respectively.
G.
INCOME TAXES
Taxes
are
calculated in accordance with taxation principles currently effective in the
PRC. The Company accounts for income taxes using the liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized as income in the period that includes the
enactment date. A valuation allowance is provided for the amount of deferred
tax
assets that, based on available evidence, are not expected to be
realized.
H.
GOVERNMENT SUBSIDIES
Subsidies
from the government are recognized at their fair values when received or there
is reasonable assurance that they will be received, and all attached conditions
are complied with. Subsides are for Company’s research and development
activities and they will continue in the following years. The amount of
subsidies received for six months ended April 30, 2006 and the year ended
October 31, 2005 were$155,316 and $326,092, respectively. The amounts granted
and timing of receipts do vary every year, depending on the policies from the
local authorities.
I.
RELATED PARTIES
Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational decisions. Parties are
also
considered to be related if they are subject to common control or common
significant influence. Related parties may be individuals or corporate
entities.
J.
FOREIGN CURRENCY TRANSLATION
The
company maintains its books and accounting records in Renminbi ("RMB"), the
PRC's currency, being the functional currency. Transactions denominated in
foreign currencies are translated into the functional currency at the exchange
rates prevailing on the transaction dates. Assets and liabilities denominated
in
foreign currencies are translated into the functional currency at the exchange
rates prevailing at the balance sheet date. Income and expenditures are
translated at the average exchange rate of the year.
On
January 1, 1994, the PRC government introduced a single rate of exchange as
quoted daily by the People's Bank of China (the "Unified Exchange Rate"). The
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the Bank of China or other banks authorized to buy and
sell
foreign currencies at the exchange rates quoted by the People's Bank of China.
Approval of foreign currency payments by the Bank of China or other institutions
requires submitting a payment application form together with supplier's
invoices, shipping documents and signed contracts.
|
April
30, 2006
|
October
31, 2005
|
||||||
|
Period/year
end RMB : US$ exchange rate
|
8.0139
|
8.0680
|
|||||
|
Average
RMB : US$ exchange rate
|
8.0481
|
8.2308
|
|||||
The
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.
K.
USE OF ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America 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 revenue and expenses
during the reporting period. Actual results when ultimately realized could
differ from those estimates.
L.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The
carrying value of financial instruments including cash, receivables, accounts
payable and accrued expenses and debt, approximates their fair value at April
30, 2006 and October 31, 2005 due to the relatively short-term nature of these
instruments.
M.
REVENUE RECOGNITION
In
accordance with the provisions of Staff Accounting Bulletin No. 103, revenue
is
recognized when merchandise is shipped and title passes to the customer and
collectibility is reasonably assured.
N.
RESEARCH AND DEVELOPMENT
Research
and development costs are expensed as incurred. Engineers and technical staff
are involved in the production of our products as well as on-going research,
with no segregation of the portion of their salaries relating to research and
development from the portion of their salaries relating to production. The
total
salaries are included in cost of sales. Other research is performed on a future
profit sharing basis conducted by universities and research
institutions.
O.
SHIPPING AND HANDLING
All
shipping and handling are expensed as incurred and outbound freight is not
billed to customers. Shipping and handling expenses included in selling and
distribution expenses were $643,471 and $748,438 for the 6 months ended April
30, 2006 and year ended October 31, 2005, respectively.
P.
ADVERTISING
Advertising
costs are expensed as incurred. They are separately disclosed in income
statements.
Q.
EMPLOYEES' BENEFITS
Mandatory
contributions are made to the Government's health, retirement benefit and
unemployment schemes at the statutory rates in force during the period, based
on
gross salary payments. The cost of these payments is charged to the statement
of
income in the same period as the related salary cost.
R.
SEGMENTS
No
business segment analysis is provided for the year end October 31, 2005 and
for
the six months ended April 30, 2006 and 2005, as less than 10% of revenue and
less than 10% of income from operations is attributable to the segment other
than sales of pharmaceutical products.
Further,
no geographical segment analysis is provided for the year ended October 31,
2005
and for the six months ended April 30, 2006 and 2005, as less than 10% of
revenue and less than 10% income from operations is attributable to the segment
other than the Mainland China.
S.
COMPREHENSIVE INCOME (LOSS)
The
Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS
No.
130 establishes standards for the reporting and display of comprehensive income,
its components and accumulated balances in a full set of general-purpose
financial statements. SFAS No. 130 defines comprehensive income (loss) to
include all changes in equity except those resulting from investments by owners
and distributions to owners, including adjustments to minimum pension
liabilities, accumulated foreign currency translation, and unrealized gains
or
losses on marketable securities.
T.
CONCENTRATION OF CREDIT RISK
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of trade accounts receivable. The Company
performs ongoing credit evaluations with respect to the financial condition
of
its creditors, but does not require collateral. In order to determine the value
of the Company's accounts receivable, the Company records a provision for
doubtful accounts to cover probable credit losses. Management reviews and
adjusts this allowance periodically based on historical experience and its
evaluation of the collectibility of outstanding accounts
receivable.
Management’s
Discussion and Analysis of Operations
Fiscal
years ended October 31, 2005
Overview
The
company achieved significant sales growth and higher gross margins in fiscal
2005. As a result, it turned the loss of fiscal 2004 into a net profit of over
$2 million. The company’s operating results demonstrate the benefits of the
management’s continued focus on growing market shares while keeping costs under
control.
Revenue
for
the
year ended October 31, 2005 increased by 84% to a record $18,915,064, compared
with $10,296,230 for the previous year. The increase in sales was a direct
result of new product launches starting in January 2005 (after a new factory
began operations), as well as our ability to continue to attract customers
with
competitive pricing.
Net
income attributable to shareholders was
$2,182,415 for the year ended October 31, 2005, compared with a loss
of
$526,195 for the previous year. The turn-around resulted from significantly
higher sales volume and higher gross margins compared with the previous year.
Cost
of sales for
the
year ended October 31, 2005 increased by 43% to $8,868,845, compared with
$6,190,503 for the previous year. Proportionately, the cost increase was just
over half of the 84% increase in sales, reflecting better cost control from
management along with new and more efficient production processes. For some
products, cost of sales actually decreased by over 20% because of the above
controls. Finally, cost of sales also included obsolescent inventories of
$138,638 (compared with $508,858 for the previous year).
Gross
profit margin was
53%
for the year ended October 31, 2005, compared with 40% for the previous year.
The improvement in gross margin reflects better cost control and more efficient
production processes.
Selling
and distribution expenses increased
by 127% to $3,347,094 for the year ended October 31, 2005, compared with
$1,477,548 for the previous year. The increase was a result of increased
transportation due to higher sales volume, as well as increased bonus payments
to salespeople.
Advertising
expenses
increased about 69 times to $1,518,686 for the year ended October 31, 2005,
compared with only $2,189 for the previous year. The sharp increase was a direct
result of major advertising campaigns and promotional initiatives started during
the year. Major forms of advertising were TV commercials and advertisements
in
magazines and newspapers.
General
and administrative expenses decreased
by 51% to $773,757 for the year ended October 31, 2005, compared with $1,578,423
for the previous year. The decline was mostly due to lower office and travel
expenses.
Provision
for doubtful accounts (for
trade receivables) for the years ended October 31, 2005 and 2004 were $138,638
and $592,736, respectively.
Depreciation
and amortization increased
by 3 times to $800,305 for the year ended October 31, 2005, compared with
$193,461 for the previous year. The increase was consistent with a
more-than-6-times increase in property, plant and equipment (PPE) to $12,845,679
from $1,960,242 the previous year. The bulk of the increase in PPE was due
to
the completion of $7 million of construction in progress during
2005.
Research
and development (R&D) expenses increased
by 37% to $1,233,504 for the year ended October 31, 2005, compared with $897,210
for the previous year. The increase was largely due to the launch of several
early-stage R&D initiatives to be carried out jointly with local
universities to develop new products.
Government
subsidies for
the
year ended October 31, 2005 were $326,092, compared with $295,536 for the
previous year. Government subsidies were given in support of our R&D
efforts. They were unconditional and with no commitments from local authorities.
We are not sure how long the subsidies can be expected to continue or if they
will continue at the present levels.
Finance
costs increased
by 2 times to $377,467 for the year ended October 31, 2005, compared with
$124,643 for the previous year. The increase was due to interest payments on
a
new long-term bank loan of $3.7 million that was initiated in 2005.
Income
taxes were
zero
for 2005 and 2004, as the Company was exempted from corporate income taxes.
It
is currently entitled to full exemption from corporate income taxes through
the
end of December 2006. From 2007 onwards, the Company will enjoy a preferential
income tax rate of 15%, based on its being in a high-tech development industry
to be promoted by the local authorities.
Management’s
Discussion of Financial Resources and Liquidity
Fiscal
years ended October 31, 2005
Overview
The
company experienced significant expansion of its assets in fiscal 2005. Current
assets increased to meet the increasing need for working capital as sales grew
at a fast pace. Fixed assets also grew significantly after the completion of
major production facilities. As a result of such asset expansion, both operating
and investing activities experienced net cash outflow, while financing
activities generated net cash inflow to finance the expansion.
Cash
and cash equivalents
aggregated $3.44 million on October 31, 2005, down $1.33 million from the end
of
fiscal 2004. Operating and investing activities together used more cash than
generated by the company’s financing activities, causing the decline in cash
balance.
Trade
receivables were
$4.06 million on October 31, 2005, up $3.73 million from the end of fiscal
2004,
reflecting the company’s significant growth in sales.
Inventories
stood at
$3.51 million on October 31, 2005, up $1.39 million from the end of fiscal
2004,
as the company meets significant growth in sales by increasing its stock of
raw
materials and finished goods.
Prepayments
were
$0.44 million on October 31, 2005, up $0.32 million from the end of fiscal
2004,
as the company increased its purchases of goods and supplies (and prepayments
thereof) to meet increasing sales volume.
Other
receivables
were
$0.38 million on October 31, 2005, up $0.32 million from the end of fiscal
2004,
again reflecting increased sales volume and activities at the company.
Land
use rights were
valued at $0.14 million, slightly higher than the previous year due to
fluctuation in the USD/RMB exchange rate.
Property,
plant and equipment
were
$11.66 million on October 31, 2005, up $10.09 million from the end of fiscal
2004, as the company completed a major facilities construction of about $7.6
million and added other fixed assets.
Consolidated
borrowings aggregated
$13.09 million, up from $8.44 million at the end of fiscal 2004. The increase
was due to a $3.72 million bank loan to finance the completion of major
production facilities, and increased current liabilities to meet working capital
needs amid increasing sales volume.
Net
cash flow
was
negative
$1.58
million during fiscal 2005. The company used $1.17 million net in cash in
operating activities, largely to meet increasing sales volume. It used $3.81
million net in cash in investing activities, mainly to complete the construction
of major new facilities and add fixed assets. The company generated $3.40
million net in cash in its financing activities, mainly through bank
loans.
Management’s
Discussion and Analysis of Operations
Six
Months Ended April 30, 2006
Overview
The
company achieved significant sales growth and higher gross margins during the
six months ended April 30, 2006. As a result, net income increased by almost
11%
compared to the same period a year ago, despite significant increases in
SG&A and advertising expenses during the period. The company’s operating
results demonstrate that the management’s strategy to launch new products, grow
market shares and keep costs under control continued to pay
off.
Revenue
for
the
six months ended April 30, 2006 increased by 179% to $20,052,818, compared
with
$7,193,313 for the same period a year ago. The increase was due to continued
success with new products launched since January 2005 (after a new factory
began
operations), as well as our ability to continue to attract customers with
competitive pricing.
Net
income attributable to shareholders
increased by almost 11% to $457,900, compared with $413,039 for the same period
a year ago. The increase resulted from significantly higher sales volume and
higher gross margins compared with the same period a year ago. Net income would
have been higher had it not been for significant increases in SG&A and
advertising expenses during the period.
Cost
of sales for
the
six months ended April 30, 2006 increased by 131% to $8,863,227, compared with
$3,989,857 for the same period a year ago. Note that cost increased
proportionately much less than sales, reflecting better cost control from
management along with new and more efficient production processes.
Gross
profit margin was
56%
for the six months ended April 30, 2006, compared with 45% for the same period
a
year ago. The improvement in gross margin reflects better cost control and
more
efficient production processes.
Selling
and distribution expenses increased
by 242% to $4,202,267 for the six months ended April 30, 2006, compared with
$1,228,724 for the same period a year ago. The increase was a result of
increased transportation due to significantly higher sales volume, as well
as
increased bonus payments to salespeople.
Advertising
expenses increased
6.3 times to $2,917,988 for the six months ended April 30, 2006, compared with
$398,714 for the same period a year ago. The sharp increase was a direct result
of continued spending on major advertising campaigns and promotional initiatives
started in fiscal 2005. Major forms of advertising were TV commercials and
advertisements in magazines and newspapers.
General
and administrative expenses increased
2.7 times to $1,632,290 for the six months ended April 30, 2006, compared with
$446,791 for the same period a year ago. The increase was mainly due to
significantly higher office and travel expenses as well as service payments.
Provision
for doubtful accounts (for
trade receivables) for the six months ended April 30, 2006 and 2005 were
$622,618 and zero, respectively.
Depreciation
and amortization decreased
by 7% to $328,051 for the six months ended April 30, 2006, compared with
$351,427 for the same period a year ago. The decrease reflected the transfer
of
approximately $2.7 million of property, plant and equipment to a newly set-up
entity.
Research
and development (R&D) expenses increased
by 39% to $817,547 for the six months ended April 30, 2006, compared with
$586,113 for the same period a year ago. The increase was largely due to the
launch of several early-stage R&D initiatives to be carried out jointly with
local universities to develop new products.
Government
subsidies for
the
six months ended April 30, 2006 were $155,316, compared with $342,411 for the
same period a year ago. Government subsidies were given in support of our
R&D efforts. They were unconditional and with no commitments from local
authorities. We are not sure how long the subsidies can be expected to continue
or if they will continue at the present levels.
Finance
costs increased
by 1.9 times to $359,465 for the six months ended April 30, 2006, compared
with
$125,047 for the same period a year ago. The increase was due to interest
payments on a new long-term bank loan of $3.7 million that was initiated in
November 2005.
Income
taxes were
zero
for the six months ended April 30, 2006 and 2005, as the Company was exempted
from corporate income taxes. It is currently entitled to full exemption from
corporate income taxes through the end of December 2006. From 2007 onwards,
the
Company will enjoy a preferential income tax rate of 15%, based on its being
in
a high-tech development industry to be promoted by the local
authorities.
Management’s
Discussion of Financial Resources and Liquidity
Six
Months Ended April 30, 2006
Overview
The
company continued to expand its asset base during the six months ended April
30,
2006, largely due to current asset expansion (by $1.76 million) to meet the
increasing need for working capital amid continued rapid growth in sales. Fixed
assets declined as disposition exceeded acquisition. During the period, both
operating and financing activities experienced net cash outflow, while investing
activities generated net cash inflow. Net cash flow was negative
$1.31
million during the period.
Cash
and cash equivalents
aggregated $2.23 million on April 30, 2006, down $1.21 million from the
beginning of the period. Operating and financing activities together used more
cash than generated by the company’s investing activities, causing the decline
in cash balance.
Trade
receivables were
$5.38 million on
April
30, 2006,
up
$1.32 million from the beginning
of the period,
reflecting the company’s continued growth in sales.
Inventories
stood at
$2.40 million on April 30, 2006, down $1.11 million from the beginning of the
period, as the company drew down its stock of finished goods to meet continued
rapid growth in sales.
Prepayments
were
$0.95 million on April 30, 2006, up $0.51 million from the beginning of the
period, as the company increased its purchases of goods and supplies (and
prepayments thereof) to meet increasing sales volume.
Other
receivables
were
$0.49 million on April 30, 2006, up $0.11 million from the beginning of the
period, again reflecting increased sales volume and activities at the company.
Due
from related parties
aggregated $0.28 million on April 30, 2006, up from zero at the beginning of
the
period. The
amounts are unsecured, interest-free and repayable within one year. They were
mainly used for the operation of the company during the period.
Due
from directors
aggregated $1.16 million on April 30, 2006, up from zero at the beginning of
the
period. The amounts are unsecured, interest-free and repayable within one year.
They were mainly used for the operation of the Company during the
period.
Deferred
expenses were
$0.69 million on April 30, 2006, up from zero at the beginning of the period,
due to expenses related to the pending reverse merger of the company.
Land
use rights were
valued at $0.14 million, slightly up from the beginning of the period due to
fluctuation in the USD/RMB exchange rate.
Property,
plant and equipment
were
$10.47 million on April 30, 2006, down $1.19 million from the beginning of
the
period, mainly due to the disposition of machinery and equipments.
Consolidated
borrowings aggregated
$13.12 million, slightly up from $13.09 million at the beginning of the period,
as fluctuation in the USD/RMB exchange rate led to slightly higher valuation
of
the company’s long-term bank loan. Current liabilities also increased slightly
to meet working capital needs amid increasing sales volume. Advance from
customers and other payables went up, while the company reduced its account
payables and repaid some of its short-term bank loans.
Net
cash flow
was
negative
$1.31
million during the period. The company used $0.50 million net in cash in
operating activities, largely to meet increasing sales volume. It used $1.68
million net in cash in its financing activities, paying back dues to directors
and related parties and repaying some of its short-term bank loans. The company
generated $0.86 million net in cash in investing activities, as disposition
of
fixed assets generated more cash than the amount of cash used in the acquisition
of fixed assets.
Plan
of Operation
Our
plan
of operation for the year ending April 30, 2007 is to continue implementing
our
business strategy, including the planned expansion and the fully implementation
of our new production facility. We also intend to expand our product portfolio
through research and development. We expect our revenue and net profit to grow
significant.
As
part
of our planned expansion, we anticipate hiring additional full-time employees
devoted to research and development activities and additional full-time
employees for sales, general and administrative activities. In addition, we
intend to use clinical research organizations and third parties to perform
our
clinical studies and manufacturing.
Overview
Historically,
the Chinese population is interested in natural health care products, and it
is
estimated that with a growing middle class and an aging population, the demand
for natural products will increase.
Acanthopanax
is estimated to be Renhuang’s leading product, which accounted for 45% of
Renhuang’s total revenue for the fiscal year of 2005, and 50% for the first half
of fiscal year of 2006. Shark Power Healthcare products accounted for 25% of
Renhuang’s total revenue in 2005, and less in 2006. The remaining balance was
dominated by traditional Western medicine products, led by Tornado Pills and
Tianma Headache pills that reached top three in China.
The
total
market share of Renhuang’s Acanthopanax products is approximately 10% and its
Shark Power Healthcare products accounts for 20% in China. The Company estimates
that, within 3-5 years, Renhuang’s Acanthopanax products will account for 50%
market share and that its market share of Shark Power Healthcare products can
reach 60% with more investment in advertisement.
It
is
further estimated that, due to the high growth rate of the Chinese economy,
including increased health consciousness, the demand of Acanthopanax products
and Shark Power Healthy Care products will increase with a 30% annual growth
rate, which is. This is a major opportunity for Renhuang.
Acanthopanax
Products
Acanthopanax
products are the most important product segment of Renhuang because Renhuang
controls 70% of all wild Acanthopanax resources in China, and has developed
new
withdrawing technology to reduce 30% of its production cost.
In
2004,
the revenue from Acanthopanax products was 30% of the total revenue, which
was
close to $3.75 million. In the fiscal year of 2005, the revenue from
Acanthopanax products rose 200%, to nearly $8.8 million. In the first half
of
fiscal year of 2006, the revenue was US $9.6 million, which is higher than
that
from the full previous year. Based on the foregoing, Renhuang conservatively
estimates that sales of Acanthopanax products will grow with an average of
50%
annually in the next 5 years.
The
Company estimates that revenue of Acanthopanax will reach US 18 million dollars
in 2006, 27.7 million dollars in 2007, and 41.6 million dollars in 2008.
Shark
Power Healthcare products
Revenue
from Shark Power Healthcare products was close to US $5 million dollars in
the
fiscal year of 2005 compared to US $3.3 million for the first six months of
fiscal year of 2006. Shark Power is popular among many students supported by
their parents. This target market, which is substantial in China, is however
neglected in many other countries. Additionally, seniors are another target
segment for these products. Outdoor exercise is not as popular in China as
in
the United States. Therefore, senior aged people in China consume a larger
amount of health care products in order to keep themselves healthy.
Because
health care products usually provide a long-term effect and its immediate result
is not visible, promotions become key factors to increase branding and market
share. Commercials on TV and radio, and advertising in magazine etc are all
trusted media that converts into increased sales.
Renhuang
has a substantial market plan for its Shark Power products that will be
implemented commencing 2007. Our conservative estimate accounts for a growth
rate of 30% for the next 5 years.
It
is
estimated that revenue of Shark Power Healthcare products in 2006 will reach
6
million dollars, 8 million dollars in 2007, and 10 million dollars in
2008.
Traditional
Medicine
During
the fiscal year of 2005, traditional medicine accounted for 30% of the total
revenue in Renhuang, and during the first half of fiscal year of 2006, it
accounted for 36% of the total revenue. In the future, after implementing more
new products, Renhuang does not see traditional medicine as its main focus.
Profit margins in this segment are lower compared with its other segments.
However, most customers of its traditional medicine products are recurring,
which generates cash flow with low risk. By utilizing stable sales channels,
Renhuang will lower its cost for acquisition of new customers for its newer
products.
Despite
increased marketing activities as a whole, Renhuang will not focus on the growth
of traditional medical products. As a result, the growth rate will be less
than
its other products and revenue will be estimated to peak during 2009 or
2010.
It
is
estimated that revenue of traditional medicine in 2006 will reach 14 million
dollars, 20 million dollars in 2007, and 22 million dollars in 2008.
Lysozyme
Enzyme
This
is a
new product for Renhuang, with an estimated substantial growth potential. The
product is highly demanded, especially in food preservation area, where Renhuang
conservatively estimates that Lysozyme Enzyme products will be achieve the
growth rate of 100% annually during the next five years starting
2007.
The
Company estimates that revenue of Lysozyme Enzyme in 2007 will reach $0.6
million dollars, and 1.2 million dollars in 2008.
Reagent
Box series
Reagent
box is an emerging market segment with a huge potential. Renhuang recently
employed a team of research scientists graduated from top schools in the United
States that owns several patents related to this segment.
Renhuang
estimates that of a total of 10 products, Renhuang plans to launch all of them
during 2007 and 2008. Renhuang estimates that Reagent Box series will sustain
a
growth rate of 100% annually in the next five years.
It
is
estimated that revenue of Reagent Box series in 2007 will reach 1.2 million
dollars, and 2.4 million dollars in 2008.
Critical
Accounting Policies
In
December 2001, the SEC request that all registrants discuss their most “critical
accounting policies” in management’s discussion and analysis of financial
condition and results of operations. The SEC indicated that a “critical
accounting policy” is one which is both important to the portrayal of the
company’s financial condition and results and requires management’s most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, US GAAP requires management
to make estimates and assumptions that affect reported amounts of assets and
liabilities as of the date of the balance sheet and reported amounts of expenses
for the periods presented. Accordingly, actual results could differ from those
estimates.
Net
profit per share:
Basic
net
profit per share is computed by dividing net profit by the weighted-average
number of common shares outstanding during the periods presented as required
by
SFAS No. 128, “Earnings Per Share”.
For
the
six months ended April 30, 2006, the Company had a net income of $0.01 per
share, despite significant increases in SG&A and advertising expenses. For
the fiscal year 2005 the Company reported a net income of $0.06 per share.
The
company had a net loss of $0.02 per share for the year ended October 31, 2004.
Subsequently,
the company launched new products to expand market share and increase sales
volume. It also adopted cost control measures to improve gross margin.
Stock-based
compensation
SFAS
No.
123, “Accounting for Stock-Based Compensation” (“SFAS 123”), provides for the
use of a fair value-based method of accounting for stock-based compensation.
However, SFAS 123 allows an entity to continue to measure compensation cost
for
stock options granted to employees using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25 “Accounting
for Stock Issued to Employees” (“APB 25”). The Company accounts for its employee
and director stock options using the intrinsic value method in accordance with
APB 25 and related interpretations. The Company measures compensation expense
for employee and director stock options as the aggregate excess of the market
value of its common stock over the exercise prices of the options on the date
that both the number of shares the grantee is entitled to receive and the
exercise prices are known. Such excess is amortized over the vesting
period.
In
accordance with the provisions of SFAS 123 and Emerging Issues Task Force
(“EITF”) No. 96-18, “Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling, Goods or Services,”
all other issuances of common stock, stock options or other equity instruments
to non-employees (including consultants and all members of the Scientific
Advisory Board) as the consideration for goods or services received by the
Company are accounted for based on the fair value of the equity instruments
issued (unless the fair value of the consideration received can be more reliably
measured). Any options issued to non-employees are recorded in expense and
additional paid-in capital in stockholders’ equity (deficiency) over the
applicable service periods using variable accounting through the vesting date
based on the fair value of the options at the end of each period.
Description
of Securities
Upon
closing the acquisition of Renhuang Pharmaceuticals, Ltd., Inc. (BVI), the
total
number of shares that the Company will be authorized
to issue will be 100 million shares of common stock, par value $0.001 per share,
and 10 million shares of preferred stock, no par value. The Company will have
a
total of 35,000,000 shares of common stock issued and outstanding and no shares
of preferred shares issued.
Common
stock
All
shares of common stock have equal rights and privileges with respect to voting,
liquidation and dividend rights. Each share of common stock entitled the hold
thereof (a) to one non-cumulative vote for each share held of record on all
matters submitted to a vote of the stockholders; (b) to participate equally
and
to receive any and all such dividends as may be declared by the board of
directors; and (c) to participate pro rata in any distribution of assets
available for distribution upon liquidation. Holders of our common stock have
no
preemptive rights to acquire additional shares of common stock or any other
securities. Our common stock is not subject to redemption and carries no
subscription or conversion rights.
The
Company’s amended certificate of incorporation also provides that the board of
directors has the flexibility to set new classes, series, and other terms and
conditions of the preferred shares. Preferred shares may be issued from time
to
time in one or more series in the discretion of the board of directors. The
board has the authority to establish the number of shares to be included in
each
such series, and to fix the designation, powers, preferences and rights of
the
shares of each such series and the qualifications, limitations and restrictions
thereof.
Preferred
stock
Preferred
shares may be issued in the future by the board without further stockholder
approval and for such purposes as the board deems in the best interest of our
company including
future stock splits
and split-ups, stock dividends, equity financings and issuances for acquisitions
and business combinations. In addition, such authorized but unissued common
and
preferred shares could be used by the board of directors for defensive purposes
against a hostile takeover attempt, including (by way of example) the private
placement of shares or the granting of options to purchase shares to persons
or
entities sympathetic to, or contractually bound to support, management. We
have
no such present arrangement or understanding with any person. Further, the
common and preferred shares may be reserved for issuance upon exercise of stock
purchase rights designed to deter hostile takeovers, commonly known as a
‘‘poison pill.’’
Share
structure and major shareholders
Notes
to the above chart:
Note
1. On
March
3rd, 2006 Harbin Renhuang Pharmaceutical Stock Co. Ltd. (“Old Renhuang”)
transferred all of its operating assets (except buildings) independent valued
by
Hei Long Jiang Haohua Certified Public Accountants Co., LTD. at 25 million
RMB
($3.3 million) to a newly organized company, Harbin Renhuang Pharmaceuticals
Co.
Ltd. (“Renhuang China”). On March 3, 2006 Renhuang Medicine for Animals, a
corporation controlled by Mr. Li Shaoming, invested 25 million RMB ($3.3
million) in cash in Renhuang China. Renhuang China has entered into a long-term
lease agreement with option to buy the buildings from Old Renhuang on favorable
conditions.
Note
2.
On March
16, 2006, the following five individuals and their designated nominee
corporations: Mr. Li Shaoming with Celebrate Fortune Company Limited (BVI),
Mr.
Pi Dianjun with China Wealth Source Company Limited (BVI), Mr. Cheung Yiu Man
with Total Prosperity Company Limited, Mr. Wulantuya with New BVI Co. and Ms.
Ding Xiuhua with Benevolent Sovereign Intl Company Limited, as further described
elsewhere in this Current Report acquired 100% of the shares in New Renhuang
from Harbin Renhuang Pharmaceutical Stock Co. Ltd. and Harbin Renhuang Medicine
for Animals Co. Ltd. The transaction has been settled via cash
payment.
Note
3.
On April
11th, 2006 Harbin Renhuang Pharmaceutical Company Limited, a corporation
incorporated in the British Virgin Island (Renhuang BVI) executed a share
exchange with the five corporate entities as referred to above and consequently
became the 100% shareholder of Renhuang BVI.
Note
4.
On
August 28, 2006, Renhuang BVI entered into a Share Exchange Agreement with
the
Company, whereby the Company issued 29,750,000 shares of Common Stock
representing 85% of the total issued and outstanding shares of the Company
as
further described in our Current Report 8 K, dated and filed on August 29,
2006
and is hereby incorporated by reference. On September 7, the transaction closed
and the Company became the 100% shareholder of Renhuang BVI.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the number of shares of Common
Stock beneficially owned on September 7, 2006, the Closing Date, by each person
who is known by the Company to beneficially own 5% or more of the Company’s
Common Stock, each of the Company’s directors and executive officers, and all of
the Company’s directors and executive officers, as a group:
|
Name
of Beneficial Owner
|
No.
of Shares
|
Percentage
of Shares
Outstanding
|
|||||
|
Shaoming
Li - Celebrate Fortune Company Limited
|
17,850,000
|
(1)
|
51.0000
|
%
|
|||
|
Dianjun
Pi - Total Prosperity Company Ltd.
|
3,159,450
|
(2)
|
9.0270
|
%
|
|||
|
Yun
Man Cheung - China Wealth Source Company Ltd.
|
4,278,050
|
(3)
|
12.2230
|
%
|
|||
|
Tuya
Wulan - New BVI Co.
|
2,975,000
|
(4)
|
8.5000
|
%
|
|||
|
Xiuhua
Ding - Benevolent Sovereign International Company Ltd
|
1,487,500
|
(5)
|
4.2500
|
%
|
|||
|
Directors
and officers as a group (5 persons):
|
29,750,000
|
85.000
|
%
|
||||
|
(1)
|
Includes
17,850,000 shares of Common Stock owned by Celebrate Fortune Company
Limited, an entity controlled by Mr. Shaoming Li.
|
|
(2)
|
Includes
3,159,450 shares of Common Stock owned by Total Prosperity Ltd.,
an entity
controlled by Mr. Dianjun Pi.
|
|
(3)
|
Includes
4,278,050 shares of Common Stock owned by China Wealth Source Company
Ltd., an entity controlled by Mr. Yun Man Cheung.
|
|
(4)
|
Includes
2,975,000 shares of Common Stock owned by New BVI Co., an entity
controlled by Mr. Tuya Wulan.
|
|
(4)
|
Includes
1,487,500 shares of Common Stock owned by Benevolent Sovereign
International Company Ltd. an entity controlled by Ms. Xiuhua Ding.
|
Directors
and Executive Officers
The
Company’s Board of Directors is composed of four directors, all of whom are
currently directors of Renhuang China:
Renhuang’s
Board of Directors is comprised of four people: Mr. Li Shaoming, Mr. Pi Dianjun,
Mr. Meng Fanrong and Dr. Leo Wang. Renhuang have vacancies for two independent
directors that will be filled shortly.
All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. The Company intends to appoint
two additional directors that are considered ‘‘independent’’ under the SEC’s
independence standards. Officers are elected annually by the board of directors
and serve at the discretion of the board. In addition, certain of the officers
of Renhuang China were named to serve as officers of the Company in the same
positions they served at Renhuang China upon the closing of the
Merger.
The
following table sets forth information regarding the members of the Company’s
Board of Directors and its executive officers following the Closing Date. The
directors listed below will serve until the next annual meeting of the Company’s
stockholders.
|
Name
|
Age
|
Position
|
||
|
Li,
Shaoming
|
44
|
Chairman
and Chief Executive Officer
|
||
|
Pi,
Dianjun
|
55
|
Director
and Chief Operating Officer
|
||
|
Dr.
Leo Wang
|
38
|
Chief
Financial Officer
|
||
|
Meng,
Fanrong
|
35
|
Director
|
The
principal occupation for the past five years (and, in some instances, for prior
years) of each of our directors and officers are as follows:
Mr.
LI SHAOMING has served as the Chairman of the Board of Directors since
the inception of Harbin Renhuang Pharmaceutical Stock Co. Ltd in 1996, the
Chairman of the Board of Director of Harbin Renhuang Pharmaceutical Co. Ltd.
starting May 1st, 2006 and director, Chairman and Chief Executive
Officer of the Company since April 2006. Mr. Li has more than 20 years
experience from the pharmaceutical and finance industry. From 1984 to 1996,
Mr.
Li served as Vice Chairman of Shenzhen Health Pharmaceutical Co. Ltd, a company
dedicated to drug research, production, and sales. Mr. Li is a professor at
Harbin Business University and Northeastern Agriculture University. Mr. Li
also
served as Vice Chairman of Heilongjiang Provincial Chinese Traditional Medicine
Association and Heilongjiang Provincial Medicine Association. Mr. Li Shaoming
graduated from Central University of Finance and Economics in Beijing, China
with a bachelor’s degree in finance.
Mr.
PI DIANJUN has served as the Chief Operation Officer of Harbin Renhuang
Pharmaceutical Stock Co. Ltd. since 2003, and the Chief Operation Officer of
Harbin Renhuang Pharmaceutical Co. Ltd. commencing May 1st, 2006,
including responsibilities for the human resource department, information
management, the center of management, and the office of the president in
Renhuang and director of the Company since April 2006. From 1992 to 2001, Mr.
Pi
served as the Chief Operation Officer of China Resource Breweries Limited,
Harbin Office; from 2002 to 2004, Mr. Pi served as Vice Chairman of Kuihua
Pharmaceutical Co. Ltd. Mr. Pi Dianjun graduated from Heilongjiang
University.
Mr.
MENG FANRONG,
the
director of the board of Harbin Renhuang Pharmaceutical Stock Co. Ltd. and
Harbin Renhuang Pharmaceutical Co. Ltd. starting May 1st,
2006,
and director of the Company since April 2006 has served as the Chief Executive
Officer of Harbin Venture Capital Ltd since 2001. Mr. Meng has more than 15
years investment experience in China. In 1997, he participated in the successful
Initial Public Listing of Asiapower Investment in Singapore. Mr. Meng also
has
participated in various international investment banking transactions with
private and publicly listed companies. Mr. Meng Fanrong graduated from Xiamen
University with a master’s degree in Finance.
Dr. LEO
WANG
has
served as the director of and Chief Financial officer of Renhuang China. An
expert on international business, finance and investment, Dr. Wang pioneered
the
study of foreign investments and multinational companies in China before the
current wave of international business flows into China. Prior to Dr. Wang’s
current position, he worked in investment management at a New York hedge fund
that invested for senior executives of Citigroup Morgan Stanley, UBS and the
Federal Reserve. He also developed investment strategies at Fleet Boston
Financial Corporation (Bank of America), and provided strategy consulting for
Raytheon Company. Previously, he was an Assistant Professor of Economics at
the
University of Copenhagen in Denmark, and an Economic Advisor to the Ministry
of
Finance in Norway. Dr. Wang holds an M.B.A. in Finance and Management from
MIT
and a Ph.D. in Economics from the University of Oslo. He was also a National
Science Foundation Scholar at Harvard University.
Director
Compensation
The
Company intends to compensate non-management directors through the issuance
of
stock awards including, without limitation, stock options, restricted stock
awards, stock grants and/or stock appreciation rights.
Executive
Officer Employment Agreements
The
Company has entered into employment agreements with each of its senior executive
officers. The Company expects that the employment agreements will be for an
initial term of one year ending at the end of 2006 and provide for automatic
successive one-year renewal terms thereafter unless terminated by either party
upon 30 prior written notice. The agreements will provide customary provisions
for earlier termination for reasons such as termination by the Company for
cause, death or disability of executive, certain events of change in control
or
termination by the executive upon good reason. The definition of ‘‘cause’’ will
include termination for conduct amounting to: fraud, embezzlement, willful
or
illegal misconduct; indictment or conviction of the executive by a court of
proper jurisdiction (or his written, voluntary and freely confession of same)
of
a crime which constitutes a felony or results in material injury to the
property, operation or reputation of the Company or its affiliates; and other
forms of misconduct customarily amounting to a termination for cause. Each
executive officer will provide venture deposit with different amounts depending
on the different job responsibilities. The venture deposit will return to the
executive officer(s) after the executive officer(s) leave.
Executive
Compensation
The
following executives, except Leo Wang, received compensation from Harbin
Renhuang Pharmaceutical Stock Co., Ltd prior to April 30, 2006. No other item
of
compensation was paid to any officer or director of the Company other than
reimbursement of expenses.
|
Name
|
Job
Title
|
Date
of Hiring
|
Revenue
|
Job
description
|
||||
|
Li,
Shaoming
|
Chairman/CEO
|
1996
|
250,000
RMB
US
$31,250
|
Oversee
the company operation
|
||||
|
Han,
Yulin
|
Chief
Producing Officer
|
1996
|
36000
RMB
US
$4,500
|
Oversee
the company producing
|
||||
|
Gao,
Zhimin
|
Chief
Accounting Officer
|
1996
|
36000
RMB
US
$4,500
|
Oversee
the company accounting system
|
||||
|
Luo,
Jingwang
|
Chief
Marketing Officer
|
2003
|
100,000
RMB
US
$12,500
|
Oversee
the marketing issue
|
||||
|
Cui,
Yuhai
|
Chief
R&D Officer
|
2004
|
36,000
RMB
US
$4,500
|
R&D
on new products
|
||||
|
Liu,
Guangming
|
Chief
Strategic Planning Officer
|
2003
|
36,000
RMB
US
$4,500
|
Strategic
Planning
|
||||
|
He,
Jiang
|
CEO
assistant
|
2004
|
36,000
RMB
US
$4,500
|
Legal
and Asset Management
|
||||
|
Pi,
Dianjun
|
Chief
Operating Officer
|
2004
|
36,000
RMB
US
$4,500
|
General
Operating
|
||||
|
Leo
Wang
|
Chief
Financial Officer
|
2006
|
480,000
RMB
US
$60,000
|
Oversee
the company financial system
|
Indemnification
of Directors and Officers
As
permitted by the provisions of the Nevada Corporation Law (the ‘‘NCL’’), the
Company has the power to indemnify any person made a party to an action, suit
or
proceeding by reason of the fact that they are or were a director, officer,
employee or agent of the Company, against expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred by them in connection with
any such action, suit or proceeding if they acted in good faith and in a manner
which they reasonably believed to be in, or not opposed to, our best interest
and, in any criminal action or proceeding, they had no reasonable cause to
believe their conduct was unlawful. Termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that
the
person did not act in good faith and in a manner which they reasonably believed
to be in or not opposed to our best interests, and, in any criminal action
or
proceeding, they had no reasonable cause to believe their conduct was
unlawful.
The
Company must indemnify a director, officer, employee or agent who is successful,
on the merits or otherwise, in the defense of any action, suit or proceeding,
or
in defense of any claim, issue, or matter in the proceeding, to which they
are a
party because they are or were a director, officer, employee or agent, against
expenses actually and reasonably incurred by them in connection with the
defense.
The
Company may provide to pay the expenses of officers and directors incurred
in
defending a civil or criminal action, suit or proceeding as the expenses are
incurred and in advance of the final disposition
of the action, suit or proceeding, upon receipt of an undertaking by or on
behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that they are not entitled
to be
indemnified by the Company.
The
NCL
also permits a corporation to purchase and maintain liability insurance or
make
other financial arrangements on behalf of any person who is or was
|
l
|
a
director, officer, employee or agent of the
corporation,
|
|
l
|
or
is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other
enterprises.
|
Such
coverage may be for any liability asserted against them and liability and
expenses incurred by them in their capacity as a director, officer, employee
or
agent, or arising out of their status as such, whether or not the corporation
has the authority to indemnify them against such liability and
expenses.
Insofar
as indemnification for liabilities arising under the Securities Act, as amended,
may be permitted to officers, directors or persons controlling our company
pursuant to the foregoing provisions, the Company has been informed that in
the
opinion of the SEC such indemnification is against public policy as expressed
in
such Act and is therefore unenforceable.
Senior
Managers
The
following individuals are senior managers reporting directly to the President
and the Board of Directors.
|
Han,
Yulin
|
37
|
Chief
Producing Officer
|
||
|
Cui,
Yuhai
|
35
|
Chief
R&D Officer
|
||
|
Lou,
Jingwang
|
48
|
Deputy
General Manager in Sales Department
|
||
|
Liu,
Guangming
|
38
|
Chief
Strategy Officer
|
MS.
HAN, YULIN
has
served as the Chief Producing Officer of Harbin Renhuang Pharmaceutical Stock
Co. Ltd since 1996, including responsibility for drug production. During the
time working in Renhuang, Ms. Han has made following substantial achievements:
· Ms.
Han
obtained the patent (with patent number 99116838.0) regarding producing
technology improvement of cold capsule, effectively solving the problem of
Aspirin Hydrolyzing problem of this product;
· Ms.
Han
obtained the patent (with patent number ZL00310682ôZL00310035.9,
ZL99321756.7) regarding designing the holding box of Squalene capsule, which
was
awarded golden patent award in China;
· Published
Paper in Chinese: “Discussion of best withdrawing technology of heart curing
pills via Orthogonal Law”;
· Published
Paper in Chinese: “Discussion of Best production technology of Spore Ammonia
Pill via orthogonal Law”;
Ms.
Han
has finished R&D, testing and application for approval of more than 30 new
products in Renhuang.
Ms.
Han
graduated from Jiamusi Medical School in Heilongjiang Province with a bachelor
degree in Chemical Medicine.
Mr.
CUI, YUHAN
has
served as the Chief R&D Officer of Harbin Renhuang Pharmaceutical Stock Co.
Ltd since 2004. Before that, Mr. Cui has served as the Chief Project Manager
in
Harbin Renhuang Pharmaceutical Co. Ltd for 7 years. During the time working
in
Renhuang, Mr. Cui was awarded to top tier award of Science Technology Progress
from Changchun Division of Chinese Academy of Sciences in 1997 and third tier
award of Science Technology Progress from Heilongjiang Science Commission in
1998. Mr. Cui graduated from Northeastern Agricultural University in Harbin
with
a bachelor degree in Biotechnology in 1994, and received his Master degree
in
Microorganism and biochemistry pharmacy from China Pharmaceutical University
in
China.
Mr.
LOU, JINGWANG has
served as Deputy General Manager in Sales Department of Harbin Renhuang
Pharmaceutical Stock Co. Ltd since 2003. From 1999 to 2003, Mr. Lou served
as
the Sales Manager of Beijing Tong Ren Tang, which is the biggest and most famous
pharmaceutical company in China. Mr. Pi Dianjun graduated from Heilongjiang
University.
Mr.
LIU GUANGMING
has
served as the Chief Strategy Officer of Harbin Renhuang Pharmaceutical Stock
Co.
Ltd since 2003, including responsibilities for the strategy planning, finance,
and capital operation in Renhuang. From 2001 to 2003, Mr. Liu served as the
Vice
President of Investment Banking Division of Harbin Time Group. Mr. Liu Guangming
graduated from Anshan University of Science and Technology with Bachelor degree
in Industrial Engineering.
Item
3.02 Unregistered Sales of Equity Securities
The
disclosure as set forth in Item 2.01 are hereby incorporated by reference into
this Item 3.02
Item
4.01 Changes in Registrant’s Certified Accountant.
The
disclosure as set forth in our Current Report dated and filed on April 10,
2006
is
hereby incorporated by reference into this Item 4.01.
Item
5.01 Changes in Control of Registrant
The
disclosure as set forth in Item 2.01 are hereby incorporated by reference into
this Item 5.01
Accounting
Treatment; Change of Control
The
merger is being accounted for as a “reverse merger,’’ since the former
stockholders of BVI own a majority of the outstanding shares of the Company’s
Common Stock immediately following the Merger. No arrangements or understandings
exist among present or former controlling stockholders with respect to the
election of members of the Company’s board of directors and, to the Company’s
knowledge, no other arrangements exist that might result in a change of control
in the future.
As
a
result of the issuance of the 29,750,000 shares of Common Stock, a change in
control occurred on the date of the consummation of the Merger.
As
of the
time immediately following the closing, the Company continued to be a ‘‘small
business issuer,’’ as defined under the Securities Exchange Act of 1934, as
amended.
Item
5.02 Departure of Directors or Principal Officers; Election of Directors;
Appointment of Principal Officers
At
the
time of disposition of the Company’s assets and discontinued operations on March
3, 2006, the Company’s then current sole director and officer, Mr. Vincent
Rinehart elected Mr. Shaoming Li, Mr. Fanrong Meng and Dianjun Pi as the
Company’s new directors and thereafter resigned. On July 6, 2006 Dr. Leo Wang
was elected as the Chief Financial Officer and to the Board of Directors. The
Company has two vacancies to be filled by independent directors.
Item
5.06 Change in Shell Company Status
As
described in Item 2.01 above, which is incorporated by reference into this
Item
5.06, the Company ceased being a shell company (as defined in Rule 12b-2 under
the Exchange Act of 1934, as amended) upon completion of the
Merger.
Item
9.01. Financial Statements and Exhibits.
| (a) |
As
a result of its acquisition of Harbin Renhuang Pharmaceutical Company
Limited (“BVI”) and its
subsidiary Harbin Renhuang Pharmaceutical Co. Ltd., (“Renhuang
China”) (as described in Item 2.01), the registrant is filing Renhuang’s
audited and unaudited financial information as Exhibit 99.1 and Exhibit
99.2 to this Current Report.
|
| (b) |
The
registrant is filing pro
forma financial information after giving effect to the acquisition
of
Renhuang BVI and its subsidiary Renhuang China (as described in Item
2.01) in this
Current Report.
|
EXHIBITS
|
Exhibit
|
|
Description
|
|
99.1
|
|
Audited
financial statements of Harbin Renhuang Stock. Co Ltd. October
31, 2005 and 2004
|
|
99.2
|
|
Unaudited
financial statements of Harbin Renhuang Stock. Co Ltd. April
30, 2006 and 2005
|
SIGNATURE
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 hereunto
duly authorized.
|
|
Renhuang
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
Date: September
8, 2006
|
By:
|
/s/ Shaoming
Li
|
|
Shaoming
Li
Chief
Executive Officer and
President
|
||
EXHIBIT
INDEX
|
Item
No.
|
Description
|
|
|
(1)
|
Item
1.02, Item 5.01 and Item 5.03 Completion of Acquisition or Disposition
of
Assets, incorporated by reference to our Current Report on Form 8-K
dated
and filed with the Commission on 2006-08-29.
|
|
|
(2)
|
Item
4.01 and 9.01: Changes in Registrant's Certifying Accountant, incorporated
by reference to our Current Report on Form 8-K/A filed and dated
with the
Commission on 2006-05-03.
|
|
|
(3)
|
Current
Report 10-KSB dated and filed on August 15, 2006 and is hereby
incorporated by reference.
|