China Medicine Corp (OTC:CHME)

On July 1, 2011, the Board of Directors (the “Board”) of China Medicine Corporation (the “Company”), after consultation with and upon the recommendation of the management of the Company and the Audit Committee of the Board (the “Audit Committee”), concluded that the Company’s previously issued financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal years ended December 31, 2006 and 2007, and the Quarterly Reports on Form 10-Q for the periods within the fiscal years 2006 and 2007 (collectively, “the previously issued financial statements”) should no longer be relied upon.

As previously disclosed in the Company’s Form 8-K filed with the Securities and Exchange Commission on March 23, 2011, in connection with the preparation of the Company’s financial statements for the year ended December 31, 2010, certain accounting and reporting errors were identified with respect to improper activities by certain employees of Guangzhou LifeTech Pharmaceutical Co., Ltd, a wholly-owned subsidiary of  the Company that the Company acquired on October 26, 2009. 

The management of the Company and the Audit Committee are conducting concurrent internal reviews with respect to these matters and in the course of such reviews, they observed that similar accounting and reporting errors also took place at Guangzhou Konzern Medicine Co., Ltd. (“Konzern”), another wholly-owned subsidiary of the Company, in relation to the subsidiary’s financial statements for the fiscal years ended December 31, 2008 and 2009.  Consequently, on March 17, 2011, the Board, concluded that the Company’s previously issued financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal years ended December 31, 2008 and 2009, and the Quarterly Reports on Form 10-Q for the periods within the fiscal years 2008, 2009 and 2010 should no longer be relied upon.

On July 1, 2011, during the course of the on-going internal reviews mentioned above, the Board determined that the accounting and reporting errors at Konzern also occurred in fiscal years 2006 and 2007 in addition to fiscal years 2008, 2009 and the quarterly periods in fiscal year 2010, as previously reported, and such errors materially impacted the previously issued financial statements.  The Company currently is not able to and will not be able to quantify the impact of these errors and related accounting adjustments until the completion of its internal reviews but has concluded that the previously issued financial statements should no longer be relied upon. The Company anticipates that at the conclusion of the internal review by the Audit Committee and its legal counsel, with the assistance of Ernst & Young Advisory Services Limited, and the completion of a re-audit of the affected fiscal years, it will have revised financial results and will issue restated financial statements.
 
The Company’s Audit Committee has discussed the matters disclosed in this Item 4.02 with Frazer Frost, LLP, the Company’s  registered public accounting firm.
 
Management is assessing what changes may be necessary in the evaluation of the Company’s internal control over financial reporting and its disclosure controls and procedures and will not reach a final conclusion with respect to these matters until completion of the restatement process.

GUANGZHOU, China, March 24, 2011 /PRNewswire-Asia/ -- China Medicine Corporation today announced that it has filed with the United States Securities and Exchange Commission 1) a Current Report on Form 8-K to disclose that its previously issued financial statements should not be relied upon, and 2) a Form 12b-25 Notification of Late Filing for its Annual Report on Form 10-K for the year ended December 31, 2010. The Company expects to restate its previously issued financial statements for fiscal years 2008 and 2009, and the quarters within the fiscal years of 2008, 2009, and 2010, in order to correct certain accounting and reporting errors that impact the accuracy of the previously issued financial statements. Because of the nature and timing of the review, the Company will be unable to file its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 with the SEC by March 31, 2011, the prescribed due date.

The Board of Directors of the Company, after consultation with and upon recommendation of the management of the Company and its Audit Committee, concluded that the Company's previously issued financial statements contained in its Annual Reports on Form 10-K for fiscal years 2008 and 2009, and the Quarterly Reports on Form 10-Q for the periods within the fiscal years of 2008, 2009 and 2010, should no longer be relied upon.

GUANGZHOU, China, March 23, 2011 /PRNewswire-Asia/ -- China Medicine Corporation today announced that the Company's Board of Directors authorized a voluntary withdrawal of the Company's application for listing its common stock on the Nasdaq Global Market.

On March 9, 2010, the Company announced its intention to list on Nasdaq in order to broaden its shareholder base, improve trading liquidity and raise the Company's profile in the investment community. On March 17, 2011, the Company notified Nasdaq of its intention to voluntarily withdraw its listing application and it received immediate confirmation of the acceptance of the withdrawal. The decision to withdraw at this time resulted from the inability of the Company to satisfy Nasdaq Listing Rule 5405(a)(1) regarding the $4.00 minimum bid price for initial listing on the Nasdaq Global Market. The voluntary withdrawal does not preclude the Company from making an application for listing on the Nasdaq Stock Market in the future. The Company's common stock will continue to be listed on the OTC Bulletin Board, under the ticker "CHME".

On February 15, 2011, China Medicine Corporation was informed by Frazer Frost, LLP  that after completion of the current audit for the year ended December 31, 2010, it will decline to stand for re-appointment as the Company’s independent registered public accounting firm for the Company’s audit and for the quarterly reviews of the Company for the year ending December 31, 2011. The decision of Frazer Frost was made on its own initiative without the prior knowledge or participation of the Company.

The audit reports of Frazer Frost on the financial statements of the Company as of and for the years ended December 31, 2009 and December 31, 2008 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.

China Medicine Corporation today announced that the Company’s Board of Directors (the “Board”) has authorized a new stock repurchase plan (the "New Repurchase Plan"). Under the New Repurchase Plan, the Board approved the repurchase of up to an additional $2,000,000 worth of shares of the Company's common stock over the 12 month period commencing upon the conclusion of the existing stock repurchase plan, in the open market or in privately negotiated transactions from time to time, in compliance with Rule 10b-5, Rule 10b5-1 and Rule 10b-18 of the Securities and Exchange Commission.

Under the Company's previously announced stock repurchase program, by December 22, 2010, the Company repurchased approximately $1.5 million of common stock, or approximately 710,000 shares. The Company will continue to make purchases under its existing stock repurchase program until the earlier of the conclusion of the existing stock repurchase plan or July 11, 2011.

Mr. Senshan Yang, Chairman and CEO of China Medicine Corporation, commented "We have the fundamental strength to pursue a variety of opportunities with our cash. We are actively investigating a variety of strategic opportunities on the acquisition front in order to best utilize our cash and ultimately create long-term shareholder value. We are committed to driving organic and acquisition-led growth and we are very confident that our dedicated efforts will help us realize our long-term business goal to expand the Company’s product portfolio and geographical footprint in China and allow us to deliver sustainable returns to our shareholders.”

Mr. Yang continued, “Our proprietary recombinant, Aflatoxin Detoxifizyme (rADTZ), which is used for removing aflatoxins in food and animal feed, is well at the last step of the Chinese Ministry of Agriculture (MOA) approval process. As we disclosed before, we have completed all requirements and are still waiting for the last step onsite inspection by the MOA, which is expected to commence in early next year. We are working closely with national and provincial MOA to complete this process as expeditiously as possible. At this point, we remain confident in receiving the final approval in near future but cannot predict the actual timing of MOA review.”

Third Quarter 2010 Financial Performance

• Revenue decreased 8.4% to $17.6 million from $19.2 million in the prior year period.

• Gross margin was 33.1%, compared to 30.5% in the prior year period.

• Operating income was $2.5 million, compared to $4.5 millionin the prior year period, which was mainly due to the R&D expenditure on a diabetes drug.

• Net income available to common shareholders decreased to $2.2 million, or $0.06 per diluted share, from $3.2 million, or $0.21 per diluted share, in the prior year period.

Mr. Senshan Yang, Chairman and CEO of China Medicine Corporation, stated, "We had a very challenging quarter, impacted by a combination of margin pressure on distributing prescription drugs due to the government's influence on the drug distribution bidding system, and rising prices of certain raw materials used in our proprietary products.   We responded to these challenges by continually executing our 'high-margin focus' strategy.  In addition, we expedited the pace of completing the required clinical trials for Zhimu Huangtong, a patented TCM drug used to treat diabetes, and expect to launch this breakthrough diabetic product in 2012.  We are very confident that we will survive this challenging time and achieve long-term success, because we are well positioned and well prepared amid the rapidly changing industry.  We will continue to strive to work responsibly and aggressively on behalf of our shareholders."

Full Year 2010 Financial Guidance

Due to these challenges, we have revised our expectations for the full year 2010.  

• Revenue is now expected to increase 5% to 8% year over year to $68 to $70 million, compared to the $72 to $76 million range we announced previously.  

• We maintain our expectation that gross margin will be in the range of 33% to 38%, as compared to 29.3% in 2009.  

• We now believe full year operating expenses will represent approximately 16-18% of revenue, up from 12-15% of revenue as announced previously.

Mr. Senshan Yang, Chairman and CEO of China Medicine Corporation, stated, "We are very happy with our performance this quarter, which marked a successful period of transition for us as we move from a pure pharmaceutical distributor to a vertically-integrated pharmaceutical enterprise. We are especially pleased with the improvement in gross margin, which was mainly driven by a product mix shift within our distribution business and the revenue contribution from our LifeTech proprietary products. Additionally, our addressable market in China continues to grow, and our efforts to capitalize on this growth are progressing very well. We believe that we are well-positioned to be a leading consolidator in this fragmented industry and we'll strive to work responsibly and aggressively on behalf of our shareholders."

In the second quarter of 2010

• Revenue increased 14.2% year over year to $17.2 million from $15.1 million, reflecting a combination of continued strong demand for our existing products and contributions from the newly-acquired Guangzhou LifeTech Pharmaceutical Co., Ltd. ("LifeTech").
  
  • Revenue from distribution increased 4.1% to $15.2 million from $14.6 million in the prior year period, driven by increased sales of high-margin products mainly for the treatment of cardiovascular and cerebral-vascular diseases.
  • Revenue from proprietary products increased to $2.0 million from $0.5 million in the prior year period, reflecting the inclusion of revenues from LifeTech's products, which were acquired at the end of 2009.
    
• Net income available to common shareholders in the second quarter of 2010 increased to $4.1 million, or $0.10 per diluted share, from $41,996, or $0.00 per diluted share, in the second quarter of 2009. The earnings per share calculation is based on 40.0 million diluted shares outstanding, compared to 15.4 million diluted shares outstanding in the prior year period. Non-GAAP net income, which excludes a one-time non-cash charge related to the warrants and the change in fair value of warrant liabilities, was $2.7 million, or $0.07 per diluted share, compared to $1.3 million, or $0.08 per diluted share, in the prior year period.

China Medicine reiterates its expectation that full year 2010 revenue will be in the range of $72 to $76 million, 11% to 17% higher than 2009, and gross margin will be in the range of 33% to 38%, as compared to 29.3% in 2009. The Company revised its expectation of full year operating expenses to represent approximately 12-15% of revenue. This guidance reflects China Medicine's current and preliminary views, which are subject to change.

GUANGZHOU, China, July 9 /PRNewswire-Asia/ -- China Medicine Corporation (OTC Bulletin Board: CHME) ("China Medicine" or "the Company"), a leading manufacturer, developer and distributor of Western pharmaceuticals, traditional Chinese medicines ("TCM"), and other health products, today announced that its board of directors authorized a stock repurchase program. The program authorizes a buyback of the Company's common stock up to a value of $2.0 million. The authorization is valid through July, 2011. The program utilizes funds currently held in the escrow account pursuant to the Company's agreement with its principal shareholder, OEP CHME Holdings, LLC, an affiliate of One Equity Partners, the private equity arm of JP Morgan, dated January 28, 2010.

Mr. Senshan Yang, Chairman and CEO of China Medicine Corporation stated, "We have the fundamental strength to pursue a variety of opportunities with our cash, and today's authorization is an appropriate and strategic decision that brings us additional flexibility to leverage our strong balance sheet. We are committed to enhancing shareholder value, and we have confidence in our long-term growth plan to expand the Company's product portfolio and geographical footprint in China."

Added to the GeoSpecial list on January 7, 2010 @ $3.70

Catalyst: Was selling under book.

Peak performance: Reached a high of $4.89 on January 15, 2010.

Current Price: $2.41

Current road block: Dilution from recent financing; Guidance range leads to a wide range in EPS. On the low side EPS growth would be minimal. On the high side EPS growth would be around 30.0%; has failed to deliver consistent EPS growth.

Will keep CHME on the GeoSpecial on the Radar List to observe if the company can move towards the high end of its guidance. We will dig for more clues, but for the time being investors may view CHME as an unexciting option. 

Note: We are still performing due diligence on the CHME share count which currently stands at 20,431,139. 

First quarter of the year is typically the slowest period for China Medicine due to lower customer purchases during the Chinese New Year holiday. Additionally, the repositioning of LifeTech's products via the newly developed sales channel and China Medicine's well established existing distribution network could improve pricing opportunity and expand customer base to accelerate revenue growth and margin increase in the quarters ahead.

China Medicine expects full year 2010 

• revenues in the range of $72 to $76 million, or 11% to 17% growth.
  
• gross margin in the range of 33% to 38%, as compared to 29.3% in 2009. 
  
• operating expenses to represent approximately 10% of revenues, as compared to 18% reported in the first quarter 2010.

This guidance reflects China Medicine's current and preliminary views, which are subject to change.

The GeoTeam has calculated that CHME guidance works out to about $0.65 on low end of its assumptions.

For 2009 CHME Adjusted net income, excluding non-cash expense of $7.2 million related to change in fair value of warrants, was $9.0 million in 2009, or $0.58 per diluted share

"I am proud to report a very productive fiscal year 2009, including the achievement of record revenues, the closing of a transformational acquisition and a meaningful financing agreement with a world-class private equity firm," Mr. Senshan Yang, Chairman and CEO of China Medicine Corporation. Looking ahead, we anticipate continued growth in our profitability level as we accelerated our transition from a pharmaceutical distributor into a vertically-integrated pharmaceutical company with a broad portfolio of self-owned products sold through our extensive distribution network."

 "We would like to thank OEP for its confidence in our outlook and for the funding support that provides the Company with greater resources to execute our acquisition strategy and commercialization plans for rADTZ. We anticipate that 2010 will be a transformational year for China Medicine, focused on strengthening our pharmaceutical manufacturing capabilities, expanding our extensive product pipeline to include more of self-owned products that will support sustainable margin expansion, continuing our R&D effort on new product development and deepening our distribution network to cover more tier II and III cities and towns in China," concluded Mr. Yang.

Source: PR Newswire (March 29, 2010)

Per a financing agreement with an investor (One Equity Partners) the Company has will have to release shares, based on a formula, to the investor if certain financial targets are not attained:

Assuming Company completes the acquisition of Jiangmen during the 2010 fiscal year.

Assuming Company does not completes the acquisition of Jiangmen during the 2010 fiscal year.

The EBITDA targets shall be adjusted upwards to account for expected returns from additional acquisitions that may be consummated.

The 2010 Target EBITDA is subject to a downward adjustment of US$1,000,000 if Closing occurs after January 31, 2010

Source: SEC 8K Filing (January 7, 2009, page 29).