As filed with the Securities and Exchange
Commission on January 25, 2010
Registration No. 333-160774
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM S-1/A
(Amendment No. 4)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHINA BIOLOGIC PRODUCTS, INC.
(Exact name of registrant as
specified in its charter)
Delaware
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2836
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75-2308816
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(State or other jurisdiction of
incorporation
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(Primary Standard Industrial
Classification
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(I.R.S. Employer
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or organization)
|
Code Number)
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Identification No.)
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No. 14 East Hushan Road, Tai'an City, Shandong
People's Republic of China 271000
(86-538)-620-3897
(Address, including zip code, and
telephone number, including area code, of registrant's principal executive
offices)
____________________________
Tristan Kuo, Chief Financial Officer
|
Louis A. Bevilacqua, Esq.
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China Biologic Products, Inc.
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Pillsbury Winthrop Shaw Pittman LLP
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No. 14 East Hushan Road, Tai'an City
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2300 N Street, N.W.
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Shandong, China 271000
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Washington, D.C. 20037-1122
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(86-538)-620-3897
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(202) 663-8158
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(Names, addresses and telephone numbers of
agents for service)
|
____________________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective
date of this registration statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
the same offering.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer [ ]
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Accelerated filer [ ]
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Non-accelerated
filer [ ] (Do not check if smaller reporting company)
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Smaller reporting company [X]
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|
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CALCULATION OF REGISTRATION FEE
|
Title of each class of securities to be
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Amount to be
|
Proposed maximum
|
Proposed maximum
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Amount of registration
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registered
|
registered
(
1)
|
offering price per share
|
aggregate offering price
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fee
(6)
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Common stock, $0.0001 par value
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1,335,581
(2)
|
$3.78
|
$5,048,496
(3)
|
$282
|
Common stock, $0.0001 par value
|
667,791
(4)
|
$4.80
|
$3,205,397
(5)
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$179
|
Total
|
2,003,372
|
-
|
$8,253,893
|
$461
|
(1) Pursuant to Rule 416 under the Securities
Act of 1933, as amended, this registration statement shall be deemed to cover
any additional securities to be offered or issued by the registrant to the
selling stockholders upon adjustment under anti-dilution provisions covering
stock splits, stock dividends and similar transactions.
(2) Represents shares of the registrant's common stock issuable upon
conversion of 3.8% secured convertible notes (the "Notes") issued in the June
2009 private placement to certain accredited investors. Pursuant to the terms
of the Notes issued in connection with the private placement, the Notes
covered hereunder are initially, subject to adjustment, convertible or
exercisable into an aggregate of 1,335,581 shares of Common Stock.
(3) The proposed maximum aggregate price per unit was estimated pursuant to
Rule 457(c) promulgated under the Securities Act of 1933, as amended, solely
for the purpose of determining the registration fee, based on the average of
high and low prices of the registrant's common stock as quoted on the
over-the-counter bulletin board on July 15, 2009.
(4) Represents shares of the registrant's
common stock issuable upon exercise of three-year warrants to purchase shares
of the registrant's common stock by the selling stockholders named in this
registration statement.
(5) Calculated in accordance with Rule 457(g) based upon the price at which
the warrants may be exercised.
(6)
An aggregate registration fee of $824 has been previously paid in connection
with the initially filed registration statement on Form S-1 (No. 333-160774).
The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall hereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or
until the registration statement shall become effective on such date as the
Commission, acting pursuant to such Section 8(a), may determine.
The information in this
prospectus is not complete and may be changed. No person may sell these
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell
these securities and no person named in this prospectus is soliciting offers
to buy these securities in any state where the offer or sale is not permitted.
PROSPECTUS
Subject to completion, dated
January 25, 2010
CHINA BIOLOGIC PRODUCTS, INC.
2,003,372 Shares of Common Stock
This prospectus relates to the resale
of up to 2,003,372 shares of our common stock being offered by the selling
stockholders, which includes:
·
1,335,581 shares of Common Stock
issuable to the selling stockholders named in this prospectus upon conversion
of 3.8% secured convertible notes issued in the June 2009 private placement to
certain accredited investors; and
·
667,791 shares of common stock issuable
upon the exercise of three-year warrants owned by the selling stockholders
named in this prospectus.
We will not receive any proceeds from
the sales by the selling stockholders, but we will receive funds from the
exercise of warrants held by the selling stockholders, if exercised for cash,
which we will use for working capital purposes.
Our common stock
commenced trading on the NASDAQ Global Market on December 2, 2009, under our
current symbol, CBPO. The closing bid price for our common stock on
January 21, 2010, is $10.99 per share.
The selling stockholders will sell our
shares at prevailing market prices or at privately negotiated prices.
Investing in our common stock
involves a high degree of risk. See "Risk Factors" beginning on page 11 to
read about factors you should consider before buying shares of our common
stock.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this Prospectus is ___________, 2009.
TABLE OF CONTENTS
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Page
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SUMMARY
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4
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RISK FACTORS
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11
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SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS
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26
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USE OF PROCEEDS
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27
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DIVIDEND POLICY
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27
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MARKET FOR OUR COMMON
STOCK
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27
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DILUTION
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28
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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28
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CORPORATE STRUCTURE
AND HISTORY
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44
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OUR BUSINESS
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47
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MANAGEMENT
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64
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EXECUTIVE
COMPENSATION
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70
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TRANSACTIONS WITH
RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS; DIRECTOR
INDEPENDENCE
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72
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CHANGE OF ACCOUNTANTS
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73
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SELLING STOCKHOLDERS
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73
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DESCRIPTION OF
SECURITIES TO BE REGISTERED
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76
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SHARES ELIGIBLE FOR
FUTURE SALE
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77
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PLAN OF DISTRIBUTION
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78
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LEGAL MATTERS
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80
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EXPERTS
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80
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INTEREST OF NAMED
EXPERTS AND COUNSEL
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80
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WHERE YOU CAN FIND
MORE INFORMATION
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81
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You should only rely on the information
contained in this prospectus. We have not, and the selling stockholders have
not, authorized any other person to provide you with different information.
This prospectus is not an offer to sell, nor is it seeking an offer to buy,
these securities in any state where the offer or sale is not permitted. The
information in this prospectus is accurate only as of the date on the front
cover, but the information may have changed since that date.
SUMMARY
The items in the following summary are
described in more detail later in this prospectus. This summary provides an
overview of selected information and does not contain all the information you
should consider. Therefore, you should also read the more detailed information
set out in this prospectus, including the financial statements, the notes
thereto and matters set forth under "Risk Factors." For certain defined terms,
see "Use of Terms" on Page 7.
Overview of Our Business
We are a biopharmaceutical company and
through our indirect Chinese subsidiaries, Shandong Taibang and Qianfeng, we
are principally engaged in the research, development and manufacturing of
plasma-based pharmaceutical products in China. Shandong Taibang operates from
our manufacturing facility located in Tai'an City, Shandong Province and
Qianfeng operates in Guizhou Province. The collection facilities of our
minority-owned subsidiary, Huitian, are located in Xi'an Province. The
plasma-based biopharmaceutical manufacturing industry in China is highly
regulated by both the provincial and central governments. Accordingly, the
manufacturing process of our products is strictly monitored from the initial
collection of plasma from human donors to finished products. Our principal
products include our approved human albumin and immunoglobulin products.
We are approved to sell human albumin
20%/10ml, 20%/25ml and 20%/50ml. Human albumin is our top-selling product.
Sales of these human albumin products represented approximately 57.8% and
63.5% of our total revenues, respectively, for the each of the years ended
December 31, 2008 and 2007, and approximately 48.7% and 58.0% of our total
revenues, respectively, for the nine months ended September 30, 2009 and 2008.
Human albumin is principally used to increase blood volume while
immunoglobulin is used for certain disease preventions and cures. Shandong
Taibang's approved human albumin and immunoglobulin products use human plasma
as the basic raw material. Albumin has been used for almost 50 years to treat
critically ill patients by replacing lost fluid and maintaining adequate blood
volume and pressure. All of our products are prescription medicines
administered in the form of injections.
We sell our products to customers in the
PRC, mainly hospitals and inoculation centers. Our sales have historically
been made on the basis of short-term arrangements and our largest customers
have changed over the years. For the years ended December 31, 2008 and 2007,
our top 5 customers accounted for approximately 16.2% and 14.9%, respectively,
of our total revenue, and for the nine months ended September 30, 2009 and
2008, our top 5 customers accounted for approximately 11.7% and 16.8%,
respectively, of our total revenue. For the years ended December 31, 2008 and
2007, our largest customer accounted for approximately 6.4% and 5.3%, of our
revenue, respectively, and for the nine months ended September 30, 2009 and
2008, our largest customer accounted for approximately 4.8% and 6.9%, of our
revenue, respectively. As we continue to diversify our geographic presence,
customer base and product mix, we expect that our largest customers will
continue to change from year to year. We have product liability insurance
covering all of our products. However, since our establishment in 2002, there
has not been any product liability claims nor has any legal action been filed
against the Company brought by patients related to the use of our products.
In this prospectus, we refer to information
and statistics regarding the plasma-based biopharmaceutical industry that we
have obtained from a variety of sources, including:
·
The 2006 Hua Yuan Medicine Net
Survey
-
The China National Institute for the Control
of Pharmaceutical and Biological Products
This information is publicly available for
free and has not been specifically prepared for us for use in this prospectus
or otherwise.
Overview of Our Industry
The collection of human plasma in China is
generally influenced by factors such as government regulations, geographical
locations of collection stations, sanitary conditions of collection stations,
living standards of the donors, and cultural and religious beliefs. Until
recently, only licensed Plasmapheresis stations owned and operated by the
government could collect human plasma. Furthermore, each collection station
was only allowed to supply plasma to the one manufacturer that had signed the
"Quality Responsibility" statement with them. However, in March 2006, the
Ministry of Health promulgated certain "Measures on Reforming Plasma
Collection Stations," or the Blood Collection Measures, whereby the ownership
and management of PRC plasma stations are required to be transferred to
plasma-based biopharmaceutical companies and the local government is charged
with regulatory supervision and administrative control in accordance with the
policies of the central government. Plasma stations that did not complete
their reform by December 31, 2006 risked revocation of their license to
collect plasma.
-
4 -
The supply of plasma for plasma-based
products in the PRC has been on the decline since 2003 from the historical
high of annual supply of approximately 7,000 tons to approximately 4,000 tons.
We believe that this decline is a direct result of the government's industry
reforms of the country's collection practices which led to the closure of many
stations that did not meet the new industry standards. Based on reports
promulgated by the PRC Ministry of Health, we estimate that the current annual
supply of plasma in China amounts to approximately 4,000 tons, as compared to
30,000 tons in the global market, with the six largest manufacturers of plasma
products accounting for approximately 50% of the annual plasma collection. In
spite of the shortage of plasma supply, revenues from the sale of plasma
products in China amounted to approximately $700 million in 2008, and revenues
from the sale of human albumin products amounted to about $400 million. We
expect that the plasma derivatives market to grow at a 15% rate per year
through 2011.
We believe that these regulatory changes,
including measures which limit illegal selling of blood, have improved the
quality of blood and plasma by increasing cleanliness standards at blood
collection stations. As the operation of the plasma stations become more
regulated and the donor population expands, we believe that the overall
quality of raw materials, such as human albumin will continue to improve,
leading to a safer, more reliable finished product.
Competition
We are subject to intense competition.
There are both local and overseas pharmaceutical enterprises that are engaged
in the manufacture and sale of potential substitute or similar
biopharmaceutical products as our products in the PRC. These competitors may
have more capital, better research and development resources, manufacturing
and marketing capability and experience than we do. In our industry, many
competitive factors may affect our sales of products, including product
efficacy, safety, price and cost effectiveness, marketing effectiveness,
quality control and quality assurance of our manufacturing operations,
research and development of new products and logistical capabilities.
We believe that we have strengthened our
position in the marketplace with our recent acquisition of a 90% equity
interest in Dalin and its 54% majority-owned operating subsidiary, Qianfeng
and a 35% equity interest in Huitian, Xi'an-based biopharmaceutical company.
Our profitability may be adversely affected
if (i) competition intensifies; (ii) competitors drastically reduce prices; or
(iii) competitors develop new products or product substitutes having
comparable medicinal applications or therapeutic effects which are more
effective and /or less costly than those produced by us.
Our Growth Strategy
Our mission is to become a first-class
biopharmaceutical enterprise in China. To achieve this objective, we have
implemented the following strategies:
·
Securing the supply of
plasma
Due to the shortage of
plasma and the reform of the ownership of plasma stations, our immediate
strategy is to negotiate and acquire plasma stations in order to secure our
plasma supply. In December 2006, we acquired five of the plasma stations in
Shandong Province. Furthermore, in January 2007, we acquired two additional
plasma stations in Guangxi Province. See "Raw Materials Plasma" below. In
June 2008, we received approval from the Guangxi Province Bureau of Health to
set up a new plasma collection station in Pu Bei County, Guangxi Province,
which, when operational, will replace CBP's existing Fang Cheng Plasma
Collection Station, or Fang Cheng. We decided to relocate Fang Cheng to a more
strategic location to increase collection volumes. During the construction
period, Fang Cheng will still continue with its normal operations. With the
approval of the Centralized Industry Zone of Pu Bei County, once Fang Cheng
becomes operational, expected to be in the fourth quarter of 2009, we hope to
expand its coverage area to secure higher collection volumes in the future. We
also expect that our recent acquisition of a majority interest in Dalin and
its PRC operating subsidiary, Qianfeng, and our acquisition of a minority
interest in Huitian, will help secure our plasma supply as well as expand
production capacity and market coverage.
-
5 -
·
Acquisition of competitors and/or
other biologic related companies
In addition to organic growth, acquisition
is an important part of our expansion strategy. Although there are about 32
approved plasma- based biopharmaceutical manufacturers in the market, we
believe that there are only 26 manufacturers in operation, only about half of
whom will be competitive. The top six manufacturers in China account for more
than 50% market share. Furthermore, we believe that the regulatory authorities
are considering further reforming the industry and those smaller, less
competitive manufacturers will face the possibility of having their
manufacturing permits revoked by the regulators, making them potential targets
for acquisition. Also, if we are presented with appropriate opportunities, we
may acquire additional companies, products or technologies in the biologic
related sectors (including but not limited to medical, pharmaceutical and
biopharmaceutical).
·
Further strengthening of research
and development capability
We
believe that, unlike other more developed countries such as the U.S., China's
plasma-based biopharmaceutical products are at the initial stage of
development. There are many other plasma-based products that are being used in
the U.S. which are not currently being manufactured in China. We intend to
strengthen our research and development capability so as to expand our product
line to include higher-margin, technologically more advanced plasma-based
biopharmaceutical products. We believe that our increased focus on research
and development will give us a competitive advantage over our competitors
·
Market development and network
expansion
Leveraging on the
high quality and excellent safety record of our products, we intend (i) to
enhance our product penetration with our existing customers by introducing new
products and (ii) to extend the reach of our products from our current market
to include other provinces where we envision significant market potential.
Risk Factors
Our ability to successfully operate our
business and achieve our goals and strategies is subject to numerous risks as
discussed more fully in the section titled "Risk Factors," including for
example:
·
our ability to overcome competition
from local and overseas pharmaceutical enterprises;
·
decrease in the availability, or
increase in the cost, of plasma;
·
failure to obtain PRC
governmental approval to increase retail prices of certain of our
biopharmaceutical products;
·
difficulty in servicing our
debt;
·
loss
of key members of our senior management; and
·
unexpected change in the PRC
government's regulation of the biopharmaceutical industry in China, or changes
in China's economic situation and legal environment.
Any of the above risks could materially and
negatively affect our business, financial position and results of operations.
An investment in our common stock involves risks. You should read and consider
the information set forth in "Risk Factors" and all other information set
forth in this prospectus before investing in our common stock.
Corporate Information
China Biologic Products, Inc. was
originally incorporated on December 20, 1989 under the laws of the State of
Texas as Shepherd Food Equipment, Inc. On November 20, 2000, Shepherd Food
Equipment, Inc. changed its corporate name to Shepherd Food Equipment, Inc.
Acquisition Corp., or Shepherd. Shepherd is the survivor of a May 28, 2003,
merger between Shepherd and GRC Holdings, Inc. or GRC. In the merger, the
company adopted the Articles of Incorporation and By-Laws of GRC and changed
its corporate name to GRC Holdings, Inc. On January 10, 2007, a Plan of
Conversion became effective pursuant to which GRC was converted into a
Delaware corporation and changed its name to China Biologic Products, Inc. We
conduct our business in China through our indirect PRC operating subsidiaries,
Shandong Taibang and Qianfeng. We also have a minority interest in Huitian, a
Xi'an based biopharmaceutical company.
-
6 -
The following chart reflects our current
corporate organizational structure:
Our principal executive offices are located
at No. 14 East Hushan Road, Tai'an City, Shandong, the People's Republic of
China 271000. Our corporate telephone number is (86)538-620-2306 and our fax
number is (86)538-620-3895. We maintain a website at
http://www.chinabiologic.com
that contains information about our operating company, but that information is
not part of this prospectus.
Use of Terms
Except as otherwise indicated by the
context, all references in this prospectus to:
·
"BVI" are to the British Virgin
Islands;
·
"China Biologic," the "Company," "we,"
"us," or "our," are to the combined business of China Biologic Products, Inc.,
a Delaware corporation, and its direct and indirect subsidiaries;
·
"Dalin" are to our majority owned
subsidiary, Chongqing Dalin Biologic Technologies Co., Ltd., a PRC limited
company;
·
"Exchange Act" are to the Securities
Exchange Act of 1934, as amended;
·
"Hong Kong" are to the Hong Kong
Special Administrative Region of the People's Republic of China. "China"
·
"Huitian" are to Xi'an Huitian Blood
Products Co., Ltd., our minority owned PRC operating subsidiary;
·
"Logic Express" are to our wholly owned
subsidiary Logic Express Limited, a BVI company;
·
"Logic Holdings" a to Logic Holdings
(Hong Kong) Limited, our wholly-owned Hong Kong subsidiary;
·
"PRC" are to the People's Republic of
China;
-
7 -
·
"Qianfeng" are to Qianfeng Biological
Products Co., Ltd., Dalin's majority owned PRC operating subsidiary;
·
"RMB" are to Renminbi, the legal
currency of China; "Securities Act" are to the Securities Act of 1933, as
amended;
·
"Shandong Medical" are to Shandong Taibang's wholly owned PRC subsidiary, Shandong Missile Medical Co., Ltd.;
·
"Shandong Taibang" are to our
subsidiary Shandong Taibang Biological Products Co. Ltd., a sino-foreign joint
venture incorporated in China; and
·
"U.S. dollar," "$," "USD" and "US$" are
to the legal currency of the United States.
Throughout this
prospectus, we have converted RMB to USD as follows:
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December 31, 2008
|
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Balance sheet
|
RMB 6.82 to US$1.00
|
Statement of income
and comprehensive income
|
RMB 6.94 to US$1.00
|
|
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December 31, 2007
|
|
Balance sheet
|
RMB 7.29 to US$1.00
|
Statement of income
and comprehensive income
|
RMB 7.59 to US$1.00
|
As the result of foreign currency
fluctuations the financial statements if prepared as of the date of this
prospectus would present different figures. The change of the foreign currency
rate of USD to RMB as of January 21, 2010 would require a translation of
amounts from RMB into USD according to the following exchange rates:
January 21, 2010
|
|
Balance sheet
|
RMB 6.84 to US$1.00
|
Statement of income
and comprehensive income
|
RMB 6.84 to US$1.00
|
-
8 -
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The Offering
|
|
|
Common stock offered by selling
stockholders
|
2,003,372 shares of our common stock,
including up to 1,335,581 shares of our common stock issuable to the
selling stockholders upon the conversion of 3.8% secured convertible notes
issued to, and up to 667,791 shares of our common stock issuable upon the
exercise of outstanding warrants held by, the selling stockholders named
in this prospectus. This number represents 8.46% of our curr
e
nt
outstanding common stock
(1)
|
|
|
Common stock outstanding before the
offering
|
23,319,977
shares.
|
|
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Common stock outstanding after the
offering
|
25,323,349 shares, assuming full
conversion of the convertible notes and full exercise of the warrants
offered for resale by the selling stockholders.
|
|
|
Proceeds to us
|
We will not receive any proceeds from the
sales by the selling stockholders, but we will receive funds from the
exercise of warrants, if exercised for cash, held by the selling
stockholders which we will use for working capital purposes.
|
|
|
NASDAQ
Symbol:
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CBPO
|
|
|
Risk Factors:
|
See "Risk Factors" beginning on page 11
and the other information in this prospectus for a discussion of the
factors you should consider before deciding to invest in our common stock.
|
(1) Based on 25,323,349 shares of common
stock outstanding (
assuming full conversion of the
convertible notes and full exercise of the warrants offered for resale by the
selling stockholders
).
-
9 -
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes selected
financial data regarding our business and should be read in conjunction with
our consolidated financial statements and related notes contained elsewhere in
this prospectus and the information under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The financial
statement data as of and for each of the fiscal years ended December 31, 2007
and 2008 have been derived from our audited consolidated financial statements
included elsewhere in this prospectus. The financial statement data as of and
for each of the nine months ended September 30, 2008 and 2009 have been
derived from our unaudited consolidated financial statements included
elsewhere in this prospectus.
(All amounts in U.S. dollars, except per
share data)
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STATEMENT OF
INCOME
|
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Nine Months Ended September 30,
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Years Ended December 31,
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2009
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2008
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2008
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2007
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Revenues
|
$
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81,369,882
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$
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33,574,764
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$
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46,751,160
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$
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32,398,669
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|
Cost of revenues
|
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22,337,596
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9,725,103
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14,040,602
|
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9,945,921
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Gross profit
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59,032,286
|
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23,849,661
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32,710,558
|
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22,452,748
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|
Operating expenses
|
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18,408,506
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8,206,079
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12,374,787
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9,695,333
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Income from
operations
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40,623,780
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15,643,582
|
|
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20,335,771
|
|
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12,757,415
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Income before taxes
and noncontrolling Interest
|
|
23,321,107
|
|
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15,540,846
|
|
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19,886,115
|
|
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12,245,838
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Provision for income
taxes
|
|
7,547,318
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4,437,141
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4,596,603
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2,074,560
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|
Net income
attributable to noncontrolling interest
|
|
10,738,295
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|
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2,323,205
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3,303,841
|
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1,991,902
|
|
Net income
attributable to controlling interest
|
|
5,035,494
|
|
|
8,780,500
|
|
|
11,985,671
|
|
|
8,179,376
|
|
Basic Earnings Per
Share
|
|
0.23
|
|
|
0.41
|
|
|
0.56
|
|
|
0.38
|
|
Diluted Earnings Per
Share
|
|
0.23
|
|
|
0.40
|
|
|
0.56
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA
|
|
September 30,
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Working capital
|
$
|
26,824,791
|
|
|
|
|
$
|
6,267,039
|
|
$
|
9,149,810
|
|
Current assets
|
|
87,591,270
|
|
|
|
|
|
25,195,816
|
|
|
15,727,332
|
|
Total assets
|
|
160,167,737
|
|
|
|
|
|
67,169,392
|
|
|
33,305,245
|
|
Current liabilities
|
|
60,766,479
|
|
|
|
|
|
18,928,777
|
|
|
6,577,522
|
|
Long-term debt
|
|
45,175
|
|
|
|
|
|
5,868,000
|
|
|
-
|
|
Total liabilities
|
|
81,863,822
|
|
|
|
|
|
25,120,484
|
|
|
6,881,608
|
|
Shareholders' equity
|
|
50,784,346
|
|
|
|
|
|
37,834,114
|
|
|
22,100,179
|
|
Noncontrolling
interest
|
|
27,519,569
|
|
|
|
|
|
4,211,794
|
|
|
4,181,338
|
|
Total liabilities and
equity
|
|
160,167,737
|
|
|
|
|
|
67,169,392
|
|
|
33,305,245
|
|
-
10 -
RISK FACTORS
The shares of our common stock are
highly speculative in nature, involve a high degree of risk and should be
purchased only by persons who can afford to lose the entire amount invested in
the common stock. Before purchasing our common stock, you should carefully
consider the following factors relating to our business and prospects. If any
of the following risks actually occurs, our business, financial condition or
operating results will suffer, the trading price of our common stock could
decline, and you may lose all or part of your investment. You should also
refer to the other information about us contained in this prospectus,
including our financial statements and related notes.
RISKS RELATED TO OUR BUSINESS
We face risks related to general
domestic and global economic conditions and to the credit crisis. Disruptions
in the capital and credit markets related to the current national and
worldwide financial crisis, which may continue indefinitely or intensify,
could adversely affect our results of operations, cash flows and financial
condition, or those of our customers, suppliers and creditors.
We currently generate sufficient operating
cash flows, which combined with access to the credit markets, provide us with
significant discretionary funding capacity. However, the current uncertainty
arising out of domestic and global economic conditions, including the
disruption in credit markets, may impact our ability to manage normal
relationships with our customers, suppliers and creditors. The disruptions in
the capital and credit markets may continue indefinitely or intensify, and
adversely impact our results of operations, cash flows and financial
condition, or those of our customers, suppliers and creditors. Disruptions in
the capital and credit markets as a result of uncertainty, changing or
increased regulation, reduced alternatives or failures of significant
financial institutions could adversely affect our access to liquidity needed
to conduct or expand our businesses or conduct acquisitions or make other
discretionary investments. Such disruptions may also adversely impact the
capital needs of our customers and suppliers, which, in turn, could adversely
affect our results of operations, cash flows and financial condition.
In addition, the demand for our products is
largely affected by the general economic conditions in China as our products
are still not affordable to many patients. As China's economy grows, we expect
more Chinese people will become consumers of medical treatments and
procedures, including procedures requiring human plasma. However, we expect
that the current global economic slowdown will result in slower economic
growth in China and a unfavorable economic environment which in turn may make
our products less affordable to more patients and result in an overall
decreased demand for our products. Such reductions and disruptions could have
a material adverse effect on our business operations.
In order to grow at the pace expected
by management, we will require additional capital to support our long-term
business plan. If we are unable to obtain additional capital in future years,
we may be unable to proceed with our long-term business plan and we may be
forced to curtail or cease our operations or further business expansion.
We will require additional working capital
to support our long-term business plan, which includes identifying suitable
targets for horizontal or vertical mergers or acquisitions, so as to enhance
the overall productivity and benefit from economies of scale. Our working
capital requirements and the cash flow provided by future operating
activities, if any, will vary greatly from quarter to quarter, depending on
the volume of business during the period and payment terms with our customers.
We may not be able to obtain adequate levels of additional financing, whether
through equity financing, debt financing or other sources, especially in light
of the global financial crisis and the market downturn. To raise funds, we may
need to issue new equities or bonds which could result in additional dilution
to our shareholders and investors. Additional financings could result in
significant dilution to our earnings per share or the issuance of securities
with rights superior to our current outstanding securities or contain
covenants that would restrict our operations and strategy. In addition, we may
grant registration rights to investors purchasing our equity or debt
securities in the future. If we are unable to raise additional financing, we
may be unable to implement our long-term business plan, develop or enhance our
products and services, take advantage of future opportunities or respond to
competitive pressures on a timely basis. In addition, a lack of additional
financing could force us to substantially curtail or cease operations.
-
11 -
We have a significant amount of debt,
which could have negative consequences to us.
We have a significant amount of debt. As of
September 30, 2009, we had, on a consolidated basis, approximately $18.6
million principal amount of indebtedness outstanding. Our substantial
indebtedness could have important consequences, including:
·
increasing our vulnerability to adverse
general economic and industry conditions and adverse changes in governmental
regulations;
·
limiting our ability to obtain
additional financing to fund capital expenditures and other general corporate
requirements;
·
requiring us to dedicate a substantial
portion of our cash flow from operations to payments on our indebtedness,
thereby reducing the availability of our cash flow to fund capital
expenditures or other general corporate purposes;
·
limiting our flexibility in planning
for or reacting to changes in our business and the industry in which we
operate; and
·
placing us at a competitive
disadvantage compared to our less leveraged competitors.
Our ability to pay interest on our
indebtedness and to satisfy our other debt obligations will depend upon, among
other things, our future operating performance and cash flow and our ability
to refinance indebtedness when necessary. Each of these factors is, to a large
extent, dependent on general economic, financial, competitive, legislative,
regulatory and other factors beyond our control. If in the future we cannot
generate sufficient cash from operations to make scheduled payments on our
indebtedness or to meet our liquidity needs or other obligations, we will need
to refinance our existing debt, obtain additional financing or sell assets. We
cannot assure you that we will be able to renegotiate or refinance any of our
debt on commercially reasonable terms or at all. In addition, our interest
expense may increase if general economic conditions result in an increasing
interest rate environment. We cannot assure you that our business will
generate cash flow, or that we will be able to obtain funding sufficient to
satisfy our debt service requirements.
If the PRC government bans or limits
plasma-based biopharmaceutical products, our operations, revenues and
profitability would be adversely affected.
The principal raw materials of our existing
and planned biopharmaceutical products is human source plasma, which, due to
its unique nature, is subject to various quality and safety control issues
which include, but are not limited to, contaminations and blood-born diseases.
In addition, limitations of current technology pose biological hazards
inherent in plasma that have yet to be discovered which could result in a wide
spread epidemic due to blood infusion. The primary law that regulates plasma
products in China is the PRC Pharmaceutical Law, the Implementation Rules on
the PRC Pharmaceutical Law and the Regulations on the Administration of Blood
Products. These rules and regulations require entities producing blood
products to strictly comply with certain hygienic standards and specifications
promulgated by the government. In the event that human plasma is discovered to
be noncompliant with the government's hygienic standards and specifications,
the health department may revoke the registration and/or the approval of the
blood product, or otherwise limit the use of such blood product. If the PRC
government bans or limits plasma-based biopharmaceutical products, our
operations, revenues and profitability would be adversely affected.
If the plasma we source is found to
be contaminated, or the supply from these plasma stations becomes restricted,
our operation, revenues and profitability would be adversely affected.
We currently source plasma mainly from
human donations to our plasma stations in Shandong and Guangxi Provinces, and
Qianfeng sources its plasma from stations in Guizhou Province. If any of our
human donors is infected with certain diseases, then the plasma from such
donor may be infected. If such contaminated plasma is not appropriately
screened out, our entire plasma source for the relevant collection station may
become contaminated. If the plasma from our collection stations is found to be
contaminated or the supply from these plasma stations becomes restricted, our
operation, revenues and profitability would be adversely affected.
-
12 -
If we are unable to adequately
monitor our plasma stations our plasma supply may be tainted and we will be
subject to sanctions by the government which would have a material adverse
effect on our business.
As part of the industry reform initiative
by the Chinese government, in 2006 we acquired the assets of five of the six
then existing plasma stations in Shandong Province through our wholly owned
subsidiaries, Xia Jin Plasma Company, the Qi He Plasma Company, the He Ze
Plasma Company, the Zhang Qiu Plasma Company and the Yang Gu Plasma Company.
We received permits to operate these subsidiaries in January 2007. In April
2007, we acquired the assets of two additional plasma stations, one through
our newly formed subsidiary, the Huan Jiang Plasma Company, and the other
through our majority owned subsidiary, the Fang Cheng Plasma Company, which is
80% owned by Shandong Taibang and 20% owned by Lin Feng, an unrelated third
party. We obtained necessary permits and commenced their operation in July and
August 2007, respectively. Qianfeng, the main operating subsidiary of recently
acquired Dalin, is the 85% owner of the seven plasma stations in Guizhou
province. Huitian, the 35% minority owned affiliated company by the Company,
has three plasma stations operating in Shaanxi province. While we monitor our
blood plasma intake procedures through frequent unscheduled inspections of our
stations, there remains a risk that our blood supply may become tainted during
the collection process. Our blood supply may become tainted if we accept blood
from donors whose blood shows any irregular findings including HIV, Hepatitis
C and liver disease. We pre-screen all donors in order to ensure that these
diseases are not present. If our blood supply becomes tainted, the
consequences for our business could be severe. We could be subject to civil
liability from suits brought by consumers and to criminal liability and loss
of our registration if we are found by the government to have been criminally
negligent.
Our operations, sales, profit and
cash flow will be adversely affected if our albumin products fail inspection
or are delayed by regulators.
Each batch of our albumin products requires
inspection by Chinese government regulators before we can ship it to our
customers. The PRC State Food and Drug Authority, or the SFDA, has a quality
standard which considers, among other things, the appearance, packing
capacity, thermal stability, pH value, protein content and percentage of
purity of the product. In order to pass inspection, our plasma must test
negative for any blood irregularities, including Hepatitis C, HIV and liver
disease. The plasma must be packaged in 25 separate 600g bags and boxed with a
packing list and labeled to be consistent with computer records. The plasma
must then be stored at -20°C as soon as possible after collection to ensure
that it will congeal within 6 hours. Government regulators usually take one
month to inspect a batch of albumin products. The process begins when the
regulator randomly selects samples of our albumin products and delivers them
to the National Institute for the Control of Pharmaceutical and Biological
Products, or the NICBPB, in Beijing for testing, and the process ends when the
products are given final approval by the NICBPB. In the event that the
regulators delay the approval of our products, change the requirements in such
a way that we are unable to comply with those requirements, or require our
other products to be inspected by regulators before we can ship them to our
customers, our operations, sales, profit and cash flow will be adversely
affected.
We rely on a Secondment Agreement
with the Shandong Institute, which is expected to terminate upon the future
privatization of the Shandong Institute, for over 39% of our Shandong Taibang
employees. If the Secondment Agreement is breached or terminated, it could
have an adverse effect on our operations and on our financial results.
The Shandong Province Institute of
Biological Products, or the Shandong Institute, has provided us with
approximately 108 of our employees out of a total of approximately 753
employees, pursuant to a secondment agreement, or Secondment Agreement, dated
October 28, 2002, between Shandong Taibang and the Shandong Institute.
Pursuant to the Secondment Agreement, we are responsible for the salaries of
these employees, as well as for their social benefits such as insurance. Our
Secondment Agreement with the Shandong Institute will expire on the sooner to
occur of October 2032 or upon the privatization of the Shandong Institute,
which was originally expected to occur before the end of 2008. However, the
completion of privatization of Shandong Institute has been further delayed
indefinitely due to slower action taken by the Shandong Ministry of Health in
implementing the privatization plan. Upon expiration or termination of the
Secondment Agreement, we plan to hire the seconded employees directly.
However, we cannot be sure that all of the employees will accept our
employment offers at that time. Guang Li Pang, Shandong Taibang's Deputy Chief
Executive Officer, Yun Hua Gao and Dian Cong Liu, our Senior Technical
Advisors are employed through the Secondment Agreement. Although none of our
seconded employees have indicated that they do not plan to continue working
for our Company after the privatization, if the Secondment Agreement is
terminated or expires and we are unable to hire those employees or replacement
employees on time, our operations, as well as our financial results, may
suffer.
-
13 -
If the distributors who we rely on do
not purchase our products, our business and results of operations will be
adversely affected.
We sell all of our products in China
through our network of about 397 distributors located in about 27 provinces
and municipal cities throughout China. While we have established working
relationships with many of our distributors and strictly regulate their sales
and marketing activities by annual distribution agreements, there are no
restrictions in these distribution agreements preventing our distributors from
also supplying products produced by our competitors. Our own marketing and
sales staff work to develop and maintain relationships with our distributors,
but there can be no assurance that we will be able to maintain such
relationships. For the years ended December 31, 2008 and 2007, direct sales to
distributors represented approximately 65.6% and 58.3%, respectively, of our
total revenues. If a number of our distributors cease to purchase our products
and we are unable to find suitable replacements, our business and results of
operations will be adversely affected.
Our inability to successfully
research and develop new
biological pharmaceutical products could have an adverse effect on our future
growth.
We believe that the successful development
of biological pharmaceutical products can be affected by many factors.
Products that appear to be promising in the early phases of research and
development may fail to be commercialized for various reasons, including the
failure to obtain the necessary regulatory approvals. In addition, the
research and development cycles for new medicine for which we must obtain a
Certificate of New Medicine from the PRC Ministry of Health, is a relatively
lengthy process. In our experience, the process of conducting research and
various tests on new products before obtaining a Certificate of New Medicine
and subsequent procedures may take approximately three to five years. There is
no assurance that our future research and development projects will be
successful or that they will be completed within the anticipated time frame or
budget. Also, there is no guarantee that we will receive the necessary
approvals from relevant authorities for the production of our newly developed
products. Even if such products could be successfully commercialized, there is
no assurance that they will be accepted by the market as anticipated.
Our financial position and operations
may be materially and adversely affected, if our product liability insurance
does not sufficiently cover our liabilities.
Under current PRC laws, manufacturers and
vendors of defective products in the PRC may incur liability for loss and
injury caused by such products. Pursuant to the General Principles of the
Civil Law of the PRC or the PRC Civil Law, which became effective in 1987, a
defective product which causes property damage or physical injury to any
person may subject the manufacturer or vendor of such product to civil
liability.
In 1993, the PRC promulgated the Product
Quality Law of the PRC or the Product Quality Law, which was revised in 2000.
The Product Quality Law was enacted to protect the rights and interests of
end-users and consumers and to strengthen the supervision and control of the
quality of products. Under the Product Quality Law, manufacturers who produce
defective products may be subject to fines and required to cease production,
and in severe cases, be subject to criminal liability and may have their
business licenses revoked.
In 1993, the Law of the PRC on the
Protection of the Rights and Interests of Consumers or the Consumers' Rights
Law was promulgated to further protect the legal rights and interests of
consumers in connection with the purchase or use of goods and services. All
businesses, including our business, must observe and comply with the
Consumers' Rights Law.
We maintain product liability insurance for
sales in the PRC for all of our products in the amount of approximately $2.9
million (RMB 20 million). Although no one has filed any claims in relation to
the use of our pharmaceutical products, our financial position and operations
may be materially and adversely affected, if our insurance coverage is
insufficient to cover a successful claim.
-
14 -
We depend heavily on key personnel,
and turnover of key employees and senior management could harm our business.
Our success, to a certain extent, is
attributable to the expertise and experience of our senior management and key
research and technical personnel, including Chao-Ming Zhao, our Chief
Executive Officer, Yu-Yun Tristan Kuo, our Chief Financial Officer, Tung Lam,
the Chief Executive Officer of Shandong Taibang and Dian Cong Liu, the Chief
Technical Adviser of Shandong Taibang, who carry out key functions in our
operation. If we lose the service of any of our senior management or key
research or technical personnel or fail to attract additional personnel with
suitable experience and qualification, our business operations and research
capability may be adversely affected.
Our senior management and employees
have worked together for a short period of time, which may make it difficult
for you to evaluate their effectiveness and ability to address challenges.
Due to our limited operating history and
recent additions to our management team, certain of our senior management and
employees have worked together at our company for only a relatively short
period of time. Specifically, Chao Ming Zhao became our Chief Executive
Officer in June 2008 after serving as our Chief Financial Officer since
November 2006 and Y. Tristan Kuo became our Chief Financial Officer in June
2008 and had served as our Vice President-Finance since September 2007. Siu
Ling Chan and Lin Ling Li became our directors in July 2006. In addition,
while Mr. Zhao, Ms. Chen and Ms. Lin were employed in various capacities by
Logic Express and Shandong Taibang, Mr. Kuo is a newcomer to our Company. As a
result of these circumstances, it may be difficult for you to evaluate the
effectiveness of our senior management and other key employees and their
ability to address future challenges to our business.
Future acquisitions may have an
adverse effect on our ability to manage our business.
Selective acquisitions form part of our
strategy to further expand our business. If we are presented with appropriate
opportunities, we may acquire additional companies, products or technologies.
Future acquisitions and the subsequent integration of new companies into ours
would require significant attention from our management. Our company has
little experience with integrating newly acquired businesses. Potential
problems encountered by each organization during mergers and acquisitions
would be unique, posing additional risks to the company. The diversion of our
management's attention and any difficulties encountered in any integration
process could have an adverse effect on our ability to manage our business.
Future acquisitions would expose us to potential risks, including risks
associated with the assimilation of new operations, technologies and
personnel, unforeseen or hidden liabilities, the diversion of resources from
our existing businesses and technologies, the inability to generate sufficient
revenue to offset the costs and expenses of acquisitions, and potential loss
of, or harm to, relationships with employees, customers and suppliers as a
result of integration of new businesses.
We may lose our competitive advantage
and our operations may suffer if we fail to prevent the loss or
misappropriation of, or disputes over, our intellectual property.
None of our products are currently covered
by patents, the trademark "Lu Yue" is licensed to us by the Shandong Institute
for our use as in the labeling of human-use medicine, biopreparate and blood
products, pursuant to a trademark license agreement, dated February 27, 2007.
We plan to apply for patents for our manufacturing processes. The patent
application will be subject to approval from the relevant PRC authorities. We
may not be able to successfully obtain the approval of the PRC authorities for
our patent applications. Furthermore, third parties may assert claims to our
proprietary procedures, technologies and systems. These proprietary
procedures, technologies and systems are important to our business as they
allow us to maintain our competitive edge over our competitors.
While we are not aware of any infringement
on our intellectual property and we have not been notified by any third party
that we are infringing on their intellectual property, our ability to compete
successfully and to achieve future revenue growth will depend, in significant
part, on our ability to protect our proprietary technology and operate without
infringing upon the intellectual property rights of others. The legal regime
in China for the protection of intellectual property rights is still at its
early stage of development. Intellectual property protection became a national
effort in China in 1979 when China adopted its first statute on the protection
of trademarks. Since then, China has adopted its Patent Law, Trademark Law and
Copyright Law and promulgated related regulations such as Regulation on
Computer Software Protection, Regulation on the Protection of Layout Designs
of Integrated Circuits and Regulation on Internet Domain Names. China has also
acceded to various international treaties and conventions in this area, such
as the Paris Convention for the Protection of Industrial Property, Patent
Cooperation Treaty, Madrid Agreement and its Protocol Concerning the
International Registration of Marks. In addition, when China became a party to
the World Trade Organization in 2001, China amended many of its laws and
regulations to comply with the Agreement on Trade-Related Aspects of
Intellectual Property Rights. Despite many laws and regulations promulgated
and other efforts made by China over the years with a view to tightening up
its regulation and protection of intellectual property rights, private parties
may not enjoy intellectual property rights in China to the same extent as they
would in many Western countries, including the United States, and enforcement
of such laws and regulations in China have not achieved the levels reached in
those countries. Both the administrative agencies and the court system in
China are not well-equipped to deal with violations or handle the nuances and
complexities between compliant technological innovation and non-compliant
infringement.
-
15 -
We rely on confidentiality agreements with
our management and employees to protect our confidential proprietary
information. However, the protection of our intellectual properties may be
compromised as a result of:
·
departure of any of our management
members or employees in possession of our confidential proprietary
information;
·
breach by such departing management
member or employee of his or her confidentiality and non-disclosure
undertaking to us;
·
infringement by others of our
proprietary information and intellectual property rights; or
·
refusal by relevant regulatory
authorities to approve our patent or trademark applications.
Any of these events or occurrences may have
a material adverse effect on our operations and the measures that we have put
into place to protect our intellectual property rights may not be sufficient.
Litigation to enforce our intellectual property rights could result in
substantial costs and may not be successful. If we are not able to
successfully defend our intellectual property rights, we might lose rights to
technology that we need to conduct and develop our business. This may
seriously harm our business, operating results and financial condition, and
enable our competitors to use our intellectual property to compete against us.
Furthermore, if third parties claim that
our products infringe their patents or other intellectual property rights, we
may be required to devote substantial resources to defend against such claims.
If we are unsuccessful in defending against such infringement claims, we may
be required to pay damages, modify our products or suspend the production and
sale of such products. We cannot guarantee that we will be able to modify our
products on commercially reasonable terms.
A disruption in the supply of
utilities, fire or other calamity at our manufacturing plant would disrupt
production of our products and adversely affect our sales.
Our products are manufactured solely at our
production facility located in Tai'an City, Shandong Province in the PRC.
While we have not in the past experienced any calamities which disrupted
production, any disruption in the supply of utilities, in particular,
electricity or power supply, or any outbreak of fire, flood or other calamity
resulting in significant damage at our facilities would severely affect our
production and have a material adverse effect on our business, financial
condition and results of operations.
We maintain insurance policies covering
losses with respect to damages to our properties and products. We do not have
insurance coverage for inventories of raw materials or business interruption.
There is no assurance that our insurance would be sufficient to cover all of
our potential losses.
We may be exposed to potential risks
relating to our internal controls over financial reporting, and our
independent auditors may not attest to the
operating effectiveness of our internal controls .
As directed by Section 404 of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies
to include a report of management on the company's internal controls over
financial reporting in their annual reports on Form 10-K. A report of our
management is included under Item 9A(T) of our Form 10-K for the year ended
December 31, 2008. In addition, Section 404 requires the independent
registered public accounting firm auditing a company's financial statements to
also attest to and report on the operating effectiveness of such company's
internal controls. However, we will not be subject to auditor attestation
requirement until our annual report for the fiscal year ending December 31,
2010. We can provide no assurance that we will comply with all of the
requirements imposed thereby. There can be no assurance that we will receive a
positive attestation from our independent registered public accountants. In
the event we identify significant deficiencies or material weaknesses in our
internal controls that we cannot remediate in a timely manner or we are unable
to receive a positive attestation from our independent registered public
accountants with respect to our internal controls, investors and others may
lose confidence in the reliability of our financial statements.
-
16 -
There is a dispute between the former
shareholders of Shandong Taibang that calls into question our ownership of
66%, or a majority, of our primary operating subsidiary, which if not resolved
in our favor will adversely affect our business.
Mr. Zu Ying Du was one of the original
equity holders in our operating subsidiary, Shandong Taibang. Pursuant to a
joint venture agreement, among the original equity holders, Mr. Du was
obligated to make a capital contribution of RMB 20 million (or approximately
$2.6 million) for a 25% interest in Shandong Taibang. Mr. Du made this
contribution using funds borrowed from the Beijing Chen Da Technology
Investment Company, or Beijing Chen Da. Mr. Du failed to repay Beijing Chen Da
for his loan of the capital contribution amount. Mr. Du disputes that the
money was due and owing. A Beijing court found that Beijing Chen Da had given
money to Mr. Du but found that the loan agreement failed to comply with
Chinese law. A notice was issued on July 5, 2004 by the Shenzhen Public
Security Bureau Economic Crime Investigation Unit requesting a stay of the
Beijing action pending their investigation into money laundering relating to
the 20 million RMB loan to Zu Ying Du.
Subsequently, Beijing Chen Da entered into
an equity transfer agreement with Mr. Du, pursuant to which Mr. Du's 25%
equity interest in Shandong Taibang was transferred to Beijing Chen Da as
repayment of the RMB 20 million debt. This agreement was signed by Mr. Du's
brother who held a power of attorney from Mr. Du. Mr. Du disputes the
legitimacy of this transfer and has argued that his brother, Du Hai Shan,
exceeded the scope of the power of attorney. Mr. Du sued his brother in the
court of Jianli County, Hubei province, relating to the propriety of the
brother's actions under the power of attorney. Initially the county court
found in its judgment that the act had exceeded the scope of the power of
attorney. Subsequently the Intermediate Court of Jingzhou City, Hubei
province, ruled on December 10, 2008 to suspend the judgment based on the
grounds that the original court lacked jurisdiction to hear the case. The case
is slated to be reviewed again by the Hubei Jingzhou Intermediate Court.
Missile Engineering, another original
equity holder wholly controlled by Mr. Du, was obligated to contribute RMB
32.8 million (or $4.2 million) for a 41% interest in Shandong Taibang by means
of cash, equipment and patent technology. It was obligated to obtain new drug
certificate and production license of its patent technology from the
government within a stipulated period in order to be recognized as a valid
capital contribution, or in the alternative, make a cash payment. The patent
technology was valued as RMB 26.4 million (or approximately $3.4 million).
However, Missile Engineering failed to obtain the new drug certificate and
production license within the stipulated period. Mr. Du also disputes whether
the period for obtaining the certificate and license had expired. Pursuant to
a stockholders resolution on September 26, 2004, Missile Engineering agreed to
sell its 41% interest in Shandong Taibang to Up-Wing and Up-Wing agreed to
take up the obligation of Missile Engineering to pay the RMB 26.4 million in
cash. Missile Engineering disputes this transaction and sued the brother of
Mr. Du in the court of Jianli County, Hubei province, relating to the
propriety of the brother's actions under the power of attorney. Initially the
county court found in its judgment that the act had exceeded the scope of the
power of attorney. Subsequently the Intermediate Court of Jingzhou City, Hubei
province, ruled on December 10, 2008 to suspend the judgment based on the
grounds that the original court lacked jurisdiction to hear the case. The case
is slated to be reviewed again by the Hubei Jingzhou Intermediate Court.
In June 10, 2005, Beijing Chen Da also sold
its equity interest in Shandong Taibang to Up-Wing Investments Limited, or
Up-Wing, pursuant to a share transfer agreement, which became effective on
September 2, 2005, upon approval by the Shandong Provincial Department of
Foreign Trade and Economic Cooperation, or the Shandong COFTEC. In March 2006,
Up-Wing sold its equity interests in Shandong Taibang to Logic Express, our
subsidiary.
In 2006, Missile Engineering applied for
arbitration before the China International Economic and Trade Arbitration
Commission, or CIETAC, to challenge the effectiveness of the transfer to
Up-Wing Investments Limited, of the equity interests in Shandong Taibang
formerly owned by Missile Engineering. The equity transfer had been approved
by the Shandong Provincial Department of Foreign Trade and Economic
Cooperation, or the Shandong COFTEC. Missile Engineering later voluntarily
withdrew this application and instead applied for administrative
reconsideration of the equity transfer, but this application was rejected by
the Ministry of Commerce in 2007. Missile Engineering applied with the
District Court of Lixia District, Jinan City, Shandong province requesting
revocation of Shandong COFTEC's approval of the equity transfer to Up-wing by
Missile Engineering. Missile Engineering later voluntarily withdrew the
action. In April 2007, Logic Express initiated an arbitration proceeding
before the Shandong Tai'an Arbitration Committee, to establish that Logic
Express is the lawful shareholder of Shandong Taibang. The parties to that
proceeding were Logic Express Ltd. and Shandong Taibang Biological Products
Co., Ltd. The Arbitration Committee's decision on September 6, 2007 confirmed
that Logic Express had legitimate ownership as a result of the transfer of
Shandong Taibang. Up-Wing started an action in the Intermediate Court of
Tai'an City, Shandong province requesting the court to establish that Up-Wing
is the lawful shareholder of Shandong Taibang. The Intermediate Court of
Tai'an City, Shandong province on December 20, 2007 rejected the application
on the basis that the same matter had been tried by the arbitration panel.
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Up-Wing filed a defamation case in the
District Court of Hi-technology and Industry Development District, Tai'an
City, Shandong province claiming defamation against Mr. Du and the 21
st
Century Economic Report Newspaper. Judgment in favor of Up-Wing was rendered
on July 22, 2008 ordering the newspaper and Mr. Du to publish an apology to
Up-Wing.
Mr. Du and Missile Engineering have filed
two actions in the Intermediate Court of Wuhan City, Hubei province, against
the following defendants, Du Hai Shan, his brother, Beijing Chen Da and Logic
Express. Mr. Du and Missile Engineering have requested that the Wuhan
Intermediate Court to restore the equity interests originally held by the
plaintiffs, 25% equity interest held by Mr. Du and 41% equity interest held by
Missile Engineering. The Wuhan Intermediate Court has issued a preliminary
order attaching 66% of the equity of Shandong Taibang pending the outcome of
the case. On September 25, 2009, the Higher People's Court of Hubei overruled
the Wuhan Intermediate Court's acceptance of jurisdiction over the case and
ruled that the Tai'an Intermediate Court in Shandong Province, where the
Company is located, had the proper jurisdiction over the parties' dispute.
The court ruled that while the plaintiffs had the right to bring a lawsuit
for the validity of the share transfer agreement because they did not attend
the previous arbitration hearing and never reached an arbitration agreement
regarding their dispute, the Tai'an Intermediate Court has the proper
jurisdiction over the dispute pursuant to the prior agreement of the parties.
As a result, the attached 66% of the equity of Shandong Taibang were released.
On November 16, 2009, the Wuhan Intermediate Court permitted Mr. Du and
Missile Engineering to withdraw their suits against Logic Express and the
other defendants. We cannot assure that the plaintiffs will not bring suits in
a court in Tai'an or elsewhere. Failure to resolve these disputes in our favor
may adversely affect our business and operations.
RISKS RELATING TO OUR FINANCIAL
CONDITION
We face risks related to general
domestic and global economic conditions and to the current credit crisis.
We currently generate sufficient operating
cash flows, which combined with access to the credit markets, provide us with
significant discretionary funding capacity. However, the current uncertainty
arising out of domestic and global economic conditions, including the recent
disruption in credit markets, has impacted accounts receivable collectivity
from our customers, and may impact our ability to pay suppliers and creditors.
If the current situation deteriorates significantly, we could see a tightened
cash flow position and an abnormal amount of bad debt expenses related to the
general economic slow-down, or supplier or customer disruptions resulting from
tighter credit markets. Such reductions and disruptions could have a material
adverse effect on our business operations.
Our cash flow could be negatively
affected as a result of our extension of relatively long payment terms to
customers that we believe are credit worthy.
As is customary in our industry, we extend
relatively long payment terms (up to six months) to customers that we believe
are credit worthy. The dollar amount of our accounts receivable, net of our
allowance for doubtful accounts as of December 31, 2008 and 2007 was $313,087
and $316,869, respectively. The bad debt (credit) expenses for the years ended
December 31, 2008 and 2007 were ($56,462) and $221,813, respectively. Although
we attempt to establish appropriate reserves for our receivables, those
reserves may not prove to be adequate in view of actual levels of bad debts.
The failure of our customers to pay us timely would negatively affect our
working capital, which could in turn adversely affect our cash flow.
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Our limited operating history may not
serve as an adequate basis to judge our future prospects and results of
operations.
We have a limited operating history.
Shandong Taibang as began its operation in October 2002. With the rapid growth
of the industry, it has experienced a high growth rate since 2002.
Furthermore, we did not acquire a controlling interest in Shandong Taibang
until September 2005. As such, our historical operating results may not
provide a meaningful basis for evaluating our business, financial performance
and prospects. We may not be able to achieve a similar growth rate in future
periods. Accordingly, you should not rely on our results of operations for any
prior periods as an indication of our future performance.
We face risks associated with debt
financing (including exposure to variation in interest rates).
Our total outstanding indebtedness,
entirely comprising of long-term bank loan, as of December 31, 2008 was $5.9
million. The interest rate on this long-term bank loan is fixed at 7.02% per
annum. Our obligations under our existing loans have been mainly met through
the cash flow from our operations and our financing activities. We are subject
to risks normally associated with debt financing, including the risk of
significant increase in interest rates and the risk that our cash flow will be
insufficient to meet required payment of principal and interest. In the past,
cash flow from operations had been sufficient to meet payment obligations
and/or we have been able to roll over our borrowings. There is however no
assurance that we will be able to do so in the future. We may also
underestimate our capital requirements and other expenditures or overestimate
our future cash flows. In such event, additional capital, debt or other forms
of financing may be required for our working capital. If any of the aforesaid
events occur and we are unable for any reason to raise additional capital,
debt or other financing to meet our working capital requirements, our
business, operating results, liquidity and financial position will be
adversely affected.
We will incur capital expenditures in
the future in connection with our growth plans and therefore may require
additional financing.
To grow our sales volume, we need to
increase our raw material supplies and strengthen our commitment to our
research and development efforts to accelerate new product development. We
plan to solve our raw materials shortage through either the building of new
plasma collection stations or through scaling up our existing collection
stations, both of which will require substantial capital expenditures. We
anticipate that our capital expenditure for the next 12 months will be
approximately $2.5 million. Such expenditures are likely to be incurred in
advance of any increase in sales. Our revenue may not increase after these
capital expenditures are incurred. This will depend on, among other factors,
on our ability to maintain or achieve high capacity utilization rates. Any
failure to increase our revenue after incurring capital expenditure to expand
production capacity will reduce our profitability.
We may need to obtain additional debt
or equity financing which may result in dilution to our stockholders and have
a material adverse economic effect on our business.
We may need to obtain additional debt or
equity financing to fund our capital expenditures. Additional equity financing
may result in dilution to our shareholders. Additional debt financing may be
required, which, if obtained, may:
·
limit our ability to pay dividends or
require us to seek consents for the payment of dividends;
·
increase our vulnerability to general
adverse economic and industry conditions;
·
limit our ability to pursue our growth
plan;
·
require us to dedicate a substantial
portion of our cash flow from operations as payment for our debt, thereby
reducing availability of our cash flow to fund capital expenditures, working
capital and other general corporate purposes; and/or
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·
limit our flexibility in planning for,
or reacting to, changes in our business and our industry.
We cannot assure you that we will be able
to obtain the additional financing on terms that are acceptable to us.
RISKS RELATING TO OUR INDUSTRY
If our supply of quality plasma is
interrupted, our results of operations and profitability will be adversely
affected.
The production of plasma-based
biopharmaceutical products relies on the supply of plasma of suitable quality.
For the years ended December 31, 2008 and 2007, the cost of plasma used by us
for production accounted for approximately 76% and 73%, respectively, of total
production cost. The supply and market prices of plasma may be adversely
affected by factors such as regulatory restrictions, weather conditions or
outbreak of diseases which would impact our costs of production. We may not be
able to pass on any resulting increase in costs to our customers and therefore
any substantial fluctuation in supply or market prices of plasma may adversely
affect our results of operations and profitability.
The biopharmaceutical industry in the
PRC is strictly regulated and changes in such regulations may have an adverse
effect on our business.
The biopharmaceutical industry in the PRC
is strictly regulated by the government. The regulatory regime, such as
administrative approval of medicines and production approvals, comprises of
series of regulations and administrative rules. The PRC regulatory authorities
may amend such regulations and administrative rules and promulgate new
regulations and administrative rules from time to time. Changes in these
regulations and administrative rules could have a significant impact on our
business. Such changes may have any adverse impact on our business.
We may not be able to carry on our
business if we lose any of the permits and licenses required by the PRC
Government in order to carry on our business.
All pharmaceutical manufacturing and
distribution enterprises in the PRC are required to obtain from various PRC
governmental authorities certain permits and licenses, including, in the case
of manufacturing enterprises, a Pharmaceutical Manufacturing Permit and, in
the case of distribution enterprises, a Pharmaceutical Distribution Permit.
We have obtained permits and licenses and
the GMP certificates, required for the manufacture of our pharmaceutical
products. These permits and licenses held by us are subject to periodic
renewal and/or reassessment by the relevant PRC Government authorities and the
standards of compliance required in relation thereto may from time to time be
subject to changes. We intend to apply for the renewal of such permits and
licenses when required by applicable laws and regulations. Any changes in
compliance standards, or any new laws or regulations that may prohibit or
render it more restrictive for us to conduct our business or increase our
compliance costs may adversely affect our operations or profitability. Any
failure by us to obtain such renewals may have a material adverse effect on
the operation of our business. In addition, we may not be able to carry on
business without such permits and business licenses being renewed.
We may encounter increased
competition from both local and overseas pharmaceutical enterprises as a
result of a relaxation of the PRC regulatory approval process for plasma-based
biopharmaceutical products or a relaxation of international trade
restrictions. A change in our competitive environment could adversely affect
our profitability and prospects.
Our continued ability to compete depends on
the development of the plasma-based biopharmaceutical manufacturing industry
in China. The plasma-based biopharmaceutical manufacturing industry in China
is highly regulated by both provincial and central governments. Prior to
engaging in the collection and production of plasma products, companies such
as ours are required to obtain collection permits from the central health
department and production permits and certificates for each new product
formulation from the various provincial food and drug authorities. We have the
advantage of being already approved by the state to collect plasma from human
donors and manufacture and sell plasma-based biopharmaceutical products in
Shandong Province, as well as in all other provinces in China, and our
research and development department has become familiar with the provincial
product approval process. However, although we believe that the regulatory
requirements pose a competitive barrier to entry into the biopharmaceutical
industry, over time there may be new entrants. If the government relaxes these
restrictions and allow more competitors to enter into the market, these
competitors may have more capital, better research and development resources,
manufacturing and marketing capability and experience than us. Our
profitability may be adversely affected if (i) competition intensifies; (ii)
competitors drastically reduce prices; or (iii) competitors develop new
products having comparable medicinal applications or therapeutic effects which
are more effective or less costly than those produced by us.
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In addition we expect that competition from
imported products will increase as a result of a trend towards lower import
tariffs and China's admission as a member of the WTO in December 2001. We
believe that lower import tariffs will result in more affordable pricing for
imported biopharmaceutical products manufactured overseas as compared to
domestically manufactured products such as ours. In addition, China's
membership in the WTO makes it more accessible to foreign biopharmaceutical
manufacturers who may wish to set up production facilities in the PRC and
compete directly with domestic manufacturers. The expected increased supply of
both domestic and foreign competitively priced biopharmaceutical products in
the PRC will result in increased competition. There is no assurance that our
strategies to remain competitive can be implemented successfully as scheduled
or at all. Our inability to remain competitive may have an adverse effect on
our profitability and prospects.
If we do not receive PRC governmental
approval to increase the retail prices of certain of our biopharmaceutical
products our revenues may be adversely affected.
Retail prices of certain of our
biopharmaceutical products in the PRC are subject to the control of the
relevant central and provincial price administration authorities. The actual
price for any given price-controlled product set by manufacturers, wholesalers
and retailers cannot exceed the price ceiling imposed in accordance with the
applicable government price control rules. Only those pharmaceutical products
which are included in the Insurance Catalogue administered at the central or
provincial level are subject to price control.
Our two principal product categories, human
albumin and human rabies immunoglobulin, which accounted for a total of
approximately 65.5% of our total revenues for the year ended December 31,
2008, were subject to national price control regulations in the PRC. Hence,
the prices of those products could not be increased at our discretion above
the relevant controlled retail price ceiling without prior governmental
approval. This, in turn, may affect the ex-factory prices set by us for our
products and we therefore do not have unfettered freedom to maximize our
profits. It is uncertain whether we will be able to obtain necessary approvals
to increase the price of any of our products.
RISKS RELATED TO DOING BUSINESS IN CHINA
Changes in China's political or
economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese
government have had a positive effect on the economic development of the
country, but the government could change these economic reforms or any of the
legal systems at any time. This could either benefit or damage our operations
and profitability. Some of the things that could have this effect are:
·
Level of government involvement in the
economy;
·
Control of foreign exchange;
·
Methods of allocating resources;
·
Balance of payments position;
·
International trade restrictions; and
·
International conflict.
The Chinese economy differs from the
economies of most countries belonging to the Organization for Economic
Cooperation and Development, or OECD, in many ways. For example, state-owned
enterprises still constitute a large portion of the Chinese economy and weak
corporate governance and a lack of flexible currency exchange policy still
prevail in China. As a result of these differences, we may not develop in the
same way or at the same rate as might be expected if the Chinese economy was
similar to those of the OECD member countries.
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Uncertainties with respect to the PRC
legal system could limit the legal protections available to you and us.
We conduct substantially all of our
business through our operating subsidiaries in the PRC. Our operating
subsidiaries are generally subject to laws and regulations applicable to
foreign investments in China and, in particular, laws applicable to
foreign-invested enterprises. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, a series of new PRC laws and
regulations have significantly enhanced the protections afforded to various
forms of foreign investments in China. However, since the PRC legal system
continues to evolve rapidly, the interpretations of many laws, regulations and
rules are not always uniform and enforcement of these laws, regulations and
rules involve uncertainties, which may limit legal protections available to
you and us. In addition, any litigation in China may be protracted and result
in substantial costs and diversion of resources and management attention. In
addition, all of our executive officers and all of our directors are residents
of China and not of the United States, and substantially all the assets of
these persons are located outside the United States. As a result, it could be
difficult for investors to affect service of process in the United States or
to enforce a judgment obtained in the United States against our Chinese
operations and subsidiaries.
You may have difficulty enforcing
judgments against us.
We are a Delaware holding company and most
of our assets are located outside of the United States. Most of our current
operations are conducted in the PRC. In addition, most of our directors and
officers are nationals and residents of countries other than the United
States. A substantial portion of the assets of these persons is located
outside the United States. As a result, it may be difficult for you to effect
service of process within the United States upon these persons. It may also be
difficult for you to enforce in U.S. courts judgments on the civil liability
provisions of the U.S. federal securities laws against us and our officers and
directors, most of whom are not residents in the United States and the
substantial majority of whose assets are located outside of the United States.
In addition, there is uncertainty as to whether the courts of the PRC would
recognize or enforce judgments of U.S. courts. Our counsel as to PRC law, has
advised us that the recognition and enforcement of foreign judgments are
provided for under the PRC Civil Procedures Law. Courts in China may recognize
and enforce foreign judgments in accordance with the requirements of the PRC
Civil Procedures Law based on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions. China does not have
any treaties or other arrangements that provide for the reciprocal recognition
and enforcement of foreign judgments with the United States. In addition,
according to the PRC Civil Procedures Law, courts in the PRC will not enforce
a foreign judgment against us or our directors and officers if they decide
that the judgment violates basic principles of PRC law or national
sovereignty, security or the public interest. So it is uncertain whether a PRC
court would enforce a judgment rendered by a court in the United States.
The PRC government exerts substantial
influence over the manner in which we must conduct our business activities.
The PRC government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Our ability to operate
in China may be harmed by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations,
land use rights, property and other matters. We believe that our operations in
China are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions
in which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the
future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a
significant effect on economic conditions in China or particular regions
thereof and could require us to divest ourselves of any interest we then hold
in Chinese properties or joint ventures.
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Future inflation in China may inhibit
our ability to conduct business in China.
In recent years, the Chinese economy has
experienced periods of rapid expansion and highly fluctuating rates of
inflation. During the past ten years, the rate of inflation in China has been
as high as 20.7% and as low as -2.2%. These factors have led to the adoption
by the Chinese government, from time to time, of various corrective measures
designed to restrict the availability of credit or regulate growth and contain
inflation. High inflation may in the future cause the Chinese government to
impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our
products and our company.
Restrictions on currency exchange may
limit our ability to receive and use our revenues effectively.
The majority of our revenues will be
settled in RMB and U.S. dollars, and any future restrictions on currency
exchanges may limit our ability to use revenue generated in RMB to fund any
future business activities outside China or to make dividend or other payments
in U.S. dollars. Although the Chinese government introduced regulations in
1996 to allow greater convertibility of the RMB for current account
transactions, significant restrictions still remain, including primarily the
restriction that foreign-invested enterprises may only buy, sell or remit
foreign currencies after providing valid commercial documents, at those banks
in China authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are
required to open and maintain separate foreign exchange accounts for capital
account items. We cannot be certain that the Chinese regulatory authorities
will not impose more stringent restrictions on the convertibility of the RMB.
Fluctuations in exchange rates could
adversely affect our business and the value of our securities.
The value of our common stock will be
indirectly affected by the foreign exchange rate between U.S. dollars and RMB
and between those currencies and other currencies in which our sales may be
denominated. Appreciation or depreciation in the value of the RMB relative to
the U.S. dollar would affect our financial results reported in U.S. dollar
terms without giving effect to any underlying change in our business or
results of operations. Fluctuations in the exchange rate will also affect the
relative value of any dividend we issue that will be exchanged into U.S.
dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been
pegged to the U.S. dollar. Although the People's Bank of China regularly
intervenes in the foreign exchange market to prevent significant short-term
fluctuations in the exchange rate, the RMB may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term.
Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention
in the foreign exchange market.
Very limited hedging transactions are
available in China to reduce our exposure to exchange rate fluctuations. To
date, we have not entered into any hedging transactions. While we may enter
into hedging transactions in the future, the availability and effectiveness of
these transactions may be limited, and we may not be able to successfully
hedge our exposure at all. In addition, our foreign currency exchange losses
may be magnified by PRC exchange control regulations that restrict our ability
to convert RMB into foreign currencies.
Currently, some of our raw materials and
major equipment are imported. In the event that the U.S. dollars appreciate
against RMB, our costs will increase. If we cannot pass the resulting cost
increases on to our customers, our profitability and operating results will
suffer. In addition, if our sales to international customers grow, we will be
increasingly subject to the risk of foreign currency depreciation.
Restrictions under PRC law on our PRC
subsidiaries' ability to make dividends and other distributions could
materially and adversely affect our ability to grow, make investments or
acquisitions that could benefit our business, pay dividends to you, and
otherwise fund and conduct our businesses.
Substantially all of our revenues are
earned by our PRC subsidiaries. However, PRC regulations restrict the ability
of our PRC subsidiaries to make dividends and other payments to their offshore
parent company. PRC legal restrictions permit payments of dividend by our PRC
subsidiaries only out of their accumulated after-tax profits, if any,
determined in accordance with PRC accounting standards and regulations. Our
PRC subsidiaries are also required under PRC laws and regulations to allocate
at least 10% of our annual after-tax profits determined in accordance with PRC
GAAP to a statutory general reserve fund until the amounts in said fund
reaches 50% of our registered capital. Allocations to these statutory reserve
funds can only be used for specific purposes and are not transferable to us in
the form of loans, advances or cash dividends. Any limitations on the ability
of our PRC subsidiaries to transfer funds to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends and otherwise fund and conduct our
business.
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Failure to comply with PRC
regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident stockholders to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries' ability to
distribute profits to us or otherwise materially adversely affect us.
In October 2005, the PRC State
Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant
Issues in the Foreign Exchange Control over Financing and Return Investment
Through Special Purpose Companies by Residents Inside China, generally
referred to as Circular 75, which required PRC residents to register with the
competent local SAFE branch before establishing or acquiring control over an
offshore special purpose company, or SPV, for the purpose of engaging in an
equity financing outside of China on the strength of domestic PRC assets
originally held by those residents. Internal implementing guidelines issued by
SAFE, which became public in June 2007 (known as Notice 106), expanded the
reach of Circular 75 by (1) purporting to cover the establishment or
acquisition of control by PRC residents of offshore entities which merely
acquire "control" over domestic companies or assets, even in the absence of
legal ownership; (2) adding requirements relating to the source of the PRC
resident's funds used to establish or acquire the offshore entity; covering
the use of existing offshore entities for offshore financings; (3) purporting
to cover situations in which an offshore SPV establishes a new subsidiary in
China or acquires an unrelated company or unrelated assets in China; and (4)
making the domestic affiliate of the SPV responsible for the accuracy of
certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas
financing and the use of proceeds. Amendments to registrations made under
Circular 75 are required in connection with any increase or decrease of
capital, transfer of shares, mergers and acquisitions, equity investment or
creation of any security interest in any assets located in China to guarantee
offshore obligations, and Notice 106 makes the offshore SPV jointly
responsible for these filings. In the case of an SPV which was established,
and which acquired a related domestic company or assets, before the
implementation date of Circular 75, a retroactive SAFE registration was
required to have been completed before March 31, 2006; this date was
subsequently extended indefinitely by Notice 106, which also required that the
registrant establish that all foreign exchange transactions undertaken by the
SPV and its affiliates were in compliance with applicable laws and
regulations. Failure to comply with the requirements of Circular 75, as
applied by SAFE in accordance with Notice 106, may result in fines and other
penalties under PRC laws for evasion of applicable foreign exchange
restrictions. Any such failure could also result in the SPV's affiliates being
impeded or prevented from distributing their profits and the proceeds from any
reduction in capital, share transfer or liquidation to the SPV, or from
engaging in other transfers of funds into or out of China.
We believe our stockholders who are PRC
residents as defined in Circular 75 have registered with the relevant branch
of SAFE, as currently required, in connection with their equity interests in
us and our acquisitions of equity interests in our PRC subsidiaries. However,
we cannot provide any assurances that their existing registrations have fully
complied with, and they have made all necessary amendments to their
registration to fully comply with, all applicable registrations or approvals
required by Circular 75. Moreover, because of uncertainty over how Circular 75
will be interpreted and implemented, and how or whether SAFE will apply it to
us, we cannot predict how it will affect our business operations or future
strategies. For example, our present and prospective PRC subsidiaries' ability
to conduct foreign exchange activities, such as the remittance of dividends
and foreign currency-denominated borrowings, may be subject to compliance with
Circular 75 by our PRC resident beneficial holders. In addition, such PRC
residents may not always be able to complete the necessary registration
procedures required by Circular 75. We also have little control over either
our present or prospective direct or indirect stockholders or the outcome of
such registration procedures. A failure by our PRC resident beneficial holders
or future PRC resident stockholders to comply with Circular 75, if SAFE
requires it, could subject these PRC resident beneficial holders to fines or
legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiaries' ability to make distributions or pay dividends or
affect our ownership structure, which could adversely affect our business and
prospects.
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Under the New EIT Law, we may be
classified as a "resident enterprise" of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC
shareholders.
China
passed a new Enterprise Income Tax Law, or the New EIT Law, and its
implementing rules, both of which became effective on January 1, 2008. Under
the New EIT Law, an enterprise established outside of China with "de facto
management bodies" within China is considered a "resident enterprise," meaning
that it can be treated in a manner similar to a Chinese enterprise for
enterprise income tax purposes. The implementing rules of the New EIT Law
define de facto management as "substantial and overall management and control
over the production and operations, personnel, accounting, and properties" of
the enterprise.
On April 22, 2009, the State Administration
of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance
of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident
Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice,
further interpreting the application of the New EIT Law and its implementation
non-Chinese enterprise or group controlled offshore entities. Pursuant to the
Notice, an enterprise incorporated in an offshore jurisdiction and controlled
by a Chinese enterprise or group will be classified as a "non-domestically
incorporated resident enterprise" if (i) its senior management in charge of
daily operations reside or perform their duties mainly in China; (ii) its
financial or personnel decisions are made or approved by bodies or persons in
China; (iii) its substantial assets and properties, accounting books,
corporate chops, board and shareholder minutes are kept in China; and (iv) at
least half of its directors with voting rights or senior management often
resident in China. A resident enterprise would be subject to an enterprise
income tax rate of 25% on its worldwide income and must pay a withholding tax
at a rate of 10% when paying dividends to its non-PRC shareholders. However,
it remains unclear as to whether the Notice is applicable to an offshore
enterprise incorporated by a Chinese natural person. Nor are detailed measures
on imposition of tax from non-domestically incorporated resident enterprises
are available. Therefore, it is unclear how tax authorities will determine tax
residency based on the facts of each case.
We may be deemed to be a resident
enterprise by Chinese tax authorities. If the PRC tax authorities determine
that we are a "resident enterprise" for PRC enterprise income tax purposes, a
number of unfavorable PRC tax consequences could follow. First, we may be
subject to the enterprise income tax at a rate of 25% on our worldwide taxable
income as well as PRC enterprise income tax reporting obligations. In our
case, this would mean that income such as interest on financing proceeds and
non-China source income would be subject to PRC enterprise income tax at a
rate of 25%. Second, although under the New EIT Law and its implementing rules
dividends paid to us from our PRC subsidiaries would qualify as "tax-exempt
income," we cannot guarantee that such dividends will not be subject to a 10%
withholding tax, as the PRC foreign exchange control authorities, which
enforce the withholding tax, have not yet issued guidance with respect to the
processing of outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes. Finally, it is possible
that future guidance issued with respect to the new "resident enterprise"
classification could result in a situation in which a 10% withholding tax is
imposed on dividends we pay to our non-PRC shareholders and with respect to
gains derived by our non-PRC shareholders from transferring our shares. We are
actively monitoring the possibility of "resident enterprise" treatment for the
2008 tax year and are evaluating appropriate organizational changes to avoid
this treatment, to the extent possible.
If we were treated as a "resident
enterprise" by PRC tax authorities, we would be subject to taxation in both
the U.S. and China, and our PRC tax may not be creditable against our U.S.
tax.
We may be exposed to liabilities
under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and
any determination that we violated these laws could have a material adverse
effect on our business.
We are subject to the Foreign Corrupt
Practice Act, or FCPA, and other laws that prohibit improper payments or
offers of payments to foreign governments and their officials and political
parties by U.S. persons and issuers as defined by the statute, for the purpose
of obtaining or retaining business. We have operations, agreements with third
parties and we make most of our sales in China. PRC also strictly prohibits
bribery of government officials. Our activities in China create the risk of
unauthorized payments or offers of payments by the employees, consultants,
sales agents or distributors of our Company, even though they may not always
be subject to our control. It is our policy to implement safeguards to
discourage these practices by our employees. However, our existing safeguards
and any future improvements may prove to be less than effective, and the
employees, consultants, sales agents or distributors of our Company may engage
in conduct for which we might be held responsible. Violations of the FCPA or
Chinese anti-corruption laws may result in severe criminal or civil sanctions,
and we may be subject to other liabilities, which could negatively affect our
business, operating results and financial condition. In addition, the U.S.
government may seek to hold our Company liable for successor liability FCPA
violations committed by companies in which we invest or that we acquire.
-
25 -
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking
statements. The forward-looking statements are contained principally in the
sections entitled "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business."
These statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements. These risks and
uncertainties include, but are not limited to, the factors described in the
section captioned "Risk Factors" above.
In some cases, you can identify
forward-looking statements by terms such as "anticipates," "believes,"
"could," "estimates," "expects," "intends," "may," "plans," "potential,"
"predicts," "projects," "should," "would" and similar expressions intended to
identify forward-looking statements. Forward-looking statements reflect our
current views with respect to future events and are based on assumptions
subject to risks and uncertainties. Given these uncertainties, you should not
place undue reliance on these forward-looking statements.
Also, forward-looking statements represent
our estimates and assumptions only as of the date of this prospectus. You
should read this prospectus and the documents that we reference in this
prospectus, or that we filed as exhibits to the registration statement of
which this prospectus is a part, completely and with the understanding that
our actual future results may be materially different from what we expect.
-
26 -
Except as required by law, we assume no
obligation to update any forward-looking statements publicly, or to update the
reasons actual results could differ materially from those anticipated in any
forward-looking statements, even if new information becomes available in the
future.
USE OF PROCEEDS
We will not receive any proceeds from the
sale of common stock covered by this prospectus. To the extent that the
selling stockholders exercise, for cash, all of the warrants covering the
667,791 shares of common stock registered for resale under this prospectus, we
would receive approximately $5.7 million in the aggregate from such exercises.
We intend to use such proceeds for general corporate and working capital
purposes, such as for the purchase of plasma and other raw materials used in
the production of our biopharmaceutical products.
DIVIDEND POLICY
We have never declared dividends or paid
cash dividends. Any gains on an investment in our common stock will likely
occur through an increase in our stock price, which may or may not occur. Our
board of directors will make any future decisions regarding dividends. Even if
our board of directors decides to pay dividends, the form, frequency and
amount will depend upon our future operations and earnings, capital
requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem relevant.
We currently intend to retain and use any future earnings for the development
and expansion of our business and do not anticipate paying any cash dividends
in the near future.
MARKET FOR OUR COMMON STOCK
Our common stock commenced trading on the NASDAQ Global
Market on December 2, 2009, under our current symbol, "CBPO." The CUSIP number
is 16938C 10 6.
The following table sets forth, for the periods indicated,
the high and low closing prices of our common stock. These prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
|
Closing Prices
|
|
|
High
|
|
Low
|
|
Year
Ended December 31, 2010
|
|
|
|
|
First Quarter
(through
January 21, 2010)
|
$13.48
|
|
$10.99
|
|
Year
Ended December 31, 2009
|
|
|
|
|
Fourth Quarter
|
$12.08
|
|
$7.10
|
|
Third Quarter
|
$8.00
|
|
$3.55
|
|
Second Quarter
|
$5.00
|
|
$2.25
|
|
First Quarter
|
$2.45
|
|
$1.69
|
|
Year Ended December 31,
2008
|
|
|
|
|
Fourth Quarter
|
$2.79
|
|
$1.26
|
|
Third Quarter
|
$4.70
|
|
$2.00
|
|
Second Quarter
|
$4.32
|
|
$2.76
|
|
First Quarter
|
$7.50
|
|
$3.30
|
|
All of the shares being registered in this
offering may be sold without restriction under the Securities Act, so long as
the registration statement of which this prospectus is a part is, and remains,
effective.
We currently have outstanding 23,319,977
shares of common stock, all of which can currently be sold under Rule 144.
-
27 -
We plan to furnish our stockholders with an
annual report for each fiscal year ending December 31 containing financial
statements audited by our independent certified public accountants. We are
subject to the information reporting requirements of the Exchange Act. As
such, we file annual, quarterly and current reports and other documents with
the SEC. We intend to maintain compliance with the periodic reporting
requirements of the Exchange Act.
As of January 21, 2010, there were
approximately 442 stockholders of
record of our common stock. The number of record holders does not include
persons who held our common stock in nominee or "street name" accounts through
brokers.
DILUTION
Our net tangible book value per share of
common stock as of September 30, 2009 was $2.07. Net tangible book value per
share is determined by dividing our net tangible book value (total assets less
intangible assets including knowhow, trademarks and copyrights and less total
liabilities) by the number of outstanding shares of our capital stock. Since
this offering is being made solely by the selling stockholders and none of the
proceeds will be paid to us, our net tangible book value will be unaffected by
this offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a biopharmaceutical company and
through our indirect Chinese subsidiaries, Shandong Taibang and Qianfeng, we
are principally engaged in the research, development and manufacturing of
plasma-based pharmaceutical products in China. Shandong Taibang operates from
our manufacturing facility located in Tai'an City, Shandong Province and
Qianfeng operates in Guizhou Province. Our minority owned subsidiary, Huitian,
operates from facilities in Xi'an Province. The plasma-based biopharmaceutical
manufacturing industry in China is highly regulated by both the provincial and
central governments. Accordingly, the manufacturing process of our products is
strictly monitored from the initial collection of plasma from human donors to
finished products. Our principal products include our approved human albumin
and immunoglobulin products.
We are approved to sell human albumin
20%/10ml, 20%/25ml and 20%/50ml. Human albumin is our top-selling product.
Sales of these human albumin products represented approximately 57.8% and
63.5% of our total revenues, respectively, for the each of the years ended
December 31, 2008 and 2007, and approximately 48.7% and 58.0% of our total
revenues, respectively, for the nine months ended September 30, 2009 and 2008.
Human albumin is principally used to increase blood volume while
immunoglobulin is used for certain disease preventions and cures. Shandong
Taibang's approved human albumin and immunoglobulin products use human plasma
as the basic raw material. Albumin has been used for almost 50 years to treat
critically ill patients by replacing lost fluid and maintaining adequate blood
volume and pressure. All of our products are prescription medicines
administered in the form of injections.
We sell our products to customers in the
PRC, mainly hospitals and inoculation centers. Our sales have historically
been made on the basis of short-term arrangements and our largest customers
have changed over the years. For the years ended December 31, 2008 and 2007,
our top 5 customers accounted for approximately 16.2% and 14.9%, respectively,
of our total revenue, and for the nine months ended September 30, 2009 and
2008, our top 5 customers accounted for approximately 11.7% and 16.8%,
respectively, of our total revenue. For the years ended December 31, 2008 and
2007, our largest customer accounted for approximately 6.4% and 5.3%, of our
revenue, respectively, and for the nine months ended September 30, 2009 and
2008, our largest customer accounted for approximately 4.8% and 6.9%, of our
revenue, respectively. As we continue to diversify our geographic presence,
customer base and product mix, we expect that our largest customers will
continue to change from year to year.
We operate and manage our business as a
single segment. We do not account for the results of our operations on a
geographic or other basis.
-
28 -
All our business has been conducted in
Renminbi, the official currency of China. Renminbi is still not a free
floating currency. The value of Renminbi is subject to changes in the Chinese
government's policies and depends to a large extent on China's domestic and
international economic and political developments, as well as supply and
demand in the local market. Since 1994, the official exchange rate for the
conversion of Renminbi to U.S. dollars has generally been stable, and Renminbi
has appreciated against the U.S. dollar since July 2005.
Principal Factors Affecting Our
Financial Condition
The following are key factors that affect
our financial condition and results of operations and we believe them to be
important to the understanding of our business:
Global Financial Crisis
The ongoing downturn in global financial
markets has is expected to slow down China's GDP growth, and may have an
adverse effect on the demand for our products which are still not affordable
to many PRC patients. If the current global economic slowdown continues and a
depressed economic environment make our products less affordable to more
patients or result in an overall decreased demand for our products, such
reductions and disruptions could have a material adverse effect on our
projected total sales increase and deteriorate our profit margins.
We believe that due to the rate of
attrition of non-compliant companies in the wake of increased governmental
regulations imposed on our industry, we have not yet seen a decline in the
demand for our products. However, we can give no assurance that this demand
for our products will continue.
Raw Material Prices
The primary raw material used in the
production of our albumin and immunoglobulin products is human plasma. These
products are still not affordable to many PRC patients. As China's economy
grows, we expect more Chinese people will become consumers of medical
treatments and procedures, including procedures requiring the use of human
plasma, resulting in increased demand for human plasma. Collection of human
plasma in China is regulated and until recently, only licensed Plasmapheresis
stations owned and operated by the government could collect human plasma. Each
collection station was only allowed to supply plasma to the one manufacturer
that has signed the "Quality Responsibility" statement with them. The price of
human plasma is negotiated on an annual basis and is determined by a number of
factors including, but not limited to, the cost of operating the collection
stations, the nutritional supplement fee awarded to the donors for each
donation, and the anticipated volume of total plasma donated. However, in
March 2006, the Ministry of Health promulgated certain "Measures on Reforming
Plasma Collection Stations," or the Blood Collection Measures, whereby the
ownership and management of PRC plasma stations are required to be transferred
to plasma-based biopharmaceutical companies while the regulatory supervision
and administrative control remain with the State. Plasma stations that did not
complete their reform by December 31, 2006, risked revocation of their license
to collect plasma.
In December 2006, we acquired five of the
six then existing plasma stations in Shandong. On January 1, 2007 we obtained
the permit to operate these stations. These acquisitions have allowed us to
have direct influence on the operation of these collection stations and secure
a stable source of plasma supply for production. In April 2007, we acquired
two plasma stations in Guangxi Province, and we obtained permit to operate
them.
The foregoing acquisitions have led to an
increase in our plasma supply and did not result in any material differences
in our cost structure. Due to current market conditions, we have generally
been able to pass substantially all cost increases in recent years on to our
customers.
Prices of and Demand for Our Products
In recent years, due to increased
regulatory restrictions and market demand, we have been able to increase the
selling price of most of our key products. The demand for our products is
largely affected by the general economic conditions in China because they are
still not affordable to many patients. As China's economy grows, we expect
more Chinese people will become consumers of medical treatments and
procedures, including procedures requiring human plasma. A significant
improvement in the economic environment in China will likely improve consumer
income which in turn would make our products more affordable and consequently
increase the demand for our products. We have been able to expand our product
range and markets by introducing new products required by customers. We
believe that our technical expertise is important in introducing products that
are in demand.
-
29 -
Production Capacity
Our sales volume is limited by our annual
production capacity. As we grow our business in the future, our ability to
fulfill additional and larger orders will depend on our ability to increase
our production capacity. Our plan to expand our production capacity will
depend on, inter alia, the availability of capital to meet our needs of
expansion or upgrading of production lines, and the availability of stable
plasma supply.
As of December 2008, our production
capacity was 700 metric tons per annum. We estimate that the production
capacity of our major competitors ranges from 300 tons to 1,000 tons per
annum. Due to the shortage of raw material supply, our current production
capacity should be sufficient for next couple years.
Competition
We are subject to intense competition.
There are both local and overseas pharmaceutical enterprises that are engaged
in the manufacture and sale of potential substitute or similar
biopharmaceutical products as our products in the PRC. These competitors may
have more capital, better research and development resources, manufacturing
and marketing capability and experience than we do. In our industry, we
compete based upon product quality, product cost, ability to produce a diverse
range of products and logistical capabilities.
We believe that we have strengthened our
position in the marketplace with our recent acquisition of a 90% equity
interest in Dalin and its 54% majority-owned operating subsidiary, Qianfeng
and a 35% equity interest in Huitian, Xi'an-based biopharmaceutical company.
Our profitability may be adversely affected
if (i) competition intensifies; (ii) competitors drastically reduce prices; or
(iii) competitors develop new products or product substitutes with comparable
medicinal applications or therapeutic effects which are more effective or less
costly than those produced by us. Please refer to "Competition" for more
information regarding this factor.
Taxation
United States
and
British Virgin Islands
We are subject to United States tax at a
tax rate of 34%. No provision for income taxes in the United States has been
made as we have no income taxable in the United States. Our subsidiary, Logic
Express Ltd., was incorporated in the BVI and under the current laws of the
BVI, is not subject to income taxes.
China
Before the implementation of the New EIT
Law, Foreign Invested Enterprises, or FIEs, established in the PRC are
generally subject to an enterprise income tax, or EIT, rate of 33.0%, which
includes a 30.0% state income tax and a 3.0% local income tax. The New EIT Law
imposes a unified EIT of 25.0% on all domestic enterprises and FIEs, unless
they qualify under certain limited exceptions. Therefore, nearly all FIEs are
subject to the new tax rate alongside other domestic businesses rather than
benefiting from the old tax laws applicable to FIEs, and its associated
preferential tax treatments, beginning January 1, 2008.
Despite these pending changes, the New EIT
Law gives the FIEs established before March 16, 2007, or Old FIEs, such as our
82.76% owned subsidiary Shandong Taibang, a five-year grandfather period
during which they can continue to enjoy their existing preferential tax
treatment. During this five-year grandfather period, the Old FIEs which
enjoyed tax rates lower than 25% under the original EIT law shall gradually
increase their EIT rate by 2% per year until the tax rate reaches 25%. In
addition, the Old FIEs that are eligible for the "two-year exemption and
three-year half reduction" or "five-year exemption and five-year
half-reduction" under the original EIT law, are allowed to remain to enjoy
their preference until these holidays expire. The discontinuation of any such
special or preferential tax treatment or other incentives would have an
adverse effect on any organization's business, fiscal condition and current
operations in China.
-
30 -
Under the New EIT Law, dividend
distributions paid out of earnings from our PRC subsidiaries are subject to a
withholding tax at 10%. This new dividend withholding tax, however, will only
be levied on our PRC subsidiary in respect of profits earned in 2008 onwards.
Profits distributed after January 1, 2008 but related to financial results
generated in the year ended December 31, 2007 and prior years will not be
subject to dividend withholding tax.
In addition to the changes to the current
tax structure, under the New EIT Law, an enterprise established outside of
China with "de facto management bodies" within China is considered a resident
enterprise and will normally be subject to an EIT of 25.0% on its global
income. The implementing rules define the term "de facto management bodies" as
"an establishment that exercises, in substance, overall management and control
over the production, business, personnel, accounting, etc., of a Chinese
enterprise." If the PRC tax authorities subsequently determine that the
Company should be classified as a resident enterprise, then our global income
will be subject to PRC income tax of 25.0%.
As a sino-foreign joint venture company,
Shandong Taibang has been granted a preferential tax holiday by the Tax Bureau
of the PRC as of 2003. Accordingly, Shandong Taibang is entitled to tax
concessions from 2003 whereby the profit for the first two financial years
beginning with the first profit-making year is exempt from income tax in the
PRC, and the profit for each of the subsequent three financial years is taxed
at 50% of the prevailing state income tax rate. Local income tax of 3% is
exempted for five years starting from the first profit-making year. Shandong
Taibang will be allowed the benefits of tax holidays under the grandfather
treatment over a five-year transition period, and the applicable income rate
will be 25% after the tax holiday. According to the PRC's central government
policy, new or high technology companies will enjoy preferential tax treatment
of 15%, instead of 25%. On February 12, 2009, Shandong Taibang received the
new technology or high technology certification from Shandong provincial
government. The Certification allows the Company to receive the 15%
preferential income tax rate, for a period of three years starting from
January 1, 2008.
Results of Operations
The following tables set forth key
components of our results of operations for the periods indicated, both in
dollars and as a percentage of our revenues.
All amounts, other than percentages, in U.S. dollars
|
Nine Months Ended September 30,
|
|
Years Ended
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
81,369,882
|
|
$
|
33,574,764
|
|
$
|
46,751,160
|
|
$
|
32,398,669
|
|
|
Cost of Revenue
|
|
22,337,596
|
|
|
9,725,103
|
|
|
14,040,602
|
|
|
9,945,921
|
|
|
Gross Profit
|
|
59,032,286
|
|
|
23,849,661
|
|
|
32,710,558
|
|
|
22,452,748
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
2,313,577
|
|
|
1,785,340
|
|
|
2,212,073
|
|
|
4,434,721
|
|
|
General and
administrative
|
|
14,996,846
|
|
|
5,756,087
|
|
|
8,996,220
|
|
|
4,651,434
|
|
|
Research and
development
|
|
1,098,083
|
|
|
664,652
|
|
|
1,166,494
|
|
|
609,178
|
|
|
Total Operating
Expenses
|
|
18,408,506
|
|
|
8,206,079
|
|
|
12,374,787
|
|
|
9,695,333
|
|
|
Income from
Operations
|
|
40,623,780
|
|
|
15,643,582
|
|
|
20,335,771
|
|
|
12,757,415
|
|
|
Other Expense
(Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss
(income) of unconsolidated affiliate
|
|
19,092
|
|
|
-
|
|
|
(175,231)
|
|
|
-
|
|
|
Change in fair
value of derivative liabilities
|
|
14,931,088
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Interest expense
(income), net
|
|
1,979,538
|
|
|
(7,531)
|
|
|
373,497
|
|
|
88,686
|
|
|
Other expense
(income), net
|
|
372,955
|
|
|
110,267
|
|
|
251,390
|
|
|
422,891
|
|
|
Total Other Expense
|
|
17,302,673
|
|
|
102,736
|
|
|
449,656
|
|
|
511,577
|
|
|
Income Before Taxes
and Noncontrolling Interest
|
|
23,321,107
|
|
|
15,540,846
|
|
|
19,886,115
|
|
|
12,245,838
|
|
|
Provision for income
taxes
|
|
7,547,318
|
|
|
4,437,141
|
|
|
4,596,603
|
|
|
2,074,560
|
|
|
Net income
attributable to noncontrolling interest
|
|
10,738,295
|
|
|
2,323,205
|
|
|
3,303,841
|
|
|
1,991,902
|
|
|
Net Income
attributable to controlling interest
|
$
|
5,035,494
|
|
$
|
8,780,500
|
|
$
|
11,985,671
|
|
$
|
8,179,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
31 -
As a percentage of
Revenues
|
|
Nine Months Ended September 30,
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
Cost of Revenue:
|
|
27.5%
|
|
|
29.0%
|
|
|
30.0%
|
|
|
30.7%
|
|
Gross Profit
|
|
72.5%
|
|
|
71.0%
|
|
|
70.0%
|
|
|
69.3%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
2.8%
|
|
|
5.3%
|
|
|
4.7%
|
|
|
13.7%
|
|
General and
administrative
|
|
18.4%
|
|
|
17.1%
|
|
|
19.2%
|
|
|
14.4%
|
|
Research and
development
|
|
1.3%
|
|
|
2.0%
|
|
|
2.5%
|
|
|
1.9%
|
|
Total Operating
Expenses
|
|
22.6%
|
|
|
24.4%
|
|
|
26.5%
|
|
|
29.9%
|
|
Income from
Operations
|
|
49.9%
|
|
|
46.6%
|
|
|
43.5%
|
|
|
39.4%
|
|
Other Expense(Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss
(income) of unconsolidated affiliate
|
|
0.0%
|
|
|
-
|
|
|
(0.4%)
|
|
|
-
|
|
Change in fair
value of derivative liabilities
|
|
18.3%
|
|
|
-
|
|
|
0.0%
|
|
|
-
|
|
Interest expense
(income), net
|
|
2.4%
|
|
|
(0.0%)
|
|
|
0.8%
|
|
|
0.3%
|
|
Other expense
(income), net
|
|
0.5%
|
|
|
0.3%
|
|
|
0.5%
|
|
|
1.3%
|
|
Total Other Expense
|
|
21.3
%
|
|
|
0.3%
|
|
|
1.0%
|
|
|
1.6%
|
|
Income Before Taxes
and Noncontrolling Interest
|
|
28.7%
|
|
|
46.3%
|
|
|
42.5%
|
|
|
37.8%
|
|
Provision for income
taxes
|
|
9.3%
|
|
|
13.2%
|
|
|
9.8%
|
|
|
6.4%
|
|
Net income
attributable to noncontrolling interest
|
|
13.2%
|
|
|
6.9%
|
|
|
7.1%
|
|
|
6.1%
|
|
Net Income
attributable to controlling interest
|
|
6.2%
|
|
|
26.2%
|
|
|
25.6%
|
|
|
25.2%
|
|
For the Nine-Month Periods Ended
September 30, 2009 and 2008 (Unaudited)
The following tables set forth key
components of our results of operations for the periods indicated, both in
dollars and as a percentage of sales revenue and key components of our revenue
for the periods indicated in dollars. The financial data for the nine months
ended September 30, 2009 reflect the operating results of the Company and its
majority-owned subsidiaries, including Dalin, while the financial data for the
same period in 2008 only reflect the operating results of the Company and its
subsidiaries Logic Express and Taibang.
|
Nine Months Ended September 30,
|
|
Period-over-period
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
Revenue
|
$
|
81,369,882
|
|
|
100.0%
|
|
$
|
33,574,764
|
|
|
100.0%
|
|
$
|
47,795,118
|
|
|
142.4%
|
|
Costs of revenue
|
|
22,337,596
|
|
|
27.5%
|
|
|
9,725,103
|
|
|
29.0%
|
|
|
12,612,493
|
|
|
129.7%
|
|
Gross profit
|
|
59,032,286
|
|
|
72.5%
|
|
|
23,849,661
|
|
|
71.0%
|
|
|
35,182,625
|
|
|
147.5%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
2,313,577
|
|
|
2.8%
|
|
|
1,785,340
|
|
|
5.3%
|
|
|
528,237
|
|
|
29.6%
|
|
General and
administrative expenses
|
|
14,996,846
|
|
|
18.4%
|
|
|
5,756,087
|
|
|
17.1%
|
|
|
9,240,759
|
|
|
160.5%
|
|
Research and
development expenses
|
|
1,098,083
|
|
|
1.3%
|
|
|
664,652
|
|
|
2.0%
|
|
|
433,431
|
|
|
65.2%
|
|
Total operating
expenses
|
|
18,408,506
|
|
|
22.6%
|
|
|
8,206,079
|
|
|
24.4%
|
|
|
10,202,427
|
|
|
124.3%
|
|
Income from
operations
|
|
40,623,780
|
|
|
49.9%
|
|
|
15,643,582
|
|
|
46.6%
|
|
|
24,980,198
|
|
|
159.7%
|
|
Other Expense
(Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss (income)
of unconsolidated affiliate
|
|
19,092
|
|
|
0.0%
|
|
|
-
|
|
|
-
|
|
|
19,092
|
|
|
100.0%
|
|
Change in fair
value of warrant liabilities
|
|
14,931,088
|
|
|
18.3%
|
|
|
-
|
|
|
-
|
|
|
14,931,088
|
|
|
100.0%
|
|
Interest expense
(income), net
|
|
1,979,538
|
|
|
2.4%
|
|
|
(7,531)
|
|
|
(0.0%)
|
|
|
1,987,069
|
|
|
26385.2%
|
|
Other expense
(income), net
|
|
372,955
|
|
|
0.5%
|
|
|
110,267
|
|
|
0.3%
|
|
|
262,688
|
|
|
238.2%
|
|
Total Other Expense
|
|
17,302,673
|
|
|
21.3%
|
|
|
102,736
|
|
|
0.3%
|
|
|
17,199,937
|
|
|
16741.9%
|
|
Income before taxes
and noncontrolling interest
|
|
23,321,107
|
|
|
28.7%
|
|
|
15,540,846
|
|
|
46.3%
|
|
|
7,780,261
|
|
|
50.1%
|
|
Provision for income
taxes
|
|
7,547,318
|
|
|
9.3%
|
|
|
4,437,141
|
|
|
13.2%
|
|
|
3,110,177
|
|
|
70.1%
|
|
Non-controlling
interest
|
|
10,738,295
|
|
|
13.2%
|
|
|
2,323,205
|
|
|
6.9%
|
|
|
8,415,090
|
|
|
362.2%
|
|
Net income
|
$
|
5,035,494
|
|
|
6.2%
|
|
$
|
8,780,500
|
|
|
26.2%
|
|
$
|
(3,745,006)
|
|
|
(42.7%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
.
Our revenues are derived
primarily from the sales of our human albumin and immunoglobulin products. Our
revenues increased 142.4%, or $47,795,118, to $81,369,882 for the nine months
ended September 30, 2009, compared to revenues of $33,574,764 for the same
period of 2008. The increase in revenues during the nine months of 2009 is
primarily attributable to a general increase in the price of plasma based
products, but was partially offset by a decrease in our sales volume for one
of our products. Among the factors that contributed to the growth in revenue,
foreign exchange translation accounted for 5.3% of the increase. Our financial
results for the nine months ended September 30, 2009 also benefited from the
consolidation of Dalin, which we acquired in the first quarter of 2009. Dalin
contributed approximately $33.8 million in revenue, which accounted for
approximately 41.5% of our total revenue for the nine months ended September
30, 2009. All of our approved products, except human hepatitis B
immunoglobulin, recorded price increases ranging from 3.4% to 43.8%. For the
nine months ended September 30, 2009, the average price for our approved human
albumin products, which contributed 48.7% to our total revenues, increased
3.4%, the average price for our approved human immunoglobulin for intravenous
injection products, which contributed 36.6% to our revenues, increased 8.8%,
the average price for our approved human tetanus immunoglobulin products,
which contributed 2.7% to our revenue, increased 12.2%, the average price for
our approved human rabies immunoglobulin products, which contributed 4.8% to
our revenues, increased 43.8%, and the average price for our approved human
hepatitis B immunoglobulin products, which contributed 3.2% to our revenues,
decreased 5.4% as compared to the same period in 2008. On July 1, 2008, the SFDA implemented the new 90-day quarantine period on plasma raw material. This
new measure further tightens the raw material that is available for
production, and has adversely impacted the already short supply of
plasma-based products. As a result, during the nine months ended September 30,
2009, the supply of plasma-based products remained very tight industry-wide.
-
32 -
The continuing price increase of our
products since 2008 was primarily attributable to the government's stringent
control on the quality standard of the plasma-based production industry, which
resulted in a shortage in the supply of finished products. We were able to
adjust our production plan to take advantage of the limited market supply of
plasma resources to realize higher profit margins. In addition, there is a
shortage in the market supply for human albumin products which has increased
the value of our products in the market place. The plasma-based industry has
been immune from the impact of the on-going global financial crisis as the
demand for our products has out-paced supply. As a result, our selling price,
cost of revenue and operating expenses during the nine months of 2009 were not
impacted by the global financial turmoil. With the acquisition of Dalin, and
its operating subsidiary Qianfeng, we are better situated to serve our
existing and new customers with expanded production capacity and market
coverage. Our management expects that our revenue growth will remain strong
for the remainder of 2009.
Cost of Revenues
Our cost of sales increased $12,612,493, or
129.7%, to $22,337,596 for the nine months ended September 30, 2009, from
$9,725,103 during the same period in 2008. This increase was partly due to a
5.0% increase in foreign exchange translation, in addition to an actual 124.7%
increase in cost of revenues. The increase in cost of revenues is primarily
due to our consolidation of Dalin and the increase in the cost of raw material
costs in connection with the expansion of our donor base during the 2009
period. Cost of revenues as a percentage of sales revenue for the nine months
ended September 30, 2009 and 2008 were 27.5% and 29.0%, respectively. The
decrease in cost of revenue as a percentage of revenue is mainly due to the
general price increases in our products.
Gross Profit
Gross profit increased by $35,182,625, or
147.5%, to $59,032,286 for the nine months ended September 30, 2009, from
$23,849,661 for the same period in 2008. As a percentage of sales revenue, our
gross profit margin increased by 1.5% to 72.5% for the nine months ended
September 30, 2009, from 71.0% for the same period in 2008. The amount
increase in our gross profit is due primarily to the consolidation of Dalin
.
Operating Expenses
Our total operating expenses increased by
$10,202,427, or 124.3%, to $18,408,506 for the nine months ended September 30,
2009, from $8,206,079 for the same period in 2008. The increase was primarily
attributable to the 160.5% increase in our general and administrative expenses
during the 2009 period, as well as the 29.6% increase in selling expense, and
the 65.2% increase in Research and development expenses. As a percentage of
sales revenue, total operating expenses decreased by 1.8% to 22.6% for the
nine months ended September 30, 2009, from 24.4% for the same period in 2008.
Selling
Expenses
. For the nine months ended
September 30, 2009, our selling expenses increased to $2,313,577, from
$1,785,340 for the same period in 2008, an increase of $528,237, or 29.6%.
Our selling expenses as a percentage of sales for the nine months ended
September 30, 2009 decreased by 2.5%, to 2.8%, from 5.3% for the same period
in 2008. The increase in selling expenses is due primarily to our
consolidation of Dalin's selling activities as well as more efforts spent on
broadening new hospital customers. The decrease in selling expenses as a
percentage of sales is due to our expanded sales following the Dalin
acquisition.
General and
Administrative Expenses
. For the
nine months ended September 30, 2009, our general and administrative expenses
increased to $14,996,846, from $5,756,087 for same period in 2008, a
$9,240,759, or 160.5% increase. General and administrative expenses as a
percentage of sales increased by 1.3% to 18.4% for the nine months ended
September 30, 2009, from 17.1% for the same period in 2008. The dollar
increase was mainly due to an increase in our personnel-related costs and
extra depreciation and amortization expenses in connection with our
acquisition of Dalin resulting from fair value adjustments, as well as
additional professional service charge related to the acquisition of Dalin.
Non-cash employee compensation for the nine months ended September 30, 2009
decreased to $62,281, from $1,283,801 for the same period in 2008, primarily
as a result of grants to employees, consultants and directors made under our
2008 Equity Incentive Plan during our third quarter of 2008. The $62,281
compensation expense, which was included in the General and Administrative
Expenses, represents the amortization of the compensation expense related to
the grant of options to the independent directors.
-
33 -
Research and
Development Expenses
.
For the nine months ended September 30, 2009 and 2008, our research and
development expenses were $1,098,083 and $664,652, respectively, an increase
of $433,431 or 65.2%. As a percentage of revenues, our research and
development expenses for the nine months ended September 30, 2009 and 2008 was
1.3% and 2.0%, respectively. The dollar increase was due primarily to the
consolidation of Dalin and increased costs from continuing clinical trial on
new products, while the decrease in the percentage of revenues is due to the
increase in revenue from consolidation of Dalin.
Change in Fair Value of Derivative
Liabilities
Prior to January 1, 2009, the warrants
issued in 2006 were accounted for as equity instruments. Because the strike
price of the warrants is denominated in USD and the Company's functional
currency is the RMB, the warrants are now classified as a derivative liability
carried at fair value, with periodic changes in the fair value charged or
credited to income each period. Similarly, the embedded derivatives (including
the conversion option) in our senior secured convertible notes and warrants
that were issued in June 2009 are classified as derivative liabilities carried
at fair value. For the nine months ended September 30, 2009 and 2008, the
Company recognized a loss on the change in the fair value of derivative
liabilities of $14,931,088 and $0, respectively. The recognized loss on the
change in the fair value is the direct result of the Company's stock price
increase from $2.00 to $7.52 as of December 31, 2008 and September 30, 2009,
respectively. Future changes in the market price of our common stock could
cause the fair value of these derivative financial instruments to change
significantly in future periods.
Interest Expense (income), net
Our net interest expense increased
$1,987,069 to $1,979,538 for the nine months ended September 30, 2009, from
interest income of $7,531 for the same period in 2008. The increase in
interest expense is primarily due to the financing related to the acquisition
of Dalin.
Income before Taxes and Non-Controlling
Interest
Income before taxes and non-controlling
interest for the nine months ended September 30, 2009 and 2008 was $23,321,107
and $15,540,846, respectively, an increase of $7,780,261, or 50.1%. Income
before taxes and non-controlling interest as a percentage of revenues was
28.7% and 46.3% for the nine months ended September 30, 2009 and 2008,
respectively. The increase is due directly to an increase in the selling
prices of our products and the consolidation of Dalin, which was offset by the
non-cash change in fair value of derivative liabilities of $14,931,088.
Provision for Income Taxes
Our provision for income taxes increased
$3,110,177, or 70.1 %, to $7,547,318 for the nine months ended September 30,
2009, from $4,437,141 for the same period in 2008. The increase in provision
for income taxes is mainly due to the consolidation of Dalin, which was offset
by the decrease of Shandong Taibang's provision for income taxes as Shandong
Taibang accrued its 2008 taxes at 25% before it was granted with preferential
15% tax rate for the 2008 tax year in early 2009. Our effective tax rate for
the quarter ended September 30, 2009 and 2008 was 32.4% and 28.6%,
respectively.
Non-controlling interest
Non-controlling interest increased
$8,415,090 or 362.2%, to $10,738,295 for the nine months ended September 30,
2009, from $2,323,205 for the same period in 2008.
Net Income attributable to controlling
interest
As a result of the factors described above,
net income attributable to controlling interest decreased $3,745,006, or
42.7%, to $5,035,494 during the nine months ended September 30, 2009, from
$8,780,500 for the same period in 2008.
Comparison of Fiscal Years Ended
December 31, 2008 and 2007
The following table sets forth key
components of our results of operations for the fiscal years ended December
31, 2008 and 2007, both in dollars and as a percentage of our net sales.
|
|
Fiscal Years Ended December 31
|
|
|
$
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Revenue
|
$
|
46,751,160
|
|
$
|
32,398,669
|
|
$
|
14,352,491
|
|
|
44.3%
|
|
Cost of revenue
|
|
14,040,602
|
|
|
9,945,921
|
|
|
4,094,681
|
|
|
41.2%
|
|
Gross profit
|
|
32,710,558
|
|
|
22,452,748
|
|
|
10,257,810
|
|
|
45.7%
|
|
Gross profit as a
percentage of revenue
|
|
70.0%
|
|
|
69.3%
|
|
|
0.7%
|
|
|
|
|
Operating expenses
|
|
12,374,787
|
|
|
9,695,333
|
|
|
2,679,454
|
|
|
27.6%
|
|
Other expense
|
|
449,656
|
|
|
511,577
|
|
|
(61,921
|
)
|
|
(12.1%
|
)
|
Income before taxes
and noncontrolling interest
|
|
19,886,115
|
|
|
12,245,838
|
|
|
7,640,277
|
|
|
62.4%
|
|
Income taxes
|
|
4,596,603
|
|
|
2,074,560
|
|
|
2,522,043
|
|
|
121.6%
|
|
Net income before
noncontrolling interest
|
$
|
15,289,512
|
|
$
|
10,171,278
|
|
$
|
5,118,234
|
|
|
50.3%
|
|
-
34 -
Revenues
.
Our revenues are derived primarily from the sales of human albumin and
various types of immunoglobulin. Our revenues increased 44.3%, or $14,352,491,
to $46,751,160 for the fiscal year ended December 31, 2008, compared to
revenues of $32,398,669 for the fiscal year ended December 31, 2007. The
increase in revenues during fiscal year 2008 is primarily attributable to a
general increase in the price of plasma based products, which was partially
offset by a decrease in our sales volume except for one of our products. Among
the factors that contributed to the growth in revenue, foreign exchange
translation accounted for 12.5% of the increase. All of our approved products,
except human rabies immunoglobulin, recorded price increases ranging from
29.7% to 227.7%. For the fiscal year ended December 31, 2008, the average
price for our approved human albumin products, which contributed 57.8% to our
total revenues, increased 29.7%, the average price for our approved human
immunoglobulin for intravenous injection, which contributed 22.0% to our
revenues, increased 102.8%, and the average price for our approved human
tetanus immunoglobulin, which contributed 3.2% to our revenue, increased
76.3%, as compared to the same period in 2007. During fiscal year 2008, the SFDA implemented the new 90-day quarantine period on plasma raw material
effective July 1, 2008. This new measure further tightens the raw material
that is available for production, and has adversely impacted the already short
supply of plasma-based products. As a result, volume in sales for our human
albumin, human hepatitis B immunoglobulin, human rabies immunoglobulin and
human tetanus immunoglobulin products decreased by 7.4%, 41.7%, 27.1% and
30.3%, respectively, while the sales volume for approved our human
immunoglobulin for intravenous use increased by 39.2%, respectively, for the
fiscal year ended December 31 2008, as compared to the same period in 2007.
Price increase of our products between 2007
and 2008 was primarily attributable to the government's stringent control on
the quality standard of the plasma-based production industry, which resulted
in a shortage in the supply of finished products. We were able to adjust our
production plan to take advantage of the limited market supply of plasma
resources to realize higher profit margins. In addition, there is a shortage
in the market supply for human albumin products which has increased the value
of our products in the market place. According to the SFDA spokeswoman, Ms.
Yan Jiang Ying in a September 2007 press conference, there is a critical
shortage in the market supply of human albumin due to the shortage of plasma
raw material. According to Ms. Yan, the overall market supply of human albumin
was 117, 127 and 48 metric tons during 2005, 2006 and the first 8 months of
2007, respectively. Our sales of human albumin products for 2005, 2006 and
2007 were 4.2, 6.0 and 5.9 metric tons, respectively, which we believe, in
light of the SFDA supply data, represents a steady increase in our market
share for the periods 2005, 2006 and 2007 from 3.6%, to 4.7% and to 8.2%,
respectively. The plasma-based industry has been immune from the impact of the
on-going global financial crisis as the demand for our products has out-paced
supply. As a result, our selling price, cost of revenue and operating expenses
during the fiscal year 2008 were not impacted by the global financial turmoil.
Cost of Revenues
.
Our cost of sales increased $4,094,681, or 41.2%, to $14,040,602 for the
year ended December 31, 2008, from $9,945,921 during the same period in 2007.
This increase was mainly due to a 12.2% increase in foreign exchange
translation, in addition to the actual 28.9% increase in cost of revenues. The
increase in cost of revenues is primarily due to the increase in cost of raw
material. The raw material cost as a percentage of total cost of revenues is
76% in 2008, as compared to the 73% in 2007. Cost of revenues as a percentage
of sales was 30.0% for the fiscal year ended December 31, 2008, as compared to
30.7% during the same period in 2007. The decrease in cost of revenue as a
percentage of sales is primarily due to the favorable selling price increase,
as well as our management's ability to maintain efficiencies in our production
process.
Gross Profit
.
The gross profit increased by $10,257,810, or 45.7%, to $32,710,558 for
the fiscal year ended December 31, 2008 from $22,452,748 for the same period
in 2007. As a percentage of sales revenue, our gross profit increased by 0.7%
to 70.0% for the fiscal year ended December 31, 2008, from 69.3% for the same
period in 2007. The increase in our gross profit as a percentage of revenues
is due primarily to the increase in selling prices, as well as our
management's ability to maintain efficiencies in our production process.
Operating Expenses
.
Our total operating expenses increased by $2,679,454, or 27.6%, to $12,374,787
for the fiscal year ended December 31, 2008, from $9,695,333 for the same
period in 2007. As a percentage of sales revenue, total expenses decreased by
3.4% to 26.5% for the fiscal year ended December 31, 2008 from 29.9% for the
same period in 2007. The increase was primarily attributable to the 65.2%
increase in our general and administrative expenses during the 2008 period,
which was offset by the 50.1% decrease in selling expense.
Selling Expenses
. For the
fiscal year ended December 31, 2008, our selling expenses decreased to
$2,212,073, from $4,434,721 for the fiscal year ended December 31, 2007, a
decrease of $2,222,648, or 50.1%. As a percentage of sales, our selling
expenses for the fiscal year ended December 31, 2008 decreased by 9.0%, to
4.7%, from 13.7% for the fiscal year ended December 31, 2007. The substantial
decrease in selling expenses is the reflection of the normalization of the
marketing strategy that initiated on the third quarter of 2007. Specifically,
we awarded sales bonuses of $0.36 million to sales personnel for their
outstanding achievement in generating revenue in 2007. Moreover, we
aggressively launched marketing efforts by holding more conferences in
conjunction with our distributors in most major cities, at an additional cost
of approximately $1.4 million for the year ended December 31, 2007. In
connection with these marketing efforts, our sales force also incurred
additional expenses of approximately $0.3 million. With the marketing efforts
in 2007, the Company was able to obtain higher sales with a substantial lower
level of selling expenses in 2008.
-
35 -
General and Administrative Expenses
.
For the fiscal year ended December 31, 2008, our general and administrative
expenses increased to $7,684,493, from $4,651,434 for the fiscal year ended
December 31, 2007, a $3,033,059, or 65.2% increase. General and administrative
expenses as a percentage of sales increased by 2.0% to 16.4% for the fiscal
year 2008 from 14.4% for the fiscal year 2007. The dollar and percentage
increase was mainly due to the increase of personnel cost of $0.9 million,
increase of professional expenses related to the costs of being a public
reporting company of $0.2 million and write off of $0.9 million bad debt.
Research and Development Expenses
.
For the fiscal years ended December 31, 2008 and 2007, our research and
development expenses were $1,166,494 and $609,178, respectively, an increase
of $557,316 or 91.5%. As a percentage of revenues, our research and
development expenses for the fiscal year ended December 31, 2008 and 2007 were
2.5% and 1.9%, respectively. The dollar and percentage increase was primarily
due to the cost of research activities and the clinical trial on our new
products during the period.
Non-cash Employee Compensation
.
Effective May 9, 2008, our board of directors adopted the 2008 Plan under
which a total of 5,000,000 shares of our common stock may be issued. During
the year ended December 31, 2008, we granted an aggregate of 937,500
immediately vested options to purchase shares of our common stock to our
employees and consultants under the 2008 Plan and granted ten-year options to
purchase an additional 60,000 shares of common stock, with one-half scheduled
to vest on January 24, 2009 and the remaining half scheduled to vest on July
24, 2009, to our three independent directors. Non-cash employee compensation
for the year ended December 31, 2008 increased to $1,311,727, from $0 for the
same period in 2007, primarily as a result of our adoption of the 2008 Plan
and grants to employees and consultants made thereunder. The $1,311,727
compensation expense represents the 937,500 shares of options fully vested on
June 1, 2008 and the amortization of the compensation expense of options to
purchase 30,000 shares that will vest on January 24, 2009.
Income Tax Expense.
Our provision for income taxes increased
$2,522,043, or 121.6%, to $4,596,603 for the year ended December 31, 2008,
from $2,074,560 for the same period in 2007. Our effective tax rate for the
year ended December 31, 2008 was 23.1%, and our 2007 effective tax rate was
16.9%.
Net Income before Minority Interest.
Our net income before minority
interest increased $5,118,234, or 50.3%, to $15,289,512 for the year ended
December 31, 2008, from $10,171,278 for the same period in 2007. Income before
taxes and minority interest as a percentage of revenues was 32.7% and 31.4%
for the year ended December 31, 2008 and 2007, respectively. The increase is
due directly to an increase in the selling prices of our products and the
reduction of the selling expenses during the year ended December 31, 2008.
Liquidity and Capital Resources
As of September 30, 2009, we had cash and
cash equivalents of $50,348,133, primarily consisting of cash on hand and
demand deposits.
To date, we have financed our operations primarily
through cash flows from operations, augmented by short-term bank borrowings
and equity contributions by our stockholders. To date, we have financed our
operations primarily through cash flows from operations, augmented by
short-term bank borrowings and equity contributions by our stockholders. With
the bank credit facilities that are available to us and other financing
activities, we expect that cash on hand, funds generated from our operations
and funds generated from companies that we may acquire in the future will be
sufficient to satisfy our current and future commitments for at least the next
twelve months. We do not believe that we have any significant short term
liquidity problems. The following table sets forth a summary of our cash flows
for the periods indicated:
Cash Flow
|
(all amounts in U.S. dollars)
|
|
|
For the Nine-Month Period Ended
|
|
|
For the Fiscal Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
35,458,229
|
|
$
|
14,691,924
|
|
$
|
20,020,039
|
|
$
|
12,650,904
|
|
Net cash provided by (used in) investing
activities
|
|
(6,059,109
|
)
|
|
(4,734,794
|
)
|
|
(21,666,504
|
)
|
|
(9,210,814
|
)
|
Net cash provided by (used in) financing
activities
|
|
12,095,925
|
|
|
(1,341,943
|
)
|
|
4,785,780
|
|
|
(3,122,278
|
)
|
Effects of Exchange Rate Change in Cash
|
|
38,472
|
|
|
598,736
|
|
|
665,268
|
|
|
424,001
|
|
Net Increase in Cash and Cash Equivalents
|
|
41,533,517
|
|
|
9,213,923
|
|
|
3,804,583
|
|
|
741,813
|
|
Cash and Cash Equivalents, Beginning
|
|
8,814,616
|
|
|
5,010,033
|
|
|
5,010,033
|
|
|
4,268,220
|
|
Cash and Cash Equivalents, End
|
$
|
50,348,133
|
|
$
|
14,223,956
|
|
$
|
8,814,616
|
|
$
|
5,010,033
|
|
Operating activities
Net cash provided by
operating activities was $35,458,229 for the nine months ended September 30,
2009, as compared to $14,691,924 net cash provided by operating activities for
the same period in 2008. The increase in net cash provided by operating
activities was mainly due to the increase in operating income of $24,980,198
to $40,623,780 for the nine months ended September 30, 2009, as compared to
$15,643,582 in the same period of 2008. For the nine months ended September
30, 2009, the net income attributed to non-controlling interest of
$10,738,295, the warrants and derivative mark-to-market charge of $14,931,088
and other non-cash activities of $5,904,816 brought the operating income to a
net income of $5,035,494. The increase in customer deposit provided $4,154,255
in net cash. The increase in other payables and accrued liabilities provided
$4,236,622 in net cash, which was offset by an increase in inventory of
$9,729,616.
Net cash provided by operating activities
was $20.0 million for the fiscal year ended December 31, 2008, as compared to
$12.7 million net cash provided by operating activities for the same period in
2007. The increase in net cash provided by operating activities was mainly due
to the increase in net income of $3.8 million to $12.0 million for the fiscal
year ended December 31, 2008, as compare to $8.2 million in the same period of
2007. For the year ended December 31, 2008, the non-cash activities of $6.7
million and the increase in other payables and taxes payable provided $2.7
million and 3.6 million, respectively, in net cash, which was offset by the
$4.7 million increase in inventory.
-
36 -
Investing activities
Our use of cash for
investing activities is primarily for the acquisition of property, plant and
equipment and intangibles. Net cash used by investing activities for the nine
months ended September 30, 2009 was $6,059,109, as compared to $4,734,794 net
cash used in investing activities during the same period of 2008. The cash
used for acquiring additional plant and equipment and intangible assets is
$3,698,049. The cash used for the payment of Dalin acquisition were offset by
the acquisition of Dalin's existing cash
,
while payment for Huitian
investment used $3,224,980 of the cash.
Net cash used for investing activities for
the fiscal year ended December 31, 2008 was $21.7 million, as compared to $9.2
million in the same period of 2007. The increase of net cash used for
investing activities was mainly attributable to advances for potential
acquisition of $14.2 million, payment for unconsolidated affiliate of $3.2
million, and the additional capital expenditures in plant and equipment for
production and plasma collecting operations to support continued strong growth
in our business.
Financing activities
Net cash provided by financing activities
for the nine months ended September 30, 2009 was $12,095,925 as compared to
$1,341,943 used in financing activities in the same period of 2008. The
increase of the cash provided by financing activities was mainly attributable
to the proceeds from issuance of convertible note of $8,967,516, proceeds from
warrants exercised of $3,455,059 and bank loans of $13,515,598, which was
offset by shareholder loan repayments of $2,840,914, a non-controlling
shareholder dividend payment of $2,293,888, a short term bank loan payment of
$2,814,528 and a long term bank loan payment of $5,863,600.
Net cash provided by
financing activities for the year ended December 31, 2008 totaled $4.8 million
as compared to $3.1 million used in financing activities in the same period of
2007. The increase of the cash provided by financing activities was mainly
attributable to the proceeds from long-term loans of $5.8 million, which was
offset by the repayment of short-term bank loan of $0.7 million.
On June 10, 2009, we
completed a private placement transaction with a group of accredited
investors. Pursuant to a securities purchase agreement with the investors
(who are the selling stockholders named below), we issued to the investors,
3.8% senior secured convertible notes, in the aggregate principal amount of
$9,554,140, convertible into 2,388,535 shares of our common stock and warrants
to purchase up to 1,194,268 shares of our common stock. The securities issued
represented approximately 13.41% of our issued and outstanding capital stock
on a fully-diluted basis as of and immediately after closing date. Prior to
the closing of the private placement transaction,
21,474,942 shares of
our common stock were issued and outstanding,
5,914,007
of which were held by persons other than the selling stockholders, our
affiliates, and affiliates of the selling stockholders.
In connection with the
private placement transaction, on June 10, 2009, we also entered into a
registration rights agreement with the investors, pursuant to which we agreed
to file within 45 days of the closing date, a registration statement
registering for resale the shares issued to the investors in the private
placement. As part of compensation for its services, Oppenheimer & Co. Inc. ("Opco"),
our placement agent in the transaction also received a three-year warrant to
purchase up to 93,750 shares of our common stock, representing 5% of the
securities purchased by first-time investors in the Company, at an exercise
price of $6.00 per share. The foregoing securities were issued pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
for the offer and sale of securities not involving a public offering and Rule
506 of Regulation D promulgated thereunder.
On June 10, 2009, the closing
date for the private placement, the total dollar value of the securities
underlying the convertible notes was $10,987,261, and the total dollar value
of the securities underlying the warrants was $5,732,486, based on the $4.60
market price per share of the Company's Common Stock as quoted on the
over-the-counter bulletin board on that date. We received $9,554,140
in gross proceeds from the private placement.
Other than the payments set
forth below, we have not made and are not required to make any payments to any
selling stockholder, any affiliate of a selling stockholder, or any person
with whom any selling stockholder has a contractual relationship regarding the
transaction (including any interest payments, liquidated damages, payments
made to "finders" or "placement agents," and any other payments or potential
payments).
Nature of Payment
|
Purpose
|
Amount/Value
|
Investor Legal Fees:
|
It is usual and customary
for an issue to agree to assume the costs of legal fees incurred by
investors in a private placement. In connection with the private
placement transaction the Company agreed to reimburse the Selling
Stockholders, within a month of the closing, for up to $250,000 in any
legal fees and other expenses incurred by the Selling Stockholders in
connection with the transaction.
|
$250,000
|
Placement Agent Fees
:
|
Oppenheimer & Co, Inc. acted
as the placement agent in the private placement transaction and, as
consideration for its services, OpCo received a cash fee equal to 6.1% of
the gross proceeds received from the sale of the securities, and a
three-year warrant to purchase common stock representing 5% of the
securities purchased by first-time investors,
|
$455,374
(1)
|
Registration Expenses
:
|
In connection with the
private placement transaction, on June 10, 2009, the Company also entered
into a registration rights agreement with the Selling Stockholders
pursuant to which we agreed to file a registration statement registering
for resale the shares underlying the securities issued to the Selling
Stockholders in the private placement and the subject of this Registration
Statement.
|
$71,824
(2)
|
Interest Payment
|
Under the terms of the
Notes, we are obligated to make approximately $272,314 in interest
payments in the first year following the closing date.
|
$272,314
|
|
TOTAL
|
$1,049,512
|
(1)
Represents
a cash fee of $586,624 and warrants to purchase up to 93,750 shares at an
exercise price of $6.00 per share issued to OpCo (net a profit to the Company
of $131,250 based on the market price per share of the Company's common stock
as quoted on the over-the-counter bulletin board on the closing date).
(2)
This
is an estimate of the fees and expenses that we expect to incur in connection
with fulfilling this registration obligation.
-
38 -
After making the foregoing
payments of $1,049,512, the Company received net proceeds of $8,504,628.
The convertible notes are
convertible at a fixed conversion price of $4.00 per share, subject to
customary adjustments for anti-dilution events. These conversion and exercise
prices are not subject to adjustment based upon the trading or market price of
the stock. There is no discount to the future market price and the selling
stockholders bear the market risk of fluctuations in the stock price.
Accordingly, t
he total possible
discount to the market price of the securities underlying the convertible
notes (divided by the net proceeds to the Company from the sale of the
convertible notes) is 29.19%, or 14.60% averaged over the two-year term of the
convertible notes
. A
tabular disclosure of the selling stockholders' projected profit on the
securities underlying the convertible notes is set forth below:
Selling Stockholder
|
Securities
(1)
|
Market Price of Securities
at Closing Date
(2)
|
Conversion Value
of Securities
(3)
|
Possible Discount
(4)
|
Possible Profit to
Selling Stockholder
(5)
|
Jayhawk Private Equity Fund,
L.P.
|
483,117
|
$2,222,338
|
$1,932,468
|
$289,870
|
$289,870
|
Jayhawk Private Equity
Co-Invest Fund, L.P.
|
30,418
|
$139,923
|
$121,672
|
$18,251
|
$18,251
|
Essence International
Investment LTD
|
1,875,000
|
$8,625,000
|
$7,500,000
|
$1,125,000
|
$1,125,000
|
TOTALS
|
2,388,535
|
$10,987,261
|
$9,554,140
|
$1,433,121
|
$1,433,121
|
(1)
Represents
the total possible shares underlying the Notes (assuming no interest payments
and complete conversion throughout the term of the notes).
(2)
Represents
the combined market price of the total number of shares underlying the
convertible notes, based on the market price per share on June 10, 2009 (the
closing date) and the total possible shares underlying the Notes.
(3)
Represents
the total possible shares the selling stockholders may receive and the
combined conversion price of the total number of shares underlying the Notes
calculated by using the contractual conversion price of $4.00 per share and
the total possible number of shares the selling shareholders may receive.
(4)
Reflects
the total possible discount to the market price as of the closing date,
calculated by subtracting the total conversion price on the closing date from
the combined market price of the total number of shares underlying the Notes
on that date.
(5)
Profit
to Selling Stockholders assumes that there was a conversion event and that the
convertible notes were immediately converted and resold at the market price on
closing date.
The warrants are exercisable
at fixed price of $4.80 per share, subject to customary adjustments for
anti-dilution events. The exercise price of the warrants does not float or
reset based on the market price of the Company's common stock. A tabular
disclosure of the Company's projected profit on the warrants is set forth
below:
Selling Stockholder
|
Securities
(1)
|
Market Price of Securities
at Closing Date
(2)
|
Conversion Value
of Securities
(3)
|
Possible Discount
(4)
|
Projected Profit to
Company
(5)
|
Jayhawk Private Equity Fund,
L.P.
(6)
|
241,559
|
$1,111,171
|
$1,159,483
|
($48,312)
|
$48,312
|
Jayhawk Private Equity
Co-Invest Fund, L.P.
(6)
|
15,209
|
$69,961
|
$73,003
|
($3,042)
|
$3,042
|
Essence International
Investment LTD
|
937,500
|
$4,312,500
|
$4,500,000
|
($187,500)
|
$187,500
|
TOTALS
|
1,194,268
|
$5,493,633
|
$5,732,486
|
($238,854)
|
$238,854
|
(1)
Represents
the total possible shares underlying the securities.
(2)
Represents
the combined market price of the total number of shares underlying the
securities, based on the market price per share on June 10, 2009 (the closing
date) and the total possible shares underlying the securities.
(3)
Represents
the total possible shares the selling shareholders may receive and the
combined conversion price of the total number of shares underlying the
securities calculated by using the contractual exercise price of $4.80 per
share and the total possible number of shares the selling shareholders may
receive.
(4)
Reflects
the total possible discount to the market price as of the closing date,
calculated by subtracting the total conversion price on the closing date from
the combined market price of the total number of shares underlying the
securities on that date.
(5)
Profit
to the Company assumes that the warrants were exercised and that the
underlying shares were immediately resold at the market price on closing date.
(6)
Jayhawk
Private Equity Fund, L.P. and Jayhawk Private Equity Co-Invest Fund, L.P. also
hold five-year warrants to purchase 483,117 shares and 28,214 shares of our
common stock, respectively, at an exercise price of $2.8425 per share. These
warrants were issued in connection with the Company's 2006 private placement
and are covered under an effective registration statement. At the time when
these warrants were sold the Company's securities were not yet publicly traded
and so a market price for the securities cannot be determined. However, if we
use the resale price of $3.00 for the securities set forth in that
registration statement, the aggregate market value of these 2006 warrants when
they were sold would have been $1,428,999, their aggregate conversion value
based on the contractual exercise price is $1,353,977 and the Company would
realize a net loss of $(75,022) on these warrants.
As a result of any conversion
discounts regarding the securities underlying the convertible notes and the
warrants held by the selling shareholders or any of their affiliates, the
selling stockholders can expect to realize a total combined possible profit of
$1,194,267.
Management believes that the
Company has sufficient cash on hand and continuing positive cash inflow, from
the sale of its plasma-based products in the PRC market. Our management
expects continued growth in revenues throughout the term of the convertible
notes, largely due to the ongoing limited supply of plasma-based products in
the PRC market due to the introduction of more stringent health and safety
measures which we already meet. In light of the foregoing, we believe that
the Company will have the financial ability to fulfill its payment obligations
under the convertible notes when they come due.
-
39 -
Loan Facilities
On June 25, 2007, Qianfeng entered into a
long term loan agreement with the Guiyang City, Yunyan sub-branch of the
Agricultural Bank of China, pursuant to which the bank loaned Qianfeng
RMB23,000,000 (approximately $3,374,100) for the purchase of raw materials.
The loan bears an interest rate of 1.15 times the prevailing interest rate
published by the Bank of China and is secured by Qianfeng's machinery and
equipment. Approximately $440,100 of the total loan amount matured on December
25, 2009, and the remaining $2,934,000 balance of the loan is scheduled to
mature in two equal lump sums on April 25, 2010 and June 25, 2010,
respectively.
On January 8, 2009, Shandong Taibang
entered into a short term loan agreement with the Taishan Sub-Branch of the
Bank Of China, pursuant to which the bank loaned Shandong Taibang RMB40
million (approximately $5,868,000). The Loan has an annual interest rate of
5.31% on all outstanding principal and is due and payable in full on January
7, 2010. Shandong Taibang is obligated under the loan agreement to pay the
interest quarterly and repay the principal along with any remaining unpaid
interest in full on the maturity date. Shandong Taibang may not prepay the
loan without the bank's prior written consent, which should be solicited no
later than 30 days before such prepayment, and any such prepayment will be
subject to a penalty equal to 0.0005% of the principal. If the loan is not
paid in full by the maturity date, the interest rate will be increased to
6.90%, until full payment is made. In addition, if the loan is used for any
other purpose than to fund the purchase of raw materials, the bank will have
the right to increase the interest rate to 8.23% on the misused portion of the
loan, effective as of the date such funds are misused, until the misused
portion is repaid in full. Furthermore, if the quarterly interest payments
required under the loan agreement are not timely made during the term, the
bank will have the right to increase the interest rate to 6.90%, and if any
such quarterly interest payments are outstanding after the maturity date and
are not timely made thereafter, then the bank will have the right to charge an
interest rate of 8.23%. Shandong Taibang currently plans to use the loan to
fund the purchase of raw materials. In November 2009, with the consent from
the bank, the company repaid RMB 20 million (approximately $2,939,000) of the
loan amount prior to its maturity.
On February 17, 2009, Qianfeng entered into
a short term loan agreement with the Guiyang City, Yunyan sub-branch of the
Agricultural Bank of China, pursuant to which the bank loaned Qianfeng
RMB3,000,000 (approximately $440,100) for use as plasma purchase. This loan
bears an interest rate of 1.1 times the prevailing Bank of China interest rate
and is secured by Qianfeng's main fractionation facility located in Guizhou,
China. The loan matures on February 16, 2010.
On May 31, 2009, Taibang entered into two
unsecured short term loan agreements, for the amount of RMB20,000,000
(approximately $2,980,000) each, with the Taishan sub-branch of the
Communication Bank of China to replace the RMB 40,000,000 (approximately
$5,860,000) long term loan originally dated October 28, 2008. Pursuant to the
agreements, these loans are for the working capital purpose and mature on June
1, 2010. Both loans bear a fixed interest rate of 5.4% with the interest
payable quarterly. As of September 30, 2009, the loan has an outstanding
balance of RMB 30 million (approximately $4,401,000). In November 2009, with
the consent from the bank, the company further reduced the loan by RMB 20
million (approximately $2,939,000).
Obligations under Material Contracts
On September 26, 2008, Logic Express entered into an equity
transfer agreement with Dalin, and Fan Shaowen, Chen Aimin, Chen Aiguo and
Yang Gang, the shareholders of Dalin, relating to the purchase of an aggregate
90% equity interest in Dalin, for a total purchase price of RMB194,400,000
(approximately, $28,479,600), due in four installments. The parties agreed
that (i) if Logic will have paid 90% of the purchase price (or RMB
174,960,000) on or before April 7, 2009, then Logic will be entitled to its
share of Dalin's portion of the profit generated by Qianfeng starting from
January 1, 2009, and (ii) if Logic fails to pay the said amount, the profit
generated by Qianfeng from January 1, 2009 until the day of payment of said
amount will be shared by Party A and Party B (i.e., Logic will be entitled to
its share of Dalin's portion of the profit generated by Qianfeng calculated
according to the proportion of the purchase price paid by it, and Party A will
be entitled to the rest of Dalin's portion of the profit generated by Qianfeng).
We timely initiated the third installment payment to achieve 90% of the
purchase price on April 7, 2009, in accordance with the instructions provided
by the Dalin shareholders, however, due to erroneous account information
provided by the selling shareholders, RMB3,865,400 (approximately, $566,281)
in funds were initially withheld by the bank, which was subsequently corrected
and paid on April 8, 2009. In addition, the proper account information for the
payment of RMB4,500,000 (approximately, $657,425) was not provided to the
Company until April 14, 2009, upon receipt of which the funds were immediately
delivered. Because the error was occasioned by an omission on the part of the
selling shareholders themselves, we were deemed by the parties to have still
fulfilled its obligations under the agreement. As of January 1, 2009, Logic
Holdings became entitled to all the rights and privileges of a 90% shareholder
in Dalin, including the right to receive its pro rata share of the profits
generated by Dalin's 54% majority-owned operating subsidiary, Qianfeng,
subject to a possible dilution to as low as 41.3%, if a dissenting Qianfeng
shareholder prevails in a pre-existing suit to obtain additional equity
interests in Qianfeng. We are obligated to pay the fourth and final
installment, representing the remaining 10% of the purchase price, on or
before April 9, 2010, the one-year anniversary of the local Administration for
Industry and Commerce's approval of the equity transfer.
According to the equity transfer agreement, we were
entitled to exercise the rights of a Dalin shareholder, as well as take over
all the corporate seals and license of Dalin. However, although we paid the
second installment to the Dalin selling shareholders on December 14, 2008, the
payment did not transfer to us Dalin's related voting power over its main
operating entity, Qianfeng, until on January 16, 2009, when our nominees gained control of the board of
directors and the management positions of Qianfeng. Our
four nominees were elected to Qianfeng's seven-member board of directors in a
special meeting of Qianfeng's shareholders, including Dalin, on that date, and
on January 17, 2009, Qianfeng's Board of Directors elected a new management
team consisting of all Logic Express' and Dalin's appointees, including a new
CEO, Executive Senior Vice President, CFO and Director of Sales. Until that
time, we could not exercise any control over, or retain any financial interest
in, Qianfang.
On April 6, 2009, Logic Express entered
into an equity transfer and entrustment agreement, or Entrustment Agreement,
among Logic Express, Shandong Taibang, and the Shandong Institute of
Biological Products, or the Shandong Institute, the holder of the minority
interests in Shandong Taibang, pursuant to which Logic Express agreed to
permit Shandong Taibang and the Shandong Institute to participate in the
indirect purchase of Qianfeng's equity interests. Under the terms of the
Entrustment Agreement, Shandong Taibang agreed to contribute 18%, or
RMB35,000,000 (approximately, $5,116,184), of the purchase price for Dalin and
the Shandong Institute agreed to contribute 12.86%, or RMB25,000,000
(approximately, $3,654,917), of the purchase price. Logic Express is obligated
to repay to Shandong Taibang and the Shandong Institute their respective
investment amounts on or before April 6th, 2010, along with their pro rata
share, based on their percentage of the purchase price contributed, of any
distribution on the indirect equity investment in Qianfeng payable to Logic
Express during 2009. Logic Express has agreed that if these investment amounts
are not repaid within 5 days of the payment due date, then Logic Express is
obligated to pay Shandong Taibang and the Shandong Institute liquidated
damages equal to 0.03% of the overdue portion of the amount due until such
time as it is paid. Logic Express has also agreed to pledge 30% of its
ownership in Shandong Taibang to the Shandong Institute as security for
nonpayment. If failure to repay continues for longer than 3 months after the
payment due date, then the Shandong Institute will be entitled to any rights
associated with the pledged interests, including but not limited to rights of
disposition and profit distribution, until such time as the investment amount
has been repaid. Logic Express also provided a guarantee that Shandong Taibang
and the Shandong Institute will receive no less than a 6% return based on
their original investment amount.
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Critical Accounting Policies
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires our management to make assumptions, estimates and judgments that
affect the amounts reported, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We have identified
certain accounting policies that are significant to the preparation of our
financial statements. These accounting policies are important for an
understanding of our financial condition and results of operation. Critical
accounting policies are those that are most important to the portrayal of our
financial conditions and results of operations and require management's
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods. Certain accounting estimates are
particularly sensitive because of their significance to financial statements
and because of the possibility that future events affecting the estimate may
differ significantly from management's current judgments. We believe the
following critical accounting policies involve the most significant estimates
and judgments used in the preparation of our financial statements.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted
FASB's accounting standard related to fair value measurements and began
recording financial assets and liabilities subject to recurring fair value
measurement at the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants.
These fair value principles prioritize valuation inputs across three broad
levels. The Company considers the carrying amount of cash, receivables,
payables including accrued liabilities and short term loans to approximate
their fair values because of the short period of time between the origination
of such instruments and their expected realization and if applicable, their
stated rates of interest are equivalent to interest rates currently available.
The fair values are measured pursuant to the three levels defined by the
FASB's accounting standard as follow:
-
Level 1: inputs to the valuation methodology
are quoted prices (unadjusted) for identical assets or liabilities in active
markets.
-
Level 2: inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets,
and inputs that are observable for the assets or liability, either directly
or indirectly, for substantially the full term of the financial instruments.
-
Level 3: inputs to the valuation methodology
are unobservable and significant to the fair value.
Revenue Recognition
We recognize revenue when products are
delivered and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed or determinable, which are
generally considered to be met upon delivery and acceptance of products at the
customer site. Sales are presented net of any discounts given to customers. As
a policy, we do not accept any product returns and based on our records,
product returns, if any, are immaterial. Sales revenue represents the invoiced
value of goods, net of a value-added tax, or VAT. All products produced by us
and sold in the PRC are subject to a Chinese VAT at a rate of 6% of the gross
sales price or at a rate approved by the Chinese local government. Products
distributed by Shandong Medical are subjected to a 17% VAT.
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41 -
Inventories
Due to its unique nature, our principal raw
material, human blood plasma is subject to various quality and safety control
issues which include, but are not limited to, contaminations and blood born
diseases. In addition, limitations of current technology pose biological
hazards inherent in plasma that have yet to be discovered, which could result
in a widespread epidemic due to blood infusion. In the event that human plasma
is discovered to contain pathogens or infectious agents or other bio-hazards,
we would be required to write down our inventory to net realizable value. We
determine the net realizable value of our inventories on the basis of
anticipated sales proceeds less estimated selling expenses. At each balance
sheet date, we evaluate inventories that may be worth less than current
carrying amounts. Total inventories amounted to $33.2 million as of September
30, 2009. In order to ensure that the growing demand for our products is met,
as well as the 90-day quarantine period requirement on plasma raw material
implemented by the PRC government, we have been gradually increasing our
inventory level of raw materials. We strictly follow the production processes
required by government regulations resulting in the relatively high level of
work-in-progress customary to our industry.
Impairment of Long-Lived Assets
We review periodically the carrying amounts
of long-lived assets including property, plant and equipment, and intangible
assets with finite useful lives, to assess whether they are impaired. We
evaluate these assets for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable such
as a change of business plan, technical obsolescence, or a period of
continuous losses. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. In determining estimates of future cash
flows, significant judgment in terms of projection of future cash flows and
assumptions is required.
Use of Estimates
The preparation of consolidated financial
statements in accordance with US GAAP requires us to make a number of
estimates and assumptions relating to the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. On an ongoing basis, we review our estimates and
assumptions, including those related to the recoverability of the carrying
amount and the estimated useful lives of long-lived assets, valuation
allowances for accounts receivable and realizable values for inventories.
Changes in facts and circumstances may result in revised estimates.
Contingencies
In the normal course of business, we are
subject to contingencies, including, legal proceedings and claims arising out
of the business that relate to a wide range of matters, including among
others, product liability. We recognize a liability for such contingency if we
determine that it is probable that a loss has occurred and a reasonable
estimate of the loss can be made. We may consider many factors in making these
assessments, including past history and the specifics of each matter. As we
have not become aware of any product liability claim since operations
commenced, we have not recognized a liability for any product liability
claims.
Recent Accounting Pronouncements
Effective January 1, 2009, the Company
adopted FASB's accounting standard related to business combination which
required acquisition method of accounting to be used for all business
combinations and for an acquirer to be identified for each business
combination. This accounting standard requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions. It also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition)
to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with the standard)
Effective January 1, 2009, the Company
adopted FASB's accounting standard regarding non-controlling interest in
consolidated financial statements. Certain provisions of this statement are
required to be adopted retrospectively for all periods presented. Such
provisions include a requirement that the carrying value of non-controlling
interests (previously referred to as minority interests) be removed from the
mezzanine section of the balance sheet and reclassified as equity. Further, as
a result of adoption this accounting standard, net income attributable to
non-controlling interests is now excluded from the determination of
consolidated net income. In addition, foreign currency translation adjustment
is allocated between controlling and non-controlling interests.
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42 -
In January 2009, the Financial Accounting
Standards Board issued an accounting standard which amended the impairment
model by removing its exclusive reliance on "market participant" estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the "market participant" view
to a holder's estimate of whether there has been a "probable" adverse change
in estimated cash flows allows companies to apply reasonable judgment in
assessing whether another-than-temporary impairment has occurred. The adoption
of this accounting standard did not have a material impact on the Company's
consolidated financial statements because all of the investments in debt
securities are classified as trading securities.
In April 2009, the Financial Accounting
Standards Board issued an accounting standard that makes the
other-than-temporary impairments guidance more operational and improves the
presentation of other-than-temporary impairments in the financial statements.
This standard replaced the existing requirement that the entity's management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have
to sell the security before recovery of its cost basis. This standard provides
increased disclosure about the credit and noncredit components of impaired
debt securities that are not expected to be sold and also requires increased
and more frequent disclosures regarding expected cash flows, credit losses,
and an aging of securities with unrealized losses. Although this standard does
not result in a change in the carrying amount of debt securities, it does
require that the portion of an other-than-temporary impairment not related to
a credit loss for a held-to-maturity security be recognized in a new category
of other comprehensive income and be amortized over the remaining life of the
debt security as an increase in the carrying value of the security. The
Company adopted this accounting standard, but it did not have a material
impact on its consolidated financial statements.
In April 2009, the Financial Accounting
Standards Board issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial
statements. Prior to this accounting standard, fair values for these assets
and liabilities were only disclosed annually. This standard applies to all
financial instruments within its scope and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This standard does not require disclosures for earlier
periods presented for comparative purposes at initial adoption, but in periods
after the initial adoption, this standard requires comparative disclosures
only for periods ending after initial adoption. The Company adopted this
accounting standard, but it did not have a material impact on the disclosures
related to its consolidated financial statements.
In June 2009, the Financial Accounting
Standards Board issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for
transfers of financial assets and the entity's continuing involvement with
them and changes the requirements for derecognizing financial assets. In
addition, it eliminates the concept of a qualifying special-purpose entity ("QSPE").
This accounting standard is effective for financial statements issued for
fiscal years beginning after November 15, 2009, and the Company does not
expect this standard to have a material effect on its consolidated financial
statements.
In June 2009, the Financial Accounting
Standards Board also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities ("VIEs").
The elimination of the concept of a QSPE, as discussed above, removes the
exception from applying the consolidation guidance within this accounting
standard. Further, this accounting standard requires a company to perform a
qualitative analysis when determining whether or not it must consolidate a
VIE. It also requires a company to continuously reassess whether it must
consolidate a VIE. Additionally, it requires enhanced disclosures about a
company's involvement with VIEs and any significant change in risk exposure
due to that involvement, as well as how its involvement with VIEs impacts the
company's financial statements. Finally, a company will be required to
disclose significant judgments and assumptions used to determine whether or
not to consolidate a VIE. This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15, 2009, and the
Company does not expect this standard to have a material effect on its
consolidated financial statements.
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43 -
In June 2009, the Financial Accounting
Standards Board issued an accounting standard which establishes the FASB
Accounting Standards Codification (the "Codification") as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The Codification does not change current U.S. GAAP,
but is intended to simplify user access to all authoritative U.S. GAAP by
providing all the authoritative literature related to a particular topic in
one place. The Codification is effective for interim and annual periods ending
after September 15, 2009, and as of the effective date, all existing
accounting standard documents will be superseded. The Codification is
effective for the Company in the third quarter of 2009, and accordingly, the
Company's Quarterly Report on Form 10-Q for the quarter ending September 30,
2009 and all current and subsequent public filings will reference the
Codification as the sole source of authoritative literature.
In August 2009, the Financial Accounting
Standards Board issued an Accounting Standards Update ("ASU") regarding
measuring liabilities at fair value. This ASU provides additional guidance
clarifying the measurement of liabilities at fair value in circumstances in
which a quoted price in an active market for the identical liability is not
available; under those circumstances, a reporting entity is required to
measure fair value using one or more of valuation techniques, as defined. This
ASU is effective for the first reporting period, including interim periods,
beginning after the issuance of this ASU. The Company is currently evaluating
the impact of this ASU on its consolidated financial statements.
In October 2009, the Financial Accounting
Standards Board issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other financing.
This ASU requires that at the date of issuance of the shares in a
share-lending arrangement entered into in contemplation of a convertible debt
offering or other financing, the shares issued shall be measured at fair value
and be recognized as an issuance cost, with an offset to additional paid-in
capital. Further, loaned shares are excluded from basic and diluted earnings
per share unless default of the share-lending arrangement occurs, at which
time the loaned shares would be included in the basic and diluted
earnings-per-share calculation. This ASU is effective for fiscal years
beginning on or after December 15, 2009, and interim periods within those
fiscal years for arrangements outstanding as of the beginning of those fiscal
years. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.
Seasonality of our Sales
Our operating results and operating cash
flows historically have not been subject to seasonal variations. This pattern
may change, however, as a result of new market opportunities or new product
introductions.
Inflation
Inflation does not materially affect our
business or the results of our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to our investors.
CORPORATE STRUCTURE AND HISTORY
Our Corporate Structure
We are a biopharmaceutical company and,
through our indirect Chinese subsidiaries, we are principally engaged in the
research, development, production and manufacturing of plasma-based
pharmaceutical products in China. Shandong Taibang, our 82.8% majority owned
subsidiary, operates from our manufacturing facility located in Shandong
Province, Qianfeng, the 54% majority owned subsidiary of Dalin, our 90%
majority owned subsidiary, operates from facilities in Guizhou Province and
Huitian, our 35% minority-owned subsidiary operates its collection facilities
in Xi'an Province.
Our Corporate History
China Biologic Products, Inc. was
originally incorporated on December 20, 1989 under the laws of the State of
Texas as Shepherd Food Equipment, Inc. On November 20, 2000, Shepherd Food
Equipment, Inc. changed its corporate name to Shepherd Food Equipment, Inc.
Acquisition Corp., or Shepherd. Shepherd is the survivor of a May 28, 2003,
merger between Shepherd and GRC Holdings, Inc. or GRC. In the merger, the
company adopted the Articles of Incorporation and By-Laws of GRC and changed
its corporate name to GRC Holdings, Inc. On January 10, 2007, a Plan of
Conversion became effective pursuant to which GRC was converted into a
Delaware corporation and changed its name to China Biologic Products, Inc.
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Our Acquisition of Logic Express
On July 19, 2006, we completed a reverse
acquisition with Logic Express, whereby we issued to the shareholders of Logic
Express 18,484,715 shares of our common stock in exchange for 100% of the
issued and outstanding shares of capital stock of Logic Express and its
majority-owned Chinese operating subsidiary, Shandong Taibang. As a result of
the reverse acquisition, Logic Express became our 100% owned subsidiary and
the former shareholders of Logic Express became our controlling stockholders
with 96.1% of our common stock. Shandong Taibang became our 82.76%
majority-owned indirect subsidiary and is the operating company for all of our
commercial operations. Shandong Taibang is a sino-foreign joint venture
company established on October 23, 2002 with a registered capital of RMB80
million (then approximately $10.3 million).
The reverse acquisition is considered to be
a recapitalization (issuance of stock by Logic Express for our net monetary
assets) in substance, rather than a business combination. Logic Express is
treated as the continuing reporting entity that acquired the Company.
Acquisition of Plasma Stations
In December 2006, our subsidiary, Shandong
Taibang, acquired all the assets of five plasma stations in Shandong Province.
We obtained the permit to operate the stations in January 2007. In April 2007,
Shandong Taibang acquired certain assets of two plasma stations in Guangxi
Province. The two plasma stations obtained their operating permits in February
and April 2007, respectively.
We acquired the assets of these plasma
stations through separate Shandong Taibang subsidiaries, specially formed for
this purpose. The subsidiaries holding six of our new plasma stations are the
Xia Jin Plasma Company, the Qi He Plasma Company, the He Ze Plasma Company,
the Huan Jiang Plasma Company, the Yang Gu Plasma Company, and the Zhang Qiu
Plasma Company. The seventh plasma station is held in the Fang Cheng Plasma
Company, which is 80% owned by Shandong Taibang and 20% owned by Lin Feng, an
unrelated third party. In January 2007, Shandong Taibang also signed a letter
of intent to acquire certain assets from a third plasma station in Guangxi
Province. However, we have not consummated this acquisition as the permit for
this station is in dispute, as described in "Legal Proceedings."
In June 2008, we received approval from the
Guangxi Province Bureau of Health to set up a new plasma collection station in
Pu Bei County, Guangxi Province. The new plasma collection station will be
located in the Centralized Industry Zone of Pu Bei County and when it becomes
operational, it will replace CBP's existing Fang Cheng Plasma Collection
Station, or Fang Cheng. We decided to relocate Fang Cheng to a more strategic
location to increase collection volumes.
Establishment of Shandong Medical
In September 2006, Shandong Taibang applied
to establish a wholly owned subsidiary, Shandong Missile Medical Co., Ltd., or
Shandong Medical, with registered capital of $384,600, fully paid on March 1,
2007. On February 7, 2007, Shandong Medical obtained a distribution license
for biological products, except for vaccine, from the Shandong Food and Drug
Administration, for a license period of five years from the date of obtaining
the license. The registration of Shandong Medical was ultimately approved by
Shandong Provincial Department of Foreign Trade and Economic Cooperation on
July 4, 2007 and Shandong Medical was formally registered on July 19, 2007.
The scope of business is wholesale of biological products, except vaccines,
with a license period of 25 years from the date of registration.
Formation of Hong Kong Subsidiary
On December 12, 2008, we established Logic
Holdings (Hong Kong) Limited, or Logic Holding, our wholly-owned Hong Kong
subsidiary, for the purpose of being a holding company for our majority
interest in Dalin.
Dalin Acquisition and Entrustment
Agreement
We completed the acquisition of 90%
interest in Dalin in April 2009 upon payment of 90% of the purchase price. We
are obligated to pay the remaining 10% of the purchase price, RMB 19,440,000
(approximately $2,847,960), on or before April 9, 2010, the one-year
anniversary of the local Administration for Industry and Commerce's approval
of the equity transfer.
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45 -
On April 6, 2009, Logic Express entered
into an equity transfer and entrustment agreement, or Entrustment Agreement,
among Logic Express, Shandong Taibang, and the Shandong Institute of
Biological Products, or the Shandong Institute, the holder of the minority
interests in Shandong Taibang, pursuant to which, Logic Express agreed to
permit Shandong Taibang and the Shandong Institute to participate in the
indirect purchase of Qianfeng's equity interests. Under the terms of the
Entrustment Agreement, Shandong Taibang agreed to contribute 18% or RMB
35,000,000 (approximately $5,116,184) of the Dalin purchase price and the
Shandong Institute agreed to contribute 12.86% or RMB 25,000,000
(approximately $3,654,917) of the Dalin purchase price. Logic Express is
obligated to repay to Shandong Taibang and the Shandong Institute their
respective investment amounts on or before April 6th, 2010, along with their
pro rata share, based on their percentage of the Dalin purchase price
contributed, of any distribution on the indirect equity investment in Qianfeng
payable to Logic Express during 2009. Logic Express has agreed that if these
investment amounts are not repaid within five days of the payment due date,
then Logic Express is obligated to pay Shandong Taibang and the Shandong
Institute liquidated damages equal to 0.03% of the overdue portion of the
amount due until such time as it is paid. Logic Express has also agreed to
pledge 30% of its ownership in Shandong Taibang to the Shandong Institute as
security for nonpayment. If failure to repay continues for longer than 3
months after the payment due date, then the Shandong Institute will be
entitled to any rights associated with the pledged interests, including but
not limited to rights of disposition and profit distribution, until such time
as the investment amount has been repaid. Logic Express also provided a
guarantee that Shandong Taibang and the Shandong Institute will receive no
less than a 6% return based on their original investment amount.
As part of our due diligence investigation
into Dalin and Qianfeng, we discovered that our indirect interest in Qianfeng
acquired under the equity transfer agreement may be diluted to as low as
41.3%, pending the outcome of a lawsuit brought by a Qianfeng shareholder. The
local AIC records show Dalin as a 54% shareholder of Qianfeng, however, the
AIC records do not reflect a May 2007 issuance of Qianfeng's equity interests
to certain investors, pursuant to a capital increase agreement. Qianfeng
received the consideration for the equity interests, but the increase in
registered capital and the related issuance of the equity interest has not yet
been registered with the local AIC, pending the outcome of a minority
shareholder suit against Qianfeng and its shareholders, alleging violation of
the shareholder's right of first refusal in connection with the new equity
issuance. For details regarding the Qianfeng shareholder suit and our position
with respect to the May 2007 issuance of Qianfeng's equity interests, see our
disclosure under "Legal Proceedings" herein.
Qianfeng is one of the largest plasma-based
biopharmaceutical companies in China and is the only manufacturer currently
operating in Guizhou Province. With a population of 39 million, Guizhou
Province has historically produced the highest volumes of plasma collection in
China, because a higher proportion of its population has been willing to
engage in the collection process. Guizhou Province has a total of 19 plasma
collection stations in operation, collecting approximately 1,200 tons of
plasma supply every year. Qianfeng owns seven of these plasma collection
stations, of which six are currently in operation and collecting approximately
250 tons of plasma supply per year, with an annual capacity of 400 tons. We
intend to employ more advanced collection techniques at these stations to
improve yields and generate additional plasma supply. We believe that Qianfeng
currently controls approximately 9.5% of the market for plasma-based
biopharmaceutical products in China. Qianfeng is in compliance with Good
Manufacturing Practices, or GMP, standards, and has been approved by the PRC's
State Food and Drug Administration or the SFDA to produce six types of
plasma-based products including Human Albumin, Human Immunoglobulin, Human
Intravenous Immunoglobulin, Human Hepatitis B Immunoglobulin, Human Tetanus
Immunoglobulin and Human Rabies Immune Globulin.
Huitian Acquisition
We purchased a 35% interest in Huitian at a
purchase price of RMB 44,000,000 (approximately $6,446,000) in June 2009.
Huitian is a manufacturer of plasma-based biopharmaceutical products in
Shaanxi Province and is one of only 32 such manufacturers in China who are
government approved. Shaanxi Province, which has a population of 37 million,
has had a historically high collection volume with approximately ten plasma
collection stations in operation, collecting approximately 300 tons of plasma
supply each year. Only four of the collection stations in Shaanxi Province are
government approved and three of these are owned by Huitian. Huitian produces
about 80 tons of plasma-based products per year and has 200 tons of annual
production capacity. Huitian believes that it currently controls approximately
1.2% of the market for plasma-based biopharmaceutical products in China; a
factor which we believe provides strong long-term growth potential. Huitian is
in compliance with GMP standards and it is also approved by the SFDA for the
production of Human Albumin, Human Immunoglobulin, Human Immunoglobulin for
Intravenous Injection, and Human Hepatitis B Immunoglobulin products.
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OUR BUSINESS
Overview
We are a biopharmaceutical company and
through our indirect majority-owned Chinese subsidiary, Shandong Taibang and
Qianfeng, we are principally engaged in the research, development, production
and manufacturing of plasma-based pharmaceutical products in China. Shandong
Taibang operates from our manufacturing facility located in Tai'an City,
Shandong Province. Qianfeng operates in Guizhou Province. The plasma-based
biopharmaceutical manufacturing industry in China is highly restricted by both
the provincial and central governments. Accordingly, the manufacturing process
of our products is strictly monitored from the initial collection of plasma
from human donors to finished products. Our principal products include our
approved human albumin and immunoglobulin products. We also have a 35%
interest in Huitian, a biopharmaceutical company based in Xi'an, Shaanxi
Province, China.
We are approved to sell human albumin
20%/10ml, 20%/25ml and 20%/50ml. Human albumin is our top-selling product.
Sales of these human albumin products represented approximately 57.8% and
63.5% of our total revenues, respectively, for the each of the years ended
December 31, 2008 and 2007, and approximately 51.6% and 57.7% of our total
revenues, respectively, for the six months ended June 30, 2009 and 2008. Human
albumin is principally used to increase blood volume while immunoglobulin is
used for certain disease preventions and cures. Shandong Taibang's approved
human albumin and immunoglobulin products use human plasma as the basic raw
material. Albumin has been used for almost 50 years to treat critically ill
patients by replacing lost fluid and maintaining adequate blood volume and
pressure. All of our products are prescription medicines administered in the
form of injections.
We sell our products to customers in the
PRC, to hospitals directly or through distributors. Our sales have
historically been made on the basis of short-term arrangements and our largest
customers have changed over the years. For the years ended December 31, 2008
and 2007, our top 5 customers accounted for approximately 16.2% and 14.9%,
respectively, of our total revenue, and for the six months ended June 30, 2009
and 2008, our top 5 customers accounted for approximately 14.1% and 17.2%,
respectively, of our total revenue. For the years ended December 31, 2008 and
2007, our largest customer accounted for approximately 6.4% and 5.3%, of our
revenue, respectively, and for the six months ended June 30, 2009 and 2008,
our largest customer accounted for approximately 4.2% and 4.2%, of our
revenue, respectively. As we continue to diversify our geographic presence,
customer base and product mix, we expect that our largest customers will
continue to change from year to year.
We operate and manage our business as a
single segment. We do not account for the results of our operations on a
geographic or other basis.
All our business has been conducted in
Renminbi, the official currency of China. Renminbi is still not a free
floating currency. The value of Renminbi is subject to changes in the Chinese
government's policies and depends to a large extent on China's domestic and
international economic and political developments, as well as supply and
demand in the local market. Since 1994, the official exchange rate for the
conversion of Renminbi to U.S. dollars has generally been stable, and Renminbi
has appreciated against the U.S. dollar since July 2005.
Our Industry
Plasma Collection in China
The collection of human plasma in China is
generally influenced by factors such as government regulations, geographical
locations of collection stations, sanitary conditions of collection stations,
living standards of the donors, and cultural and religious beliefs. Until
recently, only licensed Plasmapheresis stations owned and operated by the
government could collect human plasma. Furthermore, each collection station
was only allowed to supply plasma to the one manufacturer that had signed the
"Quality Responsibility" statement with them. However, in March 2006, the
Ministry of Health promulgated certain "Measures on Reforming Plasma
Collection Stations," or the Blood Collection Measures, whereby the ownership
and management of PRC plasma stations are required to be transferred to
plasma-based biopharmaceutical companies while the regulatory supervision and
administrative control remain with the PRC government. Plasma stations that
did not complete their reform by December 31, 2006 risked revocation of their
license to collect plasma.
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47 -
The supply of plasma for plasma-based
products in the PRC has been on the decline since 2003 from the historical
high of annual supply of approximately 7,000 tons to approximately 4,000 tons.
We believe that this decline is a direct result of the government's industry
reforms of the country's collection practices which led to the closure of many
stations that did not meet the new industry standards. Based on reports
promulgated by the PRC Ministry of Health, we estimate that the current annual
supply of plasma in China amounts to approximately 4,000 tons, as compared to
30,000 tons in the global market, with the six largest manufacturers of plasma
products accounting for approximately 50% of the annual plasma collection. In
2008, revenues from the sale of plasma products in China amounted to
approximately $700 million and revenues from the sale of human albumin
products amounted to about $400 million. We expect that the plasma derivatives
market is expect to grow at 15% per year through 2011.
We believe that these regulatory changes
have improved the quality of blood and plasma by increasing cleanliness
standards at blood collection stations and instituting measures which limit
illegal selling of blood. As the operation of the plasma stations become more
regulated and the donor population expands, we believe that the overall
quality of raw materials, such as human albumin will continue to increase,
leading to a safer, more reliable finished product.
Plasma-Based Products Industry in
China
We produce approved human albumin and
immunoglobulin products, with human plasma as the main ingredient. In addition
to the low usage ratio of such products in China as compared to other more
developed countries, there is a significant difference in the make up and
range of the plasma-based pharmaceutical products. Based on our analysis, in
most developed countries like the United States, clotting factor products
accounts for the majority of the plasma-based biopharmaceutical products,
while in China, human albumin products accounts for the vast majority of such
products. Specifically, total clotting factor products and human albumin
products, account for approximately 40% and 25%, respectively, of total the
United States' annual plasma-derived products, and account for approximately
8% and 62%, respectively, of China.
Our Business Strategy
Our mission is to become a first-class
biopharmaceutical enterprise in China. To achieve this objective, we have
implemented the following strategies:
·
Securing the supply of plasma
Due to the shortage of plasma
and the reform of the ownership of plasma stations, our immediate strategy is
to negotiate and acquire plasma stations in order to secure our plasma supply.
In June, 2006, we entered into letters of intent with five of the plasma
stations in Shandong Province to acquire certain of their assets and we
acquired those plasma stations in December 2006. Furthermore, in January 2007,
we entered into three letters of intent to acquire certain assets of three
additional plasma stations in Guangxi Province, two of which we have acquired.
See "Raw Materials Plasma" below. In June 2008, we received approval from
the Guangxi Province Bureau of Health to set up a new plasma collection
station in Pu Bei County, Guangxi Province. The new plasma collection station
will be located in the Centralized Industry Zone of Pu Bei County and when it
becomes operational, it will replace CBP's existing Fang Cheng Plasma
Collection Station, or Fang Cheng. We decided to relocate Fang Cheng to a more
strategic location to increase collection volumes. During the construction
period, Fang Cheng will still continue with its normal operations. With the
approval of the Centralized Industry Zone of Pu Bei County, once Fang Cheng
becomes operational, we hope to expand its coverage area to secure higher
collection volumes in the future.
·
Acquisition of competitors and/or
other biologic related companies
In addition to organic growth, acquisition
is an important part of our expansion strategy. Although there are about 32
approved plasma- based biopharmaceutical manufacturers in the market, we
believe that there are only 26 manufacturers in operation, only about half of
whom will be competitive. The top six manufacturers in China account for more
than 50% market share. Furthermore, we believe that the regulatory authorities
are considering further reforming the industry and those smaller, less
competitive manufacturers will face the possibility of having their
manufacturing permits revoked by the regulators, making them potential targets
for acquisition. Also, if we are presented with appropriate opportunities, we
may acquire additional companies, products or technologies in the biologic
related sectors (including but not limited to medical, pharmaceutical and
biopharmaceutical).
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48 -
·
Further strengthening of research
and development capability
We
believe that, unlike other more developed countries like the U.S., China's
plasma-based biopharmaceutical products are at the initial stage of
development. There are many other plasma-based products that are being used in
the U.S. which are not currently being manufactured in China. We intend to
strengthen our research and development capability so as to expand our product
line to include higher-margin, technologically more advanced plasma-based
biopharmaceutical products. We believe that our increased focus on research
and development will give us a competitive advantage over our competitors
·
Market development and network
expansion
Leveraging on the
high quality and excellent safety record of our products, we intend (i) to
enhance our product penetration with our existing customers by introducing new
products and (ii) to extend the reach of our products from our current market
to include other provinces where we envision significant market potential.
Our Products
Our principal products are our approved
human albumin and immunoglobulin products. We are currently approved to
produce 16 biopharmaceutical products in eight major categories as follows:
Approved
Products
(1)(2)
|
Cure/Use
|
Human Albumin: - 20%/10ml, 20%/25ml and
20%/50ml
|
Shock caused by blood loss trauma or burn;
raised intracranial pressure caused by hydrocephalus or trauma; Oedema or
ascites caused by hepatocirrhosis and nephropathy; prevention and cure of
low-density- lipoproteinemia; and Neonatal hyperbilirubinemia.
|
Human Hepatitis B Immunoglobulin 100
International Units, or IU, 200IU, 400IU
|
Prevention of measles and contagious
hepatitis. When applied together with antibiotics, its curative effect on
certain severe bacteria or virus infection may be improved.
|
Human Immunoglobulin 10%/3ml and
10%/1.5ml
|
Original immunoglobulin deficiency, such
as X chain low immunoglobulin, familiar variable immune deficiency,
immunoglobulin G secondary deficiency; Secondary immunoglobulin
deficiency: such as severe infection, newborn sepsis; and Auto-immune
deficiency diseases, such as original thrombocytopenia purpura or kawasaki
disease.
|
Human Immunoglobulin for Intravenous
Injection 5%/50ml
|
Same as above
|
Human Immunoglobulin-5g/vial
|
Same as above
|
Thymopolypeptides Injection
20mg/2ml,5mg/2ml
|
Cure for various original and secondary
T-cell deficiency syndromes, some auto-immune deficiency diseases and
various cell immunity deficiency diseases, and assists in the treatment
for tumors.
|
Human Rabies Immunoglobulin 100IU, 200IU
and 500IU
|
Mainly for passive immunity from bites or
claws by rabies or other infected animals. All patients suspected of being
exposed to rabies will be treated with a combined dose of rabies vaccine
and human rabies immunoglobulin.
|
Human Tetanus Immunoglobulin 250IU
|
Mainly used for the prevention and therapy
of tetanus. Particularly applied to patients who have allergic reactions
to Tetanus Antitoxin.
(3)
|
1. " %" represents the degree of dosage
concentration for the product and each product has its own dosage requirement.
For example, Human Albumin 20%/10ml means 2g of Human Albumin is contained in
each 10ml packaging and Human Immunoglobulin 10%/3ml means 300mg of Human
Immunoglobulin is contained in each 3ml packaging. Under PRC law, each
variation in the packaging, dosage and concentration of medical products
requires registration and approval by the SFDA. During this process the
altered product is not commercially available for sale. For example, among our
Human Albumin products only Human Albumin 20%/10ml, 20%/25ml and 20%/50ml
products are currently approved and are commercially available.
2. "IU" means International Units, or IU. IU
is a unit used to measure the activity of many vitamins, hormones, enzymes,
and drugs. An IU is the amount of a substance that has a certain biological
effect. For each substance there is an international agreement on the
biological effect that is expected for 1 IU. In the case of Immunoglobulin, it
means the number of effective units of antibodies in each package. When
exposed to an antigen, the body views it as foreign material, and takes steps
to neutralize the antigen. Typically, the body accomplishes this by making
antibodies, which are intended to defend the body from invasion by potentially
dangerous substances. These antibodies can be beneficial, as is the case when
the body learns to fight a virus, or they can be harmful, in the instance of
allergies. In a situation when the body cannot effectively react with these
antigens, injection of our product will provide sufficient antibodies to
neutralize the antigens.
3. "Tetanus Antitoxin" is a cheaper
injection treatment for tetanus. However it is not widely used because most
people are allergic to it.
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49 -
Human albumin is principally used to
increase blood volume while immunoglobulin is used for certain disease
preventions and cures. Albumin is also used to treat critically ill patients
by replacing lost fluid and maintaining adequate blood volume and pressure.
Our approved human albumin and immunoglobulin products use human plasma as the
basic raw material. All of our approved products are prescription medicines
administered in the form of injections.
Under PRC law, each variation in the
packaging, dosage and concentration of medical products requires registration
and approval by the SFDA. During this process the altered product is not
commercially available for sale. For example, among our human albumin products
only Human Albumin 20%/10ml, 20%/25ml and 20%/50ml products are currently
approved and are commercially available. Accordingly, all references, in this
prospectus, to our manufacture and sale of human albumin relate to our
approved human albumin products.
We have product liability insurance
covering all of our products in the amount of approximately $2,934,000 (RMB
20,000,000). However, since our establishment in 2002, there has not been any
product liability claims nor has any legal action been filed against us by
patients related to the use of our products.
Raw Materials
Plasma
Plasma is the principal raw material for
our biopharmaceutical products. Until the end of 2006, all plasma collection
stations were owned by the PRC government. Following the mandated
privatization of plasma stations resulted from the Ministry of Health's Blood
Collection Measures, we acquired our stable of plasma collection stations. We
believe that the acquisitions of plasma stations will give us a controlled
source of plasma and better control over the quality and quantity produced. We
will also be able to have increased control over the cost of plasma. Finally,
we believe that we will enjoy benefits of economies of scale with respect to
the administration and management expenses of our several plasma stations.
We spent $14,000,000 and $9,200,000 on
plasma in 2008 and 2007, respectively. Currently we own five plasma collection
stations in Shandong, two in Guangxi and six in Guizhou. When our production
requirements exceed the plasma supply from the stations that we own or that we
will acquire in the future, we will procure the supply deficiency from the
blood centers operated by the regulators of Shandong and other Provinces.
We currently maintain sufficient plasma
supply for approximately 90 days of production. In March 2007, the PRC Food
and Drug Administration implemented new measures on biopharmaceutical industry
effective as of July 1, 2008, requiring plasma raw material to be kept for at
least three months before being put into production. In view of the new
measures, in due course we will extend our plasma supply for approximately
four months. We have not experienced any interruptions to our production due
to shortage of plasma.
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50 -
Other Raw Materials and Packaging
Materials
Other raw materials used in the production
of our biopharmaceutical products include: reagents, consumables and packaging
materials. The principal packaging materials we use include glass bottles for
our injection products, external packaging and printed instructions for our
biopharmaceutical products. We acquire our raw materials and packaging
materials from our approved suppliers in China and overseas. We select our
suppliers based on quality, consistency, price and delivery of the raw
materials which they supply.
We have not experienced any shortage of
supply on these raw materials and packaging materials and there has not been
any significant problem with the quality of materials supplied by these
suppliers.
Our Major Suppliers
The table below lists our major suppliers
as of December 31, 2008, showing the cumulative dollar amount of raw materials
purchased from them during the fiscal year ended December 31, 2008, and the
percentage of raw materials purchased from each supplier as compared to
procurement of all raw materials.
Rank
|
Supplier's name
|
Cumulative
Amount Purchased
During Fiscal Year
2008
(US$)
|
Percentage of
Total
Purchases
During Fiscal
Year 2008
|
1
|
Chongqing Sanda Weiye
Pharmaceutical Products
|
569,653
|
15.6%
|
2
|
Zibo Zhong Bao Kang Medical
Equipment Company
|
381,277
|
10.4%
|
3
|
Liao Cheng Tiantan Plasma
Station
|
380,920
|
10.4%
|
4
|
Tai'an City Ruifeng Company
|
377,375
|
10.3%
|
5
|
Shandong Medical Bottling
Company
|
218,558
|
6.0%
|
6
|
Pall Corporation(Beijing)
|
155,938
|
4.3%
|
7
|
Shin Tai Yong Feng Company
|
144,170
|
3.9%
|
8
|
Beijing Zhongtianbaiyi
Technology Development Company
|
133,498
|
3.7%
|
9
|
Wenzhou City Jiacheng
Company
|
133,482
|
3.7%
|
10
|
Tai'an Shengrong Stainless
Steel Company
|
129,264
|
3.5%
|
|
Total
|
2,624,135
|
71.8%
|
Prior to our acquisition of the assets of
Qi He, Xiajin and Zhang Qiu, we had entered into material supply agreements
with them for the purchase of raw materials. We have replaced these material
supply agreements with plasma processing agreements, dated January 2, 2007,
between Shandong Taibang and each of Qi He, Xia Jin and Zhang Qiu, pursuant to
which we formally appointed each of these stations as our agent to purchase,
collect, examine and deepfreeze plasma on behalf of Shandong Taibang, subject
to rules and specifications that meet the State Province Food and Drug
Administration's requirements for quality, packaging and storage. Pursuant to
the plasma processing agreements, the stations must only collect plasma from
healthy donors within their respective districts and in accordance with a time
table set by Shandong Taibang. The plasma must: be negative HbsAg, anti-HCV,
anti-HIV and reaction of serum to RPR; contain an ALT ≤25 units (ALT), plasma
protein ≥55g/l; contain no virus pollution or visible erythrolysis, lipemia,
macroscopic red blood cell or any other irregular finding. In addition, the
plasma must be packaged in 25 separate 600g bags, boxed with a packing list
and labeled to be consistent with computer records and must be stored at -20°C
as soon as possible after collection to ensure that it will congeal within 6
hours. Shandong Taibang is fully responsible for the overall technical
guidance and quality supervision. Shandong Taibang pays each of the stations a
rate of RMB15 (approximately $2.0) per bag of plasma collected, with the
payment for each batch due within 10 days after the delivery of the following
batch of plasma. Each of the plasma processing agreements with Qi He, Xia Jin
and Zhang Qiu, will all expire on December 31, 2011.
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51 -
Our Major Customers
Due to the nature of our products and the
current regulations, all of our customers are located in China. We have
established relationships with most of our key customers since our
establishment in 2002. For the fiscal year ended December 31, 2008, our top
five customers, based on sales revenue and the percentage of their
contribution to our revenues, were as follows:
|
Revenues During
|
|
Percentage of Total
|
|
|
Fiscal Year 2008
|
|
Sales During
|
|
Customer
|
(US$)
|
|
Fiscal Year 2008
|
|
Handan
Zhiying Medical Company
|
2,915,461
|
|
6.2%
|
|
Zibo
KangHua Medical Supply Company
|
1,422,967
|
|
3.1%
|
|
Linyi
Luoxin Medical Company
|
1,411,582
|
|
3.0%
|
|
HeZe Mudan
Medical Company
|
931,538
|
|
2.0%
|
|
Wuhan
JiuZhengShiJi Medical Company
|
887,338
|
|
1.9%
|
|
Total
|
7,568,886
|
|
16.2%
|
|
Sales, Marketing and Distribution
Because all of our products are
prescription drugs, we can only sell to hospitals and inoculation centers
directly or through approved distributors. For the years ended December 31,
2008 and 2007, direct sales to distributors represented approximately 65.6%
and 58.3%, respectively, of our revenues. Our five largest customers in the
aggregate accounted for approximately 16.2% and 14.9% of our total revenues
for the years ended December 31, 2008 and 2007, respectively. Our largest
customer accounted for approximately 6.2% and 5.3% of our total revenues for
the years ended December 31, 2008 and 2007, respectively.
As part of our effort to ensure the quality
of our distributors, we conduct due diligence to verify whether potential
distributors have obtained necessary permits and licenses and facilities (such
as cold storage) for the distribution of our biopharmaceutical products. We
also assess the distributors' financial condition before appointing them as
distributors. We normally enter into annual supply contracts with our hospital
customers and regional distributors. Certain of our regional distributors are
appointed on an exclusive basis within a specified area. The supply contracts
normally set out the quantity and price of products. For distributors, they
also contain guidelines for the sale and distribution of our products,
including restrictions on the geographical area to which the products could be
sold. We provide our distributors with training in relation to our products
and on sales techniques. We have implemented a coding system for our products
for easy tracking. Depending on the relationship and the creditability of the
distributors, we generally grant a credit period of no longer than 30 days to
distributors with some exceptions. For hospitals and clinics, we generally
grant a credit period of no longer than 90 days. We have bad debt credit of
$0.1 million for 2008 and bad debt expense of $0.2 million for 2007. The $0.1
million bad debt credit for 2008 is due to recovery of bad debt previously
reserved.
Our current key market is in Shandong
province, representing approximately 48.1% and 42.0% of our total revenues for
the years ended December 31, 2008 and 2007, respectively. Our strategy is to
focus our market marketing efforts in Jiangsu, Zhejiang, Henan and the
northeastern part of China.
Our marketing and after-sales services
department currently employs approximately 56 employees.
We believe that due to the unique nature of
our products, the key emphasis on our marketing efforts centers on product
safety, brand recognition, timely availability and pricing. As all of our
products are prescription medicines, we are not allowed to advertise our
products in the mass media. For the years ended December 31, 2008 and 2007,
total sales and marketing expenses amounted to approximately $2.2 million and
$4.4 million, respectively, representing approximately 4.7% and 13.7%,
respectively, of our revenues.
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52 -
Our Research and Development Efforts
The Shandong Institute was established in
1971. The Shandong Institute is the research arm established by and directly
administrated by the Shandong Provincial health department. It was the only
entity approved for the research, development and production of biological and
plasma-based biopharmaceutical products in Shandong Province, the second
largest province in China. Since 1998, it promoted GMP management in the
production process of blood products and became one of the first blood
products manufacturing enterprises to obtain GMP Certification in China. In
2002, the Shandong Institute transferred all of its business and the licenses
necessary to carry on its business and seconded certain of its employees to
our subsidiary, Shandong Taibang. In 2005 and 2006, we were awarded the
advanced high-tech enterprise certification by the Department of Science and
Technology of Shandong Province and the Ministry of Science and Technology of
China, respectively. In 2007, we were admitted as a member of the Shandong
Institute of Medicine and awarded the "Advanced Enterprise" accolade by the
Shandong Blood Center.
We employ a market driven approach to
initiate research and development projects including both product and
production technique development. We believe that the key to the industry
revolves around (i) safety of products and (ii) maximizing the yield per unit
volume of plasma. Our research and development efforts are focused around the
following areas:
·
Broaden the breadth and depth of our
portfolio of plasma-based biopharmaceutical products;
·
Enhance the yield per unit volume of
plasma through new collection techniques;
·
Maximize manufacturing efficiency and
safety;
·
Promote product safety through
implementation of new technologies; and
·
Refine production technology for
existing products.
Our research center is located on the same
premises as the factory, which is located in Tai'an City, Shandong Province.
The research center is equipped with specialized equipment including advanced
testing and analytical equipment, such as atomic absorptimeter, fully
automated blood coagulation analyzer, high performance liquid chromatograph,
gas chromatograph, radioimmunoassay analyzer, ultraviolet-visible
spectrophotometer, and protein chromatograph, most of which have been imported
from the US, Japan, Italy, Germany and Australia. Our research and development
department is comprised of about 30 researchers. All of them hold degrees in
areas such as medicine, pharmacy, biology, and biochemistry. Our research
center carries out development and registration of our products.
All the products we currently manufacture
have been developed in-house. The following table outlines our research and
development work in progress:
Products Currently in
Development
|
Cure/Use
|
Status of Product
Development
|
Stage **
|
Human
Albumin- 12.5g/vial*
|
Shock
caused by blood loss trauma or burn; raised intracranial pressure caused
by hydrocephalus or trauma; Oedema or ascites caused by hepatocirrhosis
and nephropathy; prevention and cure of low-density- lipoproteinemia; and
Neonatal hyperbilirubinemia
|
Awaiting
approval by the SFDA.
|
9
|
Human
Hepatitis B Immunoglobulin (PH4) for
Intravenous Injection
|
Same as
Human Albumin.
|
Approved
to commence clinical trial.
|
8
|
Human
Immunoglobulin for Intravenous Injection 10%
|
Same as
Human Albumin
|
A
technical feasibility study and our laboratory study on the manufacturing
procedure is about to begin.
|
2
|
-53-
|
|
|
|
Human
Prothrombin Complex Concentrate
|
Use for
coagulopathie such as Hemophilia B and increase concentration of
coagulation factor VII, IX and X.
|
Approved
to commence clinical trial.
|
8
|
Human
Coagulation Factor VIII
|
Use for
coagulopathie such as Hemophilia A and increase concentration of
coagulation factor VIII.
|
Clinical
research sample and report submitted; in the process of onsite random
sampling.
|
5
|
Human
Fibrinogen
|
Cure for
lack of fibrinogen and increase human fibrinogen concentration.
|
We have
commenced laboratory studies of a manufacturing procedure.
|
2
|
_________________
* Under PRC law, each variation in the
packaging, dosage and concentration of medical products requires registration
and approval by the SFDA. During this process the altered product is not
commercially available for sale. For example, among our Human Albumin products
only Human Albumin 20%/10ml, 20%/25ml and 20%/50ml products are currently
approved and are commercially available. Our Human Albumin 12.5g/vial product
is at Stage 9 of the drug approval process, i.e. we are awaiting the SFDA's
approval. Accordingly, all references, in this prospectus, to our manufacture
and sale of Human Albumin relates to our approved Human Albumin products.
** These stages refer to the stages in the
regulatory approval process for our products disclosed under the heading
"Regulation" in this prospectus.
For the fiscal years ended December 31,
2008 and 2007, total research and development expenses amounted to
approximately $1.2 million and $0.6 million, respectively, representing
approximately 2.5% and 1.9%, respectively, of our revenues.
Our Competition
We are subject to intense competition.
There are both local and overseas pharmaceutical enterprises that are engaged
in the manufacture and sale of potential substitute or similar
biopharmaceutical products as our products in the PRC. These competitors may
have more capital, better research and development resources, manufacturing
and marketing capability and experience than we do. In our industry, we
compete based upon product quality, product cost, ability to produce a diverse
range of products and logistical capabilities.
We believe that we have strengthened our
position in the marketplace with our recent acquisition of a 90% equity
interest in Dalin and its 54% majority-owned operating subsidiary, Qianfeng
and a 35% equity interest in Huitian, Xi'an-based biopharmaceutical company.
In accordance with terms of the Dalin equity transfer agreement, as of January
1, 2009, we were entitled to all the rights and privileges of a Dalin
shareholder, including the right to receive a pro rata share of the profits
generated by Qianfeng, and pursuant to the terms of the Huitian equity
transfer agreement, we are now entitled to all the rights and privileges of a
35% shareholder in Huitian, including the right to receive our pro rata share
of the profits generated. Our profitability may be adversely affected if (i)
competition intensifies; (ii) competitors drastically reduce prices; or (iii)
competitors develop new products or product substitutes having comparable
medicinal applications or therapeutic effects which are more effective and /or
less costly than those produced by us.
Our profitability may be adversely affected
if (i) competition intensifies; (ii) competitors drastically reduce prices; or
(iii) competitors develop new products or product substitutes having
comparable medicinal applications or therapeutic effects which are more
effective and /or less costly than those produced by us.
Other approved biopharmaceutical
manufacturers in the PRC are entitled to produce many of the products produced
by us. There are currently about 32 approved manufacturers of plasma-based
pharmaceutical products in China. Many of these manufacturers are essentially
producing the same type of products that we produce: human albumin and various
types of immunoglobulin. However, due to recent Ministry of Health
regulations, we believe that it is difficult for new manufacturers to enter
into the industry. We believe that our major competitors in the albumin and
immunoglobulin market in China are Hua Lan Biological Engineering, Shanghai
Institute of Biological Products, Shanghai RAAS Blood Products Co. Ltd.,
Chengdu Ronsheng Pharmaceuticals, and Sichuan Yuanda Shuyang Pharmaceutical
Co.
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54 -
In addition, competition from imported
products and China's admission as a member of the WTO creates increased
competition. The PRC became a member of the WTO in December 2001. Competition
in the biopharmaceutical industry in the PRC will intensify generally in two
respects. With lower import tariffs, we anticipate that imported
biopharmaceutical products manufactured overseas may become increasingly
competitive with domestically produced products in terms of pricing. We also
believe that well-established foreign biopharmaceutical manufacturers may set
up production facilities in the PRC and compete with domestic manufacturers
directly. With the expected increased supply of competitively priced
biopharmaceutical products in the PRC, we may face with increased competition
from foreign biopharmaceutical products, including the types of products
manufactured by US manufacturers and other manufacturers.
According to a 2006 Hua Yuan Medicine Net
survey of the profit ranking of companies in the Chinese biological products
industry, we are ranked the 20
th
in 2006 and 25
th
in
2005, and in the plasma products area, we were ranked 5
th
in 2006.
We believe that we have maintained the same ranking in 2008 based on our
analysis data regarding the approval for sales of plasma-derived products
published by China National Institute for the Control of Pharmaceutical and
Biological Products throughout of the year. Our past financial performance is
attributable to our market position in the industry. Furthermore, while each
of the plasma products related companies have their own product composition
which include 3 main categories namely human albumin, human immunoglobulin and
lyophilized human factor, we are currently developing lyophilized human factor
products which we expect to launch in 2009. We will continue to meet
challenges and secure our market position by enhancing our existing products,
introducing new products to meet customer demand, delivering quality products
to our customers in a timely manner and maintaining our established industry
reputation.
Our Intellectual Property
Pursuant to a Trademark License Agreement
with the Shandong Institute, we hold the exclusive license to a Trademark
Registration Certificate (No.3375484) issued by the PRC Industry and Commerce
Administration Trademark Bureau. The class of goods on which the trademark has
been approved to use include: drug for human beings, serum, microorganism
products for medicine and veterinary medicine, plasma, medical blood, and
medical biological product. The registration will expire in June 2014, the
Shandong Institute has allowed us to use the trademark for free until May
2011. We expect to develop and register our own trademark before the
termination of this license.
In addition, we have registered the
following domain name:
www.chinabiologic.com
and
www.ctbb.com.cn
.
Regulations
Due to the nature of our products, we are
supervised by various levels of the PRC Ministry of Health and/or Food and
Drug Administration. Such supervision includes the safety standards regulating
our source supplies (mainly plasma), our manufacturing process through the
issuance of our GMP Certification and the inspection of our finished products.
Plasma Collection
Substantially all plasma donations for
commercialized plasma-based biopharmaceutical products are done through
plasmapheresis donation stations. Plasmapheresis donation means donors give
only selected blood components platelets, plasma, red cells,
infection-fighting white cells called granulocytes, or a combination of these,
depending on donors blood type and the needs of the community. Plasmapheresis
stations in China are commonly used to collect plasma. In China, current
regulations only allow an individual donor to donate blood in 14-day
intervals, with a maximum quantity of 580ml (or about 600 gram) per donation.
The following are the regulatory
requirements to establish a plasmapheresis station in China:
·
meet the overall plan in terms of the
total number, distribution, and operational scale of plasmapheresis stations;
·
have the required professional health
care technicians to operate a station;
·
have the facility and a hygienic
environment to operate a station;
-
55 -
·
have an identification system to
identify donors;
·
have the equipment to operate a
station; and
·
have the equipment and quality control
technicians to ensure the quality of the plasma collected.
As a result of the overhaul by the four
ministries of the State Council in May 2004, we estimate that the number of
collection stations (including plasma stations) that meet the standards
imposed by the PRC has been reduced from approximately 156 to approximately
120. Plasma stations are customarily owned and managed by the PRC health
authorities. In March 2006, the Ministry of Health promulgated the Blood
Collection Measures whereby the ownership and management of the plasma
stations must be transferred to plasma-based biopharmaceutical companies while
the regulatory supervision and administrative control remain with the
government. For those plasma stations which do not complete their reform by
December 31, 2006, their license to collect plasma will be revoked.
Set out below are some of the safety
features at China's collection stations:
·
Collection stations can only source
plasma from donors within the assigned district approved by the provincial
health authorities.
·
Collection stations must perform a
health check on the donor. Once the donor passes the health check, a "donor
permit" is issued to the donor. The standards of the health check are
established by the health authorities at the State Council level.
·
The design and printing of the "donor
permit" is administrated by the provincial health authorities, autonomous
region or municipality government, as the case maybe. The "donor permit"
cannot be altered, copied or assigned.
·
Before donors can donate plasma, the
station must verify their identities and the validity of their "donor
permits." The donors must pass the verification procedures before they are
given a health check and blood test. For those donors who have passed the
verification, health check and blood test and whose plasma were donated
according to prescribed procedures, the station will setup a record.
·
All collection stations are subject to
the regulations on transmittable diseases prevention. They must strictly
adhere to the sanitary requirements and reporting procedures in the event of
an epidemic situation.
The operation of plasma collection stations
is strictly regulated by the PRC government.
Importation of Blood Products
According to current Chinese regulations,
the following blood products are banned from importation to China:
·
Plasma frozen, liquid and
freeze-dried Human Plasma;
·
Immunoglobulin Human Normal
Immunoglobulin, Specific Immunoglobulin, Human Anti-Tetanus Immunoglobulin,
Human Anti-hemophilia Globulin, Human Anti-HBs Immunoglobulin, Human Anti-
D(Rho) Immunoglobulin and Immunoglobulin For Intravenous Administration;
·
Factor VIII Cryoprecipitated Factor
VIII and Factor VIII Concentrate (only Bayer is allowed, under a special
arrangement with PRC government, to import this product into PRC, commencing
November 2007);
·
Factor IX Concentrate;
·
Human Fibrinogen;
·
Platelet Concentrate;
·
Human Prothrombin Complex;
·
Whole blood or blood components.
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56 -
Production of Plasma-based Products
The manufacture and sale of plasma-based
biopharmaceutical products is strictly regulated by the PRC government. For
example, under PRC law, each variation in the packaging, dosage and
concentration of medical products requires registration and approval by the
SFDA. During this process the altered product is not commercially available
for sale. For example, among our human albumin products only Human Albumin
20%/10ml, 20%/25ml and 20%/50ml products are currently approved and are
commercially available. Accordingly, all references, in this prospectus, to
our manufacture and sale of human albumin relate to our approved human albumin
products. The table below shows the PRC approval process for the manufacture
and sale of new medicines:
Stage (Estimated Time Period)
|
Activities
|
|
|
|
1
|
Planning
Stage (1 month)
|
Prior to
the development of potential new products, our Research & Development
department will engage in a comprehensive review of existing medical
literature, patent status and market information, including expected
product demand and other competition, in order to determine the
feasibility of development and production of a new product offering.
Although this typically takes about 1 month to complete, this stage
precedes development efforts for a new product, which could take several
months or even years to complete. For products with lengthy development
periods, we may be required to periodically revisit this stage to confirm
the feasibility of continued development efforts.
|
2
|
Feasibility study and assumption clarification (2 months)
|
If we
determine that development, ownership and marketing of a potential new
product is possible and potentially advantageous, we proceed with
development efforts. However, potential new products are typically
developed in a laboratory or small batch setting, and in order to obtain
approval for potential new products and to market new products, we must
develop a plan for testing and producing the new product. The first step
in developing such plan is a feasibility study and assumption
clarification. This study is conducted following or during development of
a new product, and involves a review and study of the feasibility of our
technical, production and financial capabilities, production conditions
and financial forecasts. We also review the feasibility of preparing and
conducting a clinical study, or a Clinical Trial program, during this
stage.
|
3
|
Develop
scope and technique for testing the new medicine (6 months)
|
If
following completion of a Stage 2 study we make a determination that
producing and testing a potential new product is feasible and potentially
advantageous, we will develop the scope and techniques for testing the
potential new product. This involves confirming the sourcing of materials
needed for production and marketing of the potential new product and
development of the method of production, dosage design and prescription
selections. During this stage, we will also develop a clinical research
sample.
|
4
|
Preparation of a virus inactivation report and submission to the NICPBP
for preliminary review
(4-6
months)
|
If
following development of testing methods for the potential new product we
determine that testing can be successfully completed, we will prepare and
finalize the virus inactivation method for the potential new product. We
are then required to prepare a report with details on the production
method and procedures and basis of quality evaluation for preliminary
review by the NICPBP. NICPBP staff usually makes an onsite visit during
this stage to supervise testing and re-testing of the virus inactivation
process. Tested samples will be sent back to the NICPBP central office in
Beijing for evaluation.
|
5
|
R&D test
product information submitted to the SFDA for preliminary assessment (4-6
months)
|
Before the
NICPBP can determine that our clinical research sampling and virus
inactivation method and procedures are successful, we are required to
submit our clinical research sampling and virus inactivation method and
procedures to the SFDA via the provincial FDA for preliminary assessment.
We also develop the parameters for a Clinical Trial program at this stage.
Our program usually requires the establishment of a committee comprised of
our Research and Development staff whose responsibility it will be to
communicate with the hospitals and doctors who are invited to participate
in the trial.
After our submission of information to the SFDA we will become subject to
random onsite sampling by the SFDA as they review our reports and
procedures regarding testing of the potential product. The SFDA will
usually inform us of the exact sampling date and SFDA staff will randomly
select certain samples during their visit for additional testing. The SFDA
will then provide us with their preliminary assessment of our new product
and our related procedures. Depending on the results of its preliminary
assessment the SFDA may recommend that we alter certain aspects of our
reports and proposed Clinical Trial programs, or even repeat our Stage 3
and Stage 4 trials and resubmit related reports. The SFDA review process
typically takes 4-6 months, but this process could take longer if we are
required to amend or repeat our trials or if we amend our reports in order
to obtain more a favorable preliminary assessment.
|
- 57 -
6
|
Formal
application to the NICPBP for test of virus inactivation and for CDE
certification of Clinical Trial (6-7 months)
|
Once we
receive a favorable or satisfactory preliminary assessment from the SFDA,
the NICPBP will continue the process begun at Stage 4. The NICPBP will
conduct tests of virus inactivation based on defined medical literature
and on our prescribed procedures and method of production. If the tests
are successful, the NICPBP will transfer the application to the CDE for
review of our prescribed procedures and method of production and the CDE
may request additional information before making a determination. If the
CDE is satisfied with our procedures and method of production it will
certify the new product for production for Clinical Trial.
|
7
|
SFDA
review of Clinical Trial program for approval (1 month)
|
Following
provision of the CDE product certification, we must submit our Clinical
Trial program (developed at Stage 5 and 6) to the SFDA for formal
approval. The SFDA may request additional information regarding our
proposed Clinical Trial program. If the SFDA rejects our Clinical Trial
program or requires changes to any of our procedures and methods, we may
be required to amend our Clinical Trial program, which may require
repeating several of the processes previously conducted. The criteria for
SFDA approval for Clinical Trial programs are based on Good Clinical
Practice which is publicly available in the PRC.
|
-
58 -
8
|
Clinical
Trial: Phases 1 to 4 (3 years for a new drug and 2 years for a generic
drug)
|
Following
approval of our Clinical Trial program by the SFDA, we will begin Clinical
Trials of the potential new product. There are four phases to the clinical
trial process and any failure of the potential new product at any of the
Clinical Trial phases, could cause a significant delay in approval of the
new product, or termination of the new product launch:
Phase 1
: Basic clinical pharmacology and human safety evaluation
studies are conducted by the Company. Prior to determining the
effectiveness of our potential new product, we must determine that certain
pharmacological and safety standards are met by our potential new product.
These standards are set in stage 4 or according to medical literature. If
the clinical trial indicates that such standards are met, we then move on
to Phase 2 of the trials. If the Phase 1 standards are not met, we may be
required to conduct further R&D on the potential new product, alter the
new product formulation and amend the Clinical Trial program, which could
require that we repeat several of the stages referenced above.
Phase 2
: A preliminary exploration of the product's therapeutic
efficacy is conducted by the Company. If we determine at this stage that
the potential new product is not effective, we may conduct further R&D on
the potential new product, alter the new product formulation and amend the
Clinical Trial program, which would require that we repeat several of the
stages referenced above.
Phase 3
: If we determine that the potential new product meets the
required standards of Phases 1 and 2 above, we must then submit a report
of the Clinical Trial results to the SFDA together with an application for
trial production of the product. If the SFDA rejects application for trial
production or otherwise requires a repeat of our Clinical Trials, we may
be required to repeat all or a portion of our Clinical Trial program,
which may require repeating several of the processes previously conducted.
Phase 4
: If we receive SFDA approval to conduct a trial production of
the new product, we will then conduct a larger test of approximately 2,000
samples. We will conduct this test while also conducting a new drug post-
marketing study.
|
9
|
Application to the SFDA for official production permit and product
certification (8-9 months)
|
The trial
production of the potential new product will be monitored by an SFDA
inspector who will also make onsite visits and assess the results of the
trial production. We will also be required to prepare and submit to the
SFDA a report of the trial production results by gathering statistical
information obtained during the trial period.
The CDE will also conduct a final review of the trial production for the
potential new product. Upon satisfactory completion of the trial
production, the CDE will inform the SFDA. The SFDA will then issue a
permit to us for official production, the issuance of which is announced
on the SFDA's website, and copied to the NICPBP and the provincial FDA.
The SFDA will also issue the new product a Good Manufacturing Practice, or
GMP, certification. The provincial FDA will follow with the issuance of a
provincial production permit for the new product.
Although the SFDA's criteria for final approval of new products are not
publicly available in the PRC, if a manufacturer makes the adjustments to
its methods and procedures recommended by the SFDA earlier on in the
product approval process, it is likely that the SFDA will approve the new
product for production.
|
10
|
Commercial
Production
|
Following
issuance of state and provincial production permits and certifications, we
may begin production of the new product.
|
Pricing
In addition, there are regulations
regarding the retail price, rather than regulations of wholesale prices, of
our products. According to the "Regulations on controlling blood products"
promulgated by the State Council in 1996, the price (retail) setting standard
and regulatory functions reside with regional offices of the Pricing Bureau
and the Ministry of Health. Presently, there are retail pricing guidelines for
hospitals which sell our human albumin and immunoglobulin products to patients
as prescribed by the relevant regulators in each region. The retail pricing
guidelines are established based on, amongst other things, the regional living
standards and the cost of production of the manufacturers. The hospitals
cannot sell the products to patients at prices exceeding the highest retail
price prescribed by the relevant regulators. There is no pricing guideline on
the ex-factory price to the hospital and the distributors. The highest retail
price guideline is revised occasionally.
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59 -
Our Properties and Facilities
All land in China is owned by the
government. Individuals and companies are permitted to acquire land use rights
for specific purposes. Industrial land use rights are granted for a period of
50 years. This period may be renewed at the expiration of the initial and any
subsequent terms. Granted land use rights are transferable and may be used as
security for borrowings and other obligations.
In July 2003, Shandong Taibang obtained
certain land use rights from the PRC municipal government to 43,663 square
meters consisting of manufacturing facilities, warehouses and office buildings
in Tai'an City, Shandong Province. Shandong Taibang is required to make
payments totaling approximately $20,015 (RMB138,848) per year to the local
state-owned entity, for the 50 year life of the rights or until the Shandong
Institute completes its privatization process. We recorded "land use rights"
equal to "other payable land use rights" totaling $325,390 and $305,571 as
of December 31, 2008 and 2007, respectively, determined using present value of
annual payments over 50 years.
The Company's 48.6% indirectly owned
subsidiary, Qianfeng, entered into a lease agreement on June 1, 2006 with a
group of individuals in an area located next to its production facility, to
lease and use the space for processing industrial wastes for 10 years. The
annual lease amount is approximately $1,529 (RMB 10,438).
We believe that all of our properties have
been adequately maintained, are generally in good condition, and are suitable
and adequate for our business.
Some of our properties are leased from
third parties. We have entered into formal lease agreements with two of them.
The remaining leases are on a verbal basis. In all cases, the lessors have not
been able to provide copies of documentation evidencing their rights to use
the leased property. In most cases, the leased properties are small operating
spaces we leased for our sales offices in different parts of China. In the
event of any future dispute over the ownership of the leased properties, we
believe we could easily and quickly find replacement premises so that the
operations would not be affected.
Legal Proceedings
From time to time, we may become involved
in various lawsuits and legal proceedings which arise in the ordinary course
of business. However, litigation is subject to inherent uncertainties and an
adverse result in these or other matters may arise from time to time that may
harm our business. Except as disclosed below, we are currently not aware of
any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating results.
Transfers of Equity Interests
Mr. Zu Ying Du was one of the original
equity holders in our operating subsidiary, Shandong Taibang. Pursuant to a
joint venture agreement, among the original equity holders, Mr. Du was
obligated to make a capital contribution of RMB 20 million (or approximately
$2.6 million) for a 25% interest in Shandong Taibang. Mr. Du made this
contribution using funds borrowed from the Beijing Chen Da Technology
Investment Company, or Beijing Chen Da. Mr. Du failed to repay Beijing Chen Da
for his loan of the capital contribution amount. Mr. Du disputes that the
money was due and owing. A Beijing court found that Beijing Chen Da had given
money to Mr. Du but found that the loan agreement failed to comply with
Chinese law. A notice was issued on July 5, 2004 by the Shenzhen Public
Security Bureau Economic Crime Investigation Unit requesting a stay of the
Beijing action pending their investigation into money laundering relating to
the 20 million RMB loan to Zu Ying Du.
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60 -
Subsequently, Beijing Chen Da entered into
an equity transfer agreement with Mr. Du, pursuant to which Mr. Du's 25%
equity interest in Shandong Taibang was transferred to Beijing Chen Da as
repayment of the RMB 20 million debt. This agreement was signed by Mr. Du's
brother who held a power of attorney from Mr. Du. Mr. Du disputes the
legitimacy of this transfer and has argued that his brother, Du Hai Shan,
exceeded the scope of the power of attorney. Mr. Du sued his brother in the
court of Jianli County, Hubei province, relating to the propriety of the
brother's actions under the power of attorney. Initially the county court
found in its judgment that the act had exceeded the scope of the power of
attorney. Subsequently the Intermediate Court of Jingzhou City, Hubei
province, ruled on December 10, 2008 to suspend the judgment based on the
grounds that the original court lacked jurisdiction to hear the case. The case
is slated to be reviewed again by the Hubei Jingzhou Intermediate Court.
Missile Engineering, another original
equity holder wholly controlled by Mr. Du, was obligated to contribute RMB
32.8 million (or $4.2 million) for a 41% interest in Shandong Taibang by means
of cash, equipment and patent technology. It was obligated to obtain new drug
certificate and production license of its patent technology from the
government within a stipulated period in order to be recognized as a valid
capital contribution, or in the alternative, make a cash payment. The patent
technology was valued as RMB 26.4 million (or approximately $3.4 million).
However, Missile Engineering failed to obtain the new drug certificate and
production license within the stipulated period. Mr. Du also disputes whether
the period for obtaining the certificate and license had expired. Pursuant to
a stockholders resolution on September 26, 2004, Missile Engineering agreed to
sell its 41% interest in Shandong Taibang to Up-Wing and Up-Wing agreed to
take up the obligation of Missile Engineering to pay the RMB 26.4 million in
cash. Missile Engineering disputes this transaction and sued the brother of
Mr. Du in the court of Jianli County, Hubei province, relating to the
propriety of the brother's actions under the power of attorney. Initially the
county court found in its judgment that the act had exceeded the scope of the
power of attorney. Subsequently the Intermediate Court of Jingzhou City, Hubei
province, ruled on December 10, 2008 to suspend the judgment based on the
grounds that the original court lacked jurisdiction to hear the case. The case
is slated to be reviewed again by the Hubei Jingzhou Intermediate Court.
In June 10, 2005, Beijing Chen Da also sold
its equity interest in Shandong Taibang to Up-Wing Investments Limited, or
Up-Wing, pursuant to a share transfer agreement, which became effective on
September 2, 2005, upon approval by the Shandong Provincial Department of
Foreign Trade and Economic Cooperation, or the Shandong COFTEC. In March 2006,
Up-Wing sold its equity interests in Shandong Taibang to Logic Express, our
subsidiary.
In 2006, Missile Engineering applied for
arbitration before the China International Economic and Trade Arbitration
Commission, or CIETAC, to challenge the effectiveness of the transfer to
Up-Wing Investments Limited, of the equity interests in Shandong Taibang
formerly owned by Missile Engineering. The equity transfer had been approved
by the Shandong Provincial Department of Foreign Trade and Economic
Cooperation, or the Shandong COFTEC. Missile Engineering later voluntarily
withdrew this application and instead applied for administrative
reconsideration of the equity transfer, but this application was rejected by
the Ministry of Commerce in 2007. Missile Engineering applied with the
District Court of Lixia District, Jinan City, Shandong province requesting
revocation of Shandong COFTEC's approval of the equity transfer to Up-wing by
Missile Engineering. Missile Engineering later voluntarily withdrew the
action. In April 2007, Logic Express initiated an arbitration proceeding
before the Shandong Tai'an Arbitration Committee, to establish that Logic
Express is the lawful shareholder of Shandong Taibang. The parties to that
proceeding were Logic Express Ltd. and Shandong Taibang Biological Products
Co., Ltd. The Arbitration Committee's decision on September 6, 2007 confirmed
that Logic Express had legitimate ownership as a result of the transfer of
Shandong Taibang. Up-Wing started an action in the Intermediate Court of
Tai'an City, Shandong province requesting the court to establish that Up-Wing
is the lawful shareholder of Shandong Taibang. The Intermediate Court of
Tai'an City, Shandong province on December 20, 2007 rejected the application
on the basis that the same matter had been tried by the arbitration panel.
Up-Wing filed a defamation case in the
District Court of Hi-technology and Industry Development District, Tai'an
City, Shandong province claiming defamation against Mr. Du and the 21
st
Century Economic Report Newspaper. Judgment in favor of Up-Wing was rendered
on July 22, 2008 ordering the newspaper and Mr. Du to publish an apology to
Up-Wing.
Mr. Du and Missile Engineering filed two
actions in the Intermediate Court of Wuhan City, Hubei province, against the
following defendants, Du Hai Shan, his brother, Beijing Chen Da and Logic
Express. Mr. Du and Missile Engineering have requested that the Wuhan
Intermediate Court to restore the equity interests originally held by the
plaintiffs, 25% equity interest held by Mr. Du and 41% equity interest held by
Missile Engineering. The Wuhan Intermediate Court issued a preliminary order
attaching 66% of the equity of Shandong Taibang pending the outcome of the
case. On September 25, 2009, the Higher People's Court of Hubei overruled the
Wuhan Intermediate Court's acceptance of jurisdiction over the case and ruled
that the Tai'an Intermediate Court in Shandong Province, where the Company is
located, had the proper jurisdiction over the parties' dispute. The court
ruled that while the plaintiffs had the right to bring a lawsuit for the
validity of the share transfer agreement because they did not attend the
previous arbitration hearing and never reached an arbitration agreement
regarding their dispute, the Tai'an Intermediate Court has the proper
jurisdiction over the dispute pursuant to the prior agreement of the parties.
As a result, the attached 66% of the equity of Shandong Taibang were released.
On November 16, 2009, the Wuhan Intermediate Court permitted Mr. Du and
Missile Engineering to withdraw their suits against Logic Express and the
other defendants. We cannot assure you that the plaintiffs will not bring
suits in a court in Tai'an or elsewhere. Failure to resolve these disputes in
our favor may adversely affect our business and operations.
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61 -
Bobai
County
Collection Station
In January 2007, the Company's PRC
subsidiary, Shandong Taibang, advanced $413,697 (RMB3.0 million) to Feng Lin,
the 20% minority shareholder in Fang Cheng Plasma Company, the Company's
majority owned subsidiary, for the purpose of establishing or acquiring a
plasma collection station. Mr. Lin and Shandong Taibang intended to establish
the Bobai Kangan Plasma Collection Co., Ltd. ("Bobai") in Bobai County,
Guangxi and on January 18, 2007, Shandong Taibang signed a letter of intent to
acquire the assets of the Bobai Plasma Collection Station, which was co-owned
by Mr. Lin and Mr. Keliang Huang. However, in January 2007, Hua Lan Biological
Engineering Co., Ltd. ("Hua Lan") filed suit in the District Court of Hong Qi
District, Xin Xiang City, Henan Province, alleging that Feng Lin, Keliang
Huang and Shandong Taibang established and/or sought to operate the Bobai
Plasma Collection Station using a permit for collecting and supplying human
plasma in Bobai County, that was originally granted to Hua Lan by the
government of the Guangxi region, without Hua Lan's permission. The
establishment and registration of Bobai was never realized as a result of this
law suit. On January 29, 2007, on Hua Lan's motion, the District Court entered
an order to freeze funds in the amount of approximately $386,100
(RMB3,000,000) held by the defendants in the case, including approximately
$65,750 (RMB500,000) in funds held in Shandong Taibang's bank account in
Tai'an City. A hearing was held on June 25, 2007 and judgment was entered
against the defendants along with a $226,780 (RMB1,700,000) joint financial
judgment. The Company appealed the District Court judgment to the Henan
Province High Court. In November 2007, the High Court affirmed the judgment
against the three defendants and increased the amount of the joint financial
judgment to approximately $405,954 (RMB3,000,000).
In January 2008, Hua Lan enforced the
judgment granted by the High Court to freeze the Company's bank accounts.
Shandong Taibang has filed a separate action against Hua Lan before the Tai'an
City District Court to seek recovery of any losses in connection with Hua
Lan's claim and to request that the Tai'an City District Court preserve Hua
Lan's property or freeze up to approximately $411,300 (RMB 3 million) of Hua
Lan's assets to secure the return of such funds to the Company. The
intermediate court in Tai'an City accepted the application on February 14,
2008 but the matter is still pending. Pending the outcome of the proceedings,
Shandong Taibang increased its loss contingency reserve during its fourth
quarter of 2007 from approximately $75,593 (RMB566,667) to $133,400
(RMB1,000,000) to cover its share of the enforcement of this judgment. During
the fourth quarter of 2008, full amount of the judgment, including Feng Lin
and Keliang Huang's portions of the judgment and the related fees,
approximately $456,222 (RMB 3,109,900) has been withdrawn from Shandong
Taibang's account. The Company recorded Feng Lin and Keliang Huang's portion
of the judgment, approximately $304,143 (RMB2,073,234), as receivable as a
result of the withdraw. As of December 31, 2008, the Company determined that
it is unlikely that the Company will be able to recover such receivable from
those two individuals and wrote off the receivable as bad debt expense.
In light of the foregoing, it is unlikely
that the Company's planned acquisition of the assets of Bobai will go forward.
Dispute among Qianfeng Shareholders
over Raising Additional Capital
On May 28, 2007, a 91% majority of
Qianfeng's shareholders approved a plan to raise additional capital from
private strategic investors through the issuance of an additional 20,000,000
shares of Qianfeng equity interests at RMB 2.80 per share. The plan required
all existing Qianfeng shareholders to waive their rights of first refusal to
subscribe for the additional shares. The remaining 9% minority holder of
Qianfeng's shares, the Guizhou Jie'an Company, or Jie'an, did not support the
plan and did not agree to waive its right of first refusal. On May 29, 2007,
the majority shareholders caused Qianfeng to sign an Equity Purchase Agreement
with certain investors, pursuant to which the investors agreed to invest an
aggregate of RMB 50,960,000 (approximately $7,475,832) in exchange for
18,200,000 shares, or 21.4%, of Qianfeng's equity interests. At the same time,
Jie'an also subscribed for 1,800,000 shares, representing its 9% pro rata
share of the 20,000,000 shares being offered. The proceeds from all parties
were received by Qianfeng in accordance with the agreement.
-
62 -
In June 2007, Jie'an brought suit in the
High Court of Guizhou province, China, against Qianfeng and the three other
original Qianfeng shareholders, alleging the illegality of the Equity Purchase
Agreement. In its complaint, Jie'an alleged that it had a right to acquire the
shares waived by the original Qianfeng shareholders and offered to the
investors in connection with the Equity Purchase Agreement. On September 12,
2008, the Guizhou High Court ruled against Jie'an and sustained the Equity
Purchase Agreement, but on November 2008, Jie'an appealed the Guizhou High
Court judgment to the People's Supreme Court in Beijing. On May 13, 2009, the
People's Supreme Court sustained the original ruling and denied the rights of
first refusal of Jie'an over the additional shares waived by the original
Qianfeng's shareholders. The registration of the new investors as Qianfeng's
shareholders and the related increase in registered capital of Qianfeng with
the Administration for Industry and Commerce is still pending. Due to the
flaws of the Equity Purchase Agreement and the pre-conditions of the agreement
no longer valid, the Company is evaluating the possibility of voiding the
agreement to maintain the original share structure. If the Company is unable
to void the agreement, Dalin's interests in Qianfeng may be reduced to
approximately 41.3%.
Dispute over Qianfeng Technical
Consulting Agreement
In 1997, Qianfeng entered into a Technical
Cooperation Agreement with Sin Kyung Ye, or Sin, a Korean individual, to
provide certain fractionation equipment and transfer processing know-how to
Qianfeng. In August 2004, Sin filed a law suit against Qianfeng with the
Intermediate Court in Guiyang City, China, alleging non-payment of RMB 100,000
(approximately, $14,670) for his fractionation equipment and RMB 5,000,000
(approximately, $733,500) for the transfer of his technological know-how. The
Intermediate Court ruled in favor of Sin and found that Qianfeng owed Sin RMB
10,376,160 (approximately, $ 1,522,183), but Qianfeng appealed the
Intermediate Court ruling to the Guizhou High Court. The Guizhou High Court
agreed in part with Qianfeng's grounds for appeal and reduced the amount of
know-how transfer fee to RMB 1,970,413 (approximately, $289,060). In May 2007,
Sin appealed the Guizhou High Court's decision to the People's Supreme Court
in Beijing. The People's Supreme Court heard in April 2008, but had not issued
its decision as of the date of this prospectus.
Qianfeng Product Liability Claims
In January 2008, Qianfeng, along with two
local hospitals and a local blood center, was sued in the Zhuhui District
Court in Hengyang, Hunan province, China, by a resident of Hunan province, for
RMB 1,749,358 (approximately, $256,631) in damages, in connection with his
alleged HIV contamination via blood transfusion during the plaintiff's
treatment following an April 2006 traffic accident. The Zhuhui District Court
awarded the plaintiff RMB 200,000 (approximately, $29,340), but found that the
defendants were not responsible for his HIV contamination. All parties
appealed to the Zhuhui Middle Court. On December 4, 2008, the Zhuhui Middle
Court remanded the case to the lower court for retrial, on grounds that the
HIV contamination could not be directly linked to the plaintiff's treatment by
the hospitals or to Qianfeng's products. There have been no further
developments on this case as of the date of this prospectus.
Administration Interference
Qianfeng is party to an administrative
proceeding against the government of the Qiandongnan Autonomous Region, or the
Qiandongnan Authorities, in Guizhou Province, China, in connection with the
ownership of three of Qianfeng's eight plasma stations in Guizhou Province.
Qianfeng was authorized to acquire a total of eight plasma stations in Guizhou
Province based on several national and provincial administrative
authorizations issued by the PRC State Council and the Guizhou Ministry of
Health between 2006 and 2007, but to date, the governmental authorizations
have not been fully implemented by the Qiandongnan Authorities. In early 2007,
Qianfeng submitted RMB 8,010,000 (approximately $1,173,465) to the local
finance department of Sansui County, Qiandongnan, for acquiring the Sansui
Plasma Collection Station ("Sansui"), but the local finance department refused
to honor the purchase and returned the full consideration to Qianfeng.
Furthermore, subsequent local rulings published by the Qiandongnan Authorities
February 28, 2008 appear to authorize another private company to acquire the
Sansui and two other stations, the Zhengyuan Plasma Collection Station and the
Shibing Plasma Collection Station. In December 2008 Qianfeng filed an
administrative review application with the People's Government of Guizhou
Province, or the Guizhou Provincial Government, but the Guizhou Provincial
Government has delayed making a final decision pending further review of
regulations regarding administrative authorizations. Qianfeng has received
verbal notification from staff in the Guizhou Provincial Government that the
Qiandongnan Authorities have withdrawn the local rulings authorizing
acquisition of the three plasma stations, but management has not received any
written confirmation of such withdrawal. As a result, Qianfeng has maintained
its application with the Guizhou Provincial Government for a formal
administrative ruling on its right to acquire all eight plasma stations in
Guizhou Province. In addition, Qianfeng has set aside the purchase price
payable for Sansui pending the outcome of the administrative review.
Dispute over Raw Plasma
Supply Agreement with Xintai
On March 10, 2009, Henan
Xintai Medicine Company (previously known as Henan Zhongtai Medicine, "Xintai")
brought suit against Shandong Taibang and its two wholly-owned plasma
collecting subsidiaries in Shandong for breach of a raw plasma supply
agreement. The suit was subsequently withdrawn by Xintain on May 31,
2009. The agreement, signed by Shandong Taibang and Xintai on October 10,
2006, requires the two subsidiaries to provide to Xintai 45 metric tons of raw
plasma per year from 2007 to 2009. The subsidiaries provided more than 34
metric tons of plasma to Xintai during 2007 in accordance with the agreement.
On October 31, 2007, PRC State Department published the Regulation on Plasma
Collection Stations. The Company believes the agreement is invalid because it
violates clause 43 of the new Regulation, which prohibits plasma collecting
stations from providing raw plasma to any manufacturer other than their direct
parent. To comply with the Regulation, the subsidiaries ceased supplying
plasma to Xintai in late 2007. On March 12, 2009, Shandong Taibang filed a
suit in the Shandong Tai'an Middle Court against Xintai seeking damages of
RMB50,000 (approximately, $7,335) for the plasma already supplied to Xintai
during 2007. On June 29, 2009, Xintai re-filed the suit in Shandong Tai'an
Middle Court against Shandong Taibang and the two subsidiaries seeking
compensation of RMB6,000,000 (approximately, $880,200) for contract breach and
demanding that Shandong Taibang and the subsidiaries continue to honor the
agreement. On October 20, 2009, the Tai'an Middle Court combined and heard
the two suits, and the Company is awaiting the Court's ruling.
Qianfeng's Guarantee to
a Third Party
In 2007, as a condition to
purchase Huang Ping Plasma Station, Qianfeng entered into an agreement with
Guizhou Zhongxin Investment Company ("Zhongxin") in which Qianfeng agreed to
repay Zhongxin's debt out of Qianfeng's payables to Zhongxin arising from
plasma purchased from Zhongxin. In the same agreement, Qianfeng also
guaranteed to the Huang Ping County Hospital ("Huang Ping Hospital"), which
was the co-owner with Zhongxin of the Huang Ping Plasma Station, for the
amount of RMB3,000,000 (approximately, $440,100) of debt that Zhongxin owed to
Huang Ping Hospital. On June 1, 2009, Huang Ping Hospital brought suit, in
Huang Ping Country People's Court of Guizhou Province, against Zhongxin for
non-payment of its payables and debt due to Huang Ping Hospital and Qianfeng
as the guarantor. On November 2, 2009, the court ruled in favor of the
plaintiff and Qianfeng will need to repay the RMB3,000,000 debt to Huang Ping
Hospital on behalf of Zhongxin as the guarantor. The Equity Transfer
Agreement pursuant to which we acquired a 90% interest in Dalin, Qianfeng's
majority shareholder, provides that the sellers shall be responsible, in
accordance with their equity proportion in Qianfeng, for damages incurred by
Qianfeng from Zhongxin's debt and shall repay Qianfeng the sellers'
proportionate share of payments made by Qianfeng to creditors in connection
with Zhongxin's debt within 10 days after payment by Qianfeng.
-
63 -
Our Employees
As of September 30, 2009, we employed
approximately 753 full-time employees, including the recently established
plasma companies and Shandong Medical, of which approximately 108 were
seconded to us by the Shandong Institute.
We believe that we maintain a satisfactory
working relationship with our employees and we have not experienced any
significant labor disputes or any difficulties in recruiting staff for our
operations. As required by applicable Chinese law, we have entered into
employment contracts with most of our officers, managers and employees. We are
working towards entering into employment contracts with those employees who do
not currently have employment contracts with us. The PRC enacted a new Labor
Contract Law, which became effective on January 1, 2008. We have updated our
employment contracts and employee handbook and are in compliance with the new
law. We will work with the employees and the labor union to insure that our
employees obtain the full benefit of the law. We do not anticipate that
changes in the law will materially impact our balance sheet and cash flows.
Our employees in China participate in a
state pension plan organized by Chinese municipal and provincial governments.
We are required to contribute to the plan at the rates ranging of the average
monthly salary of 20%. The compensation expenses related to this plan were
$220,493 and $171,802 for the fiscal years 2008 and 2007, respectively. Other
major contributions include medical insurance (7%), unemployment insurance
(2%) and housing provision fund (8%) for employees seconded from the Shandong
Institute. In addition, we are required by Chinese law to cover employees in
China with various types of social insurance. We have purchased social
insurances for all of our employees.
MANAGEMENT
Directors and Executive Officers
The following sets forth the name and
position of each of our current executive officers and directors.
NAME
|
AGE
|
POSITION
|
Siu Ling Chan
|
45
|
Chairwoman
of the Board
|
Chao Ming Zhao
|
35
|
Chief
Executive Officer and President
|
Yu-Yun Tristan Kuo
|
55
|
Chief
Financial Officer
|
Lin Ling Li
|
45
|
Director
|
Tong Jun Lin
|
45
|
Director
|
-
64 -
Siu Ling Chan
.
Ms. Chan has been our director since July 19, 2006. She has been our
chairwoman since January 1, 2007 and served as our CEO from January 2007 to
March 2007. Ms. Chan is also currently a director of our subsidiary Logic
Express. She was also appointed as the director of Shandong Taibang in April
2006. Prior to joining us, Ms. Chan worked from 1991 to 2005, as an
administrator at the Fujian Academy of Social Sciences, and from 1989 to 1991
as a statistician at the Fujian Pingtan Economy Committee. She received her
diploma in Statistics from Xiamen University in 1989 and a diploma in
management from the Fujian Party Committee School in 2004.
Chao Ming Zhao
.
Mr. Zhao has been our Chief Executive Officer since June 1, 2008. Mr. Zhao was
our Chief Financial Officer from November 2006 to until his appointment as our
Chief Executive Officer, and has been the Chief Financial Officer of our
operating subsidiary, Shandong Taibang since September 2003. From February
2002 to June 2003, Mr. Zhao was the financial manager at EF English First
(Fuzhou) School, where he was responsible for managing the school's accounting
and its internal control. He was a manager and auditor at Fujian (CFC) Group
from July 1996 to January 2002, and was in charge of internal audit. Mr. Zhao
is a certified accountant in the PRC and is an international registered
internal auditor. Mr. Zhao obtained his Bachelor's degree in Investment
Economy Management from Fuzhou University in 1996 and received his MBA from
the Chinese University of Hong Kong in 2006.
Yu-Yun Tristan Kuo
.
Mr. Kuo has been our Chief Financial Officer since June 1, 2008 and has served
as the Vice President-Finance of the Company since September 2007. Mr. Kuo has
more than 28 years of experience in accounting, financing and information
system for companies in the manufacturing, commodity trading and banking
industries and has served in the capacity of CFO, CIO and Controller. Of these
28 years, Mr. Kuo has worked in the United States for 25 years and in Asia for
3 years. Prior to joining our company, Mr. Kuo worked for the Noble Group in
Hong Kong as the Senior Business Analysis Manager from February through August
2007. Prior to that, Mr. Kuo served as the CFO of Cuisine Solution, Inc., a
publicly traded company in Alexandria, Virginia, from December 2002 to January
2007. Mr. Kuo also served as the Vice President of Information System for Zinc
Corporation of America in Monaca, Pennsylvania from 2001 and 2002 and as Chief
Information Officer and Controller of Wise Metals Group in Baltimore,
Maryland, the largest independent aluminum sheet producer in the U.S., from
1991 to 2001. Mr. Kuo obtained his Master's degree in Accounting from the Ohio
State University and Bachelors degree in Economics from Soochow University in
Taipei.
Lin Ling Li
.
Ms. Li has been a member of our board of directors since July 19, 2006. Since
February 2006, Ms. Li has been the director of our subsidiary Logic Express,
and since May 2004, she has been a director at Up-Wing Investment Limited, a
predecessor to Logic Express. Ms. Li was a technician at Fuzhou Fuxing
Pharmaceutical Company from 1980 to 2000. From October 1998 to April 2006, she
was a senior manager at Fuzhou Chengxin Dian Dang Company Limited, where she
was involved in financing, mortgage and loan industry. She holds a diploma in
accounting from the Fujian Party Committee School of Finance and Accounting in
October 1994.
Sean Shao
.
Mr. Shao has been a member of our board of directors since July 24, 2008. He
currently serves as an independent director of Agria Corporation, a
China-based agricultural company listed in the U.S. He has served as the Chief
Financial Officer of Trina Solar Limited since August 2006, where he assisted
them in listing on the NYSE in December 2006. Prior to that, Mr. Shao served,
from September 2005 to August 2006, as the Chief Financial Officer of ChinaEdu
Corporation, a Chinese educational service provider, and from August 2004 to
September 2005, as the Chief Financial Officer of Watchdata Technologies Ltd.,
a Chinese security software company. Prior to that Mr. Shao served, from
October 1998 to July 2004, as a senior manager at Deloitte Touche Tohmatsu CPA
Ltd., Beijing, and from December 1994 to November 1997, as an assistant
manager at Deloitte & Touche, Toronto. Mr. Shao received his Master's degree
in Health Care Administration from the University of California at Los Angeles
in 1988 and his Bachelor's degree in Art from East China Normal University in
1982. Mr. Shao is an associate member of the American Institute of Certified
Public Accountants.
-
65 -
Dr. Tong Jun Lin
.
Dr. Lin has been a member of our board of directors since July 24, 2008. He
has served as an Associate Professor in the Departments of Microbiology and
Immunology and Pediatrics, Dalhousie University since 2000 and has focused his
research in immune response to microbial pathogens. Dr. Lin received his MD
(1984) and PhD (1990) degrees from the Institute of Materia Medica at the
Chinese Academy of Medical Sciences, and his post-doctoral training at the
University of Alberta (1993-1997), Duke University (1997-1998) and Dalhousie
University (1998-2000). He has published 43 peer-reviewed research articles in
leading journals and is a member of the American Association of Immunologists
and the Canadian Society for Immunologists. Dr. Lin is a recipient of the New
Investigator Award from Canadian Institutes of Health Research (2003-2008) and
an Award of Excellence in Medical Research from Dalhousie University (2004).
There are no agreements or understandings
for any of our executive officers or directors to resign at the request of
another person and no officer or director is acting on behalf of nor will any
of them act at the direction of any other person. To the best of our knowledge
and belief, there are no arrangements or understandings with any of our
principal stockholders, customers, suppliers, or any other person, pursuant to
which any of our directors or executive officers were appointed.
Directors are elected until their
successors are duly elected and qualified.
Significant Employees
The following sets forth the name and
position of each of our current significant employees.
NAME
|
AGE
|
POSITION
|
Tung Lam
|
46
|
Chief
Executive Officer of Shandong Taibang
|
Yun Hua Gao
|
55
|
Chief
Technical Adviser of Shandong Taibang
|
Dian Cong Liu
|
54
|
Chief
Technical Adviser of Shandong Taibang
|
Tung Lam
.
Mr. Lam has been the Chief Executive Officer of our operating subsidiary,
Shandong Taibang, since October 2003, and is responsible for the entire
operation. Prior to joining the Company, Mr. Lam served, from November 1999 to
August 2003, as the vice president of Fujian Province Fei Yue Group, where he
was in charge of management investment.
Yun Hua Gao
.
Mr. Gao is the Chief Technical Advisor of our operating subsidiary, Shandong
Taibang. In 1975, Mr. Gao was assigned to the Shandong Institute and has been
involved in the research and development work of plasma products. From January
2000 to October 2000, he was head of the production department at Shandong
Biological Products Institute, and from November 2002 to April 2004, he served
as manager of the production department. He graduated from Shandong Medical
University majoring in medicine in 1975.
Dian Cong Liu
.
Mr. Liu is the Chief Technical Adviser of our operating subsidiary, Shandong
Taibang. Mr. Liu has spent many years in the area of biopharmaceutical
research. Mr. Liu joined the Shandong Institute in 1978, and served as manager
of the institute's placenta product department from 1986 to 1992 and as
department head for the institute's quality assurance department from December
2000 to September 2002. Mr. Liu was one of our founding employees in 2002. He
obtained his Bachelor's degree in Medicine from Shandong Weifang Medical
School in 1978. Mr. Liu has also been certified as pharmacist by the Shandong
Food and Drug Administration since 2003.
Board Composition and Committees
Our Board is usually composed of five members, three of
whom are "independent" directors, as that term is defined in Rule 5605(a)(2)
of the Listing Rules of The Nasdaq Stock Market, Inc., or the NASDAQ Listing
Rules. On January 10, 2010, one of our independent directors, Dr. Jie Gan,
resigned from her position on the board of directors for personal reasons, and
not because of any disagreement with us on any matter relating to the
Company's operations, policies or practices. Our board of directors is
currently reviewing candidates to fill the vacancy caused by Dr. Gan's
departure and expects to appoint a suitable candidate before the end of the
2010 first quarter.
All actions of the board of directors require the approval
of a majority of the directors in attendance at a meeting at which a quorum is
present. Our directors have a duty of to act in good faith with a view to our
interests. In fulfilling their duty of care to us, our directors must ensure
compliance with our Certificate of Incorporation. Board action requires the
approval of a majority of the directors in attendance at a meeting at which a
quorum is present. During 2009, our board met 5 times and except for two, who
missed one meeting, no director missed more than 25% of the meetings of the
board or any committee on which he or she sat.
-
66 -
Our Board currently has three standing committees which,
pursuant to delegated authority, perform various duties on behalf of and
report to the Board: the Audit Committee, Compensation Committee and Corporate
Governance and Nominating Committee. Each of these Committees are comprised
entirely of independent directors. From time to time, the Board may establish
other committees. Each of the Compensation Committee and Corporate Governance
and Nominating Committee were formed on August 7, 2008 and the Audit Committee
was formed on July 24, 2008. During the fiscal year ended December 31, 2009,
the audit committee met 4 times. Copies of the charters for each of our
standing committees may be obtained from our website at
http://www.chinabiologic.com.
Compensation Committee
Until Dr. Gan's departure on January 10, 2010, our compensation committee
consisted of Mr. Tong Jun Lin, Dr. Jie Gan and Mr. Sean Shao, each of whom
qualifies as "independent" as that term is defined under the NASDAQ Listing
Rules, and Dr. Gan served as Chair of the compensation committee. Our board of
directors is currently reviewing candidates to fill the vacancy caused by Dr.
Gan's departure and expects to appoint a suitable candidate before the end of
the 2010 first quarter. Our board of directors has appointed Mr. Shao to serve
in the interim as compensation committee Chair, to fill the vacancy left by
Dr. Gan's departure.
Our compensation committee assists the Board in reviewing and approving the
compensation structure of our directors and executive officers, including all
forms of compensation to be provided to our directors and executive officers.
Our chief executive officer may not be present at any committee meeting during
which his compensation is deliberated. The compensation committee is
responsible for, among other things:
-
approving and overseeing the compensation
package for our executive officers;
-
reviewing and making recommendations to the
Board with respect to the compensation of our directors;
-
reviewing and approving corporate goals and
objectives relevant to the compensation of our chief executive officer,
evaluating the performance of our chief executive officer in light of those
goals and objectives, and setting the compensation level of our chief
executive officer based on this evaluation; and
-
reviewing periodically and making
recommendations to the Board regarding any long-term incentive compensation
or equity plans, programs or similar arrangements, annual bonuses, employee
pension and welfare benefit plans.
The Compensation Committee has sole
authority to retain and terminate outside counsel, compensation consultants
retained to assist the Compensation Committee in determining the compensation
of the Chief Executive Officer or senior executive officers, or other experts
or consultants, as it deems appropriate, including sole authority to approve
the firms' fees and other retention terms. The Compensation Committee may also
form and delegate authority to subcommittees and may delegate authority to one
or more designated members of the Compensation Committee. The Compensation
Committee may from time to time seek recommendations from the executive
officers of the Company regarding matters under the purview of the
Compensation Committee, though the authority to act on such recommendations
rests solely with the Compensation Committee.
Corporate Governance and Nominating
Committee
Until Dr. Gan's departure on January 10, 2010, our
corporate governance and nominating committee consisted of Mr. Tong Jun Lin,
Dr. Jie Gan, and Mr. Sean Shao, each of whom qualifies as "independent" as
that term is defined in the NASDAQ Listing Rules. Our board of directors
expects to appoint a suitable candidate to fill the vacancy caused by Dr.
Gan's departure before the end of the 2010 first quarter. Dr. Lin serves as
Chair of the corporate governance and nominating committee.
The corporate governance and nominating committee assists
the Board of Directors in identifying individuals qualified to become our
directors and in determining the composition of the Board and its committees.
The corporate governance and nominating committee is responsible for, among
other things:
-
identifying and recommending to the Board
nominees for election or re-election to the board, or for appointment to
fill any vacancy;
-
reviewing annually with the Board the
current composition of the Board in light of the characteristics of
independence, age, skills, experience and availability of service to us;
-
identifying and recommending to the Board
the directors to serve as members of the Board's committees; and
-
monitoring compliance with our code of
business conduct and ethics.
-
67 -
Audit Committee and Audit Committee
Financial Expert
Our board of directors established an audit
committee on July 24, 2008 and appointed Mr. Sean Shao, Dr. Jie Gan, and Dr.
Tong Jun Lin to serve as members of the committee, each of whom our board
determined to be "independent" as that term is defined by the NASDAQ Listing
Rules. Mr. Shao was appointed as the Chair of the audit committee.
Our board of directors expects to
appoint a suitable candidate to fill the vacancy caused by Dr. Gan's departure
on January 10, 2010, before the end of the 2010 first quarter.
Our audit committee oversees our accounting
and financial reporting processes and the audits of our financial statements.
Our audit committee is responsible for, among other things:
·
selecting our independent auditors and
pre-approving all auditing and non-auditing services permitted to be performed
by our independent auditors;
·
reviewing with our independent auditors
any audit problems or difficulties and management's response;
·
reviewing and approving all proposed
related-party transactions;
·
discussing the annual audited financial
statements with management and our independent auditors;
·
reviewing major issues as to the
adequacy of our internal controls and any special audit steps adopted in light
of significant internal control deficiencies;
·
annually reviewing and reassessing the
adequacy of our audit committee charter;
·
such other matters that are
specifically delegated to our audit committee by our board of directors from
time to time;
·
meeting separately and periodically
with management and our internal and independent auditors; and
·
reporting regularly to the full board
of directors.
Our board of directors has determined that
Mr. Shao possesses the accounting or related financial management experience
that qualifies him as financially sophisticated within the meaning of Rule
5605(c)(2)(A) of the NASDAQ Listing Rules and that he is an "audit committee
financial expert" as defined by the rules and regulations of the SEC.
Family Relationships
Ms. Siu Ling Chan is the wife of Mr. Tung
Lam. There are no other family relationships among any of our officers and
directors.
Involvement in Certain Legal
Proceedings
To the best of our knowledge, none of our
directors or executive officers has been convicted in a criminal proceeding,
excluding traffic violations or similar misdemeanors, or has been a party to
any judicial or administrative proceeding during the past five years that
resulted in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws, except for matters that were dismissed without sanction or settlement.
Except as set forth in our discussion below in "Transactions with Related
Persons, Promoters and Certain Control Persons; Corporate Governance," none of
our directors, director nominees or executive officers has been involved in
any transactions with us or any of our directors, executive officers,
affiliates or associates which are required to be disclosed pursuant to the
rules and regulations of the SEC.
Code of Ethics
On March 25, 2008, our board of directors
adopted a code of ethics, which applies to all of our directors, officers and
employees, including our principal executive officer, principal financial
officer, and principal accounting officer. The code of ethics is designed to
deter wrongdoing and to promote: honest and ethical conduct, including the
ethical handling of actual or apparent conflicts of interest between personal
and professional relationships; full, fair, accurate, timely and
understandable disclosure in reports and documents that we file with, or
submit to, the SEC, and in other public communications that we made;
compliance with applicable government laws, rules and regulations; the prompt
internal reporting of violations of the code to the appropriate person or
persons; and accountability for adherence to the code.
-
68 -
The Code of Ethics requires the highest
standard of ethical conduct and fair dealing of its senior financial officers,
or SFO, defined as the Chief Executive Officer and Chief Financial Officer.
While this policy is intended to only cover the actions of the SFO, we expect
our other officers, directors and employees will also review our code and
abide by its provisions. We believe that our reputation is a valuable asset
and must continually be guarded by all associated with us so as to cam the
trust, confidence and respect of our suppliers, customers and stockholders.
A copy of the Code of Ethics has been filed
as Exhibit 14 of our annual report on Form 10-KSB, filed on March 28, 2008.
EXECUTIVE COMPENSATION
Summary Compensation Table 2009 and 2008
The following table sets forth information concerning all
cash and non-cash compensation awarded to, earned by or paid to the named
persons for services rendered in all capacities during the noted periods. No
other executive officers received total annual salary and bonus compensation
in excess of $100,000.
|
|
|
|
|
|
Non-
|
Non-
|
|
|
|
|
|
|
|
|
Equity
|
qualified
|
|
|
|
|
|
|
|
|
Incentive Plan
|
Deferred
|
|
|
|
|
|
|
Stock
|
Option
|
Compensation
|
Compensation
|
All Other
|
|
Name and
|
|
Salary
|
Bonus
|
Awards
|
Awards
|
Earnings
|
Earnings
|
Compensation
|
Total
|
Principal
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
Position
|
|
|
|
|
|
|
|
|
|
Chao Ming
Zhao,
CEO and former CFO
(1)
|
2009
|
$184,046
|
$43,803
|
-
|
-
|
-
|
-
|
-
|
$227,849
|
2008
|
$148,208
|
$34,377
|
-
|
$154,954
|
-
|
-
|
-
|
$337,539
|
2007
|
$84,674
|
$16,126
|
-
|
-
|
-
|
-
|
$8,288
|
$109,088
|
Yu-Yun Tristan
Kuo,
CFO
(2)
|
2009
|
$227,095
|
$37,996
|
-
|
-
|
-
|
-
|
$9,229
|
$274,321
|
2008
|
$179,805
|
$20,582
|
-
|
$101,055
|
-
|
-
|
-
|
$301,442
|
2007
|
$43,950
|
-
|
-
|
-
|
-
|
-
|
-
|
$43,950
|
_____________
(1)
|
Chao Ming Zhao has served as our CEO since June 1, 2008
and has also served as the Chief Financial Officer of our subsidiary
Shandong Taibang since September 2003. He served as our CFO from November
2006 until June 1, 2008.
|
|
|
(2)
|
Yu-Yun Tristan Kuo has
served as our Chief Financial Officer since June 1, 2008 and has served as
the Vice President-Finance of Shandong Taibang since September 2007.
On January 7, 2010, our board of directors granted Mr. Kuo options to
purchase 50,000 shares of our common stock under the 2008 Plan, in
accordance with his employment agreement with the Company.
|
-
69 -
Summary of Employment Agreements and
Material Terms
Pursuant to an employment agreement, as consideration for
his services as our Chief Financial Officer and as a director, Chao Ming Zhao
received a monthly salary of HK$50,000 (approximately $6,400), plus a
guaranteed bonus of HK$50,000 (approximately $6,400), payable on December 31
of each year. On May 9, 2008, we entered into a new employment agreement with
Mr. Zhao, pursuant to which we agreed to pay him an annual salary of
RMB1,060,000 (approximately $151,368) per annum, as consideration for
performance of his duties as Chief Executive Officer. We also agreed to pay
Mr. Zhao an annual bonus equal to one month's salary and Mr. Zhao may be
eligible to receive additional bonus compensation as may be awarded by our
board of directors at their sole discretion. We also agreed to grant to Mr.
Zhao a ten-year nonstatutory stock option under the 2008 Plan, for the
purchase of 115,000 shares of our common stock, at an exercise price of $4.00
per share. The stock option immediately vested.
Pursuant to the terms of Mr. Yu-Yun Tristan Kuo's
employment agreement, dated May 9, 2008, we agreed to pay Mr. Kuo an annual
salary of RMB1,320,000 (approximately $188,900), as consideration for
performance of his duties as Chief Financial Officer. We also agreed to pay
Mr. Kuo an annual bonus equal to one month's salary and Mr. Kuo may be
eligible to receive additional bonus compensation as may be awarded by our
board of directors at their sole discretion. We also agreed to grant to Mr.
Kuo a ten-year nonstatutory stock option under the 2008 Plan, for the purchase
of 75,000 shares of our common stock, at an exercise price of $4.00 per share.
The stock option immediately vested. In addition, we agreed to pay Mr. Kuo,
within a month of the completion of a private placement financing by the
Company, a cash bonus equal to one percent of the gross proceeds raised via
such financing, or at the sole discretion of Mr. Kuo, the number of shares of
our common stock equivalent to such cash amount. Furthermore, we are obligated
to grant Mr. Kuo, within a month of our listing on NASDAQ, NYSE or AMEX, an
option to purchase 50,000 shares of our common stock pursuant to the 2008
Plan. The exercise price of the option is be the fair market value at the date
of the grant and the option will be immediately vested and exercisable on the
date of the grant. On January 7, 2010, our board of directors granted Mr. Kuo
options to purchase 50,000 shares of our common stock under the 2008 Plan. The
options have a ten-year term and are exercisable at an exercise price of
$12.60, which was the fair market value of the our common stock on the date of
the grant.
Outstanding Equity Awards at Fiscal Year
End
Other than as set forth below, none of our executive
officers received unexercised options, stock that has not vested or equity
incentive plan awards that remained outstanding as of the end of the fiscal
year ended December 31, 2009.
Name
|
Number of
securities
underlying
unexercised options
exercisable
|
Number of
securities
underlying
unexercised
options
unexercisable
|
Equity incentive
plan awards:
Number of securities
underlying
unexercised unearned options
|
Option
exercise
price ($)
|
Option
expiration date
|
Number of shares or
units of stock that have not
vested
|
Market value
of shares of
units of stock that have not vested
($)
|
Equity incentive
plan awards:
Number of
unearned shares,
units or
other
rights that have not vested
|
Equity incentive
plan awards:
Market or payout
value of unearned shares,
units or other rights that
have not vested
($)
|
Chao Ming
Zhao
|
115,000
|
-
|
-
|
4.00
|
6/1/2018
|
-
|
-
|
-
|
-
|
Yu-Yun
Tristan Kuo
|
75,000
|
-
|
-
|
4.00
|
6/1/2048
|
-
|
-
|
-
|
-
|
-
70 -
We use the Black-Scholes
option pricing model to measure the fair value of stock options, granted in
2009. The determination of the fair value of stock-based compensation awards
on the date of grant using an option-pricing model is affected by our stock
price as well as assumptions regarding a number of complex and subjective
variables, including the expected volatility of our stock price over the term
of the awards, actual and projected employee stock option exercise behaviors,
risk-free interest rate and expected dividends.
Compensation of Directors
The following table sets forth certain
information concerning the compensation paid to our directors for services
rendered to us during the fiscal year ending December 31, 2009:
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
earned
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
or paid
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Compensation
|
|
|
All Other
|
|
|
|
|
|
|
In cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siu Ling
Chan
|
|
130,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,585
|
|
Lin Ling Li
|
|
130,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,585
|
|
Sean Shao
|
|
24,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,000
|
|
Jie Gan
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
Tong Jun Lin
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
All directors receive reimbursements from
us for expenses which are necessarily and reasonably incurred by them for
providing services to us or in the performance of their duties. Our directors
who are also our employees receive compensation in the form of salaries,
housing allowances, employee insurance and benefits in kind. Our executive
directors do not receive any compensation in addition to their salaries in
their capacity as directors or other remunerations as members of our
management team. However, we do pay their expenses related to attending board
meetings and participating in board functions.
On July 19, 2006, we entered into director
employment agreements with Ms. Siu Ling Chan and Ms. Lin Ling Li, pursuant to
which they receive a monthly salary of HK$50,000 (approximately $6,400), plus
a guaranteed bonus of HK$50,000 (approximately $6,400) payable on December 31
of each year, as consideration for their services as directors.
On July 24, 2008, we entered into
independent director agreements with Mr. Sean Shao, Dr. Jie Gan, and Dr. Tong
Jun Lin. Under the terms of the independent director agreements, we agreed to
pay each an annual salary of $18,000 as compensation for the services to be
provided by them as independent directors, except that Mr. Shao received
an additional $6,000 as compensation for his role as head of our Audit
Committee. In addition, we agreed to grant to each independent director an
option to purchase 20,000 shares of our common stock, with an exercise price
of $4.00 per share, of which 10,000 shares vested on January 25, 2009 and the
remaining 10,000 shares vested on July 25, 2009.
-
71 -
TRANSACTIONS WITH RELATED PERSONS, PROMOTERS
AND CERTAIN CONTROL PERSONS; CORPORATE GOVERNANCE
Transactions with Related Persons
The following includes a summary of
transactions since the beginning of the 2008 fiscal year, or any currently
proposed transaction, in which we were or are to be a participant and the
amount involved that exceeded or exceeds the lesser of $120,000 or one percent
of the average of our total assets at year-end for the last two completed
fiscal years, and in which any related person had or will have a direct or
indirect material interest (other than compensation described under Item 11.
"Executive Compensation"). We believe the terms obtained or consideration that
we paid or received, as applicable, in connection with the transactions
described below were comparable to terms available or the amounts that would
be paid or received, as applicable, in arm's-length transactions.
·
On May 9, 2008, we entered into a
consulting agreement with Mr. Stanley Wong, our former Chief Executive Officer
until June 1, 2008, pursuant to which we agreed to pay Mr. Wong a monthly fee
of RMB 40,000 or its HK$ equivalent (approximately $5,725), as consideration
for performance of his duties as consultant. We also agreed to grant Mr. Wong
a ten-year non-qualified option under the 2008 Plan, for the purchase of
50,000 shares our common stock, at an exercise price of $4.00 per share. The
term of the consulting agreement commenced on June 1, 2008, and expired on
December 31, 2008, in accordance with its terms.
·
During 2007, the Company advanced in
total RMB 3,007,481 (approximately $413,697) in cash to a 20% minority
shareholder of one of the Company's plasma companies for the purchases of
plasma collection license and certain equipments for its Fang Cheng Plasma
Company. However, the title transfer of those equipments, with the estimated
value of approximately RMB 122,481 (approximately $16,871), has not been
realized. The Company determined that the likelihood of the minority
shareholder's ability to deliver the title of those equipments is minimal and
made a provision for the amount of $16,871 as of December 31, 2008. The
Company also determined that the future cash flows expected to be generated
from the Fang Cheng plasma collection license had impaired as the plasma
collected in 2008 did not warrant any carrying amount for the license. As a
result, the Company recorded an impairment write-down of intangible assets for
approximately RMB 2,885,000 (approximately $415,873).
·
In 2007, the Company also prepaid
$516,456 to the same minority shareholder of one of the plasma companies. The
prepayment is for the purpose of acquiring certain assets. Assets are expected
to be received by January 2009. However, at December 31, 2008, the Company
determined that the likelihood of recovering these advances and prepayment is
minimal, due to the minority shareholder's ability to secure the title of the
assets and the personal financial difficulty as a result of the economic
downturn, and made a provision for both amounts as bad debt expense as of
December 31, 2008. The Company is currently negotiating with the shareholder
in attempt to recover the fund. On April 6, 2009, our BVI subsidiary, Logic
Express entered into an equity transfer and entrustment agreement, among Logic
Express, Shandong Taibang, and the Shandong Institute of Biological Products,
or the Shandong Institute, the holder of the minority interests in Shandong
Taibang, pursuant to which, Logic Express agreed to permit Shandong Taibang
and the Shandong Institute to participate in the indirect purchase of
Qianfeng's equity interests. Under the terms of the Entrustment Agreement,
Shandong Taibang agreed to contribute 18% or RMB 35,000,000 (approximately
$5,116,184) of the Dalin purchase price and the Shandong Institute agreed to
contribute 12.86% or RMB 25,000,000 (approximately $3,654,917) of the Dalin
purchase price. Logic Express is obligated to repay to Shandong Taibang and
the Shandong Institute their respective investment amounts on or before April
6th, 2010, along with their pro rata share, based on their percentage of the
Dalin purchase price contributed, of any distribution on the indirect equity
investment in Qianfeng payable to Logic Express during 2009. Logic Express has
agreed that if these investment amounts are not repaid within five days of the
payment due date, then Logic Express is obligated to pay Shandong Taibang and
the Shandong Institute liquidated damages equal to 0.03% of the overdue
portion of the amount due until such time as it is paid. Logic Express has
also agreed to pledge 30% of its ownership in Shandong Taibang to the Shandong
Institute as security for nonpayment. If failure to repay continues for longer
than 3 months after the payment due date, then the Shandong Institute will be
entitled to any rights associated with the pledged interests, including but
not limited to rights of disposition and profit distribution, until such time
as the investment amount has been repaid. Logic Express also provided a
guarantee that Shandong Taibang and the Shandong Institute will receive no
less than a 6% return based on their original investment amount.
Except as set forth in our discussion
above, none of our directors, director nominees or executive officers has been
involved in any transactions with us or any of our directors, executive
officers, affiliates or associates which are required to be disclosed pursuant
to the rules and regulations of the SEC.
-
72 -
Promoters and Certain Control Persons
We did not have any promoters at any time
during the past five fiscal years.
CHANGE IN ACCOUNTANTS
None.
SELLING STOCKHOLDERS
This prospectus relates to
the resale by the selling stockholders named below, from time to time, of an
aggregate of 1,335,581 shares of our common stock that are issuable to the
selling stockholders upon conversion of the 3.8% senior secured convertible
notes issued in the June 2009 private placement described below, and 667,791
shares issuable upon exercise of three-year warrants to purchase shares of our
common stock at an exercise price of $4.80 per share. None of the selling
stockholders is an affiliate of the Company, and each of the selling
stockholders has represented to the Company in writing in substance that it
acquired the securities or will acquire the underlying securities for its own
account, and without a view towards, or for resale in connection with, the
public sale or distribution thereof, irrespective of whether or not such sale
would be registered or exempted under the Securities Act.
On June 10, 2009, we
completed a private placement transaction with a group of accredited
investors. Pursuant to a securities purchase agreement with the investors
(who are the selling stockholders named below), we issued to the investors,
3.8% senior secured convertible notes, in the aggregate principal amount of
$9,554,140, convertible into 2,388,535 shares of our common stock and warrants
to purchase up to 1,194,268 shares of our common stock. The securities issued
represented approximately 13.41% of our issued and outstanding capital stock
on a fully-diluted basis as of and immediately after closing date. The
foregoing securities were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act for the offer and sale of
securities not involving a public offering and Rule 506 of Regulation D
promulgated thereunder. For additional information regarding the June 2009
private placement see our disclosure herein under "
Liquidity and Capital
Resources
Financing Activities
."
Between January 4, 2010 and January 7, 2010, both Jayhawk Private Equity Fund,
L.P. and Jayhawk Private Equity Co-Invest Fund, L.P. exercised their right to
convert all their 3.8% senior secured convertible notes in the principal
amount of $2,054,140, into shares an aggregate of 513,535 shares of our common
stock. As a result, only Notes in the principal amount of $7,500.000 held by
Essence International Investment Ltd. remain outstanding as of the filing of
this report.
In connection with the
private placement transaction, on June 10, 2009, we entered into a
registration rights agreement with the investors, pursuant to which we agreed
to file within 45 days of the closing date, or by July 25, 2009, a
registration statement registering for resale the shares issued to the
investors in the private placement. We have amended the registration
statement to register on behalf of the Selling Stockholders, on a pro rata
basis, 2,003,372, or 55% of the shares underlying the securities issued to the
investors in the private placement. The 2,003,372 shares being offered by the
Selling Stockholders amount to approximately
8.46% of the Company's
issued and outstanding common stock, and approximately 29.06% of the Company's
common stock held by non-affiliates (assuming full conversion of the
convertible notes and full exercise of the warrants offered for resale by the
Selling Stockholders).
OpCo acted as the placement
agent in connection with the sale of the notes, pursuant to a letter
agreement, dated October 4, 2008, between the Company and OpCo, as amended.
Under the terms of the agreement, the Company agreed to retain OpCo as its
exclusive private placement agent for a period to end on December 31, 2009,
and Oppenheimer agreed to (a) assist the Company in preparing a private
placement memorandum describing the Company and its securities; (b) review
with the Company a list of investors to whom the Memorandum will be provided
and assist in scheduling meetings with potential investors; and (c) assist and
advise the Company with respect to the negotiation of the sale of the
securities to the investors. As consideration for its services, OpCo had the
right to a cash fee equal to 7% of the gross proceeds received from the
Company's sale of any securities to first-time investors, and reimbursement of
fees and expenses up to $80,000. OpCo was also entitled to receive a
three-year warrant to purchase shares equal to 5% of any securities purchased
by first-time investors in the Company and 3% of the gross proceeds received
from the Company's existing investors that have rights of first refusal to the
same securities. OpCo also had certain registration rights with respect to
the common stock underlying its warrant, which rights include: one demand to
register such shares for resale, provided that the Company is eligible to use
a registration statement on Form S-3; an unlimited number of piggyback
registration rights; "cashless exercise" rights with respect to the warrant;
and customary anti-dilution provisions. However, the Company has the right to
repurchase any shares underlying OpCo's warrant to be included in a
registration statement, at 95% of the difference between the market price per
share at the time of such repurchase and the applicable exercise price per
share for such shares. Either party had the right to terminate the agreement
in writing prior to December 31, 2009, however, the agreement provided that
OpCo's right to receive fees thereunder would continue to apply if the Company
issued shares within 6 months from termination, to any investors which OpCo
previously solicited or sought to solicit on behalf of the Company, or which
contacted the Company in connection with a transaction as a result of OpCo's
efforts and whose name appears on a list of investors provided to the Company
by OpCo on the termination date. A copy of the letter agreement between the
Company and OpCo, is filed with the registration statement of which this
prospectus is a part.
At the closing of the private placement
transaction, OpCo received a cash fee equal to $586,624, or 6.1% of the gross
proceeds received from the sale of the securities to the Selling Stockholders,
and a three-year warrant to purchase up to 93,750 shares of our common stock,
representing 5% of the securities purchased by Essence International
Investment LTD, at an exercise price of $6.00 per share. Other than with
respect to the letter agreement between the Company and OpCo, no relationships
or arrangements have existed in the past three years or are to be performed in
the future between the Company and any of the selling stockholders or any of
their affiliates, or any person with whom any selling stockholder has a
contractual relationship (or any predecessors of those persons) in connection
with the sale of the notes.
Selling Stockholders
The following table sets
forth certain information regarding the selling stockholders and the shares
offered by them in this prospectus. Beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of shares
beneficially owned by a selling stockholder and the percentage of ownership of
that selling stockholder, shares of common stock underlying shares of
convertible preferred stock, options or warrants held by that selling
stockholder that are convertible or exercisable, as the case may be, within 60
days of January 21, 2010 are included. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
selling stockholder. Each selling stockholder's percentage of ownership in the
following table is based upon
23,319,977 shares of common stock
outstanding as of
January 21, 2010.
None of the selling
stockholders has held a position as an officer or director of the Company, nor
has any selling stockholder had any material relationship of any kind with us
or any of our affiliates. All information with respect to share ownership has
been furnished by the selling stockholders. The shares being offered are being
registered to permit public secondary trading of the shares and each selling
stockholder may offer all or part of the shares owned for resale from time to
time. In addition, none of the selling stockholders has any family
relationships with our officers, directors or controlling stockholders.
Furthermore, no selling stockholder is a registered broker-dealer or an
affiliate of a registered broker-dealer. For additional information, refer to
"
Security Ownership of Certain Beneficial Owners and Management
" below.
Other than with respect to
Jayhawk Private Equity Fund, L.P. and Jayhawk Private Equity Co-Invest Fund,
L.P. (together, "Jayhawk") in connection with the Company's 2006 private
placement set forth below, and other than with respect to the June 2009
private placement, the Company has not engaged in any securities transactions
with the Selling Stockholders or any of their affiliates, or any person with
whom they have a contractual relationship. Jayhawk was a participant in the
Company's 2006 private placement of its securities to certain accredited
investors as follows which occurred on July 19, 2006. The Company had
19,234,942 shares of common stock issued and outstanding prior to that
transaction, 3,366,120 of which were held by persons other than the selling
shareholders, affiliates of the company, or affiliates of the selling
shareholders. A total of 2,200,000 shares were issued or issuable in
connection with the 2006 private placement, equaling 153% of the total issued
and outstanding securities that were issued or issuable in the transaction
(assuming full issuance), with the percentage calculated by taking the number
of shares issued and outstanding prior to the applicable transaction and held
by persons other than the selling shareholders, affiliates of the Company, or
affiliates of the selling shareholders, and dividing that number by the number
of shares issued or issuable in connection with the applicable transaction. At
the time of the July 2006 transaction, the Company's common stock was not yet
publicly traded and so a market price immediately prior to the transaction
cannot be determined, however, the investors in that transaction set $3.00 as
the per share resale price of the securities in the registration statement
filed in connection with the transaction and the average sale price of the
securities in the first quarter of public trading was $3.00 per share. As of
January 21, 2010, the closing price of the Company's common stock (the class
of securities subject to the July 2006 transaction) as quoted on the
NASDAQ was $10.99 per share.
The Company has already
advised each selling stockholder that it may not use shares registered offered
by them in this prospectus to cover short sales of the Company's common stock
made prior to the date on which the registration statement that is a part of
this prospectus shall have been declared effective by the SEC. Each selling
stockholders has acknowledged receipt of such notice and has agreed to
promptly notify the Company of any subsequent changes in this and any other
information provided to us that may occur prior to the effective date of such
registration statement. None of the selling stockholders has advised the
Company that it has an existing short position in the Company's common stock.
The term "selling
stockholders" also includes any transferees, pledges, donees, or other
successors in interest to the selling stockholders named in the table below.
To our knowledge, subject to applicable community property laws, each person
named in the table has sole voting and investment power with respect to the
shares of common stock set forth opposite such person's name. We will file a
supplement to this prospectus to name successors to any named selling
stockholders who are able to use this prospectus to resell the securities
registered hereby.
-
73 -
We will not receive any
of the proceeds from the sale of any shares by the selling stockholders. We
have agreed to bear expenses incurred by the selling stockholders that relate
to the registration of the shares being offered and sold by the selling
stockholders, including the SEC registration fee and legal, accounting,
printing and other expenses of this offering.
Name of Selling Stockholder
|
|
Shares
Beneficially
Owned Prior to
Offering
|
|
Maximum
Number of
Shares to be
Sold
|
|
Shares
Beneficially
Owned
After
Offering
(1)
|
|
Percentage
Ownership
After
Offering
(2)
|
|
Jayhawk Private Equity Fund, L.P.
|
|
1,892,338
|
(3)
|
405,212
|
|
1,487,126
|
|
6.38%
|
|
Jayhawk Private Equity Co-Invest Fund,
L.P.
|
|
118,198
|
(4)
|
25,513
|
|
92,685
|
|
*
|
|
Essence International Investment LTD
|
|
2,812,500
|
(5)
|
1,572,647
|
|
1,239,853
|
|
5.31%
|
|
Total
|
|
4,823,036
|
|
2,003,372
|
|
2,819,664
|
|
12.09%
|
|
_______________________
* means less than 1%.
(1)
|
Beneficial Ownership is determined in
accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities. Each of the beneficial owners
listed above has direct ownership of and sole voting power and investment
power with respect to the shares of our common stock.
|
|
|
(2)
|
As of January 21, 2010, a total of 23,319,977
shares of our common stock are considered to be outstanding pursuant to
SEC Rule 13d-3(d) (1). warrants that are exercisable and notes that are
convertible within 60 days have been included in the denominator.
|
|
|
(3)
|
Consists of (i) 1,650,779 shares of our
common stock owned as of January 21, 2010 and (ii) 241,559 shares of
common stock issuable upon the exercise of three-year warrants to purchase
common stock at an exercise price of $4.80 per share. The General Partner
of Jayhawk Private Equity Fund, L.P. is Jayhawk Private Equity GP, L.P.,
whose General Partner is Jayhawk Capital Management, LLC. Jayhawk Capital
Management, LLC is controlled by Kent C. McCarthy.
|
|
|
(4)
|
Consists of (i) 102,989 shares of our common
stock owned as of January 21, 2010 and (ii) 15,209 shares of common stock
issuable upon the exercise of three-year warrants to purchase common stock
at an exercise price of $4.80 per share. The General Partner of Jayhawk
Private Equity Co-Invest Fund, L.P. is Jayhawk Private Equity GP, L.P.,
whose General Partner is Jayhawk Capital Management, LLC. Jayhawk Capital
Management, LLC is controlled by Kent C. McCarthy.
|
|
|
(5)
|
Consists of (i) 1,875,000 shares of our
common stock issuable upon conversion of our 3.8% convertible notes issued
in the 2009 financing; and (ii) 937,500 shares of common stock issuable
upon the exercise of three-year warrants to purchase common stock at an
exercise price of $4.80 per share. The General Partner of Essence
International Investment LTD is DT Capital Management Limited which is
controlled by Lixin Tian.
|
Prior to the June 2009
private placement, approximately 6,129,007 shares of the Company's common
stock were held by persons other than the selling stockholders and their
affiliates and the affiliates of the Company. Prior to the June 2009 private
placement, a total of 2,028,365 shares of common stock were registered for
resale by the selling shareholders or their affiliates in prior registration
statements, consisting of (i) 1,489,342 shares and 93,772 shares of common
stock held by Jayhawk Private Equity Fund, L.P. and Jayhawk Private Equity
Co-Invest Fund, L.P., respectively, and (ii) 372,336 shares and 23,443 shares
of common stock issuable to them, respectively, upon the exercise of five-year
warrants to purchase common stock at an exercise price of $2.8425 per share.
This amount also included an aggregate of 49,472 shares of common stock
issuable upon the exercise of a five-year warrant to purchase common stock at
an exercise price of $2.8425 per share, transferred to them by Capital
Ventures International. Of these shares, 788,132 shares have been sold by
Jayhawk in registered resale transactions and 1,240,233 shares continue to be
held by them. All the five-year warrants issued by the Company in the 2006
private placement, including the five-year warrants held by Jayhawk, were
redeemed on September 24, 2009, and Jayhawk exercised all five-year warrants
held by them for 445,251 shares of the Company's common stock in the
aggregate.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information
regarding beneficial ownership of our common stock as of January 21, 2010 (i)
by each person who is known by us to beneficially own more than 5% of our
common stock; (ii) by each of our officers and directors; and (iii) by all of
our officers and directors as a group.
Unless otherwise specified, the address of
each of the persons set forth below is in care of China Biologic Products,
Inc., No. 14 East Hushan Road, Tai'an City, Shandong, People's Republic of
China 271000.
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74 -
Name & Address of
Beneficial Owner
|
Office, If Any
|
Title of Class
Officers and Directors
|
Amount and
Nature of
Beneficial
Ownership
(1)
|
Percent of
Class
(2)
|
Siu Ling Chan
|
Chairwoman of the Board
|
Common stock $.0001 par
value
|
6,912,624
(3)
|
30.4%
|
Chao Ming Zhao
|
Chief Executive Officer
|
Common stock $.0001 par
value
|
1,136,787
(4)
|
5.0%
|
Yu-Yun Tristan Kuo
|
Chief Financial Officer
|
Common stock $.0001 par
value
|
12
5,000
(5)
|
0.5%
|
Lin Ling Li
|
Director
|
Common stock $.0001 par
value
|
6,912,624
(3)
|
30.4%
|
Sean Shao
|
Director
|
Common stock $.0001 par
value
|
20,000
(6)
|
0.1%
|
Tong Jun Lin
|
Director
|
Common stock $.0001 par
value
|
20,000
(6)
|
0.1%
|
All officers and
directors as a group (7
persons named above)
|
|
Common stock
$.0001 par value
|
15,127,035
|
66.4%
|
|
|
5% Securities Holders
|
|
|
Siu Ling Chan
|
Chairwoman of the Board
|
Common stock $.0001 par
value
|
6,912,624
(3)
|
30.4%
|
Lin Ling Li
|
Director
|
Common stock $.0001 par
value
|
6,912,624
(3)
|
30.4%
|
Chao Ming Zhao
|
Chief Executive Officer
|
Common stock $.0001 par
value
|
1,136,787
(4)
|
5.0%
|
IDG-Accel China Growth Fund
II LP.
(7)
|
-
|
Common stock $.0001 par
value
|
1,797,367
|
7.9%
|
Patrick J. McGoven
(8)
|
-
|
Common stock $.0001 par
value
|
1,944,360
|
8.6%
|
Quan Zhou
(8)
|
-
|
Common stock $.0001 par
value
|
1,944,360
|
8.6%
|
Jayhawk Private Equity Fund,
L.P.
(9)
|
-
|
Common stock $.0001 par
value
|
1,892,338
|
8.1%
|
Kent C. McCarthy
(10)
|
-
|
Common stock $.0001 par
value
|
2,010,536
|
8.8%
|
Essence International
Investment LTD
(11)
|
-
|
Common stock $.0001 par
value
|
2,812,500
|
11.0%
|
Lixin Tian
(11)
|
-
|
Common stock $.0001 par
value
|
2,812,500
|
11.0%
|
________________
*Less than 1%
(1)
|
Beneficial Ownership is
determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Each of the
beneficial owners listed above has direct ownership of and sole voting
power and investment power with respect to the shares of our common stock.
|
(2)
|
As of January 21, 2010, a
total of
23,319,977
shares of our common stock are considered to be
outstanding pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner
above, any securities that are exercisable or convertible within 60 days
have been included in the denominator.
|
(3)
|
Includes 50,000 shares
underlying a ten-year nonstatutory stock option granted under the 2008
Plan, exercisable at $4.00 per share.
|
(4)
|
Includes 115,000 shares
underlying a ten-year nonstatutory stock option granted under the 2008
Plan, exercisable at $4.00 per share.
|
(5)
|
Includes 75,000 shares underlying a ten-year
nonstatutory stock option granted under the 2008 Plan, exercisable at
$4.00 per share, and 50,000 shares underlying a ten-year nonstatutory
stock option granted under the 2008 Plan on January 7, 2010, pursuant to
his employment agreement with the Company and exercisable at $12.60 per
share.
|
(6)
|
Represents shares underlying
an option to purchase 20,000 shares of our common stock, with an exercise
price of $4.00 per share, of which 10,000 shares vested on January 25,
2009 and the remaining 10,000 shares vested on July 25, 2009.
|
(7)
|
Patrick J. McGoven and Quan
Zhou are directors and executive officers of IDG-Accel China Growth Fund
GP II Associates Ltd., which is the ultimate general partner of IDG-Accel
China Growth Fund II LP. By virtue of acting together to direct the
management and operations of the general partner of IDG-Accel China Growth
Fund II LP., Patrick J. McGoven and Quan Zhou may be deemed to have shared
voting and dispositive power with respect to the securities of the Company
held by IDG-Accel China Growth Fund II LP. Each of Patrick J. McGoven and
Quan Zhou disclaims beneficial ownership of the securities of the Company
held by IDG-Accel China Growth Fund II LP.
|
(8)
|
Represents our securities
held by IDG-Accel China Growth Fund II LP. disclosed in the preceding
note, as well as, 146,993 shares of common stock, held by IDG-Accel China
Investors II L. P. Patrick J. McGoven and Quan Zhou are directors and
executive officers of IDG-Accel China Growth Fund GP II Associates Ltd.,
which is the general partner of IDG-Accel China Investors II L.P. By
virtue of acting together to direct the management and operations of the
general partner of IDG-Accel China Investors II L.P., Patrick J. McGoven
and Quan Zhou may be deemed to have shared voting and dispositive power
with respect to the securities of the Company held by IDG -Accel China
Investors II L.P. Each of Patrick J. McGoven and Quan Zhou disclaims
beneficial ownership of the securities of the Company held by IDG-Accel
China Investors II L. P.
|
(9)
|
Consists of (i)
1,650,779 shares of our common stock owned as of January 21, 2010 and (ii)
241,559 shares of common stock issuable upon the exercise of three-year
warrants to purchase common stock at an exercise price of $4.80 per share.
The General Partner of Jayhawk Private Equity Fund, L.P. is Jayhawk
Private Equity GP, L.P., whose General Partner is Jayhawk Capital
Management, LLC. Jayhawk Capital Management, LLC is controlled by Kent C.
McCarthy.
|
(10)
|
Represents our
securities held by Jayhawk Private Equity Fund, L.P. disclosed in the
preceding note, as well as the following securities held by Jayhawk
Private Equity Co-Invest Fund, L.P.: (i) 102,989 shares of our common
stock owned as of January 21, 2010 and (ii) 15,209 shares of common stock
issuable upon the exercise of three-year warrants to purchase common stock
at an exercise price of $4.80 per share. The General Partner of Jayhawk
Private Equity Co-Invest Fund, L.P. is Jayhawk Private Equity GP, L.P.,
whose General Partner is Jayhawk Capital Management, LLC. Jayhawk Capital
Management, LLC is controlled by Kent C. McCarthy.
|
(11)
|
Consists of (i) 1,875,000
shares of our common stock issuable upon conversion of our 3.8%
convertible notes issued in the 2009 financing; and (ii) 937,500 shares of
common stock issuable upon the exercise of three-year warrants to purchase
common stock at an exercise price of $4.80 per share. The General Partner
of Essence International Investment LTD is DT Capital Management Limited
which is controlled by Lixin Tian.
|
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75 -
DESCRIPTION OF SECURITIES TO BE REGISTERED
In this offering, we are registering shares
of our common stock, par value $.0001 per share, issuable upon conversion or
exercise of the convertible notes and warrants sold in the June 2009 private
placement.
Capital Stock
We are currently authorized to issue 100,000,000 shares of common stock,
par value $.0001 per share, of which 23,319,977 shares were issued and
outstanding as of January 21, 2010. Each common share entitles the holder to
one vote on all matters submitted to a vote of our stockholders. When a
dividend is declared by the Board, all stockholders are entitled to receive a
fixed dividend. All shares of our common stock issued by the company are of
the same class, and have equal liquidation, preference, and adjustment rights.
Holders of outstanding shares of our common stock have no preemptive,
conversion or redemptive rights.
All of the issued and outstanding shares of our common stock are duly
authorized, validly issued, fully paid and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders will be diluted.
Warrants, Convertible Notes, and
Registration Right
On July 19, 2006, we issued
to the investors in the 2006 private placement warrants to purchase an
aggregate of 1,070,000 shares of our Common Stock which are exercisable by the
holders at $2.8425 per share for a period of five years following the closing
of the private placement. In the event the market price of our Common Stock
exceeds 160% of the exercise price of the warrants at any time after 45 days
following the effective date of the registration statement of which this
prospectus forms a part, then we may require the holder of such warrants to
exercise any unexercised warrants so long as this registration statement
remains effective and certain other conditions are met. The warrants may not
be exercised including pursuant to these forced exercise provisions -- if it
would result in the holder beneficially owning more than (i) 4.9999% of our
outstanding Common Stock (which provision may be waived by the holder thereof
with upon notice to us 61 days prior to such exercise); or (ii) 9.9999% of our
outstanding Common Stock (which provision may not be waived by any party). In
the event we issue shares of our Common Stock or any type of securities
convertible or exercisable into shares of our Common Stock at a price below
$2.8425, the exercise price of the warrants shall be adjusted downwards on a
"weighted average" basis. In connection with the 2006 private placement, we
issued to Lane Capital Markets, LLC, the placement agent for the transaction,
warrants for the purchase of 214,000 shares of our common stock in the
aggregate, for its services as placement agent.
On September
24, 2009, we redeemed all outstanding and unexercised warrants to purchase the
Company's common stock that were issued to investors in the July 2006 private
placement, except for the placement agent warrants (the "2006 Warrants"). Our
right to redeem the 2006 Warrants was triggered by the satisfaction of the
conditions to such right, including that the volume weighted average trading
price per share of the Company's common stock for 15 consecutive trading days,
as reported by Bloomberg L.P., was equal to or greater than 160% of the
exercise price of the 2006 Warrants. Warrants to purchase a total of 875,000
shares of the Company's common stock were exercised, equal to 100% of all the
2006 Warrants that remained outstanding and unexercised. The Company received
approximately $2.48 million in proceeds from the exercise of the warrants. The
Company intends to use the proceeds for general corporate
purposes. None of the 2006 Warrants or warrants issued to the placement agent
in the 2006 private placement remained unexercised as of January 21, 2010.
On June 10, 2009, we issued to the
investors in the 2009 private placement warrants to purchase an aggregate of
1,194,268 shares of our Common Stock which are exercisable by the holders at
$4.80 per share for a period of three years following the closing of the
private placement. The warrants are also subject to customary adjustments for
stock splits, dividends, recapitalizations, and other antidilution events. In
connection with the 2009 private placement, we also issued to Oppenheimer &
Co. Inc., or Opco, a three-year warrant to purchase up to 93,750 shares of our
common stock, representing 5% of the Securities purchased by first-time
investors in the Company, at an exercise price of $6.00 per share. Opco also
received certain registration rights with respect to the common stock
underlying its warrant, which rights include: one demand to register such
shares for resale, provided that we are eligible to use a registration
statement on Form S-3; an unlimited number of piggyback registration rights;
"cashless exercise" rights with respect to the warrant; and customary
anti-dilution provisions. We will have the right to repurchase any shares
underlying Opco's warrant to be included in a registration statement, at 95%
of the difference between the market price per share at the time of such
repurchase and the applicable exercise price per share for such shares. All
1,194,268 of these warrants remain unexercised as of January 21, 2010.
On June 10, 2009, we also issued to the
investors in the 2009 private placement senior secured convertible notes in
the aggregate principal amount of $9,554,140. The notes carry interest of 3.8%
per annum. The notes are convertible into shares of our common stock at the
conversion rate of $4.00 per share, subject to customary adjustments for any
recapitalizations, stock combinations, stock dividends, stock splits and other
antidilution events. Pursuant to the terms of the notes, the investors have
rights to participate in any future offerings by the Company until June 10,
2010, except for underwritten public offerings, equity compensation grants,
issuances of stock upon the conversion or exchange of convertible securities
outstanding on the closing of the 2009 private placement, and certain
acquisitions. Investors also have a right of first refusal to participate in
the purchase of any securities of the Company proposed to be transferred by a
controlling stockholder or another investor in the June 2009 private placement
occurring on or before June 10, 2010. Any investors that do not exercise their
right of first refusal may exercise a customary right of co-sale. The Company
may not register any transfers subject to these rights unless the transferors
comply with certain notice procedures provided in the terms of the notes. If
these rights are not exercised, the transferors may transfer their securities
on the proposed terms for 60 calendar days from the expiration of these
rights.
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76 -
In connection with the private placement
transaction, on June 10, 2009, we also entered into a registration rights
agreement with the investors, pursuant to which we agreed to file within 45
days of the closing date, a registration statement registering for resale the
shares issued to the investors in the private placement. If we do not file the
required registration statement in a timely manner, or if we fail to file a
pre-effective amendment to such registration statements and respond in writing
to any comments made by the SEC within a pre-defined period, then the
investors have the right, by providing four weeks' written notice to require
us, to redeem all or a portion of the notes held by them at a redemption
price, payable in cash, equal to the outstanding principal amount of the note,
plus an amount equal to two years of interest payments (compounded
semi-annually) on such principal amount, less any amount of interest actually
and previously paid on such outstanding principal amount. The notes are also
redeemable upon an event of default, a change of control, liquidation,
dissolution or wind-up of the affairs of the Company or any subsidiary, the
amendment, alteration or repeal of any provision of the Certificate of
Incorporation or bylaws of the Company or any subsidiary in a manner that
materially adversely affects the rights or preferences of the investor
(including but not limited to increasing or decreasing the authorized number
of members of the board of directors of the Company or any subsidiary without
the consent of the investors), or the failure to complete any of the
post-closing conditions of the Dalin/Huitian Acquisitions within six months of
the closing date.
Preferred Stock
We are currently authorized to issue up to
10,000,000 shares of preferred stock, par value $.0001 per share, in one or
more classes or series within a class as may be determined by our board of
directors, who may establish the number of shares to be included in each class
or series, may fix the designation, powers, preferences and rights of the
shares of each such class or series and any qualifications, limitations or
restrictions thereof. Any preferred stock so issued by the board of directors
may rank senior to the common stock with respect to the payment of dividends
or amounts upon liquidation, dissolution or winding up of us, or both.
Moreover, under certain circumstances, the issuance of preferred stock or the
existence of the un-issued preferred stock might tend to discourage or render
more difficult a merger or other change in control. We currently have no
shares of preferred stock outstanding.
Transfer Agent and Registrar
Our independent stock transfer agent and
registrar for our common stock is Securities Transfer Corporation. Their
mailing address is 2591 Dallas Parkway, Suite #102, Frisco, Texas, 75034, and
their telephone number is (469) 633-0101.
SHARES ELIGIBLE FOR FUTURE SALE
As of
January 21, 2010
, we had outstanding
23,319,977 shares of common stock.
Shares Covered by this Prospectus
All of the 2,003,372 shares of common stock
underlying the securities being registered in this offering may be sold
without restriction under the Securities Act, so long as the registration
statement of this prospectus is a part is, and remains, effective.
Rule 144
Under Rule 144, a person who has
beneficially owned restricted shares of our common stock for at least six
months would be entitled to sell their securities provided that (i) such
person is not deemed to have been one of our affiliates at the time of, or at
any time during the three months preceding, a sale, (ii) we are subject to the
Exchange Act reporting requirements for at least 90 days before the sale and
(iii) if the sale occurs prior to satisfaction of a one-year holding period,
we provide current information at the time of sale.
Persons who have beneficially owned
restricted shares of our common stock or warrants for at least six months but
who are our affiliates at the time of, or at any time during the three months
preceding, a sale, would be subject to additional restrictions, by which such
person would be entitled to sell within any three-month period only a number
of securities that does not exceed the greater of:
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77 -
·
1% of the total number of securities of
the same class then outstanding, which will equal approximately 233,198 shares
immediately after this offering; or
·
the average weekly trading volume of
such securities during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
provided,
in each case, that we are subject to the Exchange Act periodic reporting
requirements for at least three months before the sale.
Such sales by affiliates must also comply
with the manner of sale, current public information and notice provisions of
Rule 144. All of our currently issued and outstanding shares may currently be
sold in reliance on Rule 144. The selling stockholders will not be governed
by the foregoing restrictions when selling the aggregate 2,003,372 shares of
our common stock issuable upon conversion and exercise of the convertible
notes and warrants issued in the 2009 private placement covered under this
prospectus.
Lock-Up Agreements
One of our controlling stockholder entered
into a share pledge agreement in connection with the June 2009 private
placement, pursuant to which, she agreed that, so long as at least 50% of the
original principal amount of the Notes remains outstanding for the two year
period following the closing, she will not dispose of more than 500,000 shares
of the Company's common stock in any one year period or more than 1,000,000
shares of the Company's common stock throughout the two-year term. She also
agreed to provide the investors in the private placement with the right of
first refusal during the two-year term with respect to any transfer of her
securities. This lock-up provision will expire on June 10, 2011.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to
time, sell, transfer or otherwise dispose of any or all of their shares of
common stock or interests in shares of common stock on any stock exchange,
market or trading facility on which the shares are traded or in private
transactions. These dispositions may be at fixed prices, at prevailing market
prices at the time of sale, at prices related to the prevailing market price,
at varying prices determined at the time of sale, or at negotiated prices.
The selling stockholders will sell our
shares at prevailing market prices or at privately negotiated prices. The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:
·
ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;
·
block trades in which the broker-dealer
will attempt to sell the shares as agent, but may position and resell a
portion of the block as principal to facilitate the transaction;
·
purchases by a broker-dealer as
principal and resale by the broker-dealer for its account;
·
an exchange distribution in accordance
with the rules of the applicable exchange;
·
privately negotiated transactions;
·
short sales effected after the date the
registration statement of which this Prospectus is a part is declared
effective by the SEC;
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78 -
·
through the writing or settlement of
options or other hedging transactions, whether through an options exchange or
otherwise;
·
broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a stipulated
price per share;
·
sales pursuant to Rule 144;
·
a combination of any such methods of
sale; and
·
any other means permitted by applicable
law.
The selling stockholders may, from time to
time, pledge or grant a security interest in some or all of the shares of
common stock owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer and sell the
shares of common stock, from time to time, under this prospectus, or under an
amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act amending the list of selling stockholders to
include the pledgee, transferee or other successors in interest as selling
stockholders under this prospectus. The selling stockholders also may transfer
the shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In connection with the sale of our common
stock or interests therein, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial institutions, which may in
turn engage in short sales of the common stock in the course of hedging the
positions they assume. The selling stockholders may also sell shares of our
common stock short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers that in turn
may sell these securities. The selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions or
the creation of one or more derivative securities which require the delivery
to such broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The aggregate proceeds to the selling
stockholders from the sale of the common stock offered by them will be the
purchase price of the common stock less discounts or commissions, if any. Each
of the selling stockholders reserves the right to accept and, together with
their agents from time to time, to reject, in whole or in part, any proposed
purchase of common stock to be made directly or through agents. We will not
receive any of the proceeds from this offering.
Broker-dealers engaged by the selling
stockholders may arrange for other broker-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the selling
stockholders (or, if any broker-dealer acts as agent for the purchase of
shares, from the purchaser) in amounts to be negotiated. The selling
stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
The selling stockholders also may resell
all or a portion of the shares in open market transactions in reliance upon
Rule 144 under the Securities Act, provided that they meet the criteria and
conform to the requirements of that rule.
Any underwriters, agents or broker-dealers,
and any selling stockholders who are affiliates of broker-dealers, that
participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are "underwriters" within the meaning of Section
2(11) of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. We know of no existing arrangements
between any of the selling stockholders and any other stockholder, broker,
dealer, underwriter, or agent relating to the sale or distribution of the
shares, nor can we presently estimate the amount, if any, of such
compensation. See "Selling Stockholders" for description of any material
relationship that a stockholder has with us and the description of such
relationship.
To the extent required, the shares of our
common stock to be sold, the names of the selling stockholders, the respective
purchase prices and public offering prices, the names of any agents, dealers
or underwriters and any applicable commissions or discounts with respect to a
particular offer will be set forth in an accompanying prospectus supplement
or, if appropriate, a post-effective amendment to the registration statement
that includes this prospectus.
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79 -
In order to comply with the securities laws
of some states, if applicable, the common stock may be sold in these
jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states the common stock may not be sold unless it has been
registered or qualified for sale or an exemption from registration or
qualification requirements is available and is complied with.
We have advised the selling stockholders
that the anti-manipulation rules of Regulation M under the Exchange Act may
apply to sales of shares in the market and to the activities of the selling
stockholders and their affiliates. In addition, we will make copies of this
prospectus (as it may be supplemented or amended from time to time) available
to the selling stockholders for the purpose of satisfying the prospectus
delivery requirements of the Securities Act. The selling stockholders may
indemnify any broker-dealer that participates in transactions involving the
sale of the shares against certain liabilities, including liabilities arising
under the Securities Act.
We have agreed to pay certain fees and
expenses incurred by us incident to the registration of the shares. Such fees
and expenses are estimated to be $71,824. We have agreed to indemnify the
selling stockholders against liabilities, including liabilities under the
Securities Act and state securities laws, relating to the registration of the
shares offered by this prospectus.
We have agreed with the selling
stockholders to keep the registration statement of which this prospectus
constitutes a part effective until the earlier of (1) such time as all of the
shares covered by this prospectus have been disposed of pursuant to and in
accordance with the registration statement or (2) the date on which the shares
may be sold pursuant to Rule 144 of the Securities Act.
LEGAL MATTERS
The validity of the securities offered by
this prospectus will be passed upon for us by Pillsbury Winthrop Shaw Pittman
LLP, Washington, D.C.
EXPERTS
Our audited consolidated financial
statements as of December 31, 2008 and 2007 and for each of the two
years in the period ended December 31, 2008 included in this prospectus and
elsewhere and in the registration statement have been so included in reliance
upon the report of Frazer Frost, LLP (Successor entity of Moore Stephens Wurth
Frazer & Torbet, LLP, see Form 8-K filed on January 7, 2010), independent
auditors, appearing in this registration statement, and their authority as
experts in accounting and auditing.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this
prospectus as having prepared or certified any part of this prospectus or
having given an opinion upon the validity of the securities being registered
or upon other legal matters in connection with the registration or offering of
the common stock was employed on a contingency basis, or had, or is to
receive, in connection with the offering, a substantial interest, direct or
indirect, in China Biologic or any of its parents or subsidiaries. Nor was any
such person connected with China Biologic or any of its parents or
subsidiaries as a promoter, managing or principal underwriter, voting trustee,
director, officer or employee.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Bylaws provide for the indemnification
of our directors and officers, past, present and future, under certain
circumstances, against attorney's fees, judgments, fines and other expenses
incurred by them in any litigation to which they become a party arising from
their association with or activities on behalf of us. We will also bear
expenses of such litigation for any of our directors, officers, employees or
agents upon such persons promise to repay us therefore if it is ultimately
determined that any such person shall not have been entitled to
indemnification. This indemnification policy could result in substantial
expenditure by us, which we may be unable to recoup.
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80 -
Insofar as indemnification by us for
liabilities arising under the Securities Exchange Act of 1934 may be permitted
to our directors, officers and controlling persons pursuant to provisions of
the Articles of Incorporation and Bylaws, or otherwise, we have been advised
that in the opinion of the SEC, such indemnification is against public policy
and is, therefore, unenforceable. In the event that a claim for
indemnification by such director, officer or controlling person of us in the
successful defense of any action, suit or proceeding is asserted by such
director, officer or controlling person in connection with the securities
being offered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
At the present time, there is no pending
litigation or proceeding involving a director, officer, employee or other
agent of ours in which indemnification would be required or permitted. We are
not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, a registration
statement on Form S-1 under the Securities Act with respect to the common
stock offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to us and the common stock offered in this offering, we refer you
to the registration statement and to the attached exhibits. With respect to
each such document filed as an exhibit to the registration statement, we refer
you to the exhibit for a more complete description of the matters involved.
You may inspect our registration statement
and the attached exhibits and schedules without charge at the public reference
facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C.
20549. You may obtain copies of all or any part of our registration statement
from the SEC upon payment of prescribed fees. You may obtain information on
the operation of the public reference room by calling the SEC at
1-800-SEC-0330.
Our SEC filings, including the registration
statement and the exhibits filed with the registration statement, are also
available from the SEC's website at www.sec.gov, which contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the SEC.
-
81 -
CHINA BIOLOGIC PRODUCTS, INC.
2,003,372 Shares of Common Stock
PROSPECTUS
_______, 2010
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution
The following table sets forth the costs
and expenses, other than underwriting discounts and commissions, payable by us
in connection with the sale of common stock being registered. All amounts,
other than the SEC registration fee, are estimates. We will pay all these
expenses.
|
|
Amount to be Paid
|
|
SEC Registration Fee
|
$
|
824.00
|
|
Printing Fees and
Expenses
|
|
2,500.00
|
|
Legal Fees and
Expenses
|
|
50,000.00
|
|
Accounting Fees and
Expenses
|
|
10,000.00
|
|
Blue Sky Fees and
Expenses
|
|
5,000.00
|
|
Transfer Agent and
Registrar Fees
|
|
2,000.00
|
|
Miscellaneous
|
|
1,500.00
|
|
Total
|
$
|
71,824.00
|
|
Item 14. Indemnification of Directors
and Officers
China Biologic Products, Inc. is a Delaware
corporation. Section 102(b)(7) of the Delaware General Corporation Law or the
DGCL, permits a corporation to provide in its certificate of incorporation
that a director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability for any of the following:
·
any breach of the director's duty of
loyalty to the corporation or its stockholders;
·
acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law;
·
payments of unlawful dividends or
unlawful stock repurchases or redemptions under Section 174 of the DGCL; or
·
any transaction from which the director
derived an improper personal benefit.
Under the DGCL, any repeal or modification
of such provisions will not adversely affect any right or protection of a
director for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
Our certificate of incorporation provides
that no director shall be personally liable to us or any of our stockholders
for monetary damages for breach of fiduciary duty by such director as a
director, except for any (a) breach of the director's duty of loyalty to the
Corporation or its stockholders; (b) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (c)
pursuant to Section 174 or the DGCL; or (d) for any transaction from which the
director derived an improper benefit.
Under Section 145 of the DGCL, a
corporation may indemnify any individual made a party or threatened to be made
a party to any type of proceeding, other than an action by or in the right of
the corporation, because he or she is or was an officer, director, employee or
agent of the corporation or was serving at the request of the corporation as
an officer, director, employee or agent of another corporation or entity
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such proceeding: (1) if he or she acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation; or (2) in the case of a
criminal proceeding, he or she had no reasonable cause to believe that his or
her conduct was unlawful. A corporation may indemnify any individual made a
party or threatened to be made a party to any threatened, pending or completed
action or suit brought by or in the right of the corporation because he or she
was an officer, director, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or other entity, against expenses actually and
reasonably incurred in connection with such action or suit if he or she acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation, provided that such
indemnification will be denied if the individual is found liable to the
corporation unless, in such a case, the court determines the person is
nonetheless entitled to indemnification for such expenses. A corporation must
indemnify a present or former director or officer who successfully defends
himself or herself in a proceeding to which he or she was a party because he
or she was a director or officer of the corporation against expenses actually
and reasonably incurred by him or her. Expenses incurred by an officer or
director, or any employees or agents as deemed appropriate by the board of
directors, in defending civil or criminal proceedings may be paid by the
corporation in advance of the final disposition of such proceedings upon
receipt of an undertaking by or on behalf of such director, officer, employee
or agent to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the corporation. The Delaware law
regarding indemnification and expense advancement is not exclusive of any
other rights which may be granted by our restated certificate of incorporation
or restated bylaws, a vote of stockholders or disinterested directors,
agreement or otherwise.
II-1
Our restated bylaws provide that we must
indemnify our former and present directors and officers against any and all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by any such director or officer in connection with any
threatened, pending or completed action, suit or proceeding, to the fullest
extent permitted by the laws of Delaware. We have undertaken to pay any
expenses reasonably incurred by a director or officer in defending a civil or
criminal action, suit, or proceeding in advance of the final disposition of
such action, suit, or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount, if it is ultimately
determined that he or she is not entitled to be indemnified by us. The
provision of indemnification to persons under our restated bylaws does not
limit or restrict in any way our power to indemnify them in any other way
permitted by law. The Company has also entered into separate agreements with
certain directors indemnifying them to the fullest extent permitted by the
foregoing. The Company has purchased director and officer liability insurance,
as permitted by its bylaws.
Insofar as indemnification by us for
liabilities arising under the Exchange Act may be permitted to our directors,
officers and controlling persons pursuant to provisions of the Articles of
Incorporation and Bylaws, or otherwise, we have been advised that in the
opinion of the SEC, such indemnification is against public policy and is,
therefore, unenforceable. In the event that a claim for indemnification by
such director, officer or controlling person of us in the successful defense
of any action, suit or proceeding is asserted by such director, officer or
controlling person in connection with the securities being offered, we will,
unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Exchange Act and will be governed by the final adjudication
of such issue.
At the present time, there is no pending
litigation or proceeding involving a director, officer, employee or other
agent of ours in which indemnification would be required or permitted. We are
not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
Item 15. Recent Sales of Unregistered
Securities
On June 10, 2009, we completed a private
placement transaction with a group of accredited investors. Pursuant to the
securities purchase agreement, we issued to the investors, or their designees,
3.8% senior secured convertible notes in the aggregate principal amount of
$9,554,140, convertible into shares of our common stock and warrants to
purchase up to 1,194,268 shares of our common stock at an exercise price of
$4.80 per share. The securities issued represented approximately 13.41% of our
issued and outstanding capital stock on a fully-diluted basis as of and
immediately after closing date. For details regarding the Purchase Agreement
and the related transaction documents, see our Current Report on Form 8-K
filed on June 5, 2009 and the exhibits thereto.
As compensation for its services, Opco, our
placement agent in the transaction will receive a cash fee equal to 6.1% of
the gross proceeds received from the sale of the Securities. Opco will also
receive a three-year warrant to purchase up to 93,750 shares of our common
stock, representing 5% of the Securities purchased by first-time investors in
the Company, at an exercise price of $6.00 per share. Opco also received
certain registration rights with respect to the common stock underlying its
warrant, which rights include: one demand to register such shares for resale,
provided that we are eligible to use a registration statement on Form S-3; an
unlimited number of piggyback registration rights; "cashless exercise" rights
with respect to the warrant; and customary anti-dilution provisions. We will
have the right to repurchase any shares underlying Opco's warrant to be
included in a registration statement, at 95% of the difference between the
market price per share at the time of such repurchase and the applicable
exercise price per share for such shares.
In connection with the private placement
transaction, on June 10, 2009, we also entered into a registration rights
agreement with the investors, pursuant to which we agreed to file within 45
days of the closing date, a registration statement registering for resale the
shares issued to the investors in the private placement. If we not file the
required registration statement in a timely manner, or if we fail to file
pre-effective amendment to such registration statements and respond in writing
to any comments made by the SEC within a pre-defined period, then the
investors have the right, by providing four weeks' written notice to require
us, to redeem all or a portion of the notes held by them at a redemption
price, payable in cash, equal to the outstanding principal amount of the note,
plus an amount equal to two years of interest payments (compounded
semi-annually) on such principal amount, less any amount of interest actually
and previously paid on such outstanding principal amount. An aggregate of
1,335,581 shares of our common stock issuable upon conversion of the
convertible notes and 667,791 shares issuable upon exercise of the warrants
issued in connection with the 2009 private placement are being registered
herein.
For more information regarding the June
2009 private placement transaction see our disclosure herein under "
Liquidity
and Capital Resources
Financing Activities
" and under "
Selling
Stockholders
."
II-2
The foregoing securities were issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act for the offer and sale of securities not involving a public
offering and Rule 506 of Regulation D promulgated thereunder. The investors
agreed, pursuant to the terms and conditions of the securities purchase
agreement, as applicable, that (a) they had access to all of the Company's
information pertaining to the investment and were provided with the
opportunity to ask questions and receive answers regarding the offering, (b)
they acquired the securities, as applicable, for their own account for
investment and not for the account of any other person and not with a view to
or for any distribution within the meaning of the Securities Act and (c) they
will not sell or otherwise transfer the securities, as applicable, unless in
compliance with state and federal securities laws. Each of the investors
represented, pursuant to the terms and conditions of the Purchase Agreement,
that they are accredited investors as defined in Rule 501(a) under the
Securities Act and that there was no general solicitation or advertising in
connection with the offer and sale of the Securities.
Item 16. Exhibits and Financial
Statement Schedules
The following exhibits are included as part
of this Form S-1.
Exhibit
No.
|
Description
|
|
|
2.1
|
Share Exchange Agreement between the
Company, Logic Express Limited and the selling stockholders signatory
thereto, dated as of July 18, 2006 (incorporated by reference to Exhibit 2
of the registration statement on Form SB-2, filed by the Company on
September 5, 2007)
|
|
|
3.1
|
Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the registration
statement on Form SB-2, filed by the Company on September 5, 2007)
|
|
|
3.2
|
Amended and Restated By-Laws, adopted on
March 31, 2009 (incorporated by reference to Exhibit 3.2 of the Annual
Report on Form 10-K filed by the Company on March 31, 2009).
|
|
|
4.1
|
Securities Purchase Agreement between the
Company, Logic Express Limited, Shandong Taibang Biological Products Co.,
Ltd., and the selling stockholders and investors signatory thereto, dated
as of July 18, 2006 (incorporated by reference to Exhibit 4.1 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
4.2
|
Registration Rights Agreement, between the
Company and certain investors signatory thereto, dated as of July 18, 2006
(incorporated by reference to Exhibit 4.2 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.3
|
Form of Stockholder Warrant to purchase
Common Stock, dated as of July 19, 2006 (incorporated by reference to
Exhibit 4.3 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
4.4
|
Lane Warrant, dated as of July 19, 2006
(incorporated by reference to Exhibit 4.4 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.5
|
Share Escrow Agreement, between the
Company, Lane, as investor representative, the Escrow Agent, and the
selling stockholders signatory thereto, dated as of July 19, 2006
(incorporated by reference to Exhibit 4.5 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.6
|
Escrow Agreement, between the Company, the
Escrow Agent, and the selling stockholders signatory thereto, dated as of
July 19, 2006 (incorporated by reference to Exhibit 4.6 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
II-3
|
|
4.7
|
Amendment No. 1 to the Share Escrow
Agreement, between the Company, Lane, as investor representative, the
Escrow Agent, and the selling stockholders signatory thereto, dated as of
February 16, 2007 (incorporated by reference to Exhibit 4.7 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
4.8
|
Amendment No. 2 to Share Escrow Agreement,
between the Company, Lane, as investor representative, the Escrow Agent,
and the selling stockholders signatory thereto, dated as of March 27, 2007
(incorporated by reference to Exhibit 4.8 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.9
|
Amendment No. 3 to Share Escrow Agreement,
between the Company, Lane, as investor representative, the Escrow Agent,
and the selling stockholders signatory thereto, dated as of April 2, 2007
(incorporated by reference to Exhibit 4.9 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.10
|
Amendment No. 4 to Share Escrow Agreement,
between the Company, Lane, as investor representative, the Escrow Agent,
and the selling stockholders signatory thereto, dated as of May 9, 2007
(incorporated by reference to Exhibit 4.10 of the registration statement
on Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.11
|
Amendment No. 1 to Securities Purchase
Agreement, between the Company, Logic Express Limited, Shandong Taibang
Biological Products Co., Ltd. and the selling stockholders and investors
signatory thereto, dated as of February 16, 2007 (incorporated by
reference to Exhibit 4.11 of the registration statement on Form SB-2,
filed by the Company on September 5, 2007)
|
|
|
4.12
|
Amendment No. 2 to Securities Purchase
Agreement, between the Company, Logic Express Limited, Shandong Taibang
Biological Products Co., Ltd. and the selling stockholders and investors
signatory thereto, dated as of March 27, 2007 (incorporated by reference
to Exhibit 4.12 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
4.13
|
Amendment No. 3 to Securities Purchase
Agreement, between the Company, Logic Express Limited, Shandong Taibang
Biological Products Co., Ltd. and the selling stockholders and investors
signatory thereto, dated as of April 2, 2007 (incorporated by reference to
Exhibit 4.13 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
4.14
|
Amendment No. 4 to Securities Purchase
Agreement, between the Company, Logic Express Limited, Shandong Taibang
Biological Products Co., Ltd. and the selling stockholders and investors
signatory thereto, dated as of May 9, 2007 (incorporated by reference to
Exhibit 4.14 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
4.15
|
Amendment No. 5 to Securities Purchase
Agreement, between the Company and investors signatory thereto, dated as
of August 20, 2007 (incorporated by reference to Exhibit 4.15 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
4.16
|
Form of Registration Rights Agreement,
dated June 5, 2009 (incorporated by reference to Exhibit 4.1 of the
Current Report on Form 8-K filed by the Company on June 5, 2009).
|
|
|
4.17
|
Form of 3.8% Convertible Senior Secured
Note due 2011(incorporated by reference to Exhibit 4.2 of the Current
Report on Form 8-K filed by the Company on June 5, 2009).
|
|
|
4.18
|
Form of Warrant (incorporated by reference
to Exhibit 4.3 of the Current Report on Form 8-K filed by the Company on
June 5, 2009).
|
|
|
5.1*
|
Opinion of Pillsbury
Winthrop Shaw Pittman LLP
|
|
|
10.1
|
China Biologic Products, Inc. 2008 Equity
Incentive Plan (incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K, filed by the Company on May 13, 2008)
|
|
|
10.2
|
Form of Stock Option Award Agreement of
China Biologic Products, Inc. (incorporated by reference to Exhibit 10.5
of the current report on Form 8-K, filed by the Company on May 13, 2008)
|
II-4
|
|
10.3
|
Group Secondment Agreement, dated October
28, 2002, between Shandong Taibang Biological Products Co., Ltd. and the
Shandong Institute (English Translation) (incorporated by reference to
Exhibit 10.1 of the registration statement on Form SB-2/A, filed by the
Company on December 3, 2007)
|
|
|
10.4
|
Amended and Restated Joint Venture
Agreement, between Logic Express Limited and the Shandong Institute, dated
as of March 12, 2006 (English Translation) (incorporated by reference to
Exhibit 10.2 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
10.5
|
Letter of Intent for Equity Transfer,
between Logic Express Limited and the Shandong Institute, dated as of June
10, 2006 (English Translation) (incorporated by reference to Exhibit 10.3
of the registration statement on Form SB-2, filed by the Company on
September 5, 2007)
|
|
|
10.6
|
Raw Plasma Supply Agreement, between
Shandong Taibang Biological Products Co., Ltd. and Qihei Plasma Collection
Station, dated as of December 30, 2005 (English Translation) (incorporated
by reference to Exhibit 10.4 of the registration statement on Form SB-2,
filed by the Company on September 5, 2007)
|
|
|
10.7
|
Raw Plasma Supply Agreement, between
Shandong Taibang Biological Products Co., Ltd. and the Xiajin Plasma
Collection Station, dated as of December 30, 2005 (English Translation)
(incorporated by reference to Exhibit 10.5 of the registration statement
on Form SB-2, filed by the Company on September 5, 2007)
|
|
|
10.8
|
Raw Plasma Supply Agreement, between
Shandong Taibang and the Zhangqiu Plasma Collection Station, dated as of
December 30, 2005 (English Translation) (incorporated by reference to
Exhibit 10.6 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
10.9
|
Plasma Processing Agreement, between
Shandong Taibang Biological Products Co., Ltd. and Qi He An Tai Plasma
Collection Co., Ltd., dated as of January 2, 1007 (English Translation)
(incorporated by reference to Exhibit 10.9 of the registration statement
on Form SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.10
|
Plasma Processing Agreement, between
Shandong Taibang Biological Products Co., Ltd. and the Xia Jin An Tai
Plasma Collection Co., Ltd., dated as of January 2, 2007 (English
Translation) (incorporated by reference to Exhibit 10.10 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
10.11
|
Plasma Processing Agreement, between
Shandong Taibang Biological Products Co., Ltd. and the Zhang Qiu An Tai
Plasma Collection Co., Ltd., dated as of January 2, 2007 (English
Translation) (incorporated by reference to Exhibit 10.11 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
10.12
|
Asset Purchase Agreement, between Zhang
Qiu An Tai Plasma Collection Co., Ltd. and Zhang Qiu Plasma Collection
Station, dated as of December 31, 2006 (English Translation) (incorporated
by reference to Exhibit 10.12 of the registration statement on Form
SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.13
|
Asset Purchase Agreement, between Guang Xi
Huan Jiang Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan
Autonomous County Plasma Collection Station, dated as of April 24, 2007
(English Translation) (incorporated by reference to Exhibit 10.13 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
10.14
|
Asset Purchase Agreement, between Qi He An
Tai Plasma Collection Co., Ltd. and Qi He County Plasma Collection
Station, dated as of November 9, 2006 (English Translation) (incorporated
by reference to Exhibit 10.14 of the registration statement on Form
SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.15
|
Asset Purchase Agreement, between Xia Jin
An Tai Plasma Collection Co., Ltd. and Xia Jin County Plasma Collection
Station, dated as of October 20, 2006 (English Translation) (incorporated
by reference to Exhibit 10.15 of the registration statement on Form
SB-2/A, filed by the Company on December 3, 2007)
|
II-5
|
|
10.16
|
Asset Purchase Agreement, between Liao
Cheng An Tai Plasma Collection Co., Ltd. and Yang Gu County Plasma
Collection Station, dated as of November 3, 2006 (English Translation)
(incorporated by reference to Exhibit 10.16 of the registration statement
on Form SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.17
|
Asset Purchase Agreement, between Fang
Cheng Plasma Collection Co., Ltd. and Fang Cheng Plasma Company, dated as
of April 30, 2007 (English Translation) (incorporated by reference to
Exhibit 10.21 of the registration statement on Form SB-2/A, filed by the
Company on December 3, 2007)
|
|
|
10.18
|
Asset Purchase Agreement, between He Ze An
Tai Plasma Collection Co., Ltd and Yun Cheng County Plasma Collection
Station, dated as of December 15, 2006 (English Translation) (incorporated
by reference to Exhibit 10.22 of the registration statement on Form
SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.19
|
Raw Plasma Supply Agreement, between
Shandong Taibang Biological Products Co., Ltd. and Liao Cheng Tiantan
Plasma Collection Co. Ltd., dated as of November 1, 2007 (English
Translation) (incorporated by reference to Exhibit 10.23 of the
registration statement on Form SB-2/A, filed by the Company on December
28, 2007)
|
|
|
10.20
|
Asset Purchase Agreement, between Guang Xi
Huan Jiang Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan
Autonomous County Plasma Collection Station, dated as of August 5, 2007
(English Translation) (incorporated by reference to Exhibit 10.13 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
10.21
|
Equity Transfer Agreement, dated September
26, 2008, among Logic Express Limited, Chongqing Dalin Biologic
Technologies Co., Ltd. and certain shareholders of Chongqing Dalin
Biologic Technologies Co., Ltd. (incorporated by reference to Exhibit 10.1
of the current report on Form 8-K, filed by the Company on October 2,
2008)
|
|
|
10.22
|
Supplemental Agreement, dated November 3,
2008, among Logic Express Limited, Fan Shaowen, as representative of the
shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. and
Chongqing Dalin Biologic Technologies Co., Ltd. (English Translation)
(incorporated by reference to Exhibit 10.2 of the current report on Form
8-K, filed by the Company on November 7, 2008)
|
|
|
10.23
|
Second Supplemental Agreement, dated
November 14, 2008, among Logic Express Limited, Fan Shaowen as
representative of the shareholders of Chongqing Dalin Biologic
Technologies Co., Ltd. and Chongqing Dalin Biologic Technologies Co., Ltd.
(English Translation) (incorporated by reference to exhibit 10.3 of the
current report of Form 8-K, filed by the Company on November 20, 2008)
|
|
|
10.24
|
Amended Equity Transfer Agreement, dated
December 12, 2008, among Logic Express Limited, Chongqing Dalin Biologic
Technologies Co., Ltd., and certain shareholders of Chongqing Dalin
Biologic Technologies Co., Ltd. (English Translation) (incorporated by
reference to exhibit 10.4 of the current report of Form 8-K, filed by the
Company on December 18, 2008)
|
|
|
10.25
|
Equity Transfer Agreement, between
Shandong Taibang Biological Products Co., Ltd. and Mr. Fan Qingchun, dated
October 10, 2008 (incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K, filed by the Company on October 16, 2008)
|
|
|
10.26
|
Joint Venture and Cooperation Agreement
between Mr. Fan Qingchun, Shandong Taibang Biological Products Co., Ltd.
and Shaanxi Power Construction Corporation, dated September 12, 2008
(incorporated by reference to Exhibit 10.2 of the current report on Form
8-K, filed by the Company on October 16, 2008)
|
|
|
10.27
|
Agreement on Equity Transfer, Acquisition,
Joint Venture and Cooperation, among Shandong Taibang Biological Products
Co., Ltd., Shaanxi Power Construction Corporation and Mr. Fan Qingchun,
dated September 12, 2008 (incorporated by reference to Exhibit 10.3 of the
current report on Form 8-K, filed by the Company on October 16, 2008)
|
II-6
|
|
10.28
|
(Shareholder) Agreement among Shandong
Taibang Biological Products Co., Ltd., Logic Express Limited and
Biological Institute, dated September 12, 2008 (incorporated by reference
to Exhibit 10.4 of the current report on Form 8-K, filed by the Company on
October 16, 2008)
|
|
|
|
10.29
|
Trademark Licensing Agreement, dated as of
February 27, 2007 (English Translation) (incorporated by reference to
Exhibit 10.17 of the registration statement on Form SB-2/A, filed by the
Company on December 3, 2007)
|
|
|
|
10.30
|
Loan Agreement, dated as of November 30,
2006, among Shandong Taibang and the Shandong Institute and Logic Express
(English Translation) (incorporated by reference to Exhibit 10.18 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
|
10.31
|
Supplementary Agreement, dated as of
September 1, 2007, among Shandong Taibang Biological Products Co., Ltd.,
the Shandong Institute and Logic Express Limited (English Translation)
(incorporated by reference to Exhibit 10.19 of the registration statement
on Form SB-2/A, filed by the Company on December 3, 2007)
|
|
|
|
10.32
|
Form of Bank of Communications Loan
Contract, among Shandong Taibang and the Tai'an Branch of the Bank of
Communications (English Translation) (incorporated by reference to Exhibit
10.20 of the registration statement on Form SB-2/A, filed by the Company
on December 3, 2007)
|
|
|
|
10.33
|
China Bank of Communications Loan
Contract, dated October 28, 2008, between Shandong Taibang Biological
Products Co. Ltd. and Bank of Communications, Tai'an Branch (English
Translation) (incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K, filed by the Company on November 3, 2008)
|
|
|
|
10.34
|
Loan Agreement between Shandong Taibang
Biological Products Co., Ltd. and Bank Of China, dated January 8, 2009
(English Translation) (incorporated by reference to Exhibit 10.1 of the
current report on Form 8-K, filed by the Company on January 13, 2009)
|
|
|
|
10.35
|
Consulting Agreement, between Stanley Wong
and China Biologic Products, Inc., dated May 9, 2008 (incorporated by
reference to Exhibit 10.2 of the current report on Form 8-K, filed by the
Company on May 13, 2008)
|
|
|
|
10.36
|
Employment Agreement, between Y. Tristan
Kuo and China Biologic Products, Inc., dated May 9, 2008 (incorporated by
reference to Exhibit 10.3 of the current report on Form 8-K, filed by the
Company on May 13, 2008)
|
|
|
|
10.37
|
Employment Agreement, between Chao Ming
Zhao and China Biologic Products, Inc., dated May 9, 2008 (incorporated by
reference to Exhibit 10.4 of the current report on Form 8-K, filed by the
Company on May 13, 2008)
|
|
|
|
10.38
|
Form of Director's Employment Agreement of
China Biologic (incorporated by reference to Exhibit 10.8 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
|
10.39
|
Form of Independent Director Agreement of
China Biologic Products, Inc. (incorporated by reference to Exhibit 10.1
of the current report on Form 8-K, filed by the Company on July 30, 2008)
|
|
|
|
10.40
|
Form of Indemnity Agreement of China
Biologic Products, Inc. (incorporated by reference to Exhibit 10.2 of the
current report on Form 8-K, filed by the Company on July 30, 2008)
|
|
|
|
10.41
|
Form of Securities Purchase Agreement,
dated June 5, 2009 (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed by the Company on June 5, 2009).
|
|
|
|
10.42
|
Form of Guarantee and Pledge Agreement,
dated June 10, 2009 (incorporated by reference to Exhibit 10.2 of the
Current Report on Form 8-K filed by the Company on June 5, 2009).
|
|
|
|
10.43
|
Form of Indemnification Agreement, dated
June 10, 2009 (incorporated by reference to Exhibit 10.3 of the Current
Report on Form 8-K filed by the Company on June 5, 2009).
|
II-7
_________________________
* Filed herewith
Item 17. Undertakings
(A)
The undersigned
registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(a) Include any
prospectus required by Section 10(a)(3) of the Securities Act, and
(b) Reflect in
the prospectus any facts or events arising after the effective date of this
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate represent a fundamental change in the
information set forth in this Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed with
the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement; and
(c) Include any
additional or changed material information with respect to the plan of
distribution not previously disclosed in Registration Statement;
(2) That,
for the purpose of determining any liability under the Securities Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide
offering thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) If the
registrant is subject to Rule 430C (§230.430C of this chapter), each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of
this chapter), shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness.
Provided,
however,
that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document incorporated
or deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or prospectus that
was part of the registration statement or made in any such document
immediately prior to such date of first use.
(B)
Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-8
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Tai'an City, Shandong Province, China, on the
25th
day of
January, 2010.
|
CHINA BIOLOGIC
PRODUCTS, INC.
|
|
|
By:
|
/s/ Chao Ming Zhao
|
|
Chao Ming Zhao
|
|
Chief Executive
Officer (Principal Executive Officer)
|
|
|
|
|
By:
|
/s/ Y. Tristan Kuo
|
|
Y. Tristan Kuo
|
|
Chief Financial
Officer (Principal Financial and Accounting Officer)
|
POWER OF ATTORNEY
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed by the
following persons in the capacities and on the dates indicated. Each person
whose signature appears below constitutes and appoints Chao Ming Zhao and Y.
Tristan Kuo, and each of them individually, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Signature
|
Title
|
Date
|
|
|
|
/s/ Siu Ling Chan
Siu Ling Chan
|
Chairwoman of the
Board
|
January 25, 2010
|
|
|
|
/s/ Chao Ming Zhao
Chao Ming Zhao
|
Chief Executive
Officer
(Principal Executive
Officer)
|
January 25, 2010
|
|
|
|
/s/ Yu-Yun Tristan
Kuo
Yu-Yun Tristan Kuo
|
Chief Financial
Officer
(Principal Financial
and Accounting Officer)
|
January 25, 2010
|
|
|
|
/s/ Lin Ling Li
Lin Ling Li
|
Director
|
January 25, 2010
|
|
|
|
/s/ Sean Shao
Sean Shao
|
Director
|
January 25, 2010
|
|
|
|
/s/ Tong Jun Lin
Tong Jun Lin
|
Director
|
January 25, 2010
|
EXHIBIT INDEX
Exhibit
No.
|
Description
|
|
|
2.1
|
Share Exchange Agreement between the
Company, Logic Express Limited and the selling stockholders signatory
thereto, dated as of July 18, 2006 (incorporated by reference to Exhibit 2
of the registration statement on Form SB-2, filed by the Company on
September 5, 2007)
|
|
|
3.1
|
Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the registration
statement on Form SB-2, filed by the Company on September 5, 2007)
|
|
|
3.2
|
Amended and Restated By-Laws, adopted on
March 31, 2009 (incorporated by reference to Exhibit 3.2 of the Annual
Report on Form 10-K filed by the Company on March 31, 2009).
|
|
|
4.1
|
Securities Purchase Agreement between the
Company, Logic Express Limited, Shandong Taibang Biological Products Co.,
Ltd., and the selling stockholders and investors signatory thereto, dated
as of July 18, 2006 (incorporated by reference to Exhibit 4.1 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
4.2
|
Registration Rights Agreement, between the
Company and certain investors signatory thereto, dated as of July 18, 2006
(incorporated by reference to Exhibit 4.2 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.3
|
Form of Stockholder Warrant to purchase
Common Stock, dated as of July 19, 2006 (incorporated by reference to
Exhibit 4.3 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
4.4
|
Lane Warrant, dated as of July 19, 2006
(incorporated by reference to Exhibit 4.4 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.5
|
Share Escrow Agreement, between the
Company, Lane, as investor representative, the Escrow Agent, and the
selling stockholders signatory thereto, dated as of July 19, 2006
(incorporated by reference to Exhibit 4.5 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.6
|
Escrow Agreement, between the Company, the
Escrow Agent, and the selling stockholders signatory thereto, dated as of
July 19, 2006 (incorporated by reference to Exhibit 4.6 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
4.7
|
Amendment No. 1 to the Share Escrow
Agreement, between the Company, Lane, as investor representative, the
Escrow Agent, and the selling stockholders signatory thereto, dated as of
February 16, 2007 (incorporated by reference to Exhibit 4.7 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
4.8
|
Amendment No. 2 to Share Escrow Agreement,
between the Company, Lane, as investor representative, the Escrow Agent,
and the selling stockholders signatory thereto, dated as of March 27, 2007
(incorporated by reference to Exhibit 4.8 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.9
|
Amendment No. 3 to Share Escrow Agreement,
between the Company, Lane, as investor representative, the Escrow Agent,
and the selling stockholders signatory thereto, dated as of April 2, 2007
(incorporated by reference to Exhibit 4.9 of the registration statement on
Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.10
|
Amendment No. 4 to Share Escrow Agreement,
between the Company, Lane, as investor representative, the Escrow Agent,
and the selling stockholders signatory thereto, dated as of May 9, 2007
(incorporated by reference to Exhibit 4.10 of the registration statement
on Form SB-2, filed by the Company on September 5, 2007)
|
|
|
4.11
|
Amendment No. 1 to Securities Purchase
Agreement, between the Company, Logic Express Limited, Shandong Taibang
Biological Products Co., Ltd. and the selling stockholders and investors
signatory thereto, dated as of February 16, 2007 (incorporated by
reference to Exhibit 4.11 of the registration statement on Form SB-2,
filed by the Company on September 5, 2007)
|
|
|
4.12
|
Amendment No. 2 to Securities Purchase
Agreement, between the Company, Logic Express Limited, Shandong Taibang
Biological Products Co., Ltd. and the selling stockholders and investors
signatory thereto, dated as of March 27, 2007 (incorporated by reference
to Exhibit 4.12 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
4.13
|
Amendment No. 3 to Securities Purchase
Agreement, between the Company, Logic Express Limited, Shandong Taibang
Biological Products Co., Ltd. and the selling stockholders and investors
signatory thereto, dated as of April 2, 2007 (incorporated by reference to
Exhibit 4.13 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
4.14
|
Amendment No. 4 to Securities Purchase
Agreement, between the Company, Logic Express Limited, Shandong Taibang
Biological Products Co., Ltd. and the selling stockholders and investors
signatory thereto, dated as of May 9, 2007 (incorporated by reference to
Exhibit 4.14 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
4.15
|
Amendment No. 5 to Securities Purchase
Agreement, between the Company and investors signatory thereto, dated as
of August 20, 2007 (incorporated by reference to Exhibit 4.15 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
4.16
|
Form of Registration Rights Agreement,
dated June 5, 2009 (incorporated by reference to Exhibit 4.1 of the
Current Report on Form 8-K filed by the Company on June 5, 2009).
|
|
|
4.17
|
Form of 3.8% Convertible Senior Secured
Note due 2011(incorporated by reference to Exhibit 4.2 of the Current
Report on Form 8-K filed by the Company on June 5, 2009).
|
|
|
4.18
|
Form of Warrant (incorporated by reference
to Exhibit 4.3 of the Current Report on Form 8-K filed by the Company on
June 5, 2009).
|
|
|
5.1*
|
Opinion of Pillsbury Winthrop Shaw
Pittman LLP
|
|
|
10.1
|
China Biologic Products, Inc. 2008 Equity
Incentive Plan (incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K, filed by the Company on May 13, 2008)
|
|
|
10.2
|
Form of Stock Option Award Agreement of
China Biologic Products, Inc. (incorporated by reference to Exhibit 10.5
of the current report on Form 8-K, filed by the Company on May 13, 2008)
|
|
|
10.3
|
Group Secondment Agreement, dated October
28, 2002, between Shandong Taibang Biological Products Co., Ltd. and the
Shandong Institute (English Translation) (incorporated by reference to
Exhibit 10.1 of the registration statement on Form SB-2/A, filed by the
Company on December 3, 2007)
|
|
|
10.4
|
Amended and Restated Joint Venture
Agreement, between Logic Express Limited and the Shandong Institute, dated
as of March 12, 2006 (English Translation) (incorporated by reference to
Exhibit 10.2 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
10.5
|
Letter of Intent for Equity Transfer,
between Logic Express Limited and the Shandong Institute, dated as of June
10, 2006 (English Translation) (incorporated by reference to Exhibit 10.3
of the registration statement on Form SB-2, filed by the Company on
September 5, 2007)
|
|
|
10.6
|
Raw Plasma Supply Agreement, between
Shandong Taibang Biological Products Co., Ltd. and Qihei Plasma Collection
Station, dated as of December 30, 2005 (English Translation) (incorporated
by reference to Exhibit 10.4 of the registration statement on Form SB-2,
filed by the Company on September 5, 2007)
|
|
|
10.7
|
Raw Plasma Supply Agreement, between
Shandong Taibang Biological Products Co., Ltd. and the Xiajin Plasma
Collection Station, dated as of December 30, 2005 (English Translation)
(incorporated by reference to Exhibit 10.5 of the registration statement
on Form SB-2, filed by the Company on September 5, 2007)
|
|
|
10.8
|
Raw Plasma Supply Agreement, between
Shandong Taibang and the Zhangqiu Plasma Collection Station, dated as of
December 30, 2005 (English Translation) (incorporated by reference to
Exhibit 10.6 of the registration statement on Form SB-2, filed by the
Company on September 5, 2007)
|
|
|
10.9
|
Plasma Processing Agreement, between
Shandong Taibang Biological Products Co., Ltd. and Qi He An Tai Plasma
Collection Co., Ltd., dated as of January 2, 1007 (English Translation)
(incorporated by reference to Exhibit 10.9 of the registration statement
on Form SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.10
|
Plasma Processing Agreement, between
Shandong Taibang Biological Products Co., Ltd. and the Xia Jin An Tai
Plasma Collection Co., Ltd., dated as of January 2, 2007 (English
Translation) (incorporated by reference to Exhibit 10.10 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
10.11
|
Plasma Processing Agreement, between
Shandong Taibang Biological Products Co., Ltd. and the Zhang Qiu An Tai
Plasma Collection Co., Ltd., dated as of January 2, 2007 (English
Translation) (incorporated by reference to Exhibit 10.11 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
10.12
|
Asset Purchase Agreement, between Zhang
Qiu An Tai Plasma Collection Co., Ltd. and Zhang Qiu Plasma Collection
Station, dated as of December 31, 2006 (English Translation) (incorporated
by reference to Exhibit 10.12 of the registration statement on Form
SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.13
|
Asset Purchase Agreement, between Guang Xi
Huan Jiang Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan
Autonomous County Plasma Collection Station, dated as of April 24, 2007
(English Translation) (incorporated by reference to Exhibit 10.13 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
10.14
|
Asset Purchase Agreement, between Qi He An
Tai Plasma Collection Co., Ltd. and Qi He County Plasma Collection
Station, dated as of November 9, 2006 (English Translation) (incorporated
by reference to Exhibit 10.14 of the registration statement on Form
SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.15
|
Asset Purchase Agreement, between Xia Jin
An Tai Plasma Collection Co., Ltd. and Xia Jin County Plasma Collection
Station, dated as of October 20, 2006 (English Translation) (incorporated
by reference to Exhibit 10.15 of the registration statement on Form
SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.16
|
Asset Purchase Agreement, between Liao
Cheng An Tai Plasma Collection Co., Ltd. and Yang Gu County Plasma
Collection Station, dated as of November 3, 2006 (English Translation)
(incorporated by reference to Exhibit 10.16 of the registration statement
on Form SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.17
|
Asset Purchase Agreement, between Fang
Cheng Plasma Collection Co., Ltd. and Fang Cheng Plasma Company, dated as
of April 30, 2007 (English Translation) (incorporated by reference to
Exhibit 10.21 of the registration statement on Form SB-2/A, filed by the
Company on December 3, 2007)
|
|
|
10.18
|
Asset Purchase Agreement, between He Ze An
Tai Plasma Collection Co., Ltd and Yun Cheng County Plasma Collection
Station, dated as of December 15, 2006 (English Translation) (incorporated
by reference to Exhibit 10.22 of the registration statement on Form
SB-2/A, filed by the Company on December 3, 2007)
|
|
|
10.19
|
Raw Plasma Supply Agreement, between
Shandong Taibang Biological Products Co., Ltd. and Liao Cheng Tiantan
Plasma Collection Co. Ltd., dated as of November 1, 2007 (English
Translation) (incorporated by reference to Exhibit 10.23 of the
registration statement on Form SB-2/A, filed by the Company on December
28, 2007)
|
10.20
|
Asset Purchase Agreement, between Guang Xi
Huan Jiang Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan
Autonomous County Plasma Collection Station, dated as of August 5, 2007
(English Translation) (incorporated by reference to Exhibit 10.13 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
10.21
|
Equity Transfer Agreement, dated September
26, 2008, among Logic Express Limited, Chongqing Dalin Biologic
Technologies Co., Ltd. and certain shareholders of Chongqing Dalin
Biologic Technologies Co., Ltd. (incorporated by reference to Exhibit 10.1
of the current report on Form 8-K, filed by the Company on October 2,
2008)
|
|
|
10.22
|
Supplemental Agreement, dated November 3,
2008, among Logic Express Limited, Fan Shaowen, as representative of the
shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. and
Chongqing Dalin Biologic Technologies Co., Ltd. (English Translation)
(incorporated by reference to Exhibit 10.2 of the current report on Form
8-K, filed by the Company on November 7, 2008)
|
|
|
10.23
|
Second Supplemental Agreement, dated
November 14, 2008, among Logic Express Limited, Fan Shaowen as
representative of the shareholders of Chongqing Dalin Biologic
Technologies Co., Ltd. and Chongqing Dalin Biologic Technologies Co., Ltd.
(English Translation) (incorporated by reference to exhibit 10.3 of the
current report of Form 8-K, filed by the Company on November 20, 2008)
|
|
|
10.24
|
Amended Equity Transfer Agreement, dated
December 12, 2008, among Logic Express Limited, Chongqing Dalin Biologic
Technologies Co., Ltd., and certain shareholders of Chongqing Dalin
Biologic Technologies Co., Ltd. (English Translation) (incorporated by
reference to exhibit 10.4 of the current report of Form 8-K, filed by the
Company on December 18, 2008)
|
|
|
10.25
|
Equity Transfer Agreement, between
Shandong Taibang Biological Products Co., Ltd. and Mr. Fan Qingchun, dated
October 10, 2008 (incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K, filed by the Company on October 16, 2008)
|
|
|
10.26
|
Joint Venture and Cooperation Agreement
between Mr. Fan Qingchun, Shandong Taibang Biological Products Co., Ltd.
and Shaanxi Power Construction Corporation, dated September 12, 2008
(incorporated by reference to Exhibit 10.2 of the current report on Form
8-K, filed by the Company on October 16, 2008)
|
|
|
10.27
|
Agreement on Equity Transfer, Acquisition,
Joint Venture and Cooperation, among Shandong Taibang Biological Products
Co., Ltd., Shaanxi Power Construction Corporation and Mr. Fan Qingchun,
dated September 12, 2008 (incorporated by reference to Exhibit 10.3 of the
current report on Form 8-K, filed by the Company on October 16, 2008)
|
|
|
10.28
|
(Shareholder) Agreement among Shandong
Taibang Biological Products Co., Ltd., Logic Express Limited and
Biological Institute, dated September 12, 2008 (incorporated by reference
to Exhibit 10.4 of the current report on Form 8-K, filed by the Company on
October 16, 2008)
|
|
|
|
10.29
|
Trademark Licensing Agreement, dated as of
February 27, 2007 (English Translation) (incorporated by reference to
Exhibit 10.17 of the registration statement on Form SB-2/A, filed by the
Company on December 3, 2007)
|
|
|
|
10.30
|
Loan Agreement, dated as of November 30,
2006, among Shandong Taibang and the Shandong Institute and Logic Express
(English Translation) (incorporated by reference to Exhibit 10.18 of the
registration statement on Form SB-2/A, filed by the Company on December 3,
2007)
|
|
|
|
10.31
|
Supplementary Agreement, dated as of
September 1, 2007, among Shandong Taibang Biological Products Co., Ltd.,
the Shandong Institute and Logic Express Limited (English Translation)
(incorporated by reference to Exhibit 10.19 of the registration statement
on Form SB-2/A, filed by the Company on December 3, 2007)
|
|
|
|
10.32
|
Form of Bank of Communications Loan
Contract, among Shandong Taibang and the Tai'an Branch of the Bank of
Communications (English Translation) (incorporated by reference to Exhibit
10.20 of the registration statement on Form SB-2/A, filed by the Company
on December 3, 2007)
|
|
|
|
10.33
|
China Bank of Communications Loan
Contract, dated October 28, 2008, between Shandong Taibang Biological
Products Co. Ltd. and Bank of Communications, Tai'an Branch (English
Translation) (incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K, filed by the Company on November 3, 2008)
|
|
|
|
10.34
|
Loan Agreement between Shandong Taibang
Biological Products Co., Ltd. and Bank Of China, dated January 8, 2009
(English Translation) (incorporated by reference to Exhibit 10.1 of the
current report on Form 8-K, filed by the Company on January 13, 2009)
|
|
|
|
10.35
|
Consulting Agreement, between Stanley Wong
and China Biologic Products, Inc., dated May 9, 2008 (incorporated by
reference to Exhibit 10.2 of the current report on Form 8-K, filed by the
Company on May 13, 2008)
|
|
|
|
10.36
|
Employment Agreement, between Y. Tristan
Kuo and China Biologic Products, Inc., dated May 9, 2008 (incorporated by
reference to Exhibit 10.3 of the current report on Form 8-K, filed by the
Company on May 13, 2008)
|
|
|
|
10.37
|
Employment Agreement, between Chao Ming
Zhao and China Biologic Products, Inc., dated May 9, 2008 (incorporated by
reference to Exhibit 10.4 of the current report on Form 8-K, filed by the
Company on May 13, 2008)
|
|
|
|
10.38
|
Form of Director's Employment Agreement of
China Biologic (incorporated by reference to Exhibit 10.8 of the
registration statement on Form SB-2, filed by the Company on September 5,
2007)
|
|
|
|
10.39
|
Form of Independent Director Agreement of
China Biologic Products, Inc. (incorporated by reference to Exhibit 10.1
of the current report on Form 8-K, filed by the Company on July 30, 2008)
|
|
|
|
10.40
|
Form of Indemnity Agreement of China
Biologic Products, Inc. (incorporated by reference to Exhibit 10.2 of the
current report on Form 8-K, filed by the Company on July 30, 2008)
|
|
|
|
10.41
|
Form of Securities Purchase Agreement,
dated June 5, 2009 (incorporated by reference to Exhibit 10.1 of the
Current Report on Form 8-K filed by the Company on June 5, 2009).
|
|
|
|
10.42
|
Form of Guarantee and Pledge Agreement,
dated June 10, 2009 (incorporated by reference to Exhibit 10.2 of the
Current Report on Form 8-K filed by the Company on June 5, 2009).
|
|
|
|
10.43
|
Form of Indemnification Agreement, dated
June 10, 2009 (incorporated by reference to Exhibit 10.3 of the Current
Report on Form 8-K filed by the Company on June 5, 2009).
|
_________________________
* Filed herewith
CHINA BIOLOGIC
PRODUCTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Contents
|
|
Page(s)
|
Consolidated
Balance Sheets (unaudited)
|
|
F-1
|
Consolidated
Statements of Income and Other Comprehensive Income (unaudited)
|
|
F-2
|
Consolidated
Statements of Changes in Equity (unaudited)
|
|
F-3
|
Consolidated
Statements of Cash Flows (unaudited)
|
|
F-4
|
Notes to the
Consolidated Financial Statements (unaudited)
|
|
F-5
|
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 AND
DECEMBER 31, 2008
ASSETS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
50,348.133
|
|
$
|
8,814,616
|
|
Accounts receivable, net
of allowance for doubtful accounts of $1,393,567
and
$1,268,052 as of September 30, 2009 and
December 31, 2008, respectively
|
|
1,473,942
|
|
|
313,087
|
|
Accounts receivable - related party
|
|
41,430
|
|
|
-
|
|
Dividend receivable
|
|
-
|
|
|
147,256
|
|
Other receivables
|
|
926,581
|
|
|
356,957
|
|
Inventories
|
|
33,218,618
|
|
|
14,949,196
|
|
Prepayments and deferred expense
|
|
1,582,566
|
|
|
614,704
|
|
Total
current assets
|
|
87,591,270
|
|
|
25,195,816
|
|
PLANT AND EQUIPMENT, net
|
|
27,849,832
|
|
|
19,299,364
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
|
6,277,894
|
|
|
6,533,977
|
|
Refundable deposit for
potential acquisition
|
|
-
|
|
|
14,181,800
|
|
Prepayments - non-current
|
|
4,870,735
|
|
|
955,874
|
|
Intangible assets, net
|
|
21,152,417
|
|
|
1,002,561
|
|
Goodwill
|
|
12,425,589
|
|
|
-
|
|
Total
other assets
|
|
44,726,635
|
|
|
22,674,212
|
|
Total
assets
|
$
|
160,167,737
|
|
$
|
67,169,392
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Accounts payable
|
$
|
3,610,470
|
|
$
|
2,481,889
|
|
Notes payable
|
|
-
|
|
|
29,340
|
|
Short term loans - bank
|
|
10,782,450
|
|
|
-
|
|
Short term loans - holder of
noncontrolling interest
|
|
4,425,777
|
|
|
773,277
|
|
Other payables and accrued liabilities
|
|
17,118,218
|
|
|
3,962,931
|
|
Other payable - related
parties
|
|
3,086,940
|
|
|
-
|
|
Accrued interest - holder of noncontrolling
interest
|
|
1,319,556
|
|
|
-
|
|
Distribution payable to holder
of noncontrolling interest
|
|
759,319
|
|
|
3,252,354
|
|
Customer deposits
|
|
7,751,013
|
|
|
1,091,792
|
|
Taxes payable
|
|
5,913,231
|
|
|
4,060,010
|
|
Long term loan - bank, current maturities
|
|
3,374,100
|
|
|
-
|
|
Investment payable
|
|
2,625,405
|
|
|
3,275,501
|
|
Total current liabilities
|
|
60,766,479
|
|
|
18,927,094
|
|
OTHER LIABILITIES:
|
|
|
|
|
|
|
Non-current other payable - land use right
|
|
324,121
|
|
|
325,390
|
|
Notes payable, net of discount
of $9,508,965 as of September 30, 2009
|
|
45,175
|
|
|
-
|
|
Long term loan - bank, net of current
maturities
|
|
-
|
|
|
5,868,000
|
|
Derivative liability -
conversion option
|
|
12,784,873
|
|
|
-
|
|
Fair value of derivative instruments
|
|
7,943,174
|
|
|
-
|
|
Total
other liabilities
|
|
21,097,343
|
|
|
6,193,390
|
|
Total
liabilities
|
|
81,863,822
|
|
|
25,120,484
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
EQUITY:
|
|
|
|
|
|
|
Common stock, $0.0001 par
value, 100,000,000 shares authorized,
22,650,442
and 21,434,942 shares issued and
outstanding at September 30, 2009 and
December
31, 2008, respectively
|
|
2,265
|
|
|
2,143
|
|
Paid-in-capital
|
|
19,191,623
|
|
|
10,700,032
|
|
Statutory reserves
|
|
13,413,353
|
|
|
6,989,801
|
|
Retained earnings
|
|
13,074,618
|
|
|
15,392,253
|
|
Accumulated other
comprehensive income
|
|
5,102,487
|
|
|
4,752,885
|
|
Total shareholders'
equity
|
|
50,784,346
|
|
|
37,837,114
|
|
NONCONTROLLING INTEREST
|
|
27,519,569
|
|
|
4,211,794
|
|
Total equity
|
|
78,303,915
|
|
|
42,048,908
|
|
Total
liabilities and equity
|
$
|
160,167,737
|
|
$
|
67,169,392
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-1
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008
(Unaudited)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
26,871,259
|
|
$
|
13,799,915
|
|
$
|
80,861,353
|
|
$
|
33,574,764
|
|
Revenues
related party
|
|
168,480
|
|
|
-
|
|
|
508,529
|
|
|
-
|
|
Total revenues
|
|
27,039,739
|
|
|
13,799,915
|
|
|
81,369,882
|
|
|
33,574,764
|
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
6,942,948
|
|
|
4,138,077
|
|
|
22,283,881
|
|
|
9,725,103
|
|
Cost of revenues
related party
|
|
17,953
|
|
|
-
|
|
|
53,715
|
|
|
-
|
|
Total cost of revenues
|
|
6,960,901
|
|
|
4,138,077
|
|
|
22,337,596
|
|
|
9,725,103
|
|
GROSS PROFIT
|
|
20,078,838
|
|
|
9,661,838
|
|
|
59,032,286
|
|
|
23,849,661
|
|
OPERATING EXPENSES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
619,467
|
|
|
780,246
|
|
|
2,313,577
|
|
|
1,785,340
|
|
General and administrative expenses
|
|
5,169,137
|
|
|
1,634,233
|
|
|
14,996,846
|
|
|
5,756,087
|
|
Research and
development expenses
|
|
262,500
|
|
|
201,037
|
|
|
1,098,083
|
|
|
664,652
|
|
Total
operating expenses
|
|
6,051,104
|
|
|
2,615,516
|
|
|
18,408,506
|
|
|
8,206,079
|
|
INCOME FROM OPERATIONS
|
|
14,027,734
|
|
|
7,046,322
|
|
|
40,623,780
|
|
|
15,643,582
|
|
OTHER EXPENSES (INCOME)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss (income)
of unconsolidated affiliate
|
|
(31,051
|
)
|
|
-
|
|
|
19,092
|
|
|
-
|
|
Change in fair value of derivative
liabilities
|
|
13,242,333
|
|
|
-
|
|
|
14,931,088
|
|
|
-
|
|
Interest expense
(income), net
|
|
724,771
|
|
|
(21,713
|
)
|
|
1,979,538
|
|
|
(7,531
|
)
|
Other expense (income), net
|
|
337,645
|
|
|
57,815
|
|
|
372,955
|
|
|
110,267
|
|
Total
other expenses, net
|
|
14,273,698
|
|
|
36,102
|
|
|
17,302,673
|
|
|
102,736
|
|
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING
INTEREST
|
|
(245,964
|
)
|
|
7,010,220
|
|
|
23,321,107
|
|
|
15,540,846
|
|
PROVISION FOR INCOME TAXES
|
|
2,535,023
|
|
|
1,572,816
|
|
|
7,547,318
|
|
|
4,437,141
|
|
NET INCOME (LOSS) BEFORE NONCONTROLLING INTEREST
|
|
(2,780,987
|
)
|
|
5,437,404
|
|
|
15,773,789
|
|
|
11,103,705
|
|
Less: Net income attributable to noncontrolling
interest
|
|
3,412,582
|
|
|
958,858
|
|
|
10,738,295
|
|
|
2,323,205
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST
|
|
(6,193,569
|
)
|
|
4,478,546
|
|
|
5,035,494
|
|
|
8,780,500
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
(62,767
|
)
|
|
121,814
|
|
|
349,602
|
|
|
1,992,939
|
|
COMPREHENSIVE INCOME (LOSS)
|
$
|
(6,256,336
|
)
|
$
|
4,600,360
|
|
$
|
5,385,096
|
|
$
|
10,773,439
|
|
BASIC EARNINGS PER SHARE
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of shares
|
|
21,632,793
|
|
|
21,434,942
|
|
|
21,504,002
|
|
|
21,434,942
|
|
Earnings (loss) per share
|
$
|
(0.29
|
)
|
$
|
0.21
|
|
$
|
0.23
|
|
$
|
0.41
|
|
DILUTED EARNINGS PER SHARE
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
21,632,793
|
|
|
21,504,629
|
|
|
21,767,086
|
|
|
21,713,170
|
|
Earnings (loss) per
share
|
$
|
(0.29
|
)
|
$
|
0.21
|
|
$
|
0.23
|
|
$
|
0.40
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
China Biologic Products. Inc.'s shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
Accumulated other
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
Statutory
|
|
|
|
|
|
comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
paid in capital
|
|
|
reserves
|
|
|
Unrestricted
|
|
|
income
|
|
|
interest
|
|
|
Total
|
|
BALANCE, December 31, 2007
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
9,388,305
|
|
$
|
3,934,703
|
|
$
|
6,461,680
|
|
$
|
2,608,794
|
|
$
|
3,885,892
|
|
$
|
26,281,517
|
|
Stock based compensation
|
|
|
|
|
|
|
|
1,283,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,283,801
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,780,500
|
|
|
|
|
|
2,323,205
|
|
|
11,103,705
|
|
Dividend declared to noncontrolling
interest shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,640,960
|
)
|
|
(1,640,960
|
)
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
1,962,866
|
|
|
(1,962,866
|
)
|
|
|
|
|
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,992,939
|
|
|
|
|
|
1,992,939
|
|
BALANCE, September 30, 2008 (unaudited)
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
10,672,106
|
|
$
|
5,897,569
|
|
$
|
13,279,314
|
|
$
|
4,601,733
|
|
$
|
4,568,137
|
|
$
|
39,021,002
|
|
Stock based compensation
|
|
|
|
|
|
|
|
27,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,926
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,205,171
|
|
|
|
|
|
980,636
|
|
|
4,185,807
|
|
Dividend declared to noncontrolling
interest shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,341,085
|
)
|
|
(1,341,085
|
)
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
1,092,232
|
|
|
(1,092,232
|
)
|
|
|
|
|
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,152
|
|
|
4,106
|
|
|
1,55,258
|
|
BALANCE, December 31, 2008
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
10,700,032
|
|
$
|
6,989,801
|
|
$
|
15,392,253
|
|
$
|
4,752,885
|
|
$
|
4,211,794
|
|
$
|
42,048,908
|
|
Cumulative effect of reclassification of warrants
|
|
|
|
|
|
|
|
(738,449
|
)
|
|
|
|
|
(929,577
|
)
|
|
|
|
|
|
|
|
(1,668,026
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
62,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,281
|
|
Warrants exercised
|
|
1,215,500
|
|
|
122
|
|
|
9,167,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,167,881
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,035,494
|
|
|
|
|
|
10,738,295
|
|
|
15,773,789
|
|
Dividend declared to noncontrolling
interest shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,955,392
|
)
|
|
(8,955,392
|
)
|
Noncontrolling interest
acquired from acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,525,059
|
|
|
21,525,059
|
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
6,423,552
|
|
|
(6,423,552
|
)
|
|
|
|
|
|
|
|
-
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,602
|
|
|
(187
|
)
|
|
349,415
|
|
BALANCE, September 30, 2009 (unaudited)
|
|
22,650,442
|
|
$
|
2,265
|
|
$
|
19,191,623
|
|
$
|
13,413,353
|
|
$
|
13,074,618
|
|
$
|
5,102,487
|
|
$
|
27,519,569
|
|
$
|
78,303,915
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)
|
|
2009
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income attributable to controlling
interest
|
$
|
5,035,494
|
|
$
|
8,780,500
|
|
Net income attributable
to noncontrolling interest
|
|
10,738,295
|
|
|
2,323,205
|
|
Consolidated net income
|
|
15,773,789
|
|
|
11,103,705
|
|
Adjustments
to reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
2,158,206
|
|
|
914,575
|
|
Amortization
|
|
2,654,269
|
|
|
80,753
|
|
Loss on disposal of equipment
|
|
114,246
|
|
|
73,310
|
|
Recovery of bad debt previously reserved
|
|
(9,621
|
)
|
|
-
|
|
Allowance for bad debt - accounts receivables
|
|
90,442
|
|
|
-
|
|
Allowance for bad debt - other receivables and
prepayments
|
|
659,788
|
|
|
-
|
|
Stock based compensation
|
|
62,281
|
|
|
1,283,801
|
|
Change in fair value of warrant liabilities
|
|
14,931,088
|
|
|
-
|
|
Amortization of deferred note issuance cost
|
|
110,938
|
|
|
-
|
|
Amortization of discount on convertible notes
|
|
45,175
|
|
|
-
|
|
Equity in loss of unconsolidated affiliate
|
|
19,092
|
|
|
-
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
Notes receivable
|
|
-
|
|
|
43,011
|
|
Accounts receivable
|
|
(1,306,293
|
)
|
|
(353,412
|
)
|
Accounts receivable -
related party
|
|
378,308
|
|
|
-
|
|
Other
receivables
|
|
(485,641
|
)
|
|
15,251
|
|
Inventories
|
|
(9,729,616
|
)
|
|
(3,206,654
|
)
|
Prepayments
and deferred expenses
|
|
(511,819
|
)
|
|
(355,012
|
)
|
Accounts payable
|
|
(149,764
|
)
|
|
72,681
|
|
Other
payables and accrued liabilities
|
|
4,236,622
|
|
|
1,267,099
|
|
Accrued interest - holder
of noncontrolling interest
|
|
1,319,555
|
|
|
-
|
|
Customer
deposits
|
|
4,154,255
|
|
|
383,703
|
|
Taxes payable
|
|
942,929
|
|
|
3,477,543
|
|
Contingent
liability
|
|
-
|
|
|
(108,430
|
)
|
Net
cash provided by operating activities
|
|
35,458,229
|
|
|
14,691,924
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Cash acquired through acquisition
|
|
11,945,303
|
|
|
-
|
|
Proceeds from dividend receivable
|
|
147,256
|
|
|
-
|
|
Payments made for acquisition
|
|
(10,373,854
|
)
|
|
-
|
|
Payments made for unconsolidated affiliate
|
|
(3,224,980
|
)
|
|
-
|
|
Purchase of plant and equipment
|
|
(2,323,903
|
)
|
|
(3,154,996
|
)
|
Additions to intangible assets
|
|
(1,374,146
|
)
|
|
(9,620
|
)
|
Proceeds from sale of equipment
|
|
513
|
|
|
53,078
|
|
Advances for potential acquisition
|
|
-
|
|
|
(1,463,000
|
)
|
Advances on non-current assets
|
|
(855,298
|
)
|
|
(160,256
|
)
|
Net
cash used in investing activities
|
|
(6,059,109
|
)
|
|
(4,734,794
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Change in restricted cash
|
|
-
|
|
|
(338,353
|
)
|
Payments on notes payable
|
|
(29,318
|
)
|
|
-
|
|
Proceeds from warrants conversion
|
|
3,455,059
|
|
|
-
|
|
Proceeds from issuance of convertible notes
|
|
8,967,516
|
|
|
-
|
|
Repayments of former shareholders loan in acquiring company
|
|
(2,840,914
|
)
|
|
-
|
|
Proceeds from short term loans - bank
|
|
13,515,598
|
|
|
-
|
|
Payments on short term loans - bank
|
|
(2,814,528
|
)
|
|
(716,850
|
)
|
Payments on long term loan - bank
|
|
(5,863,600
|
)
|
|
-
|
|
Dividends paid to noncontrolling interest shareholders
|
|
(2,293,888
|
)
|
|
(286,740
|
)
|
Net
cash provided by (used in) financing activities
|
|
12,095,925
|
|
|
(1,341,943
|
)
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
38,472
|
|
|
598,736
|
|
INCREASE
IN CASH
|
|
41,533,517
|
|
|
9,213,923
|
|
CASH and CASH
EQUIVALENTS, beginning of period
|
|
8,814,616
|
|
|
5,010,033
|
|
CASH
and CASH EQUIVALENTS, end of period
|
$
|
50,348,133
|
|
$
|
14,223,956
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Income taxes paid
|
$
|
7,525,262
|
|
$
|
1,830,589
|
|
Interest paid (net
of capitalized interest)
|
$
|
911,846
|
|
$
|
47,197
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Reclassification
of warrant liability to paid-in capital upon warrants conversion
|
$
|
5,712,822
|
|
$
|
-
|
|
Dividend paid by offsetting accounts
receivable-related party
|
$
|
943,907
|
|
$
|
-
|
|
Dividend paid in exchange of holder of noncontrolling
interest loan
|
$
|
3,737,283
|
|
$
|
-
|
|
Dividend
paid by offsetting loan due from holder of noncontrolling interest
|
$
|
4,470,995
|
|
$
|
-
|
|
Net assets acquired with prepayments made in prior periods
|
$
|
14,248,548
|
|
$
|
-
|
|
Net assets acquired with unpaid investment
|
$
|
2,849,710
|
|
$
|
-
|
|
Land use right acquired with prepayments made in prior
periods
|
$
|
131,931
|
|
$
|
-
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Note 1 Organization background and principal activities
Principal Activities and Reorganization
China Biologic Products, Inc. (the Company or CBP) was
originally incorporated in 1992 under the laws of the state of Texas. After it
completed the acquisition with Logic Express Limited, it converted to a Delaware
corporation. The Company through its direct and indirect subsidiaries is
principally engaged in the research, development, commercialization, manufacture
and sale of human blood products to customers in the People's Republic of China
(the PRC) and to some extent in India.
Current Development
Dalin Acquisition and Entrustment Agreement
Logic Express Ltd. (Logic Express), CBP's wholly owned
subsidiary, through Logic Holdings (Hong Kong) Ltd. (Logic Holdings) completed the
acquisition of 90% interest in Guiyang Dalin Biologic Technologies Co. Ltd.
(Dalin), previously known as Chongqing Dalin Biologic Technologies Co. Ltd.,
in April 2009 upon payment of 90% of the total purchase price of approximately
RMB 194,400,000 ($28,479,600). The Company is obligated to pay the remaining 10%
of the purchase price, RMB 19,440,000 (approximately $2,847,960), on or before
April 9, 2010, the one-year anniversary of the local Administration for Industry
and Commerce's approval of the equity transfer. Guiyang Qianfeng Biological
Products Co., Ltd. (Qianfeng), Dalin's 54% owned subsidiary, is one of the
largest plasma-based biopharmaceutical companies in China and is the only
manufacturer currently operating in Guizhou Province. Qianfeng is in compliance
with Good Manufacturing Practices, or GMP, standards, and has been approved by
the PRC's State Food and Drug Administration or the SFDA to produce six types of
plasma-based products including Human Albumin, Human Immunoglobulin, Human
Intravenous Immunoglobulin, Human Hepatitis B Immunoglobulin, Human Tetanus
Immunoglobulin and Human Rabies Immune Globulin.
In accordance with the terms of the equity transfer agreement,
Logic Holdings effectively became a 90% shareholder in Dalin, including the
right to receive its pro rata share of the profits on January 1, 2009.
On April 6, 2009, Logic Express entered into an equity transfer
and entrustment agreement, or Entrustment Agreement, among Logic Express,
Shandong Taibang Biological Products Co. Ltd (Shandong Taibang), and the
Shandong Institute of Biological Products (the Shandong Institute), the holder
of the minority interests in Shandong Taibang, pursuant to which, Logic Express
agreed to permit Shandong Taibang and the Shandong Institute to participate in
the indirect purchase of Qianfeng's equity interests. Under the terms of the
Entrustment Agreement, Shandong Taibang agreed to contribute 18% or RMB
35,000,000 (approximately $5,116,184) of the Dalin purchase price and the
Shandong Institute agreed to contribute 12.86% or RMB 25,000,000 (approximately
$3,654,917) of the Dalin purchase price. Logic Express is obligated to repay to
Shandong Taibang and the Shandong Institute their respective investment amounts
on or before April 6th, 2010, along with their pro rata share, based on their
percentage of the Dalin purchase price contributed, of any distribution on the
indirect equity investment in Qianfeng payable to Logic Express during 2009.
Logic Express has agreed that if these investment amounts are not repaid within
five days of the payment due date, then Logic Express is obligated to pay
Shandong Taibang and the Shandong Institute liquidated damages equal to 0.03% of
the overdue portion of the amount due until such time as it is paid. Logic
Express has also agreed to pledge 30% of its ownership in Shandong Taibang to
the Shandong Institute as security for nonpayment. If failure to repay continues
for longer than three months after the payment due date, then the Shandong
Institute will be entitled to any rights associated with the pledged interests,
including but not limited to rights of disposition and profit distribution,
until such time as the investment amount has been repaid. Logic Express also
provided a guarantee that Shandong Taibang and the Shandong Institute will
receive no less than a 6% return based on their original investment amount.
F-5
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Huitian Acquisition
Shandong Taibang purchased a 35% interest in Xi'an Huitian
Blood Products Co. Ltd (Huitian) at a purchase price of RMB 44,000,000
(approximately $6,446,000) on October 10, 2008 and paid the final installment on
July 16, 2009. Huitian is a manufacturer of plasma-based biopharmaceutical
products in Shaanxi Province and is one of only 32 such manufacturers in China
who are government approved. Huitian is in compliance with GMP standards and it
is also approved by the SFDA for the production of Human Albumin, Human
Immunoglobulin, Human Immunoglobulin for Intravenous Injection, and Human
Hepatitis B Immunoglobulin products.
Formation of Logic Holding
On December 12, 2008, the Company established Logic Holding,
the Company's wholly-owned Hong Kong subsidiary of Logic Express, for the
purpose of being a holding company for the majority interest in Dalin.
Note 2 Summary of significant accounting policies
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America. The Company's functional currency is the Chinese Renminbi (RMB); however, the Company's reporting currency is the United States
Dollar (USD); therefore, the accompanying consolidated financial statements
have been translated and presented in USD. All material inter-company
transactions and balances have been eliminated in the consolidation.
While management has included all normal recurring adjustments
considered necessary to give a fair presentation of the operating results for
the periods presented, interim results are not necessarily indicative of results
for a full year. The information included in this Form 10-Q should be read in
conjunction with information included in the 2008 annual report filed on Form
10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. For example, management estimates the fair
value of stock based compensation as well as potential losses on outstanding
receivables. Management believes that the estimates utilized in preparing its
financial statements are reasonable and prudent. Actual results could differ
from these estimates.
Foreign Currency Translation
The reporting currency of the Company is the US dollar. The
Company's functional currency is the Chinese Renminbi (RMB), also the local
currency of the Company's principal operating subsidiaries. Results of
operations and cash flows are translated at average exchange rates during the
period. Assets and liabilities are translated at the unified exchange rate as
quoted by the People's Bank of China at the end of the period. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the statements of changes in equity. Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
In accordance with Financial Accounting Standards Board's
(FASB) accounting standard, cash flows from the Company's operations is
calculated based upon the local currencies. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
The consolidated balance sheet amounts, with the exception of
equity at September 30, 2009 and December 31, 2008 were translated at RMB 6.82
to $1.00 and RMB 6.82 to $1.00, respectively. The equity accounts were stated at their historical rate. The average translation rates applied
to consolidated statements of income and cash flow for the nine months ended
September 30, 2009 and 2008 were RMB 6.82 and RMB 6.97 to $1.00, respectively.
F-6
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Revenue Recognition
The Company recognizes revenue when products are delivered and
the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists
and the sales price is fixed or determinable, which are generally considered to
be met upon delivery and acceptance of products at the customer site. Sales are
presented net of any discounts given to customers. As a policy, the Company does
not accept any product returns and based on the Company's records, product
returns, if any, are immaterial. Sales revenue represents the invoiced value of
goods, net of a value-added tax (VAT). All products produced by the Company
and sold in the PRC are subject to a Chinese VAT at a rate of 6% of the gross
sales price or at a rate approved by the Chinese local government. Products
distributed by Shandong Medical and plasma raw material inter-company sales from
Puding Plasma Company to Qianfeng are subjected to a 17% VAT.
Shipping and Handling
Shipping and handling costs related to costs of goods sold are
included in selling expenses and totaled $82,786 and $12,468 for the three
months ended September 30, 2009 and 2008, respectively. For the nine months
ended September 30, 2009 and 2008, shipping and handling costs totaled $206,577
and $34,004, respectively.
Financial Instruments
On January 1, 2008, the Company adopted FASB's accounting
standard related to fair value measurements and began recording financial assets
and liabilities subject to recurring fair value measurement at the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. These fair value principles prioritize
valuation inputs across three broad levels. Receivables, payables, short and
long term loans, and derivative liabilities qualify as financial instruments.
Management concluded the carrying values of the receivables, payables and short
term loans approximate their fair values because of the short period of time
between the origination of such instruments and their expected realization, and
if applicable, their stated rates of interest are equivalent to interest rates
currently available. The fair values of the long term debt and derivative
liabilities are measured pursuant to the three levels defined by the FASB's
accounting standard as follow:
-
Level 1: inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
-
Level 2: inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for
substantially the full term of the financial instruments.
-
Level 3: inputs to the valuation methodology are unobservable and
significant to the fair value.
As required by FASB's accounting standard, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement. Depending on the product and
the terms of the transaction, the fair value of the derivative liabilities were
modeled using a series of techniques, including closed-form analytic formula,
such as the Black-Scholes Option Pricing Model, which does not entail material
subjectivity because the methodology employed does not necessitate significant
judgment, and the pricing inputs are observed from actively quoted markets.
Derivative liabilities related to warrants issued by the Company and the
liability related to derivative instruments (including the conversion option)
embedded in the Company's Senior Secured Convertible Notes are carried at fair
value, with changes in the fair value charged or credited to income. The fair
values are determined using the Black-Scholes Model or a binomial model, defined
in FASB's accounting standard related to fair value measurements as level 2
inputs.
|
|
Carrying Value as of
|
|
|
Fair Value Measurements at
September 30, 2009
|
|
|
|
September 30, 2009
|
|
|
using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities-Conversion option
|
$
|
12,784,873
|
|
$
|
-
|
|
$
|
12,784,873
|
|
$
|
-
|
|
Warrants liabilities
|
$
|
7,943,174
|
|
$
|
-
|
|
$
|
7,943,174
|
|
$
|
-
|
|
F-7
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The Company did not identify any other assets or liabilities
that are required to be presented on the balance sheet at fair value in
accordance with FASB's accounting standard.
Concentration Risks
The Company's operations are carried out in the PRC and are
subject to specific considerations and significant risks not typically
associated with companies in North America and Western Europe. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC economy. The Company's results may be adversely
affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
The Company maintains balances at financial institutions which,
from time to time, may exceed Federal Deposit Insurance Corporation insured
limits for the banks located in the United States or may exceed Hong Kong
Deposit Protection Board insured limits for the banks located in Hong Kong.
Balances at financial institutions or state-owned banks within the PRC are not
covered by insurance. Total cash in banks as of September 30, 2009 and December
31, 2008 amounted to $49,853,355 and $8,689,414, respectively, $4,866,254 and
$47,865 of which are covered by insurance, respectively. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in bank accounts.
The Company's major product, human albumin: - 20%/10ml,
20%/25ml and 20%/50ml, and 10%/10ml, 10%/25ml and 10%/50ml, accounted for 42.7%
and 58.3% of total revenues, for the three months ended September 30, 2009 and
2008, respectively. 48.7% and 58.0% of total revenues, for the nine months ended
September 30, 2009 and 2008, respectively. If the market demands for human
albumin cannot be sustained in the future or if the price of human albumin
decreases, it would adversely affect the Company's operating results.
All of the Company's customers are located in the PRC and
India. As of September 30, 2009 and 2008, the Company had no significant
concentration of credit risk, except for the amounts due from related parties.
There were no customers that individually comprised 10% or more of the revenue
during the three and nine months ended September 30, 2009 and 2008. No
individual customer represented more than 10% of trade receivables at September
30, 2009 and December 31, 2008. The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no collateral
from its customers.
There were no vendors that individually comprised 10% or more
of the purchase during the three and nine months ended September 30, 2009. No
individual vendors represented more than 10% of accounts payables at September
30, 2009 and December 31, 2008. The Company's top three vendors comprised 32.7%
and 41.5% of the Company's purchases for the three and nine months ended
September 30, 2008, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand
deposits in accounts maintained with state-owned banks within the PRC, Hong Kong
and the United States. The Company considers all highly liquid investments with
original maturities of three months or less at the time of purchase to be cash
equivalents.
Accounts Receivable
During the normal course of business, the Company extends
unsecured credit to its customers. Management reviews its accounts receivable on
a regular basis to determine if the allowance for doubtful accounts is adequate.
An estimate for doubtful accounts is made when collection of the full amount is
no longer probable. Account balances are written-off after management has
exhausted all efforts of collection.
F-8
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Inventories
Inventories are stated at the lower of cost or market using the
weighted average method. The cost of finished goods included direct costs of raw
materials as well as direct labor used in production. Indirect production costs
such as utilities and indirect labor related to production such as assembling,
shipping and handling for raw material costs are also included in the cost of
inventories.
The Company reviews its inventory periodically for possible
obsolete goods and cost in excess of net realizable value to determine if any
reserves are necessary. As of September 30, 2009 and December 31, 2008, the
Company has determined that no reserve is necessary.
Plant and Equipment
Plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets with 5% residual value.
Estimated useful lives of the assets are as follows:
|
Estimated Useful Life
|
Buildings and improvement
|
30
|
years
|
Machinery and equipment
|
10
|
years
|
Furniture, fixtures and office equipment
|
5-10
|
years
|
Construction in progress represents the costs incurred in
connection with the construction of buildings, new additions, and capitalized
interest incurred in connection with the Company's plant facilities. In
accordance with the provisions of FASB's accounting standard related to
capitalization of interest, interest incurred on borrowings is capitalized to
the extent that borrowings do not exceed construction in progress. The credit is
a reduction of interest expense. No depreciation is provided for construction in
progress until such time as the assets are completed and placed into service.
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Major additions and betterment to property and equipment are
capitalized.
The Company periodically evaluates the carrying value of
long-lived assets in accordance with FASB's accounting standard related to
accounting for impairment and disposal of long-lived assets. When estimated cash
flows generated by those assets are less than the carrying amounts of the asset,
the Company recognizes an impairment loss. Based on its review, the Company
believes that, as of September 30, 2009 and December 31, 2008, there were no
impairments of its long-lived assets.
Investment in Unconsolidated Affiliate
Equity method investments are recorded at original cost and
adjusted to recognize the Company's proportionate share of the investee's net
income or losses and additional contributions made and distributions received.
The Company recognizes a loss if it is determined that other than temporary
decline in the value of the investment exists. Subsidiaries in which the Company
has the ability to exercise significant influence, but does not have a
controlling interest is accounted for using the equity method. Significant
influence is generally considered to exist when the Company has an ownership
interest in the voting stock between 20% and 50%, and other factors, such as
representation on the Board of Directors, voting rights and the impact of
commercial arrangements, are considered in determining whether the equity method
of accounting is appropriate. The Company accounts for investments with
ownership less than 20% using cost method.
Intangible Assets
Intangible assets are stated at cost (estimated fair value upon
contribution or acquisition), less accumulated amortization. Amortization
expense is recognized on the straight-line basis over the estimated useful lives
of the assets as follows:
Intangible assets
|
|
Estimated useful lives
|
Land use rights
|
|
50
|
years
|
Permits and licenses
|
|
5-10
|
years
|
Blood donor network
|
|
10
|
years
|
Software
|
|
3.8
|
years
|
Good Manufacturing Practice certificate
|
|
5-10
|
years
|
Long-term customer-relationship intangible assets
|
|
4
|
years
|
F-9
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
All land in the PRC is owned by the government; however, the
government grants land use rights. The Company has obtained rights to use
various parcels of land for 50 years. The Company amortizes the cost of the land
use rights over their useful life using the straight-line method.
Other intangible assets represent permits, licenses, blood
donor network, software, Good Manufacturing Practice (GMP) certificate and
long-term customer-relationship intangible assets. The Company amortized the
cost of these intangible assets over their useful life using the straight-line
method.
Intangible assets of the Company are reviewed at least annually
or more often if circumstances dictate, to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the years of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of September 30, 2009, the Company expects these assets to be fully
recoverable.
Revenues
The Company's revenues are primarily derived from the
manufacture and sale of human blood products. The Company's revenues by
significant types of product for the three months and nine months ended
September 30, 2009 and 2008 are as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Human Albumin 20%/10% in
10ml,
25ml and 50ml
|
$
|
11,556,199
|
|
$
|
8,049,853
|
|
$
|
39,649,829
|
|
$
|
19,463,172
|
|
Human Hepatitis B Immunoglobulin
|
|
1,317,786
|
|
|
1,321,667
|
|
|
2,611,945
|
|
|
2,909,204
|
|
Human Immunoglobulin for Intravenous
|
|
10,251,433
|
|
|
2,705,502
|
|
|
29,787,712
|
|
|
6,427,129
|
|
Human Rabies Immunoglobulin
|
|
1,348,213
|
|
|
883,242
|
|
|
3,903,464
|
|
|
2,526,634
|
|
Human Tetanus Immunoglobulin
|
|
812,201
|
|
|
472,769
|
|
|
2,184,811
|
|
|
1,337,690
|
|
Human Immunoglobulin
|
|
1,426,667
|
|
|
-
|
|
|
1,962,607
|
|
|
-
|
|
Others
|
|
327,240
|
|
|
366,882
|
|
|
1,269,514
|
|
|
910,935
|
|
Totals
|
$
|
27,039,739
|
|
$
|
13,799,915
|
|
$
|
81,369,882
|
|
$
|
33,574,764
|
|
The Company is engaged in sale of human blood products to
customers in China and India. The amount sold in India was less than 10% of
total sales for the three and nine months ended September 30, 2009.
Research and Development Costs
Research and development costs are expensed as incurred.
Retirement and Other Post Retirement Benefits
Contributions to retirement schemes (which are defined
contribution plans) are charged to the statement of operations as and when the
related employee service is provided.
Product Liability
The Company's products are covered by product liability
insurance of approximately $2,934,000 (RMB 20,000,000). As of September 30, 2009
and December 31, 2008, no claim on the insurance policy was filed. However,
there are two pre-existing potential claims against Qianfeng's products,
which are still in the court proceedings as explained in the legal proceeding
section below.
F-10
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Government Grants
The Company's subsidiary, Shandong Taibang, is entitled to
receive grants from the Tai'an municipal government due to its operation in the
high and new technology business sector. For the three and nine months ended
September 30, 2009 and 2008, no non-refundable grants were received from the
Tai'an municipal government. Grants received from the Tai'an municipal
government can be used for enterprise development and technology innovation
purposes.
Income Taxes
The Company reports income taxes pursuant to FASB's accounting
standard for income taxes. Under the asset and liability method of accounting
for income taxes as required by this accounting standard, deferred income tax
liabilities and assets are determined based on the temporary differences between
the financial statement and tax basis of assets and liabilities using tax rates
expected to be in effect during the years in which the basis differences
reverse. A valuation allowance is recorded when it is more likely than not that
some of the deferred tax assets will not be realized. FASB's accounting standard
for accounting for uncertainty in income taxes requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. As of
January 1, 2007, income tax positions must meet a more-likely-than-not
recognition threshold to be recognized. A tax position is recognized as a
benefit only if it is more likely than not that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
more likely than not test, no tax benefit is recorded. Provision for income
taxes consist of taxes currently due plus deferred taxes. Since the Company had
no operations within the United States there is no provision for US taxes and
there are no deferred tax amounts at September 30, 2009 and 2008.
Deferred tax is accounted for using the balance sheet liability
method in respect of temporary differences arising from differences between the
carrying amount of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of assessable tax profit. In
principle, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probably that taxable profit will be available against which deductible
temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to
apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it is
related to items credited or charged directly to equity, in which case the
deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they
related to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net basis.
Value Added Tax
Enterprises or individuals, who sell products, engage in repair
and maintenance or import and export goods in the PRC are subject to a VAT in
accordance with Chinese laws. The VAT rate applicable to the Company is 6% of
the gross sales price. Products distributed by Shandong Medical and plasma raw
material inter-company sales from Puding Plasma Company to Qianfeng are
subjected to a 17% VAT. No credit is available for VAT paid on purchases.
Stock-based Compensation
The Company accounts and reports stock-based compensation
pursuant to FASB's accounting standard related to accounting for stock-based
compensation which defines a fair-value-based method of accounting for stock
based employee compensation and transactions in which an entity issues its
equity instruments to acquire goods and services from non-employees. Stock
compensation for stock granted to non-employees has been determined in accordance with this standard as the fair value of the
consideration received or the fair value of equity instruments issued, whichever
is more reliably measured.
F-11
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Noncontrolling Interest
Effective January 1, 2009, the Company adopted FASB's
accounting standard regarding non-controlling interest in consolidated financial
statements. Certain provisions of this statement are required to be adopted
retrospectively for all periods presented. Such provisions include a requirement
that the carrying value of noncontrolling interests (previously referred to as
minority interests) be removed from the mezzanine section of the balance sheet
and reclassified as equity.
Further, as a result of adoption this accounting standard, net
income attributable to noncontrolling interests is now excluded from the
determination of consolidated net income.
Recently Issued Accounting Pronouncements
In January 2009, the Financial Accounting Standards Board
issued an accounting standard which amended the impairment model by removing its
exclusive reliance on market participant estimates of future cash flows used
in determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the market participant view to a holder's
estimate of whether there has been a probable adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of this accounting
standard did not have a material impact on the Company's consolidated financial
statements because all of the investments in debt securities are classified as
trading securities.
In April 2009, the Financial Accounting Standards Board issued
an accounting standard that makes the other-than-temporary impairments guidance
more operational and improves the presentation of other-than-temporary
impairments in the financial statements. This standard replaced the existing
requirement that the entity's management assert it has both the intent and
ability to hold an impaired debt security until recovery with a requirement that
management assert it does not have the intent to sell the security, and it is
more likely than not it will not have to sell the security before recovery of
its cost basis. This standard provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be
sold and also requires increased and more frequent disclosures regarding
expected cash flows, credit losses, and an aging of securities with unrealized
losses. Although this standard does not result in a change in the carrying
amount of debt securities, it does require that the portion of an
other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. The Company adopted this
accounting standard, but it did not have a material impact on its consolidated
financial statements.
In April 2009, the Financial Accounting Standards Board issued
an accounting standard that requires disclosures about fair value of financial
instruments not measured on the balance sheet at fair value in interim financial
statements as well as in annual financial statements. Prior to this accounting
standard, fair values for these assets and liabilities were only disclosed
annually. This standard applies to all financial instruments within its scope
and requires all entities to disclose the method(s) and significant assumptions
used to estimate the fair value of financial instruments. This standard does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption, but in periods after the initial adoption, this standard
requires comparative disclosures only for periods ending after initial adoption.
The Company adopted this accounting standard, but it did not have a material
impact on the disclosures related to its consolidated financial statements.
In June 2009, the Financial Accounting Standards Board issued
an accounting standard amending the accounting and disclosure requirements for
transfers of financial assets. This accounting standard requires greater
transparency and additional disclosures for transfers of financial assets and
the entity's continuing involvement with them and changes the requirements for
derecognizing financial assets. In addition, it eliminates the concept of a
qualifying special-purpose entity (QSPE). This accounting standard is
effective for financial statements issued for fiscal years beginning after
November 15, 2009, and the Company does not expect this standard to have a
material effect on its consolidated financial statements.
F-12
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
In June 2009, the Financial Accounting Standards Board also
issued an accounting standard amending the accounting and disclosure
requirements for the consolidation of variable interest entities (VIEs). The
elimination of the concept of a QSPE, as discussed above, removes the exception
from applying the consolidation guidance within this accounting standard.
Further, this accounting standard requires a company to perform a qualitative
analysis when determining whether or not it must consolidate a VIE. It also
requires a company to continuously reassess whether it must consolidate a VIE.
Additionally, it requires enhanced disclosures about a company's involvement
with VIEs and any significant change in risk exposure due to that involvement,
as well as how its involvement with VIEs impacts the company's financial
statements. Finally, a company will be required to disclose significant
judgments and assumptions used to determine whether or not to consolidate a VIE.
This accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009, and the Company does not expect this
standard to have a material effect on its consolidated financial statements.
In June 2009, the Financial Accounting Standards Board issued
an accounting standard which establishes the FASB Accounting Standards
Codification (the Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with U.S. GAAP. The
Codification does not change current U.S. GAAP, but is intended to simplify user
access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009, and as
of the effective date, all existing accounting standard documents will be
superseded. The Codification is effective for the Company in the third quarter
of 2009, and accordingly, the Company's Quarterly Report on Form 10-Q for the
quarter ending September 30, 2009 and all current and subsequent public filings
will reference the Codification as the sole source of authoritative literature.
In August 2009, the Financial Accounting Standards Board issued
an Accounting Standards Update (ASU) regarding measuring liabilities at fair
value. This ASU provides additional guidance clarifying the measurement of
liabilities at fair value in circumstances in which a quoted price in an active
market for the identical liability is not available; under those circumstances,
a reporting entity is required to measure fair value using one or more of
valuation techniques, as defined. This ASU is effective for the first reporting
period, including interim periods, beginning after the issuance of this ASU. The
Company is currently evaluating the impact of this ASU on its consolidated
financial statements.
In October 2009, the Financial Accounting Standards Board
issued an ASU regarding accounting for own-share lending arrangements in
contemplation of convertible debt issuance or other financing. This ASU requires
that at the date of issuance of the shares in a share-lending arrangement
entered into in contemplation of a convertible debt offering or other financing,
the shares issued shall be measured at fair value and be recognized as an
issuance cost, with an offset to additional paid-in capital. Further, loaned
shares are excluded from basic and diluted earnings per share unless default of
the share-lending arrangement occurs, at which time the loaned shares would be
included in the basic and diluted earnings-per-share calculation. This ASU is
effective for fiscal years beginning on or after December 15, 2009, and interim
periods within those fiscal years for arrangements outstanding as of the
beginning of those fiscal years. The Company is currently evaluating the impact
of this ASU on its consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform
to the current period presentation. These reclassifications have no effect on
net income or cash flows.
Note 3 Related party transactions
The material related party transactions undertaken by the
Company with related parties as of September 30, 2009 and December 31, 2008 are
presented as follows:
F-13
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
Assets
|
|
Purpose
|
|
|
(unaudited)
|
|
|
|
|
Accounts receivable related
party
(1)
|
|
Processing fees
|
|
$
|
41,430
|
|
$
|
-
|
|
Liabilities
|
|
Purpose
|
|
|
September 30, 2009
(unaudited)
|
|
|
December 31, 2008
|
|
Short term loans holder of
noncontrolling interest
(2)
|
|
Loan
|
|
$
|
758,277
|
|
$
|
773,277
|
|
Short term loans holder of noncontrolling
interest
(3)
|
|
Loan
|
|
|
3,667,500
|
|
|
773,277
|
|
Total
|
|
|
|
$
|
4,425,777
|
|
$
|
773,277
|
|
Accrued interest holder of noncontrolling
interest
(3)
|
|
Interest payable
|
|
$
|
1,319,556
|
|
$
|
-
|
|
Other payable related
parties
(4)
|
|
Loan
|
|
$
|
2,122,772
|
|
$
|
-
|
|
Other payable related parties
(5)
|
|
Contribution
|
|
|
964,168
|
|
|
-
|
|
Total
|
|
|
|
$
|
3,086,940
|
|
$
|
-
|
|
(1)
Qianfeng provides processing services for
Guizhou Eakan, one of the Qianfeng's non-controlling shareholders. The total
processing services income amounted to $168,480 and $508,529 for the three and
nine months period ended September 30, 2009, respectively. As of September 30, 2009, Guizhou
Eakan owes Qianfeng processing fees in an amount of $41,430. This balance has
been paid in cash at the end of October 2009.
(2)
As of September 30, 2009 and December 31, 2008,
the Company borrowed an aggregate of $758,277 and $773,277, respectively, from
its noncontrolling interest shareholder, Shandong Institute, for working capital
purposes. The Company is required to repay the loan in cash due by December
2010, with an annual interest rate of 6%.
(3)
On April 6, 2009, Logic Express entered into an
equity transfer and entrustment agreement, or Entrustment Agreement, among Logic
Express, Shandong Taibang, and the Shandong Institute of Biological Products, or
the Shandong Institute, the holder of the noncontrolling interests in Shandong
Taibang, pursuant to which, Logic Express agreed to permit Shandong Taibang and
the Shandong Institute to participate in the indirect purchase of Qianfeng's
equity interests. Under the terms of the Entrustment Agreement, Shandong
Institute agreed to contribute 12.86% or $3,667,500 (RMB 25,000,000) of the
Dalin purchase price. Logic express is obligated to repay to the Shandong
Institute their investment amount on or before April 6th, 2010, along with their
pro rata share, based on their percentage of the Dalin purchase price
contributed, of any distribution on the indirect equity investment in Qianfeng
payable to Logic Express during 2009. The accrued interest holder of
noncontrolling interest amounted to $1,319,556 represents the pro rata share of
equity investment income pursuant of Entrustment Agreement for the nine month
period ended September 30, 2009.
(4)
Qianfeng has payables to Guizhou Eakan Investing
Corp. in the amount of approximately $2,122,772 (RMB14, 470,160). Guizhou Eakan
Investing Corp. is one of the shareholders of Guizhou Eakan, one of the
Qianfeng's minority shareholders. The Company borrowed the amount for working
capital purposes. The balance is due on demand in the form of cash.
(5)
Qianfeng has payables to Guizhou Jie'an, a
holder of noncontrolling interest, in amount of approximately $964,168 (RMB
6,569,840). In 2007, Qianfeng received additional contributions from Guizhou
Jie'an in the amount of $962,853 to maintain Jie'an ownership interest in the
Company at 9%. However, due to legal dispute among Shareholders over Raising
Additional Capital as stated in legal proceeding section, commitment and
contingent liabilities, the money may be returned to Jie'an.
Note 4 Accounts receivable
Trade accounts receivable consist of the following:
F-14
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Trade accounts receivable
|
$
|
2,867,509
|
|
$
|
1,581,139
|
|
Less: Allowance for doubtful accounts
|
|
(1,393,567
|
)
|
|
(1,268,052
|
)
|
Total
|
$
|
1,473,942
|
|
$
|
313,087
|
|
The activity in the allowance for doubtful accounts for trade
accounts receivable for the nine months ended September 30, 2009 and the year
ended December 31, 2008 is as follows:
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning allowance for doubtful accounts
|
$
|
1,268,052
|
|
$
|
1,238,772
|
|
Additional charged to bad debt expense
|
|
90,442
|
|
|
-
|
|
Recovery of amount
previously reserved
|
|
(9,621
|
)
|
|
(56,462
|
)
|
Write-off charged against the allowance
|
|
-
|
|
|
-
|
|
Foreign currency
translation adjustment
|
|
44,694
|
|
|
85,742
|
|
Ending allowance for doubtful accounts
|
$
|
1,393,567
|
|
$
|
1,268,052
|
|
Note 5 Inventories
Inventories consisted of the following:
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
$
|
17,329,704
|
|
$
|
7,043,349
|
|
Work-in-process
|
|
7,046,910
|
|
|
4,801,768
|
|
Finished goods
|
|
8,842,004
|
|
|
3,104,079
|
|
Total
|
$
|
33,218,618
|
|
$
|
14,949,196
|
|
Note 6 Prepayments and deferred expense
Prepayments and deferred expense represent partial payments for
deposits on material purchases, prepaid leases and prepayment for insurance
expenses and amounted to $1,582,566 and $614,704 as of September 30, 2009 and
December 31, 2008, respectively.
Long term prepayments represent partial payments or deposits on
plant and equipment and intangible assets purchases and amounted to $4,870,735
and $955,874 as of September 30, 2009 and December 31, 2008, respectively.
Note 7 Plant and equipment, net
Plant and equipment consist of the following:
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Buildings and improvements
|
$
|
12,728,183
|
|
$
|
5,809,724
|
|
Machinery and equipment
|
|
23,464,542
|
|
|
12,308,174
|
|
Furniture, fixtures, office equipment and
vehicle
|
|
3,527,426
|
|
|
1,501,946
|
|
Total depreciable assets
|
|
39,720,151
|
|
|
19,619,844
|
|
Accumulated depreciation
|
|
(13,402,281
|
)
|
|
(3,099,259
|
)
|
Plant and equipment, net
|
|
26,317,870
|
|
|
16,520,585
|
|
Construction in
progress
|
|
1,531,962
|
|
|
2,778,779
|
|
Total
|
$
|
27,849,832
|
|
$
|
19,299,364
|
|
F-15
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Depreciation expense for the three months ended September 30,
2009 and 2008 amounted to $568,581 and $334,821, respectively. Depreciation
expense for the nine months ended September 30, 2009 and 2008 amounted to
$2,158,206 and $914,575, respectively. No interest was capitalized into
construction in progress in either of the three and nine months ended September
30, 2009 and 2008.
Note 8 Investment in unconsolidated affiliate
On October 10, 2008, Shandong Taibang entered into an Equity
Transfer Agreement (the "Huitian Agreement") with Mr. Fan Qingchun (the
"Transferor"), a PRC citizen holding 35% of the equity interest in Huitian, a
PRC limited liability company. Pursuant to the Huitian Agreement, the Transferor
agrees to sell to Shandong Taibang, and Shandong Taibang agrees to purchase from
the Transferor, 35% equity interest in Huitian for an aggregate purchase price
of $6,502,901 (or RMB 44,327,890) including interest of $48,101 (RMB 327,890).
Huitian is one of the 32 government approved plasma-based product producers in
China, and it is in compliance with Good Manufacturing Practices (GMP)
standards. It is also approved by the PRC's State Food and Drug Administration
(SFDA) to produce four types of plasma-based products.
Logic Express also entered into an investment entrustment
agreement (the "Investment Agreement") with the minority shareholder in Shandong
Taibang, Shandong Institute, pursuant to which Logic Express agrees to provide
the investment amount for the acquisition and the Shandong Institute agree to
entrust Shandong Taibang to acquire the 35% equity interest of Huitian in its
name. In exchange Logic Express is also obligated to pay Shandong Taibang
approximately $17,604 (or RMB120,000) per year as consideration for Shandong
Taibang's performance under this agreement. Under the Investment Agreement,
after the acquisition, Logic Express will be in charge of Huitian's daily
operation and management, will bear the costs, expenses, liabilities and losses
incurred in its operation, and will enjoy its profits. Shandong Taibang will
perform relevant tasks according to Logic Express's instruction, and will not
exercise any management right over Huitian or derive any financial return from
Huitian. Logic Express agreed to indemnify Shandong Taibang for any loss in
connection with the investment and pledged its equity interest in Shandong
Taibang as collateral against such losses.
Summarized unaudited financial information of Huitian is as
follows:
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
Current assets
|
$
|
9,813,186
|
|
$
|
8,039,180
|
|
Non-current assets
|
|
8,906,123
|
|
|
10,145,248
|
|
Total assets
|
|
18,719,309
|
|
|
18,184,428
|
|
Current liabilities
|
|
3,380,402
|
|
|
2,747,573
|
|
Non-current liabilities
|
|
-
|
|
|
-
|
|
Shareholders' equity
|
|
15,338,907
|
|
|
15,436,855
|
|
Total liabilities and shareholders' equity
|
$
|
18,719,309
|
|
$
|
18,184,428
|
|
The portion of the difference between the cost of an investment
and the amount of underlying equity in net assets of Huitian that is recognized
as goodwill shall not be amortized, but instead should continue to be reviewed
for impairment in accordance with FASB's accounting standard.
Summarized unaudited financial information of Huitian is as
follows:
|
|
Nine months ended
|
|
|
|
September 30, 2009
|
|
Net sales
|
$
|
4,321,473
|
|
Gross profit
|
|
1,782,297
|
|
Income before taxes
|
|
74,174
|
|
Net loss
|
|
(54,550
|
)
|
Company's share of net loss
|
$
|
(19,092
|
)
|
F-16
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The rollforward of investment in Huitian in the balance sheet
is shown below:
|
|
Huitian - 35%
|
|
|
|
Ownership
|
|
December 31, 2007
|
$
|
-
|
|
Investment made
|
|
6,502,902
|
|
Net income from 2008
|
|
175,231
|
|
Dividend declared
|
|
(147,256
|
)
|
Foreign currency translation gain
|
|
3,100
|
|
December 31, 2008
|
|
6,533,977
|
|
Net loss from the nine months ended
September 30, 2009
|
|
(19,092
|
)
|
Dividend declared
|
|
(236,815
|
)
|
Foreign currency translation loss
|
|
(176
|
)
|
September 30, 2009 (unaudited)
|
$
|
6,277,894
|
|
Note 9 Intangible assets, net
Intangible assets consisted of the following:
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Land use rights
|
$
|
3,346,354
|
|
$
|
848,982
|
|
Permits and licenses
|
|
11,367,820
|
|
|
389,709
|
|
Blood donor network
|
|
2,347
|
|
|
22,885
|
|
Software
|
|
124,156
|
|
|
40,758
|
|
GMP certificate
|
|
2,327,885
|
|
|
-
|
|
Long-term customer-relationship
|
|
6,941,170
|
|
|
-
|
|
Totals
|
|
24,109,732
|
|
|
1,302,334
|
|
Accumulated amortization
|
|
(2,957,315
|
)
|
|
(299,773
|
)
|
Intangible assets, net
|
$
|
21,152,417
|
|
$
|
1,002,561
|
|
Total amortization expense for the three months ended September
30, 2009 and 2008 amounted to $950,021 and $27,561 respectively. Amortization
expense for the nine months ended September 30, 2009 and 2008 amounted to
$2,654,269 and $80,753, respectively.
The amortization expense related to purchased and other
intangible assets due to the consolidation of Dalin is $793,278 for the three
months ended September 30, 2009. The amortization expense related to purchased
and other intangible assets due to the consolidation of Dalin is $2,379,185 for
the nine months ended September 30, 2009.
Amortization expense for intangible assets for the next five
fiscal years is as follows:
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
Amortization expense
|
$
|
838,577
|
|
$
|
3,352,322
|
|
$
|
3,352,070
|
|
$
|
3,345,523
|
|
$
|
1,582,855
|
|
$
|
8,708,291
|
|
Note 10 Debt
Short term loans and current maturities of long term
loan
Short term loans represent renewable loans due to various banks
which are normally due within one year.
F-17
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The Company's bank loans consisted of the following:
|
|
|
|
|
Annual
|
|
|
September 30,
|
|
|
December 31,
|
|
Loans
|
|
Due
by
|
|
|
interest rates
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Short term loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term bank loan, un-secured
|
|
June 1, 2010
|
|
|
5.40%
|
|
$
|
4,401,000
|
|
$
|
-
|
|
Short term bank loan, un-secured
|
|
January 7, 2010
|
|
|
5.31%
|
|
|
5,868,000
|
|
|
-
|
|
Short term loan, un-secured
|
|
On demand
|
|
|
0.00%
|
|
|
73,350
|
|
|
-
|
|
Short term loan, secured by raw
material
(1)
|
|
February 16, 2010
|
|
|
5.84%
|
|
|
440,100
|
|
|
-
|
|
Subtotal
|
|
|
|
|
|
|
|
10,782,450
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term bank loan current maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term loan,
secured by building, machinery and equipment
(2)
|
|
December 25, 2009
|
|
|
7.76%
|
|
|
440,100
|
|
|
-
|
|
Long term loan, secured by
building, machinery and equipment
(2)
|
|
April 25, 2010
|
|
|
7.76%
|
|
|
1,467,000
|
|
|
-
|
|
Long term loan, secured by
building, machinery and equipment
(2)
|
|
June 25, 2010
|
|
|
7.76%
|
|
|
1,467,000
|
|
|
-
|
|
Subtotal
|
|
|
|
|
|
|
|
3,374,100
|
|
|
-
|
|
Long term bank loan,
secured by buildings and land use rights
|
|
August 3, 2010
|
|
|
7.02%
|
|
|
-
|
|
|
5,868,000
|
|
Total
|
|
|
|
|
|
|
$
|
14,156,550
|
|
$
|
5,868,000
|
|
|
|
(1)
|
The interest rate for this short term loan is adjustable
quarterly at 1.10 times of the prevailing rate as published by Bank of
China. As of September 30, 2009, the interest rate is fixed at 5.84% per
annum.
|
|
|
(2)
|
The interest rate is adjustable monthly at 1.15 times of
the prevailing rate as published by Bank of China. As of September 30,
2009, the interest rate is fixed at 7.76% per annum. The long term loan is
comprised of $440,100, $1,467,000, and $1,467,000 with respective due date
on December 25, 2009, on April 25, 2010 and on June 25, 2010,
respectively.
|
Interest expense totaling $849,304 and $15,128 was incurred
during the three months ended September 30, 2009 and 2008, respectively.
Interest expense totaling $2,414,118 and $59,800 was incurred
during the nine months ended September 30, 2009 and 2008, respectively.
The above loans are secured by Shandong Taibang's land use
rights and buildings located in Taian, Shandong Province, PRC and Qianfeng's
buildings and machinery and equipment located in Guiyang, Guizhou Province, PRC,
with carrying net values as follows:
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Buildings in Taian, Shandong
|
$
|
1,238,010
|
|
$
|
1,417,138
|
|
Land use rights in Taian, Shandong
|
|
433,793
|
|
|
195,691
|
|
Buildings in Guiyang, Guizhou
|
|
1,298,572
|
|
|
-
|
|
Machinery and equipment in Guiyang, Guizhou
|
|
9,108,351
|
|
|
-
|
|
Total
|
$
|
12,078,726
|
|
$
|
1,612,829
|
|
F-18
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Other payables and accruals
Other payables and accruals consist of the following:
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Other payables
(1)
|
$
|
10,290,251
|
|
$
|
319,699
|
|
Payable to Sansui Finance department for pending investment on plasma stations
(2)
|
|
1,175,067
|
|
|
-
|
|
Accruals for salaries and welfare
|
|
912,248
|
|
|
830,388
|
|
Accruals for RTO expenses
|
|
245,657
|
|
|
245,657
|
|
Accruals for selling commission and
promotion fee
|
|
1,710,073
|
|
|
1,508,102
|
|
Other Payable - Government Grant
|
|
143,488
|
|
|
114,148
|
|
Other payable - Deposit received
|
|
207,705
|
|
|
283,826
|
|
Other payable - Funds
|
|
1,981,482
|
|
|
627,157
|
|
Accrued interest
|
|
-
|
|
|
33,954
|
|
Others
(3)
|
|
452,247
|
|
|
-
|
|
Total
|
$
|
17,118,218
|
|
$
|
3,962,931
|
|
(1)
|
The other payables mainly comprise of deposits by
potential strategic investors with the amount of $7,465,640. As of
September 30, 2009, Qianfeng has received in an aggregate amount of
$7,465,640 from potential private strategic investors in connection with
subscribing shares from Qianfeng pursuant to Equity Purchase Agreement.
The registration of the new investors as Qianfeng's shareholders and the
related increase in registered capital of Qianfeng with the Administration
for Industry and Commerce (AIC) is in incomplete due to share holders
dispute as disclosed in below legal proceedings section below.
|
|
|
(2)
|
In early 2007, Qianfeng submitted RMB 8,010,000
(approximately $1,175,067) to the finance department of Sansui County, in
China's Qiandongnan Autonomous Region, for acquiring the Sansui Plasma
Collection Station from the local government, which action was legitimized
and fully endorsed by relevant provincial government authorities. However,
the finance department refused to implement the provincial government's
authorization and has returned the funds to Qianfeng. As of September 30,
2009, Qianfeng has set aside the full amount as a payable to Sansui
County, pending the outcome of provincial government's administrative
review as disclosed in the legal proceedings note below.
|
|
|
(3)
|
Others mainly comprise of the contingent liability due to
the pending, outcome of the preceding of Qianfeng's Guarantee to a Third
Party as disclosed in below legal proceedings section below, Qianfeng
provisioned a loss contingency reserve during its third quarter of 2009
for approximately $451,006 (RMB 3,074,342) to cover its share of the
enforcement of this judgment.
|
Other payable - land use rights
In July 2003, Shandong Taibang obtained certain land use rights
from the Tai'an municipal government. Shandong Taibang is required to make
payments totaling approximately $20,369 (RMB 138,848) per year to the local
state-owned entity, for the 50-year life of the rights or until Biological
Institute completes its privatization process. The Company recorded land use
rights equal to other payable land use rights totaling $ 324,121 and
$325,390 as of September 30, 2009 and December 31, 2008, respectively,
determined using present value of annual payments over 50 years.
Note 11 Convertible Notes
F-19
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
$9,554,140, 3.8% Senior Secured Convertible Notes, due June 5, 2011
|
$
|
9,554,140
|
|
$
|
-
|
|
Less: unamortized discount
|
|
(9,508,965
|
)
|
|
-
|
|
Notes payables, net
|
|
45,175
|
|
|
|
|
Accrued interest
|
|
-
|
|
|
|
|
Total
|
$
|
45,175
|
|
$
|
-
|
|
On June 5, 2009, the Company entered into a securities purchase
agreement (the Purchase Agreement) with certain accredited investors
(collectively, the Investors), pursuant to which the Company agreed to issue
to the Investors, 3.8% Senior Secured Convertible Notes in the aggregate
principal amount of $9,554,140 (the Notes) and warrants (the Warrants and
together with the Notes, the Subscribed Securities) to purchase up to
1,194,268 shares of common stock of the Company (the Warrant Shares and
together with the Conversion Shares, the Underlying Securities). The
transaction closed on June 10, 2009. Other than with respect to this
transaction, none of the Investors have had a material relationship with the
Company or any of the Company's officers, directors or affiliates or any
associate of any such officer or director.
The Notes accrue interest at 3.8% per annum (the Interest
Rate), from the closing until repayment, whether on maturity on June 5, 2011,
by acceleration or otherwise. Interest on the Notes is due and payable in cash
semi-annually on September 30 and March 31 of each year, commencing September
30, 2009, but the Company has the option to pay the interest due through the
issuance of its common stock at a conversion price of $4.00 per share. If the
Company defaults in the payment of the principal of or interest on the Notes
when due, then upon the Investors' election, the Company is obligated to either
(a) redeem all or a portion of the Notes pursuant to the redemption rights
discussed below or (b) pay interest on such defaulted amount at a rate equal to
the Interest Rate plus 2.0%. The Notes are convertible at any time before
maturity into shares of our common stock at a conversion price of $4.00 per
share, subject to certain adjustments as specified in the Notes.
The Company's obligations under the Notes are secured by the
pledge by Siu Ling Chan, our board chair and a principal shareholder, of
3,000,000 shares of common stock held by her, pursuant to the terms of a
Guarantee and Pledge Agreement among the Company, the investors and Ms. Chan. To
induce Ms. Chan to enter into the Guarantee and Pledge Agreement with the
Investors, the Company has agreed to indemnify her for all damages, liabilities,
losses and expenses of any kind (losses), which may be sustained or suffered
by her, arising out of or in connection with any enforcement action instituted
by the Investors pursuant to the Guarantee and Pledge Agreement. The Company's
indemnification obligation is limited to losses that arise as the result of any
negligent or unlawful conduct of the Company that is caused unilaterally by the
Company and is beyond Ms. Chan's control in her capacity as a director of the
Company, and will not exceed the fair market value of the pledged shares as of
the closing of the transaction.
The Warrants have a term of 3 years, an exercise price of $4.80
per share, subject to adjustments as provided in the Warrants, from time to time
pursuant to anti-dilution and other customary provisions, and are exercisable by
the Investors at any time after the date on which their related Notes are
converted, except that if any of the Notes is converted in part, the Investors
may only exercise a corresponding portion of the related Warrant.
The Company has granted the Investors demand and piggy-back
registration rights with respect to the Underlying Securities, pursuant to a
registration rights agreement among the Company and the Investors.
The Company paid its placement agent a cash fee of 6.1% of the
proceeds received in connection with the issuance of the Notes and also issued
to the placement agent a 3-year warrant to purchase 93,750 shares of the
Company's common stock at an exercise price of $6.00 per share, expiring after 3
years. The aggregate $870,417 fees paid to the placement agent, including the
fair value of the warrant issued to them was deferred and is being amortized
over the life of the Notes.
The Company allocated $6,552,504 of the proceeds received to
the fair value of the derivative instruments embedded in the Notes (including
the conversion option) and $3,826,897 to the fair value of the Warrants issued
to the Investors. As a result, the Company recognized an initial charge to
income of $825,261 for the amount by which the fair value of these liabilities exceeded the face amount of
the Notes for the three and nine months ended September 30, 2009. The Notes are
being accreted to their redemption value over the period to maturity, using an
effective interest method.
F-20
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The fair values of the embedded derivatives and
the warrants issued to the Investors and the placement agents were determined
using a binomial model, based on the market price of the Company's common stock,
volatility estimated at 130% based on a review of the historic volatility of the
Company's common stock, an expected dividend yield of zero, the remaining life
of the instruments and risk-free rates of return of 1.11% - 1.88%.
For the three and nine months ended September 30, 2009, the
Company recorded a loss of $10,813,201 and $9,656,224, respectively, related to
the change in the fair value of the embedded derivative instruments in the Notes
and the warrants.
Note 12 - Earnings (loss) per share
Basic earnings/(loss) per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings/(loss) per share is calculated by dividing net income
by the weighted average number of common shares outstanding and dilutive
potential common shares outstanding during the period.
Earnings (loss) per share is as follows for the three months
ended September 30,
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income (loss) attributable to
controlling interest for earnings (loss) per share
|
$
|
(6,193,569
|
)
|
$
|
4,478,546
|
|
Weighted average shares used in basic computation
|
|
21,632,793
|
|
|
21,434,942
|
|
Diluted effect of warrants and
options
|
|
-
|
|
|
69,687
|
|
Weighted average shares used in diluted computation
|
|
21,632,793
|
|
|
21,504,629
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
Basic
|
$
|
(0.29
|
)
|
$
|
0.21
|
|
Diluted
|
$
|
(0.29
|
)
|
$
|
0.21
|
|
For the three months ended September 30, 2009, all of the
warrants, stock options and conversion options were excluded in the calculation
of diluted earnings per share because of their anti-dilutive nature.
For the three months ended September 30, 2008, the average
stock price was greater than the exercise prices of the 1,284,000 warrants which
resulted in additional weighted average common stock equivalents of 69,687.
However, 937,500 options were excluded from the calculation because of their
anti-dilutive nature.
Earning per share is as follows for the nine months ended
September 30,
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income attributable to controlling
interest for earnings per share
|
$
|
5,035,494
|
|
$
|
8,780,500
|
|
Weighted average shares used in basic computation
|
|
21,504,002
|
|
|
21,434,942
|
|
Diluted effect of warrants and
options
|
|
263,084
|
|
|
278,228
|
|
Weighted average shares used in diluted computation
|
|
21,767,086
|
|
|
21,713,170
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
$
|
0.23
|
|
$
|
0.41
|
|
Diluted
|
$
|
0.23
|
|
$
|
0.40
|
|
F-21
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
For the nine months ended September 30, 2009, the average stock
price was greater than the exercise prices of the 1,284,000 warrants which
resulted in additional weighted average common stock equivalents of 263,084.
However, 4,644,053 warrants, stock options and conversion options were excluded
in the calculation of diluted earnings per share because of their anti-dilutive
nature.
For the nine months ended September 30, 2008, the average stock
price was greater than the exercise prices of the 1,284,000 warrants which
resulted in additional weighted average common stock equivalents of 278,228.
However, 937,500 options were excluded from the calculation because of their
anti-dilutive nature.
Note 13 Taxes
Income taxes
The Company is governed by the Income Tax Law of the People's
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax Laws). Under the
Income Tax Laws, foreign investment enterprises (FIE) generally are subject to
an income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments unless the enterprise is located in specially
designated regions of cities for which more favorable effective tax rates apply.
Upon approval by the PRC tax authorities, FIEs scheduled to operate for a period
of 10 years or more and engaged in manufacturing and production may be exempt
from income taxes for two years, commencing with their first profitable year of
operations, after taking into account any losses brought forward from prior
years, and thereafter with a 50% exemption for the next three years.
In 2002, the Company became a Sino-foreign joint venture. In
2003, the Company was granted by the state government for benefit of income tax
exemption in first 2 years from January 2003 to December 2004 and 50% exemption
for the third to fifth years from January 2005 to December 2007.
Beginning January 1, 2008, the new Enterprise Income Tax
(EIT) law replaced the laws for Domestic Enterprises (DES) and Foreign
Invested Enterprises (FIEs).
The key changes are:
a.
|
The new standard EIT rate of 25% will replace the 33%
rate currently applicable to both DES and FIEs, except for High Tech
companies who pays at a reduced rate of 15%; and
|
|
|
b.
|
Companies established before March 16, 2007 will continue
to enjoy tax holiday treatment approved by local government for a grace
period of the next 5 years or until the tax holiday term is completed,
whichever is sooner.
|
The Company's subsidiary, Shandong Taibang, was established
before March 16, 2007 and is, therefore, qualified to continue enjoying the
reduced tax rate as described above.
Starting from January 1, 2008, Shandong Taibang became subject
to 25% income tax rate according to the newly issued Income Tax Laws of PRC.
According to PRC's central government policy, certain new technology or high
technology companies will enjoy preferential tax treatment of 15%, instead of
25%. On February 12, 2009, Shandong Taibang received the new technology or high
technology certification from Shandong provincial government. The Certification
allows the Company to receive the 15% preferential income tax rate, for a period
of three years starting from January 1, 2008.
Starting from January 1, 2008, all dividends paid to foreign
parents are subject to a 10% income tax. As a result, Logic Express recorded
$334,877 and $0 income tax expense for the nine months ended September 30, 2009
and 2008, respectively, for dividends Shandong Taibang paid to its foreign
parent, Logic Express. Logic Holdings recorded $374,073 and $0 income tax
expense for the nine months ended September 30, 2009 and 2008, respectively, for
dividends Dalin paid to its foreign parent, Logic Holdings.
F-22
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The following table reconciles the U.S. statutory rates to the
Company's effective tax rate for the three months and the nine months ended
September 30, 2009 and September 30, 2008:
|
|
For the three months
|
|
|
For the nine months
|
|
|
|
ended September 30,
|
|
|
ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
U.S. statutory rates
|
|
34.0
|
%
|
|
35.0
|
%
|
|
34.0
|
%
|
|
35.0
|
%
|
Foreign income
|
|
(34.0
|
)
|
|
(35.0
|
)
|
|
(34.0
|
)
|
|
(35.0
|
)
|
China tax rates
|
|
25.0
|
|
|
25.0
|
|
|
25.0
|
|
|
25.0
|
|
China income tax exemption
|
|
(10.0
|
)
|
|
(10.0
|
)
|
|
(10.0
|
)
|
|
(10.0
|
)
|
Other items
(1)
|
|
(15.0
|
)
|
|
7.4
|
|
|
17.4
|
|
|
13.6
|
|
Effective income tax rates
|
|
0.0
|
%
|
|
22.4
|
%
|
|
32.4
|
%
|
|
28.6
|
%
|
(1)
The (15.0)% represents the $13.2 million
derivative mark-to-market expense as disclosed in below note 16 and the $1.7
million expenses incurred by CBP, Logic Express and Logic Holding that are not
deductible in PRC for the three months ended September 30, 2009, which caused a
loss of $245,964 before provision for income taxes and non-controlling interest.
Therefore, we have incurred a zero effective tax rate for the three months ended
September 30, 2009 due to a loss before provision for income tax. The 7.4%
represents the $0.2 million expenses incurred by CBP, Logic Express that are not
deductible in PRC for the three months ended September 30, 2008.
The 17.4% represents the $14.9 million derivative
mark-to-market expense as disclosed in below note 16 and the $5.0 million
expenses incurred by CBP, Logic Express and Logic Holding that are not
deductible in PRC for the nine months ended September 30, 2009. The 13.6%
represents the $2.5 million expenses incurred by CBP, Logic Express that are not
deductible in PRC for the nine months ended September 30, 2008.
The estimated tax savings due to the tax exemption for the
three months ending September 30, 2009 and 2008 amounted to $1,514,862 and
$563,374, respectively. The net effect on earnings per share if the income tax
had been applied would decrease basic earnings per share for the three months
ended September 30, 2009 and 2008 by $0.07 and $0.03, respectively. The net
effect on earnings per share if the income tax had been applied would decrease
diluted earnings per share for the three months ended September 30, 2009 and
2008 by $0.07 and $0.03, respectively.
The estimated tax savings due to the tax exemption for the nine
months ending September 30, 2009 and 2008 amounted to $4,506,389 and $1,358,863,
respectively. The net effect on earnings per share if the income tax had been
applied would decrease basic earnings per share for the nine months ended
September 30, 2009 and 2008 by $0.21 and $0.06, respectively. The net effect on
earnings per share if the income tax had been applied would decrease diluted
earnings per share for the nine months ended September 30, 2009 and 2008 by
$0.21 and $0.06, respectively.
CBP was incorporated in the United States and has incurred net
operating losses for income tax purposes for the period ending September 30,
2009. The estimated net operating loss carry forwards for United States income
taxes amounted to $4,344,584 and $2,996,886 as of September 30, 2009 and
December 31, 2008, respectively, which may be available to reduce future years'
taxable income. These carry forwards will expire, if not utilized, from 2026
through 2029. Management believes that the realization of the benefits from
these losses appears uncertain due to the Company's limited operating history
and continuing losses for United States income tax purposes. Accordingly, the
Company has provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. Management reviews this valuation allowance
periodically and makes adjustments as warranted. The following table represents
the rollforward of the deferred tax valuation allowance:
|
|
For the nine months ended
|
|
|
For the year ended
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
Balance as of beginning of period
|
$
|
1,018,941
|
|
$
|
640,318
|
|
Increase
|
|
458,217
|
|
|
378,623
|
|
Balance as of end of period
|
$
|
1,477,158
|
|
$
|
1,018,941
|
|
F-23
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The Company has cumulative undistributed earnings of foreign
subsidiaries of approximately $35 million as of September 30, 2009, which is
included in consolidated retained earnings and will continue to be indefinitely
reinvested in international operations. Accordingly, no provision has been made
for U.S. deferred taxes related to future repatriation of these earnings, nor is
it practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the future.
Value added tax
VAT on sales amounted to $1,981,600 and $903,665 for the three
months ended September 30, 2009 and 2008, respectively. VAT on sales amounted to
$5,834,961 and $2,192,304 for the nine months ended September 30, 2009 and 2008,
respectively. Sales are recorded net of VAT collected and paid as the Company
acts as an agent for the government. VAT taxes are not impacted by the income
tax holiday.
Taxes payable consisted of the following:
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
VAT tax payable
|
$
|
690,247
|
|
$
|
331,505
|
|
Income tax payable
|
|
5,018,767
|
|
|
3,630,878
|
|
Other miscellaneous tax payable
|
|
204,217
|
|
|
97,627
|
|
|
$
|
5,913,231
|
|
$
|
4,060,010
|
|
Note 14 Commitments and contingent liabilities
Capital and lease commitments
The Company's 82.76% owned subsidiary, He Ze Plasma Company,
entered into a lease agreement on January 13, 2005, with the Yun Cheng Lan Tian
Transportation Company in Yun Cheng County, Shandong Province, to lease land use
rights for a period of 10 years. The annual lease amount is approximately $1,751
(RMB 12,000) with no early termination penalty. The Company has the right of
first refusal to renew the lease after the ten year lease term.
The Company's 82.76% owned subsidiary, Qi He Plasma Company,
entered into a lease agreement on April 26, 2007, with the Zhang Bo Shi Village
in Qi He County, Shandong Province, to lease land use rights for a period of 50
years. The annual lease amount is approximately $4,566 (RMB 31,144) with no
early termination penalty.
The Company's 82.76% owned subsidiary, Zhang Qiu Plasma
Company, leased land use right and the use of building and equipment for a
period of 10 year from January 1, 2007 with annual lease payment of $43,977
(RMB300,000). The lease was terminated in March 2008. The Company entered into a
lease agreement on April 1, 2008, with the Zhang Qiu Red Cross Blood Center, to
lease land use rights and the use building and equipment for a period of 10
years. The annual lease payment is approximately $1,466 (RMB 10,000) with no
early termination penalty.
The Company's 48.6% indirectly owned subsidiary, Qianfeng,
entered into a lease agreement on June 1, 2006 with a group of individuals in an
area located next to its production facility, to lease and use the space for
processing industrial waste for 10 years. The annual lease amount is
approximately $1,530 (RMB 10,438).
The Company's indirectly owned subsidiary, Huang Ping Plasma
Company, entered into a lease with Huang Ping County Finance Department on April
28, 2007, Guizhou Province, to lease land use rights and use a building and
equipment for a period of 3 years. The annual lease payment is approximately
$10,261 (RMB 70,000).
The Company's indirectly owned subsidiary, Pu Ding Plasma
Company, entered into a lease with Pu Ping County Health Department, Guizhou
Province on March 31, 2007, to lease land use rights and use a building and
equipment for a period of 3 years. The annual lease payment is approximately
$21,989 (RMB 150,000).
F-24
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The Company's indirectly owned subsidiary, Na Yong Plasma
Company, entered into a lease with Na Yong County Health Department, Guizhou
Province on March 31, 2007, to lease land use rights and use a building and
equipment for a period of 3 years. The annual lease payment is approximately
$21,989 (RMB 150,000).
The Company's indirectly owned subsidiary, Wei Ning Plasma
Company, entered into a lease with Wei Ning County Health Department, Guizhou
Province on April 9, 2007, to lease land use rights and use building and
equipment for a period of 3 years. The annual lease payment is approximately
$11,727 (RMB 80,000).
The Company recognizes lease expense on a straight line basis
over the term of the lease in accordance to FASB's accounting standard related
to leases. Total capital and operating lease commitments outstanding for the
fiscal year ended December 31:
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
Property and equipment
|
$
|
239,278
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Lease
|
|
73,393
|
|
|
26,622
|
|
|
9,327
|
|
|
9,327
|
|
|
9,327
|
|
|
205,172
|
|
Total
|
$
|
312,671
|
|
$
|
26,622
|
|
$
|
9,327
|
|
$
|
9,327
|
|
$
|
9,327
|
|
$
|
205,172
|
|
For the three months ended September 30, 2009 and 2008, total
rent expense amounted to $44,395 and $1,451, respectively.
For the nine months ended September 30, 2009 and 2008, total
rent expense amounted to $102,721 and $19,507, respectively.
Legal proceedings
Transfer of Equity Interests
Mr. Zu Ying Du was one of the original equity holders in our
operating subsidiary, Shandong Taibang. Pursuant to a joint venture agreement,
among the original equity holders, Mr. Du was obligated to make a capital
contribution of RMB 20 million (or approximately $2.6 million) for a 25%
interest in Shandong Taibang. Mr. Du made this contribution using funds borrowed
from the Beijing Chen Da Technology Investment Company, or Beijing Chen Da. Mr.
Du failed to repay Beijing Chen Da for his loan of the capital contribution
amount. Mr. Du disputes that the money was due and owing. A Beijing court found
that Beijing Chen Da had given money to Mr. Du but found that the loan agreement
failed to comply with Chinese law. A notice was issued on July 5, 2004 by the
Shenzhen Public Security Bureau Economic Crime Investigation Unit requesting a
stay of the Beijing action pending their investigation into money laundering
relating to the 20 million RMB loan to Zu Ying Du.
Subsequently, Beijing Chen Da entered into an equity transfer
agreement with Mr. Du, pursuant to which Mr. Du's 25% equity interest in
Shandong Taibang was transferred to Beijing Chen Da as repayment of the RMB 20
million debt. This agreement was signed by Mr. Du's brother who held a power of
attorney from Mr. Du. Mr. Du disputes the legitimacy of this transfer and has
argued that his brother, Du Hai Shan, exceeded the scope of the power of
attorney. Mr. Du sued his brother in the court of Jianli County, Hubei province,
relating to the propriety of the brother's actions under the power of attorney.
Initially the county court found in its judgment that the act had exceeded the
scope of the power of attorney. Subsequently the Intermediate Court of Jingzhou
City, Hubei province, ruled on December 10, 2008 to suspend the judgment based
on the grounds that the original court lacked jurisdiction to hear the case. The
case is slated to be reviewed again by the Hubei Jingzhou Intermediate Court.
Missile Engineering, another original equity holder wholly
controlled by Mr. Du, was obligated to contribute RMB 32.8 million (or $4.2
million) for a 41% interest in Shandong Taibang by means of cash, equipment and
patent technology. It was obligated to obtain new drug certificate and
production license of its patent technology from the government within a
stipulated period in order to be recognized as a valid capital contribution, or
in the alternative, make a cash payment. The patent technology was valued as RMB
26.4 million (or approximately $3.4 million). However, Missile Engineering
failed to obtain the new drug certificate and production license within the
stipulated period. Mr. Du also disputes whether the period for obtaining the
certificate and license had expired. Pursuant to a stockholders resolution on September 26, 2004, Missile
Engineering agreed to sell its 41% interest in Shandong Taibang to Up-Wing and
Up-Wing agreed to take up the obligation of Missile Engineering to pay the RMB
26.4 million in cash. Missile Engineering disputes this transaction and sued the
brother of Mr. Du in the court of Jianli County, Hubei province, relating to the
propriety of the brother's actions under the power of attorney. Initially the
county court found in its judgment that the act had exceeded the scope of the
power of attorney. Subsequently the Intermediate Court of Jingzhou City, Hubei
province, ruled on December 10, 2008 to suspend the judgment based on the
grounds that the original court lacked jurisdiction to hear the case. The case
is slated to be reviewed again by the Hubei Jingzhou Intermediate Court.
F-25
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
In June 10, 2005, Beijing Chen Da also sold its equity interest
in Shandong Taibang to Up-Wing Investments Limited, or Up-Wing, pursuant to a
share transfer agreement, which became effective on September 2, 2005, upon
approval by the Shandong Provincial Department of Foreign Trade and Economic
Cooperation, or the Shandong COFTEC. In March 2006, Up-Wing sold its equity
interests in Shandong Taibang to Logic Express, our subsidiary.
In 2006, Missile Engineering applied for arbitration before the
China International Economic and Trade Arbitration Commission, or CIETAC, to
challenge the effectiveness of the transfer to Up-Wing Investments Limited, of
the equity interests in Shandong Taibang formerly owned by Missile Engineering.
The equity transfer had been approved by the Shandong Provincial Department of
Foreign Trade and Economic Cooperation, or the Shandong COFTEC. Missile
Engineering later voluntarily withdrew this application and instead applied for
administrative reconsideration of the equity transfer, but this application was
rejected by the Ministry of Commerce in 2007. Missile Engineering applied with
the District Court of Lixia District, Jinan City, Shandong province requesting
revocation of Shandong COFTEC's approval of the equity transfer to Up-wing by
Missile Engineering. Missile Engineering later voluntarily withdrew the action.
In April 2007, Logic Express initiated an arbitration proceeding before the
Shandong Tai'an Arbitration Committee, to establish that Logic Express is the
lawful shareholder of Shandong Taibang. The parties to that proceeding were
Logic Express Ltd. and Shandong Taibang Biological Products Co., Ltd. The
Arbitration Committee's decision on September 6, 2007 confirmed that Logic
Express had legitimate ownership as a result of the transfer of Shandong
Taibang. Up-Wing started an action in the Intermediate Court of Tai'an City,
Shandong province requesting the court to establish that Up-Wing is the lawful
shareholder of Shandong Taibang. The Intermediate Court of Tai'an City, Shandong
province on December 20, 2007 rejected the application on the basis that the
same matter had been tried by the arbitration panel.
Up-Wing filed a defamation case in the District Court of
Hi-technology and Industry Development District, Tai'an City, Shandong province
claiming defamation against Mr. Du and the 21
st
Century Economic
Report Newspaper. Judgment in favor of Up-Wing was rendered on July 22, 2008
ordering the newspaper and Mr. Du to publish an apology to Up-Wing.
Mr. Du and Missile Engineering filed two actions in the
Intermediate Court of Wuhan City, Hubei province, against the following
defendants, Du Hai Shan, his brother, Beijing Chen Da and Logic Express. Mr. Du
and Missile Engineering have requested that the Wuhan Intermediate Court to
restore the equity interests originally held by the plaintiffs, 25% equity
interest held by Mr. Du and 41% equity interest held by Missile Engineering. The
Wuhan Intermediate Court issued a preliminary order attaching 66% of the equity
of Shandong Taibang pending the outcome of the case. However, on September 25,
2009, the Higher People's Court of Hubei overruled the Wuhan Intermediate
Court's acceptance of jurisdiction over the case and ruled that the Tai'an
Intermediate Court in Shandong Province, where the Company is located, had the
proper jurisdiction over the parties' dispute. As a result, the attached 66% of
the equity of Shandong Taibang were released. The court ruled that while the
plaintiffs had the right to bring a lawsuit for the validity of the share
transfer agreement because they did not attend the previous arbitration hearing
and never reached an arbitration agreement regarding their dispute, the Tai'an
Intermediate Court has the proper jurisdiction over the dispute pursuant to the
prior agreement of the parties. Although the plaintiffs may decide bring their
suit to Tai'an, Management believes that the possibility of the plaintiffs
prevailing in Tai'an is slim in light of the historical Tai'an proceedings in
connection with the dispute: a Tai'an arbitration panel has already confirmed
that the share transfer agreements are effective, including the share transfer
agreement between the plaintiffs and the Company, and the Tai'an Intermediate
Court has already confirmed the legal force of the arbitration award. Failure to
resolve these disputes in our favor may adversely affect our business and
operations.
F-26
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Bobai County Collection Station
In January 2007, the Company's PRC subsidiary, Shandong
Taibang, advanced $413,697 (RMB3.0 million) to Feng Lin, the 20% minority
shareholder in Fang Cheng Plasma Company, the Company's majority owned
subsidiary, for the purpose of establishing or acquiring a plasma collection
station. Mr. Lin and Shandong Taibang intended to establish the Bobai Kangan
Plasma Collection Co., Ltd. (Bobai) in Bobai County, Guangxi and on January
18, 2007, Shandong Taibang signed a letter of intent to acquire the assets of
the Bobai Plasma Collection Station, which was co-owned by Mr. Lin and Mr.
Keliang Huang. However, in January 2007, Hua Lan Biological Engineering Co.,
Ltd. (Hua Lan) filed suit in the District Court of Hong Qi District, Xin Xiang
City, Henan Province, alleging that Feng Lin, Keliang Huang and Shandong Taibang
established and/or sought to operate the Bobai Plasma Collection Station using a
permit for collecting and supplying human plasma in Bobai County, that was
originally granted to Hua Lan by the government of the Guangxi region, without
Hua Lan's permission. The establishment and registration of Bobai was never
realized as a result of this law suit. On January 29, 2007, on Hua Lan's motion,
the District Court entered an order to freeze funds in the amount of
approximately $386,100 (RMB3,000,000) held by the defendants in the case,
including approximately $65,750 (RMB500,000) in funds held in Shandong Taibang's
bank account in Tai'an City. A hearing was held on June 25, 2007 and judgment
was entered against the defendants along with a $226,780 (RMB1,700,000) joint
financial judgment. The Company appealed the District Court judgment to the
Henan Province High Court. In November 2007, the High Court affirmed the
judgment against the three defendants and increased the amount of the joint
financial judgment to approximately $405,954 (RMB3,000,000).
In January 2008, Hua Lan enforced the judgment granted by the
High Court to freeze the Company's bank accounts. Shandong Taibang has filed a
separate action against Hua Lan before the Tai'an City District Court to seek
recovery of any losses in connection with Hua Lan's claim and to request that
the Tai'an City District Court preserve Hua Lan's property or freeze up to
approximately $411,300 (RMB 3 million) of Hua Lan's assets to secure the return
of such funds to the Company. The intermediate court in Tai'an City accepted the
application on February 14, 2008 but the matter is still pending. Pending the
outcome of the proceedings, Shandong Taibang increased its loss contingency
reserve during its fourth quarter of 2007 from approximately $75,593
(RMB566,667) to $133,400 (RMB1,000,000) to cover its share of the enforcement of
this judgment. During the fourth quarter of 2008, full amount of the judgment,
including Feng Lin and Keliang Huang's portions of the judgment and the related
fees, approximately $456,222 (RMB 3,109,900) has been withdrawn from Shandong
Taibang's account. The Company recorded Feng Lin and Keliang Huang's portion of
the judgment, approximately $304,143 (RMB2,073,234), as receivable as a result
of the withdraw. As of December 31, 2008, the Company determined that it is
unlikely that the Company will be able to recover such receivable from those two
individuals and wrote off the receivable as bad debt expense.
In light of the foregoing, it is unlikely that the Company's
planned acquisition of the assets of Bobai will go forward.
Dispute among Qianfeng Shareholders over Raising
Additional Capital
On May 28, 2007, a 91% majority of Qianfeng's shareholders
approved a plan to raise additional capital from private strategic investors
through the issuance of an additional 20,000,000 shares of Qianfeng equity
interests at RMB 2.80 per share. The plan required all existing Qianfeng
shareholders to waive their rights of first refusal to subscribe for the
additional shares. The remaining 9% minority holder of Qianfeng's shares, the
Guizhou Jie'an Company, or Jie'an, did not support the plan and did not agree to
waive its right of first refusal. On May 29, 2007, the majority shareholders
caused Qianfeng to sign an Equity Purchase Agreement with certain investors,
pursuant to which the investors agreed to invest an aggregate of RMB 50,960,000
(approximately $7,475,832) in exchange for 18,200,000 shares, or 21.4%, of
Qianfeng's equity interests. At the same time, Jie'an also subscribed for
1,800,000 shares, representing its 9% pro rata share of the 20,000,000 shares
being offered. The proceeds from all parties were received by Qianfeng in
accordance with the agreement.
In June 2007, Jie'an brought suit in the High Court of Guizhou
province, China, against Qianfeng and the three other original Qianfeng
shareholders, alleging the illegality of the Equity Purchase Agreement. In its
complaint, Jie'an alleged that it had a right to acquire the shares waived by
the original Qianfeng shareholders and offered to the investors in connection
with the Equity Purchase Agreement. On September 12, 2008, the Guizhou High
Court ruled against Jie'an and sustained the Equity Purchase Agreement, but on
November 2008, Jie'an appealed the Guizhou High Court judgment to the People's
Supreme Court in Beijing. On May 13, 2009, the People's Supreme Court sustained
the original ruling and denied the rights of first refusal of Jie'an over the
additional shares waived by the original Qianfeng's shareholders. The registration of the new
investors as Qianfeng's shareholders and the related increase in registered
capital of Qianfeng with the Administration for Industry and Commerce is still
pending. Due to the flaws of the Equity Purchase Agreement and the
pre-conditions of the agreement no longer valid, the Company is evaluating the
possibility of voiding the agreement to maintain the original share structure.
If the Company is unable to void the agreement, Dalin's interests in Qianfeng
may be reduced to approximately 41.3%.
F-27
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Dispute over Qianfeng Technical Consulting
Agreement
In 1997, Qianfeng entered into a Technical Cooperation
Agreement with Sin Kyung Ye, or Sin, a Korean individual, to provide certain
fractionation equipment and transfer processing know-how to Qianfeng. In August
2004, Sin filed a law suit against Qianfeng with the Intermediate Court in
Guiyang City, China, alleging non-payment of RMB 100,000 (approximately,
$14,670) for his fractionation equipment and RMB 5,000,000 (approximately,
$733,500) for the transfer of his technological know-how. The Intermediate Court
ruled in favor of Sin and found that Qianfeng owed Sin RMB 10,376,160
(approximately, $ 1,522,183), but Qianfeng appealed the Intermediate Court
ruling to the Guizhou High Court. The Guizhou High Court agreed in part with
Qianfeng's grounds for appeal and reduced the amount of know-how transfer fee to
RMB 1,970,413 (approximately, $289,060). In May 2007, Sin appealed the Guizhou
High Court's decision to the People's Supreme Court in Beijing. The People's
Supreme Court heard in April 2008 and ruled on December 29, 2009 against Qianfeng and increased the transfer fee to RMB 4,700,000 (approximately
$689,491). The Company made a provision for the judgment in December 2009 and is
evaluating the possibility of appeal.
Qianfeng Product Liability Claims
In January 2008, Qianfeng, along with two local hospitals and a
local blood center, was sued in the Zhuhui District Court in Hengyang, Hunan
province, China, by a resident of Hunan province, for RMB 1,749,358
(approximately, $256,631) in damages, in connection with his alleged HIV
contamination via blood transfusion during the plaintiff's treatment following
an April 2006 traffic accident. The Zhuhui District Court awarded the plaintiff
RMB 200,000 (approximately, $29,340), but found that the defendants were not
responsible for his HIV contamination. All parties appealed to the Zhuhui Middle
Court. On December 4, 2008, the Zhuhui Middle Court remanded the case to the
lower court for retrial, on grounds that the HIV contamination could not be
directly linked to the plaintiff's treatment by the hospitals or to Qianfeng's
products. There have been no further developments on this case as of November
13, 2009.
Administration Interference
Qianfeng is party to an administrative proceeding against the
government of the Qiandongnan Autonomous Region, or the Qiandongnan Authorities,
in Guizhou Province, China, in connection with the ownership of three of
Qianfeng's eight plasma stations in Guizhou Province. Qianfeng was authorized to
acquire a total of eight plasma stations in Guizhou Province based on several
national and provincial administrative authorizations issued by the PRC State
Council and the Guizhou Ministry of Health between 2006 and 2007, but to date,
the governmental authorizations have not been fully implemented by the
Qiandongnan Authorities. In early 2007, Qianfeng submitted RMB 8,010,000
(approximately $1,173,465) to the local finance department of Sansui County,
Qiandongnan, for acquiring the Sansui Plasma Collection Station (Sansui), but
the local finance department refused to honor the purchase and returned the full
consideration to Qianfeng. Furthermore, subsequent local rulings published by
the Qiandongnan Authorities February 28, 2008 appear to authorize another
private company to acquire the Sansui and two other stations, the Zhengyuan
Plasma Collection Station and the Shibing Plasma Collection Station. In December
2008 Qianfeng filed an administrative review application with the People's
Government of Guizhou Province, or the Guizhou Provincial Government, but the
Guizhou Provincial Government has delayed making a final decision pending
further review of regulations regarding administrative authorizations. Qianfeng
has received verbal notification from staff in the Guizhou Provincial Government
that the Qiandongnan Authorities have withdrawn the local rulings authorizing
acquisition of the three plasma stations, but management has not received any
written confirmation of such withdrawal. As a result, Qianfeng has maintained
its application with the Guizhou Provincial Government for a formal
administrative ruling on its right to acquire all eight plasma stations in
Guizhou Province. In addition, Qianfeng has set aside the purchase price payable
for Sansui pending the outcome of the administrative review.
F-28
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Dispute over Raw Plasma Supply Agreement with
Xintai
On March 10, 2009, Henan Xintai Medicine Company (previously
known as Henan Zhongtai Medicine, Xintai) brought suit against Shandong
Taibang and its two wholly-owned plasma collecting subsidiaries in Shandong for
breach of a raw plasma supply agreement. The suit was subsequently withdrawn by
Xintain on May 31, 2009. The agreement, signed by Shandong Taibang and Xintai on
October 10, 2006, requires the two subsidiaries to provide to Xintai 40 metric
tons of raw plasma per year from 2007 to 2009. The subsidiaries provided more
than 34 metric tons of plasma to Xintai during 2007 in accordance with the
agreement. On October 31, 2007, PRC State Department published the Regulation on
Plasma Collection Stations. The Company believes the agreement is invalid
because it violates the clause 43 of the new Regulation, which prohibits plasma
collecting stations from providing raw plasma to manufacturer other than their
direct parent. To comply with the Regulation, the subsidiaries ceased supplying
plasma to Xintai in late 2007. On March 12, 2009, Shandong Taibang filed a suit
in the Shandong Taian Middle Court against Xintai seeing damages of RMB50,000
(approximately, $7,335) for the plasma already supplied to Xintai during 2007.
On June 29, 2009, Xintai re-filed the suit in Shandong Taian Middle Court
against Taibang and the two subsidiaries seeking compensation of RMB6,000,000
(approximately, $880,200) for contract breach and demanding that Taibang and the
subsidiaries continue to honor the agreement. On October 20, 2009, the Taian
Middle Court combined and heard the two suits, and the Company is awaiting the
Court's ruling.
Qianfeng's Guarantee to a Third Party
In 2007, as a condition to purchase Huang Ping Plasma Station,
Qianfeng entered into an agreement with Guizhou Zhongxin Investment Company
(Zhongxin) in which Qianfeng agreed to repay Zhongxin's debt out of Qianfeng's
payables to Zhongxin arising from plasma purchased from Zhongxin. In the same
agreement, Qianfeng also guaranteed to the Huang Ping County Hospital (Huang
Ping Hospital), which was the co-owner with Zhongxin of the Huang Ping Plasma
Station, for the amount of RMB3,000,000 (approximately, $440,100) of debt that
Zhongxin owed to Huang Ping Hospital. On June 1, 2009, Huang Ping Hospital
brought suit, in Huang Ping Country People's Court of Guizhou Province, against
Zhongxin for non-payment of its payables and debt due to Huang Ping Hospital and
Qianfeng as the guarantor. On November 2, 2009, the court ruled in favor of the
plantiff and Qianfeng will need to repay the RMB3,000,000 debt to Huang Ping
Hospital on behalf of Zhongxin as the guarantor. The Equity Transfer Agreement
pursuant to which we acquired a 90% interest in Dalin, Qianfeng's majority
shareholder, provides that the sellers shall be responsible, in accordance with
their equity proportion in Qianfeng, for damages incurred by Qianfeng from
Zhongxin's debt and shall repay Qianfeng the sellers' proportionate share of
payments made by Qianfeng to creditors in connection with Zhongxin's debt within
10 days after payment by Qianfeng.
Note 15 Warrants and options
Warrants
On July 18, 2006, the Company entered into a securities
purchase agreement with certain accredited investors and completed the sale of
2,200,000 shares of common stock and 1,070,000 warrants with an exercise price
of $2.8425 per share (2006 Warrants). The warrants have a 5-year term and are
callable by the Company if the shares trade at 160% of the exercise price for 15
consecutive trading days. On July 28, 2006, the Company also issued 214,000
warrants with an exercise price at $2.8425 (Placement Agent Warrant) to Lane
Capital Markets, LLC, the placement agent. These warrants have a 5-year term and
are non-callable.
Effective January 1, 2009, 1,284,000 warrants previously
treated as equity pursuant to the derivative treatment exemption are no longer
afforded equity treatment because the strike price of the warrants is
denominated in US dollar, a currency other than the Company's functional
currency, the Chinese Renminbi. As a result, the warrants are not considered
indexed to the Company's own stock, and as such, all future changes in the fair
value of these warrants will be recognized currently in earnings until such time
as the warrants are exercised or expired.
As such, effective January 1, 2009, the Company reclassified
the original fair value of these warrants of $738,449 from equity to a
liability, as if these warrants were treated as a derivative liability since
their date of issue in July 2006. On January 1, 2009, the Company reclassified
from additional paid-in capital, as a cumulative effect adjustment, $929,577
from beginning retained earnings and $1,668,026 to a long-term derivative
liability to recognize the fair value of such warrants on such date.
F-29
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
In September 2009, as authorized by the board of directors, the
Company redeemed all of its outstanding 2006 Warrants with an exercise price of
$2.8425 per share, in connection with the above-mentioned Securities Purchase
Agreement dated July 18, 2006. In addition, there were 145,500 shares of
Placement Agent Warrants were converted into common stock. As a result, as of
September 30, 2009, there were 1,215,500 warrants converted into the Company's
common stock. The fair value of these warrants at the conversion date totaled
$5,712,822 was transferred to equity. In addition, the fair value of the
remaining 68,500 common stock purchase warrants was $404,807 as of September 30,
2009. As such the Company recognized a loss of $2,429,132 and $4,449,603,
respectively, from the change in fair value of these warrants for three and nine
months ended September 30, 2009.
On June 5, 2009, the Company entered into a securities purchase
agreement with certain accredited investors pursuant to which the Company issued
3.8% Senior Secured Convertible Notes in the aggregate principal amount of
$9,554,140 and Warrants to purchase up to 1,194,268 shares of common stock of
the Company. The Warrants have a term of 3 years, an exercise price of $4.80 per
share, as adjusted from time to time pursuant to anti-dilution and other
customary provisions, and are exercisable by the Investors at any time after the
date on which their related Notes are converted, except that if any of the Notes
is converted in part, the Investors may only exercise a corresponding portion of
the related Warrant. The Company also issued to the placement agents 93,750
Warrants to purchase common stock at an exercise price of $6.00 per share,
expiring after 3 years.
These common stock purchase warrants were not issued with the
intent of effectively hedging any future cash flow, fair value of any asset,
liability or any net investment in a foreign operation. The warrants do not
qualify for hedge accounting, and as such, all future changes in the fair value
of these warrants will be recognized currently in earnings until such time as
the warrants are exercised or expire. These common stock purchase warrants do
not trade in an active securities market, and as such, the Company estimated the
fair value of these warrants using the Black-Scholes option pricing model, based
on the market price of the Company's common stock, volatility estimated at 130%
based on a review of the historic volatility of the Company's common stock, an
expected dividend yield of zero, the remaining life of the warrants and
risk-free rates of return of 1.11% - 1.88%.
Historical volatility was computed using daily pricing
observations for recent periods that correspond to the term of the warrants. The
Company believes this method produces an estimate that is representative of our
expectations of future volatility over the expected term of these warrants. The
Company has no reason to believe future volatility over the expected remaining
life of these warrants likely to differ materially from historical volatility.
The expected life is based on the remaining term of the warrants. The risk-free
interest rates used are based on the yield on U.S. Treasury securities with a
similar according to the remaining term as the warrants.
The summary of warrant activity is as follows:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
December 31, 2007
|
|
1,284,000
|
|
$
|
2.84
|
|
|
3.55
|
|
Granted
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
September30, 2008 (unaudited)
|
|
1,284,000
|
|
$
|
2.84
|
|
|
2.80
|
|
Granted
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
December 31, 2008
|
|
1,284,000
|
|
$
|
2.84
|
|
|
2.55
|
|
Granted
|
|
1,288,018
|
|
|
4.89
|
|
|
2.70
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
(1,215,500
|
)
|
|
2.84
|
|
|
1.81
|
|
September 30, 2009 (unaudited)
|
|
1,356,518
|
|
$
|
4.78
|
|
|
2.67
|
|
Options
On May 9, 2008, the Company adopted the 2008 Equity Incentive
Plan, which provides up to 5,000,000 shares of Company's Common Stock to be made
available to employees and directors at various prices as established by the Board of Directors of the Company. On May 9, 2008, the Company
granted options to purchase an aggregate of 937,500 shares of the Company's
common stock under the 2008 Plan to certain directors and employees, pursuant to
stock option agreements between the Company and each of these directors or
employees. The options have an exercise price of $4.00 per share, will vest
immediately and will expire on June 1, 2018. On July 24, 2008, the Company
granted options to purchase an aggregate of 60,000 shares of the Company's
common stock under the 2008 plan to its three independent directors. These
options have an exercise price of $4.00 per share and 30,000 shares were vested
on January 24, 2009 and the remaining 30,000 shares were vested on July 24,
2009, with the expiration date of July 24, 2018. As of September 30, 2009, there
were 4,002,500 shares available under the plan.
F-30
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The fair value of each option granted on May 9, 2008 and July
24, 2008 are estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
Granted on
|
|
May
9, 2008
|
|
|
July
24, 2008
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
3.56%
|
|
|
3.56%
|
|
Expected life (in years)
|
|
5
|
|
|
5
|
|
Weighted average expected volatility
|
|
59.4%
|
|
|
81.2%
|
|
The volatility of the Company's common stock was estimated by
management based on the historical volatility of the Company's common stock, the
risk free interest rate was based on Treasury Constant Maturity Rates published
by the U.S. Federal Reserve for periods applicable to the estimated life of the
options, and the expected dividend yield was based on the Company's current and
expected dividend policy. The value of the options was based on the Company's
common stock price on the date the options were granted. Because the Company
does not have a history of employee stock options, the Company utilized the
simplified method to estimate the life of the options which is the same as
assuming that the options are exercised at the mid-point between the vesting
date and expiration date. For the nine months ended September 30, 2009 and 2008,
the Company expensed $62,281 and $1,283,801 in compensation expense. The options
are accounted for as equity under FASB's accounting standard related to
derivative instruments and hedging activities. The options activity is as
follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
December 31, 2007
|
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
Granted
|
|
997,500
|
|
|
937,500
|
|
|
4.00
|
|
|
10.00
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
September 30, 2008
(unaudited)
|
|
997,500
|
|
|
937,500
|
|
$
|
4.00
|
|
|
9.68
|
|
$
|
-
|
|
Granted
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
December 31, 2008
|
|
997,500
|
|
|
937,500
|
|
$
|
4.00
|
|
|
9.43
|
|
$
|
-
|
|
Granted
|
|
-
|
|
|
60,000
|
|
|
4.00
|
|
|
9.06
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
September 30, 2009
(unaudited)
|
|
997,500
|
|
|
997,500
|
|
$
|
4.00
|
|
|
8.68
|
|
$
|
-
|
|
Note 16 Change in fair value of derivative liabilities
Loss (gain) on change in fair value of derivative liabilities
for the three and nine months ended September 30, 2009 comprised as following:
F-31
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2009
|
|
Change in fair value of derivative liabilities of:
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Conversion option of convertible notes
|
$
|
6,988,311
|
|
$
|
6,232,369
|
|
Warrants
attached to convertible notes
|
|
3,554,340
|
|
|
3,181,749
|
|
Warrants issued to placement agent
|
|
270,550
|
|
|
242,106
|
|
Subtotal
|
|
10,813,201
|
|
|
9,656,224
|
|
Warrants issued with prior placements
|
|
2,429,132
|
|
|
4,449,603
|
|
Initial
charge to income from convertible notes
|
|
-
|
|
|
825,261
|
|
Total
|
$
|
13,242,333
|
|
$
|
14,931,088
|
|
Note 17 Interest expense (income), net
Interest expense (income), net for the three months ended
September 30, 2009 and 2008 comprised as following:
|
|
2009
|
|
|
2008
|
|
Interest expense (income), net
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Interest expense bank and other loans
|
$
|
713,364
|
|
$
|
15,128
|
|
Interest
expense convertible notes
|
|
135,940
|
|
|
-
|
|
Interest income
|
|
(124,533
|
)
|
|
(36,841
|
)
|
Total
|
$
|
724,771
|
|
$
|
(21,713
|
)
|
Interest expense (income), net for the nine months ended
September 30, 2009 and 2008 comprised as following:
|
|
2009
|
|
|
2008
|
|
Interest expense (income), net
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Interest expense bank and other loans
|
$
|
2,257,000
|
|
$
|
59,800
|
|
Interest
expense convertible notes
|
|
157,118
|
|
|
-
|
|
Interest income
|
|
(434,580
|
)
|
|
(67,331
|
)
|
Total
|
$
|
1,979,538
|
|
$
|
(7,531
|
)
|
Note 18 Statutory reserves
In accordance with the Law of the PRC on Joint Ventures Using
Chinese and Foreign Investment and the Company's Articles of Association,
appropriations from net profit should be made to the Reserve Fund and the
Enterprise Expansion Fund, after offsetting accumulated losses from prior years,
and before profit distributions to the investors. The percentages to be
appropriated to the Reserve Fund and the Enterprise Expansion Fund are
determined by the Board of Directors of the Company.
Reserve fund
10% of the net income determined in accordance with PRC
accounting rules and regulations are transferred to a statutory surplus reserve
fund until such reserve balance reaches 50% of the Company's registered capital.
As of September 30, 2009, approximately $5 million still needs to be transferred
to statutory reserve. The transfer to this reserve must be made before
distribution of any dividend to shareholders. The surplus reserve fund is
non-distributable other than during liquidation and can be used to fund previous
years' losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing stockholders in proportion
to their shareholding or by increasing the par value of the shares currently
held by them, provided that the remaining reserve balance after such issue is
not less than 25% of the registered capital.
Enterprise expansion fund
The enterprise fund may be used to acquire plant and equipment
or to increase the working capital to expend on production and operation of the
business. The Company's policy is to transfer 5% of the Shandong Taibang's net
income to this fund determined in accordance with the Company's policy.
F-32
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Note 19 Retirement benefit plans
Regulations in the PRC require the Company to contribute to a
defined contribution retirement plan for the benefit of all permanent employees.
All permanent employees are entitled to an annual pension equal to their basic
salaries at retirement. The PRC government is responsible for the benefit
liability to these retired employees. The Company is required to make
contributions to the state retirement plan at 20% of the monthly base salaries
of the current employees. For the three months ended September 30, 2009 and
2008, the Company made pension contributions in the amount of $145,089
and $100,702, respectively. For the nine months ended
September 30, 2009 and 2008, the Company made pension contributions in the
amount of $487,459 and $274,347, respectively.
Note 20 - Noncontrolling interest and distribution
The roll forward of noncontrolling interest in the balance
sheet is shown below:
|
|
Fang Cheng
|
|
|
Shandong
|
|
|
Guizhou
|
|
|
Guiyang
|
|
|
Guiyang
|
|
|
|
|
|
|
Plasma Co.
|
|
|
Taibang
|
|
|
Renyuan
|
|
|
Qianfeng
|
|
|
Dalin
|
|
|
|
|
|
|
Minority
|
|
|
Minority
|
|
|
Minority
|
|
|
Minority
|
|
|
Minority
|
|
|
Total
|
|
|
|
Owner
|
|
|
Owner
|
|
|
Owners
|
|
|
Owners
|
|
|
Owner
|
|
|
Noncontrolling
|
|
|
|
(20%)
|
|
|
(17.24%)
|
|
|
(75%)
|
|
|
(46%)
|
|
|
(10%)
|
|
|
interest
|
|
December 31, 2007
|
$
|
82,994
|
|
$
|
3,802,898
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,885,892
|
|
Net income(loss)
|
|
(83,938
|
)
|
|
3,387,779
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,303,841
|
|
Foreign currency translation gain/(loss)
|
|
944
|
|
|
3,162
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,106
|
|
Dividend declared
|
|
-
|
|
|
(2,982,045
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,982,045
|
)
|
December 31, 2008
|
$
|
-
|
|
$
|
4,211,794
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,211,794
|
|
Dalin acquisition
|
|
-
|
|
|
-
|
|
|
2,444,304
|
|
|
17,317,066
|
|
|
1,763,689
|
|
|
21,525,059
|
|
Net income(loss)
|
|
(4,372
|
)
|
|
3,729,183
|
|
|
(84, 745
|
)
|
|
6,308,851
|
|
|
789,378
|
|
|
10,738,295
|
|
Foreign currency translation gain/(loss)
|
|
-
|
|
|
(187
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(187
|
)
|
Dividend declared
|
|
-
|
|
|
(1,212,834
|
)
|
|
-
|
|
|
(7,327,205
|
)
|
|
(415,353
|
)
|
|
(8,955,392
|
)
|
September 30, 2009
(unaudited)
|
$
|
(4,372
|
)
|
$
|
6,727,956
|
|
$
|
2,359,559
|
|
$
|
16,298,712
|
|
$
|
2,137,714
|
|
$
|
27,519,569
|
|
Dividends declared are split pro rata between the shareholders
according to their ownership interest. The payment of the dividends may occur at
different times to the shareholders resulting in distributions which do not
appear to be reflective of the minority ownership percentages. As of September
30, 2009, minority shareholders owned 17.24% of the Shandong Taibang, 10% of
Dalin and 46% of Qianfeng. The table below shows the minority shareholder and
dividends outstanding.
|
|
Shandong
|
|
|
Guiyang
|
|
|
Guiyang
|
|
|
|
|
|
|
Taibang
|
|
|
Qianfeng
|
|
|
Dalin
|
|
|
Total
|
|
|
|
Noncontrolling
|
|
|
Noncontrolling
|
|
|
Noncontrolling
|
|
|
Noncontrolling
|
|
|
|
shareholder
|
|
|
shareholder
|
|
|
shareholder
|
|
|
shareholder
|
|
Distribution payable, December 31, 2007
|
$
|
506,626
|
|
$
|
-
|
|
$
|
-
|
|
$
|
506,626
|
|
Dividend declared
|
|
2,982,045
|
|
|
-
|
|
|
-
|
|
|
2,982,045
|
|
Dividend paid
|
|
(288,300
|
)
|
|
-
|
|
|
-
|
|
|
(288,300
|
)
|
Foreign currency
translation adjustments
|
|
51,983
|
|
|
-
|
|
|
-
|
|
|
51,983
|
|
Distribution payable, December 31, 2008
|
$
|
3,252,354
|
|
|
|
|
|
|
|
$
|
3,252,354
|
|
Dividend declared
|
|
1,212,834
|
|
|
7,327,205
|
|
|
415,353
|
|
|
8,955,392
|
|
Dividend paid
|
|
(3,720,649
|
)
|
|
(7,330,671
|
)
|
|
(415,353
|
)
|
|
(11,466,673
|
)
|
Foreign currency translation
adjustments
|
|
14,780
|
|
|
3,466
|
|
|
-
|
|
|
18,246
|
|
Distribution payable, September 30, 2009
(unaudited)
|
$
|
759,319
|
|
$
|
-
|
|
$
|
-
|
|
$
|
759,319
|
|
F-33
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
Note 21 Business combinations
On September 26,
2008, Logic Express (Party B) entered into an equity transfer agreement with
Dalin, a PRC limited liability company, and Fan Shaowen, Chen Aimin, Chen Aiguo
and Yang Gang, the shareholders of Dalin (collectively Party A), relating to
the purchase of an aggregate 90% equity interest in Dalin, for a total purchase
price of RMB194,400,000 (approximately $28,479,600), due in four installments.
The parties agreed that (i) if Logic will have paid 90% of the purchase price of
approximately $25,632,000 (or RMB 174,960,000) on or before April 7, 2009, then
Logic will be entitled to its share of Dalin's portion of the profit generated
by Qianfeng starting from January 1, 2009, and (ii) if Logic fails to pay the
said amount, the profit generated by Qianfeng from January 1, 2009 until the day
of payment of said amount will be shared by Party A and Party B (i.e., Logic
will be entitled to its share of Dalin's portion of the profit generated by
Qianfeng calculated according to the proportion of the purchase price paid by
it, and Party A will be entitled to the rest of Dalin's portion of the profit
generated by Qianfeng). The Company timely initiated the third installment
payment to achieve 90% of the purchase price on April 7, 2009, in accordance
with the instructions provided by the Dalin shareholders, which was subsequently
paid on April 8 and April 14, 2009. The transaction was deemed by the Party A
that Party B fulfilled its obligations under the agreement. As a result, Logic
Holdings, the Hong Kong subsidiary, is now entitled to all the rights and
privileges of a 90% shareholder in Dalin, including the right to receive its pro
rata share of the profits generated by Dalin's 54% majority-owned operating
subsidiary, Qianfeng Biological Products Co., Ltd., or Qianfeng, as of January
1, 2009, subject to a possible dilution to as low as 41.3%, if a dissenting
Qianfeng shareholder prevails in a pre-existing suit to obtain additional equity
interests in Qianfeng. The Company is obligated to pay the fourth and final
installment, representing the remaining 10% of the Dalin purchase price, on or
before April 9, 2010, the one-year anniversary of the local Administration for
Industry and Commerce's approval of the equity transfer.
According to the Equity Transfer Agreement, as amended, the Company can exercise
the shareholder's rights, as well as taking over all the corporate seals and
license, of Dalin upon the payment of the second installment. The Company paid
the second installment according to the agreement on December 14, 2008, however,
the payment did not transfer to the Company, Dalin's related voting power over
its main operating entity, Qianfeng, until the Company's nominees gained control
of the board of directors and the management positions of Qianfeng on January
16, 2009. The Company's four nominees were elected to Qianfeng's seven-member
board of directors in a special meeting of Qianfeng's shareholders, including
Dalin, on that date, and on January 16, 2009, the Qianfeng's Board of Directors
elected a new management team consisting of all Logic Express' and Dalin's
appointees, including a new Chief Executive Officer, Executive Senior Vice
President, Chief Financial Officer and Director of Sales. Until that time, the
Company could not exercise any control over, or retain any financial interest in
Qianfang. Therefore, the Company believes that January 16, 2009, the date on
which the Company legally obtained control, acquired the assets, assumed the
liabilities and became entitled to Dalin's share of the profit generated by
Qianfeng from January 1, 2009 as the acquisition date for the accounting purpose
according to the FASB's accounting standard related to business combination. The
results of Dalin's and its subsidiaries' operations from January 1, 2009 through
September 30, 2009 are included in the Company's Consolidated Statements of
Operations and Comprehensive Income.
Effective January 1, 2009, the Company adopted FASB's
accounting standard related to business combination which required acquisition
method of accounting to be used for all business combinations and for an
acquirer to be identified for each business combination. This accounting
standard requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at
their fair values as of that date, with limited exceptions. It
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with the standard).
The Company's acquisition of Dalin was accounted for in
accordance with this standard and the Company has allocated the purchase price
of Dalin based upon the fair value of the net assets acquired and liabilities
assumed and the fair value of the noncontrolling interest measured at the
acquisition date. The Company estimated the fair values of the assets acquired
and liabilities assumed at the acquisition date in accordance with the business
combination standard issued by FASB and, except for cash and cash equivalents,
fair value was estimated using level 3 inputs under FASB's accounting standard
related to fair value measurements. Level 3 inputs for the nonfinancial assets
included a valuation report (prepared by a third party appraisal firm) that
primarily utilized a combination of Income approach, cost approach and Market
approach valuation techniques. Level 3 inputs for other assets and liabilities
included present value techniques applied to after-tax income, expected
after-tax cash flows and estimated selling prices (less costs of disposal and profit allowance) for
inventories. In accordance with FASB's accounting standard related to goodwill
and other intangible assets, indefinite lived intangibles and goodwill are not
being amortized.
F-34
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
The following table summarizes the net book value and the fair
value of the assets acquired and liabilities assumed at the date of acquisition,
which represents the purchase price allocation at the date of the acquisition of
Dalin based on valuation report which was prepared by a third party appraisal
firm:
|
|
Net
Book Value
|
|
|
Fair
Value
|
|
Current assets
|
$
|
26,883,246
|
|
$
|
26,883,246
|
|
Property, plant and equipment, net
|
|
6,060,024
|
|
|
8,098,959
|
|
Intangibles
|
|
1,729,112
|
|
|
21,471,408
|
|
Other non-current assets
|
|
3,449,162
|
|
|
3,449,162
|
|
Goodwill
|
|
-
|
|
|
12,425,589
|
|
Total assets
|
|
38,121,544
|
|
|
72,328,364
|
|
Total liabilities
|
|
(21,911,373
|
)
|
|
(21,911,373
|
)
|
Net assets
|
$
|
16,210,171
|
|
$
|
50,416,991
|
|
The Company determined the $50.4 million fair value of the
acquired assets of Dalin based on an evaluation by an independent appraisal and
the final asset evaluation by the management. The excess of the cost of an
acquired entity over the net of the amounts assigned to assets acquired and
liabilities assumed shall be recognized as goodwill. As a result, the $12.4
million of goodwill was due to the acquisition purchase price over the fair
value of the assets acquired. During the three months ended September 30, 2009,
the Company did not record any impairment charge from write-downs of purchased
intangible assets since the Company do not identify any trends caused a
reduction in expected future cash flows.
The following table presents the details of the fair value
purchased intangible assets acquired through business combinations as of January
16, 2009:
|
|
Useful life
|
|
|
|
|
|
|
(in
years)
|
|
|
Fair
Value
|
|
Plasma collection permits
|
|
10
|
|
$
|
10,891,092
|
|
Land use rights
|
|
40
|
|
|
1,285,968
|
|
Long-term customer-relationship intangible
assets
|
|
4
|
|
|
6,955,384
|
|
GMP certificate
|
|
5.8
|
|
|
2,332,652
|
|
Software
|
|
3.8
|
|
|
6,312
|
|
Total
|
|
|
|
$
|
21,471,408
|
|
In addition, the Company determined the $21.5 million fair
value of the noncontrolling interest of Dalin based on an evaluation by an
independent third party appraisal firm. Level 3 inputs for noncontrolling
interest included considering average control premium in relevant Merger and
Acquisition premium.
Pro Forma
The following unaudited pro forma condensed income statement
for the three and nine months ended September 30, 2008 were prepared under
generally accepted accounting principles as if the acquisition of Dalin has
occurred on January 1, 2008. The pro forma information may not be indicative of
the results that actually would have occurred if the acquisition had been in
effect from and on the date indicated.
F-35
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,
2009
(Unaudited)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September, 2008
|
|
|
September, 2008
|
|
Revenues
|
$
|
19,306,855
|
|
$
|
61,653,874
|
|
Cost of revenues
|
|
4,647,386
|
|
|
18,252,493
|
|
Gross profit
|
|
14,659,469
|
|
|
43,401,381
|
|
Operating expenses
|
|
3,480,736
|
|
|
12,423,749
|
|
Other expenses, net
|
|
25,920
|
|
|
168,702
|
|
Provision for Income taxes
|
|
1,932,007
|
|
|
6,698,344
|
|
Net income before noncontrolling interest
|
|
9,220,806
|
|
|
24,110,586
|
|
Less: net income attributable to noncontrolling interest
|
|
2,327,527
|
|
|
7,823,067
|
|
Net income attributable to controlling
interest
|
$
|
6,893,279
|
|
$
|
16,287,519
|
|
Basic - earning per share
|
|
|
|
|
|
|
Weighted average number of
shares
|
|
21,434,942
|
|
|
21,434,942
|
|
Earnings per share
|
$
|
0.32
|
|
$
|
0.76
|
|
Diluted - earning per share
|
|
|
|
|
|
|
Weighted average number of shares
|
|
21,504,629
|
|
|
21,713,170
|
|
Earnings per share
|
$
|
0.32
|
|
$
|
0.75
|
|
Note 22 Subsequent Events
The Company has performed an evaluation of
subsequent events through January 22, 2010.
F-36
CHINA BIOLOGIC PRODUCTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008 AND 2007
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
Index to Financial Statements
|
Page
|
CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2008 AND 2007
|
|
|
|
Report of Independent
Registered Public Accounting Firm
|
F-38
|
Consolidated Balance
Sheets as of December 31, 2008 and 2007
|
F-39
|
Consolidated
Statements of Income and Other Comprehensive Income for the Years Ended
December 31, 2008 and 2007
|
F-40
|
Consolidated
Statements of Shareholders' Equity for the Years Ended December 31, 2008
and 2007
|
F-41
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and 2007
|
F-42
|
Notes to Consolidated
Financial Statements
|
F-43
|
F-37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
China
Biologic Products, Inc.
We have audited the accompanying consolidated balance sheets of
China Biologic Products, Inc. and subsidiaries as of December, 2008 and 2007,
and the related consolidated statements of income and other comprehensive
income, shareholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2008. China Biologic Products, Inc's
management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
China Biologic Products, Inc. and subsidiaries as of December 31, 2008 and 2007,
and the results of its operations and cash flows for each of the years in the
two-year period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Frazer Frost, LLP (Successor entity of
Moore Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on January 7,
2010)
Walnut, California
March 30, 2009
F-38
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2007
A S S E T S
|
|
|
|
2008
|
|
|
2007
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
$
|
8,814,616
|
|
$
|
5,010,033
|
|
Note receivable
|
|
-
|
|
|
41,130
|
|
Accounts receivable, net of
allowance for doubtful accounts of $1,268,052
|
|
|
|
|
|
|
and
$1,238,772 as of December 31, 2008 and 2007, respectively
|
|
313,087
|
|
|
316,869
|
|
Dividend receivable
|
|
147,256
|
|
|
-
|
|
Other receivables
|
|
356,957
|
|
|
301,773
|
|
Other receivables- related party
|
|
-
|
|
|
413,697
|
|
Inventories
|
|
14,949,196
|
|
|
9,505,074
|
|
Prepayments and deferred expense
|
|
614,704
|
|
|
138,756
|
|
Total current assets
|
|
25,195,816
|
|
|
15,727,332
|
|
|
|
|
|
|
|
|
PLANT AND EQUIPMENT, net
|
|
19,299,364
|
|
|
15,434,124
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
|
6,533,977
|
|
|
-
|
|
Refundable deposit for potential
acquisition
|
|
14,181,800
|
|
|
-
|
|
Prepayments-non-current
|
|
955,874
|
|
|
711,459
|
|
Long term prepayment related party
|
|
-
|
|
|
516,456
|
|
Intangible assets, net
|
|
1,002,561
|
|
|
915,874
|
|
Total other assets
|
|
22,674,212
|
|
|
2,143,789
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
67,169,392
|
|
$
|
33,305,245
|
|
|
|
|
|
|
|
|
L I A B I L I T I E S A N D S H A R E H O L
D E R S'
E Q U I T Y
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Accounts payable
|
$
|
2,481,889
|
|
$
|
2,677,587
|
|
Notes payable
|
|
29,340
|
|
|
-
|
|
Short term loans - bank
|
|
-
|
|
|
685,500
|
|
Short term loan minority shareholder
|
|
773,277
|
|
|
722,674
|
|
Other payables and accrued liabilities
|
|
3,962,931
|
|
|
1,200,068
|
|
Other payable - land use right
|
|
1,683
|
|
|
1,485
|
|
Distribution payable to minority
shareholder
|
|
3,252,354
|
|
|
506,626
|
|
Customer deposits
|
|
1,091,792
|
|
|
398,794
|
|
Taxes payable
|
|
4,060,010
|
|
|
384,788
|
|
Investment payable
|
|
3,275,501
|
|
|
-
|
|
Total current liabilities
|
|
18,928,777
|
|
|
6,577,522
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES:
|
|
|
|
|
|
|
Non-current other payable land use
right
|
|
323,707
|
|
|
304,086
|
|
Long term loan-bank
|
|
5,868,000
|
|
|
-
|
|
Total other liabilities
|
|
6,191,707
|
|
|
304,086
|
|
Total liabilities
|
|
25,120,484
|
|
|
6,881,608
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
142,120
|
|
|
|
|
|
|
|
|
MINORITY INTEREST
|
|
4,211,794
|
|
|
3,885,892
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
|
|
|
Common stock, $0.0001 par value,
100,000,000 shares authorized, 21,434,942
|
|
|
|
|
|
|
shares issued and
outstanding at December 31, 2008 and 2007
|
|
2,143
|
|
|
2,143
|
|
Paid-in-capital
|
|
10,700,032
|
|
|
9,388,305
|
|
Statutory reserves
|
|
6,989,801
|
|
|
3,934,703
|
|
Retained earnings
|
|
15,392,253
|
|
|
6,461,680
|
|
Accumulated other comprehensive income
|
|
4,752,885
|
|
|
2,608,794
|
|
Total shareholders' equity
|
|
37,837,114
|
|
|
22,395,625
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
|
67,169,392
|
|
$
|
33,305,245
|
|
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these statements.
F-39
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
REVENUES
|
$
|
46,751,160
|
|
$
|
32,398,669
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
14,040,602
|
|
|
9,945,921
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
32,710,558
|
|
|
22,452,748
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
Selling expenses
|
|
2,212,073
|
|
|
4,434,721
|
|
General and administrative
expenses
|
|
7,684,493
|
|
|
4,651,434
|
|
Research and development
expenses
|
|
1,166,494
|
|
|
609,178
|
|
Stock-based compensation
expenses (general and administrative)
|
|
1,311,727
|
|
|
-
|
|
TOTAL OPERATING EXPENSES
|
|
12,374,787
|
|
|
9,695,333
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
20,335,771
|
|
|
12,757,415
|
|
|
|
|
|
|
|
|
OTHER EXPENSES (INCOME):
|
|
|
|
|
|
|
Equity in income of
unconsolidated affiliate
|
|
(175,231
|
)
|
|
-
|
|
Interest expense (income), net
|
|
373,497
|
|
|
88,686
|
|
Other expense (income), net
|
|
251,390
|
|
|
422,891
|
|
TOTAL OTHER EXPENSES (INCOME), NET
|
|
449,656
|
|
|
511,577
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
|
|
|
|
|
AND MINORITY INTEREST
|
|
19,886,115
|
|
|
12,245,838
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
4,596,603
|
|
|
2,074,560
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE MINORITY INTEREST
|
|
15,289,512
|
|
|
10,171,278
|
|
|
|
|
|
|
|
|
LESS MINORITY INTEREST
|
|
3,303,841
|
|
|
1,991,902
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
11,985,671
|
|
|
8,179,376
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
2,144,091
|
|
|
1,490,409
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
$
|
14,129,762
|
|
$
|
9,669,785
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE:
|
|
|
|
|
|
|
Weighted average number of
shares
|
|
21,434,942
|
|
|
21,434,942
|
|
Earnings per share
|
$
|
0.56
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE:
|
|
|
|
|
|
|
Weighted average number of
shares
|
|
21,556,342
|
|
|
21,861,014
|
|
Earnings per share
|
$
|
0.56
|
|
$
|
0.37
|
|
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these statements.
F-40
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
Common stock
|
|
|
|
|
|
Retained earnings
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
Statutory
|
|
|
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
value
|
|
|
capital
|
|
|
reserves
|
|
|
Unrestricted
|
|
|
income
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2006
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
9,388,305
|
|
$
|
2,199,580
|
|
$
|
17,427
|
|
$
|
1,118,385
|
|
$
|
12,725,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,179,376
|
|
|
|
|
|
8,179,376
|
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
1,735,123
|
|
|
(1,735,123
|
)
|
|
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,490,409
|
|
|
1,490,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2007
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
9,388,305
|
|
$
|
3,934,703
|
|
$
|
6,461,680
|
|
$
|
2,608,794
|
|
$
|
22,395,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
1,311,727
|
|
|
|
|
|
|
|
|
|
|
|
1,311,727
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,985,671
|
|
|
|
|
|
11,985,671
|
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
3,055,098
|
|
|
(3,055,098
|
)
|
|
|
|
|
-
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,144,091
|
|
|
2,144,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
10,700,032
|
|
$
|
6,989,801
|
|
$
|
15,392,253
|
|
$
|
4,752,885
|
|
$
|
37,837,114
|
|
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these statements.
F-41
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
$
|
11,985,671
|
|
$
|
8,179,376
|
|
Adjustments to reconcile net income to
cash
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
Minority Interest
|
|
3,303,841
|
|
|
1,991,902
|
|
Depreciation
|
|
1,088,155
|
|
|
777,007
|
|
Amortization
|
|
61,095
|
|
|
91,965
|
|
Loss on disposal of equipment
|
|
214,663
|
|
|
245,042
|
|
Allowance for bad debt accounts receivable
|
|
(56,462
|
)
|
|
221,813
|
|
Allowance for bad debt other
receivables and prepayments
|
|
560,668
|
|
|
-
|
|
Impairment of assets
|
|
415,873
|
|
|
-
|
|
Stock based compensation
|
|
1,311,727
|
|
|
-
|
|
Equity in income of unconsolidated affiliate
|
|
(175,231
|
)
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
Notes receivable
|
|
43,245
|
|
|
44,109
|
|
Accounts receivable
|
|
81,980
|
|
|
3,351,444
|
|
Other receivables
|
|
(33,462
|
)
|
|
310,943
|
|
Other receivables related party
|
|
1,442
|
|
|
(2,302
|
)
|
Inventories
|
|
(4,695,495
|
)
|
|
(2,845,676
|
)
|
Prepayments and deferred expenses
|
|
(459,019
|
)
|
|
599,238
|
|
Accounts payable
|
|
(376,527
|
)
|
|
93,800
|
|
Other payables and accrued
liabilities
|
|
2,695,860
|
|
|
(773,185
|
)
|
Other payables land use right
|
|
(37,308
|
)
|
|
(1,346
|
)
|
Customer deposits
|
|
653,514
|
|
|
2,679
|
|
Taxes payable
|
|
3,585,237
|
|
|
227,604
|
|
Contingent liability
|
|
(149,428
|
)
|
|
136,491
|
|
Net cash provided
by operating activities
|
|
20,020,039
|
|
|
12,650,904
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Payments to related
party
|
|
-
|
|
|
(395,010
|
)
|
Additions to plant and equipment
|
|
(4,033,667
|
)
|
|
(7,715,142
|
)
|
Additions to intangible
assets
|
|
(83,259
|
)
|
|
(234,120
|
)
|
Payments for unconsolidated affiliate
|
|
(3,171,300
|
)
|
|
-
|
|
Prepayments for
potential acquisition
|
|
(14,181,800
|
)
|
|
-
|
|
Advances on non-current assets
|
|
(270,119
|
)
|
|
(381,996
|
)
|
Advances on building
purchase to related party
|
|
-
|
|
|
(496,001
|
)
|
Proceeds from sales of equipment
|
|
73,641
|
|
|
11,455
|
|
Net
cash used in investing activities
|
|
(21,666,504
|
)
|
|
(9,210,814
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
28,830
|
|
|
-
|
|
Proceeds from short
term loan
|
|
-
|
|
|
1,316,700
|
|
Payments on short term loan
|
|
(720,750
|
)
|
|
(3,291,750
|
)
|
Proceeds from long term
loan
|
|
5,766,000
|
|
|
-
|
|
Payments on long term debt
|
|
-
|
|
|
(658,350
|
)
|
Dividends paid to
minority shareholders
|
|
(288,300
|
)
|
|
(488,878
|
)
|
Net cash provided
by (used in) financing activities
|
|
4,785,780
|
|
|
(3,122,278
|
)
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
|
|
665,268
|
|
|
424,001
|
|
|
|
|
|
|
|
|
INCREASE IN CASH
|
|
3,804,583
|
|
|
741,813
|
|
|
|
|
|
|
|
|
CASH, beginning of year
|
|
5,010,033
|
|
|
4,268,220
|
|
|
|
|
|
|
|
|
CASH, end of year
|
$
|
8,814,616
|
|
$
|
5,010,033
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Income taxes paid
|
$
|
1,523,867
|
|
$
|
1,803,510
|
|
Interest paid (net of capitalized
interest)
|
$
|
108,170
|
|
$
|
107,077
|
|
Non-cash transactions
|
|
|
|
|
|
|
Accounts receivable in exchange for accrued liabilities
|
$
|
-
|
|
$
|
1,126,404
|
|
Unpaid investment in unconsolidated affiliate
|
$
|
3,218,565
|
|
$
|
-
|
|
Plant and equipment acquired with prepayments made in prior
periods
|
$
|
78,905
|
|
$
|
498,147
|
|
See report of independent registered public accounting firm.
The accompanying notes are an integral part of these statements.
F-42
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Note 1 Organization background and principal activities
Principal Activities and Reorganization
China Biologic Products, Inc. (the Company or CBP) was originally incorporated in 1992 under the laws of the state of Texas as Shepherd Food Equipment, Inc. On July 18, 2006, the Company entered into a Share Exchange
Agreement with Logic Express Ltd (Logic Express) and its stockholders. Upon the closing of the Share Exchange Agreement on July 19, 2006, Logic Express became a wholly-owned subsidiary of the Company.
Logic Express was incorporated on January 6, 2006, in the British Virgin Islands. Logic Express was established for the purpose of acquiring an 82.76% majority equity interest in Shandong Missile Biological Products Co., Ltd., which it acquired on
April 17, 2006 and on February 27, 2007 changed its name to Shandong Taibang Biological Products Co., Ltd. (Shandong Taibang). As a result of the acquisition, Shandong Taibang became the Company's indirect subsidiary.
The Company through its direct and indirect subsidiaries is principally engaged in the research, development, commercialization, manufacture and sale of human blood products to customers in the People's Republic of China (the PRC)
and India.
Acquisition of assets from plasma stations
In the third quarter of 2006, Shandong Taibang, through its wholly owned plasma companies, entered into an asset transfer agreement with the Shandong Provincial government to acquire certain assets of five plasma stations in Shandong Province, for
total consideration of approximately $2,607,356 (RMB 19.3 million). The operating licenses of the plasma companies were effective as of January 1, 2007.
In January 2007, Shandong Taibang, through its 100% and 80% owned plasma companies, entered into letters of intent to acquire certain assets of two plasma stations in Guangxi Province for total consideration of approximately $761,781
(approximately RMB 5.6 million).
Establishment of distribution company
In September 2006, Shandong Taibang applied to establish a wholly owned subsidiary Shandong Missile Medical Co., Ltd. (Shandong Medical). The registration of Shandong Medical was approved by the Shandong Provincial Department
of Foreign Trade and Economic Cooperation on July 19, 2007. Shandong Medical's scope of business is the wholesale of biological products with a business license period of 25 years from the date of registration, with a registered capital of
$384,600.
Establishment of new collection station in Guangxi
In June 2008, the Company received the approval from the Guangxi Province Bureau of Health to set up a new plasma collection station in Pu Bei County, Guangxi Province. The new plasma collection station will be located in the Centralized Industry
Zone of Pu Bei County and when it becomes operational, it will replace CBP's existing Fang Cheng Plasma Collection Station (Fang Cheng). The Company's management decided to relocate Fang Cheng to a more strategic location to increase
collection volumes. During the construction period, the existing Fang Cheng Plasma Station will still continue with its normal operations. With the approval of the Centralized Industry Zone of Pu Bei County, once Fang Cheng becomes operational, the
Company hopes to expand its coverage area to secure higher collection volumes in the future.
See report of independent registered public accounting firm.
F-43
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Note 2 Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). All material inter-company transactions and balances have been
eliminated in the consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For example, management
estimates the fair value of stock based compensation as well as potential losses on outstanding receivables. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could
differ from these estimates.
Foreign currency translation
The reporting currency of the Company is the US dollar. The Company's principal operating subsidiaries established in the PRC use their local currency, Renminbi (RMB), as their functional currency. Results of operations and cash
flows are translated at average exchange rates during the period. Assets and liabilities are translated at the unified exchange rate as quoted by the People's Bank of China at the end of the period. Translation adjustments resulting from this
process are included in accumulated other comprehensive income in the statements of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred.
In accordance with FAS 95, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance sheet.
The consolidated balance sheet amounts, with the exception of equity at December 31, 2008 and 2007 were translated at RMB6.82 to $1.00 and RMB7.29 to $1.00, respectively. The equity accounts were stated at their historical rate. The average
translation rates applied to consolidated statements of income and cash flow for the years ended December 31, 2008 and 2007 were RMB6.94 and RMB7.59, respectively.
Revenue recognition
The Company recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or
determinable, which are generally considered to be met upon delivery and acceptance of products at the customer site. Sales are presented net of any discounts given to customers. As a policy, the Company does not accept any product returns and based
on our records, product returns, if any, are immaterial. Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All products produced by the Company and sold in the PRC are subject to a Chinese VAT at a
rate of 6% of the gross sales price or at a rate approved by the Chinese local government. Products distributed by Shandong Medical are subjected to a 17% VAT.
Shipping and handling
Shipping and handling costs related to costs of goods sold are included in selling, general and administrative costs and totaled $60,164 and $93,107 for the years ended December 31, 2008 and 2007, respectively.
Financial instruments
Statement of Financial Accounting Standards (SFAS) 107, Disclosures about Fair Value of Financial Instruments requires disclosure of the fair value of financial instruments held by the Company. SFAS 107 defines the fair value
of financial instruments. The Company considers the carrying amount of cash, receivables, payables including accrued liabilities and short term loans to approximate their fair values because of the short period of time between the origination of
such instruments and their expected realization and if applicable, their stated rates of interest are equivalent to interest rates currently available.
See report of independent registered public accounting firm.
F-44
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
On January 1, 2008, the Company adopted SFAS 157, Fair Value
Measurements, which defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosures
requirements for fair value measures. The three levels are defined as follow:
-
Level 1: inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
-
Level 2: inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for
substantially the full term of the financial instruments.
-
Level 3: inputs to the valuation methodology are unobservable and
significant to the fair value.
The Company's investment in unconsolidated affiliate amounted
to $6,533,977 as of December 31, 2008. Since there is no quoted or observable
market price for the fair value of similar investment, the Company then used the
level 3 inputs for its valuation methodology. The determination of the fair
value was based on the capital investment that the Company contributed income or
losses from investment and additional contributions made and distributions
received. The carrying value of the investment in unconsolidated affiliate
approximated the fair value as of December 31, 2008.
The carrying value of the long term bank loan amounted to
$5,868,000. The Company used Level 2 inputs for its valuation methodology for
the long term bank loan by comparing the stated loan interest rate to the rate
charged by the Bank of China to similar loans.
|
|
Carrying Value as of
|
|
|
Fair Value
Measurements at December 31, 2008
|
|
|
|
December 31, 2008
|
|
|
using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Investment
|
$
|
6,533,977
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,533,977
|
|
Long term bank loan
|
$
|
5,868,000
|
|
$
|
-
|
|
$
|
5,380,114
|
|
$
|
-
|
|
The Company did not identify any assets or liabilities that are
required to be presented on the balance sheet at fair value in accordance with
SFAS 157.
Concentration of risk
The Company's operations are carried out in the PRC and are
subject to specific considerations and significant risks not typically
associated with companies in North America and Western Europe. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC economy. The Company's results may be adversely
affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Cash includes cash on hand and demand deposits in accounts
maintained with state-owned banks within the PRC, Hong Kong and the United
States. Certain financial instruments, which subject the Company to
concentration of credit risk, consist of cash. The Company maintains balances at
financial institutions which, from time to time, may exceed Federal Deposit
Insurance Corporation insured limits for the banks located in the United States
or may exceed Hong Kong Deposit Protection Board insured limits for the banks
located in Hong Kong. Balances at financial institutions or state-owned banks
within the PRC are not covered by insurance. Total cash in state-owned banks at
December 31, 2008 and 2007 amounted to $8,689,414 and $4,814,991, respectively,
$47,865 and $240,797 of which are covered by insurance, respectively. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any risks on its cash in bank accounts.
The Company's major product, human albumin: - 20%/10ml,
20%/25ml and 20%/50ml, accounted for 57.8% and 63.5% of total revenues, for the
years ended December 31, 2008 and 2007, respectively. If the market demands for
human albumin cannot be sustained in the future or if the price of human albumin
decreases, it would adversely affect the Company's operating results.
See report of independent registered public accounting firm.
F-45
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
All of the Company's customers are located in the PRC. As of
December 31, 2008 and 2007, the Company had no significant concentration of
credit risk, except for the amounts due from related parties. There were no
customers that individually comprised 10% or more of the revenue during the
fiscal year ended December 31, 2008 and 2007, respectively. No individual
customer represented more than 10% of trade receivables at December 31, 2008 and
2007. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its
customers.
The Company's top three vendors comprised 36.3% and 24.0%,
respectively, of the Company's purchases for the years ended December 31, 2008
and 2007. Accounts payable to these vendors amounted $448,016 and $318,843 as of
December 31, 2008 and 2007, respectively.
Accounts receivable
During the normal course of business, the Company extends
unsecured credit to its customers. Management reviews its accounts receivable on
a regular basis to determine if the allowance for doubtful accounts is adequate.
An estimate for doubtful accounts is made when collection of the full amount is
no longer probable. Account balances are written-off after
management has exhausted all efforts of collection. Trade accounts receivable
consist of the following:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Trade accounts receivable
|
$
|
1,581,139
|
|
$
|
1,555,641
|
|
Less: Allowance for doubtful accounts
|
|
(1,268,052
|
)
|
|
(1,238,772
|
)
|
Total
|
$
|
313,087
|
|
$
|
316,869
|
|
The activity in the allowance for doubtful accounts for trade
accounts receivable for the years ended December 31, 2008 and 2007 is as
follows:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Beginning allowance for doubtful accounts
|
$
|
1,238,772
|
|
$
|
1,131,209
|
|
Bad debt expense
|
|
-
|
|
|
221,813
|
|
Recovery of amount
previously reserved
|
|
(56,462
|
)
|
|
-
|
|
Write-off charged against the allowance
|
|
-
|
|
|
(188,891
|
)
|
Foreign currency translation adjustment
|
|
85,742
|
|
|
74,641
|
|
Ending allowance for doubtful accounts
|
$
|
1,268,052
|
|
$
|
1,238,772
|
|
Inventories
Inventories are stated at the lower of cost or market using the
weighted average basis and consist of the following:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Raw materials
|
$
|
7,043,349
|
|
$
|
3,841,595
|
|
Work-in-process
|
|
4,801,768
|
|
|
4,068,389
|
|
Finished goods
|
|
3,104,079
|
|
|
1,595,090
|
|
Total
|
$
|
14,949,196
|
|
$
|
9,505,074
|
|
The Company reviews its inventory periodically for possible
obsolete goods or to determine if any reserves are necessary for potential
obsolescence. As of December 31, 2008 and 2007, the Company has determined that
no reserve is necessary.
Plant and equipment
Plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets with 5% residual value. Depreciation
expense for the year ended December 31, 2008 and 2007 amounted to $1,088,155 and
$777,007, respectively.
See report of independent registered public accounting
firm.
F-46
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Estimated useful lives of the assets are as follows:
|
Estimated Useful Life
|
Buildings and improvement
|
30
|
years
|
Machinery and equipment
|
10
|
years
|
Furniture, fixtures and office equipment
|
5-10
|
years
|
Construction in progress represents the costs incurred in
connection with the construction of buildings, new additions, or capitalized
interest incurred in connection with the Company's plant facilities. In
accordance with the provisions of SFAS No. 34, Capitalize of Interest Cost,
interest incurred on borrowings is capitalized to the extent that borrowings do
not exceed construction in progress. The credit is a reduction of interest
expense. No depreciation is provided for construction in progress until such
time as the assets are completed and placed into service. Maintenance, repairs
and minor renewals are charged directly to expenses as incurred. Major additions
and betterment to property and equipment are capitalized.
The Company periodically evaluates the carrying value of
long-lived assets in accordance with SFAS 144. When estimated cash flows
generated by those assets are less than the carrying amounts of the asset, the
Company recognizes an impairment loss. Based on its review, the Company believes
that, as of December 31, 2008, there were no impairments of its long-lived
assets.
Plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Buildings and improvements
|
$
|
5,809,724
|
|
$
|
4,525,589
|
|
Machinery and equipment
|
|
12,308,174
|
|
|
8,201,720
|
|
Furniture, fixtures, and office equipment
|
|
1,501,946
|
|
|
768,197
|
|
Total depreciable assets
|
|
19,619,844
|
|
|
13,495,506
|
|
Accumulated depreciation
|
|
(3,099,259
|
)
|
|
(1,840,197
|
)
|
|
|
16,520,585
|
|
|
11,655,309
|
|
Construction in progress
|
|
2,778,779
|
|
|
3,778,815
|
|
Total
|
$
|
19,299,364
|
|
$
|
15,434,124
|
|
Interest expense of $0 and $52,701 was capitalized into
construction in progress for the years ended December 31, 2008 and 2007,
respectively.
Investment in unconsolidated affiliate
Equity method investments are recorded at original cost and
adjusted to recognize the Company's proportionate share of the investee's net
income or losses and additional contributions made and distributions received.
The Company recognizes a loss if it is determined that other than temporary
decline in the value of the investment exists.
Intangible assets
Intangible assets are stated at cost (estimated fair value upon
contribution or acquisition), less accumulated amortization. Amortization
expense is recognized on the straight-line basis over the estimated useful lives
of the assets as follows:
Intangible assets
|
|
Estimated useful lives
|
Land use rights
|
|
50 years
|
Permits and licenses
|
|
5-10 years
|
Blood donor network
|
|
10 years
|
All land in the PRC is owned by the government; however, the
government grants land use rights. The Company has obtained rights to use
various parcels of land for 50 years. The Company amortizes the cost of the land
use rights over their useful life using the straight-line method.
Other intangible assets represent permits, licenses and Good
Manufacturing Practice Certificates contributed in return for equity upon the
establishment of Shandong Taibang in 2002. Contributed rights include those
necessary to manufacture and distribute human blood products in the PRC
market as authorized by the relevant PRC authorities. The estimated useful life
of the contributed rights is 5-10 years.
See report of independent registered public accounting
firm.
F-47
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Intangible assets consisted of the following:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Land use rights
|
$
|
848,982
|
|
$
|
819,937
|
|
Permits and licenses
|
|
389,709
|
|
|
326,983
|
|
Blood donor network
|
|
2,347
|
|
|
5,621
|
|
Software
|
|
61,296
|
|
|
28,892
|
|
Totals
|
|
1,302,334
|
|
|
1,181,433
|
|
Accumulated amortization
|
|
(299,773
|
)
|
|
(265,559
|
)
|
Intangible assets, net
|
$
|
1,002,561
|
|
$
|
915,874
|
|
Total amortization expense for the years ended December
31, 2008 and 2007 amounted to $61,095 and $91,965, respectively.
Amortization expense for intangible assets for the next five
fiscal years is as follows:
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
Amortization expense
|
$
|
64,328
|
|
$
|
62,635
|
|
$
|
62,635
|
|
$
|
56,560
|
|
$
|
31,777
|
|
$
|
749,029
|
|
Intangible assets of the Company are reviewed at least annually
or more often if circumstances dictate, to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the years of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
For the years ended December 31, 2008 and 2007, the Company recorded an
impairment loss of $415,873 and $0, respectively. As of December 31, 2008, the Company expects these assets to be fully
recoverable.
Revenues
The Company's revenues are primarily derived from the
manufacture and sale of human blood products. The Company's revenues by
significant types of product for the years ended December 31, 2008 and
2007 are as follows:
|
|
2008
|
|
|
2007
|
|
Human Albumin 20%/10ml, 20%/25ml and
20%/50ml
|
$
|
27,021,733
|
|
$
|
20,544,330
|
|
Human Hepatitis B Immunoglobulin
|
|
3,203,901
|
|
|
1,532,661
|
|
Human Immunoglobulin for Intravenous
Injection
|
|
10,307,294
|
|
|
3,335,607
|
|
Human Rabies Immunoglobulin
|
|
3,619,622
|
|
|
5,753,124
|
|
Human Tetanus Immunoglobulin
|
|
1,492,421
|
|
|
1,105,630
|
|
Others
|
|
1,106,189
|
|
|
127,317
|
|
Totals
|
$
|
46,751,160
|
|
$
|
32,398,669
|
|
The Company is engaged in sale of human blood products to
customers in India. The amount was immaterial and less than 10% of total sales
for the year ended December 31, 2008.
Research and development costs
Research and
development costs are expensed as incurred.
See report of independent registered public accounting
firm.
F-48
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Retirement and other post
retirement benefits
Contributions to retirement schemes (which are defined contribution plans) are charged to the statement of operations as and when the related employee service is provided.
Product liability
The Company's products are covered by product liability insurance of approximately $2,934,000 (RMB 20,000,000). For the years ended December 31, 2008 and 2007, no claim on the insurance policy was filed.
Government grants
The Company's subsidiary, Shandong Taibang, is entitled to receive grants from the PRC municipal government due to its operation in the high- and new technology business sector. For the years ended December 31, 2008 and 2007, Shandong Taibang
received non-refundable grants of $139,365 and $257,415, respectively, from the PRC municipal government. Grants received from the PRC municipal government can be used for enterprise development and technology innovation purposes. The
government grants received during the 2008 and 2007 periods were recognized in the accompanying statement of operations as an offset to Research and Development expenses as they were earmarked or as a reduction of cost of the assets acquired.
Income taxes
The Company accounts for income taxes under SFAS 109, Accounting for Income Taxes, which requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between
income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of taxes currently due plus deferred taxes. Since the Company had no operations within the United States there is no provision for US taxes
and there are no deferred tax amounts at December 31, 2008 and 2007. In July, 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretations No. 48,
Accounting for Uncertainty in Income Taxes an interpretation
of FASB Statement No. 109
(FIN 48), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a return. FIN 48 provides guidance on the measurement, recognition, classification and disclosure of
tax positions, along with accounting for the related interest and penalties. FIN 48 became effective at the beginning of 2007 and had no impact on the Company's consolidated financial statements.
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis
used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be
available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
Value added tax
Enterprises or individuals, who sell products, engage in repair and maintenance or import and export goods in the PRC are subject to a VAT in accordance with Chinese laws. The VAT rate applicable to the Company is 6% of the gross sales price.
Products distributed by Shandong Medical are subjected to a 17% VAT. No credit is available for VAT paid on purchases.
Stock-based compensation
See report of independent registered public accounting firm.
F-49
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
The Company accounts and reports stock-based compensation pursuant to SFAS 123R Accounting for Stock-Based Compensation, which defines a fair-value-based method of accounting for stock based employee compensation and transactions in
which an entity issues its equity instruments to acquire goods and services from non-employees. Stock compensation for stock granted to non-employees has been determined in accordance with SFAS 123R and the EITF 96-18, "Accounting for Equity
Instruments that are issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services", as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably
measured.
Recently issued accounting pronouncements
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115 which permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS 159 is to provide opportunities to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply hedge accounting provisions. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. The Company adopted SFAS 159 on January 1, 2008, and chose not to elect the option to measure the fair value of eligible financial assets and liabilities.
In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities (FSP EITF 07-3), which
addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been
performed. The adoption of FSP EITF 07-3 did not impact the Company's consolidated financial statements
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51, which establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained non-controlling
equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company believes adopting SFAS 160 will significantly impact its financial statements for purchases of minority ownership completed after December
31, 2008.
In December 2007, the FASB issued SFAS 141(R), Business Combinations to replace SFAS 141, Business Combinations
.
SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting
(which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This replaces SFAS 141's cost-allocation process, which required the cost of an acquisition to be allocated
to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the
identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company believes adopting SFAS 141R will
significantly impact its financial statements for all business combinations completed after December 31, 2008.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities An Amendment of SFAS No. 133. Effective on January 1, 2009, SFAS 161 seeks to improve financial reporting for derivative
instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of
derivative instruments and gains and losses in a tabular format; (2) the disclosure of
derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. The Company is in the process of evaluating the new disclosure requirements under SFAS 161.
See report of independent registered public accounting firm.
F-50
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
In May 2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting Principles". SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section
411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." SFAS 162 has no impact on the Company's financial condition, operations or cash flows.
In June 2008, the FASB issued EITF 07-5 Determining whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock. This Issue is effective for financial statements issued for fiscal years beginning after December
15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS 133 Accounting for Derivatives and Hedging Activities specifies that a contract that would otherwise meet the definition
of a derivative but is both (a) indexed to the Company's own stock and (b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new
two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard triggers liability
accounting on all options and warrants exercisable at strike prices denominated in any currency other than the functional currency of the operating entity in China (Renminbi). EITF 07-5 is effective for fiscal years beginning after December 15,
2008, and is expected to materially affect the Company's financial statements to carry all warrants and options as liabilities at fair value and to reflect the change in fair value as a gain (loss).
In June 2008, FASB issued EITF 08-4, Transition Guidance for Conforming Changes to Issue No. 98-5. The objective of EITF 08-4 is to provide transition guidance for conforming changes made to EITF 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, that result from EITF 00-27 Application of Issue No. 98-5 to Certain Convertible Instruments, and SFAS 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. EITF 08-4 had no impact on the
Company.
On October 10, 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on
our financial position or results for the years ended December 31, 2008.
In January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20, and EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets. FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its
exclusive reliance on market participant estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the market participant view to a
holder's estimate of whether there has been a probable adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1 did not have a material impact on our consolidated financial statements because all of our investments in debt securities are classified as trading securities
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on net income or cash flows.
See report of independent registered public accounting firm.
F-51
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Note 3 Related party transactions
The material related party transactions undertaken by the
Company with related parties during the years ended December 31, 2008 and
2007 are presented as follows:
Amount Due from
|
|
Purpose
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Minority shareholder of subsidiary
(1)
|
|
Advances
|
|
$
|
-
|
|
$
|
413,697
|
|
Minority shareholder of subsidiary
(2)
|
|
Prepayment for assets
|
|
|
-
|
|
|
516,456
|
|
|
|
|
|
|
|
|
|
|
|
Amount Due to
|
|
Purpose
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Minority shareholder of subsidiary
(3)
|
|
Loan
|
|
$
|
773,277
|
|
$
|
722,674
|
|
(1) During 2007, the Company advanced in total $413,697 (RMB
3,007,481) in cash
to a 20% minority shareholder of one of the Company's plasma companies for the purchases of plasma collection license
and certain equipments for its Fang Cheng Plasma Company. However, the title
transfer of those equipments, with the estimated value of approximately $16,871
(RMB 122,481), has not been realized. The Company determined that the likelihood
of the minority shareholder's ability to deliver the title of those equipments
is minimal and made a provision for the amount of $16,871 as of December 31,
2008. The Company also determined that the future cash flows expected to be
generated from the Fang Cheng plasma collection license had impaired as the
plasma collected in 2008 did not warrant any carrying amount for the license. As
a result, the Company recorded an impairment write-down of intangible assets for
approximately $415,873 (RMB 2,885,000).
(2) The Company prepaid approximately $516,456 (RMB 3,767,000)
to a minority shareholder of one of the plasma companies as of December 31,
2008. The prepayment is for the purpose of acquiring certain assets. Assets are
expected to be received by January 2009. The Company determined that the
likelihood of recovering this prepayment is minimal, due to the minority
shareholder's ability to secure the title of the assets and the personal
financial difficulty as a result of the economic downturn, and made a provision
for the amount as allowance for bad debt as of December 31, 2008. The Company is
currently negotiating with the shareholder in attempt to recover the fund.
(3) As of December 31, 2008 and 2007, the Company borrowed an
aggregate of $773,277 and $722,674, respectively, from its minority shareholder,
Shandong Institute, for working capital purposes. The Company is required to
repay the loan in cash due by August 2009, with an annual interest rate of
6%.
Note 4 Prepayments and deferred expense
Prepayments and deferred expense represent partial payments for
deposits on raw material purchases and prepayment for insurance expenses and
amounted to $614,704 and $138,756 as of December 31, 2008 and 2007,
respectively.
Long term prepayments represent partial payments or deposits on
plant and equipment and intangible assets purchases and amounted to $955,874 and
$711,459 as of December 31, 2008 and 2007, respectively.
Note 5 Investment in unconsolidated affiliate
On October 10, 2008, Shandong Taibang entered into an Equity
Transfer Agreement (the "Equity Transfer Agreement") with Mr. Fan Qingchun (the
"Transferor"), a PRC citizen holding 35% of the equity interest in Xi'an Huitian
Blood Products Co., Ltd. ("Huitian"), a PRC limited liability company. Pursuant
to the Equity Transfer Agreement, the Transferor agrees to sell to Shandong
Taibang, and Shandong Taibang agrees to purchase from the Transferor, 35% equity
interest in Huitian for an aggregate purchase price of $6,502,902 (or RMB
44,327,890) including interest of $48,102 (RMB 327,890). Huitian is one of the
32 government approved plasma-based product producers in China, and it is in
compliance with Good Manufacturing Practices (GMP) standards. It is also
approved by the PRC's State Food and Drug Administration (SFDA) to produce
four types of plasma-based products. As December 31, 2008, the Company has paid
a total of $3,171,300 with the unpaid balance of $3,275,501 to be due by March
31, 2009, including interest.
While the
Company is able and willing to make the final payment, the local tax authority
where Huitian is located prohibited the Company from making the final payment
due to the dispute over the Mr. Fan's personal income tax rate and the
withholding tax receiving jurisdiction. The Company is awaiting the final
decision from the local tax authority and expects the payment can be made during
April, 2009.
Logic Express has also entered into an investment entrustment
agreement (the "Investment Agreement") with the minority shareholder in Shandong
Taibang, Shandong Biological Products Research Institute ("Biological
Institute"), pursuant to which Logic Express agrees to provide the investment
amount for the acquisition and the Shandong Institute agree to entrust Shandong
Taibang to acquire the 35% equity interest of Huitian in its name. In exchange
Logic Express is also obligated to pay Shandong Taibang approximately $18,000
(or RMB120,000) per year as consideration for Shandong Taibang's performance under
this agreement. Under the Investment Agreement, after the acquisition, Logic
Express will be in charge of Huitian's daily operation and management, will bear
the costs, expenses, liabilities and losses incurred in its operation, and will
enjoy its profits. Shandong Taibang will perform relevant tasks according to
Logic Express's instruction, and will not exercise any management right over
Huitian or derive any financial return from Huitian. Logic Express agreed to
indemnify Shandong Taibang for any loss in connection with the investment and
pledged its equity interest in Shandong Taibang as collateral against such
losses.
See report of independent registered public accounting firm.
F-52
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Summarized unaudited financial information of Huitian is as
follows:
|
|
December 31, 2008
|
|
Current assets
|
$
|
8,039,180
|
|
Non-current assets
|
|
10,145,248
|
|
Total assets
|
|
18,184,428
|
|
Current liabilities
|
|
2,747,573
|
|
Non-current liabilities
|
|
-
|
|
Shareholders' equity
|
|
15,436,855
|
|
Total liabilities and shareholders' equity
|
$
|
18,184,428
|
|
The portion of the difference between the cost of an investment
and the amount of underlying equity in net assets of Huitian that is recognized
as goodwill in accordance with APB Opinion No. 18, the Equity Method of
Accounting for investment in Common Stock, shall not be amortized. However,
equity method goodwill shall not be reviewed for impairment in accordance with
SFAS No.142, but instead should continue to be reviewed for impairment in
accordance with paragraph 19(h) of APB18.
Summarized unaudited financial information of Huitian from October 10,
2008, date of acquisition, to December 31, 2008 is as follows:
|
|
From October 10, 2008
|
|
|
|
to
|
|
|
|
December 31, 2008
|
|
Net sales
|
$
|
1,777,321
|
|
Gross profit
|
$
|
1,022,416
|
|
Income before taxes
|
$
|
560,443
|
|
Net income
|
$
|
500,661
|
|
Company's share of net income
|
$
|
175,231
|
|
The roll forward of investment in Huitian in the
balance sheet is shown below:
|
|
|
|
|
|
|
|
Huitian Minority
|
|
|
|
35% Ownership
|
|
December 31, 2007
|
$
|
-
|
|
Investment made
|
|
6,502,902
|
|
Net Income
|
|
175,231
|
|
Dividend declared
|
|
(147,256
|
)
|
Foreign currency translation gain
|
|
3,100
|
|
December 31, 2008
|
$
|
6,533,977
|
|
|
|
|
|
|
|
|
|
See report of independent registered public
accounting firm.
|
|
|
|
F-53
|
|
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Note 6 Debt
Short term and long term loans
Short term loans represent renewable loans due to various banks
which are normally due within one year.
The Company's bank loans consisted of the following:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Short term bank loan, secured by buildings
and land use rights, due on February 25, 2008, annual interest rate at
6.12%
|
$
|
-
|
|
$
|
685,500
|
|
Long term bank loan, secured by buildings and land use
rights, due on August 3, 2010, annual interest rate at 7.02%
|
|
5,868,000
|
|
|
-
|
|
Totals
|
$
|
5,868,000
|
|
$
|
685,500
|
|
The above loans are secured by Shandong Taibang's land use
rights and a building located in Taian, Shandong Province, PRC, with carrying
value as follows:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Buildings
|
$
|
1,417,138
|
|
$
|
1,369,831
|
|
Land use rights
|
|
195,691
|
|
|
387,989
|
|
Totals
|
$
|
1,612,829
|
|
$
|
1,757,820
|
|
Other payables and accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables and accruals consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
Other payables
|
$
|
1,344,830
|
|
$
|
664,195
|
|
Accruals for salaries and welfare
|
|
830,388
|
|
|
184,942
|
|
Accruals for RTO expenses
|
|
245,657
|
|
|
245,658
|
|
Accruals for selling commission
|
|
1,508,102
|
|
|
104,753
|
|
Accruals for interest
|
|
33,954
|
|
|
-
|
|
Others
|
|
-
|
|
|
520
|
|
Total
|
$
|
3,962,931
|
|
$
|
1,200,068
|
|
Other payable - land use rights
In July 2003, Shandong Taibang obtained certain land use rights
from the PRC municipal government. Shandong Taibang is required to make payments
totaling approximately $20,369 (RMB 138,848) per year to the local state-owned
entity, for the 50-year life of the rights or until Biological Institute
completes its privatization process. The Company recorded land use rights
equal to other payable land use rights totaling $325,390 and $305,571 as of
December 31, 2008 and December 31, 2007, respectively, determined using present
value of annual payments over 50 years.
Note 7 - Earnings per share
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding and dilutive potential common shares
outstanding during the period.
See report of independent registered public accounting
firm.
F-54
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Earning per share is as follows for the years ended December
31,
|
|
2008
|
|
|
2007
|
|
Net income for earnings per share
|
$
|
11,985,671
|
|
$
|
8,179,376
|
|
Weighted average shares used in basic computation
|
|
21,434,942
|
|
|
21,434,942
|
|
Diluted effect of warrants and
options
|
|
121,400
|
|
|
426,072
|
|
Weighted average shares used in diluted computation
|
|
21,556,342
|
|
|
21,861,014
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
$
|
0.56
|
|
$
|
0.38
|
|
Diluted
|
$
|
0.56
|
|
$
|
0.37
|
|
At December 31, 2008, 1,284,000 warrants were included in the
calculation of diluted earnings per share and 937,500 options were excluded from
the calculation because of their antidilutive nature.
At December 31, 2007, all outstanding warrants were included in
the calculation of diluted earnings per share.
Note 8 Taxes
Income taxes
The Company is governed by the Income Tax Law of the People's
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax Laws). Under the
Income Tax Laws, foreign investment enterprises (FIE) generally are subject to
an income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments unless the enterprise is located in specially
designated regions of cities for which more favorable effective tax rates apply.
Upon approval by the PRC tax authorities, FIEs scheduled to operate for a period
of 10 years or more and engaged in manufacturing and production may be exempt
from income taxes for two years, commencing with their first profitable year of
operations, after taking into account any losses brought forward from prior
years, and thereafter with a 50% exemption for the next three years.
In 2002, the Company became a Sino-foreign joint venture. In
2003, the Company was granted by the state government for benefit of income tax
exemption in first 2 years from January 2003 to December 2004 and 50% exemption
for the third to fifth years from January 2005 to December 2007.
Beginning January 1, 2008, the new Enterprise Income Tax
(EIT) law will replace the existing laws for Domestic Enterprises (DES) and
Foreign Invested Enterprises (FIEs).
The key changes are:
a.
|
The new standard EIT rate of 25% will replace the 33%
rate currently applicable to both DES and FIEs, except for High Tech
companies who pays at a reduced rate of 15%; and
|
|
|
b.
|
Companies established before March 16, 2007 will continue
to enjoy tax holiday treatment approved by local government for a grace
period of the next 5 years or until the tax holiday term is completed,
whichever is sooner.
|
The Company's subsidiary, Shandong Taibang, was established
before March 16, 2007 and therefore is qualified to continue enjoying the
reduced tax rate as described above.
Starting from January 1, 2008, Shandong Taibang became subject
to 25% income tax rate according to the newly issued Income Tax Laws of PRC.
According to PRC's central government policy, certain new technology or high
technology companies will enjoy preferential tax treatment of 15%, instead of
25%. On February 12, 2009, Shandong Taibang received the new technology or high
technology certification from Shandong provincial government. The Certification
allows the Company to receive the 15% preferential income tax rate, for a period
of three years starting from January 1, 2008.
See report of independent registered public accounting firm.
F-55
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
The local government granted the Company tax exemption for
purchases of locally manufactured equipment for the fiscal year ended December
31, 2003 through 2007. Starting January 1, 2008 the government no longer
provides this tax exemption for purchases of locally manufactured equipment.
During the third quarter of 2008, the Company received a tax rebate for the
amount of $319,095 (RMB 2,181,102) for the Company's reinvestment of its
dividends back into Shandong Taibang at the end of our fiscal year 2007.
Starting January 1, 2008, all dividends paid to foreign parents are subject to a
10% income tax. As a result, the company recorded a $1,228,775 income tax
expense for dividends Shandong Taibang paid to its foreign parent, Logic
Express.
The following table reconciles the U.S. statutory rates to the
Company's effective tax rate for the years ended December 31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
|
U.S. Statutory rates
|
|
35.0
|
%
|
|
35.0
|
%
|
|
Foreign Income
|
|
(35.0
|
)
|
|
(35.0
|
)
|
|
China Tax rates
|
|
25.0
|
|
|
33.0
|
|
|
China income tax exemption
|
|
(10.0
|
)
|
|
(18.0
|
)
|
|
Other items (1)
|
|
8.1
|
|
|
1.9
|
|
|
Effective income tax rates
|
|
23.1
|
%
|
|
16.9
|
%
|
|
(1) The 8.1% represents the $1,228,775 income tax expense for
dividends Shandong Taibang paid to its foreign parent in 2008 and expenses
incurred by CBP and Logic Express that are not deductible in PRC for the year
ended December 31, 2008 offset by tax rebate of $319,095 received during the
third quarter of 2008. The 1.9% represents expenses incurred by CBP and Logic
Express that are not deductible in PRC for the year ended December 31, 2007.
The estimated tax savings due to the tax exemption for the
fiscal year ending December 31, 2008 and 2007 amounted to $2,443,657 and
$2,498,472, respectively. The net effect on earnings per share if the income tax
had been applied would decrease basic earnings per share for the years ended
December 31, 2008 and 2007 by $0.11 and $0.12, respectively, would decrease the
diluted earnings per share for the years ended December 31, 2008 and 2007 by
$0.11 and $0.11, respectively.
CBP was incorporated in the United States and has incurred net
operating losses of $1,777,854 (estimated) and $614,982 for income tax
purposes for the years ended December 31, 2008 and 2007, respectively. The
estimated net operating loss carry forwards for United States income taxes
amounted to $3,661,143 which may be available to reduce future years' taxable
income. These carry forwards will expire, if not utilize, from 2026 through
2028. Management believes that the realization of the benefits from these losses
appears uncertain due to the Company's limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. Management reviews this valuation allowance periodically and
makes adjustments as warranted. The following table represents the rollforward
of the deferred tax valuation allowance
|
|
For the year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Balance of January 1,
|
$
|
640,318
|
|
$
|
431,224
|
|
Increase
|
|
604,471
|
|
|
209,094
|
|
Balance as of December 31,
|
$
|
1,244,789
|
|
$
|
640,318
|
|
|
|
|
|
|
|
|
Value added tax
|
|
|
|
|
|
|
VAT on sales amounted to $3,098,977 and $2,203,070 for the
years ended December 31, 2008 and 2007, respectively. Sales are recorded net of
VAT collected and paid as the Company acts as an agent for the government. VAT
taxes are not impacted by the income tax holiday.
See report of independent registered public accounting
firm.
F-56
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Taxes payable consisted of the following:
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
VAT tax payable
|
$
|
331,505
|
|
$
|
168,369
|
|
Income tax payable
|
|
3,630,878
|
|
|
187,924
|
|
Others miscellaneous tax payable
|
|
97,627
|
|
|
28,495
|
|
|
$
|
4,060,010
|
|
$
|
384,788
|
|
Note 9 Commitments and contingent liabilities
Capital and lease commitments
The Company's 82.76% owned subsidiary, He Ze, entered into a
lease agreement on January 13, 2005, with the Yun Cheng Lan Tian Transportation
Company in Yun Cheng County, Shandong Province, to lease land use rights for a
period of 10 years. The annual lease amount is approximately $1,760 (RMB 12,000)
with no early termination penalty. The Company has the right of first refusal to
renew the lease after the ten year lease term.
The Company's 82.76% owned subsidiary, Qi He, entered into a
lease agreement on April 26, 2007, with the Zhang Bo Shi Village in Qi He
County, Shandong Province, to lease land use rights for a period of 50 years.
The annual lease amount is approximately $4,569 (RMB 31,144) with no early
termination penalty.
The Company's 82.76% owned subsidiary, Zhang Qiu, leased land
use right and the use of building and equipment for a period of 10 year from
January 1, 2007 with annual lease payment of $43,245 (RMB300,000). The lease was
terminated in March 2008. The Company entered into a lease agreement on April 1,
2008, with the Zhang Qiu Red Cross Blood Center, to lease land use rights and
the use of building and equipment for a period of 10 years. The annual lease
payment is approximately $1,467 (RMB 10,000) with no early termination penalty.
The Company recognizes lease expense on a straight line basis
over the term of the lease in accordance to SFAS 13, Accounting for leases.
Total capital and lease commitments outstanding as of December 31, 2008 were as
follows:
Fiscal year
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
Property and equipment
|
$
|
82,068
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Lease
|
|
7,796
|
|
|
7,796
|
|
|
7,796
|
|
|
7,796
|
|
|
7,796
|
|
|
205,977
|
|
Purchase of 54% Dalin Equity
|
|
11,407,392
|
|
|
2,851,848
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
11,497,256
|
|
$
|
2,859,644
|
|
$
|
7,796
|
|
$
|
7,796
|
|
$
|
7,796
|
|
$
|
205,977
|
|
For the years ended December 31, 2008 and 2007, total rent
expense amounted to $21,717 and $0, respectively.
Contingencies
In the normal course of business, the Company is exposed to
claims related to the manufacture and use of the Company's products, but
currently the Company is not aware of any such claim.
Legal proceedings
Misuse of Company Seal
In July 2006, one of the Company's sales employees
misappropriated goods and resold them to other parties using a counterfeit
Company seal. The amount involved was approximately $0.15 million (RMB1.16
million). The incident was revealed during a routine reconciliation of accounts
receivable. The Company reported the misappropriation to the police and the
employee was arrested and criminal charges were brought against him. To date,
the Company recovered approximately $0.05 million (cash of RMB350,000 and goods
valued at approximately RMB30,000). Pursuant to a financial guarantee and
repayment agreement between the Company and the employee, witnessed by officials
at the Taian City Police Station, the Company will continue to pursue recovery.
See report of independent registered public accounting firm.
F-57
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Transfer of Equity Interests
Mr. Zu Ying Du was one of the original equity holders in our operating subsidiary, Shandong Taibang. Pursuant to a joint venture agreement, among the original equity holders, Mr. Du was obligated to make a capital contribution of RMB20 million (or
approximately $2.6 million) for a 25% interest in Shandong Taibang. Mr. Du made this contribution using funds borrowed from the Beijing Chen Da Technology Investment Company, or Beijing Chen Da. Mr. Du failed to repay Beijing Chen Da for his
loan of the capital contribution amount.
Mr. Du disputes that the money was due and owing. A Beijing court found that Beijing Chen Da had given money to Mr. Du but found that the loan agreement failed to comply with Chinese law. A notice
was issued on July 5, 2004 by the Shenzhen Public Security Bureau Economic Crime Investigation Unit requesting a stay of the Beijing action pending their investigation into money laundering relating to the 20 million RMB loan to Zu Ying Du.
On September 26, 2004, Beijing Chen Da entered into an equity transfer agreement with Mr. Du, pursuant to which Mr. Du's 25% equity interest in Shandong Taibang was transferred to Beijing Chen Da as repayment of the RMB20 million debts. This
agreement was signed by Mr. Du's brother who held a power of attorney from Mr. Du. This transfer was approved by the Shandong Provincial Department of Foreign of Trade and Economic Cooperation, or the Shandong COFTEC on March 17, 2005. Mr. Du
disputes the legitimacy of this transfer and has argued that his brother, Du Hai Shan, exceeded the scope of the power of attorney. Mr. Du sued his brother in the court of Jianli County, Hubei province, relating to the propriety of the
brother's actions under the power of attorney. Initially the county court found in its judgment that the power of attorney was valid, but that the transfer agreements signed by Mr. Du's brother, Du Hai Shan were invalid because their
execution and delivery were beyond the scope of Du Hai Shan's authority under the power of attorney. Subsequently the Intermediate Court of Jingzhou City, Hubei province, ruled on December 10, 2008 to suspend the judgment based on the grounds
that the original court lacked jurisdiction to hear the case. The case is stated to be reviewed again by the Hubei Jingzhou Intermediate Court.
Missile Engineering, another original equity holder wholly controlled by Mr. Du, was obligated to contribute RMB32.8 million (or $4.2 million) for a 41% interest in Shandong Taibang by means of cash, equipment and patent technology. It was
obligated to obtain a new drug certificate and production license of its patent technology from the government within a stipulated period in order to be recognized as a valid capital contribution, or in the alternative, make a cash payment. The
patent technology was valued as RMB26.4 million (or approximately $3.4 million). However, Missile Engineering failed to obtain the new drug certificate and production license within the stipulated period. Mr. Du also disputes whether the period
for obtaining the certificate and license had expired. Pursuant to a stockholders resolution on September 26, 2004, Missile Engineering agreed to sell its 41% interest in Shandong Taibang to Up-Wing and Up-Wing agreed to take up the obligation of
Missile Engineering to pay the RMB26.4 million in cash. This transfer was approved by Shandong COFTEC on March 17, 2005. Missile Engineering disputes this transaction and sued Mr. Du's brother in the court of Jianli County, Hubei province,
relating to the propriety of the brother's actions under the power of attorney. Initially the county court found in its judgment that the act had exceeded the scope of the power of attorney. Subsequently the Intermediate Court of Jingzhou City,
Hubei province, ruled on December 10, 2008 to suspend the judgment based on the grounds that the original court lacked jurisdiction to hear the case. The case is stated to be reviewed again by the Hubei Jingzhou Intermediate Court.
In June 10, 2005, Beijing Chen Da also sold its equity interest in Shandong Taibang to Up-Wing Investments Limited, or Up-Wing, pursuant to a share transfer agreement, which became effective on September 2, 2005, upon approval by the Shandong
Provincial Department of Foreign Trade and Economic Cooperation, or the Shandong COFTEC. In March 2006, Up-Wing sold its equity interests in Shandong Taibang to Logic Express, our subsidiary.
In 2006, Missile Engineering applied for arbitration before the China International Economic and Trade Arbitration Commission, or CIETAC, to challenge the effectiveness of the transfer to Up-Wing Investments Limited, of the equity interests in
Shandong Taibang, formerly owned by Missile Engineering. The equity transfer had been approved by the Shandong Provincial Department of Foreign Trade and Economic Cooperation, or the Shandong COFTEC. Missile Engineering later voluntarily withdrew
this application and instead applied for administrative reconsideration of the equity transfer, but this application was rejected by the Ministry of Commerce in 2007. Missile Engineering applied with the District Court of Lixia District, Jinan City,
Shandong province requesting revocation of Shandong COFTEC's approval of the equity transfer to Up-wing by Missile Engineering. Missile Engineering later voluntarily withdraw the action. In April 2007, Logic Express initiated an arbitration
proceeding
before the Shandong Taian Arbitration Committee, to establish that Logic Express is the lawful shareholder of Shandong Taibang. The parties to that proceeding were Logic Express Ltd. and Shandong Taibang Biological Products Co., Ltd. The
Arbitration Committee's decision on September 6, 2007 confirmed that Logic Express had legitimate ownership as a result of the transfers of Shandong Taibang. Up-Wing started an action in the Intermediate Court of Taian City, Shandong province
requesting the court to establish that Up-wing is the lawful shareholder of Shandong Taibang. The intermediate court rejected the application by Up-Wing on the basis that the same matter had been tried by the arbitration panel.
See report of independent registered public accounting firm.
F-58
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
On February 16, 2009, Mr. Du and Missile Engineering have filed actions in the Intermediate Court of Wuhan City, Hubei province, against the following defendants, Du Hai Shan the brother of Mr. Du, Beijing Chen Da and Logic Express. Mr. Du and
Missile Engineering have requested that the Wuhan Intermediate Court to restore the equity interests originally held by the plaintiffs, 25% equity interest by Mr. Du and 41% equity interest by Missile Engineering. On February 17, the Wuhan
Intermediate Court has issued preliminary orders attaching 66% of the equity of Shandong Taibang pending the outcome of the case.
Bobai County Collection Station
In January 2007, the Company's PRC subsidiary, Shandong Taibang, advanced $413,697 (RMB3.0 million) to Feng Lin, the 20% minority shareholder in Fang Cheng Plasma Company, the Company's majority owned subsidiary, for the purpose of
establishing or acquiring a plasma collection station. Mr. Lin and Shandong Taibang intended to establish the Bobai Kangan Plasma Collection Co., Ltd. (Bobai) in Bobai County, Guangxi and on January 18, 2007, Shandong Taibang signed a
letter of intent to acquire the assets of the Bobai Plasma Collection Station, which was co-owned by Mr. Lin and Mr. Keliang Huang. However, in January 2007, Hua Lan Biological Engineering Co., Ltd. (Hua Lan) filed suit in the District
Court of Hong Qi District, Xin Xiang City, Henan Province, alleging that Feng Lin, Keliang Huang and Shandong Taibang established and/or sought to operate the Bobai Plasma Collection Station using a permit for collecting and supplying human plasma
in Bobai County, that was originally granted to Hua Lan by the government of the Guangxi region, without Hua Lan's permission. The establishment and registration of Bobai was never realized as a result of this law suit. On January 29, 2007, on
Hua Lan's motion, the District Court entered an order to freeze funds in the amount of approximately $386,100 (RMB3,000,000) held by the defendants in the case, including approximately $65,750 (RMB500,000) in funds held in Shandong
Taibang's bank account in Taian City. A hearing was held on June 25, 2007 and judgment was entered against the defendants along with a $226,780 (RMB1,700,000) joint financial judgment. The Company appealed the District Court judgment to
the Henan Province High Court. In November 2007, the High Court affirmed the judgment against the three defendants and increased the amount of the joint financial judgment to approximately $405,954 (RMB3,000,000).
In January 2008, Hua Lan enforced the judgment granted by the High Court to freeze the Company's bank accounts. Shandong Taibang has filed a separate action against Hua Lan before the Taian City District Court to seek recovery of any losses in
connection with Hua Lan's claim and to request that the Taian City District Court preserve Hua Lan's property or freeze up to approximately $411,300 (RMB 3 million) of Hua Lan's assets to secure the return of such funds to the Company.
The intermediate court in Taian City accepted the application on February 14, 2008 but the matter is still pending. Pending the outcome of the proceedings, Shandong Taibang increased its loss contingency reserve during its fourth quarter of 2007
from approximately $75,593 (RMB566,667) to $133,400 (RMB1,000,000) to cover its share of the enforcement of this judgment. During the fourth quarter of 2008, full amount of the judgment, including Feng Lin and Keliang Huang's portions
of the judgment and the related fees, approximately $456,222 (RMB 3,109,900) has been withdrawn from Shandong Taibang's account. The Company recorded Feng Lin and Keliang Huang's portion of the judgment, approximately $304,143
(RMB2,073,234), as receivable as a result of the withdraw. As of December 31, 2008, the Company determined that it is unlikely that the Company will be able to recover such receivable from those two individuals and wrote off the receivable as bad
debt expense.
In light of the foregoing, it is unlikely that the Company's planned acquisition of the assets of Bobai will go forward.
See report of independent registered public accounting firm.
F-59
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Note 10 Warrants and options
Warrants
The Company's warrants are accounted for as equity under SFAS
133 and EITF 00-19. The warrant activity is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life
|
|
December 31, 2006
|
|
1,284,000
|
|
|
1,284,000
|
|
$
|
2.84
|
|
|
4.55
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
1,284,000
|
|
|
1,284,000
|
|
$
|
2.84
|
|
|
3.55
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
1,284,000
|
|
|
1,284,000
|
|
$
|
2.84
|
|
|
2.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 9, 2008, the Company adopted the 2008 Equity Incentive
Plan, which provides up to 5,000,000 shares of Company's Common Stock to be made
available to employees and directors at various prices as established by the
Board of Directors of the Company. On May 9, 2008, the Company granted options
to purchase an aggregate of 937,500 shares of the Company's common stock under
the 2008 Plan to certain directors and employees, pursuant to stock option
agreements between the Company and each of these directors or employees. The
options have an exercise price of $4.00 per share, will vest immediately vest
and will expire on June 1, 2018. On July 24, 2008, the Company granted options
to purchase an aggregate of 60,000 shares of the Company's common stock under
the 2008 plan to its three independent directors. These options have an exercise
price of $4.00 per share and 30,000 shares will be vested on January 24, 2009
and the remaining 30,000 shares will be vested on July 24, 2009, with the
expiration date of July 24, 2018. As of December 31, 2008, there were 4,002,500
shares available under the plan.
The fair value of each option granted on May 9, 2008 and July
24, 2008 are estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
Granted on
|
|
May 9, 2008
|
|
|
July 24, 2008
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
3.56%
|
|
|
3.56%
|
|
Expected life (in years)
|
|
5
|
|
|
5
|
|
Weighted average expected volatility
|
|
59.4%
|
|
|
81.2%
|
|
The volatility of the Company's common stock was estimated by
management based on the historical volatility of the Company's common stock, the
risk free interest rate was based on Treasury Constant Maturity Rates published
by the U.S. Federal Reserve for periods applicable to the estimated life of the
options, and the expected dividend yield was based on our current and expected
dividend policy. The value of the options was based on the Company's common
stock price on the date the options were granted. Because the Company does not
have a history of employee stock options, the Company utilized the simplified
method to estimate the life of the options which is the same as assuming that
the options are exercised at the mid-point between the vesting date and
expiration date. For the year ended December 31, 2008, the Company expensed
$1,311,727 in compensation expense. As of December 31, 2008, approximately
$62,281 of estimated expense with respect to non-vested stock-based awards has
yet to be recognized and will be recognized as an expense over the employee's
remaining weighted average service period of approximately 0.67 years. The
options are accounted for as equity under SFAS 133 and EITF 00-19.The options
activity is as follows:
See report of independent registered public accounting
firm.
F-60
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
December 31, 2006
|
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
-
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
Granted
|
|
997,500
|
|
|
937,500
|
|
|
4.00
|
|
|
10.00
|
|
|
-
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
997,500
|
|
|
937,500
|
|
$
|
4.00
|
|
|
9.43
|
|
$
|
-
|
|
Note 11 Statutory reserves
In accordance with the Law of the PRC on Joint Ventures Using
Chinese and Foreign Investment and the Company's Articles of Association,
appropriations from net profit should be made to the Reserve Fund and the
Enterprise Expansion Fund, after offsetting accumulated losses from prior years,
and before profit distributions to the investors. The percentages to be
appropriated to the Reserve Fund and the Enterprise Expansion Fund are
determined by the Board of Directors of the Company.
Reserve fund
For the years ended December 31, 2008 and 2007, the Company
transferred $2,036,732 and $1,156,748, respectively, to the surplus reserve
fund. Amounts represent 10% of the net income determined in accordance with PRC
accounting rules and regulations, and are transferred to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company's registered
capital. As of December 31, 2008, amount of $3,806,825 still needs to be
transferred to statutory reserve. The transfer to this reserve must be made
before distribution of any dividend to shareholders. The surplus reserve fund is
non-distributable other than during liquidation and can be used to fund previous
years' losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing stockholders in proportion
to their shareholding or by increasing the par value of the shares currently
held by them, provided that the remaining reserve balance after such issue is
not less than 25% of the registered capital.
Enterprise expansion fund
The enterprise fund may be used to acquire fixed assets or to
increase the working capital to expend on production and operation of the
business. For the years ended December 31, 2008 and 2007, the Company
transferred $1,018,366 and $578,375, respectively, to the fund. Amounts
represent 5% of the net income determined in accordance with PRC accounting
rules and regulations.
Note 12 Retirement benefit plans
Regulations in the PRC require the Company to contribute to a
defined contribution retirement plan for the benefit of all permanent employees.
All permanent employees are entitled to an annual pension equal to their basic
salaries at retirement. The PRC government is responsible for the benefit
liability to these retired employees. The Company is required to make
contributions to the state retirement plan at 20% of the monthly base salaries
of the current employees. For the years ended December 31, 2008 and 2007, the
Company made pension contributions in the amount of $220,493 and $171,802,
respectively.
Note 13- Minority interest and distribution
The roll forward of minority interest in the balance sheet is
shown below:
See report of independent registered public accounting
firm.
F-61
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
|
|
Fang Cheng
Minority
Owners
(20%)
|
|
|
Shandong Taibang
Minority Owners
(17.24%)
|
|
|
Total
Minority
Interest
|
|
December 31, 2006
|
$
|
-
|
|
$
|
2,308,487
|
|
$
|
2,308,487
|
|
Net income(loss)
|
|
(2,332
|
)
|
|
1,994,234
|
|
|
1,991,902
|
|
Foreign currency translation gain/(loss)
|
|
(96
|
)
|
|
-
|
|
|
(96
|
)
|
Investment made
|
|
82,260
|
|
|
-
|
|
|
82,260
|
|
Dividend declared
|
|
-
|
|
|
(2,207,541
|
)
|
|
(2,207,541
|
)
|
Dividend reinvested
|
|
-
|
|
|
1,710,880
|
|
|
1,710,880
|
|
December 31, 2007
|
$
|
79,832
|
|
$
|
3,806,060
|
|
$
|
3,885,892
|
|
Net income(loss)
|
|
(83,938
|
)
|
|
3,387,779
|
|
|
3,303,841
|
|
Foreign currency translation gain/(loss)
|
|
4,106
|
|
|
-
|
|
|
4,106
|
|
Dividend declared
|
|
-
|
|
|
(2,982,045
|
)
|
|
(2,982,045
|
)
|
December 31, 2008
|
$
|
-
|
|
$
|
4,211,794
|
|
$
|
4,211,794
|
|
Dividends declared are split pro rata between the shareholders
according to their ownership interest. The payment of the dividends may occur at
different times to the shareholders resulting in distributions which do not
appear to be reflective of the minority ownership percentages. In 2008 and 2007,
minority shareholders owned 17.24% of the Company's subsidiaries. The table
below shows the minority shareholder and dividends outstanding.
|
|
Minority shareholder
|
|
Distribution payable, December 31, 2006
|
$
|
476,597
|
|
Dividend declared
|
|
2,207,541
|
|
Dividend paid
|
|
(488,878
|
)
|
Dividend used to increase registered capital
|
|
(1,710,880
|
)
|
Foreign currency translation adjustments
|
|
22,246
|
|
Distribution payable, December 31, 2007
|
$
|
506,626
|
|
Dividend declared
|
|
2,982,045
|
|
Dividend paid
|
|
(288,300
|
)
|
Foreign currency translation adjustments
|
|
51,983
|
|
Distribution payable, December 31, 2008
|
$
|
3,252,354
|
|
Note 14 Subsequent event
On September 26, 2008, Logic Express Limited (Logic Express),
a wholly-owned BVI subsidiary of the Company, entered into an Equity Transfer
Agreement with Fan Shaowen, Chen Aimin, Chen Aiguo and Yang Gang for the
purchase of a total of a 90% equity interest in Chongqing Dalin Biologic
Technologies Co., Ltd., (Chongqing Dalin), a PRC limited liabilities company,
for a price of $28,518,480 (RMB 194,400,000). The Company made prepayments of
approximately $2,023,165 (RMB 13,810,000) and approximately $12,208,296
(RMB83,390,000) on this potential acquisition in October and December 2008,
respectively. An English translation of the Equity Transfer Agreement is
incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed with
SEC on October 2, 2008. As of December 31, 2008, the Company has completed the
financial and legal due
diligence investigations on Dalin and Qianfeng and expects to close the transaction within a few months, subject to the formal transfer of title to the Company. In January 2009, Logic Express appointed three out of the four Board of Directors
members to the Chongqing Dalin to take control of Dalin. On January 16, 2009, the shareholders of Qianfeng Biological Products (Qianfeng), which Chongqing Dalin owns 54% equity interest, elected four Board of Directors appointed by
Chongqing Dalin as part of its seven board members. On January 17, 2009, the Board of Directors of Qianfeng elected a new management team consists of all Logic Express and Chongqing Dalin's appointees, including CEO, Executive Senior Vice
President, CFO and Directors of sales. As a result, the Company took over the control of Qianfeng starting January 16, 2009.
As part of its due diligence investigation into Dalin and Qianfeng, the
Company discovered that the indirect interest in Qianfeng that would be acquired
under Equity Transfer Agreement will be diluted. The local AIC records show
Dalin as a 54% shareholder of Qianfeng. However, Qianfeng issued equity to
certain investors pursuant to a capital increase agreement, dated May 2007.
Qianfeng received the consideration for the equity, but the increase in
registered capital and issuance of the equity interest has not yet been
registered with AIC. A shareholder of Qianfeng brought a lawsuit claiming that
such shareholder's right of first refusal with respect to the new equity
issuance was violated. When the capital increase is registered with AIC, Dalin
will own about 43.3% in Qianfeng. The lawsuit brought by the Qianfeng
shareholder was decided against such shareholder, who subsequently appealed.
Therefore, Dalin's interests in Qianfeng could be diluted to as low as 41.3% as
the result of the issuance of additional equity to the shareholder, if his
appeal prevails. Even if the indirect equity interest that the Company acquires
through the proposed acquisition is diluted down to 41.3%, the Company would be
able to retain control over Qianfeng as a result of the four board membership to
the Qianfeng's board. The Company does not expect this dispute to impact its
ability to complete the acquisition.
See report of independent registered public accounting firm.
F-62
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
On October 10, 2008, Shandong Taibang entered into an Equity Transfer Agreement with Mr. Fan Qingchun, a PRC citizen holding 35% of the equity interest in Xi'an Huitian Blood Products Co., Ltd., a PRC limited liabilities company
(Huitian), for a price of approximately $6,454,800 (RMB 44,000,000).The Company has made a prepayment of $1,467,000 (RMB 10,000,000) and $1,760,400(RMB 12,000,000) on this potential acquisition in September and in November
2008, respectively. An English translation of the Equity Transfer Agreement is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed with SEC on October 16, 2008. Since November 14, 2008, the date of second installment payment, the Company has been exercise its rights in Huitian as a shareholder, pursuant to cooperation agreements among Taibang and the other Huitian shareholders, including the right to re-elect directors to Huitian's board of
directors and board of supervisors and engagement of new executive officers. On March 17, 2009, the Shandong Taibang successfully completed the registration process with Administration of Industry and Commerce in the City of Xi'An, Shannxi
Province to transfer the 35% equity title from Mr. Fan Qingchun to Shandong Taibang according to the Equity Transfer Agreement. In January 2009, Shandong Taibang received approximately $147,256 (RMB 1,003,789) from Huitian for its share of 2008
dividends declared by Huitian according to the Equity Transfer Agreement.
On January 8, 2009, Shandong Taibang entered into a loan agreement with Taishan Sub-Branch of the Bank of China, to borrow $5,868,000 (RMB 40,000,000) for purchase of raw material. The loan bears a fixed interest rate of 5.31% per annum and
payable in full on January 7, 2010 and early prepayment will be subject to a penalty equal to 0.0005 of the principal. During the term of the loan agreement, the Company had agreed that it will not engage in any sub-contracting, leasing, equity
restructuring, pooling, consolidating, merging, splitting, joint investment, capital transferring, filing for restructuring, fling for dissolution, filing for bankruptcy, and other actions which may affect realization of the bank's right under
the loan agreement.
On February 16, 2009, Shandong Taibang's board of directors declared a cash dividend in the amount of approximately $2,640,600 (RMB 18,000,000). According to the PRC tax law, Shandong Taibang had withheld at source 10% of the dividend
amount of its BVI parent, Logic Express.
See report of independent registered public accounting firm.
F-63
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