UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10−Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31,
2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________
to _____________
Commission File No. 000-53147
|
CHINA
BIOLOGIC PRODUCTS, INC.
|
|
(Name of Small Business Issuer in Its Charter)
|
|
|
|
DELAWARE
|
|
75-2308816
|
|
|
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
No. 14 East Hushan Road,
|
Taian City, Shandong
|
Peoples Republic of China 271000
|
|
(Address of principal executive offices)
|
|
(+86) 538-620-2306
|
|
(Registrants telephone number, including area code)
|
Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
[ ]
Indicate by
check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes [ ] No
[ ]
Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
|
|
Large accelerated filer [ ]
|
Accelerated filer [ ]
|
Non-accelerated filer [ ] (Do
not check if a smaller reporting company)
|
Smaller reporting company [X]
|
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes [ ] No
[X]
The number of
shares outstanding of each of the issuers classes of common equity, as of May
13, 2009 is as follows:
|
|
|
Class of Securities
|
|
Shares Outstanding
|
|
|
|
Common Stock, $0.0001 par value
|
|
21,434,942
|
EXPLANATORY NOTE
China Biologic Products, Inc. (the Company) is
filing this Amendment No. 1 to its Quarterly Report on Form 10-Q (the
Amendment) to restate its consolidated financial statements for the three
months ended March 31, 2009 included in its Quarterly Report on Form 10-Q for
the quarter ended March 31, 2009, previously filed with the Securities and
Exchange Commission on May 15, 2009 (the the Original Filing). This Amendment
is being filed to amend the recognition of fair value of the callable feature
for the warrants issued in 2006 and recognition of deferred tax liabilities in
connection with business combination of Guiyang Dalin Biologic Technologies Co.,
Ltd. (Dalin).
Recognition of fair value of the callable feature for the warrants issued in
2006
In 2006, the Company issued 1,070,000 warrants (the 2006 Warrants) to certain
accredited investors. According to the terms of the 2006 Warrants, the Company
may, in its sole discretion, elect to require the 2006 Warrants holders to
exercise up to all of the unexercised portion of the 2006 Warrants (Callable
Feature). The Company inadvertently omitted the fair value of the Callable
Features embedded in the 2006 Warrants when reclassifying the fair value of 2006
Warrants from equity to derivative liabilities as of January 1, 2009 in adopting
EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed
to an Entity's Own Stock (FASB ASC 815-40-15-5) (EITF 07-05). As a result,
the retained earnings and additional paid-in capital should have been increased
by $535,615 and $138,160, respectively, and the derivative liabilities should
have been decreased by $673,775 as of January 1, 2009. As a result, the loss of
change in fair value of derivative liabilities during the three months ended
March 31, 2009 should have been increased by $16,269. The derivative
liabilities, retained earnings and additional paid-in capital should have been
decreased by $657,507 and increased by $519,346 and $138,161, respectively, as
of March 31, 2009.
Recognition of deferred tax liabilities in connection with the business
combination of Dalin
In connection with the business combination of Dalin in 2009, the Company
misinterpreted the U.S. GAAP regarding the accounting for the business
combination. As a result, the Company did not recognize deferred tax liabilities
for differences between the assigned values and the tax bases of the intangible
assets and certain property, plant and equipment acquired in the business
combination as in accordance with ASC Topic 740, Income Taxes. As of January 1,
2009, deferred tax liabilities of $4,749,099 should have been recognized with a
corresponding increase in goodwill of $4,749,099. During the quarter ended March
31, 2009, the Company also should have recorded deferred tax benefit
representing the tax effect of the amortization of intangible assets and the
depreciation of property, plant and equipment for the quarter ended March 31,
2009. As a result, the goodwill, deferred tax liabilities, retained earnings,
noncontrolling interest and accumulated other comprehensive income of the
Company should have been increased by $4,769,979, $4,645,188, $66,747, $58,048
and $4, respectively, as of March 31, 2009.
For purposes of the Amendment, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, each item of the Original Filing
that was affected by the restatement has been amended and restated in its
entirety. Unless otherwise indicated, this report speaks only as of the date
that the Original Filing was filed. No attempt has been made in this Amendment
to update other disclosures presented in the Original Filing. This Amendment
does not reflect events occurring after the filing of the Original Filing or
modify or update those disclosures, including the exhibits to the Original
Filing affected by subsequent events, except that this Amendment includes as
exhibits 31.1, 31.2, 32.1 and 32.2 new certifications by the Companys Chief
Executive Officer and Chief Financial Officer as required by Rule 12b-15.
TABLE OF CONTENTS
|
|
|
|
PART I
|
FINANCIAL INFORMATION
|
|
3
|
ITEM 1.
|
FINANCIAL
STATEMENTS.
|
|
3
|
ITEM 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
|
38
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
|
53
|
ITEM 4.
|
CONTROLS AND
PROCEDURES.
|
|
53
|
PART II
|
OTHER INFORMATION
|
|
55
|
ITEM 1.
|
LEGAL
PROCEEDINGS.
|
|
55
|
ITEM 1A.
|
RISK
FACTORS.
|
|
58
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
|
58
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES.
|
|
59
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
|
59
|
ITEM 5.
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OTHER
INFORMATION.
|
|
59
|
ITEM 6.
|
EXHIBITS.
|
|
60
|
PART I
FINANCIAL INFORMATION
|
|
ITEM 1.
|
FINANCIAL STATEMENTS.
|
CHINA BIOLOGIC PRODUCTS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
|
|
|
Contents
|
|
Page(s)
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008
|
|
4
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the three months
ended March 31, 2009 and 2008 (unaudited)
|
|
5
|
|
|
|
Consolidated
Statements of Shareholders Equity
|
|
6
|
|
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31, 2009 and 2008
(unaudited)
|
|
7
|
|
|
|
Notes to the
Consolidated Financial Statements (unaudited)
|
|
8 37
|
3
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 AND DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
December 31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(As Restated Note 2)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
34,005,948
|
|
$
|
8,814,616
|
|
Notes receivable
|
|
|
468,800
|
|
|
|
|
Accounts receivable, net of allowance for doubtful
accounts of
$1,275,437 and $1,268,052 as of March 31, 2009 and December 31, 2008,
respectively
|
|
|
383,781
|
|
|
313,087
|
|
Accounts receivable - related party
|
|
|
631,803
|
|
|
|
|
Dividend receivable
|
|
|
147,055
|
|
|
147,256
|
|
Other receivables
|
|
|
845,780
|
|
|
356,957
|
|
Other receivables - related party
|
|
|
797,138
|
|
|
|
|
Inventories
|
|
|
26,700,002
|
|
|
14,949,196
|
|
Prepayments and deferred expense
|
|
|
1,133,535
|
|
|
614,704
|
|
Total current assets
|
|
|
65,113,842
|
|
|
25,195,816
|
|
PLANT AND EQUIPMENT, net
|
|
|
27,583,288
|
|
|
19,299,364
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
|
|
6,565,312
|
|
|
6,533,977
|
|
Refundable deposit for potential
acquisition
|
|
|
|
|
|
14,181,800
|
|
Prepayments - non-current
|
|
|
4,519,925
|
|
|
955,874
|
|
Intangible assets, net
|
|
|
21,636,063
|
|
|
1,002,561
|
|
Goodwill
|
|
|
18,462,452
|
|
|
|
|
Total other assets
|
|
|
51,183,752
|
|
|
22,674,212
|
|
Total assets
|
|
$
|
143,880,882
|
|
$
|
67,169,392
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,502,387
|
|
$
|
2,481,889
|
|
Notes payable
|
|
|
29,300
|
|
|
29,340
|
|
Short term loans - bank
|
|
|
7,720,550
|
|
|
|
|
Short term loan - holder of noncontrolling
interest
|
|
|
772,223
|
|
|
773,277
|
|
Other payables and accrued liabilities
|
|
|
12,978,381
|
|
|
3,962,931
|
|
Other payable - land use right
|
|
|
29,281
|
|
|
1,683
|
|
Other payable - holder of noncontrolling
interest
|
|
|
1,333,795
|
|
|
|
|
Other payable - related party
|
|
|
2,563,643
|
|
|
|
|
Accrued interest - related party
|
|
|
305,966
|
|
|
|
|
Distribution payable to holder of noncontrolling
interest
|
|
|
4,166,692
|
|
|
3,252,354
|
|
Customer deposits
|
|
|
6,390,937
|
|
|
1,091,792
|
|
Taxes payable
|
|
|
5,211,498
|
|
|
4,060,010
|
|
Long term bank loan-current maturities
|
|
|
439,500
|
|
|
|
|
Investment payable
|
|
|
17,510,836
|
|
|
3,275,501
|
|
Total current liabilities
|
|
|
62,954,989
|
|
|
18,928,777
|
|
OTHER LIABILITIES:
|
|
|
|
|
|
|
|
Non-current other payable - land use
right
|
|
|
324,546
|
|
|
323,707
|
|
Long term loan-bank, net of current
maturities
|
|
|
8,790,000
|
|
|
5,868,000
|
|
Deferred tax liabilities
|
|
|
4,645,188
|
|
|
|
|
Warrant liabilities
|
|
|
1,403,543
|
|
|
|
|
Total other liabilities
|
|
|
15,163,277
|
|
|
6,191,707
|
|
Total liabilities
|
|
|
78,118,266
|
|
|
25,120,484
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 100,000,000 shares
authorized,
21,434,942 shares issued and outstanding at March 31, 2009 and December 31,
2008
|
|
|
2,143
|
|
|
2,143
|
|
Paid-in-capital
|
|
|
10,127,116
|
|
|
10,700,032
|
|
Statutory reserves
|
|
|
9,750,637
|
|
|
6,989,801
|
|
Retained earnings
|
|
|
16,546,251
|
|
|
15,392,253
|
|
Accumulated other comprehensive income
|
|
|
4,177,931
|
|
|
4,159,298
|
|
Total shareholders equity
|
|
|
40,604,078
|
|
|
37,243,527
|
|
NONCONTROLLING INTEREST
|
|
|
25,158,538
|
|
|
4,805,381
|
|
Total equity
|
|
|
65,762,616
|
|
|
42,048,908
|
|
Total liabilities and shareholders
equity
|
|
$
|
143,880,882
|
|
$
|
67,169,392
|
|
The
accompanying notes are an integral part of these consolidated statements.
4
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Unaudited)
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
(As Restated Note 2)
|
|
|
|
|
REVENUES
|
|
$
|
21,148,598
|
|
$
|
7,849,007
|
|
COST OF SALES
|
|
|
6,214,930
|
|
|
1,948,898
|
|
GROSS PROFIT
|
|
|
14,933,668
|
|
|
5,900,109
|
|
OPERATING EXPENSES
:
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
579,496
|
|
|
494,529
|
|
General and administrative expenses
|
|
|
3,822,907
|
|
|
1,584,128
|
|
Research and development expenses
|
|
|
467,727
|
|
|
183,782
|
|
Total operating expenses
|
|
|
4,870,130
|
|
|
2,262,439
|
|
INCOME FROM OPERATIONS
|
|
|
10,063,538
|
|
|
3,637,670
|
|
Equity in income of unconsolidated
affiliate
|
|
|
(40,247
|
)
|
|
|
|
Change in fair value of warrant
liabilities
|
|
|
409,292
|
|
|
|
|
Interest expense (income), net
|
|
|
370,853
|
|
|
22,973
|
|
Other expense (income), net
|
|
|
51,315
|
|
|
412
|
|
Total other expenses (income), net
|
|
|
791,213
|
|
|
23,385
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING
INTEREST
|
|
|
9,272,325
|
|
|
3,614,285
|
|
PROVISION FOR INCOME TAXES
|
|
|
1,905,395
|
|
|
740,482
|
|
NET INCOME BEFORE NONCONTROLLING INTEREST
|
|
|
7,366,930
|
|
|
2,873,803
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
3,058,134
|
|
|
606,003
|
|
NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
|
|
|
4,308,796
|
|
|
2,267,800
|
|
OTHER COMPREHENSIVE INCOME
:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
18,633
|
|
|
942,699
|
|
Comprehensive income attributable to noncontrolling
interest
|
|
|
427,298
|
|
|
184,467
|
|
COMPREHENSIVE INCOME
|
|
$
|
4,754,727
|
|
$
|
3,394,966
|
|
BASIC EARNINGS PER SHARE
:
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
21,434,942
|
|
|
21,434,942
|
|
Earnings per share
|
|
$
|
0.20
|
|
$
|
0.11
|
|
DILUTED EARNINGS PER SHARE
:
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
21,434,942
|
|
|
21,964,168
|
|
Earnings per share
|
|
$
|
0.20
|
|
$
|
0.10
|
|
The accompanying notes are an
integral part of these consolidated statements.
5
CHINA BIOLOGIC PRODUCTS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
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
|
|
$
|
2,313,348
|
|
$
|
4,181,338
|
|
$
|
26,281,517
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,267,800
|
|
|
|
|
|
606,003
|
|
|
2,873,803
|
|
Dividend declared to noncontrolling interest
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(385,080
|
)
|
|
(385,080
|
)
|
Adjustment to statutory
reserve
|
|
|
|
|
|
|
|
|
|
|
352,954
|
|
|
(352,954
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
942,699
|
|
|
184,467
|
|
|
1,127,166
|
|
BALANCE, March 31, 2008
(unaudited)
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
9,388,305
|
|
$
|
4,287,657
|
|
$
|
8,376,526
|
|
$
|
3,256,047
|
|
$
|
4,586,728
|
|
$
|
29,897,406
|
|
Stock based compensation
|
|
|
|
|
|
|
|
1,311,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,311,727
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,717,871
|
|
|
|
|
|
2,697,838
|
|
|
12,415,709
|
|
Dividend declared to noncontrolling interest
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,596,965
|
)
|
|
(2,596,965
|
)
|
Adjustment to statutory
reserve
|
|
|
|
|
|
|
|
|
|
|
2,702,144
|
|
|
(2,702,144
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903,251
|
|
|
117,780
|
|
|
1,021,031
|
|
BALANCE, December 31, 2008
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
10,700,032
|
|
$
|
6,989,801
|
|
$
|
15,392,253
|
|
$
|
4,159,298
|
|
$
|
4,805,381
|
|
$
|
42,048,908
|
|
Cumulative effect of reclassification of 2006
warrants, as restated (Note 2)
|
|
|
|
|
|
|
|
(600,289
|
)
|
|
|
|
|
(393,962
|
)
|
|
|
|
|
|
|
|
(994,251
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
27,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,373
|
|
Net income, as restated (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,308,796
|
|
|
|
|
|
3,058,134
|
|
|
7,366,930
|
|
Dividend declared to
noncontrolling interest shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,633,987
|
)
|
|
(4,633,987
|
)
|
Noncontrolling interest acquired from
acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,501,712
|
|
|
21,501,712
|
|
Adjustment to statutory
reserve
|
|
|
|
|
|
|
|
|
|
|
2,760,836
|
|
|
(2,760,836
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, as
restated (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,633
|
|
|
427,298
|
|
|
445,931
|
|
BALANCE, March 31, 2009
(unaudited), as restated (Note 2)
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
10,127,116
|
|
$
|
9,750,637
|
|
$
|
16,546,251
|
|
$
|
4,177,931
|
|
$
|
25,158,538
|
|
$
|
65,762,616
|
|
The accompanying notes are an integral part of these consolidated
statements.
6
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Unaudited)
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
(As Restated Note 2)
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income attributable to controlling
interest
|
|
$
|
4,308,796
|
|
$
|
2,267,800
|
|
Net income attributable to non-controlling
interest
|
|
|
3,058,134
|
|
|
606,003
|
|
Consolidated net income
|
|
|
7,366,930
|
|
|
2,873,803
|
|
Adjustments to reconcile net income to cash
provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
759,072
|
|
|
274,361
|
|
Amortization
|
|
|
838,459
|
|
|
26,157
|
|
(Gain) Loss on disposal of equipment
|
|
|
(276
|
)
|
|
166
|
|
Allowance for bad debt
|
|
|
26,581
|
|
|
|
|
Deferred tax
liabilities
|
|
|
(124,799
|
)
|
|
|
|
Stock based compensation
|
|
|
27,373
|
|
|
|
|
Change in fair value of warrant
liabilities
|
|
|
409,292
|
|
|
|
|
Equity in income of unconsolidated
affiliate
|
|
|
(40,246
|
)
|
|
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
(468,832
|
)
|
|
|
|
Accounts receivable
|
|
|
(97,007
|
)
|
|
(960,482
|
)
|
Accounts receivable - related party
|
|
|
(212,367
|
)
|
|
|
|
Other receivables
|
|
|
(18,487
|
)
|
|
1,285
|
|
Other receivables - related party
|
|
|
|
|
|
1,398
|
|
Inventories
|
|
|
(3,513,011
|
)
|
|
(1,585,462
|
)
|
Prepayments and deferred expenses
|
|
|
(124,944
|
)
|
|
(96,457
|
)
|
Accounts payable
|
|
|
(252,850
|
)
|
|
(310,692
|
)
|
Other payables and accrued liabilities
|
|
|
307,916
|
|
|
101,089
|
|
Accrued interest - related party
|
|
|
305,966
|
|
|
|
|
Customer deposits
|
|
|
2,872,712
|
|
|
927,456
|
|
Taxes payable
|
|
|
(979,190
|
)
|
|
871,964
|
|
Contingent liability
|
|
|
|
|
|
(105,707
|
)
|
Net
cash provided by operating activities
|
|
|
7,082,292
|
|
|
2,018,879
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Cash acquired through acquisition
|
|
|
11,938,784
|
|
|
|
|
Purchase of plant and equipment
|
|
|
(986,640
|
)
|
|
(1,249,620
|
)
|
Additions to intangible assets
|
|
|
(88,845
|
)
|
|
(3,285
|
)
|
Advances on non-current assets
|
|
|
(474,736
|
)
|
|
|
|
Advances on building acquired from related
party
|
|
|
|
|
|
(106,777
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
10,388,563
|
|
|
(1,359,682
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds from short term bank loan
|
|
|
7,647,822
|
|
|
|
|
Payments on short term loan
|
|
|
|
|
|
(698,850
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
7,647,822
|
|
|
(698,850
|
)
|
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
|
|
|
72,655
|
|
|
182,249
|
|
INCREASE IN CASH
|
|
|
25,191,332
|
|
|
142,596
|
|
CASH, beginning of period
|
|
|
8,814,616
|
|
|
5,010,033
|
|
CASH, end of period
|
|
$
|
34,005,948
|
|
$
|
5,152,629
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,783,619
|
|
$
|
|
|
Interest paid (net of capitalized
interest)
|
|
$
|
236,649
|
|
$
|
18,416
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
Dividend paid by offsetting loan due from holder of
noncontrolling
interest
|
|
$
|
3,735,243
|
|
$
|
|
|
Net assets acquired with prepayments made in prior
periods
|
|
$
|
14,240,772
|
|
$
|
|
|
Net assets acquired with unpaid
investment
|
|
$
|
14,240,772
|
|
$
|
|
|
Plant and equipment acquired with prepayments made
in prior periods
|
|
$
|
87,305
|
|
$
|
|
|
The accompanying notes are an integral part
of these consolidated statements.
7
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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. 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 Peoples Republic of China (the PRC) and India.
Current Development
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 CBPs
existing Fang Cheng Plasma Collection Station (Fang Cheng). The Companys
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.
Dalin Acquisition and Entrustment Agreement
On September
26, 2008, Logic Express Limited (Logic Express), through Logic Holdings (Hong
Kong) Limited (Logic Holdings), the newly established subsidiary in Hong
Kong, entered into an Equity Transfer Agreement with Chongqing Dalin Biological
Technologies Co., Ltd. (Dalin), a PRC limited liability company, 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 approximately $28,479,600 (RMB194,400,000). By April
2009, the Company made three payments for total amount of approximately
$25,638,850 (RMB 174,960,000), which represents 90% of the purchase price in
accordance with terms of the equity transfer agreement. Logic Holdings is
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 Commerces approval of the equity
transfer
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.
Huitian Acquisition
On October 10,
2008, Taibang entered into an equity transfer agreement pursuant to which
Taibang agreed to acquire 35% of the equity interest in Xian Huitian Blood
Products Co., Ltd., or Huitian, a biopharmaceutical company based in Xian,
Shaanxi Province, China, from Mr. Fan Qingchun, a PRC citizen, for an aggregate
purchase price of approximately $6,446,000 (RMB 44,000,000). The Company paid
approximately $3,223,000 (RMB 22,000,000) of the purchase price and, pursuant
to the equity transfer agreement, as amended, the Company is obligated to pay
the balance of the purchase price 5 business days following June 30, 2009 with
interest. On March 17, 2009, the Company completed the government approval
process for the acquisition, and pursuant to the terms of the equity transfer
agreement, is entitled to all the rights and privileges of a 35% shareholder in
Huitian, including the right to receive the pro rata share of the profits
generated.
Formation of Hong Kong Subsidiary
On December
12, 2008, the Company established Logic Holding (Hong Kong) Limited (or Logic
Holding), our wholly-owned Hong Kong subsidiary of Logic Express, for the
purpose of being a holding company for majority interest in Dalin.
8
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,
2009
(Unaudited)
Note 2 Restatement of March 31, 2009 consolidated
financial statements
This financial statements contain restatements related to the
recognition of fair value of the callable feature for the warrants issued in
2006 and recognition of deferred tax liabilities in connection with business
combination of Dalin for the three months ended and as of March 31, 2009.
Recognition of fair value of the callable feature for the
warrants issued in 2006
In 2006, the Company issued 1,070,000 warrants (the 2006
Warrants) to certain accredited investors, see Note 11. As a result of adopting
EITF 07-5,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity's Own Stock (FASB ASC 815-40-15-5)
(or EITF 07-05),
effective January 1, 2009, both of the 2006 Warrants and Placement Agent
Warrants (as defined in Note 11 below) previously treated as equity pursuant to
the derivative treatment exemption are no longer afforded equity treatment
because the strike price of these warrants are denominated in US dollar, a
currency other than the Companys functional currency, Renminbi. As a result,
these warrants are not considered indexed to the Companys own stock, and as
such, all future changes in the fair value of these warrants will be recognized
in earnings until such time as the warrants are exercised or expired.
According to the terms of the 2006 Warrants, the Company may,
in its sole discretion, elect to require the 2006 Warrants holders to exercise
up to all of the unexercised portion of the 2006 Warrants (Callable Feature).
The Company inadvertently omitted the fair value of the Callable Features
embedded in the 2006 Warrants when reclassifying the fair value of 2006 Warrants
from equity to derivative liabilities as of January 1, 2009. As a result, the
retained earnings and additional paid-in capital should have been increased by
$535,615 and $138,160, respectively, and the derivative liabilities should have
been decreased by $673,775 as of January 1, 2009. As a result, the loss of
change in fair value of derivative liabilities during the three months ended
March 31, 2009 should have been increased by $16,269. The derivative
liabilities, retained earnings and additional paid-in capital should have been
decreased by $657,506 and increased by $519,346 and $138,160, respectively, as
of March 31, 2009.
Recognition of deferred tax liabilities in connection with
the business combination of Dalin
In connection with the business combination of Dalin in 2009
(see Note 1), the Company misinterpreted US GAAP regarding the accounting for
business combination. As a result, the Company did not recognize deferred tax
liabilities for differences between the assigned values and the tax bases of the
intangible assets and certain property, plant and equipment acquired in the
business combination as in accordance with ASC Topic 740,
Income Taxes
. As of
January 1, 2009, deferred tax liabilities of $4,749,099 should have been
recognized with a corresponding increase in goodwill of $4,749,099. During the
three months ended March 31, 2009, the Company also should have recorded
deferred tax benefit representing the tax effect of the amortization of
intangible assets and the depreciation of property, plant and equipment for the
three months ended March 31, 2009. As a result, the goodwill, deferred tax
liabilities, retained earnings, noncontrolling interest and accumulated other
comprehensive income of the Company should have been increased by $4,769,979,
$4,645,188, $66,747, $58,048 and $4, respectively, as of March 31, 2009.
9
The impact of these restatements on the December 31, 2009
financial statements is reflected in the following tables:
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
Balance Sheet
Amounts
|
|
|
Reported
|
|
|
Restatement
|
|
|
Restated
|
|
Goodwill (note 15)
|
|
$
|
13,692,473
|
|
$
|
4,769,979
|
|
$
|
18,462,452
|
|
Total assets
|
|
|
139,110,903
|
|
|
4,769,979
|
|
|
143,880,882
|
|
Deferred tax liabilities (note 9)
|
|
|
-
|
|
|
4,645,188
|
|
|
4,645,188
|
|
Derivative liabilities (note 3 and 11)
|
|
|
2,061,049
|
|
|
(657,506
|
)
|
|
1,403,543
|
|
Total liabilities
|
|
|
74,130,584
|
|
|
3,987,682
|
|
|
78,118,266
|
|
Additional paid-in capital
|
|
|
9,988,956
|
|
|
138,160
|
|
|
10,127,116
|
|
Retained earnings
|
|
|
15,960,158
|
|
|
586,093
|
|
|
16,546,251
|
|
Noncontrolling interest (note 14)
|
|
|
25,100,490
|
|
|
58,048
|
|
|
25,158,538
|
|
Total stockholders' equity
|
|
|
64,980,319
|
|
|
782,297
|
|
|
65,762,616
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
Statement of
Operations and Other Comprehensive Income Amounts
|
|
|
Reported
|
|
|
Restatement
|
|
|
Restated
|
|
Change in fair value of derivative
liabilities (note 11)
|
|
$
|
393,023
|
|
$
|
16,269
|
|
$
|
409,292
|
|
Net other expense
|
|
|
774,944
|
|
|
16,269
|
|
|
791,213
|
|
Income before income taxes
|
|
|
9,288,594
|
|
|
(16,269
|
)
|
|
9,272,325
|
|
Provision for income taxes (note 9)
|
|
|
2,030,194
|
|
|
(124,799
|
)
|
|
1,905,395
|
|
Net income
|
|
|
7,258,400
|
|
|
108,530
|
|
|
7,366,930
|
|
Net income attributable to noncontrolling interest (note
14)
|
|
|
3,000,082
|
|
|
58,052
|
|
|
3,058,134
|
|
Other comprehensive income
|
|
|
18,637
|
|
|
(4
|
)
|
|
18,633
|
|
Comprehensive income attributed to controlling interest
|
|
|
4,276,955
|
|
|
50,474
|
|
|
4,327,429
|
|
Basic earnings per share (note 8)
|
|
$
|
0.20
|
|
$
|
-
|
|
$
|
0.20
|
|
Diluted earnings per share (note 8)
|
|
$
|
0.20
|
|
$
|
-
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
Statement of Cash
Flow
|
|
|
Reported
|
|
|
Restatement
|
|
|
Restated
|
|
Net income
|
|
$
|
7,258,400
|
|
$
|
108,530
|
|
$
|
7,366,930
|
|
Change in fair value of derivative liabilities
|
|
|
393,023
|
|
|
16,269
|
|
|
409,292
|
|
Deferred tax benefit, net
|
|
|
-
|
|
|
(124,799
|
)
|
|
(124,799
|
)
|
10
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Note 3 Summary of significant accounting
policies
Basis of Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Companys functional currency is the Chinese Renminbi (RMB); however, the
Companys 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 Companys functional currency is
the Chinese Renminbi (RMB), also the local currency of the Companys
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 Peoples 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 Companys
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 March 31,
2009 and December 31, 2008 were translated at RMB6.83 to $1.00 and RMB6.82 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 three months ended March 31, 2009 and 2008 were RMB6.83 and
RMB7.15, 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 the Companys 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 $44,180 and $7,248 for the three months ended March 31, 2009 and
2008, respectively.
11
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Financial Instruments
FAS 107,
Disclosures about Fair Value of Financial Instruments requires disclosure of
the fair value of financial instruments held by the Company. FAS 107 defines
financial instruments and requires fair value disclosures about those
instruments. FAS 157, Fair Value Measurements, adopted January 1. 2008,
defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. 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 FAS 157. 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
analyzes all financial instruments with features of both liabilities and equity
under FAS 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, FAS 133, Accounting for
Derivative Instruments and Hedging Activities and EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock.
As required by
FAS 157, 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.
The fair value
of 1,284,000 warrants was determined using the Black-Scholes Model, defined in
SFAS 157 as level 2 inputs, and recorded the change in earnings. As a result,
the derivative liability is carried on the balance sheet at its fair value.
The carrying
value of the long term bank loan amounted to $8,790,000. The Company used Level
3 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2009
using Fair Value Hierarchy
|
|
|
|
Carrying Value as of
March 31, 2009
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Warrant
liabilities (Restated)
|
|
$
|
1,403,543
|
|
$
|
|
|
$
|
1,403,543
|
|
$
|
|
|
Long term
bank loan
|
|
$
|
8,790,000
|
|
$
|
|
|
$
|
|
|
$
|
8,790,000
|
|
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 FAS 157.
Concentration Risks
The Companys
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 Companys 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 Companys 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.
12
CHINA BIOLOGIC PRODUCTS
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Cash includes cash
on hand and demand deposits in accounts maintained with state-owned banks
within the PRC, Hong Kong and the United States. 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 as
of March 31, 2009 and December 31, 2008 amounted to $33,786,039and $8,689,414,
respectively. $78,141 and $78,140 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 Companys
major product, human albumin: - 20%/10ml, 20%/25ml and 20%/50ml, accounted for
58.2% and 58.1% of total revenues, for the three months ended March 31, 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 Companys operating results.
All of the
Companys customers are located in the PRC and India. As of March 31, 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 months ended March 31,
2009 and 2008. No individual customer represented more than 10% of trade
receivables at March 31, 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 months ended March 31, 2009 and 2008. No individual vendors represented
more than 10% of accounts payables at March 31, 2009 and 2008.
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. 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:
|
|
|
|
|
|
|
|
|
|
March 31, 2009
(unaudited)
|
|
December 31, 2008
|
|
Trade accounts receivable
|
|
$
|
1,659,218
|
|
$
|
1,581,139
|
|
Less: Allowance for doubtful accounts
|
|
|
(1,275,437
|
)
|
|
(1,268,052
|
)
|
Total
|
|
$
|
383,781
|
|
$
|
313,087
|
|
The activity
in the allowance for doubtful accounts for trade accounts receivable for the
three months ended March 31, 2009 and the year ended December 31, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2009
(unaudited)
|
|
December 31, 2008
|
|
Beginning allowance for doubtful accounts
|
|
$
|
1,268,052
|
|
$
|
1,238,772
|
|
Bad debt expense
|
|
|
26,581
|
|
|
|
|
Recovery of amount previously reserved
|
|
|
(16,768
|
)
|
|
(56,462
|
)
|
Write-off charged against the allowance
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(2,428
|
)
|
|
85,742
|
|
Ending allowance for doubtful accounts
|
|
$
|
1,275,437
|
|
$
|
1,268,052
|
|
13
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Inventories
Inventories
are stated at the lower of cost or market using the weighted average basis and
consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2009
(unaudited)
|
|
December 31, 2008
|
|
Raw materials
|
|
$
|
13,116,729
|
|
$
|
7,043,349
|
|
Work-in-process
|
|
|
7,233,674
|
|
|
4,801,768
|
|
Finished goods
|
|
|
6,349,599
|
|
|
3,104,079
|
|
Total
|
|
$
|
26,700,002
|
|
$
|
14,949,196
|
|
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 March
31, 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. Depreciation expense for the three months ended
March 31, 2009 and 2008 amounted to $759,072 (unaudited) and $274,361 (unaudited),
respectively.
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 Companys plant facilities. In accordance with the provisions of FAS 34,
Capitalization 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 FAS 144. Accounting for the Impairment or 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 March 31, 2009 and December 31, 2008,
there were no impairments of its long-lived assets.
Plant and
equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2009
(unaudited)
|
|
December 31, 2008
|
|
Buildings and improvements
|
|
$
|
12,502,700
|
|
$
|
5,809,724
|
|
Machinery and equipment
|
|
|
23,002,042
|
|
|
12,308,174
|
|
Furniture, fixtures, office equipment and
vehicle
|
|
|
3,237,677
|
|
|
1,501,946
|
|
Total depreciable assets
|
|
|
38,742,419
|
|
|
19,619,844
|
|
Accumulated depreciation
|
|
|
(11,985,029
|
)
|
|
(3,099,259
|
)
|
Plant and equipment, net
|
|
|
26,757,390
|
|
|
16,520,585
|
|
Construction in progress
|
|
|
825,898
|
|
|
2,778,779
|
|
Total
|
|
$
|
27,583,288
|
|
$
|
19,299,364
|
|
14
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
No interest
was capitalized into construction in progress in either of the three months
ended March 31, 2009 and 2008.
Investment in Unconsolidated Affiliate
Equity method
investments are recorded at original cost and adjusted to recognize the
Companys proportionate share of the investees 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
|
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.
Intangible
assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2009
(unaudited)
|
|
December 31, 2008
|
|
Land use rights
|
|
$
|
2,136,255
|
|
$
|
848,982
|
|
Permits and licenses
|
|
|
11,258,012
|
|
|
389,709
|
|
Blood donor network
|
|
|
22,854
|
|
|
22,885
|
|
Software
|
|
|
87,712
|
|
|
40,758
|
|
GMP certificate
|
|
|
2,327,885
|
|
|
|
|
Long-term customer-relationship
|
|
|
6,941,170
|
|
|
|
|
Totals
|
|
|
22,773,888
|
|
|
1,302,334
|
|
Accumulated amortization
|
|
|
(1,137,825
|
)
|
|
(299,773
|
)
|
Intangible assets, net
|
|
$
|
21,636,063
|
|
$
|
1,002,561
|
|
15
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Total
amortization expense for the three months ended March 31, 2009 and 2008
amounted to $838,459 (unaudited) and $26,157 (unaudited), respectively. The
amortization expenses related to purchased and other intangible assets due to
the consolidation of Dalin is $792,629 for the three months ended March 31,
2009.
Amortization
expense for intangible assets for the next five fiscal years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Amortization expense
|
|
$
|
2,509,062
|
|
$
|
3,343,432
|
|
$
|
3,344,902
|
|
$
|
3,339,680
|
|
$
|
1,575,993
|
|
$
|
7,522,999
|
|
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 March
31, 2009, the Company expects these assets to be fully recoverable.
Revenues
The Companys
revenues are primarily derived from the manufacture and sale of human blood
products. The Companys revenues by significant types of product for the three
months ended March 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
2009
(Unaudited)
|
|
2008
(Unaudited)
|
|
Human Albumin 20%/10ml, 20%/25ml and
20%/50ml
|
|
$
|
12,351,699
|
|
$
|
4,556,503
|
|
Human Hepatitis B Immunoglobulin
|
|
|
60,099
|
|
|
224,475
|
|
Human Immunoglobulin for Intravenous
Injection
|
|
|
5,372,502
|
|
|
1,655,292
|
|
Human Rabies Immunoglobulin
|
|
|
1,629,011
|
|
|
1,203,267
|
|
Human Tetanus Immunoglobulin
|
|
|
1,029,686
|
|
|
111,552
|
|
Human Immunoglobulin
|
|
|
213,877
|
|
|
|
|
Others
|
|
|
491,724
|
|
|
97,918
|
|
Totals
|
|
$
|
21,148,598
|
|
$
|
7,849,007
|
|
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 months
ended March 31, 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 Companys
products are covered by product liability insurance of approximately $2,930,000
(RMB 20,000,000). As of March 31, 2009 and December 31, 2008, no claim on the
insurance policy was filed. However, there are two pre-existing potential
claims against Qianfengs products, which are still in the court proceedings as
explained in the legal proceeding section below.
Government Grants
The Companys
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 three months ended March 31, 2009 and 2008, no
non-refundable grants were received from the PRC municipal government. Grants
received from the PRC municipal government can be used for enterprise
development and technology innovation purposes.
16
CHINA BIOLOGIC PRODUCTS
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Income Taxes
The Company
accounts for income taxes under FAS 109, Accounting for Income Taxes and FIN
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109, FAS 109 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
March 31, 2009 and 2008. FIN 48 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.
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 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 FAS 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 FAS 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.
Noncontrolling
Interest
Effective
January 1, 2009, the Company adopted FAS 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research
Bulletin No. 51 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 on
FAS 160, net income
attributable to noncontrolling interests is now excluded from the determination
of consolidated net income. In addition, foreign currency translation
adjustment is allocated between controlling and noncontrolling interests.
17
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Recently Issued Accounting Pronouncements
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
holders 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 the Companys consolidated
financial statements because all of the Companys investments in debt
securities are classified as trading securities.
In April 2009,
the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. FSP FAS 157-4 amends FAS 157
and provides additional guidance for estimating fair value in accordance with
SFAS 157 when the volume and level of activity for the asset or liability have
significantly decreased and also includes guidance on identifying circumstances
that indicate a transaction is not orderly for fair value measurements. This
FSP shall be applied prospectively with retrospective application not
permitted. This FSP shall be effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity early adopting this FSP must also early adopt FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments. Additionally, if an entity elects to early adopt either FSP FAS
107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt
this FSP. Management is currently evaluating this new FSP but do not believe that
it will have a significant impact on the determination or reporting of the
financial results.
In April 2009,
the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends FAS 115,
Accounting for Certain Investments in Debt and Equity Securities, FAS 124,
Accounting for Certain Investments Held by Not-for-Profit Organizations, and
EITF 99-20, Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets, to make the other-than-temporary
impairments guidance more operational and to improve the presentation of
other-than-temporary impairments in the financial statements. This FSP will
replace the existing requirement that the entitys 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 FSP 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 FSP 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. This FSP shall
be effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. An entity may
early adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also,
if an entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and
APB 28-1, the entity also is required to early adopt this FSP. Management is
currently evaluating this new FSP but do not believe that it will have a
significant impact on the determination or reporting of the financial results.
In April 2009,
the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS 107 to require
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 FSP, fair values for these assets
and liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of SFAS 107 and requires all entities to disclose
the method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it also elects to
early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending after initial adoption.
Management is currently evaluating the disclosure requirements of this new FSP.
18
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
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 4 Related party transactions
The material
related party transactions undertaken by the Company with related parties as of
March 31, 2009 and December 31, 2008 are presented as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount Due
from
|
|
|
Purpose
|
|
March 31, 2009
(unaudited)
|
|
December 31,
2008
|
|
Due from
noncontrolling interest shareholders
(1)
|
|
|
Advances
|
|
|
204,864
|
|
|
|
|
Due from
noncontrolling interest shareholders
(1)
|
|
|
Advances
|
|
|
592,274
|
|
|
|
|
Due from
noncontrolling interest shareholders
(2)
|
|
|
Processing
fees
|
|
|
631,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Due
to
|
|
|
Purpose
|
|
March 31, 2009
(unaudited)
|
|
December 31,
2008
|
|
Noncontrolling interest shareholder of
subsidiary
(3)
|
|
|
Loan
|
|
$
|
772,223
|
|
$
|
773,277
|
|
Guizhou Eakan Investing Corp.
(4)
|
|
|
Loan
|
|
|
2,119,878
|
|
|
|
|
Guizhou Jiean
(3)
|
|
|
Contribution
|
|
|
962,481
|
|
|
|
|
Shandong Institute
(6)
|
|
|
Institutes
share of Dalin net income
|
|
|
305,966
|
|
|
|
|
Noncontrolling interest shareholder of
subsidiary
(7)
|
|
|
Partial
acquisition consideration
|
|
|
371,314
|
|
|
|
|
Former Dalin shareholders
(7)
|
|
|
Partial
acquisition consideration
|
|
|
443,765
|
|
|
|
|
(1)
On November 13, 2008, Qianfeng advanced
its shareholders Guizhou Eakan and Guizhou Jiean approximately $1,172,000 (RMB
8,000,000) and $1,391,750 (RMB 9,500,000), respectively, as shareholders loans
according to the shareholders resolution of November 10, 2008. The loans bear
interest at the prevailing bank lending rate in PRC and payable each calendar
quarterly, which is 5.31% at March 31, 2009 and matures in one year. The loans
were partially offset with the dividends declared on March 10, 2009 with
outstanding balances of $204,864 and $592,274 due from Guizhou Eakan and
Guizhou Jiean, respectively.
(2)
Qianfeng provides processing services
for Guizhou Eakon, one of the Qianfengs non-controlling shareholders. As of
March 31, 2009, Guizhou Eakon owes Qianfeng processing fees in the amount of
$631,803.
(3)
As of March 31, 2009 and December 31,
2008, the Company borrowed an aggregate of $772,223 and $773,277, 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%.
(4)
Qianfeng has payables to Guizhou Eakan
Investing Corp. in the amount of approximately $2,119,878 (RMB 14,470,160).
Guizhou Eakan Investing Corp. is one of the shareholders of Guizhou Eakon, one
of the Qianfengs minority shareholders.
(5)
Qianfeng has payables to Guizhou Jiean
in amount of approximately $962,481 (RMB 6,569,840). In 2007, Qianfeng received
additional contributions from Guizhou Jiean in the amount of $962,481 to
maintain Jiean ownership interest in the Company at 9%. However, due to legal
dispute among Shareholders over Raising Additional Capital as stated in legal
proceeding section of Note 9, commitment and contingent liabilities, the money
may be returned to Jiean.
19
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
(6)
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
Qianfengs equity interests. The amount $305,966 represents the pro rata share
of equity investment income pursuant of Entrustment Agreement for the three
month period ended March 31, 2009.
(7)
The Company has a payable due to the
four Dalins original shareholders in the amount approximately $815,079 (RMB
5,563,680), which represents partial acquisition considerations Logic Express
paid to the former shareholders of Dalin, which will be remitted to those
shareholders at their demand. Among the total $815,079, $371,314 is due to the
current 10% noncontrolling interest shareholder of Dalin, Fan Shaowen and
$443,765 is due to the remaining three Dalins original shareholders and
currently are the employees of our subsidiary.
Note 5 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 $1,133,535 and
$614,704 as of March 31, 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 $4,519,925 and $955,874 as of March
31, 2009 and December 31, 2008, respectively.
Note 6 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 Xian Huitian Blood Products Co., Ltd. (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 $6,494,036 (or RMB 44,327,890) including interest of $48,036
(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 PRCs State Food and
Drug Administration (SFDA) to produce four types of plasma-based products. As
of March 31, 2009, the Company has paid a total of $3,223,000 with the unpaid
balance of $3,271,036 to be due by July 7, 2009, including interest.
Logic Express
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 $17,580 (or RMB120,000) per
year as consideration for Shandong Taibangs performance under this agreement.
Under the Investment Agreement, after the acquisition, Logic Express will be in
charge of Huitians 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
Expresss 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.
20
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Summarized
unaudited financial information of Huitian is as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
December 31, 2008
|
|
Current assets
|
|
$
|
8,125,584
|
|
$
|
8,039,180
|
|
Non-current assets
|
|
|
9,963,109
|
|
|
10,145,248
|
|
Total assets
|
|
|
18,088,693
|
|
|
18,184,428
|
|
Current liabilities
|
|
|
2,557,902
|
|
|
2,747,573
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
15,530,791
|
|
|
15,436,855
|
|
Total liabilities and shareholders equity
|
|
$
|
18,088,693
|
|
$
|
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 FAS 142, but instead should
continue to be reviewed for impairment in accordance with paragraph 19(h) of
APB18.
Summarized
unaudited financial information of Huitian is as follows:
|
|
|
|
|
|
|
Three months ended
March 31, 2009
|
|
Net sales
|
|
$
|
1,159,285
|
|
Gross profit
|
|
|
389,530
|
|
Income before taxes
|
|
|
135,281
|
|
Net income
|
|
|
114,989
|
|
Companys share of net income
|
|
$
|
40,247
|
|
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 Income from the three months ended
March 31, 2009
|
|
|
40,247
|
|
Foreign currency translation loss
|
|
|
(8,912
|
)
|
March 31, 2009 (unaudited)
|
|
$
|
6,565,312
|
|
Note 7 Debt
Short and long term loans
Short term
loans represent renewable loans due to various banks which are normally due
within one year.
21
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
The Companys
bank loans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short/Long-term loan
|
|
Due by
|
|
Annual
interest rates
|
|
March 31, 2009
(Unaudited)
|
|
December 31,
2008
|
|
Long term bank loan, secured by buildings
and land use rights
|
|
|
August 3, 2010
|
|
|
7.02
|
%
|
$
|
5,860,000
|
|
$
|
5,868,000
|
|
Short term bank loan, un-secured
|
|
|
January 7, 2010
|
|
|
5.31
|
%
|
|
5,860,000
|
|
|
|
|
Short term loan, un-secured
|
|
|
On demand
|
|
|
0.00
|
%
|
|
73,250
|
|
|
|
|
Long term loan, secured by building,
machinery and equipment
(1)
|
|
|
June 25, 2010
|
|
|
7.76
|
%
|
|
3,369,500
|
|
|
|
|
Short term loan, guaranteed by minority shareholder of Qianfeng
|
|
|
July 3, 2009
|
|
|
8.54
|
%
|
|
1,347,800
|
|
|
|
|
Short term loan, secured by raw
material
(2)
|
|
|
February 16, 2010
|
|
|
5.84
|
%
|
|
439,500
|
|
|
|
|
Totals
|
|
|
|
|
|
|
|
$
|
16,950,050
|
|
$
|
5,868,000
|
|
|
|
(1)
|
The interest
rate is adjustable monthly at 1.15 times of the prevailing rate as published
by Bank of China. As of March 31, 2009, the interest rate is fixed at 7.7625%
per annum. The short term portion of this loan is $439,500 and due by
December 25, 2009. The remaining balance of $1,465,000 and $1,465,000 are due
on April 25, 2010 and June 25, 2010, respectively.
|
|
|
(2)
|
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 March 31, 2009, the
interest rate is fixed at 5.841% per annum.
|
Interest
expense totaling $622,449 and $494,040 was incurred during the three months
ended March 31, 2009 and 2008, respectively.
The above
loans are secured by Shandong Taibangs land use rights and buildings located
in Taian, Shandong Province, PRC and Qianfengs buildings and machinery and
equipment located in Guiyang, Guizhou Province, PRC, with carrying net values
as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2009
(unaudited)
|
|
December 31, 2008
|
|
Buildings in Taian, Shandong
|
|
$
|
1,236,322
|
|
$
|
1,417,138
|
|
Land use rights in Taian, Shandong
|
|
|
423,021
|
|
|
195,691
|
|
Buildings in Guiyang, Guizhou
|
|
|
1,269,802
|
|
|
|
|
Machinery and equipment in Guiyang, Guizhou
|
|
|
9,044,860
|
|
|
|
|
Totals
|
|
$
|
11,974,005
|
|
$
|
1,612,829
|
|
22
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Other payables and accruals
Other payables
and accruals consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2009
(unaudited)
|
|
December 31, 2008
|
|
Other payables
(1)
|
|
$
|
9,099,271
|
|
$
|
319,699
|
|
Payable to Sansui Finance department for
pending investment on plasma stations
(2)
|
|
|
1,173,465
|
|
|
|
|
Accruals for salaries and welfare
|
|
|
670,634
|
|
|
830,388
|
|
Accruals for RTO expenses
|
|
|
245,657
|
|
|
245,657
|
|
Accruals for selling commission and
promotion fee
|
|
|
911,166
|
|
|
1,508,102
|
|
Other Payable-Government Grant
|
|
|
184,312
|
|
|
114,148
|
|
Other payable - Deposit received
|
|
|
192,892
|
|
|
283,826
|
|
Other payable - Funds
|
|
|
359,303
|
|
|
627,157
|
|
Accruals for interest
|
|
|
|
|
|
33,954
|
|
Others
|
|
|
141,681
|
|
|
|
|
Total
|
|
$
|
12,978,381
|
|
$
|
3,962,931
|
|
|
|
(1)
|
The other
payables mainly comprise of deposits by potential strategic investors and
payable to former shareholders of Dalin with the amount of $5,824,840 and
$2,466,930, respectively. As of March 31, 2009, Qianfeng has received in an
aggregate amount of $5,824,840 from potential private strategic investors in
connection with subscribing shares from Qianfeng pursuant to Equity Purchase
Agreement. The registration of the new investors as Qianfengs 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.
The amount $2,466,930 represents partial acquisition considerations Logic
Express paid to the former shareholders of Dalin, which will be remitted to
those shareholders at their demand.
|
|
|
(2)
|
In early
2007, Qianfeng submitted RMB 8,010,000 (approximately $1,173,465) to the
finance department of Sansui County, in Chinas Qiandongnan Autonomous
Region, for acquiring the Sansui Plasma Collection Station from the local
government, which action was legitimized and fully endorsement by relevant
provincial government authorities. However, the finance department refused to
implement the provincial governments authorization and has returned the
funds to Qianfeng. As of March 31, 2009, Qianfeng has set aside the full
amount as a payable to Sansui County, pending the outcome of provincial
governments administrative review as disclosed in the legal proceedings note
below.
|
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 $353,827 and $325,390 as of March 31, 2009
and December 31, 2008, respectively, determined using present value of annual
payments over 50 years.
Note 8 - Earnings per share (Restated)
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.
23
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Earning per
share is as follows for the three months ended March 31,
|
|
|
|
|
|
|
|
|
|
2009
(unaudited)
|
|
2008
(unaudited)
|
|
Net income attributable to common
shareholders for earnings per share
|
|
$
|
4,308,796
|
|
$
|
2,267,800
|
|
Weighted average shares used in basic
computation
|
|
|
21,434,942
|
|
|
21,434,942
|
|
Diluted effect of warrants and options
|
|
|
|
|
|
529,226
|
|
Weighted average shares used in diluted
computation
|
|
|
21,434,942
|
|
|
21,964,168
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
$
|
0.11
|
|
Diluted
|
|
$
|
0.20
|
|
$
|
0.10
|
|
At March 31,
2009, all outstanding warrants and options were excluded in the calculation of
diluted earnings per share because of their anti-dilutive nature.
At March 31,
2008, all outstanding warrants were included in the calculation of diluted
earnings per share.
Note 9 Taxes (Restated)
Income taxes
The Company is
governed by the Income Tax Law of the Peoples 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 Companys
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 PRCs
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.
24
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Starting
January 1, 2008, all dividends paid to foreign parents are subject to a 10%
income tax. As a result, Logic Express recorded $218,238 and $0 income tax
expense for the three months ended March 31, 2009 and 2008, respectively, for
dividends Shandong Taibang paid to its foreign parent, Logic Express.
The following
table reconciles the U.S. statutory rates to the Companys effective tax rate
for the three months ended March 31, 2009 and March 31, 2008:
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
U.S. Statutory rates
|
|
|
35.0
|
%
|
|
35.0
|
%
|
Foreign Income
|
|
|
(35.0
|
)
|
|
(35.0
|
)
|
China Tax rates
|
|
|
25.0
|
|
|
25.0
|
|
China income tax exemption
|
|
|
(10.0
|
)
|
|
(10.0
|
)
|
Other items
(1)
|
|
|
5.5
|
|
|
5.5
|
|
Effective income tax rates
|
|
|
20.5
|
%
|
|
20.5
|
%
|
(1)
The 6.9% represents the $0.2 million
income tax expense for dividends Shandong Taibang paid to Logic Express, its
foreign parent and $1.3 million expenses incurred by CBP, Logic Express and
Logic Holding that are not deductible in PRC for the three months ended March
31, 2009. The 5.5% represents the $0.6 million expenses incurred by CBP, Logic
Express and Logic Holding that are not deductible in PRC for the three months
ended March 31, 2008.
The estimated
tax savings due to the tax exemption for the three months ending March 31, 2009
and 2008 amounted to $763,331 and $318,221, respectively. The net effect on
earnings per share if the income tax had been applied would decrease both basic
and diluted earnings per share for the three months ended March 31, 2009 and 2008
by $0.04 and $0.01, respectively.
The provision for income taxes consists of the following for
the three months ended March 31, 2009:
|
|
2009
|
|
Current
|
|
|
|
U.S.
|
$
|
-
|
|
Foreign (China)
|
|
2,030,194
|
|
|
|
2,030,194
|
|
Deferred
|
|
|
|
U.S.
|
|
-
|
|
Foreign (China)
|
|
(124,799
|
)
|
|
|
(124,799
|
)
|
|
|
|
|
Provision
for income taxes
|
$
|
1,905,395
|
|
25
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Deferred taxes
As of March 31, 2009, significant temporary differences between
the tax basis and financial statement basis of accounting for liabilities that
gave rise to deferred taxes were principally related to the following:
|
|
|
|
|
For the three months ended
|
|
March 31, 2009
(unaudited)
|
Deferred tax liabilities arising from:
|
|
|
|
- Intangible assets
|
$
|
4,173,891
|
|
- Property, plant and equipment
|
|
471,297
|
|
Deferred tax liabilities
|
$
|
4,645,188
|
|
CBP was
incorporated in the United States and has incurred net operating losses of
$719,896 and $1,777,854 for income tax purposes as of March 31, 2009 and
December 31, 2008, respectively. The estimated net operating loss carry
forwards for United States income taxes amounted to $4,381,039 which may be
available to reduce future years taxable income. These carry forwards will
expire, if not utilize, from 2026 through 2029. Management believes that the
realization of the benefits from these losses appears uncertain due to the
Companys 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. The
net change in the valuation allowance for the period ended March 31, 2009 was
$244,765 and the accumulated valuation allowance as of March 31, 2009 amounted
to $1,489,553. 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
three months ended
March 31, 2009
(unaudited)
|
|
For the
year ended
December 31, 2008
|
|
Balance as
of beginning of period
|
|
$
|
1,244,789
|
|
$
|
640,318
|
|
Increase
|
|
|
244,764
|
|
|
604,471
|
|
Balance as
of end of period
|
|
$
|
1,489,553
|
|
$
|
1,244,789
|
|
Value added tax
VAT on sales
amounted to $1,578,403 and $493,150 for the three months ended March 31, 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:
26
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
December 31, 2008
|
|
|
|
(Unaudited)
|
|
|
VAT tax payable
|
|
$
|
687,849
|
|
$
|
331,505
|
|
Income tax payable
|
|
|
4,462,645
|
|
|
3,630,878
|
|
Others miscellaneous tax payable
|
|
|
61,004
|
|
|
97,627
|
|
|
|
$
|
5,211,498
|
|
$
|
4,060,010
|
|
Note 10 Commitments and contingent
liabilities
Capital and lease commitments
The Companys
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 Companys
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 Companys
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 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 Companys
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).
The Companys
indirectly owned subsidiary, Huang Ping, entered into a lease with Huang Ping
County Finance Department on April 28, 2007, Guizhou Province, to lease land
use rights and use building and equipment for a period of 3 years. The annual
lease payment is approximately $10,269 (RMB 70,000).
The Companys
indirectly owned subsidiary, Pu Ding, entered into a lease with Pu Ping County
Health Department, Guizhou Province on March 31, 2007, to lease land use rights
and use building and equipment for a period of 3 years. The annual lease
payment is approximately $22,005 (RMB 150,000).
The Companys
indirectly owned subsidiary, Na Yong, entered into a lease with Na Yong County
Health Department, Guizhou Province on March 31, 2007, to lease land use rights
and use building and equipment for a period of 3 years. The annual lease
payment is approximately $22,005 (RMB 150,000).
The Companys
indirectly owned subsidiary, Wei Ning, 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 $11,720 (RMB 80,000).
The Company
recognizes lease expense on a straight line basis over the term of the lease in
accordance to FAS 13, Accounting for Leases." Total capital and lease commitments
outstanding as of March 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
year
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Property and equipment
|
|
$
|
77,383
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Lease
|
|
|
73,293
|
|
|
26,586
|
|
|
9,315
|
|
|
9,315
|
|
|
9,315
|
|
|
204,892
|
|
Total
|
|
$
|
150,676
|
|
$
|
26,586
|
|
$
|
9,315
|
|
$
|
9,315
|
|
$
|
9,315
|
|
$
|
204,892
|
|
27
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
For the three
months ended March 31, 2009 and 2008, total rent expense amounted to $33,134
and $16,226, respectively.
Guarantees
As of March
31, 2009, Qianfeng guaranteed approximately $1,465,000 (RMB10,000,000) of a
short term bank loans for Eakan, a noncontrolling shareholder of Qianfeng. In
return, Eakan cross guaranteed Qianfengs bank loan of $1,347,800. The Company
is obligated to perform under the guarantee if Eakan fails to pay principal and
interest payments when due. The maximum potential amount of future undiscounted
payments under the guarantee is $1.5 million including accrued interest. As of
March 31, 2009, the Company did not record a liability for the guarantee
because management believes Eakan is current in its payment obligations, and
the likelihood of the Company having to make good on the guarantee is remote.
Contingencies
In the normal
course of business, the Company is exposed to claims related to the manufacture
and use of the Companys products, but currently the Company is not aware of
any such claim.
Legal proceedings
Misuse of Company Seal
In July 2006,
one of the Companys 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.
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 approximately
$2.6 million or (RMB20 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 $2.6 million
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. Dus 25% equity interest in Shandong Taibang was
transferred to Beijing Chen Da as repayment of the $2.6 million debts. This
agreement was signed by Mr. Dus 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 brothers 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. Dus brother, Du Hai Shan were
invalid because their execution and delivery were beyond the scope of Du Hai
Shans 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 approximately $4.2 million (RMB32.8 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
approximately $3.4 million (RMB26.4 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 $3.4 million in cash. This transfer was approved by Shandong COFTEC
on March 17, 2005. Missile Engineering disputes this transaction and sued Mr.
Dus brother in the court of Jianli County, Hubei province, relating to the
propriety of the brothers 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.
28
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 COFTECs 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 Committees 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.
On February
16, 2009, Mr. Du and Missile Engineering 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, 2009,
the Wuhan Intermediate Court 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 Companys PRC subsidiary, Shandong Taibang, advanced $413,697 (RMB3.0
million) to Feng Lin, the 20% minority shareholder in Fang Cheng Plasma
Company, the Companys 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 Lans
permission. The establishment and registration of Bobai was never realized as a
result of this law suit. On January 29, 2007, on Hua Lans 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 Taibangs 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).
29
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
In January
2008, Hua Lan enforced the judgment granted by the High Court to freeze the
Companys 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 Lans claim and to request that the Taian City District
Court preserve Hua Lans property or freeze up to approximately $411,300 (RMB 3
million) of Hua Lans 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 Huangs portions of the judgment and the related fees, approximately
$456,222 (RMB 3,109,900) has been withdrawn from Shandong Taibangs account.
The Company recorded Feng Lin and Keliang Huangs 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 Companys planned acquisition of the
assets of Bobai will go forward.
Dispute among Shareholders over Raising Additional
Capital
On May 28,
2007, a 91% majority of Qianfengs 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 Qianfengs shares, the Guizhou Jiean Company, or Jiean, 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 approximately $7,475,832 (RMB 50,960,000) in exchange
for 18,200,000 shares, or 21.4%, of Qianfengs equity interests. At the same
time, Jiean 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,
Jiean 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, Jiean 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
Jiean and sustained the Equity Purchase Agreement, but on November 2008,
Jiean appealed the Guizhou High Court judgment to the Peoples Supreme Court
in Beijing. The Peoples Supreme Court heard the case in February 2009, but had
not issued its decision as of the date of this report. The registration of the
new investors as Qianfengs shareholders and the related increase in registered
capital of Qianfeng with the Administration for Industry and Commerce is
pending the outcome of this law suit. If Jiean prevails in its suit against
Qianfeng, it would have the right to receive additional Qianfeng equity
interests, and Dalins interests in Qianfeng would be reduced to approximately
41.3%. Whatever the outcome of the appeal, we will be able to retain control
over Qianfeng due to our right to appoint a majority of Qianfengs directors.
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 approximately,
$14,670 (RMB 100,000) for his fractionation equipment and approximately,
$733,500 (RMB 5,000,000) for the transfer of his technological know-how. The
Intermediate Court ruled in favor of Sin and found that Qianfeng owed Sin
approximately, $ 1,522,183 (RMB 10,376,160), but Qianfeng appealed the
Intermediate Court ruling to the Guizhou High Court. The Guizhou High Court
agreed in part with Qianfengs grounds for appeal and reduced the amount of
know-how transfer fee to approximately, $289,060 (RMB 1,970,413). In May 2007,
Sin appealed the Guizhou High Courts decision to the Peoples Supreme Court in
Beijing. The Peoples Supreme Court heard in April 2008, but had not issued its
decision as of the date of this report.
30
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
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 approximately, $256,631 (RMB 1,749,358) in
damages, in connection with his alleged HIV contamination via blood transfusion
during the plaintiffs treatment following an April 2006 traffic accident. The
Zhuhui District Court awarded the plaintiff approximately, $29,340 (RMB
200,000), 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
plaintiffs treatment by the hospitals or to Qianfengs products. There have
been no further developments on this case as of the date of this report.
On November
10, 2006, Qianfeng and eight other defendants were sued in the Sigu District
Court of Hengyang County, Hunan province, China, by a resident of Hunan
province, for approximately, $106,446 (RMB 725,606) in damages, in connection
with his alleged Hepatitis C contamination via blood transfusion and injection
of plasma-based products, during the plaintiffs August 2004 treatment for
hemophilia. On December 8, 2008, the Sigu District Court ruled in favor of the
plaintiff and held Qianfeng liable for 10% of the total approximately, $2,680
(RMB 18,293) judgment against three of the defendants. All three defendants,
including Qianfeng appealed the district court ruling to the Intermediate Court
of the Hengyang County. On May 4, 2009, the Intermediate Court ruled against
the defendants and sustained the original district court ruling. As of result,
Qianfeng is liable and obligated to pay the plaintiff approximately, $2,680
(RMB 18,293) in damages and related court fees.
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 Qianfengs 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 approximately
$1,173,465 (RMB 8,010,000) 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
Peoples 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.
31
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Note 11 Warrants and options (Restated)
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
on July 18, 2006. Concurrent with the private placement, the Company issued
1,070,000 warrants with an exercise price of $2.8425 per share to investors. The
warrants have a 5-year term and shall be callable by the Company if the shares
trade at 160% of the exercise price for 15 consecutive trading days after the
registration statement has been effective for 45 days. On July 28, 2006, the
Company also issued 214,000 warrants with exercise price of $2.8425 (Placement Agent Warrant) to Lane Capital Markets,
LLC, the placement agent. These warrants have a 5-year term and were
non-callable and vested upon grant.
Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own
Stock, which is effective for financial statements for fiscal years beginning
after December 15, 2008 and which replaced the previous guidance on this topic
in EITF 01-6. Paragraph 11(a) of FAS 133 specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the
Companys 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 issuers own stock and thus able to qualify for the FAS 133 paragraph 11(a)
scope exception. Because of strike prices of the 1,284,000 previously issued
warrants are denominated in USD which is different than the Companys function
currency, RMB, these warrants previously treated as equity pursuant to the
derivative treatment exemption were no longer afforded equity treatment.
As such, effective January 1, 2009, the Company
reclassified the original fair value of these warrants $600,289 from equity to
liability status 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,
$393,962 from beginning retained earnings and $994,251 to a long-term derivative
liability to recognize the fair value of such warrants on such date. The fair
value of these common stock purchase warrants increased to $1,403,543 as of
March 31, 2009. As such, the Company recognized a $409,292 loss from the change
in fair value of these warrants for three months ended March 31, 2009.
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 using the following
assumptions:
|
|
|
|
|
|
|
|
Granted on
|
|
March 31, 2009
|
|
January 1, 2009
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Risk-free
interest rate
|
|
|
0.98
|
%
|
|
1.01
|
%
|
Expected
life (in years)
|
|
|
2.30
|
|
|
2.55
|
|
Weighted
average expected volatility
|
|
|
130
|
%
|
|
130
|
%
|
Expected
volatility is based on historical volatility. 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 rate is based on U.S.
Treasury securities according to the remaining term of the warrants.
32
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
The summary of
warrant activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Life
|
|
December 31, 2007
|
|
|
1,284,000
|
|
$
|
2.84
|
|
|
3.55
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008(unaudited)
|
|
|
1,284,000
|
|
$
|
2.84
|
|
|
3.30
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
1,284,000
|
|
$
|
2.84
|
|
|
2.55
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009(unaudited)
|
|
|
1,284,000
|
|
$
|
2.84
|
|
|
2.30
|
|
Options
On May 9,
2008, the Company adopted the 2008 Equity Incentive Plan, which provides up to
5,000,000 shares of Companys 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 Companys 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 Companys 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 Companys common stock was estimated by management based on the
historical volatility of the Companys 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 Companys current and expected
dividend policy. The value of the options was based on the Companys 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 three months ended March 31, 2009, the Company
expensed $27,373 in compensation expense. As of March 31, 2009, approximately
$34,908 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 employees
remaining weighted average service period of approximately 0.42 years. The
options are accounted for as equity under SFAS 133 and EITF 00-19.The options
activity is as follows:
33
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
December 31, 2007
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
997,500
|
|
|
937,500
|
|
|
4.00
|
|
|
10.00
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
997,500
|
|
|
937,500
|
|
$
|
4.00
|
|
|
9.43
|
|
$
|
|
|
Granted
|
|
|
|
|
|
30,000
|
|
|
4.00
|
|
|
9.31
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
|
997,500
|
|
|
967,500
|
|
$
|
4.00
|
|
|
9.18
|
|
$
|
|
|
Note 12 Statutory reserves
In accordance
with the Law of the PRC on Joint Ventures Using Chinese and Foreign
Investment and the Companys 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 three
months ended March 31, 2009 and 2008, the Company transferred $2,508,741
(unaudited) and $235,303 (unaudited), 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 Companys registered
capital. As of March 31, 2009, approximately $8 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. For the three
months ended March 31, 2009 and 2008, the Company transferred $252,095
(unaudited) and $117,651 (unaudited), respectively, to the fund. Amounts
represent 5% of the net income determined in accordance with the Companys
policy.
Note 13 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 March 31, 2009 and 2008, the Company made pension
contributions in the amount of $220,493 (unaudited) and $54,591 (unaudited),
respectively.
34
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Note 14- Noncontrolling interest and
distribution (Restated)
The roll
forward of noncontrolling interest in the balance sheet is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fang Cheng
Plasma Co.
Minority
Owner
(20%)
|
|
Shandong
Taibang
Minority
Owners
(17.24%)
|
|
Guizhou
Renyuan
Minority
Owners
(75%)
|
|
Guiyang
Qianfeng
Minority
Owners
(46%)
|
|
Chongqing
Dalin
Minority
Owner
(10%)
|
|
Total
Noncontrolling
interest
|
|
December 31, 2007
|
|
$
|
82,994
|
|
$
|
4,098,344
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
4,181,338
|
|
Net income(loss)
|
|
|
(83,938
|
)
|
|
3,387,779
|
|
|
|
|
|
|
|
|
|
|
|
3,303,841
|
|
Foreign currency translation gain/(loss)
|
|
|
944
|
|
|
301,303
|
|
|
|
|
|
|
|
|
|
|
|
302,247
|
|
Dividend declared
|
|
|
|
|
|
(2,982,045
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,982,045
|
)
|
December 31, 2008
|
|
$
|
|
|
$
|
4,805,381
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
4,805,381
|
|
Dalin acquisition
|
|
|
|
|
|
|
|
|
2,521,470
|
|
|
17,249,290
|
|
|
1,730,952
|
|
|
21,501,712
|
|
Net income(loss)
|
|
|
(2,449
|
)
|
|
850,158
|
|
|
15,694
|
|
|
1,914,995
|
|
|
279,736
|
|
|
3,058,134
|
|
Foreign currency translation gain/(loss)
|
|
|
|
|
|
(4,260
|
)
|
|
36,543
|
|
|
352,923
|
|
|
42,092
|
|
|
427,298
|
|
Dividend declared
|
|
|
|
|
|
(454,308
|
)
|
|
|
|
|
(4,179,679
|
)
|
|
|
|
|
(4,633,987
|
)
|
March 31, 2009
|
|
$
|
(2,449
|
)
|
$
|
5,196,971
|
|
$
|
2,573,707
|
|
$
|
15,337,529
|
|
$
|
2,052,780
|
|
$
|
25,158,538
|
|
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 March 31, 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 Taibang
Noncontrolling
shareholder
|
|
Guiyang Qianfeng
Noncontrolling
shareholder
|
|
Total
Noncontrolling
shareholder
|
|
Distribution payable, December 31, 2006
|
|
$
|
476,597
|
|
$
|
|
|
$
|
476,597
|
|
Dividend declared
|
|
|
2,207,541
|
|
|
|
|
|
2,207,541
|
|
Dividend paid
|
|
|
(488,878
|
)
|
|
|
|
|
(488,878
|
)
|
Dividend used to increase registered
capital
|
|
|
(1,710,880
|
)
|
|
|
|
|
(1,710,880
|
)
|
Foreign currency translation adjustments
|
|
|
22,246
|
|
|
|
|
|
22,246
|
|
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
|
|
|
454,308
|
|
|
4,179,679
|
|
|
4,633,987
|
|
Dividend paid
|
|
|
|
|
|
(3,735,243
|
)
|
|
(3,735,243
|
)
|
Foreign currency translation adjustments
|
|
|
12,796
|
|
|
2,798
|
|
|
15,594
|
|
Distribution payable, March 31, 2009
|
|
$
|
3,719,458
|
|
$
|
447,234
|
|
$
|
4,166,692
|
|
Note 15 Business Combinations (Restated)
On September
26, 2008, Logic Express 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, 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. On April 14, 2009, the
Company paid the third installment towards the acquisition which represented the
payment of 90% of the purchase price in the aggregate, and in accordance with
terms of the equity transfer agreement, 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 Dalins 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 are 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 Commerces approval of the equity
transfer. On January 16, 2009, Qianfengs shareholders, including Dalin,
elected four members to its seven member Board of Directors that were nominated
by Dalin, and on January 17, 2009, the Qianfengs Board of Directors elected a
new management team consisting of all Logic Express and Dalins appointees,
including a new CEO, Executive Senior Vice President, CFO and Director of
Sales. The operational control of Qianfeng passed to the Company effective
January 1, 2009. The results of Dalins and its subsidiaries operations from
January 1, 2009 through March 31, 2009 are included in the Companys
Consolidated Statements of Income and Comprehensive Income.
35
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
Effective
January 1, 2009, the Company adopted FAS 141R, Business Combinations to
replace FAS 141, Business Combinations. FAS 141R retains the fundamental
requirements in FAS 141 that the acquisition method of accounting (which FAS
141 called the purchase method) be used for all business combinations and for
an acquirer to be identified for each business combination. FAS 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 FAS
141s 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. FAS 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 FAS 141R).
The Companys
acquisition of Dalin was accounted for in accordance with FAS 141R and we have
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 FAS 141R and, expect for cash and cash
equivalents, fair value was estimated using level 3 inputs under SFAS No. 157.
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 SFAS No. 142, Goodwill and Other Intangibles
Assets, indefinite lived intangibles and goodwill are not being amortized.
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
|
|
|
|
|
|
17,174,688
|
|
Total assets
|
|
|
38,121,544
|
|
|
77,077,463
|
|
Total liabilities
|
|
|
21,911,373
|
|
|
26,660,472
|
|
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. Pursuant to FAS 141R, 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 $17.2 million of goodwill was due to the acquisition
purchase price over the fair value of the assets acquired. During the three
months ended March 31, 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.
36
CHINA BIOLOGIC
PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009
(Unaudited)
The following
table presents the details of the fair value purchased intangible assets
acquired through business combinations as of January 1, 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 months ended March
31, 2009 and 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.
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
|
|
2009
|
|
2008
|
|
Sales
|
|
$
|
21,148,598
|
|
$
|
16,221,336
|
|
Cost of Goods Sold
|
|
|
6,214,930
|
|
|
4,844,829
|
|
Gross Profit
|
|
|
14,933,688
|
|
|
11,376,507
|
|
Operating Expenses
|
|
|
4,870,130
|
|
|
3,358,037
|
|
Other expense, net
|
|
|
791,213
|
|
|
85,803
|
|
Income Tax
|
|
|
1,905,395
|
|
|
1,428,232
|
|
Net Income before noncontrolling interest
|
|
|
7,366,930
|
|
|
6,504,435
|
|
Less: Net income attributable to
noncontrolling interest
|
|
|
3,058,134
|
|
|
2,136,434
|
|
Net Income attributable to controlling
interest
|
|
$
|
4,308,796
|
|
$
|
4,368,001
|
|
Basic - earning per share
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
21,434,942
|
|
|
21,434,942
|
|
Earnings per share
|
|
$
|
0.20
|
|
$
|
0.20
|
|
Diluted - earning per share
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
21,434,942
|
|
|
21,964,168
|
|
Earnings per share
|
|
$
|
0.20
|
|
$
|
0.20
|
|
37
|
|
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
|
Special Note Regarding Forward Looking
Statements
This Quarterly
Report on Form 10-Q, including the following Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such statements include, among others, those concerning our
expected financial performance and strategic and operational plans, as well as
all assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and that a number of risks and uncertainties
could cause actual results of the Company to differ materially from those
anticipated, expressed or implied in the forward-looking statements. The words
believe, expect, anticipate, project, targets, optimistic,
intend, aim, will or similar expressions are intended to identify
forward-looking statements. All statements other than statements of historical
fact are statements that could be deemed forward-looking statements. Risks and
uncertainties that could cause actual results to differ materially from those
anticipated include risks related to, among others: our potential inability to
raise additional capital that is necessary to fund our operations and our
expansion, including our intended acquisitions; the possibility that third
parties hold proprietary rights that preclude us from marketing our products;
the emergence of additional competing technologies; changes in domestic and
foreign laws, regulations and taxes; changes in economic conditions;
uncertainties related to Chinas legal system and economic, political and
social events in China; a general economic downturn; a downturn in the
securities markets; Securities and Exchange Commission regulations which affect
trading in the securities of penny stocks. Additional disclosures regarding
factors that could cause our results and performance to differ from results or
performance anticipated by this Report are discussed in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008 at Item 1A. Risk
Factors.
Readers are
urged to carefully review and consider the various disclosures made by us in
this Report and our other filings with the SEC. These reports attempt to advise
interested parties of the risks and factors that may affect our business,
financial condition and results of operations and prospects. The
forward-looking statements made in this Report speak only as of the date hereof
and we disclaim any obligation to provide updates, revisions or amendments to
any forward-looking statements to reflect changes in our expectations or future
events.
Use of Terms
Except as
otherwise indicated by the context, all references in this annual report to (i)
China Biologic, the Company, we, us, or our, are references to the
combined business of China Biologic Products, Inc., a Delaware corporation, and
its direct and indirect subsidiaries; (ii) Logic Express are to our
wholly
owned subsidiary Logic Express Limited, a BVI company; (iii) Shandong Taibang
are to our subsidiary Shandong Taibang Biological Products Co. Ltd., a
sino-foreign joint venture incorporated in China; (iv) Logic Holding is to
Logic Holding (Hong Kong) Limited, our wholly-owned Hong Kong subsidiary; (v)
Dalin are to our majority owned subsidiary, Chongqing Dalin Biologic
Technologies Co., Ltd., a PRC limited company; (vi) Securities Act are to the
Securities Act of 1933, as amended; (vii) Exchange Act are to the Securities
Exchange Act of 1934, as amended; (viii) RMB are to Renminbi, the legal currency
of China; (ix) U.S. dollar, $ and US$ are to the legal currency of the
United States; (x) China and PRC are to the Peoples Republic of China; and
(xi) BVI are to the British Virgin Islands.
Overview of Our Business
We are a
biopharmaceutical company and through our indirect majority-owned Chinese
subsidiaries,
Shandong Taibang and Guizhou Qianfeng,
we are principally engaged in the research, development, production and
manufacturing of plasma-based pharmaceutical products in China. Shandong
Taibang and Guiyang Qianfeng
operates from our manufacturing facilities
located in Taian City, Shandong Province
and Guiyang City, 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.
38
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 58.2% and 58.1% of our total revenues, respectively, for the
three months ended March 31, 2009 and 2008. Human albumin is principally used
to increase blood volume while immunoglobulin is used for certain disease
preventions and cures. Our 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. Our sales have historically been made on the
basis of short-term arrangements and our largest customers have changed over
the years. For the three months ended March 31, 2009 and 2008, our top 5
customers accounted for approximately 20.5% and 27.4%, respectively, of our
total revenue. For the three months ended March 31, 2009 and 2008, our largest
customer accounted for approximately 7.8% and 14.9%, 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.
During the
quarter ended March 31, 2009, our revenues were derived primarily from the sale
of our approved human albumin and immunoglobulin products. Our revenue during
the fiscal quarter ended March 31, 2009 increased 169.4% to a $21,148,598 compared with $7,849,007
in 2008. The increase in revenues during the 2009 period is primarily
attributable to a general increase in the price of plasma-based products and
foreign exchange translation, which was partially offset by an increase in the
sales volume of our human hepatitis B immunoglobulin and human rabies
immunoglobulin products. All of our approved products, except for human
hepatitis B immunoglobulin, recorded price increases ranging from 3.5% to
49.2%. Our first quarter financial results also benefited from our
consolidation of financial data from our new majority-owned PRC subsidiary,
Dalin, with our financial statements for the period, which contributed
approximately $9.5 million in revenue and accounted for approximately 44.6% of
our total revenue of the first quarter of 2009.
During 2008,
the SFDA implemented the new 90-day quarantine period on plasma raw material,
effective July 1, 2008. This new measure further tightened the availability of
raw material for production, and has adversely impacted the already short
supply of plasma-based products. The price increase of plasma-based products
from period to period is primarily attributable to the PRC governments
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 and realize higher profit margins by developing a
portfolio of high margin products and increasing the yield per unit volume of
plasma.
First Quarter of 2009 Financial Performance
Highlights
We continued
to experience strong demand for our products and services during the three
months ended March 31, 2009, which resulted in growth in our revenue and net
income. The following are some financial highlights for the three months ended
March 31, 2009:
|
|
|
|
|
Revenue
: Revenue increased $13,299,591, or
169.4%, to $21,148,598 for the three months ended March 31, 2009, from
$7,849,007 for the same period in 2008.
|
|
|
|
|
|
Income from operations
: Income from
operations increased $6,425,868, or 176.7%,
to $10,063,538 for the three months ended March 31, 2009, from $3,637,670 for
the same period in 2008.
|
|
|
|
|
|
Net income
: Net income: Net income
increased $2,040,996, or 90.0%, to $4,308,796 for the three months ended March
31, 2009, from $2,267,800 for the same period in 2008.
|
|
|
|
|
|
Fully diluted net income per share
: Fully
diluted net income per share was $0.20 for the three months ended March 31,
2009, as compared to $0.10 for the same period in 2008.
|
39
Our net
income, as reported in our result of operations for the three months ended
March 31, 2009 and 2008, was $4,308,796 and $2,267,800, respectively. Our
results of operations in the first quarter of 2009, as compared to the same
period in 2008, was
materially impacted by our acquisition of a 90% majority interest in Dalin in the
first quarter of 2009.
Recent
Developments
Formation
of Hong Kong Subsidiary
On December 12, 2008, we established Logic Holding (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
On September
26, 2008, Logic Express 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, 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. On April 14, 2009, we
paid the third installment towards the acquisition which represented our
payment of 90% of the purchase price in the aggregate, and in accordance with
terms of the equity transfer agreement, Logic Holdings, our 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 Dalins 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. We are 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
Commerces approval of the equity transfer. On January 16, 2009, Qianfengs
shareholders, including Dalin, elected four members to its seven member Board
of Directors that were nominated by Dalin, and on January 17, 2009, the
Qianfengs Board of Directors elected a new management team consisting of all
Logic Express and Dalins appointees, including a new CEO, Executive Senior
Vice President, CFO and Director of Sales. For details regarding terms of the
equity transfer agreement, as amended, see our Current Reports on Form 8-K
filed on October 2, 2008, November 12, 2008, November 20, 2008, December 18,
2008 and April 1, 2009 with the SEC.
On April 6,
2009, Logic Express entered into an equity transfer and entrustment agreement,
or Entrustment Agreement, among Logic Express, Taibang, and the Shandong
Institute of Biological Products, or the Shandong Institute, the holder of the
minority interests in Taibang, pursuant to which, Logic Express agreed to
permit Taibang and the Shandong Institute to participate in the indirect
purchase of Qianfengs equity interests. Under the terms of the Entrustment
Agreement, 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 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 5 days of the
payment due date, then Logic Express is obligated to pay 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 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
Taibang and the Shandong Institute will receive no less than a 6% return based
on their original investment amount. For details regarding the Entrustment
Agreement, see our Current Report on Form 8-K filed on April 13, 2009 with the
SEC.
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 in the future, 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
Qianfengs 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 shareholders right of first refusal in connection
with the new equity issuance. For details regarding the Qianfeng shareholder
suit see our disclosure under Legal Proceedings herein. When the capital
increase is registered with AIC, Dalins equity interest in Qianfeng will be
reduced to approximately 43.3%, and if the minority shareholder prevails in its
suit against Qianfeng and its shareholders, Dalins interests in Qianfeng could
be diluted to as low as 41.3%. Even if the minority shareholder were to prevail
in its suit, the Company will be able to retain control over Qianfeng as a
result of our right to appoint a majority of Qianfengs directors.
Management does not expect this dispute to impact our ability to complete the
acquisition.
40
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 7 of these plasma collection
stations, of which 6 are currently in operation and collecting approximately
250 tons of plasma supply per year, with an annual capacity of 40 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 PRCs
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
On October 10,
2008, Taibang entered into an equity transfer agreement pursuant to which
Taibang agreed to acquire 35% of the equity interest in Xian Huitian Blood
Products Co., Ltd., or Huitian, a biopharmaceutical company based in Xian,
Shaanxi Province, China, from Mr. Fan Qingchun, a PRC citizen, for an aggregate
purchase price of RMB 44,000,000 (approximately, $6,446,000). We have already
paid RMB 22,000,000 (approximately, $3,223,000) of the Huitian purchase price
and, pursuant to the equity transfer agreement, as amended, we are obligated to
pay the balance of the purchase price 5 business days following June 30, 2009,
at an interest rate on the accrued and unpaid balance of 8% from October 1,
2008 to March 31, 2009, and 5.5% from April 1 2009 to June 30, 2009. On March
17, 2009, we completed the government approval process for the acquisition, and
pursuant to the terms of the 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. For more
information regarding the Huitian equity transfer see our Current Reports on
Form 8-K filed on October 16, 2008 and on April 1, 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.
41
The following
chart reflects our new corporate organizational structure:
Our principal
executive offices are located at No. 14 East Hushan Road, Taian City, Shandong,
Peoples 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 report.
Principal Factors Affecting our Financial
Performance
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.
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 Chinas economy grows, we expect more Chinese people will become consumers
of medical treatments and procedures, including procedures requiring the use of
human plasma. As a result, we expect the enhanced economic conditions in China
will result in increased demand for human plasma.
42
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 can only supply plasma to the one manufacturer
that has signed the Quality Responsibility statement with them. In Shandong
Province, there are six plasma collection stations and we had annual plasma
supply contracts with three of them indicating the estimated cost for each ton
of plasma until December 2006. 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.
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 government. Plasma stations, that did
not complete their reform by December 31, 2006, risked revocation of their
license to collect plasma. In December 2006, we signed agreements to acquire
certain assets of five of the six plasma stations in Shandong, which we have
since acquired. On January 1, 2007 we obtained the permit to operate these
stations. These acquisitions will allow us to have direct influence on the
operation of these collection stations in the future and secure a stable source
of plasma supply for production.
In January
2007, we entered into letters of intent to acquire certain assets of three
plasma stations in Guangxi Province, two of which we acquired in February and
April 2007 and obtained their permit to operate. However, there can be no
assurance that the acquisition of the remaining plasma station can be completed
or continue on the same terms that we have initially agreed to in the letter of
intent as the permit for this station is in dispute. Please refer to Legal
Proceedings for more information regarding this dispute.
Through
Shandong Taibang, we formed separate subsidiaries that acquired the assets of
the five plasma stations in Shandong and two of the plasma stations in Guangxi
Province, and we will form a subsidiary to acquire the assets of the remaining
plasma station in Guangxi Province. The wholly-owned subsidiaries of Shandong
Taibang holding 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, the Zhang Qiu Plasma Company and Pu Bei Plasma Company,
which is still under construction. The other 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. Our acquisition of each plasma station was
conditioned on the governments issuance to our acquiring subsidiaries all
permits necessary to operate the acquired assets which we have now obtained. We
have also made employment offers to all or substantially all of the employees
of each plasma station that we have acquired.
We do not
expect any material differences in our cost structure as a result of the
acquisition of the plasma stations. However, we expect that our plasma supply
will increase due to improved management. Although we have generally been able
to pass substantially all cost increases in recent years on to our customers,
there is no assurance that we can continue to do that in the future.
Prices of Our
Products
In recent
years, due to market demand, we were able to increase the selling price of most
of our key products.
Demand for Our
Products
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 Chinas 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 and the current
credit crisis will result in slower economic growth in China and a depressed
economic environment which in turn may make our products less affordable to
more patients. In spite of the slowdown, we expect that in light of the ongoing
shortage for our products and the fact that there is no medical alternative to
our products in treating certain medical diseases, such reductions and
disruptions could have a less material adverse effect on our business
operations than it could have on the health care industry in general.
43
In addition,
we are trying to mitigate any possible impact of these conditions by expanding
our product range and markets through the introduction of new products required
by customers. We believe that our technical expertise is important in
introducing products that are in demand.
Production Capacity
Prior to the
completion of our newly constructed facility with 700 metric tons annual
production capacity in July 2008, our sales volume is limited by our annual
production capacity. The acquisition of our majority-owned PRC subsidiary,
Dalin, has increased our production capacity to 1,100 metric tons per year.
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 us. In
our industry, we compete based upon product quality, product cost, ability to
produce a diverse range of products and logistical capabilities. 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.
Taxation
United States, British Virgin Islands and
Hong Kong
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.
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-invested 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 organizations business, fiscal condition and current operations
in China.
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
organizations 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 PRCs 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.
44
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 sales revenue and key
components of our revenue for the periods indicated in dollars. The financial
data for the three months ended March 31, 2009 reflect the operating results of
the Company and its subsidiaries, including Huitian and 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.
For the Three-Month
Periods Ended March 31, 2009 and 2008 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
$
|
|
%
|
|
|
|
Ended March 31,
|
|
Increase
|
|
Increase
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
(Decrease)
|
|
Revenue
|
|
$
|
21,148,598
|
|
$
|
7,849,007
|
|
$
|
13,299,591
|
|
|
169.4
|
%
|
Cost of revenue
|
|
|
6,214,930
|
|
|
1,948,898
|
|
|
4,266,032
|
|
|
218.9
|
%
|
Gross profit
|
|
|
14,933,668
|
|
|
5,900,109
|
|
|
9,033,559
|
|
|
153.1
|
%
|
Gross profit as a percentage of revenue
|
|
|
70.6
|
%
|
|
75.2
|
%
|
|
|
|
|
|
|
Operating expenses
|
|
|
4,870,130
|
|
|
2,262,439
|
|
|
2,607,691
|
|
|
115.3
|
%
|
Other expense
|
|
|
791,213
|
|
|
23,385
|
|
|
767,828
|
|
|
3283.4
|
%
|
Income before taxes and noncontrolling
interest
|
|
|
9,272,325
|
|
|
3,614,285
|
|
|
5,658,040
|
|
|
156.6
|
%
|
Income taxes
|
|
|
1,905,395
|
|
|
740,482
|
|
|
1,164,913
|
|
|
157.3
|
%
|
Net income before noncontrolling interests
|
|
$
|
7,366,930
|
|
$
|
2,873,803
|
|
$
|
4,493,127
|
|
|
156.4
|
%
|
Revenues
. Our revenues are
derived primarily from the sales of our human albumin and immunoglobulin
products. Our revenues increased 169.4%, or $13,299,591, to $21,148,598 for the
three months ended March 31, 2009, compared to revenues of $7,849,007 for the
three months ended March 31, 2008. The increase in revenues during the first
quarter 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 two of our products. Among the factors that contributed to the
growth in revenue, foreign exchange translation accounted for 12.4% of the
increase. Our first quarter financial results also benefited from the
consolidation of Dalin, which we acquired in the first quarter of 2009. Dalin contributed
approximately $9.5 million in revenue, which accounted for approximately 44.6%
of our total revenue for the first quarter of 2009. All of our approved
products, except human hepatitis B immunoglobulin, recorded price increases
ranging from 3.5% to 49.2%. For the quarter ended March 31, 2009, the average
price for our approved human albumin products, which contributed 58.2% to our
total revenues, increased 3.5%, the average price for our approved human
immunoglobulin for intravenous injection products, which contributed 25.4% to
our revenues, increased 14.7%, and the average price for our approved human
tetanus immunoglobulin products, which contributed 4.9% to our revenue,
increased 34.3%, 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 first quarter of 2009, the supply of plasma-based
products remained very tight industry-wide.
The continuing price
increase of our products since 2008 was primarily attributable to the
governments 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 first quarter
of 2009 were not impacted by the global financial turmoil. With the acquisition
of Dalin, and its operating subsidiary Qianfeng, the Company is better situated
to serve its 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.
45
Cost of Revenues
. Our cost of sales
increased $4,266,032, or 218.9%, to $6,214,930 for the quarter ended March 31,
2009, from $1,948,898 during the same period in 2008. This increase was mainly
due to a 14.5% increase in foreign exchange translation, in addition to an
actual 204.4% 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
materials during the 2009 period. Cost of revenues as a percentage of sales was
29.4% for the quarter ended March 31, 2009, as compared to 24.8% during the
same period in 2008. The increase in cost of revenues as a percentage of sales
is primarily due to the increase in raw material costs in connection with the
expansion of our donor base during the 2009 period. Our increased cost of sales
reflects approximately 10% increase of donor compensation since beginning of
2008.
Gross Profit
. Gross profit increased
by $9,033,559, or 153.1%, to $14,933,668 for the quarter ended March 31, 2009,
from $5,900,109 for the same period in 2008. As a percentage of sales revenue,
our gross profit margin decreased by 4.6% to 70.6% for the quarter ended March
31, 2009, from 75.2% for the same period in 2008. The decrease in our gross
profit as a percentage of revenues is due primarily to the increase in our raw
material costs, which was partially offset by the general increase in the price
of our products.
Operating Expenses
. Our total operating expenses increased by $2,607,691, or 115.3%, to
$4,870,130 for the quarter ended March 31, 2009, from $2,262,439 for the same
period in 2008. The increase was primarily attributable to the 141.3% increase
in our general and administrative expenses during the 2009 period, as well as
the 17.2% increase in selling expense. As a percentage of sales revenue, total
operating expenses decreased by 5.8% to 23.0% for the quarter ended March 31,
2009, from 28.8% for the same period in 2008.
Selling
Expenses
. For the quarter ended March 31, 2009, our selling expenses
increased to $579,496, from $494,529 for the quarter ended March 31, 2008, an
increase of $84,967, or 17.2%. As a percentage of sales, our selling expenses
for the quarter ended March 31, 2009 decreased by 3.6%, to 2.7%, from 6.3% for
first quarter 2008. The increase in selling expenses is due primarily to our
consolidation of Dalins 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 three months ended March 31, 2009, our
general and administrative expenses increased to $3,822,907, from $1,584,128
for the quarter ended March 31, 2008, a $2,238,779, or 141.0% increase. General
and administrative expenses as a percentage of sales decreased by 2.1% to 18.1%
for the first quarter of 2009, from 20.2% 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 as result of fair value adjustments as well as additional
professional service charge related to the acquisition of Dalin.
Research
and Development Expenses
.
For
the quarter ended March 31, 2009 and 2008, our research and development
expenses were $467,727 and $183,782, respectively, an increase of $283,945 or
154.5%. As a percentage of revenues, our research and development expenses for
the quarter ended March 31, 2009 and 2008 were 2.2% and 2.3%, respectively. The
dollar increase was due primarily to the consolidation of Dalin and increased
costs from continuing clinical trial on new products.
Non-cash
Employee Compensation
.
Effective May 9, 2008, our board of
directors adopted the China Biologic Products, Inc. 2008 Equity Incentive Plan,
or the 2008 Plan, under which a total of 5,000,000 shares of our common stock
may be issued. On May 9, 2008, we granted to certain of our directors and
employees immediately vested ten-year options to purchase an aggregate of
937,500 shares of our common stock under the 2008 Plan, 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 and will expire on June
1, 2018. On July 24, 2008, we granted to our three independent directors, ten-year options
to purchase an additional 60,000 shares of common stock at $4.00 per share,
one-half of which vested on January 24, 2009 and the remaining half of which is
scheduled to vest on July 24, 2009. Non-cash employee compensation for the
quarter ended March 31, 2009 increased to $27,373, from $0 for the same period
in 2008, primarily as a result of our adoption of the 2008 Plan and the grants
to employees, consultants and directors made thereunder. The $27,373
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.
46
Change in Fair
Value of Derivative Liability.
The Company analyzes all financial instruments with features of both
liabilities and equity under FAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, FAS 133 and
EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock. Before the adoption of EITF
07-5 Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entitys Own Stock, the warrants issued in 2006 did not require bifurcation or
result in liability accounting. However, with the recent adoption of EITF 07-5,
due to the strike price of outstanding warrants is denominated in USD other
than the Companys functional currency, RMB, the denomination effect feature
must be bifurcated from its host instrument and accounted for separately as a
derivative liability. The Company has followed the criteria in EITF 07-05 and recorded the fair value of
these warrants as derivative liability in the accompanying consolidated
financial statements. The changes in the values of these warrants are shown in
the accompanying consolidated statements of income and other comprehensive
income. For the three months ended March 31, 2009 and 2008, the Company
recognized a loss in the change in fair value of derivative liability in the
amounts of $409,292 and $0, respectively.
Interest Expense(income), net.
Our
net of interest expense increased $347,880 to $370,853 for the quarter ended
March 31, 2009, from $22,973 for the same period in 2008. The increase in
interest expense is primarily due to financing related to the acquisition of
Dalin.
Income Tax Expense.
Our provision for
income taxes increased $1,164,913, or 157.3%, to $1,905,395 for the quarter
ended March 31, 2009, from $740,482 for the same period in 2008. Our effective
tax rate for the quarter ended March 31, 2009 and 2008 was 20.6% and 20.5%,
respectively.
Net Income before Non-Controlling Interest.
Our net income before non-controlling interest increased $4,493,127, or
156.4%, to $7,366,930 for the quarter ended March 31, 2009, from
$2,873,803 for the same period in 2008. Income before taxes and non-controlling
interest as a percentage of revenues was 34.8% and 36.6% for the quarter ended
March 31, 2009 and 2008, respectively. The increase is due directly to an
increase in the selling prices of our products and the consolidation of Dalin
during the quarter ended March 31, 2009.
Liquidity and Capital Resources
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. As of March 31, 2009, we had approximately $34million
in cash and cash equivalents, primarily consisting of cash on hand and demand
deposits.
The following
table provides the statements of net cash flows for the three months ended
March 31, 2009 compared to March 31, 2008 (Unaudited):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
|
2009
|
|
2008
|
|
Net Cash Provided by Operating Activities
|
|
$
|
7,082,292
|
|
$
|
2,018,879
|
|
Net Cash Provided by (Used in) Investing
Activities
|
|
$
|
10,388,563
|
|
$
|
(1,359,682
|
)
|
Net Cash Provided by (Used in) Financing
Activities
|
|
$
|
7,647,822
|
|
$
|
(698,850
|
)
|
Effect of Exchange Rate Change on Cash
|
|
$
|
72,655
|
|
$
|
182,249
|
|
Net Increase in Cash and Cash Equivalents
|
|
$
|
25,191,332
|
|
$
|
142,596
|
|
Cash and Cash Equivalents, Beginning
|
|
$
|
8,814,616
|
|
$
|
5,010,033
|
|
Cash and Cash Equivalents, Ending
|
|
$
|
34,005,948
|
|
$
|
5,152,629
|
|
47
Operating activities
Net cash provided by operating activities was
$7.1 million for the quarter ended March 31, 2009, as compared to $2.0 million
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 consolidated net income of $4.5 million, to $7.4 million for the
quarter ended March 31, 2009, as compared to $2.9 million in the same period of
2008. For the quarter ended March 31, 2009, our non-cash activities of $1.9
million and the increase in customer deposit provided $2.9 million in net cash,
which was offset by a $3.5million increase in inventory.
Investing activities
Net cash
provided by investing activities for the quarter ended March 31, 2009 was $10.4 million, as compared to $1.4 million net cash used in
the same period of 2008. The increase of net cash provided by investing was mainly
attributable to the acquisition of Dalins existing cash acquired.
Financing activities
Net cash
provided by financing activities for the quarter ended March 31, 2009 totaled $7.6 million as compared to $0.7
million 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 bank loans of $7.6
million. 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 company
believes that it will be able to secure the large majority of the financing required
for the two above mentioned acquisitions from domestic bank facilities and
available cash resources.
Obligations
under Material Contracts
The following
table sets forth our material contractual obligations as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
Contractual
Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
Long-Term Debt Obligations
|
|
$
|
9,229,500
|
|
$
|
439,500
|
|
$
|
8,790,000
|
|
$
|
|
|
$
|
|
|
Due to Related Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
83,196
|
|
|
65,925
|
|
|
17,271
|
|
|
|
|
|
|
|
Capital Lease Obligations
|
|
|
249,520
|
|
|
7,368
|
|
|
18,630
|
|
|
18,630
|
|
|
204,892
|
|
Purchase Obligations
|
|
|
77,383
|
|
|
77,383
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,639,599
|
|
$
|
590,176
|
|
$
|
8,825,901
|
|
$
|
18,630
|
|
$
|
204,892
|
|
Below is a
summary of our current obligations under material contracts:
|
|
|
|
|
On September
26, 2008, Logic Express 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, 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. On
April 14, 2009, we paid the third installment towards the acquisition which
represented our payment of 90% of the purchase price in the aggregate, and in
accordance with terms of the equity transfer agreement, Logic Holdings, our
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 Dalins 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. We are 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 Commerces approval of the equity transfer.
|
48
|
|
|
|
|
On October
10, 2008, Taibang entered into an equity transfer agreement pursuant to which
Taibang agreed to acquire 35% of the equity interest in Xian Huitian Blood
Products Co., Ltd., or Huitian, a biopharmaceutical company based in Xian,
Shaanxi Province, China, from Mr. Fan Qingchun, a PRC citizen, for an
aggregate purchase price of RMB 44,000,000 (approximately, $6,446,000). We
have already paid RMB 22,000,000 (approximately, $3,223,000) of the Huitian
purchase price and, pursuant to the equity transfer agreement, as amended, we
are obligated to pay the balance of the purchase price 5 business days
following June 30, 2009, at an interest rate on the accrued and unpaid
balance of 8% from October 1, 2008 to March 31, 2009, and 5.5% from April 1
2009 to June 30, 2009. On March 17, 2009, we completed the government
approval process for the acquisition, and pursuant to the terms of the 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. For more information regarding the Huitian equity
transfer see our Current Reports on Form 8-K filed on October 16, 2008 and on
April 1, 2009.
|
|
|
|
|
|
On April 6,
2009, Logic Express entered into an equity transfer and entrustment agreement,
or Entrustment Agreement, among Logic Express, Taibang, and the Shandong
Institute of Biological Products, or the Shandong Institute, the holder of
the minority interests in Taibang, pursuant to which, Logic Express agreed to
permit Taibang and the Shandong Institute to participate in the indirect
purchase of Qianfengs equity interests. Under the terms of the Entrustment
Agreement, 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 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 5 days of
the payment due date, then Logic Express is obligated to pay 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 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 Taibang and the Shandong Institute will receive no less than a
6% return based on their original investment amount. For details regarding
the Entrustment Agreement, see our Current Report on Form 8-K filed on April
13, 2009 with the SEC.
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On January
8, 2009, we entered into a short term loan agreement with the Taishan
Sub-Branch of the Bank Of China, pursuant to which, the bank loaned Taibang
RMB40 million (approximately $5.8 million). 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. We are 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. Taibang may not prepay the Loan
without the Banks 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%. The Company currently plans to use the loan to
fund the purchase of raw materials.
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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 RMB
23,000,000 (approximately $3,369,500) 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 Qianfengs machinery and
equipment. Approximately $439,500 of the total loan amount matured on
December 25, 2008, and the remaining $2,930,000 balance of the loan is
scheduled to mature in two equal lump sums on April 25, 2010 and June 25,
2010, respectively.
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On January 4, 2009, Qianfeng entered into a
short term loan agreement with the Guiyang City, Yunyan sub-branch of the
Industrial and Commercial Bank of China, pursuant to which the bank loaned
Qianfeng RMB 9,200,000 (approximately $1,347,800) for use as raw material
purchase. The loan bears a fixed interest rate of 8.541% per annum and is
secured by Qianfengs raw material inventory. The loan matures on July 3,
2009.
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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 RMB
3,000,000 (approximately $439,500) 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 Qianfengs main fractionation facility located in
Guizhou, China. The loan matures on February 16, 2010.
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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 managements 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 managements 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
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 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. SFAS 157, Fair
Value Measurements, adopted January 1, 2008, 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:
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Level 1:
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
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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.
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Level 3:
inputs to the valuation methodology are unobservable and significant to the
fair value.
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Revenue recognition
We 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, 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
(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.
50
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 $26.7 million and $15.0 million as of March 31, 2009 and December
31, 2008,
respectively. 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 Statement of Financial Accounting
Standards (SFAS) 141R,
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 141s
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).
51
Effective
January 1, 2009, the Company adopted SFAS 160, Noncontrolling Interests
in Consolidated Financial Statements - an amendment of Accounting Research
Bulletin No. 51 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 on
SFAS 160, net income attributable to noncontrolling interests is now excluded
from the determination of consolidated net income.
Effective
January 1, 2009, the Company adopted the provisions of EITF 07-5,
Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entitys Own Stock, which is effective for
financial statements for fiscal years beginning after December 15, 2008 and
which replaced the previous guidance on this topic in EITF 01-6. Paragraph 11(a) of FAS
133 specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Companys 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 issuers own stock and thus able to
qualify for the FAS 133 paragraph 11(a) scope exception.
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
holders 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 the Companys consolidated
financial statements because all of the Companys investments in debt
securities are classified as trading securities.
In April 2009,
the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on
identifying circumstances that indicate a transaction is not orderly for fair
value measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting this FSP
must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS
124-2). Additionally, if an entity elects to early adopt either FSP FAS 107-1
and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments
(FSP FAS 107-1 and APB 28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect
to early adopt this FSP. Management is currently evaluating this new FSP but does
not believe that it will have a significant impact on the determination or
reporting of the financial results.
In April 2009,
the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, SFAS 124,
Accounting for Certain Investments Held by Not-for-Profit Organizations, and
EITF Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be
Held by a Transferor in Securitized Financial Assets, to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entitys 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 FSP 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 FSP 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. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity may early adopt this FSP
only if it also elects to early adopt FSP FAS 157-4. Also, if an entity elects
to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1, the entity
also is required to early adopt this FSP. Management is currently evaluating
this new FSP but does not believe that it will have a significant impact on the
determination or reporting of the financial results.
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In April 2009,
the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require 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 FSP, fair values for these assets and liabilities
were only disclosed annually. This FSP applies to all financial instruments
within the scope of SFAS 107 and requires all entities to disclose the
method(s) and significant assumptions used to estimate the fair value of
financial instruments. This FSP shall be effective for interim periods ending
after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. An entity may early adopt this FSP only if it also
elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP
does not require disclosures for earlier periods presented for comparative
purposes at initial adoption. In periods after initial adoption, this FSP
requires comparative disclosures only for periods ending after initial
adoption. Management is currently evaluating the disclosure requirements of
this new FSP.
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.
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ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Not
Applicable.
ITEMS 4 AND 4A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Evaluation of
Disclosure Controls and Procedures
We maintain
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act). Disclosure controls and procedures refer to controls and other
procedures designed to ensure that information required to be disclosed in the
reports we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
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As required by
Rule 13a-15(e), our management has carried out an evaluation, with the
participation and under the supervision of our Chief Executive Officer, Mr.
Chao Ming Zhao and our Chief Financial Officer, Mr. Y. Tristan Kuo, of the
effectiveness of the design and operation of our disclosure controls and
procedures, as of March 31, 2009. Based upon, and as of the date of this
evaluation, Messrs. Zhao and Kuo, determined that, because of the material
weaknesses described in Item 9A. Controls and Procedures on our annual report
on Form 10-K for the year ended December 31, 2008, which we are still in the
process of remediating, as of March 31, 2009, our disclosure controls and
procedures were not effective. Investors are directed to Item 9A of annual
report on Form 10-K for the year ended December 31, 2008 for the description of
these weaknesses.
Remediation Measures
for Material Weaknesses
Management
believes that the material weaknesses identified in our annual report on Form
10-K for the year ended December 31, 2008, were the direct result of our changes
in both junior and senior accounting personnel during the 2008 period and our
lack of audit committee oversight during a part of that period. We began to
remediate the material weaknesses described and plan to continue implementing
the measures described below in our ongoing efforts to address these internal
control deficiencies as soon as practicable.
We believe
that the material weaknesses identified above were the direct result of our
recent expansion toward the year end of 2008. We have taken the measures below
and plan to continue taking measures to remediate these material weaknesses as
soon as practicable.
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Hire an
additional financial reporting and accounting personnel with relevant account
experience, skills and knowledge in the preparation of financial statements
under the requirements of US GAAP and financial reporting disclosure under
the requirement of SEC rules.
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Develop a
rigorous process for collecting and reviewing information required for the
preparation of the financial statements including footnotes. The Company has
engaged the registered public accounting firm of Ernst & Young to assist
management in developing this process.
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Our management does not believe that these
material weaknesses and the cost of remediation for these material weaknesses
will have a material effect on our financial condition or results of operations.
Changes in Internal
Controls over Financial Reporting
We regularly
review our system of internal control over financial reporting and make changes
to our processes and systems to improve controls and increase efficiency, while
ensuring that we maintain an effective internal control environment. Changes
may include such activities as implementing new, more efficient systems,
consolidating activities, and migrating processes.
Except as
described above, there were no changes in our internal controls over financial
reporting during the first quarter of 2009 that have materially affected, or
are reasonably likely to materially affect our internal control over financial
reporting.
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PART II
OTHER INFORMATION
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ITEM 1.
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LEGAL PROCEEDINGS.
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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. Other than the legal proceedings set
forth 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.
Misuse of
Company Seal
In July 2006,
one of the Companys 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.
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. Dus 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. Dus 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 brothers 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. Dus brother, Du Hai Shan were
invalid because their execution and delivery were beyond the scope of Du Hai
Shans 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. Dus
brother in the court of Jianli County, Hubei province, relating to the propriety of
the brothers 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.
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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 COFTECs 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 Committees 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.
On February
16, 2009, Mr. Du and Missile Engineering 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, 2009,
the Wuhan Intermediate Court 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 Companys PRC subsidiary, Shandong Taibang, advanced $413,697 (RMB3.0
million) to Feng Lin, the 20% minority shareholder in Fang Cheng Plasma
Company, the Companys 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 Lans
permission. The establishment and registration of Bobai was never realized as a
result of this law suit. On January 29, 2007, on Hua Lans 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 Taibangs 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).
56
In January
2008, Hua Lan enforced the judgment granted by the High Court to freeze the
Companys 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 Lans claim and to request that the Taian City District
Court preserve Hua Lans property or freeze up to approximately $411,300 (RMB 3
million) of Hua Lans 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 Huangs portions of the judgment and the related fees, approximately
$456,222 (RMB 3,109,900) has been withdrawn from Shandong Taibangs account.
The Company recorded Feng Lin and Keliang Huangs 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 Companys 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 Qianfengs 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 Qianfengs shares, the Guizhou Jiean Company, or Jiean,
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 Qianfengs equity interests. At
the same time, Jiean 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,
Jiean 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, Jiean 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
Jiean and sustained the Equity Purchase Agreement, but on November 2008,
Jiean appealed the Guizhou High Court judgment to the Peoples Supreme Court
in Beijing. The Peoples Supreme Court heard the case in February 2009, but had
not issued its decision as of the date of this report. The registration of the
new investors as Qianfengs shareholders and the related increase in registered
capital of Qianfeng with the Administration for Industry and Commerce is
pending the outcome of this law suit. If Jiean prevails in its suit against
Qianfeng, it would have the right to receive additional Qianfeng equity
interests, and Dalins interests in Qianfeng would be reduced to approximately
41.3%. Whatever the outcome of the appeal, we will be able to retain control
over Qianfeng due to our right to appoint a majority of Qianfengs directors.
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 Qianfengs 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 Courts decision to the
Peoples Supreme Court in Beijing. The Peoples Supreme Court heard in April
2008, but had not issued its decision as of the date of this report.
57
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 plaintiffs 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
plaintiffs treatment by the hospitals or to Qianfengs products. There have
been no further developments on this case as of the date of this report.
On November 10, 2006, Qianfeng and eight other
defendants were sued in the Sigu
District Court of Hengyang County, Hunan province, China, by a resident of Hunan province, for RMB 725,606
(approximately, $106,446) in damages, in connection with his alleged Hepatitis
C contamination via blood transfusion and injection of plasma-based products,
during the plaintiffs August 2004 treatment for hemophilia. On December 8,
2008, the Sigu District Court ruled in favor of the plaintiff and held Qianfeng
liable for 10% of the total RMB 18,293 (approximately, $2,680) judgment
against three of the defendants. All three defendants, including Qianfeng
appealed the district court ruling to the Intermediate Court of the Hengyang
County. On May 4, 2009, the Intermediate Court ruled against the defendants and
sustained the original district court ruling. As of result, Qianfeng is liable
and obligated to pay the plaintiff RMB 18,293 (approximately, $2,680 in damages and related court fees.
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 Qianfengs 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 Peoples
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.
Not
applicable.
|
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
We have not
sold any equity securities during the quarter ended March 31, 2009 which sale
was not previously disclosed in a current report on Form 8-K filed during that
period.
58
|
|
|
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
None.
|
|
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
No matters
were submitted to our security holders during the quarter ended March 31, 2009
that were not reported in a current report on Form 8-K filed during that
period.
|
|
ITEM 5.
|
OTHER INFORMATION.
|
We have no
information to include that was required to be but was not disclosed in a
report on Form 8-K during the period covered by this Form 10-Q. There have been
no material changes to the procedures by which security holders may recommend
nominees to our board of directors.
59
The following
exhibits are filed as part of this report or incorporated by reference:
* Previously filed
60
SIGNATURES
Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
CHINA BIOLOGIC PRODUCTS, INC.
|
|
|
|
Dated: May 6, 2011
|
|
/s/ Chao Ming Zhao
|
|
|
|
|
|
Chao Ming Zhao
Chairman and Chief Executive Officer
(
Principal
Executive Officer
)
|
|
|
|
|
|
|
Dated: May 6, 2011
|
|
/s/ Y. Tristan Kuo
|
|
|
|
|
|
Y. Tristan Kuo
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
63
EXHIBIT INDEX
* Previously filed
64
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