UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2010
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to
_____________
Commission File Number: 001-34566
CHINA BIOLOGIC PRODUCTS, INC.
|
(Exact name of registrant as specified in its charter)
|
|
Delaware
|
|
75-2308816
|
|
|
(State or other jurisdiction of incorporation
|
|
(I.R.S. Employer Identification No.)
|
|
|
or organization)
|
|
|
|
No. 14 East Hushan Road
|
Taian City, Shandong 271000
|
Peoples
Republic of China
|
(Address of principal executive offices)
|
(+86)
538-620-2306
|
(Registrants telephone number, including area code)
|
|
|
(Former name, former address and former fiscal year, if
changed since last report)
|
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
o
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
o
No
o
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
o
|
Accelerated filer
o
|
Non-accelerated filer
o
(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
o
No
x
The number of shares outstanding of each of the issuers
classes of common stock, as of May 12, 2010 is as follows:
Class of
Securities
|
|
Shares Outstanding
|
Common Stock, $0.0001 par value
|
|
23,520,803
|
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, 2010 included in its Quarterly Report on Form 10-Q for the quarter ended
March 31, 2010, previously filed with the Securities and Exchange Commission on
May 14, 2010 (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. The retained earnings and additional paid-in
capital should have been increased by $1,246,476 and decreased by $1,246,476,
respectively, as of March 31, 2010.
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 US 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
three months ended March 31, 2010, 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, 2010. As a result, the goodwill, deferred tax
liabilities, retained earnings and noncontrolling interest should have been
increased by $4,775,139, $4,150,333, $290,477 and $334,143, respectively, as of
March 31, 2010. The net income, net income attributable to noncontrolling
interest and other comprehensive income of the Company should have been
increased by $124,919, $66,810 and $43, for the three months ended March 31,
2010, respectively.
For the 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 Report 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
|
|
|
|
|
ITEM 1.
|
FINANCIAL STATEMENTS.
|
2
|
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
45
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|
56
|
ITEM 4
|
CONTROLS AND PROCEDURES.
|
56
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.
|
|
|
|
|
|
PART II
|
OTHER INFORMATION
|
|
|
|
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ITEM 1.
|
LEGAL PROCEEDINGS.
|
57
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ITEM 1A.
|
RISK FACTORS.
|
59
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
|
59
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
59
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ITEM 4.
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(REMOVED AND RESERVED).
|
59
|
ITEM 5.
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OTHER INFORMATION.
|
59
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ITEM 6.
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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, 2010 AND
2009
Contents
|
Page(s)
|
Consolidated Balance Sheets as of March 31,
2010 (unaudited) and December 31, 2009
|
3
|
Consolidated Statements of Income and Other Comprehensive
Income for the three months ended March 31, 2010 and 2009 (unaudited)
|
4
|
Consolidated Statements of Changes in
Equity
|
5
|
Consolidated Statements of Cash Flows for the three months
ended March 31, 2010 and 2009 (unaudited)
|
6
|
Notes to the Consolidated Financial
Statements (unaudited)
|
7
|
-2-
|
CHINA BIOLOGIC PRODUCTS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2010 and DECEMBER 31,
2009
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(As Restated - Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
51,190,425
|
|
$
|
53,843,951
|
|
Notes receivable
|
|
550,125
|
|
|
-
|
|
Accounts receivable, net of allowance for
doubtful accounts of $1,255,629 and $1,254,955 as of March 31,2010 and December 31, 2009, respectively
|
|
3,764,123
|
|
|
1,767,076
|
|
Accounts receivable - related
party
|
|
270,086
|
|
|
222,617
|
|
Other receivables
|
|
2,177,594
|
|
|
2,186,441
|
|
Inventories, net of allowance
for obsolete of $717,960 and $519,333 as of March 31,2010 and December 31,
2009, respectively
|
|
39,175,405
|
|
|
35,132,724
|
|
Prepayments and deferred expense
|
|
1,672,261
|
|
|
1,299,125
|
|
Deferred tax assets
|
|
785,081
|
|
|
1,053,771
|
|
Total current assets
|
|
99,585,100
|
|
|
95,505,705
|
|
|
|
|
|
|
|
|
PLANT AND EQUIPMENT, net
|
|
31,867,690
|
|
|
28,873,413
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
Investment in unconsolidated
affiliate
|
|
6,815,961
|
|
|
6,627,355
|
|
Prepayments - non-current
|
|
3,362,943
|
|
|
3,223,960
|
|
Intangible assets, net
|
|
20,335,295
|
|
|
21,180,322
|
|
Goodwill
|
|
17,200,728
|
|
|
17,200,728
|
|
Total
other assets
|
|
47,714,927
|
|
|
48,232,365
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
179,167,717
|
|
$
|
172,611,483
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Accounts payable
|
$
|
3,520,975
|
|
$
|
3,701,843
|
|
Notes payable
|
|
-
|
|
|
48,598
|
|
Short term loans - bank
|
|
7,408,350
|
|
|
4,474,350
|
|
Short term loans - holder of
noncontrolling interest
|
|
3,652,500
|
|
|
3,652,500
|
|
Other payables and accrued liabilities
|
|
17,282,264
|
|
|
19,246,814
|
|
Other payable - related
parties
|
|
3,087,527
|
|
|
3,087,527
|
|
Accrued interest - holder of noncontrolling
interest
|
|
1,154,687
|
|
|
2,068,526
|
|
Customer deposits
|
|
4,553,560
|
|
|
3,868,577
|
|
Taxes payable
|
|
7,519,268
|
|
|
8,774,079
|
|
Investment payable
|
|
2,195,365
|
|
|
2,195,365
|
|
Total current liabilities
|
|
50,374,496
|
|
|
51,118,179
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES:
|
|
|
|
|
|
|
Other payable - land use right
|
|
323,390
|
|
|
323,687
|
|
Notes payable, net of discount of $7,325,349 and
$8,464,380 as of March 31, 2010 and December 31, 2009, respectively
|
|
174,651
|
|
|
89,760
|
|
Derivative liability -
conversion option
|
|
15,275,245
|
|
|
19,960,145
|
|
Fair value of derivative instruments
|
|
9,177,262
|
|
|
12,701,262
|
|
Deferred tax liabilities
|
|
4,150,333
|
|
|
4,275,295
|
|
Total other
liabilities
|
|
29,100,881
|
|
|
37,350,149
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
79,475,377
|
|
|
88,468,328
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY:
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 100,000,000
shares authorized,
|
|
|
|
|
|
|
23,500,803 and 23,056,442
shares issued and outstanding at March 31 ,2010 and December 31, 2009,
respectively
|
|
2,349
|
|
|
2,305
|
|
Additional paid-in-capital
|
|
26,778,332
|
|
|
21,270,601
|
|
Statutory reserves
|
|
19,831,853
|
|
|
17,414,769
|
|
Retained earnings
|
|
15,028,114
|
|
|
6,781,449
|
|
Accumulated other
comprehensive income
|
|
4,246,881
|
|
|
4,227,537
|
|
Total shareholders' equity
|
|
65,887,529
|
|
|
49,696,661
|
|
|
|
|
|
|
|
|
NONCONTROLLING INTEREST
|
|
33,804,811
|
|
|
34,446,494
|
|
|
|
|
|
|
|
|
Total equity
|
|
99,692,340
|
|
|
84,143,155
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
$
|
179,167,717
|
|
$
|
172,611,483
|
|
The accompanying notes are an integral part of these
consolidated statements.
- 3 -
CHINA BIOLOGIC PRODUCTS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER
COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND
2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(As Restated - Note 2)
|
|
|
|
|
REVENUES
:
|
|
|
|
|
|
|
Revenues
|
$
|
26,861,522
|
|
$
|
20,905,869
|
|
Revenues - related party
|
|
237,031
|
|
|
242,729
|
|
Total revenues
|
|
27,098,553
|
|
|
21,148,598
|
|
|
|
|
|
|
|
|
COST OF REVENUES
:
|
|
|
|
|
|
|
Cost of revenues
|
|
6,798,854
|
|
|
6,214,930
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
20,299,699
|
|
|
14,933,668
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
:
|
|
|
|
|
|
|
Selling expenses
|
|
942,908
|
|
|
579,496
|
|
General and administrative expenses
|
|
4,962,252
|
|
|
3,822,907
|
|
Research and
development expenses
|
|
1,168,655
|
|
|
467,727
|
|
Total operating expenses
|
|
7,073,815
|
|
|
4,870,130
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
13,225,884
|
|
|
10,063,538
|
|
|
|
|
|
|
|
|
OTHER (INCOME) EXPENSE
:
|
|
|
|
|
|
|
Equity in income
of unconsolidated affiliate
|
|
(188,541
|
)
|
|
(40,247
|
)
|
Change in fair value of derivative liabilities
|
|
(3,833,577
|
)
|
|
409,292
|
|
Interest expense,
net
|
|
181,053
|
|
|
370,853
|
|
Other income - related party
|
|
(914,289
|
)
|
|
-
|
|
Other expense, net
|
|
94,320
|
|
|
51,315
|
|
Total other
(income) expense, net
|
|
(4,661,034
|
)
|
|
791,213
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES AND NONCONTROLLING
INTEREST
|
|
17,886,918
|
|
|
9,272,325
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
3,071,147
|
|
|
1,905,395
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE NONCONTROLLING INTEREST
|
|
14,815,771
|
|
|
7,366,930
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interest
|
|
4,152,022
|
|
|
3,058,134
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
|
|
10,663,749
|
|
|
4,308,796
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
19,344
|
|
|
18,633
|
|
Comprehensive income attributable to
noncontrolling interest
|
|
(23,955
|
)
|
|
427,298
|
|
COMPREHENSIVE INCOME
|
$
|
10,659,138
|
|
$
|
4,754,727
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE
:
|
|
|
|
|
|
|
Weighted average number of shares
|
|
23,386,893
|
|
|
21,434,942
|
|
Earnings per share
|
$
|
0.46
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE
:
|
|
|
|
|
|
|
Weighted average number of shares
|
|
26,471,425
|
|
|
21,434,942
|
|
Earnings per share
|
$
|
0.26
|
|
$
|
0.20
|
|
The accompanying notes are an integral part of these
consolidated statements.
-4-
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
Statutory
|
|
|
|
|
|
comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
paid in
capital
|
|
|
reserves
|
|
|
Unrestricted
|
|
|
income
|
|
|
interest
|
|
|
Total
|
|
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
|
|
|
|
|
|
|
|
(600,289
|
)
|
|
|
|
|
(393,962
|
)
|
|
|
|
|
|
|
|
(994,251
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
27,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,373
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,633
|
|
|
427,298
|
|
|
445,931
|
|
BALANCE, March 31, 2009 (unaudited)
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
10,127,116
|
|
$
|
9,750,637
|
|
$
|
16,546,251
|
|
$
|
4,177,931
|
|
$
|
25,158,538
|
|
$
|
65,762,616
|
|
Stock based compensation
|
|
|
|
|
|
|
|
34,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,908
|
|
Warrants exercised
|
|
1,284,000
|
|
|
128
|
|
|
8,571,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,571,409
|
|
Convertible notes exercised
|
|
250,000
|
|
|
25
|
|
|
2,187,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,187,330
|
|
Stock option exercised
|
|
87,500
|
|
|
9
|
|
|
349,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,100,670
|
)
|
|
|
|
|
13,557,524
|
|
|
11,456,854
|
|
Dividend declared to noncontrolling interest shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,321,405
|
)
|
|
(4,321,405
|
)
|
Noncontrolling interest acquired from
acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,347
|
|
|
23,347
|
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
7,664,132
|
|
|
(7,664,132
|
)
|
|
|
|
|
|
|
|
-
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,606
|
|
|
28,490
|
|
|
78,096
|
|
BALANCE, December 31, 2009
|
|
23,056,442
|
|
$
|
2,305
|
|
$
|
21,270,601
|
|
$
|
17,414,769
|
|
$
|
6,781,449
|
|
$
|
4,227,537
|
|
$
|
34,446,494
|
|
$
|
84,143,155
|
|
Stock based compensation
|
|
|
|
|
|
|
|
571,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571,893
|
|
Issuance of common stock upon exercise of Warrants
|
|
180,826
|
|
|
18
|
|
|
2,436,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,436,925
|
|
Issuance of common stock upon conversion of Convertible
Note
|
|
263,535
|
|
|
26
|
|
|
2,498,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,498,957
|
|
Net income, as restated (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,663,749
|
|
|
|
|
|
4,152,022
|
|
|
14,815,771
|
|
Dividend declared to noncontrolling interest shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,782,420
|
)
|
|
(4,782,420
|
)
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
2,417,084
|
|
|
(2,417,084
|
)
|
|
|
|
|
|
|
|
-
|
|
Non-control Interest transfer per
equity transferred in Fangcheng
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,670
|
|
|
12,670
|
|
Foreign currency translation adjustments, as restated (Note
2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,344
|
|
|
(23,955
|
)
|
|
(4,611
|
)
|
BALANCE, March 31, 2010 (unaudited), as restated (Note 2)
|
|
23,500,803
|
|
$
|
2,349
|
|
$
|
26,778,332
|
|
$
|
19,831,853
|
|
$
|
15,028,114
|
|
$
|
4,246,881
|
|
$
|
33,804,811
|
|
$
|
99,692,340
|
|
The accompanying notes are an integral part of these
consolidated statements.
- 5 -
CHINA BIOLOGIC PRODUCTS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
(As Restated - Note 2)
|
|
|
|
|
Net income attributable to controlling
interest
|
$
|
10,663,749
|
|
$
|
4,308,796
|
|
Net income attributable to
noncontrolling interest
|
|
4,152,022
|
|
|
3,058,134
|
|
Consolidated net income
|
|
14,815,771
|
|
|
7,366,930
|
|
Adjustments to reconcile net income to cash
provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
793,657
|
|
|
759,072
|
|
Amortization
|
|
869,251
|
|
|
838,459
|
|
Loss
(gain) on disposal
of equipment
|
|
3,019
|
|
|
(276
|
)
|
Allowance for bad debt - accounts receivables
|
|
23,329
|
|
|
26,581
|
|
Allowance for
obsolete inventories
|
|
198,559
|
|
|
-
|
|
Deferred tax benefit, net
|
|
89,664
|
|
|
(124,799
|
)
|
Stock based
compensation
|
|
571,893
|
|
|
27,373
|
|
Change in fair value of derivative liabilities
|
|
(3,833,577
|
)
|
|
409,292
|
|
Amortization of
deferred note issuance cost
|
|
86,790
|
|
|
-
|
|
Amortization of discount on convertible notes
|
|
99,318
|
|
|
-
|
|
Equity in income
of unconsolidated affiliate
|
|
(188,541
|
)
|
|
(40,246
|
)
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
Notes receivable
|
|
(549,938
|
)
|
|
(468,832
|
)
|
Accounts receivable
|
|
(1,997,040
|
)
|
|
(97,007
|
)
|
Accounts
receivable - related party
|
|
(47,452
|
)
|
|
(212,367
|
)
|
Other receivables
|
|
8,847
|
|
|
(18,487
|
)
|
Inventories
|
|
(4,283,720
|
)
|
|
(3,513,011
|
)
|
Prepayments and deferred expenses
|
|
(512,690
|
)
|
|
(124,944
|
)
|
Accounts payable
|
|
(180,806
|
)
|
|
(252,850
|
)
|
Other payables and accrued liabilities
|
|
(2,383,690
|
)
|
|
307,916
|
|
Accrued interest -
holder of noncontrolling interest
|
|
(913,840
|
)
|
|
305,966
|
|
Customer deposits
|
|
684,750
|
|
|
2,872,712
|
|
Taxes payable
|
|
(1,260,708
|
)
|
|
(979,190
|
)
|
Net cash provided by operating activities
|
|
2,092,846
|
|
|
7,082,292
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Cash acquired through acquisition
|
|
334
|
|
|
11,938,784
|
|
Payments made for acquisition
|
|
(1,476,781
|
)
|
|
-
|
|
Purchase of plant and equipment
|
|
(1,443,043
|
)
|
|
(986,640
|
)
|
Additions to intangible assets
|
|
(24,484
|
)
|
|
(88,845
|
)
|
Advances on non-current assets
|
|
(569,626
|
)
|
|
(474,736
|
)
|
Net cash (used in) provided by investing activities
|
|
(3,513,600
|
)
|
|
10,388,563
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from warrants conversion
|
|
689,160
|
|
|
-
|
|
Proceeds from short term loans
- bank
|
|
5,924,660
|
|
|
7,647,822
|
|
Payments on short term loans - bank
|
|
(2,962,330
|
)
|
|
-
|
|
Payments on notes payables
|
|
(48,582
|
)
|
|
-
|
|
Distribution paid to noncontrolling interest
shareholders
|
|
(4,780,790
|
)
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
(1,177,882
|
)
|
|
7,647,822
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE CHANGE IN CASH
|
|
(54,890
|
)
|
|
72,655
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH
|
|
(2,653,526
|
)
|
|
25,191,332
|
|
|
|
|
|
|
|
|
CASH and CASH EQUIVALENTS, beginning of
year
|
|
53,843,951
|
|
|
8,814,616
|
|
|
|
|
|
|
|
|
CASH and CASH EQUIVALENTS, end of year
|
$
|
51,190,425
|
|
$
|
34,005,948
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
|
|
|
|
|
|
|
Income taxes paid
|
$
|
3,806,691
|
|
$
|
1,783,619
|
|
Interest paid (net of
capitalized interest)
|
$
|
62,286
|
|
$
|
236,649
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Reclassification
of derivative liability to equity related to conversion of convertible
notes
|
$
|
1,809,771
|
|
$
|
-
|
|
Reclassification of derivative liability to equity related
to exercise of warrants
|
$
|
2,436,907
|
|
$
|
-
|
|
Distribution paid by offsetting accounts receivable -
related party
|
$
|
-
|
|
$
|
3,735,243
|
|
Net assets acquired with prepayments made in prior periods
|
$
|
-
|
|
$
|
14,240,772
|
|
Net assets addition with unpaid commitment
|
$
|
395,540
|
|
$
|
14,240,772
|
|
Plant and equipment acquired with prepayments made in prior
periods
|
$
|
424,858
|
|
$
|
87,305
|
|
The accompanying notes are an integral part of these
consolidated statements.
-6-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Note 1 Organization background and principal activities
Principal Activities and Reorganization
China Biologic Products, Inc. (the Company or CBP) was originally incorporated in 1992 under the laws of the state of Texas. After it completed the acquisition with Logic Express Limited, it converted to a Delaware
corporation. The Company through its direct and indirect subsidiaries is principally engaged in the research, development, commercialization, manufacture and sale of human blood products to customers in the Peoples Republic of China (the
PRC) and to some extent in India.
Current Development
Dalin Acquisition and Entrustment Agreement
Logic Express Ltd. (Logic Express), CBPs wholly owned subsidiary, through Logic Holdings(Hong Kong) Ltd. (Logic Holdings) completed the acquisition of 90% interest in Guiyang Dalin Biologic Technologies Co. Ltd.
(Dalin), previously known as Chongqing Dalin Biologic Technologies Co. Ltd., in April 2009 upon payment of 90% of the total purchase price of approximately RMB 194,400,000 ($28,479,600). The Company is obligated to pay the remaining
10% of the purchase price, RMB 19,440,000 (approximately $2,847,960), on or before April 9, 2010, the one-year anniversary of the local Administration for Industry and Commerces approval of the equity transfer. On April 9, 2010, the
Company paid the final 10% of the total purchase price according to the equity transfer agreement.
In accordance with the terms of the equity transfer agreement, Logic Holdings effectively became a 90% shareholder in Dalin, including the right to receive its pro rata share of the profits on January 1, 2009.
On April 6, 2009, Logic Express entered into an equity transfer and entrustment agreement, or Entrustment Agreement, among Logic Express, Shandong Taibang Biological Products Co. Ltd (Shandong Taibang), and the Shandong Institute of
Biological Products (the Shandong Institute), the holder of the minority interests in Shandong Taibang, pursuant to which, Logic Express agreed to permit Shandong Taibang and the Shandong Institute to participate in the indirect purchase
of Qianfengs equity interests. Under the terms of the Entrustment Agreement, Shandong Taibang agreed to contribute 18% or RMB 35,000,000 (approximately $5,116,184) of the Dalin purchase price and the Shandong Institute agreed to contribute
12.86% or RMB 25,000,000 (approximately $3,654,917) of the Dalin purchase price. Logic Express is obligated to repay to Shandong Taibang and the Shandong Institute their respective investment amounts on or before April 6th, 2010, along with
their pro rata share, based on their percentage of the Dalin purchase price contributed, of any distribution on the indirect equity investment in Qianfeng payable to Logic Express during 2009. Logic Express has agreed that if these investment
amounts are not
repaid within five days of the payment due date, then Logic Express is obligated to pay Shandong Taibang and the Shandong Institute liquidated damages equal to 0.03% of the overdue portion of the amount due until such time as it is paid. Logic
Express has also agreed to pledge 30% of its ownership in Shandong Taibang to the Shandong Institute as security for nonpayment. If failure to repay continues for longer than three months after the payment due date, then the Shandong Institute will
be entitled to any rights associated with the pledged interests, including but not limited to rights of disposition and profit distribution, until such time as the investment amount has been repaid. Logic Express also provided a guarantee that
Shandong Taibang and the Shandong Institute will receive no less than a 6% return based on their original investment amount. On April 12, 2010, the Company fully paid Shandong Institute and Shandong Taibang on the respective investment amounts, as
well as the interest, according to the Entrustment Agreement, as described in more detail in Note 3 below.
Formation of PRC Subsidiary
On December 21, 2009, the Company established Logic Management and Consulting (China) Co., Ltd. (Logic China), wholly-owned by the Hong Kong subsidiary, for the purpose of being a holding company for the majority interest in Dalin and to
facilitate our Chinese operation at the holding company level. On December 28, 2009, the Company transferred the 90% equity interest in Guiyang Dalin from Logic Holding to Logic China to better situate the Company in PRC operations.
Acquisition of 20% of equity interest in Fangcheng Plasma Co.
On January 13, 2010, the 20% title of Fangcheng Plasma Company was transferred from former non-controlling interest to Taibang, who is now the 100% owner of Fangcheng Plasma Company.
Acquisition of Ziguang Bio-Technology Co.
On January 22, 2010, Shandong Taibang entered into an Equity Transfer Agreement with Yuncheng Ziguang Biotechnology Co., Ltd. which is located in Yuncheng, Shandong Province. Under the terms of the Equity Transfer Agreement, Shandong Taibang agreed
to purchase 100% of Yuncheng Ziguangs equity interest at a purchase price of RMB 10,066,672 (approximately $1,476,781), which was paid on February 24, 2010.
-7-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Note 2 Restatement of March 31, 2010 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, 2010.
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. The retained earnings and additional paid-in
capital should have been increased by $1,246,476 and decreased by $1,246,476,
respectively, as of March 31, 2010.
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, 2010, 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, 2010. As a result, the goodwill, deferred tax
liabilities, retained earnings, accumulated other comprehensive income and noncontrolling interest should have been
increased by $4,775,139, $4,150,333, $290,477, $186 and $334,143, respectively, as of
March 31, 2010. The net income, net income attributable to noncontrolling
interest and other comprehensive income of the Company should have been
increased by $124,919, $66,810 and $43, for the three months ended March 31,
2010, respectively.
Reclassification of accumulated other comprehensive income
to noncontrolling interest
As required by ASC 810-10-50-1 Aa2, the Company reclassify $1,025,442 of
accumulated other comprehensive income to noncontrolling interest as of March
31, 2010 to separately disclose the amounts of comprehensive income attributable
to both the Company and noncontrolling interests. As a result of this
reclassification, the accumulated other comprehensive income decreased by
$1,025,442 and noncontrolling interests increased by $1,025,442 as of March 31,
2010. This reclassification has no effect on previously reported financial
position or results.
The impact of these restatements and reclassificication on the March 31, 2010
financial statements is reflected in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Amounts
|
|
As Previously Reported
|
|
|
Restatement
|
|
|
Reclassification
|
|
|
As Restated
|
|
Goodwill
|
$
|
12,425,589
|
|
$
|
4,775,139
|
|
$
|
-
|
|
$
|
17,200,728
|
|
Total assets
|
|
174,392,578
|
|
|
4,775,139
|
|
|
-
|
|
|
179,167,717
|
|
Deferred tax liabilities (note 14)
|
|
-
|
|
|
4,150,333
|
|
|
-
|
|
|
4,150,333
|
|
Total liabilities
|
|
75,325,044
|
|
|
4,150,333
|
|
|
-
|
|
|
79,475,377
|
|
Additional paid-in-capital
|
|
28,024,808
|
|
|
(1,246,476
|
)
|
|
-
|
|
|
26,778,332
|
|
Retained earnings
|
|
13,491,161
|
|
|
1,536,953
|
|
|
-
|
|
|
15,028,114
|
|
Accumulated other
comprehensive income
|
|
5,272,137
|
|
|
186
|
|
|
(1,025,442
|
)
|
|
4,246,881
|
|
Noncontrolling interest (note 21)
|
|
32,445,226
|
|
|
334,143
|
|
|
1,025,442
|
|
|
33,804,811
|
|
Total equity
|
|
99,067,534
|
|
|
624,806
|
|
|
|
|
|
99,692,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations and Other
Comprehensive Income Amounts
|
|
As Previously Reported
|
|
|
Restatement
|
|
|
Reclassification
|
|
|
As Restated
|
|
Provision for income taxes (note 14)
|
$
|
3,196,066
|
|
$
|
(124,919
|
)
|
$
|
-
|
|
$
|
3,071,147
|
|
Net income
|
|
14,690,852
|
|
|
124,919
|
|
|
-
|
|
|
14,815,771
|
|
Net income attributable to
noncontrolling interest (note 21)
|
|
4,085,212
|
|
|
66,810
|
|
|
-
|
|
|
4,152,022
|
|
Other comprehensive income
|
|
(4,654
|
)
|
|
43
|
|
|
-
|
|
|
(4,611
|
)
|
Foreign currency
translation adjustments
|
|
(4,654
|
)
|
|
23,998
|
|
|
-
|
|
|
19,344
|
|
Comprehensive income
attributable to noncontrolling interest
|
|
-
|
|
|
(23,955
|
)
|
|
-
|
|
|
(23,955
|
)
|
Comprehensive income attributed to
controlling interest
|
|
10,600,986
|
|
|
82,107
|
|
|
-
|
|
|
10,683,093
|
|
Basic earnings per share (note 13)
|
$
|
0.45
|
|
$
|
0.01
|
|
|
-
|
|
$
|
0.46
|
|
Diluted earnings per share (note 13)
|
$
|
0.41
|
|
$
|
(0.15
|
)
|
|
-
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flow
|
|
As Previously Reported
|
|
|
Restatement
|
|
|
Reclassification
|
|
|
As Restated
|
|
Net income
|
$
|
14,690,852
|
|
$
|
124,919
|
|
$
|
-
|
|
$
|
14,815,771
|
|
Deferred tax benefit, net
|
|
214,583
|
|
|
(124,919
|
)
|
|
-
|
|
|
89,664
|
|
-8-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(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 2009 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 consolidated statements of changes in equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred.
In accordance with Financial Accounting Standards Boards (FASB) accounting standard, cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the
consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.
The consolidated balance sheet amounts, with the exception of equity, at March 31, 2010 and December 31, 2009 were translated at RMB 6.82 to $1.00 and RMB 6.82 to $1.00, respectively. The equity accounts were stated at their historical rate.
The average translation rates applied to consolidated statements of income and cash flow for the three months ended March 31, 2010 and 2009 were RMB 6.82 and RMB 6.83 to $1.00, respectively.
-9-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Revenue Recognition
The Company recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or
determinable, which are generally considered to be met upon delivery and acceptance of products at the customer site. Sales are presented net of any discounts given to customers. As a policy, the Company does not accept any product returns and based
on the Companys records, product returns, if any, are immaterial. Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT).
Shipping and Handling
Shipping and handling costs related to costs of goods sold are included in selling expenses and totaled $68,435 and $44,180 for the three months ended March 31, 2010 and 2009, respectively.
Financial Instruments
On January 1, 2008, the Company adopted FASBs accounting standard related to fair value measurements and began recording financial assets and liabilities subject to recurring fair value measurement at the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. Receivables, payables, short and long term loans, and derivative
liabilities qualify as financial instruments. Management concluded the carrying values of the receivables, payables and short term loans approximate their fair values because of the short period of time between the origination of such instruments
and their expected realization, and if applicable, their stated rates of interest are equivalent to interest rates currently available. The fair values of the long term debt and derivative liabilities are measured pursuant to the three levels
defined by the FASBs accounting standard as follow:
-
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
-
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of
the financial instruments.
-
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value.
As required by FASBs accounting standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Depending on the product and the terms of the
transaction, the fair value of the derivative liabilities were modeled using a series of techniques, including closed-form analytic formula, such as the Black-Scholes Option
Pricing Model, which does not entail material subjectivity because the
methodology employed does not necessitate significant judgment, and the pricing
inputs are observed from actively quoted markets. Derivative liabilities related
to warrants issued by the Company and the liability related to derivative
instruments (including the conversion option) embedded in the Companys Senior
Secured Convertible Notes are carried at fair value, with changes in the fair
value charged or credited to income. The fair values are determined using the
Black-Scholes Model or a binomial model, defined in FASBs accounting standard
related to fair value measurements as level 2 inputs.
-10-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
|
|
Carrying Value as
of March 31, 2010
|
|
|
Fair Value Measurements at March
31, 2010
using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities-Conversion option
|
$
|
15,275,245
|
|
$
|
-
|
|
$
|
15,275,245
|
|
$
|
-
|
|
Warrants liabilities
|
$
|
9,177,262
|
|
$
|
-
|
|
$
|
9,177,262
|
|
$
|
-
|
|
The assumptions used in calculating the fair value of the
derivative liabilities as of March 31, 2010 using the Black-Scholes option
pricing model are as follows:
|
|
Conversion
|
|
|
Warrants
|
|
|
|
Options
|
|
|
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
0.52%
|
|
|
1.13%
|
|
Expected life (in years)
|
|
1.2
|
|
|
2.2
|
|
Weighted average expected volatility
|
|
130%
|
|
|
130.0%
|
|
The Company did not identify any other assets or liabilities
that are required to be presented on the balance sheet at fair value in
accordance with FASBs accounting standard.
Concentration Risks
The Company's operations are carried out in the PRC and are
subject to specific considerations and significant risks not typically
associated with companies in North America and Western Europe. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC economy. The Company's results may be adversely
affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
The Company maintains balances at financial institutions which,
from time to time, may exceed Federal Deposit Insurance Corporation insured
limits for the banks located in the United States or may exceed Hong Kong
Deposit Protection Board insured limits for the banks located in Hong Kong.
Balances at financial institutions or state-owned banks within the PRC are not
covered by insurance. Total cash in banks as of March 31, 2010 and December
31,
2009 amounted to $50,943,464 and $53,576,495, respectively, $1,268,701 and $1,009,053 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.
-11-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
The Companys major product, human albumin: 20%/10ml, 20%/25ml and 20%/50ml, and 10%/10ml, 10%/25ml and 10%/50ml, accounted for 46.9% and 58.4% of total revenues, for the three months ended March 31, 2010 and 2009, 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, 2010 and 2009, the Company had no significant concentration of credit risk. There were no customers that individually comprised 10% or more of the revenue during
the three months ended March 31, 2010 and 2009. Only one customer represented more than 10% of trade receivables at March 31, 2010 and no individual customer represented more than 10% of trade receivables at December 31, 2009. The Company performs
ongoing credit evaluations of its customers financial condition and, generally, requires no collateral from its customers.
There was one vendor that individually comprised 10% or more of the purchase and account payables during the three months ended March 31, 2010 and no vendor that individually comprised 10% or more of the purchase or account payables during the same
period in 2009.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits in accounts maintained with state-owned banks within the PRC, Hong Kong and the United States. The Company considers all highly liquid investments with original maturities of three
months or less at the time of purchase to be cash equivalents.
Accounts Receivable
During the normal course of business, the Company extends unsecured credit to its customers. Management reviews its accounts receivable on a regular basis to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful
accounts is made when collection of the full amount is no longer probable. Account balances are written-off after management has exhausted all efforts of collection.
Inventories
Inventories are stated at the lower of cost or market using the
weighted average method. The cost of finished goods included direct costs of raw
materials as well as direct labor used in production. Indirect production costs
such as utilities and indirect labor related to production such as assembling,
shipping and handling for raw material costs are also included in the cost of
inventories.
-12-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
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, 2010 and December 31, 2009, the Company
reserved $717,960 and $519,333, respectively, as allowance for obsolete
inventory for raw material plasma that may not qualify for production due to the
90-day quarantine period rules implemented by SFDA on July 1, 2008.
Plant and Equipment
Plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets with 5% residual value.
Estimated useful lives of the assets are as follows:
|
|
|
|
|
|
|
Estimated Useful Life
|
Buildings and improvement
|
30 years
|
Machinery and equipment
|
10 years
|
Furniture, fixtures and office equipment
|
5-10 years
|
Construction in progress represents the costs incurred in
connection with the construction of buildings, new additions, and capitalized
interest incurred in connection with the Companys plant facilities. In
accordance with the provisions of FASBs accounting standard related to
capitalization of interest, interest incurred on borrowings is capitalized to
the extent that borrowings do not exceed construction in progress. The credit is
a reduction of interest expense. No depreciation is provided for construction in
progress until such time as the assets are completed and placed into service.
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Major additions and betterment to property and equipment are
capitalized.
The Company periodically evaluates the carrying value of
long-lived assets in accordance with FASBs accounting standard related to
accounting for impairment and disposal of long-lived assets. When estimated cash
flows generated by those assets are less than the carrying amounts of the asset,
the Company recognizes an impairment loss. Based on its review, the Company
believes that, as of March 31, 2010 and December 31, 2009, there were no
impairments of its long-lived assets.
-13-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
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, blood
donor network, software, Good Manufacturing Practice (GMP) certificate and
long-term customer-relationship intangible assets. The Company amortized the
cost of these intangible assets over their useful life using the straight-line
method.
Intangible assets of the Company are reviewed at least annually
or more often if circumstances dictate, to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the years of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of March 31, 2010, the Company expects these assets to be fully recoverable.
-14-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Companys share of the net identifiable assets of the
acquired subsidiary at the date of acquisition. Goodwill is tested annually for
impairment and carried at cost less accumulated impairment losses. Impairment
losses on goodwill are not reversed. Gains and losses on the disposal of an
entity include the carrying amount of goodwill relating to the entity sold.
Revenues and Customer Deposits
Payments received before all of the relevant criteria for
revenue recognition are recorded as customer deposits.
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, 2010 and 2009
are as follows:
|
|
Three months ended March 31,
|
|
|
|
(Unaudited)
|
|
|
|
2010
|
|
|
2009
|
|
Human Albumin 20%/10% in 10ml, 25ml and
50ml
|
$
|
12,699,407
|
|
$
|
12,351,699
|
|
Human Hepatitis B Immunoglobulin
|
|
3,332,307
|
|
|
60,099
|
|
Human Immunoglobulin for Intravenous
Injection
|
|
5,395,465
|
|
|
5,372,502
|
|
Human Rabies Immunoglobulin
|
|
3,778,122
|
|
|
1,629,011
|
|
Human Tetanus Immunoglobulin
|
|
687,315
|
|
|
1,029,686
|
|
Human Immunoglobulin
|
|
649,973
|
|
|
213,877
|
|
Others
|
|
555,964
|
|
|
491,724
|
|
Total
|
$
|
27,098,553
|
|
$
|
21,148,598
|
|
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, 2010.
Research and Development Costs
Research and development costs composed of salary, material
used and other expense 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.
-15-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Product Liability
The Companys products are covered by two product liability insurance of approximately $2,934,000 (RMB 20,000,000) each for Shandong Taibang and Qianfeng. As of March 31, 2010 and December 31, 2009, no claim on the insurance policy was
filed. However, there is one pre-existing potential claim against Qianfengs products outstanding, which are still pending and the Company believes to be immaterial to the consolidated financial statements for the period ended March 31, 2010.
Government Grants
The Companys subsidiary, Shandong Taibang, is entitled to receive grants from the Taian municipal government due to its operation in the high and new technology business sector. For the three months ended March 31, 2010 and 2009, no
non-refundable grants were received from the Taian municipal government. Grants received from the Taian municipal government can be used for enterprise development and technology innovation purposes.
Income Taxes
The Company reports income taxes pursuant to FASBs accounting standard for income taxes. Under the asset and liability method of accounting for income taxes as required by this accounting standard, deferred income tax liabilities and assets
are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is
recorded when it is more likely than not that some of the deferred tax assets will not be realized. FASBs accounting standard for accounting for uncertainty in income taxes requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the financial statements or tax returns. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. A tax position is recognized as a
benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
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 probable 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.
-16-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
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.
Provision for income taxes consist of taxes currently due plus deferred taxes. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. No significant penalties or interest
relating to income taxes have been incurred during the three months ended March 31, 2010 and 2009. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.
Value Added Tax
Enterprises or individuals, who sell products, engage in repair and maintenance or import and export goods in the PRC are subject to a VAT in accordance with Chinese laws. The VAT rate applicable to the Company is 6% of the gross sales price.
Products distributed by Shandong Medical are subjected to a 17% VAT. No credit is available for VAT paid on purchases.
Stock-based Compensation
The Company accounts and reports stock-based compensation pursuant to FASBs accounting standard related to accounting for stock-based compensation which defines a fair-value-based method of accounting for stock based employee compensation and
transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. Stock compensation for stock granted to non-employees has been determined in accordance with this standard as the fair value of the
consideration received or the fair value of equity instruments issued, whichever is more reliably measured.
Noncontrolling Interest
Effective January 1, 2009, the Company adopted FASBs accounting standard regarding non-controlling interest in consolidated financial statements. Certain provisions of this statement are required to be adopted retrospectively for all periods
presented. Such provisions include a requirement that the carrying value of noncontrolling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity.
-17-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Further, as a result of adoption this accounting standard, net income attributable to noncontrolling interests is now excluded from the determination of consolidated net income.
Recently Issued Accounting Pronouncements
In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assetsan amendment of FASB Statement No. 140.The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the
exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a
transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The effective date of this amended pronouncement was as of the beginning of a reporting entitys first annual reporting period
that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company adopted this standard and the adoption of this standard did not have a material
effect on the Companys consolidated financial statements.
In December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB
Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling
financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entitys economic
performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a
controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entitys involvement in variable interest entities, which will enhance the information provided to
users of financial statements. The effective date of this amended pronouncement was as of the beginning of a reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual
reporting period. The Company adopted this standard and the adoption of this standard did not have a material effect on the Companys consolidated financial statements.
-18-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes
of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company adopted this
standard and the adoption of this standard did not have a material effect on the Companys consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity
interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements An Amendment of ARB No. 51. If an
entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period
ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company adopted this standard and the adoption of this standard did not have material
effect on the Companys consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06 Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the
reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net
number).This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and
valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value
measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The Company is currently evaluating the
impact of this ASU, however, the Company does not expect the adoption of this
ASU to have a material impact on its consolidated financial statements.
-19-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
In February 2010, the FASB issued Accounting Standards Update
2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements, or ASU 2010-09. ASU 2010-09 primarily rescinds the
requirement that, for listed companies, financial statements clearly disclose
the date through which subsequent events have been evaluated. Subsequent events
must still be evaluated through the date of financial statement issuance;
however, the disclosure requirement has been removed to avoid conflicts with
other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and
was adopted in February 2010.
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, 2010 and December 31, 2009 are
presented as follows:
|
|
|
|
|
March 31, 2010
|
|
|
December 31,
|
|
Assets
|
|
Purpose
|
|
|
(unaudited)
|
|
|
2009
|
|
Accounts receivable related
party
(1)
|
|
Processing fees
|
|
$
|
270,086
|
|
$
|
222,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31,
|
|
Liabilities
|
|
Purpose
|
|
|
(unaudited)
|
|
|
2009
|
|
Short term loans holder of noncontrolling
interest
(2)
|
|
Loan
|
|
$
|
3,652,500
|
|
$
|
3,652,500
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest holder of noncontrolling
interest
(2)
|
|
Interest payable
|
|
$
|
1,154,687
|
|
$
|
2,068,526
|
|
|
|
|
|
|
|
|
|
|
|
Other payable related
parties
(3)
|
|
Loan
|
|
$
|
2,122,772
|
|
$
|
2,122,772
|
|
Other payable related parties
(4)
|
|
Contribution
|
|
|
964,168
|
|
|
964,168
|
|
Distribution payable - holder of noncontrolling
interest
|
|
Distribution
|
|
|
587
|
|
|
587
|
|
Total
|
|
|
|
$
|
3,087,527
|
|
$
|
3,087,527
|
|
(1)
Qianfeng provides processing services for
Guizhou Eakan, one of the Qianfengs non-controlling shareholders. The total
processing services income amounted to $237,031 and $242,729 for the three
months period ended March 31, 2010 and 2009, respectively. As of March 31, 2010
and December 31, 2009, Guizhou Eakan owes Qianfeng processing fees in an amount of $270,086 and $222,617,
respectively. The outstanding balance as of March 31, 2010 has been paid in cash
at the beginning of April 2010.
-20-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
(2)
On April 6, 2009, Logic Express entered into an
equity transfer and entrustment agreement, or Entrustment Agreement, among Logic
Express, Shandong Taibang, and the Shandong Institute of Biological Products, or
the Shandong Institute, the holder of the noncontrolling interests in Shandong
Taibang, pursuant to which, Logic Express agreed to permit Shandong Taibang and
the Shandong Institute to participate in the indirect purchase of Qianfeng's
equity interests. Under the terms of the Entrustment Agreement, Shandong
Institute agreed to contribute 12.86% or $3,652,500 (RMB 25,000,000) of the
Dalin purchase price. Logic express is obligated to repay to the Shandong
Institute their investment amount on or before April 6th, 2010, along with their
pro rata share, based on their percentage of the Dalin purchase price
contributed, of any distribution on the indirect equity investment in Qianfeng
payable to Logic Express during 2009. As of March 31, 2010, the Company was able
to settle the interest liability with Shandong Institute for $1,154,687
therefore recognizing an other income of $913,839. On April 12, 2010, the
Company fully paid the Shandong Institute and Shandong Taibang on the respective
investment amounts, as well as the interest, according the Entrustment
Agreement. The interest paid to the Shandong Institute is approximately
$1,154,687.
(3)
Qianfeng has payables to Guizhou Eakan Investing
Corp. in the amount of approximately $2,122,772 (RMB14, 470,160). Guizhou Eakan
Investing Corp. is one of the shareholders of Guizhou Eakan, one of the
Qianfengs minority shareholders. The Company borrowed this non-interest bearing
amount for working capital purposes. The balance is due on demand in the form of
cash.
(4)
Qianfeng has payables to Guizhou Jiean, a
holder of noncontrolling interest, in amount of approximately $964,168 (RMB
6,569,840). In 2007, Qianfeng received additional contributions from Guizhou
Jiean in the amount of $962,853 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, commitment and
contingent liabilities, the money may be returned to Jiean.
Note 5 Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Trade accounts receivable
|
$
|
5,019,752
|
|
$
|
3,022,031
|
|
Less: Allowance for doubtful accounts
|
|
(1,255,629
|
)
|
|
(1,254,955
|
)
|
Total
|
$
|
3,764,123
|
|
$
|
1,767,076
|
|
-21-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
The activity in the allowance for doubtful accounts for trade
accounts receivable for the three months ended March 31, 2010 and the year ended
December 31, 2009 is as follows:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning allowance for doubtful
accounts
|
$
|
1,254,955
|
|
$
|
1,268,052
|
|
Additional charged to bad
debt expense
|
|
2,883
|
|
|
18,737
|
|
Recovery
of amount previously reserved
|
|
(2,210
|
)
|
|
(31,826
|
)
|
Write-off charged against
the allowance
|
|
-
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
1
|
|
|
(8
|
)
|
Ending allowance for doubtful accounts
|
$
|
1,255,629
|
|
$
|
1,254,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
$
|
21,671,903
|
|
$
|
19,720,420
|
|
Work-in-process
|
|
8,938,701
|
|
|
8,407,319
|
|
Finished goods
|
|
9,282,761
|
|
|
7,524,318
|
|
Total
|
|
39,893,365
|
|
|
35,652,057
|
|
Less: Allowance for obsolete
inventories
|
|
(717,960
|
)
|
|
(519,333
|
)
|
Inventories, net
|
$
|
39,175,405
|
|
$
|
35,132,724
|
|
Note 7 Other receivables, prepayments and deferred
expense
Other receivables represent deposits the Company paid to
suppliers or service providers, as well as receivables from employees amounting
to $2,177,594 and $2,186,441 as of March 31, 2010 and December 31, 2009,
respectively. In 2009, the Shandong Taibang sponsored two separate housing
projects with local developers to assist 107 of its employees to purchase houses
to be constructed. Developers required deposits of at least 80% of the total
purchase price before the commencement of the project. Employees are required to
deposit at least 30% and up to 80% of the total purchase prices and Shandong
Taibang advanced $1,512,583 in total, which represents the difference between
the required deposits by the developer and the actual deposits made by the
employees, on behalf of the employees to the developer. The advances to the
employees are expected to be re-paid within one year.
Prepayments and deferred expense represent partial payments for
deposits on material purchases, prepaid leases and prepayment for insurance
expenses and amounted to $1,672,261 and $1,299,125 as of March 31, 2010 and
December 31, 2009, respectively.
Long term prepayments represent partial payments or deposits on
plant and equipment and intangible assets purchases and amounted to $3,362,943
and $3,223,960 as of March 31, 2010 and December 31, 2009, respectively.
-22-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Note 8 Plant and equipment, net
Plant and equipment consist of the following:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Buildings and improvements
|
$
|
14,593,694
|
|
$
|
12,901,205
|
|
Machinery and equipment
|
|
23,957,008
|
|
|
23,428,848
|
|
Furniture, fixtures, office equipment and
vehicle
|
|
4,000,773
|
|
|
3,862,385
|
|
Total depreciable assets
|
|
42,551,475
|
|
|
40,192,438
|
|
Accumulated depreciation
|
|
(14,747,707
|
)
|
|
(13,953,793
|
)
|
Plant and equipment, net
|
|
27,803,768
|
|
|
26,238,645
|
|
Construction in progress
|
|
4,063,922
|
|
|
2,634,768
|
|
Total
|
$
|
31,867,690
|
|
$
|
28,873,413
|
|
Depreciation expense for the three months ended March 31, 2010
and 2009 amounted to $793,657 and $759,072, respectively. No interest was
capitalized into construction in progress in the three months ended March 31,
2010 and 2009. Construction in progress summary as below:
|
|
|
CIP balance as of
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
Expected date of
|
|
|
Estimated additional
|
|
Projects
|
|
|
(unaudited)
|
|
|
completion
|
|
|
cost
to input
|
|
Danzhan Plasma Co.
|
|
$
|
599,094
|
|
|
June 2010
|
|
$
|
203,089
|
|
Huangping Plasma Co.
|
|
|
850,448
|
|
|
June 2010
|
|
|
221,890
|
|
Puding Plasma Co.
|
|
|
521,748
|
|
|
June 2010
|
|
|
72
|
|
Nayong Plasma Co.
|
|
|
590,403
|
|
|
June 2010
|
|
|
436,556
|
|
Weining Plasma Co.
|
|
|
703,288
|
|
|
June 2010
|
|
|
31,425
|
|
Qiangfeng
|
|
|
8,069
|
|
|
June 2010
|
|
|
254,821
|
|
Taibang
|
|
|
790,872
|
|
|
June 2010
|
|
|
427,427
|
|
Total
|
|
$
|
4,063,922
|
|
|
|
|
$
|
1,575,280
|
|
Note 9 Investment in unconsolidated affiliate
On October 10, 2008, Shandong Taibang entered into an Equity
Transfer Agreement (the "Huitian Agreement") with Mr. Fan Qingchun (the
"Transferor"), a PRC citizen holding 35% of the equity interest in Huitian, a
PRC limited liability company. Pursuant to the Huitian Agreement, the Transferor
agrees to sell to Shandong Taibang, and Shandong Taibang agrees to purchase from
the Transferor, 35% equity interest in Huitian for an aggregate purchase price
of $6,502,901 (or RMB 44,327,890) including interest of $48,101 (RMB 327,890).
-23-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Logic Express also entered into an investment entrustment
agreement (the "Investment Agreement") with the minority shareholder in Shandong
Taibang, Shandong Institute, pursuant to which Logic Express agrees to provide
the investment amount for the acquisition and the Shandong Institute agree to
entrust Shandong Taibang to acquire the 35% equity interest of Huitian in its
name. In exchange Logic Express is also obligated to pay Shandong Taibang
approximately $17,604 (or RMB120,000) per year as consideration for Shandong
Taibang's performance under this agreement. Under the Investment Agreement,
after the acquisition, Logic Express will be in charge of Huitian's daily
operation and management, will bear the costs, expenses, liabilities and losses
incurred in its operation, and will enjoy its profits. Shandong Taibang will
perform relevant tasks according to Logic Express's instruction, and will not
exercise any management right over Huitian or derive any financial return from
Huitian. Logic Express agreed to indemnify Shandong Taibang for any loss in
connection with the investment and pledged its equity interest in Shandong
Taibang as collateral against such losses.
Summarized unaudited financial information of Huitian is as
follows:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
Current assets
|
$
|
7,612,869
|
|
$
|
9,912,775
|
|
Non-current assets
|
|
9,964,191
|
|
|
10,195,357
|
|
Total assets
|
$
|
17,577,060
|
|
$
|
20,108,132
|
|
Current liabilities
|
|
983,021
|
|
|
4,031,033
|
|
Non-current liabilities
|
|
308,070
|
|
|
308,070
|
|
Shareholders' equity
|
|
16,285,969
|
|
|
15,769,029
|
|
Total liabilities and shareholders' equity
|
$
|
17,577,060
|
|
$
|
20,108,132
|
|
The portion of the difference between the cost of an investment
and the amount of underlying equity in net assets of Huitian that is recognized
as goodwill shall not be amortized, but instead should continue to be reviewed
for impairment in accordance with FASBs accounting standard.
Summarized unaudited financial information of
Huitian is as follows:
|
|
|
|
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Net sales
|
$
|
2,402,751
|
|
$
|
1,159,285
|
|
Gross profit
|
$
|
1,335,319
|
|
$
|
389,530
|
|
Income before taxes
|
$
|
647,420
|
|
$
|
135,281
|
|
Net income
|
$
|
538,689
|
|
$
|
114,989
|
|
Companys share of net income
|
$
|
188,541
|
|
$
|
40,247
|
|
The roll forward of investment in Huitian in the balance sheet
is shown below:
-24-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
|
|
Huitian - 35%
|
|
|
|
Ownership
|
|
December 31, 2008
|
$
|
-
|
|
Investment made
|
|
6,533,977
|
|
Net income from 2009
|
|
566,984
|
|
Dividend declared
|
|
(473,952
|
)
|
Foreign currency translation gain
|
|
346
|
|
December 31, 2009
|
|
6,627,355
|
|
Net income from the three months
ended March 31, 2010
|
|
188,541
|
|
Dividend declared
|
|
-
|
|
Foreign currency translation gain
|
|
65
|
|
March 31, 2010 (unaudited)
|
$
|
6,815,961
|
|
Note 10 Intangible assets, net
Intangible assets consisted of the following:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Land use rights
|
$
|
4,184,039
|
|
$
|
4,163,140
|
|
Permits and licenses
|
|
11,261,611
|
|
|
11,261,611
|
|
Blood donor network
|
|
2,347
|
|
|
2,347
|
|
Software
|
|
149,492
|
|
|
145,897
|
|
GMP certificate
|
|
2,327,885
|
|
|
2,327,885
|
|
Long-term customer-relationship
|
|
6,941,170
|
|
|
6,941,170
|
|
Totals
|
|
24,886,544
|
|
|
24,842,050
|
|
Accumulated amortization
|
|
(4,531,249
|
)
|
|
(3,661,728
|
)
|
Intangible assets, net
|
$
|
20,335,295
|
|
$
|
21,180,322
|
|
Total amortization expense for the three months ended March 31,
2010 and 2009 amounted to $869,251 and $838,459 respectively.
The amortization expense related to purchased and other
intangible assets due to the consolidation of Dalin is $793,386 and $792,629 for
the three months ended March 31, 2010 and 2009, respectively.
Amortization expense for intangible assets for the next five
fiscal years is as follows:
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
Amortization expense
|
$
|
3,353,442
|
|
$
|
3,346,893
|
|
$
|
1,583,503
|
|
$
|
1,485,798
|
|
$
|
1,164,382
|
|
$
|
9,401,277
|
|
-25-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Note 11 Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term loans and current
maturities of long term loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term loans represent
renewable loans due to various banks which are normally due within one
year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys bank loans consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
Due by
|
|
|
Annual
interest rates
|
|
|
March 31, 2010
(Unaudited)
|
|
|
December 31,
2009
|
|
Short term
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term bank loan, secured
(1)
|
|
June 1, 2010
|
|
|
5.40%
|
|
$
|
1,467,000
|
|
$
|
1,467,000
|
|
Short term bank loan, un-secured
|
|
January 7, 2010
|
|
|
5.31%
|
|
|
2,934,000
|
|
|
2,934,000
|
|
Short
term loan, un-secured
|
|
On demand
|
|
|
0.00%
|
|
|
73,350
|
|
|
73,350
|
|
Short term bank loan, secured
(2)
|
|
March 22, 2010
|
|
|
5.84%
|
|
|
2,934,000
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
$
|
7,408,350
|
|
$
|
4,474,350
|
|
Interest expense related to the bank loans totaling $62,286 and
$622,449 were incurred during the three months ended March 31, 2010 and 2009,
respectively.
(1)
The loan in the amount of $1,467,000 is secured
by Shandong Taibangs land use rights and buildings located in Taian, Shandong
Province, PRC with the carrying net value as follows:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Buildings in Taian, Shandong
|
$
|
1,238,010
|
|
$
|
1,238,010
|
|
Land use rights in Taian, Shandong
|
|
433,793
|
|
|
433,793
|
|
Total
|
$
|
1,671,803
|
|
$
|
1,671,803
|
|
(2)
The loan in the amount of $2,934,000 is secured
by Qianfengs buildings located in Guiyang, Guizhou Province, PRC, with carrying
net values of RMB 28,933,927 as of March 31, 2010.
Other payables and accruals
Other payables and accruals consist of the following:
-26-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Other payables
(1)
|
$
|
8,722,680
|
|
$
|
7,465,640
|
|
Accruals for promotion costs and others
(2)
|
|
3,502,207
|
|
|
5,281,843
|
|
Accruals for salaries and welfare
|
|
1,552,363
|
|
|
2,341,874
|
|
Accruals for RTO expenses
|
|
245,657
|
|
|
245,657
|
|
Accruals for selling commission and
promotion fee
|
|
749,451
|
|
|
691,858
|
|
Other Payable - government grant
|
|
95,077
|
|
|
143,488
|
|
Other payable - deposit received
|
|
336,348
|
|
|
160,683
|
|
Other payable - funds
|
|
1,627,475
|
|
|
2,383,501
|
|
Accrued interest
|
|
-
|
|
|
81,264
|
|
Others
(3)
|
|
451,006
|
|
|
451,006
|
|
Total
|
$
|
17,282,264
|
|
$
|
19,246,814
|
|
(1)
|
The other payables mainly comprise of deposits by
potential strategic investors with the amount of $7,465,640. As of March
31, 2010, Qianfeng has received in an aggregate amount of $7,465,640 from
potential private strategic investors in connection with subscribing
shares from Qianfeng pursuant to Equity Purchase Agreement. The
registration of the new investors as Qianfengs shareholders and the
related increase in registered capital of Qianfeng with the Administration
for Industry and Commerce (AIC) is incomplete due to share holders
dispute as disclosed in below legal proceedings section below (Note 14).
Additional interest of $1.2millions was accrued for the year from 2007 to
current quarter based on average market interest rate around
5.9%.
|
|
|
(2)
|
Accruals for promotions and others mainly represent the
payables for donors promoting expenses, accrual for audit fee, payables to
employees and payables to vendors or subcontractors for construction in
plasma stations in Qianfeng.
|
|
|
(3)
|
Others mainly comprise of the contingent liability due to
the pending, outcome of the preceding of Qianfengs Guarantee to a Third
Party as disclosed in below legal proceedings section below, Qianfeng
provisioned a loss contingency reserve during its third quarter of 2009
for approximately $451,006 (RMB 3,074,342) to cover its share of the
enforcement of this judgment.
|
Other payable - land use rights
In July 2003, Shandong Taibang obtained certain land use rights
from the Taian 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 $ 323,390 and
$323,687 as of March 31, 2010 and December 31, 2009, respectively, determined
using present value of annual payments over 50 years.
-27-
CHINA BIOLOGIC PRODUCTS INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
Note 12 Convertible Notes
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31,
|
|
|
|
(unaudited)
|
|
|
2009
|
|
$9,554,140, 3.8% Senior Secured Convertible
Notes, due June 5, 2011
|
$
|
9,554,140
|
|
$
|
9,554,140
|
|
Less: converted
|
|
(2,054,140
|
)
|
|
(1,000,000
|
)
|
Total convertible notes outstanding
|
|
7,500,000
|
|
|
8,554,140
|
|
Less: unamortized discount
|
|
(7,325,349
|
)
|
|
(8,464,380
|
)
|
Notes payables, net
|
$
|
174,651
|
|
$
|
89,760
|
|
On June 5, 2009, the Company entered into a securities purchase
agreement (the Purchase Agreement) with certain accredited investors
(collectively, the Investors), pursuant to which the Company agreed to issue
to the Investors, 3.8% Senior Secured Convertible Notes in the aggregate
principal amount of $9,554,140 (the Notes) and warrants (the Warrants and
together with the Notes, the Subscribed Securities) to purchase up to
1,194,268 shares of common stock of the Company (the Warrant Shares and
together with the Conversion Shares, the Underlying Securities). The
transaction closed on June 10, 2009. Other than with respect to this
transaction, none of the Investors have had a material relationship with the
Company or any of the Companys officers, directors or affiliates or any
associate of any such officer or director.
The Notes accrue interest at 3.8% per annum (the Interest
Rate), from the closing until repayment, whether on maturity on June 5, 2011,
by acceleration or otherwise. Interest on the Notes is due and payable in cash
semi-annually on September 30 and March 31 of each year, commencing September
30, 2009, but the Company has the option to pay the interest due through the
issuance of its common stock at a conversion price of $4.00 per share. If the
Company defaults in the payment of the principal of or interest on the Notes
when due, then upon the Investors election, the Company is obligated to either
(a) redeem all or a portion of the Notes pursuant to the redemption rights
discussed below or (b) pay interest on such defaulted amount at a rate equal to
the Interest Rate plus 2.0%. The Notes are convertible at any time before
maturity into shares of our common stock at a conversion price of $4.00 per
share, subject to certain adjustments as specified in the Notes.
The Companys obligations under the Notes are secured by the
pledge by Siu Ling Chan, our board chair and a principal shareholder, of
3,000,000 shares of common stock held by her, pursuant to the terms of a
Guarantee and Pledge Agreement among the Company, the investors and Ms. Chan. To
induce Ms. Chan to enter into the Guarantee and Pledge Agreement with the
Investors, the Company has agreed to indemnify her for all damages, liabilities,
losses and expenses of any kind (losses), which may be sustained or suffered
by her, arising out of or in connection with any enforcement action instituted
by the Investors pursuant to the Guarantee and Pledge Agreement. The Companys
indemnification obligation is limited to losses that arise as the result of any
negligent or unlawful conduct of the Company that is caused unilaterally by the
Company and is beyond Ms. Chans control in her capacity as a director of the
Company, and will not exceed the fair market value of the pledged shares as of
the closing of the transaction.
-28-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
The Warrants have a term of 3 years, an exercise price of $4.80
per share, subject to adjustments as provided in the Warrants, from time to time
pursuant to anti-dilution and other customary provisions, and are exercisable by
the Investors at any time after the date on which their related Notes are
converted, except that if any of the Notes is converted in part, the Investors
may only exercise a corresponding portion of the related Warrant.
The Company has granted the Investors demand and piggy-back
registration rights with respect to the Underlying Securities, pursuant to a
registration rights agreement among the Company and the Investors.
The Company paid its placement agent a cash fee of 6.1% of the
proceeds received in connection with the issuance of the Notes and also issued
to the placement agent a 3-year warrant to purchase 93,750 shares of the
Companys common stock at an exercise price of $6.00 per share, expiring after 3
years. The aggregate $870,417 fees paid to the placement agent, including the
fair value of the warrant issued to them was deferred and is being amortized
over the life of the Notes.
On December 22, 2009, two of the Companys Note holders
exercised their rights to convert $1,000,000 of their Notes into an aggregate of
250,000 shares of the Companys common stock. On January 13, 2010, two Note
holders continued to exercise their rights to convert $1,054,140 of their
remaining Notes into an aggregate of 263,535 shares of the Companys common
stock. The fair value market of conversion options of $2,627,558, carrying value
of $14,428 and accrued interest of $8,550 were included in additional
paid-in-capital upon conversion of the convertible notes. As a result, Notes in
the principal amount of $7,500,000 is outstanding as of March 31, 2010.
Note 13 - Earnings (loss) per share (Restated)
Basic earnings/(loss) per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings/(loss) per share is calculated by dividing net income
by the weighted average number of common shares outstanding and dilutive
potential common shares outstanding during the period.
Earnings (loss) per share is as follows for the three
months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Net income attributable to
controlling interest for basic earnings per share
|
$
|
10,663,749
|
|
$
|
4,308,796
|
|
Weighted average shares used in basic
computation
|
|
23,386,893
|
|
|
21,434,942
|
|
Earnings per share -
Basic
|
$
|
0.46
|
|
$
|
0.20
|
|
-29-
CHINA BIOLOGIC PRODUCTS INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Net income attributable to
controlling interest for basic earnings per share
|
$
|
10,663,749
|
|
$
|
4,308,796
|
|
Add: interest of convertible notes
|
|
172,121
|
|
|
-
|
|
Subtract: Gain from changes in
Fair value of derivative liabilities and warrants
|
|
(3,833,576
|
)
|
|
-
|
|
Net income attributable to
controlling interest for diluted earnings per share
|
$
|
7,002,294
|
|
$
|
4,308,796
|
|
|
|
|
|
|
|
|
Weighted average shares used
in basic computation
|
|
23,386,893
|
|
|
21,434,942
|
|
Diluted effect of convertible debentures,
warrants and options
|
|
3,084,532
|
|
|
-
|
|
Weighted average shares used
in diluted computation
|
|
26,471,425
|
|
|
21,434,942
|
|
Earnings per share - Diluted
|
$
|
0.26
|
|
$
|
0.20
|
|
For the three months ended March 31, 2010, 50,000 shares of
stock option were excluded from the calculation because of anti-diluted nature.
All other warrants, stock options and conversion options were included in the
calculation of diluted earnings per share because of their dilutive nature.
For the three months ended March 31, 2009, all outstanding
warrants and options were excluded in the calculation of diluted earnings per
share because of their anti-dilutive nature.
Note 14 Taxes (Restated)
Income taxes
Starting from January 1, 2008, all of the Companys Chinese
subsidiaries, except plasma companies, 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.
Qianfeng is currently enjoying the preferential income tax rate
of 15% also under the 10-year Western Development Tax Concession, which started
on January 2001 and ends on December 2010. The PRC tax authority is studying the
possibility of extending the concession, especially for those industries that
encouraged by the PRC government, such as ours. In the event that PRC tax
authorities discontinue the concession, Qianfeng will apply for the new or high
technology preferential tax treatment of 15% like Shandong Taibang.
-30-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
All of the Company plasma companies are qualified as small
scale taxpayers and are subject to a tax rate of 6% in 2010.
Starting from January 1, 2008, all dividends paid to foreign
parents are subject to a 10% income tax. As a result, Logic Holdings recorded $0
and $218,238 income tax expense for the three months ended March 31, 2010 and
2009, respectively, for dividends Dalin paid to its foreign parent, Logic
Holdings. Logic Express recorded $582,763 and $218,089 income tax expense during
the three months ended March 31, 2010 and 2009, respectively, for dividends
Taibang distributed 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, 2010 and 2009:
|
|
2010
|
|
|
2009
|
|
U.S. Statutory rates
|
|
34.0%
|
|
|
34.0%
|
|
Foreign Income
|
|
(34.0
|
)
|
|
(34.0
|
)
|
China Tax rates
|
|
25.0
|
|
|
25.0
|
|
China income tax exemption
|
|
(10.0
|
)
|
|
(10.0
|
)
|
Temporary differences (China)
(1)
|
|
0.8
|
|
|
(1.4
|
)
|
Other items
(2)
|
|
1.4
|
|
|
6.9
|
|
Effective income tax rates
|
|
17.2%
|
|
|
20.5%
|
|
(1)
The 0.8%
represents the effect of realization of temporary difference of $143,771 for the
three months ended March 31, 2010. The -1.4% represents the effect of
realization of temporary difference of -$124,799 for the three months ended
March 31, 2010.
(2)
The other items represent $0.6 million of income
tax expense for dividends that Shandong Taibang distributed to Logic Express,
its foreign parent and $3.1 million of expense incurred by CBP, Logic Express
and Logic Holding that are not deductible in PRC offset by $3.8 million gains
(not taxable) from fair value changes of derivative liabilities for the three
months ended March 31, 2010. 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 estimated tax savings due to the tax exemption for the
three months ending March 31, 2010 and 2009 amounted to $1,742,291 and $763,331,
respectively. The net effect on earnings per share if the income tax had been
applied would decrease basic earnings per share for the three months ended March
31, 2010 and 2009 by $0.07 and $0.04, respectively. The net effect on earnings
per share if the income tax had been applied would decrease diluted earnings per
share for the three months ended March 31, 2010 and 2009 by $0.07 and $0.01,
respectively.
The provision for income taxes consists of the following for
the unaudited three months ended March 31, 2010 and 2009:
-31-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
|
|
2010
|
|
|
2009
|
|
Current
|
|
|
|
|
|
|
U.S.
|
$
|
-
|
|
$
|
-
|
|
Foreign (China)
|
|
2,927,376
|
|
|
2,030,194
|
|
Total current
|
|
2,927,376
|
|
|
2,030,194
|
|
Deferred
|
|
|
|
|
|
|
U.S.
|
|
-
|
|
|
-
|
|
Foreign (China)
|
|
143,771
|
|
|
(124,799
|
)
|
Total deferred
|
|
143,771
|
|
|
(124,799
|
)
|
|
|
|
|
|
|
|
Provision for income taxes
|
$
|
3,071,147
|
|
$
|
1,905,395
|
|
Deferred taxes
In assessing the realizability of deferred tax assets, the
Company considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the future operation during the periods in
which those temporary differences are utilized. Based upon an assessment of the
historical operations and factors, the Company believes that it will be able to
realize the deferred tax assets.
As of March 31, 2010 and December 31, 2009, significant temporary differences
between the tax basis and financial statement basis of accounting for assets and
liabilities that gave rise to deferred taxes were principally related to the
following:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Deferred tax
assets arising from:
|
|
|
|
|
|
|
-Accrued expenses
|
$
|
785,081
|
|
$
|
1,053,771
|
|
-Tax loss
carryforwards
|
|
1,707,840
|
|
|
1,618,630
|
|
Gross deferred tax
assets
|
|
2,492,921
|
|
|
2,672,401
|
|
Less: valuation allowance
|
|
(1,707,840
|
)
|
|
(1,618,630
|
)
|
Net deferred tax
assets
|
$
|
785,081
|
|
$
|
1,053,771
|
|
Deferred tax liabilities arising from:
|
|
|
|
|
|
|
- Intangible assets
|
|
3,702,044
|
|
|
3,821,093
|
|
- Property,
plant and equipment
|
|
448,289
|
|
|
454,202
|
|
Deferred tax liabilities
|
$
|
4,150,333
|
|
$
|
4,275,295
|
|
Classification
on consolidated balance sheets:
|
|
|
|
|
|
|
Deferred tax assets - current
|
$
|
785,081
|
|
$
|
1,053,771
|
|
Deferred tax
liabilities - non-current
|
$
|
4,150,333
|
|
$
|
4,275,295
|
|
-32-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
CBP was incorporated in the United States and has incurred net
operating losses for income tax purposes for the three months ended March 31,
2010. The estimated net operating loss carry forwards for United States income
taxes amounted to $5,023,058 and $4,760,677 as of as of March 31, 2010 and
December 31, 2009, respectively, which may be available to reduce future years
taxable income. These carry forwards will expire, if not utilized, from 2026
through 2029. Management believes that the realization of the benefits from
these losses appears uncertain due to the 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 from CBP to reduce the asset to zero. Management reviews this valuation
allowance periodically and makes adjustments as warranted. The following table
represents the rollforward of the deferred tax valuation allowance:
|
|
For the three months
|
|
|
For the year ended
|
|
|
|
ended March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Balance of January 1,
|
$
|
1,618,630
|
|
$
|
1,018,941
|
|
Increase
|
|
89,210
|
|
|
599,689
|
|
Balance as of December 31,
|
$
|
1,707,840
|
|
$
|
1,618,630
|
|
The Company has cumulative undistributed earnings of foreign
subsidiaries of approximately $58 million as of March 31, 2010, which is
included in consolidated retained earnings and will continue to be indefinitely
reinvested in international operations. Accordingly, no provision has been made
for U.S. deferred taxes related to future repatriation of these earnings, nor is
it practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the future.
Value added tax
VAT on sales amounted to $1,928,948 and $1,578,403 for the
three months ended March 31, 2010 and 2009, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
VAT tax payable
|
$
|
911,348
|
|
$
|
1,110,216
|
|
Income tax payable
|
|
6,471,237
|
|
|
7,479,279
|
|
Other miscellaneous tax payable
|
|
136,683
|
|
|
184,584
|
|
|
$
|
7,519,268
|
|
$
|
8,774,079
|
|
-33-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Note 15 Commitments and contingent liabilities
Capital and lease commitments
The Companys 82.76% owned subsidiary, He Ze Plasma Company, entered into a lease agreement on January 13, 2005, with the Yun Cheng Lan Tian Transportation Company in Yun Cheng County, Shandong Province, to lease land use rights for a period of
10 years. The annual lease amount is approximately $1,751 (RMB 12,000) with no early termination penalty. The Company has the right of first refusal to renew the lease after the ten year lease term.
The Companys 82.76% owned subsidiary, Qi He Plasma Company, entered into a lease agreement on April 26, 2007, with the Zhang Bo Shi Village in Qi He County, Shandong Province, to lease land use rights for a period of 50 years. The annual lease
amount is approximately $4,566 (RMB 31,144) with no early termination penalty.
The Companys 82.76% owned subsidiary, Zhang Qiu Plasma Company, leased land use right and the use of building and equipment for a period of 10 year from January 1, 2007 with annual lease payment of $43,977 (RMB300,000). The lease was
terminated in March 2008. The Company entered into a lease agreement on April 1, 2008, with the Zhang Qiu Red Cross Blood Center, to lease land use rights and the use building and equipment for a period of 10 years. The annual lease payment is
approximately $1,466 (RMB 10,000) with no early termination penalty.
The 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 waste
for 10 years. The annual lease amount is approximately $1,530 (RMB 10,438).
The Companys indirectly owned subsidiary, Huang Ping Plasma Company, entered into a lease with Huang Ping County Finance Department on April 28, 2007, Guizhou Province, to lease land use rights and use a building and equipment for a period of
3 years. The annual lease payment is approximately $10,261 (RMB 70,000).
The Companys indirectly owned subsidiary, Wei Ning Plasma Company, entered into a lease with Wei Ning County Health Department, Guizhou Province on April 9, 2007, to lease land use rights and use building and equipment for a period of 3 years.
The annual lease payment is approximately $11,727 (RMB 80,000).
The Company recognizes lease expense on a straight line basis over the term of the lease in accordance to FASBs accounting standard related to leases. Total contractual commitments for construction in progress and operating lease commitments
outstanding as of March 31, 2010:
-34-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
Commitments for construction
projects
|
$
|
1,575,280
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating Lease
|
|
224,825
|
|
|
250,839
|
|
|
198,740
|
|
|
9,327
|
|
|
8,951
|
|
|
192,518
|
|
Total
|
$
|
1,800,105
|
|
$
|
250,839
|
|
$
|
198,740
|
|
$
|
9,327
|
|
$
|
8,951
|
|
$
|
192,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
three months ended March 31, 2010 and 2009, total rent expense amounted to
$20,348 and $33,134, respectively.
|
|
Legal proceedings
Bobai County Collection
Station
In January 2007, the Company's PRC subsidiary, Shandong
Taibang, advanced $413,697 (RMB3.0 million) to Feng Lin, the 20% minority
shareholder in Fang Cheng Plasma Company, the Company's majority owned
subsidiary, for the purpose of establishing or acquiring a plasma collection
station. Mr. Lin and Shandong Taibang intended to establish the Bobai Kangan
Plasma Collection Co., Ltd. (Bobai) in Bobai County, Guangxi and on January
18, 2007, Shandong Taibang signed a letter of intent to acquire the assets of
the Bobai Plasma Collection Station, which was co-owned by Mr. Lin and Mr.
Keliang Huang. However, in January 2007, Hua Lan Biological Engineering Co.,
Ltd. (Hua Lan) filed suit in the District Court of Hong Qi District, Xin Xiang
City, Henan Province, alleging that Feng Lin, Keliang Huang and Shandong Taibang
established and/or sought to operate the Bobai Plasma Collection Station using a
permit for collecting and supplying human plasma in Bobai County, that was
originally granted to Hua Lan by the government of the Guangxi region, without
Hua Lan's permission. The establishment and registration of Bobai was never
realized as a result of this law suit. On January 29, 2007, on Hua Lan's motion,
the District Court entered an order to freeze funds in the amount of
approximately $386,100 (RMB3,000,000) held by the defendants in the case,
including approximately $65,750 (RMB500,000) in funds held in Shandong Taibang's
bank account in Tai'an City. A hearing was held on June 25, 2007 and judgment
was entered against the defendants along with a $226,780 (RMB1,700,000) joint
financial judgment. The Company appealed the District Court judgment to the
Xinxiang City Intermediate Court. In November 2007, the Intermediate Court
affirmed the judgment against the three defendants and increased the amount of
the joint financial judgment to approximately $405,954 (RMB3,000,000).
In January 2008, Hua Lan enforced the judgment granted by the
Intermediate Court to freeze the Company's bank accounts. Shandong Taibang has
filed a separate action against Hua Lan before the Tai'an City District Court to
seek recovery of any losses in connection with Hua Lan's claim and to request
that the Tai'an City District Court preserve Hua Lan's property or freeze up to
approximately $411,300 (RMB 3 million) of Hua Lan's assets to secure the return
of such funds to the Company. The intermediate court in Tai'an City accepted the
application on February 14, 2008 but the matter is still pending. Pending the
outcome of the proceedings, Shandong Taibang increased its loss contingency
reserve during its fourth quarter of 2007 from approximately $75,593
(RMB566,667) to $133,400
(RMB1,000,000) to cover its share of the enforcement of this judgment. During the fourth quarter of 2008, full amount of the judgment, including Feng Lin and Keliang Huang's portions of the judgment and the related fees, approximately $456,222
(RMB 3,109,900) has been withdrawn from Shandong Taibang's account. The Company recorded Feng Lin and Keliang Huang's portion of the judgment, approximately $304,143 (RMB2,073,234), as receivable as a result of the withdrawal. 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 January 2010, Feng Lin transferred his 20% equity in Fang
Cheng Plasma Company as a repayment to such receivable. As a result, the Company is now the 100% owner of the Fang Cheng Plasma Company.
-35-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
In October 2009, Shandong Taibang appealed to the High Court of Henan Province requesting the court to reverse judgments from the Hong Qi District Court based on Shandong Taibang's belief that Hua Lans involvement in Bobai was in violation of
PRC Blood Products Regulations as Hua Lan did not invest, as Shandong Taibang did, in Bobai as required by the Regulation. The Company was awaiting the judgment of the Henan High Court as of the date of this report. In light of the foregoing, it is
unlikely that the Company's planned acquisition of the assets of Bobai will go forward.
Dispute among Qianfeng Shareholders over Raising Additional Capital
On May 28, 2007, a 91% majority of Qianfeng's shareholders approved a plan to raise additional capital from private strategic investors through the issuance of an additional 20,000,000 shares of Qianfeng equity interests at RMB 2.80 per share. The
plan required all existing Qianfeng shareholders to waive their rights of first refusal to subscribe for the additional shares. The remaining 9% minority holder of Qianfeng's shares, the Guizhou Jie'an Company, or Jie'an, did not support the plan
and did not agree to waive its right of first refusal. On May 29, 2007, the majority shareholders caused Qianfeng to sign an Equity Purchase Agreement with certain investors, pursuant to which the investors agreed to invest an aggregate of RMB
50,960,000 (approximately $7,475,832) in exchange for 18,200,000 shares, or 21.4%, of Qianfeng's equity interests. At the same time, Jie'an also subscribed for 1,800,000 shares, representing its 9% pro rata share of the 20,000,000 shares being
offered. The proceeds from all parties were received by Qianfeng in accordance with the agreement.
In June 2007, Jie'an brought suit in the High Court of Guizhou province, China, against Qianfeng and the three other original Qianfeng shareholders, alleging the illegality of the Equity Purchase Agreement. In its complaint, Jie'an alleged that it
had a right to acquire the shares waived by the original Qianfeng shareholders and offered to the investors in connection with the Equity Purchase Agreement. On September 12, 2008, the Guizhou High Court ruled against Jie'an and sustained the Equity
Purchase Agreement, but on November 2008, Jie'an appealed the Guizhou High Court judgment to the People's Supreme Court in Beijing. On May 13, 2009, the People's Supreme Court sustained the original ruling and denied the rights of first refusal of
Jie'an over the additional shares waived by the
original Qianfeng's shareholders. The registration of the new investors as Qianfeng's shareholders and the related increase in registered capital of Qianfeng with the Administration for Industry and Commerce are still pending. On January 27, 2010,
the strategic investors brought suit in the High Court of Guizhou Province against Qianfeng alleging Qianfengs failure to register their equity interest in Qianfeng with the local AIC and requesting the distribution of their share of
Qianfengs dividends. Dalin was also joined as a co-defendant as it is the majority shareholder and exercises control over Qianfengs day-to-day operations. The Company does not expect the strategic investors to prevail because, upon
evaluation of the Equity Purchase Agreement, the Company believes that the Equity Purchase Agreement is void due to certain invalid pre-conditions and the absence of shareholder authorization of the initial investment. In the event that Qianfeng is
required to return their original investment amount to the strategic investors, Qianfeng has set aside the strategic investors fund along with RMB 7,313,387 (approximately $1,072,216) in accrued interests, and RMB 519,600 (approximately
$74,712) for the 1% penalty imposed by the agreement for any breach. If strategic investors prevail in their suit, Dalin's interests in Qianfeng may be reduced to approximately 41.3% . The High Court of Guizhou heard the case on April 8, 2010
and encouraged, and accepted by both parties, to settle the dispute outside the court. As of the date of this report, the Company is still negotiating with the strategic investors for a term that is acceptable to the Company.
-36-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Administration Interference
Qianfeng is party to an administrative proceeding against the government of the Qiandongnan Autonomous Region, or the Qiandongnan Authorities, in Guizhou Province, China, in connection with the ownership of three of Qianfeng's entitled eight plasma
stations in Guizhou Province. Qianfeng was authorized to acquire a total of eight plasma stations in Guizhou Province based on several national and provincial administrative authorizations issued by the PRC State Council and the Guizhou Ministry of
Health between 2006 and 2007, but to date, the governmental authorizations have not been fully implemented by the Qiandongnan Authorities. In early 2007, Qianfeng submitted RMB 8,010,000 (approximately $1,173,465) to the local finance department
of Sansui County, Qiandongnan, for acquiring the Sansui Plasma Collection Station (Sansui), but the local finance department refused to honor the purchase and returned the full consideration to Qianfeng. Furthermore, subsequent local
rulings published by the Qiandongnan Authorities February 28, 2008 appear to authorize another private company to acquire the Sansui and two other stations, the Zhengyuan Plasma Collection Station and the Shibing Plasma Collection Station. In
December 2008 Qianfeng filed an administrative review application with the People's Government of Guizhou Province, or the Guizhou Provincial Government, but the Guizhou Provincial Government has delayed making a final decision pending further
review of regulations regarding administrative authorizations. Qianfeng has received verbal notification from staff in the Guizhou Provincial Government that the Qiandongnan Authorities have withdrawn the local rulings. As a result, Qianfeng has
withdrawn its application with the Guizhou Provincial Government to facilitate further negotiation with Qiandongnan Authorities on its right to acquire all eight plasma stations in Guizhou Province. In addition, Qianfeng has set aside the funds
necessary to purchase Sansui pending the
outcome of the administrative review. There have been no further developments on this case as of the date of this report.
-37-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
Qianfeng's Guarantee to a Third Party
In 2007, as a condition to purchase Huang Ping Plasma Station, Qianfeng entered into an agreement with Guizhou Zhongxin Investment Company (Zhongxin) in which Qianfeng agreed to repay Zhongxin's debt out of Qianfeng's payables to
Zhongxin arising from plasma purchased from Zhongxin. In the same agreement, Qianfeng also guaranteed to the Huang Ping County Hospital (Huang Ping Hospital), which was the co-owner with Zhongxin of the Huang Ping Plasma Station, for the
amount of RMB3,074,342 (approximately, $451,006) of debt that Zhongxin owed to Huang Ping Hospital. On June 1, 2009, Huang Ping Hospital brought suit, in Huang Ping County People's Court of Guizhou Province, against Zhongxin for non-payment of
its payables and debt due to Huang Ping Hospital and Qianfeng as the guarantor. On November 2, 2009, the court ruled in favor of the plaintiff and Qianfeng will need to repay the Zhongxins debt to Huang Ping Hospital on behalf of Zhongxin as
the guarantor. In October 2009, Qianfeng appealed to the Middle Court of Kaili District in Guizhou Province and was accepted by the court in January 2010. On April 8, 2010, the Middle Court of Kaili District ruled to sustain the original judgment.
As a result, Qianfeng is in the process of filing suit against Zhongxin in the attempt to recover the RMB 3,074,342 debt that was under the guarantee. The Equity Transfer Agreement pursuant to which we acquired a 90% interest in Dalin, Qianfeng's
majority shareholder, provides that the sellers will be responsible, in accordance with their equity proportion in Qianfeng, for damages incurred by Qianfeng from Zhongxin's debt and shall repay Dalin the sellers' proportionate share of payments
made by Qianfeng to creditors in connection with Zhongxin's debt within 10 days after payment by Qianfeng. The RMB 3,074,342 contingent liability and proportionate share of the liability to be recovered from the sellers were properly reflected in
the financials as of March 31, 2010.
Note 16 Warrants and options
Warrants
On June 5, 2009, the Company entered into a securities purchase agreement with certain accredited investors pursuant to which the Company issued 3.8% Senior Secured Convertible Notes in the aggregate principal amount of $9,554,140 and Warrants
to purchase up to 1,194,268 shares of common stock of the Company. The Warrants have a term of 3 years, an exercise price of $4.80 per share, as adjusted from time to time pursuant to anti-dilution and other customary provisions, and are
exercisable by the Investors at any time after the date on which their related Notes are converted, except that if any of the Notes is converted in part, the Investors may only exercise a corresponding portion of the related Warrant. The Company
also issued to the placement agents 93,750 Warrants to purchase common stock at an exercise price of $6.00 per share, expiring after 3 years. During the first quarter of 2010, 143,575 shares of the Investors Warrants and all of the
placement agents Warrants were converted into the Companys common stock and the related derivative liabilities
amounted to $2,436,907 were transferred to additional paid-in capital
accordingly.
-38-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
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.
The summary of warrant activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
December 31, 2008
|
|
1,284,000
|
|
$
|
2.84
|
|
|
2.55
|
|
Granted
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
March 31, 2009 (unaudited)
|
|
1,284,000
|
|
$
|
2.84
|
|
|
2.30
|
|
Granted
|
|
1,288,018
|
|
|
4.89
|
|
|
2.44
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
(1,284,000
|
)
|
|
2.84
|
|
|
1.80
|
|
December 31, 2009
|
|
1,288,018
|
|
$
|
4.89
|
|
|
2.44
|
|
Granted
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
(237,325
|
)
|
|
4.80
|
|
|
3.17
|
|
March 31, 2010 (unaudited)
|
|
1,050,693
|
|
$
|
4.80
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 January 7, 2010, our board of directors
granted to one of the employee options to purchase 50,000 shares of our common
stock, with an exercise price of $12.60 and vested immediately with the
expiration date of January 7, 2020, under the 2008 plan, in accordance with his
employment agreement with the company. On February 4, 2010, the board of
directors granted to a newly appointed director options to purchase 20,000
shares of our common stock, with an exercise price of $10.66; 10,000 shares of
which will be vested on August 4, 2010 and the remaining 10,000 shares will be
vested on February 4, 2011. As of March 31, 2010, there were 3,932,500 shares
available under the plan.
The fair value of each option granted on May 9, 2008, July 24,
2008, January 7, 2010 and February 4, 2010 are estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
-39-
CHINA BIOLOGIC PRODUCTS INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 9,
|
|
|
July 24,
|
|
|
January 7,
|
|
|
February 4,
|
|
Granted on
|
|
2008
|
|
|
2008
|
|
|
2010
|
|
|
2010
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
3.56%
|
|
|
3.56%
|
|
|
2.62%
|
|
|
2,29%
|
|
Expected life (in years)
|
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Weighted average expected volatility
|
|
59.4%
|
|
|
81.2%
|
|
|
130.0%
|
|
|
130.0%
|
|
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, 2010 and 2009,
the Company expensed $571,893 and $27,373 in compensation expense. The options
are accounted for as equity under FASBs accounting standard related to
derivative instruments and hedging activities. The options activity is as
follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life
|
|
December 31, 2008
|
|
997,500
|
|
|
937,500
|
|
$
|
4.00
|
|
|
9.43
|
|
Granted
|
|
-
|
|
|
30,000
|
|
|
4.00
|
|
|
9.31
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
March 31, 2009 (unaudited)
|
|
997,500
|
|
|
967,500
|
|
$
|
4.00
|
|
|
9.18
|
|
Granted
|
|
-
|
|
|
30,000
|
|
|
4.00
|
|
|
9.06
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
(87,500
|
)
|
|
(87,500
|
)
|
|
4.00
|
|
|
8.42
|
|
December 31, 2009
|
|
910,000
|
|
|
910,000
|
|
$
|
4.00
|
|
|
8.43
|
|
Granted
|
|
70,000
|
|
|
50,000
|
|
|
12.05
|
|
|
9.80
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
March 31, 2010 (unaudited)
|
|
980,000
|
|
|
960,000
|
|
$
|
4.57
|
|
|
8.53
|
|
Note 17 Change in fair value of derivative
liabilities
Loss (gain) on change in fair value of derivative liabilities
for the three months ended March 31, 2010 comprised as following:
-40-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
|
|
Fair value at
|
|
Fair value at
|
|
|
|
|
|
|
|
|
Change in fair
|
|
|
|
January 1,
|
|
|
dates of
|
|
|
Fair value at
|
|
|
Fair value at
|
|
|
value at
|
|
|
|
2010 or
|
|
|
warrants
|
|
|
date of notes
|
|
|
March 31,
|
|
|
March 31,
|
|
Change in fair value of derivative
liabilities of:
|
|
issuance date
|
|
|
exercised
|
|
|
conversion
|
|
|
2010
|
|
|
2010
|
|
Conversion option of
convertible notes
|
$
|
19,960,145
|
|
$
|
-
|
|
$
|
2,627,558
|
|
$
|
15,275,245
|
|
$
|
(2,057,342
|
)
|
Warrants attached to
convertible notes
|
|
11,804,252
|
|
|
1,078,788
|
|
|
-
|
|
|
9,177,262
|
|
|
(1,548,202
|
)
|
Warrants issued to placement
agent
|
|
897,010
|
|
|
668,977
|
|
|
-
|
|
|
-
|
|
|
(228,033
|
)
|
Total
|
$
|
32,661,407
|
|
$
|
1,747,765
|
|
$
|
2,627,558
|
|
$
|
24,452,507
|
|
$
|
(3,833,577
|
)
|
Note 18 Interest expense (income), net
Interest expense (income), net for the three months ended March
31, 2010 and 2009 comprised as following:
Interest expense (income), net
|
|
2010
|
|
|
2009
|
|
Interest expense bank and other loans
|
$
|
62,286
|
|
$
|
622,449
|
|
Interest
expense due to strategic investors
|
|
99,182
|
|
|
-
|
|
Interest expense convertible notes
|
|
172,121
|
|
|
-
|
|
Interest
income
|
|
(152,536
|
)
|
|
(251,596
|
)
|
Total
|
$
|
181,053
|
|
$
|
370,853
|
|
Note 19 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
10% of the net income determined in accordance with PRC
accounting rules and regulations are transferred to a statutory surplus reserve
fund until such reserve balance reaches 50% of the Companys registered capital.
As of March 31, 2010, approximately $19.8 million were reserved and have met 50%
of the Companys registered capital. 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.
-41-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2010
(Unaudited)
Enterprise expansion fund
The enterprise fund may be used to acquire plant and equipment
or to increase the working capital to expend on production and operation of the
business. The Companys policy is to transfer 5% of the Shandong Taibangs net
income to this fund determined in accordance with the Companys policy.
Note 20 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, 2010 and 2009,
the Company made pension contributions in the amount of $109,033 and $220,493,
respectively.
Note 21 - Noncontrolling interest and
distribution
(Restated)
The roll forward of noncontrolling interest in the balance
sheet is shown below:
|
|
Fang Cheng
|
|
|
Shandong
|
|
|
Guizhou
|
|
|
Guiyang
|
|
|
Guiyang
|
|
|
|
|
|
|
Plasma Co.
|
|
|
Taibang
|
|
|
Renyuan
|
|
|
Qianfeng
|
|
|
Dalin
|
|
|
|
|
|
|
Minority
|
|
|
Minority
|
|
|
Minority
|
|
|
Minority
|
|
|
Minority
|
|
|
Total
|
|
|
|
Owner
|
|
|
Owner
|
|
|
Owners
|
|
|
Owners
|
|
|
Owner
|
|
|
Noncontrolling
|
|
|
|
(20%)
|
|
|
(17.24%)
|
|
|
(75%)
|
|
|
(46%)
|
|
|
(10%)
|
|
|
interest
|
|
December 31, 2008
|
$
|
-
|
|
$
|
4,805,381
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,805,381
|
|
Dalin acquisition
|
|
-
|
|
|
-
|
|
|
2,444,203
|
|
|
17,317,241
|
|
|
1,763,615
|
|
|
21,525,059
|
|
Net income(loss)
|
|
(12,670
|
)
|
|
5,321,061
|
|
|
(111,753
|
)
|
|
9,884,220
|
|
|
1,534,800
|
|
|
16,615,658
|
|
Foreign currency translation
gain/(loss)
|
|
-
|
|
|
(186
|
)
|
|
115,238
|
|
|
330,316
|
|
|
10,420
|
|
|
455,788
|
|
Dividend declared
|
|
-
|
|
|
(1,212,834
|
)
|
|
-
|
|
|
(7,327,205
|
)
|
|
(415,353
|
)
|
|
(8,955,392
|
)
|
December 31, 2009
|
$
|
(12,670
|
)
|
$
|
8,913,422
|
|
$
|
2,447,688
|
|
$
|
20,204,572
|
|
$
|
2,893,482
|
|
$
|
34,446,494
|
|
Net income(loss)
|
|
|
|
|
1,514,990
|
|
|
(59,708
|
)
|
|
2,359,885
|
|
|
336,855
|
|
|
4,152,022
|
|
Reverse for 20% acquisition
|
|
12,670
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,670
|
|
Foreign currency translation gain/(loss)
|
|
-
|
|
|
93,941
|
|
|
25,115
|
|
|
(93,962)
|
|
|
(49,049)
|
|
|
(23,955)
|
|
Dividend declared
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,048,920
|
)
|
|
(733,500
|
)
|
|
(4,782,420
|
)
|
March 31, 2010 (unaudited)
|
$
|
-
|
|
$
|
10,522,353
|
|
$
|
2,413,095
|
|
$
|
18,421,575
|
|
$
|
2,447,788
|
|
$
|
33,804,811
|
|
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,
2010, 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.
-42-
CHINA BIOLOGIC PRODUCTS INC. AND
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
March 31, 2010
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
Guiyang
|
|
|
Guiyang
|
|
|
|
|
|
|
Taibang
|
|
|
Qianfeng
|
|
|
Dalin
|
|
|
Total
|
|
|
|
Noncontrolling
|
|
|
Noncontrolling
|
|
|
Noncontrollin
|
|
|
Noncontrolling
|
|
|
|
shareholder
|
|
|
shareholder
|
|
|
g
shareholder
|
|
|
shareholder
|
|
Distribution payable, December 31, 2008
|
$
|
3,252,354
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,252,354
|
|
Dividend declared
|
|
1,212,834
|
|
|
7,327,205
|
|
|
415,353
|
|
|
8,955,392
|
|
Dividend paid
|
|
(4,479,381
|
)
|
|
(7,330,671
|
)
|
|
(415,353
|
)
|
|
(12,225,405
|
)
|
Foreign currency translation
adjustments
|
|
14,780
|
|
|
3,466
|
|
|
-
|
|
|
18,246
|
|
Distribution payable,
December 31, 2009
|
$
|
587
|
|
|
-
|
|
|
-
|
|
$
|
587
|
|
Dividend declared
|
|
-
|
|
|
4,048,920
|
|
|
733,500
|
|
|
4,782,420
|
|
Dividend paid
|
|
-
|
|
|
(4,048,920
|
)
|
|
(733,500
|
)
|
|
(4,782,420
|
)
|
Foreign currency translation
adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Distribution payable,
March 31, 2010
(unaudited)
|
$
|
587
|
|
$
|
-
|
|
$
|
-
|
|
$
|
587
|
|
Note 22 Business combinations
Acquisition of Ziguang Bio-Technology Co.
On January 22, 2010, Shandong Taibang entered into an Equity
Transfer Agreement with Yuncheng Ziguang Biotechnology Co., Ltd. which is
located in Yuncheng, Shandong Province. Under the terms of the Equity Transfer
Agreement, Shandong Taibang agreed to purchase 100% of Yuncheng Ziguangs equity
interest at a purchase price of RMB 10,066,672 (approximately $1,476,781), which
was paid on February 24, 2010. Yuncheng Ziguangs main business is
manufacturing, packing and selling of health drinks and foods. Among its assets,
Yuncheng Ziguang owns six buildings and a right to acquire a land use right with
approximately 323,000 square feet in size. The purpose of this acquisition is
mainly for relocation of Shandong Taibangs Yun Cheng plasma station, which is
adjacent to Yuncheng Ziguang, into the existing building and the land that
Yuncheng Ziguang currently owns or entitled to own. Yun Cheng plasma station is
the oldest and smallest among the Company's five stations in Shandong. Shandong
Taibang expects that the relocation of the plasma station into the new facility
will increase its plasma collection capacity with a low investment cost.
The following table summarizes 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 Ziguang based on
an independent third party appraiser. The appraiser conducted an on-site visit,
inspected each item, conducted market research and investigation, followed some
asset evaluation policies and regulations issued by the Chinese government, and
provided an evaluation report.
-43-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
|
|
Fair Value
|
|
Current assets
|
$
|
334
|
|
Property, plant and equipment, net
|
|
1,613,370
|
|
Total assets
|
|
1,613,704
|
|
Total liabilities
|
|
(136,924
|
)
|
Net assets
|
$
|
1,476,780
|
|
No material acquisition-related costs were incurred and recognized in the Companys income statement for the three months ended March 31, 2010.
No supplemental pro forma information was disclosed as Ziguang had not commenced operations for the period ended March 31, 2010.
Note 23 Subsequent Events
The Company paid the final 10% of Dalin acquisition purchase price on April 9, 2010 according to the equity transfer agreement as described under the Current Development in the Note 1.
-44-
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. 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, 2009 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, except to the extent required by federal securities law, 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 report to:
-
BVI are to the British Virgin Islands;
-
China Biologic, the Company, we, us, or our, are to the combined
business of China Biologic Products, Inc., a Delaware corporation, and its
direct and indirect subsidiaries;
-
Dalin are to our majority owned subsidiary, Guiyang Dalin Biologic
Technologies Co., Ltd., a PRC limited company;
-
Exchange Act are to the Securities Exchange Act of 1934, as amended;
-
Hong Kong are to the Hong Kong Special Administrative Region of the
People's Republic of China;
-
China or PRC are to the People's Republic of China;
-
Huitian are to Xi'an Huitian Blood Products Co., Ltd., our minority
owned PRC operating subsidiary;
-
"Logic China" are to our wholly owned indirect PRC subsidiary Logic
Management and Consulting (China) Co., Ltd.
-
Logic Express are to our wholly owned subsidiary Logic Express Limited,
a BVI company;
-
Logic Holdings a to Logic Holdings (Hong Kong) Limited, our wholly-owned
Hong Kong subsidiary;
-
Qianfeng are to Qianfeng Biological Products Co., Ltd., Dalin's majority
owned PRC operating subsidiary;
-
RMB are to Renminbi, the legal currency of China;
- 45 -
-
Securities Act are to the Securities Act of 1933, as amended;
-
Taibang Medical are to Shandong Taibang's wholly owned PRC subsidiary,
Shandong Taibang Medical Company;
-
Shandong Taibang are to our subsidiary Shandong Taibang Biological
Products Co. Ltd., a sino-foreign joint venture incorporated in China; and
-
U.S. dollar, $, USD and US$ are to the legal currency of the
United States.
Throughout this report, we have converted RMB to USD as
follows:
|
|
|
|
March 31, 2010
|
|
Balance sheet
|
RMB 6.82 to US$1.00
|
Statement of income and comprehensive income
|
RMB 6.82 to US$1.00
|
|
|
March 31, 2009
|
|
Balance sheet
|
RMB 6.83 to US$1.00
|
Statement of income and comprehensive income
|
RMB 6.83 to US$1.00
|
Overview of Our Business
We are a biopharmaceutical company and through our indirect
majority-owned Chinese subsidiaries, Shandong Taibang and Qianfeng, and
minority-owned Chinese subsidiary, Huitian, we are principally engaged in the
research, development and manufacturing of plasma-based pharmaceutical products
in China. Shandong Taibang operates from our manufacturing facility located in
Tai'an City, Shandong Province and Qianfeng operates in Guizhou Province. Our
minority owned subsidiary, Huitian, operates from facilities in Shaanxi
Province. The plasma-based biopharmaceutical manufacturing industry in China is
highly regulated by both the provincial and central governments. Accordingly,
the manufacturing process of our products is strictly monitored from the initial
collection of plasma from human donors to finished products. Our principal
products include our approved human albumin and immunoglobulin products.
We are approved to sell human albumin 20%/10ml, 20%/25ml,
20%/50m, 10%/10ml, 10%/25ml, 10%/50ml and 25%/50ml. Human albumin is our
top-selling product. Sales of these human albumin products represented
approximately 46.9% and 58.4% of our total revenues, respectively, for the three
months ended March 31, 2010 and 2009, respectively. Human albumin is principally
used to increase blood volume while immunoglobulin, one of our other major
products, is used for certain disease preventions and cures. The Companys
approved human albumin and immunoglobulin products use human plasma as the basic
raw material. Albumin has been used for almost 50 years to treat critically ill
patients by replacing lost fluid and maintaining adequate blood volume and
pressure. All of our products are prescription medicines administered in the
form of injections.
We sell our products to customers in the PRC, mainly hospitals
and inoculation centers. Our sales have historically been made on the basis of
short-term arrangements and our largest customers have changed over the years.
For the three months ended March 31, 2010 and 2009, our top 5 customers
accounted for approximately 20.7% and 20.5%, respectively, of our total revenue.
For the three months ended March 31, 2010 and 2009, our largest customer
accounted for approximately 6.8% and 7.8% of our revenue, respectively. As we
continue to diversify our geographic presence, customer base and product mix, we
expect that our largest customers will continue to change from year to year.
We operate and manage our business as a single segment. We do
not account for the results of our operations on a geographic or other
basis.
All our business has been conducted in Renminbi, the official
currency of China. Renminbi is still not a free floating currency. The value of
Renminbi is subject to changes in the Chinese government's policies and depends
to a large extent on China's domestic and international economic and political
developments, as well as supply and demand in the local market. Since 1994, the
official exchange rate for the conversion of Renminbi to U.S. dollars has
generally been stable, and Renminbi has appreciated against the U.S. dollar
since July 2005.
- 46 -
On November 25, 2009, we received approval to list our securities on The NASDAQ Global Market. The symbol for our common stock is CBPO. We began trading on NASDAQ under this symbol on December 2, 2009.
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.
During the quarter ended March 31, 2010, 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, 2010 increased 28.1%, or $5,949,955, to
$27,098,553 compared with $21,148,598 over the same period in 2009. The increase in revenue is mainly due to the general increase in prices of our products. All of our approved products recorded price increases ranging from 3.1% to 118.3%
.
First Quarter of 2010 Financial Performance Highlights
We continued to experience strong demand for our products and services during the three months ended March 31, 2010, which resulted in growth in our revenue and net income. The following are some financial highlights for the three months ended March
31, 2010:
-
Revenue
: Revenue increased
$5,949,955, or 28.1%, to $27,098,553 for the three months ended March 31,
2010, from $21,148,598 for the same period in 2009.
-
Gross Profit:
Gross profit
increased $5,366,031, or 35.9%, to $20,299,699 for the three months ended
March 31, 2010, from $14,933,668 for the same period in 2009.
-
Income from operations
: Income
from operations increased $3,162,346, or 31.4%, to $13,225,884 for the three
months ended March 31, 2010, from $10,063,538 for the same period in 2009.
-
Net income
: Net income increased
$6,354,953, or 147.5%, to $10,663,749 for the three months ended March 31,
2010, from $4,308,796 for the same period in 2009.
-
Fully
diluted net income per share
: Fully diluted net income per share was $0.26
for the three months ended March 31, 2010, as compared to $0.20 for the same
period in 2009.
Our net income, as reported in our result of operations for
the three months ended March 31, 2010 and 2009, was $10,663,749 and $4,308,796, respectively. Our results of operations in the first quarter of 2010,
as compared to the same period in 2009, was materially impacted by the price
increase in our products and the income reflected from change in derivative
liabilities.
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, 2010 reflect the operating results of the Company and its subsidiaries, including Yuncheng Ziguang, while the financial data for the same period in 2009 reflect the operating results of the Company and its
subsidiaries excluding Yuncheng Ziguang, which was acquired January 21, 2010.
- 47 -
For the Three-Month Periods Ended March 31, 2010 and 2009
(Unaudited)
|
|
Three Months
|
|
|
$
|
|
|
%
|
|
|
|
Ended March 31,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Revenue
|
$
|
27,098,553
|
|
$
|
21,148,598
|
|
$
|
5,949,955
|
|
|
28.1%
|
|
Cost of revenue
|
|
6,798,854
|
|
|
6,214,930
|
|
|
583,924
|
|
|
9.4%
|
|
Gross profit
|
|
20,299,699
|
|
|
14,933,668
|
|
|
5,366,031
|
|
|
35.9%
|
|
Gross profit as a percentage of revenue
|
|
74.9%
|
|
|
70.6%
|
|
|
4.3%
|
|
|
|
|
Operating expenses
|
|
7,073,815
|
|
|
4,870,130
|
|
|
2,203,685
|
|
|
45.2%
|
|
Other (income) expense
|
|
(4,661,034
|
)
|
|
791,213
|
|
|
(5,452,247
|
)
|
|
(689.1%
|
)
|
Income before taxes and noncontrolling
interest
|
|
17,886,918
|
|
|
9,272,325
|
|
|
8,614,593
|
|
|
92.9%
|
|
Income taxes
|
|
3,071,147
|
|
|
1,905,395
|
|
|
1,165,752
|
|
|
61.2%
|
|
Net income before noncontrolling interests
|
$
|
14,815,771
|
|
$
|
7,366,930
|
|
$
|
7,448,841
|
|
|
101.1%
|
|
Revenues
. Our revenues are derived primarily from the
sales of our human albumin and immunoglobulin products. Our revenues increased
28.1%, or $5,949,955, to $27,098,553 for the three months ended March 31, 2010,
compared to revenues of $21,148,598 for the three months ended March 31, 2009.
The growth in revenue is mainly due to the general price increase of our
products, as well as the 0.1% increase in foreign exchange translation. All of
our approved products recorded price increases ranging from 3.1% to 118.3% . For
the quarter ended March 31, 2010, the average price for our approved human
albumin products, which contributed 46.9% to our total revenues, increased 3.1%,
the average price for our approved human hepatitis B immunoglobulin products,
which contributed 12.3% to our total revenues, increased 65.8%, the average
price for our approved human immunoglobulin for intravenous injection products,
which contributed 19.9% to our revenues, increased 34.2%, the average price for
our approved human rabies immunoglobulin products, which contributed 13.9% to
our revenues, increased 24.3%, the average price for our approved human tetanus
immunoglobulin products, which contributed 2.5% to our revenue, increased 19.7%,
and the average price for our approved human immunoglobulin products, which
contributed 2.4% to our revenue, increased 118.3%, as compared to the same
period in 2009. The general price increase in our products is mainly due to the
continuing supply shortage in the industry. However, increased imports of human
albumin products are alleviating the previous imbalance of supply and demand.
Cost of Revenues
. Our cost of sales increased $583,924,
or 9.4%, to $6,798,854 for the quarter ended March 31, 2010, from $6,214,930
during the same period in 2009. This increase was mainly due to a 9.3% actual
increase in cost of revenues as a result of the increased sales, as well as a
0.1% increase due to foreign exchange translation. Cost of revenues as a
percentage of sales was 25.1% for the quarter ended March 31, 2010, as compared
to 29.4% during the same period in 2009. The decrease in cost of revenues as a
percentage of sales is primarily due to the increase in selling price of our
products.
Gross Profit
. Gross profit increased by $5,366,031, or
35.9%, to $20,299,699 for the quarter ended March 31, 2010, from $14,933,668 for
the same period in 2009. As a percentage of sales revenue, our gross profit
margin increased by 4.3% to 74.9% for the quarter ended March 31, 2010, from
70.6% for the same period in 2009. The increase in gross profit margin is due
primarily to the general price increase of our products for the first quarter of
2010 as compared to the same period in 2009.
Operating Expenses
. Our total operating expenses
increased by $2,203,685, or 45.2%, to $7,073,815 for the quarter ended March 31,
2010, from $4,870,130 for the same period in 2009. The increase was primarily
attributable to the 149.9% increase in our research and development expenses
during the 2010 period, as well as the 62.7% increase in selling expense and the
29.8% increase in our general and administrative expenses. As a percentage of
sales revenue, total operating expenses increased by 3.1% to 26.1% for the
quarter ended March 31, 2010, from 23.0% for the same period in 2009
Selling Expenses
. For the quarter ended March 31, 2010,
our selling expenses increased to $942,908, from $579,496 for the quarter ended
March 31, 2009, an increase of $363,412, or 62.7% . As a percentage of sales,
our selling expenses for the quarter ended March 31, 2010 increased by 0.8%, to
3.5%, from 2.7% for first quarter 2009. The increase in selling expenses is due
primarily to the increase in salary and employee benefit and selling and
promotion expenses as the Company continues its efforts in selling directly to
hospitals and inoculation centers.
- 48 -
General and Administrative Expenses
. For the three months ended March 31, 2010, our general and administrative expenses increased $1,139,345, or 29.8%, to $4,962,252, from $3,822,907 for the quarter
ended March 31, 2009. General and administrative expenses as a percentage of sales increased by 0.2% to18.3% for the first quarter of 2010, from 18.1% for the same period in 2009. The increase in general and administrative expenses, as compared to
the same period in 2009, is due primarily to the increase in travel, meal and entertainment and conference expenses as the result of integrating multiple sites after the acquisition of Dalin. The increase was offset by the decrease in legal and
accounting expenses related to the acquisition of Dalin in the first quarter of 2009. Non-cash employee compensation for the three months ended March 31, 2010 increased to $571,893, from $27,373 for the same period in 2009, as a result of
granting employee stock options to one of the Companys officers and to its newly appointed independent director.
Research and Development Expenses
.
For the quarter ended March 31, 2010 and 2009, our research and development expenses were $1,168,655 and $467,727, respectively, an increase of $700,928 or
149.9% . As a percentage of revenues, our research and development expenses for the quarter ended March 31, 2010 and 2009 were 4.3% and 2.2%, respectively. The increase in research and development expenses is due to the allocation of cost associated
with the development of two new products that are at the end of developing stages.
Change in Fair Value of Derivative Liabilities.
The embedded derivatives (including the conversion option) in our senior secured convertible notes and warrants that were issued in June 2009 are classified as
derivative liabilities carried at fair value. For the three months ended March 31, 2010 and 2009, the Company recognized an income from the change in fair value of derivative liabilities in the amounts of $3,833,577 and a loss of $409,292,
respectively. The recognized income from the change in the fair value of derivative liabilities in the first quarter of 2010 is mainly due to the Companys stock price decrease from $12.08 to $11.04 as of December 31, 2009 and March 31,
2010, respectively. Future changes in the market price of our common stock could cause the fair value of these derivative financial instruments to change significantly in future periods.
Interest (Income) Expense, net.
Our net of interest (income) expense
decreased by $189,800, or 51.2%, to an expense of $181,053 for the quarter ended
March 31, 2010, from an interest expense of $370,853 for the same period in
2009. The decrease of interest expense was mainly due to the interest income
increased by $0.3 million in the first quarter of 2010 from the Companys short
term deposits with financing institute.
Other income- related party.
The other income from related party was due
to the Company was able to finally settle with $0.9 million less in interest expenses accrued in accordance with the Entrustment Agreement, dated April 6, 2009,
among Logic Express, Shandong Taibang and the Shandong Institute of Biological Products, the holder of the minority
interests in Shandong Taibang.
Income Tax Expense.
Our provision for income taxes
increased $1,165,752, or 61.2%, to $3,071,147 for the quarter ended March 31,
2010, from $1,905,395 for the same period in 2009. Our effective tax rate for
the quarter ended March 31, 2010 and 2009 was 17.2% and 20.5%, respectively.
Net Income before Non-Controlling Interest.
Our net
income before non-controlling interest increased $7,448,841, or 101.1%, to
$14,815,771 for the quarter ended March 31, 2010, from $7,366,930 for the same
period in 2009. Income before non-controlling interest as a percentage of
revenues was 54.7% and 34.8% for the quarter ended March 31, 2010 and 2009,
respectively.
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, 2010, we had $51,190,425 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, 2010 compared to March 31, 2009 (Unaudited):
- 49 -
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net Cash Provided by Operating Activities
|
$
|
2,092,846
|
|
$
|
7,082,292
|
|
Net Cash (Used in) Provided by Investing Activities
|
$
|
(3,513,600
|
)
|
$
|
10,388,563
|
|
Net Cash (Used in) Provided by Financing
Activities
|
$
|
(1,177,882
|
)
|
$
|
7,647,822
|
|
Effect of Exchange Rate Change on Cash
|
$
|
(54,890
|
)
|
$
|
72,655
|
|
Net Decrease in Cash and Cash Equivalents
|
$
|
(2,653,526
|
)
|
$
|
25,191,332
|
|
Cash and Cash Equivalents, Beginning
|
$
|
53,843,951
|
|
$
|
8,814,616
|
|
Cash and Cash Equivalents, Ending
|
$
|
51,190,425
|
|
$
|
34,005,948
|
|
Operating activities
Net cash provided by operating activities was $2.1 million for
the quarter ended March 31, 2010, as compared to $7.1 million net cash provided
by operating activities for the same period in 2009. The decrease in net cash
provided by operating activities was mainly due to the increase in inventory and
accounts receivable of $4.3 million and $2.0 million, respectively, as well as
the decrease in other payables and taxes payable of $2.4 million and $1.3
million, respectively, offset by the increase in cash related consolidated net
income of $7.4 million, to $14.8 million for the quarter ended March 31, 2010,
as compared to $7.4 million in the same period of 2009.
Investing activities
Net cash used in investing activities for the quarter ended
March 31, 2010 was $3.5 million, as compared to $10.4 million net cash provided
by in the same period of 2009. Yuncheng Ziguang acquisition and construction in
progress addition used in $1.5 million and $1.4 million of cash, respectively,
during the quarter ended March 31, 2010.
On January 22, 2010, Shandong Taibang entered into an Equity
Transfer Agreement with Yuncheng Ziguang Biotechnology Co., Ltd., which is
located in Yuncheng, Shandong Province. Under the terms of the Equity Transfer
Agreement, Shandong Taibang agreed to purchase 100% of Yuncheng Ziguang's equity
interest at a purchase price of RMB 10,066,672 (approximately $1,476,781), which
was subsequently paid as of February 24, 2010. Yuncheng Ziguang's main business
is manufacturing, packing and selling of health drinks and foods. Among its
assets, Yuncheng Ziguang owns six buildings and a right to acquire a land use
right with approximately 323,000 square feet in size. The purpose of this
acquisition is mainly for the relocation of Shandong Taibang's Yun Cheng plasma
station, which is adjacent to Yuncheng Ziguang, into the existing building and
the land that Yuncheng Ziguang currently owns or entitled to own. Yun Cheng
plasma station is the oldest and smallest among the Company's five stations in
Shandong. Shandong Taibang expects that the relocation of the plasma station
into the new facility will increase its plasma collection capacity with a low
investment cost.
The following chart reflects our new corporate organizational
structure:
- 50 -
- 51 -
Financing activities
Net cash used in financing activities for the quarter ended
March 31, 2010 totaled $1.2 million as compared to $7.6 million provided by
financing activities in the same period of 2009. The increase of the cash used
in financing activities was mainly attributable to the dividend paid to minority
shareholder of $4.8 million and repayment of short-term bank loan of $3.0
million, while short-term bank loans and proceeds from warrants conversion
provided $5.9 million and $0.7 million.
Management believes that the Company has sufficient cash on
hand and continuing positive cash inflow, from the sale of its plasma-based
products in the PRC market. Our management expects continued growth in revenues
throughout the term of the convertible notes, largely due to the ongoing limited
supply of plasma-based products in the PRC market due to the introduction of
more stringent health and safety measures which we already meet. In light of the
foregoing, we believe that the Company will have the financial ability to
fulfill its payment obligations under the convertible notes when they come due.
Obligations under Material Contracts
The following table sets forth our material contractual
obligations as of March 31, 2010:
Payment due by period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Short-Term Obligations
|
$
|
12,215,537
|
|
$
|
12,215,537
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Long-Term Debt Obligations
|
|
7,500,000
|
|
|
-
|
|
|
7,500,000
|
|
|
-
|
|
|
-
|
|
Due to Related Companies
|
|
3,086,940
|
|
|
3,086,940
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating Lease Obligations
|
|
885,201
|
|
|
224,825
|
|
|
449,579
|
|
|
18,279
|
|
|
192,518
|
|
Purchase Obligations
|
|
1,575,280
|
|
|
1,575,280
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
25,626,958
|
|
$
|
17,102,582
|
|
$
|
7,949,579
|
|
$
|
18,279
|
|
$
|
192,518
|
|
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, and Fan Shaowen, Chen Aimin, Chen Aiguo and Yang Gang,
the shareholders of Dalin, relating to the purchase of an aggregate 90% equity
interest in Dalin, for a total purchase price of RMB194,400,000
(approximately, $28,479,600), due in four installments. The parties agreed
that (i) if Logic will have paid 90% of the purchase price (or RMB
174,960,000) on or before April 7, 2009, then Logic will be entitled to its
share of Dalin's portion of the profit generated by Qianfeng starting from
January 1, 2009, and (ii) if Logic fails to pay the said amount, the profit
generated by Qianfeng from January 1, 2009 until the day of payment of said
amount will be shared by the selling shareholders and Logic (i.e., Logic will
be entitled to its share of Dalin's portion of the profit generated by
Qianfeng calculated according to the proportion of the purchase price paid by
it, and the selling shareholders will be entitled to the rest of Dalin's
portion of the profit generated by Qianfeng). We timely initiated the third
installment payment to achieve 90% of the purchase price on April 7, 2009, in
accordance with the instructions provided by the Dalin shareholders, however,
due to erroneous account information provided by the selling shareholders,
RMB3,865,400 (approximately, $566,281) in funds were initially withheld by the
bank, which was subsequently corrected and paid on April 8, 2009. In addition,
the proper account information for the payment of RMB4,500,000 (approximately,
$657,425) was not provided to the Company until April 14, 2009, upon receipt
of which the funds were immediately delivered. Because the error resulted from
an omission on the part of the selling shareholders themselves, we were deemed
by the parties to have still fulfilled its obligations under the agreement. As
of January 1, 2009, Logic Holdings became entitled to all the rights and
privileges of a 90% shareholder in Dalin, including the right to receive its
pro rata share of the profits generated by Dalin's 54% majority-owned
operating subsidiary, Qianfeng, subject to a possible dilution to as low as
41.3%, if certain strategic investors purchase of Qianfengs equity in May
2007 is found to be valid. However, we did not exercise any control over
Qianfeng until January 16, 2009, when our four nominees were elected to
Qianfengs seven-member board of directors in a special meeting of Qianfengs
board of directors on that date, and our management took control of Qianfengs
operations as of the same date. We are obligated to pay the fourth and final
installment, representing the remaining 10% of the purchase price, on or
before April 9, 2010, the one-year anniversary of the local Administration for
Industry and Commerce's approval of the equity transfer. On April 9, 2010, the
Company paid the remaining 10% of the purchase price to the selling
shareholders, except for the withholding of approximately $299,000 related to
the contingent liabilities to be settled upon the completion of two legal
proceedings according to the Equity Transfer Agreement.
- 52 -
-
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, the holder of the minority interests in Shandong Taibang,
pursuant to which Logic Express agreed to permit Shandong Taibang and the Shandong Institute to participate in the indirect purchase of Qianfeng's equity interests. Under the terms of the Entrustment Agreement, Shandong Taibang agreed to contribute
18%, or RMB35,000,000 (approximately, $5,116,184), of the purchase price for Dalin and the Shandong Institute agreed to contribute 12.86%, or RMB25,000,000 (approximately, $3,654,917), of the purchase price. Logic Express is obligated to
repay to Shandong Taibang and the Shandong Institute their respective investment amounts on or before April 6th, 2010, along with their pro rata share, based on their percentage of the purchase price contributed, of any distribution on the indirect
equity investment in Qianfeng payable to Logic Express during 2009. Logic Express has agreed that if these investment amounts are not repaid within 5 days of the payment due date, then Logic Express is obligated to pay Shandong Taibang and the
Shandong Institute liquidated damages equal to 0.03% of the overdue portion of the amount due until such time as it is paid. Logic Express has also agreed to pledge 30% of its ownership in Shandong Taibang to the Shandong Institute as security for
nonpayment. If failure to repay continues for longer than 3 months after the payment due date, then the Shandong Institute will be entitled to any rights associated with the pledged interests, including but not limited to rights of disposition and
profit distribution, until such time as the investment amount has been repaid. Logic Express also provided a guarantee that Shandong Taibang and the Shandong Institute will receive no less than a 6% return based on their original investment amount.
On April 12, 2010, the Company fully paid the Shandong Institute and Shandong Taibang on the respective investment amounts, as well as the interest, according the Entrust Agreement. The interest paid to the Shandong Institute is approximately
$1,154,687.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes
thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an
understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management's difficult, subjective,
or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their
significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most
significant estimates and judgments used in the preparation of our financial statements.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted FASB's accounting standard related to fair value measurements and began recording financial assets and liabilities subject to recurring fair value measurement at the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. The Company considers the carrying amount of cash, receivables, payables
including accrued liabilities and short term loans to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization and if applicable, their stated rates of interest are
equivalent to interest rates currently available. The fair values are measured pursuant to the three levels defined by the FASB's accounting standard as follow:
-
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
-
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of
the financial instruments.
-
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value.
- 53 -
Revenue Recognition
We recognize revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable,
which are generally considered to be met upon delivery and acceptance of products at the customer site. Sales are presented net of any discounts given to customers. As a policy, we do not accept any product returns and based on our records, product
returns, if any, are immaterial. Sales revenue represents the invoiced value of goods, net of a value-added tax, or VAT. All products produced by us and sold in the PRC are subject to a Chinese VAT at a rate of 6% of the gross sales price or at a
rate approved by the Chinese local government. Products distributed by Taibang Medical are subjected to a 17% VAT.
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 $39.2 million as of March 31, 2010. 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 U.S. 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
In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assetsan amendment of FASB Statement No. 140.The amendments in this Accounting Standards Update improve
financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered
control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability
and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The effective date
of this amended pronouncement was as of the beginning of a reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting
periods thereafter. The Company adopted this standard and the adoption of this standard did not have a material effect on the Companys consolidated financial statements.
- 54 -
In December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB
Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling
financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entitys economic
performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a
controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entitys involvement in variable interest entities, which will enhance the information provided to
users of financial statements. The effective date of this amended pronouncement was as of the beginning of a reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual
reporting period. The Company adopted this standard and the adoption of this standard did not have a material effect on the Companys consolidated financial statements..
In January 2010, FASB issued ASU No. 2010-01 Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes
of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company adopted this
standard and the adoption of this standard did not have a material effect on the Companys consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 Accounting and Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity
interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements An Amendment of ARB No. 51. If an
entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period
ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company adopted this standard and the adoption of this standard did not have material
effect on the Companys consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06 Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the
reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net
number).This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and
valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value
measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is
currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
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In February 2010, the FASB issued Accounting Standards Update 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement that, for
listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the disclosure requirement has
been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010.
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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEMS 4 AND 4A(T). CONTROLS AND PROCEDURES
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.
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, 2010. 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, 2009, which we are still in the process of remediating, as of March 31, 2010, our disclosure controls and procedures were not effective.
Investors are directed to Item 9A of annual report on Form 10-K, as amended on
March 31, 2011, for the year ended December 31, 2009 for the description of these weaknesses.
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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.
During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2009, the management concluded that, after adding two qualified accountants, the Company still needs to increase its qualified accounting
personnel and enhance the supervision, monitoring and reviewing of financial statements preparation processes. The Company has already taken measures to remediate these material weaknesses by seeking an additional financial reporting and accounting
staff member with relevant accounting experience, skills and knowledge in the preparation of financial statements in accordance with U.S. GAAP and financial reporting disclosure requirements under SEC rules. In addition, the Company is working
closely with its outside consultant in reinforcing the rigorous process for collecting and reviewing information required for the preparation of the financial statements including footnotes.
Other than the foregoing changes, there were no changes in our internal controls over financial reporting during the first quarter of fiscal 2010 that have materially affected, or are reasonably likely to materially affect our internal control over
financial reporting.
PART II
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may
arise from time to time that may harm our business. 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.
Bobai County Collection Station
In January 2007, the Company's PRC subsidiary, Shandong Taibang, advanced $413,697 (RMB3.0 million) to Feng Lin, the 20% minority shareholder in Fang Cheng Plasma Company, the Company's majority owned subsidiary, for the purpose of establishing
or acquiring a plasma collection station. Mr. Lin and Shandong Taibang intended to establish the Bobai Kangan Plasma Collection Co., Ltd. (Bobai) in Bobai County, Guangxi and on January 18, 2007, Shandong Taibang signed a letter of
intent to acquire the assets of the Bobai Plasma Collection Station, which was co-owned by Mr. Lin and Mr. Keliang Huang. However, in January 2007, Hua Lan Biological Engineering Co., Ltd. (Hua Lan) filed suit in the District Court of
Hong Qi District, Xin Xiang City, Henan Province, alleging that Feng Lin, Keliang Huang and Shandong Taibang established and/or sought to operate the Bobai Plasma Collection Station using a permit for collecting and supplying human plasma in Bobai
County, that was originally granted to Hua Lan by the government of the Guangxi region, without Hua Lan's permission. The establishment and registration of Bobai was never realized as a result of this law suit. On January 29, 2007, on Hua Lan's
motion, the District Court entered an order to freeze funds in the amount of approximately $386,100 (RMB3,000,000) held by the defendants in the case, including approximately $65,750 (RMB500,000) in funds held in Shandong Taibang's bank
account in Tai'an City. A hearing was held on June 25, 2007 and judgment was entered against the defendants along with a $226,780 (RMB1,700,000) joint financial judgment. The Company appealed the District Court judgment to the Xinxiang City
Intermediate Court. In November 2007, the Intermediate Court affirmed the judgment against the three defendants and increased the amount of the joint financial judgment to approximately $405,954 (RMB3,000,000).
In January 2008, Hua Lan enforced the judgment granted by the Intermediate Court to freeze the Company's bank accounts. Shandong Taibang has filed a separate action against Hua Lan before the Tai'an City District Court to seek recovery of any losses
in connection with Hua Lan's claim and to request that the Tai'an City District Court preserve Hua Lan's property or freeze up to approximately $411,300 (RMB 3 million) of Hua Lan's assets to secure the return of such funds to the Company. The
intermediate court in Tai'an City accepted the application on February 14, 2008 but the matter is still pending. Pending the outcome of the proceedings, Shandong Taibang increased its loss contingency reserve during its fourth quarter of 2007 from
approximately $75,593 (RMB566,667) to $133,400 (RMB1,000,000) to cover its share of the enforcement of this judgment. During the fourth quarter of 2008, full amount of the judgment, including Feng Lin and Keliang Huang's portions of the
judgment and the related fees, approximately $456,222 (RMB
3,109,900) has been withdrawn from Shandong Taibang's account. The Company recorded Feng Lin and Keliang Huang's portion of the judgment, approximately $304,143 (RMB2,073,234), as receivable as a result of the withdrawal. 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 January 2010, Feng Lin transferred his 20% equity in Fang Cheng
Plasma Company as a repayment to such receivable. As a result, the Company is now the 100% owner of the Fang Cheng Plasma Company.
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In October 2009, Shandong Taibang appealed to the High Court of Henan Province requesting the court to reverse judgments from the Hong Qi District Court based on Shandong Taibang's belief that Hua Lans involvement in Bobai was in violation of
PRC Blood Products Regulations as Hua Lan did not invest, as Shandong Taibang did, in Bobai as required by the Regulation. The Company was awaiting the judgment of the Henan High Court as of the date of this report. In light of the foregoing, it is
unlikely that the Company's planned acquisition of the assets of Bobai will go forward.
Dispute among Qianfeng Shareholders over Raising Additional Capital
On May 28, 2007, a 91% majority of Qianfeng's shareholders approved a plan to raise additional capital from private strategic investors through the issuance of an additional 20,000,000 shares of Qianfeng equity interests at RMB 2.80 per share. The
plan required all existing Qianfeng shareholders to waive their rights of first refusal to subscribe for the additional shares. The remaining 9% minority holder of Qianfeng's shares, the Guizhou Jie'an Company, or Jie'an, did not support the plan
and did not agree to waive its right of first refusal. On May 29, 2007, the majority shareholders caused Qianfeng to sign an Equity Purchase Agreement with certain investors, pursuant to which the investors agreed to invest an aggregate of RMB
50,960,000 (approximately $7,475,832) in exchange for 18,200,000 shares, or 21.4%, of Qianfeng's equity interests. At the same time, Jie'an also subscribed for 1,800,000 shares, representing its 9% pro rata share of the 20,000,000 shares being
offered. The proceeds from all parties were received by Qianfeng in accordance with the agreement.
In June 2007, Jie'an brought suit in the High Court of Guizhou province, China, against Qianfeng and the three other original Qianfeng shareholders, alleging the illegality of the Equity Purchase Agreement. In its complaint, Jie'an alleged that it
had a right to acquire the shares waived by the original Qianfeng shareholders and offered to the investors in connection with the Equity Purchase Agreement. On September 12, 2008, the Guizhou High Court ruled against Jie'an and sustained the Equity
Purchase Agreement, but on November 2008, Jie'an appealed the Guizhou High Court judgment to the People's Supreme Court in Beijing. On May 13, 2009, the People's Supreme Court sustained the original ruling and denied the rights of first refusal of
Jie'an over the additional shares waived by the original Qianfeng's shareholders. The registration of the new investors as Qianfeng's shareholders and the related increase in registered capital of Qianfeng with the Administration for Industry and
Commerce are still pending. On January 27, 2010, the strategic investors brought suit in the High Court of Guizhou Province against Qianfeng alleging Qianfengs failure to register their equity interest in Qianfeng with the local AIC and
requesting the distribution of their share of Qianfengs dividends. Dalin was also joined as a co-defendant as it is the majority shareholder and exercises control over Qianfengs day-to-day operations. The Company does not expect the
strategic investors to prevail because, upon evaluation of the Equity Purchase Agreement, the Company believes that the Equity Purchase Agreement is void due to certain invalid pre-conditions and the absence of shareholder authorization of the
initial investment. In the event that Qianfeng is required to return their original investment amount to the strategic investors, Qianfeng has set aside the strategic investors fund along with RMB 7,313,387 (approximately $1,072,216) in
accrued interests, and RMB 519,600 (approximately $74,712) for the 1% penalty imposed by the agreement for any breach. If strategic investors prevail in their suit, Dalin's interests in Qianfeng may be reduced to approximately 41.3% . The High
Court of Guizhou heard the case on April 8, 2010 and encouraged, and accepted by both parties, to settle the dispute outside the court. As of the date of this report, the Company is still negotiating with the strategic investors for a term that is
acceptable to the Company.
Administration Interference
Qianfeng is party to an administrative proceeding against the government of the Qiandongnan Autonomous Region, or the Qiandongnan Authorities, in Guizhou Province, China, in connection with the ownership of three of Qianfeng's entitled eight plasma
stations in Guizhou Province. Qianfeng was authorized to acquire a total of eight plasma stations in Guizhou Province based on several national and provincial administrative authorizations issued by the PRC State Council and the Guizhou Ministry of
Health between 2006 and 2007, but to date, the governmental authorizations have not been fully implemented by the Qiandongnan Authorities. In early 2007, Qianfeng submitted RMB 8,010,000 (approximately $1,173,465) to the local finance department
of Sansui County, Qiandongnan, for acquiring the Sansui Plasma Collection Station (Sansui), but the local finance department refused to honor the purchase and returned the full consideration to Qianfeng. Furthermore, subsequent local
rulings published by the Qiandongnan Authorities February 28, 2008 appear to authorize another private company to acquire the Sansui and two other stations,
the Zhengyuan Plasma Collection Station and the Shibing Plasma Collection Station. In December 2008 Qianfeng filed an administrative review application with the People's Government of Guizhou Province, or the Guizhou Provincial Government, but the
Guizhou Provincial Government has delayed making a final decision pending further review of regulations regarding administrative authorizations. Qianfeng has received verbal notification from staff in the Guizhou Provincial Government that the
Qiandongnan Authorities have withdrawn the local rulings. As a result, Qianfeng has withdrawn its application with the Guizhou Provincial Government to facilitate further negotiation with Qiandongnan Authorities on its right to acquire all eight
plasma stations in Guizhou Province. In addition, Qianfeng has set aside the funds necessary to purchase Sansui pending the outcome of the administrative review. There have been no further developments on this case as of the date of this report.
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Qianfeng's Guarantee to a Third Party
In 2007, as a condition to purchase Huang Ping Plasma Station, Qianfeng entered into an agreement with Guizhou Zhongxin Investment Company (Zhongxin) in which Qianfeng agreed to repay Zhongxin's debt out of Qianfeng's payables to
Zhongxin arising from plasma purchased from Zhongxin. In the same agreement, Qianfeng also guaranteed to the Huang Ping County Hospital (Huang Ping Hospital), which was the co-owner with Zhongxin of the Huang Ping Plasma Station, for the
amount of RMB3,074,342 (approximately, $451,006) of debt that Zhongxin owed to Huang Ping Hospital. On June 1, 2009, Huang Ping Hospital brought suit, in Huang Ping County People's Court of Guizhou Province, against Zhongxin for non-payment of
its payables and debt due to Huang Ping Hospital and Qianfeng as the guarantor. On November 2, 2009, the court ruled in favor of the plaintiff and Qianfeng will need to repay the Zhongxins debt to Huang Ping Hospital on behalf of Zhongxin as
the guarantor. In October 2009, Qianfeng appealed to the Middle Court of Kaili District in Guizhou Province and was accepted by the court in January 2010. On April 8, 2010, the Middle Court of Kaili District ruled to sustain the original judgment.
As a result, Qianfeng is in the process of filing suit against Zhongxin in the attempt to recover the RMB 3,074,342 debt that was under the guarantee. The Equity Transfer Agreement pursuant to which we acquired a 90% interest in Dalin, Qianfeng's
majority shareholder, provides that the sellers will be responsible, in accordance with their equity proportion in Qianfeng, for damages incurred by Qianfeng from Zhongxin's debt and shall repay Dalin the sellers' proportionate share of payments
made by Qianfeng to creditors in connection with Zhongxin's debt within 10 days after payment by Qianfeng. The RMB 3,074,342 contingent liability and proportionate share of the liability to be recovered from the sellers were properly reflected in
the financials as of December 31, 2009.
ITEM 1A.
RISK FACTORS.
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, 2010 which sale was not previously disclosed in a current report on Form 8-K filed during that period.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.
(REMOVED AND RESERVED).
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 -
ITEM 6.
EXHIBITS.
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)
61
EXHIBIT INDEX
* previously filed.
62
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