UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q /A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2010
[ ] 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.
(Name of Small Business Issuer in Its Charter)
DELAWARE
|
75-2308816
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
No. 14 East Hushan Road,
Taian City, Shandong
Peoples Republic of China 271000
(Address of principal
executive offices)
(+86) 538-620-2306
(Registrants telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ]
|
Accelerated filer [ ]
|
|
|
Non-accelerated filer [ ]
|
Smaller reporting company [X]
|
(Do not check if a smaller reporting company)
|
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of each of the issuers
classes of common equity, as of August 9, 2010 is as follows:
Class of Securities
|
Shares Outstanding
|
Common Stock, $0.0001 par value
|
23,513,533
|
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 and six
months ended June 30, 2010, previously filed with the Securities and Exchange
Commission on August 13, 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 June 30, 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 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 six months ended
June 30, 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 six months ended June 30,
2010. As a result, the goodwill, deferred tax liabilities, retained earnings,
accumulated other comprehensive income and noncontrolling interest should have
been increased by $4,794,669, $4,041,837, $348,616, $1,577 and $402,639,
respectively, as of June 30, 2010. The net income, net income attributable to noncontrolling interest
and other comprehensive income of the Company should have been increased by
$124,986, $66,847 and $3,040, respectively, for three months ended June 30, 2010
and $249,905, $133,657 and $3,083, respectively, for six months ended June 30,
2010.
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 Filing was filed. No attempt has been made in this
Amendment to update other disclosures presented in the Original Filing. This
Amendment does not reflect events occurring after the filing of the Original
Filing or modify or update those disclosures, including the exhibits to the
Original Filing affected by subsequent events, except that this Amendment
includes as exhibits 31.1, 31.2, 32.1 and 32.2 new certifications by the
Companys Chief Executive Officer and Chief Financial Officer as required by
Rule 12b-15.
TABLE OF CONTENTS
|
|
|
|
PART I
|
FINANCIAL INFORMATION
|
|
|
|
|
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.
|
57
|
.
|
|
|
|
|
|
PART II
|
OTHER INFORMATION
|
|
|
|
|
ITEM 1.
|
LEGAL PROCEEDINGS.
|
57
|
ITEM 1A.
|
RISK FACTORS.
|
60
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
|
60
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
60
|
ITEM 4.
|
(REMOVED AND RESERVED).
|
60
|
ITEM 5.
|
OTHER INFORMATION.
|
60
|
ITEM 6.
|
EXHIBITS.
|
60
|
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
CHINA BIOLOGIC PRODUCTS, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2010 AND 2009
Contents
|
Page(s)
|
Consolidated Balance Sheets as of June 30,
2010 (unaudited) and December 31, 2009
|
3
|
Consolidated Statements of Income and Other Comprehensive
Income for the three and six months ended June 30, 2010 and 2009
(unaudited)
|
4
|
Consolidated Statements of Changes in
Equity (unaudited)
|
5
|
Consolidated Statements of Cash Flows for the six months
ended June 30, 2010 and 2009 (unaudited)
|
6
|
Notes to the Consolidated Financial
Statements (unaudited)
|
7
|
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2010 and DECEMBER
31, 2009
ASSETS
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
( As Restated Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
56,263,131
|
|
$
|
53,843,951
|
|
Accounts
receivable, net of allowance for doubtful accounts of $1,253,975 and
$1,254,955 as of June 30,2010 and December 31, 2009, respectively
|
|
5,658,429
|
|
|
1,767,076
|
|
Accounts receivable - related
party
|
|
229,817
|
|
|
222,617
|
|
Other
receivables
|
|
2,291,010
|
|
|
2,186,441
|
|
Inventories, net of allowance
for obsolete of $742,269 and $519,333 as of June 30, 2010 and December 31,
2009, respectively
|
|
41,434,786
|
|
|
35,132,724
|
|
Prepayments and
deferred expense
|
|
1,848,327
|
|
|
1,299,125
|
|
Deferred tax assets
|
|
1,119,908
|
|
|
1,053,771
|
|
Total current assets
|
|
108,845,408
|
|
|
95,505,705
|
|
|
|
|
|
|
|
|
PLANT AND EQUIPMENT, net
|
|
35,598,253
|
|
|
28,873,413
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
Investment in unconsolidated
affiliate
|
|
7,001,553
|
|
|
6,627,355
|
|
Prepayments -
non-current
|
|
2,637,092
|
|
|
3,223,960
|
|
Intangible assets, net
|
|
19,988,081
|
|
|
21,180,322
|
|
Goodwill
|
|
17,220,258
|
|
|
17,200,728
|
|
Total other
assets
|
|
46,846,984
|
|
|
48,232,365
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
191,290,645
|
|
$
|
172,611,483
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Accounts payable
|
$
|
3,268,413
|
|
$
|
3,701,843
|
|
Notes payable
|
|
-
|
|
|
48,598
|
|
Short term loans
- bank
|
|
5,965,650
|
|
|
4,474,350
|
|
Short term loans - holder of
noncontrolling interest
|
|
-
|
|
|
3,652,500
|
|
Other payables
and accrued liabilities
|
|
20,592,061
|
|
|
19,246,814
|
|
Other payable - related parties
|
|
3,100,153
|
|
|
3,087,527
|
|
Accrued interest
- holder of noncontrolling interest
|
|
-
|
|
|
2,068,526
|
|
Customer deposits
|
|
4,051,003
|
|
|
3,868,577
|
|
Taxes payable
|
|
7,509,571
|
|
|
8,774,079
|
|
Investment payable
|
|
78,800
|
|
|
2,195,365
|
|
Current
maturities of notes payable, net of discount of $7,112,409 as of June 30,
2010
|
|
387,591
|
|
|
-
|
|
Total
current liabilities
|
|
44,953,242
|
|
|
51,118,179
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES:
|
|
|
|
|
|
|
Other payable -
land use right
|
|
324,265
|
|
|
323,687
|
|
Derivative liability -
conversion option
|
|
13,522,842
|
|
|
19,960,145
|
|
Fair value of
derivative instruments
|
|
8,658,837
|
|
|
12,701,262
|
|
Deferred tax liabilities
|
|
4,041,837
|
|
|
4,275,295
|
|
Notes payable,
net of discount of $8,464,380 as of December 31, 2009
|
|
-
|
|
|
89,760
|
|
Total other
liabilities
|
|
26,547,781
|
|
|
37,350,149
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
71,501,023
|
|
|
88,468,328
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY:
|
|
|
|
|
|
|
Common stock,
$0.0001 par value, 100,000,000 shares authorized,
23,513,533 and
23,056,442 shares issued and outstanding at
June 30 ,2010 and December
31, 2009, respectively
|
|
2,351
|
|
|
2,305
|
|
Additional paid-in-capital
|
|
26,824,278
|
|
|
21,270,601
|
|
Statutory
reserves
|
|
23,233,527
|
|
|
17,414,769
|
|
Retained earnings
|
|
24,562,122
|
|
|
6,781,449
|
|
Accumulated
other comprehensive income
|
|
4,522,321
|
|
|
4,227,537
|
|
Total
shareholders' equity
|
|
79,144,599
|
|
|
49,696,661
|
|
|
|
|
|
|
|
|
NONCONTROLLING INTEREST
|
|
40,645,023
|
|
|
34,446,494
|
|
|
|
|
|
|
|
|
Total
equity
|
|
119,789,622
|
|
|
84,143,155
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
$
|
191,290,645
|
|
$
|
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 AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(As Restated Note 2)
|
|
|
|
|
|
(As Restated Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
40,580,807
|
|
$
|
33,030,868
|
|
$
|
67,442,329
|
|
$
|
53,936,737
|
|
Revenues - related party
|
|
327,509
|
|
|
150,677
|
|
|
564,540
|
|
|
393,406
|
|
Total revenues
|
|
40,908,316
|
|
|
33,181,545
|
|
|
68,006,869
|
|
|
54,330,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
9,058,906
|
|
|
9,161,765
|
|
|
15,857,760
|
|
|
15,376,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
31,849,410
|
|
|
24,019,780
|
|
|
52,149,109
|
|
|
38,953,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
1,856,881
|
|
|
1,114,614
|
|
|
2,799,789
|
|
|
1,694,110
|
|
General and administrative expenses
|
|
5,905,950
|
|
|
6,004,802
|
|
|
10,868,202
|
|
|
9,827,709
|
|
Research and development expenses
|
|
1,317,483
|
|
|
367,856
|
|
|
2,486,138
|
|
|
835,583
|
|
Total operating expenses
|
|
9,080,314
|
|
|
7,487,272
|
|
|
16,154,129
|
|
|
12,357,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
22,769,096
|
|
|
16,532,508
|
|
|
35,994,980
|
|
|
26,596,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (INCOME) EXPENSE
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss (income) of unconsolidated affiliate
|
|
(157,114
|
)
|
|
90,390
|
|
|
(345,655
|
)
|
|
50,143
|
|
Change in fair value of derivative liabilities
|
|
(2,270,829
|
)
|
|
432,889
|
|
|
(6,104,406
|
)
|
|
842,181
|
|
Interest expense, net
|
|
439,005
|
|
|
883,914
|
|
|
620,058
|
|
|
1,254,767
|
|
Other income - related party
|
|
(449
|
)
|
|
-
|
|
|
(914,738
|
)
|
|
-
|
|
Other expense, net
|
|
102,914
|
|
|
(16,005
|
)
|
|
197,234
|
|
|
35,310
|
|
Total other (income) expense, net
|
|
(1,886,473
|
)
|
|
1,391,188
|
|
|
(6,547,507
|
)
|
|
2,182,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR
INCOME TAXES AND NONCONTROLLING INTEREST
|
|
24,655,569
|
|
|
15,141,320
|
|
|
42,542,487
|
|
|
24,413,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
4,961,895
|
|
|
2,857,199
|
|
|
8,033,042
|
|
|
4,762,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
19,693,674
|
|
|
12,284,121
|
|
|
34,509,445
|
|
|
19,651,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable
to noncontrolling interest
|
|
6,757,992
|
|
|
4,401,127
|
|
|
10,910,014
|
|
|
7,459,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO
CONTROLLING INTEREST
|
|
12,935,682
|
|
|
7,882,994
|
|
|
23,599,431
|
|
|
12,191,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE
INCOME
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
275,440
|
|
|
(1,301
|
)
|
|
294,784
|
|
|
17,332
|
|
Comprehensive (income) loss attributable to noncontrolling interest
|
|
164,372
|
|
|
(33,422
|
)
|
|
140,417
|
|
|
393,876
|
|
COMPREHENSIVE INCOME
|
$
|
13,375,494
|
|
$
|
7,848,271
|
|
$
|
24,034,632
|
|
$
|
12,602,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
23,511,435
|
|
|
21,442,909
|
|
|
23,449,508
|
|
|
21,438,948
|
|
Earnings per share
|
$
|
0.55
|
|
$
|
0.37
|
|
$
|
1.01
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
26,599,255
|
|
|
21,442,909
|
|
|
26,541,685
|
|
|
21,438,948
|
|
Earnings per share
|
$
|
0.41
|
|
$
|
0.37
|
|
$
|
0.68
|
|
$
|
0.57
|
|
The accompanying notes are an integral part of these
consolidated statements.
-4-
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
Retained earnings
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Statutory
|
|
|
|
|
|
comprehensive
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
reserves
|
|
|
Unrestricted
|
|
|
income (loss)
|
|
|
interest
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 warrants
|
|
|
|
|
|
|
|
(600,289
|
)
|
|
|
|
|
(393,962
|
)
|
|
|
|
|
|
|
|
(994,251
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
54,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,967
|
|
Issuance
of common stock upon exercise of warrants
|
|
40,000
|
|
|
4
|
|
|
211,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211,301
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,191,790
|
|
|
|
|
|
7,459,261
|
|
|
19,651,051
|
|
Dividend
declared to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,633,987
|
)
|
|
(4,633,987
|
)
|
Noncontrolling interest
acquired from acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,525,059
|
|
|
21,525,059
|
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
4,748,201
|
|
|
(4,748,201
|
)
|
|
|
|
|
|
|
|
-
|
|
Foreign currency
translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,332
|
|
|
393,876
|
|
|
411,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2009 (unaudited)
|
|
21,474,942
|
|
$
|
2,147
|
|
$
|
10,366,007
|
|
$
|
11,738,002
|
|
$
|
22,441,880
|
|
$
|
4,176,630
|
|
$
|
29,549,590
|
|
$
|
78,274,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
7,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,314
|
|
Issuance of common stock upon exercise of warrants
|
|
1,244,000
|
|
|
124
|
|
|
8,359,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,360,108
|
|
Issuance of common
stock upon conversion of convertible notes
|
|
250,000
|
|
|
25
|
|
|
2,187,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,187,330
|
|
Stock
option exercised
|
|
87,500
|
|
|
9
|
|
|
349,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,983,664
|
)
|
|
|
|
|
9,156,397
|
|
|
(827,267
|
)
|
Dividend
declared to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,321,405
|
)
|
|
(4,321,405
|
)
|
Adjustment to statutory
reserve
|
|
|
|
|
|
|
|
|
|
|
5,676,767
|
|
|
(5,676,767
|
)
|
|
|
|
|
|
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,907
|
|
|
61,912
|
|
|
112,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
617,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
617,841
|
|
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 notes
|
|
263,535
|
|
|
27
|
|
|
2,498,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,498,957
|
|
Stock option exercised
|
|
12,730
|
|
|
1
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Net
income, as restated (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,599,431
|
|
|
|
|
|
10,910,014
|
|
|
34,509,445
|
|
Dividend declared to
noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,864,572
|
)
|
|
(4,864,572
|
)
|
Adjustment to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
5,818,758
|
|
|
(5,818,758
|
)
|
|
|
|
|
|
|
|
-
|
|
Noncontrolling interest
transfer per equity transferred in Fangcheng
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,670
|
|
|
12,670
|
|
Foreign
currency translation adjustments, as restated (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,784
|
|
|
140,417
|
|
|
435,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 2010
(unaudited), as restated (Note 2)
|
|
23,513,533
|
|
$
|
2,351
|
|
$
|
26,824,278
|
|
$
|
23,233,527
|
|
$
|
24,562,122
|
|
$
|
4,522,321
|
|
$
|
40,645,023
|
|
$
|
119,789,622
|
|
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 SIX MONTHS
ENDED JUNE 30, 2010 AND 2009
(Unaudited)
|
|
2010
|
|
|
2009
|
|
|
|
(As Restated Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net income attributable to controlling
interest
|
$
|
23,599,431
|
|
$
|
12,191,790
|
|
Net income attributable
to noncontrolling interest
|
|
10,910,014
|
|
|
7,459,261
|
|
Consolidated net income
|
|
34,509,445
|
|
|
19,651,051
|
|
Adjustments to
reconcile net income to cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
1,670,321
|
|
|
1,589,625
|
|
Amortization
|
|
1,740,659
|
|
|
1,704,248
|
|
(Gain) Loss on disposal of equipment
|
|
3,020
|
|
|
(506
|
)
|
Recovery of bad debt previously reserved
|
|
(8,973
|
)
|
|
(22,311
|
)
|
Allowance for bad debt - other receivables and prepayment
|
|
432,895
|
|
|
406,736
|
|
Allowance for obsolete inventories
|
|
219,897
|
|
|
-
|
|
Deferred tax benefit, net
|
|
(311,476
|
)
|
|
(249,701
|
)
|
Stock based compensation
|
|
617,841
|
|
|
54,967
|
|
Change in fair value of derivative liabilities
|
|
(6,104,406
|
)
|
|
842,181
|
|
Amortization of deferred note issuance cost
|
|
171,667
|
|
|
25,323
|
|
Amortization of discount on convertible notes
|
|
312,259
|
|
|
20,356
|
|
Equity in (income) loss of unconsolidated affiliate
|
|
(345,655
|
)
|
|
50,143
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
(3,861,953
|
)
|
|
(676,036
|
)
|
Accounts receivable - related party
|
|
(6,264
|
)
|
|
(375,810
|
)
|
Other receivables
|
|
(95,231
|
)
|
|
(23,082
|
)
|
Inventories
|
|
(6,351,255
|
)
|
|
(4,130,960
|
)
|
Prepayments and deferred expenses
|
|
(849,198
|
)
|
|
(750,937
|
)
|
Accounts payable
|
|
(446,713
|
)
|
|
(50,767
|
)
|
Other payables and accrued liabilities
|
|
1,252,134
|
|
|
4,594,379
|
|
Accrued interest - holder of noncontrolling interest
|
|
(2,068,526
|
)
|
|
911,084
|
|
Customer deposits
|
|
169,398
|
|
|
4,251,476
|
|
Taxes payable
|
|
(1,294,805
|
)
|
|
608,063
|
|
Net cash provided by
operating activities
|
|
19,355,081
|
|
|
28,429,522
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
Cash acquired through acquisition
|
|
-
|
|
|
11,943,673
|
|
Payments made for
acquisition
|
|
(4,022,288
|
)
|
|
(10,373,854
|
)
|
Purchase of plant and equipment
|
|
(6,154,212
|
)
|
|
(1,865,746
|
)
|
Additions to intangible
assets
|
|
(87,769
|
)
|
|
(1,014,766
|
)
|
Advances on non-current assets
|
|
(471,667
|
)
|
|
(590,428
|
)
|
Net cash used in investing activities
|
|
(10,735,936
|
)
|
|
(1,901,121
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from warrants conversion
|
|
689,160
|
|
|
113,700
|
|
Proceeds from issuance
of convertible notes
|
|
-
|
|
|
8,971,337
|
|
Repayments of former shareholders loan
in acquiring company
|
|
-
|
|
|
(2,652,737
|
)
|
Proceeds from short
term loans - bank
|
|
5,867,600
|
|
|
13,513,754
|
|
Payments on short term loans - bank
|
|
(4,400,700
|
)
|
|
-
|
|
Payments on long term
loan - bank
|
|
-
|
|
|
(5,862,800
|
)
|
Repayments of non-controlling
shareholder loan
|
|
(3,652,500
|
)
|
|
-
|
|
Payments on notes
payables
|
|
(48,595
|
)
|
|
-
|
|
Distribution paid to noncontrolling
interest shareholders
|
|
(4,864,240
|
)
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
(6,409,275
|
)
|
|
14,083,254
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE
CHANGE IN CASH
|
|
209,310
|
|
|
52,750
|
|
|
|
|
|
|
|
|
INCREASE IN CASH
|
|
2,419,180
|
|
|
40,664,405
|
|
|
|
|
|
|
|
|
CASH and CASH EQUIVALENTS,
beginning of periods
|
|
53,843,951
|
|
|
8,814,616
|
|
|
|
|
|
|
|
|
CASH and CASH EQUIVALENTS,
end of periods
|
$
|
56,263,131
|
|
$
|
49,479,021
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
|
|
|
|
|
|
|
Income taxes paid
|
$
|
9,500,399
|
|
$
|
4,351,056
|
|
Interest paid
|
$
|
161,684
|
|
$
|
715,158
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Reclassification of
derivative liability to equity related to conversion of convertible notes
|
$
|
2,498,957
|
|
$
|
-
|
|
Reclassification of derivative
liability to equity related to exercise of warrants
|
$
|
1,747,765
|
|
$
|
97,601
|
|
Distribution paid in
exchange of holder of noncontrolling interest loan
|
$
|
-
|
|
$
|
3,736,773
|
|
Distribution paid by offsetting
accounts receivable - related party
|
$
|
-
|
|
$
|
3,720,649
|
|
Net assets addition
with unpaid commitment
|
$
|
-
|
|
$
|
2,849,321
|
|
Intangible assets acquired with
prepayments made in prior periods
|
$
|
440,070
|
|
$
|
-
|
|
Plant and equipment
acquired with prepayments made in prior periods
|
$
|
629,166
|
|
$
|
14,290,227
|
|
The accompanying notes are an integral part of these
consolidated statements.
-6-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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. 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. The purpose of this acquisition is for relocation
of Shandong Taibangs Yang Gu Plasma Company into the facility of Yuncheng
Ziguang. Currently, Yuncheng Ziguang has no operation and is under the
construction for such purpose.
-7-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Note 2Restatement of June 30, 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 and six months ended and as of June
30, 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 June
30, 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
six months ended June 30, 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 six months ended
June 30, 2010. As a result, the goodwill, deferred tax liabilities, retained
earnings, accumulated other comprehensive income and noncontrolling interest
should have been increased by $4,794,669, $4,041,837, $348,616, $1,577 and
$402,639, respectively, as of June 30, 2010. The net income, net income attributable to noncontrolling
interest and other comprehensive income of the Company should have been
increased by $124,986, $66,847 and $3,040, respectively, for three months ended June 30, 2010 and
$249,905, $133,657 and $3,083, respectively, for six months ended June 30, 2010.
The impact of these restatements on the June 30, 2010 financial
statements is reflected in the following tables:
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Balance Sheet Amounts
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Restatement
|
|
|
As Restated
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
12,425,589
|
|
$
|
4,794,669
|
|
$
|
17,220,258
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
186,495,976
|
|
|
4,794,669
|
|
|
191,290,645
|
|
Deferred tax liabilities
(note 14)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
4,041,837
|
|
|
4,041,837
|
|
Total liabilities
|
|
|
|
|
|
|
|
|
|
|
67,459,186
|
|
|
4,041,837
|
|
|
71,501,023
|
|
Additional paid-in-capital
|
|
|
|
|
|
|
|
|
|
|
28,070,754
|
|
|
(1,246,476
|
)
|
|
26,824,278
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
22,967,030
|
|
|
1,595,092
|
|
|
24,562,122
|
|
Accumulated other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
4,520,744
|
|
|
1,577
|
|
|
4,522,321
|
|
Noncontrolling interest (note 21)
|
|
|
|
|
|
|
|
|
|
|
40,242,384
|
|
|
402,639
|
|
|
40,645,023
|
|
Total stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
119,036,790
|
|
|
752,832
|
|
|
119,789,622
|
|
|
|
For the three months ended June 30,
2010
|
|
|
For the six months ended June 30, 2010
|
|
Statement of Operations and Other
Comprehensive
|
|
As Previously
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Income Amounts
|
|
Reported
|
|
|
Restatement
|
|
|
As Restated
|
|
|
Reported
|
|
|
Restatement
|
|
|
As Restated
|
|
Provision for income taxes
(note 14)
|
$
|
5,086,881
|
|
$
|
(124,986
|
)
|
$
|
4,961,895
|
|
$
|
8,282,947
|
|
$
|
(249,905
|
)
|
$
|
8,033,042
|
|
Net income
|
|
19,568,688
|
|
|
124,986
|
|
|
19,693,674
|
|
|
34,259,540
|
|
|
249,905
|
|
|
34,509,445
|
|
Net income attributable to
noncontrolling interest (note 21)
|
|
6,691,145
|
|
|
66,847
|
|
|
6,757,992
|
|
|
10,776,357
|
|
|
133,657
|
|
|
10,910,014
|
|
Other comprehensive income
|
|
436,772
|
|
|
3,040
|
|
|
439,812
|
|
|
432,118
|
|
|
3,083
|
|
|
435,201
|
|
Foreign currency
translation adjustments
|
|
274,049
|
|
|
1,391
|
|
|
275,440
|
|
|
293,350
|
|
|
1,434
|
|
|
294,784
|
|
Other
comprehensive income attributable to noncontrolling interest
|
|
162,723
|
|
|
1,649
|
|
|
164,372
|
|
|
138,768
|
|
|
1,649
|
|
|
140,417
|
|
Comprehensive income
attributed to controlling interest
|
|
13,151,592
|
|
|
59,530
|
|
|
13,211,122
|
|
|
23,776,533
|
|
|
117,682
|
|
|
23,894,215
|
|
Basic earnings per share
(note 13)
|
$
|
0.55
|
|
$
|
-
|
|
$
|
0.55
|
|
$
|
1.00
|
|
$
|
0.01
|
|
$
|
1.01
|
|
Diluted earnings per share
(note 13)
|
$
|
0.49
|
|
$
|
(0.08
|
)
|
$
|
0.41
|
|
$
|
0.90
|
|
$
|
(0.22
|
)
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Previously
|
|
|
|
|
|
|
|
Statement of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Restatement
|
|
|
As Restated
|
|
Net income
|
|
|
|
|
|
|
|
|
|
$
|
34,259,540
|
|
$
|
249,905
|
|
$
|
34,509,445
|
|
Deferred tax benefit, net
|
|
|
|
|
|
|
|
|
|
|
(61,571
|
)
|
|
(249,905
|
)
|
|
(311,476
|
)
|
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, potential losses on outstanding receivables
and slow-moving inventories, impairment loss of long-lived assets, allocation of
plasma production cost, as well as bonus accruals for year end management bonus.
Management believes that the estimates utilized in preparing its financial
statements are reasonable and prudent. Actual results could differ from these
estimates.
-8-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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 June 30, 2010 and December 31, 2009 were translated at RMB 6.79 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 for the three months ended June 30, 2010 and 2009 were RMB
6.82 and RMB 6.82 to $1.00, respectively. The average translation rates applied
to consolidated statements of income and cash flow for the six months ended June
30, 2010 and 2009 were RMB 6.82 and RMB 6.82 to $1.00, respectively.
Revenue Recognition
The Company recognizes revenue when products are delivered and
the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists
and the sales price is fixed or determinable, which are generally considered to
be met upon delivery and acceptance of products at the customer site. Sales are
presented net of any discounts given to customers. As a policy, the Company does
not accept any product returns and based on the Companys records, product
returns, if any, are immaterial. Sales revenue represents the invoiced value of
goods, net of a value-added tax (VAT).
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 and six months ended June 30, 2010
and 2009 are as follows:
-9-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
|
|
Three months
ended June 30,
|
|
|
Six months
ended June 30,
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Human Albumin 20%/10%
in 10ml,
25ml and 50ml
|
$
|
18,989,767
|
|
$
|
15,741,932
|
|
$
|
31,689,174
|
|
$
|
28,093,631
|
|
Human
Hepatitis B Immunoglobulin
|
|
2,839,125
|
|
|
1,234,060
|
|
|
6,171,432
|
|
|
1,294,159
|
|
Human Immunoglobulin for
Intravenous Injection
|
|
16,095,707
|
|
|
14,163,778
|
|
|
21,491,172
|
|
|
19,536,280
|
|
Human
Rabies Immunoglobulin
|
|
1,326,275
|
|
|
926,240
|
|
|
5,104,397
|
|
|
2,555,251
|
|
Human Tetanus
Immunoglobulin
|
|
1,168,355
|
|
|
342,924
|
|
|
1,855,670
|
|
|
1,372,610
|
|
Human
Immunoglobulin
|
|
200,531
|
|
|
322,063
|
|
|
850,504
|
|
|
535,940
|
|
Others
|
|
288,556
|
|
|
450,548
|
|
|
844,520
|
|
|
942,272
|
|
Totals
|
$
|
40,908,316
|
|
$
|
33,181,545
|
|
$
|
68,006,869
|
|
$
|
54,330,143
|
|
The Company is engaged in sale of human blood products to
customers in China and India. The amount sold in India was less than 10% of
total sales for the three and six months ended June 30, 2010 and June 30, 2009,
respectively.
Shipping and Handling
Shipping and handling costs related to costs of goods sold are
included in selling expenses and totaled $90,388 and $79,611 for the three
months ended June 30, 2010 and 2009, respectively. For the six months ended June
30, 2010 and 2009, costs totaled $158,823 and $123,791, 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.
-10-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
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.
|
|
Carrying Value as of
June
30, 2010
|
|
|
Fair Value Measurements at June 30,
2010
using Fair Value Hierarchy (Unaudited)
|
|
|
|
(Unaudited)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative
liabilities-Conversion option
|
$
|
13,522,842
|
|
$
|
-
|
|
$
|
13,522,842
|
|
$
|
-
|
|
Warrants liabilities
|
$
|
8,658,837
|
|
$
|
-
|
|
$
|
8,658,837
|
|
$
|
-
|
|
The assumptions used in calculating the fair value of the
derivative liabilities as of June 30, 2010 using the Black-Scholes option
pricing model are as follows:
|
|
Conversion Options
|
|
|
Warrants
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
0.32%
|
|
|
0.60%
|
|
Expected life (in
years)
|
|
0.93
|
|
|
1.95
|
|
Weighted average expected volatility
|
|
80%
|
|
|
120%
|
|
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 June 30, 2010 and December 31,
2009 amounted to $56,118,364 and $53,576,495, respectively, $570,424 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
June 30, 2010
(Unaudited)
The Companys major product, human albumin: 20%/10ml, 20%/25ml,
20%/50ml, 10%/10ml, 10%/25ml and 10%/50ml, accounted for 46.4% and 47.4% of the
total revenues for the three months ended June 30, 2010 and 2009, respectively,
and 46.6% and 51.7% of total revenues for the six months ended June 30, 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 June 30, 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 and six months ended June
30, 2010 and 2009. Only one customer represented more than 10% of trade
receivables at June 30, 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 were one and two vendors that individually comprised 10%
or more of the purchase during the three and six months ended June 30, 2010 and
no vendor that individually comprised 10% or more of the purchase during the
same period in 2009. There were one individual vendors represented more than 10%
of accounts payables at June 30, 2010 and none individual vendors represented
more than 10% of accounts payables at December 31, 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 major raw materials (plasma) used in the
production are being allocated based on the managements estimation of
historical yields and market value from the
annual production for each different products. 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
June 30, 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 June 30, 2010 and December 31, 2009, the Company
reserved $742,269 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 State Food and Drug Administration
("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 ,office
equipment and vehicle
|
|
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 June 30, 2010 and December 31, 2009, there were no
impairments of its long-lived assets.
Investment in Unconsolidated Affiliate
Equity method investments are recorded at original cost and
adjusted to recognize the 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. Subsidiary 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.
-13-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
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
|
|
39-50 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 most
parcels of land for 50 years, and several parcels of land in entity Qianfeng for
39 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 June 30, 2010, the Company expects these assets to be fully recoverable.
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.
-14-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Customer Deposits
Payments received before all of the relevant criteria for
revenue recognition are recorded as customer deposits.
Research and
Development Costs
Research and development costs composed of salary,
material used and other expense as incurred.
Material used for the production of our new products that are
pending for the approval from SFDA to validate for production are recorded in
research and development expenses.
Retirement and Other Post Retirement Benefits
Contributions to retirement schemes (which are defined
contribution plans) are charged to the statement of operations as and when the
related employee service is provided.
Product Liability
The Companys products are covered by two product liability
insurance of approximately $2,934,000 (RMB 20,000,000) each for Shandong Taibang
and Qianfeng. As of June 30, 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 June 30, 2010.
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.
-15-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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.
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 and six months ended June 30, 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 of raw material, and
immaterial Credit is applied for VAT paid on supplies purchase.
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.
-16-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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.
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.
-17-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Recently Issued Accounting Pronouncements
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.
-18-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
In April 2010, the FASB issued Accounting Standards Update
2010-13, CompensationStock Compensation (Topic 718): Effect of Denominating
the Exercise Price of a Share-Based Payment Award in the Currency of the Market
in Which the Underlying Equity Security Trades, or ASU 2010-13. This Update
provides amendments to Topic 718 to clarify that an employee share-based payment
award with an exercise price denominated in currency of a market in which a
substantial porting of the entitys equity securities trades should not be
considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The Company does not expect the adoption of ASU 2010-17
to have a significant impact on its consolidated financial statements.
In April 2010, the FASB issued Accounting Standard Update
20-10-17, Revenue RecognitionMilestone Method (Topic 605): Milestone Method of
Revenue Recognition or ASU 2010-17. This Update provides guidance on the
recognition of revenue under the milestone method, which allows a vendor to
adopt an accounting policy to recognize all of the arrangement consideration
that is contingent on the achievement of a substantive milestone (milestone
consideration) in the period the milestone is achieved. The pronouncement is
effective on a prospective basis for milestones achieved in fiscal years and
interim periods within those years, beginning on or after June 15, 2010.
Adoption of ASU 2010-17 does not have any significant impacts on its
consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform
to the current period presentation. These reclassifications have no effect on
net income or cash flows.
Note 4 Related party transactions
The material related party transactions undertaken by the
Company with related parties as of June 30, 2010 and December 31, 2009 are
presented as follows:
-19-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
|
|
|
|
|
June 30, 2010
|
|
|
December 31,
|
|
Assets
|
|
Purpose
|
|
|
(unaudited)
|
|
|
2009
|
|
Accounts receivable related
party
(1)
|
|
Processing fees
|
|
$
|
229,817
|
|
$
|
222,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31,
|
|
Liabilities
|
|
Purpose
|
|
|
(unaudited)
|
|
|
2009
|
|
Short term loans holder of
noncontrolling interest
(2)
|
|
Loan
|
|
$
|
-
|
|
$
|
3,652,500
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest holder of
noncontrolling interest
(2)
|
|
Interest payable
|
|
$
|
-
|
|
$
|
2,068,526
|
|
|
|
|
|
|
|
|
|
|
|
Other payable related
parties
(3)
|
|
Loan
|
|
$
|
2,131,455
|
|
$
|
2,122,772
|
|
Other payable related parties
(4)
|
|
Contribution
|
|
|
968,109
|
|
|
964,168
|
|
Distribution payable to
noncontrolling interest
|
|
Distribution
|
|
|
589
|
|
|
587
|
|
Total other payable related
parties
|
|
|
|
$
|
3,100,153
|
|
$
|
3,087,527
|
|
(1)
Qianfeng provides processing services for
Guizhou Eakan, one of the Qianfengs non-controlling shareholders. The Companys
total processing services income amounted to $125,628 and $150,677 for the three
months period ended June 30, 2010 and 2009, respectively. The Companys total
processing services income amounted to $362,659 and $393,406 for the six months
period ended June 30, 2010 and 2009, respectively. Starting from second quarter
of 2010, Qianfeng changed the business model from processing service to full
manufacturing, which includes raw material procurement, and selling of finished
goods to Guizhou Eakan, The Companys sales income amounted to $201,881 for the
three and
six-month period ended June 30, 2010. As of June 30, 2010 and December 31, 2009,
accounts receivable due from Guizhou Eakan amounted to $229,817 and $222,617,
respectively. The outstanding balance as of June 30, 2010 has been paid in cash
in July 2010.
(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 June 30, 2010, the Company was able
to settle the interest liability with Shandong Institute for $913,839 less than
the Companys previous estimation and resulted in an other non-operating 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 final interest settlement plus additional
interest of $135,541 for the six days from April 6, 2010 to April 12, 2010.
(3)
Qianfeng has payables to Guizhou Eakan Investing
Corp. in the amount of approximately $2,131,455 (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.
-20-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
(4)
Qianfeng has payables to Guizhou Jiean, a
holder of noncontrolling interest, in amount of approximately $968,109 (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 the legal proceeding section, commitment and
contingent liabilities, the money may be returned to Jiean. During the second
quarter of 2010, Jiean requested Qianfeng to register its 1.8 million shares of
additional capital infusion as per Equity Purchase Agreement and was approved by
the majority shareholders of Qianfeng in a shareholders meeting held in the
second quarter of 2010. However, the request is still waiting for the Companys
Board to ratify the validity and the completion of the registration with PRCs
local AIC. If such request is granted, Dalins ownership in Qianfeng will be
diluted from 54% to 52.54%.
Note 5 Accounts receivable
Trade accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Trade accounts receivable
|
$
|
6,912,404
|
|
$
|
3,022,031
|
|
Less: Allowance for doubtful accounts
|
|
(1,253,975
|
)
|
|
(1,254,955
|
)
|
Total
|
$
|
5,658,429
|
|
$
|
1,767,076
|
|
The activity in the allowance for doubtful accounts for trade
accounts receivable for the six months ended June 30, 2010 and the year ended
December 31, 2009 is as follows:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Beginning allowance for
doubtful accounts
|
$
|
1,254,955
|
|
$
|
1,268,052
|
|
Additional charged
to bad debt expense
|
|
2,885
|
|
|
18,737
|
|
Recovery of amount previously reserved
|
|
(8,973
|
)
|
|
(31,826
|
)
|
Write-off charged
against the allowance
|
|
-
|
|
|
-
|
|
Foreign currency translation adjustment
|
|
5,108
|
|
|
(8
|
)
|
Ending allowance for doubtful accounts
|
$
|
1,253,975
|
|
$
|
1,254,955
|
|
Note 6 Inventories
Inventories consisted of the following:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
$
|
23,419,802
|
|
$
|
19,720,420
|
|
Work-in-process
|
|
10,097,740
|
|
|
8,407,319
|
|
Finished goods
|
|
8,659,513
|
|
|
7,524,318
|
|
Total
|
|
42,177,055
|
|
|
35,652,057
|
|
Less: Allowance for
obsolete inventories
|
|
(742,269
|
)
|
|
(519,333
|
)
|
Inventories, net
|
$
|
41,434,786
|
|
$
|
35,132,724
|
|
-21-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
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 $2,291,010 and $2,186,441 as of June 30, 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
apartments 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 $1,848,327 and $1,299,125 as of June 30, 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 $2,637,092
and $3,223,960 as of June 30, 2010 and December 31, 2009, respectively.
Note 8 Plant and equipment, net
Plant and equipment consist of the following:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Buildings and improvements
|
$
|
20,569,915
|
|
$
|
12,901,205
|
|
Machinery and equipment
|
|
24,582,872
|
|
|
23,428,848
|
|
Furniture, fixtures, office
equipment and vehicle
|
|
4,643,988
|
|
|
3,862,385
|
|
Total depreciable assets
|
|
49,796,775
|
|
|
40,192,438
|
|
Accumulated depreciation
|
|
(15,672,645
|
)
|
|
(13,953,793
|
)
|
Plant and equipment, net
|
|
34,124,130
|
|
|
26,238,645
|
|
Construction in progress
|
|
1,474,123
|
|
|
2,634,768
|
|
Total
|
$
|
35,598,253
|
|
$
|
28,873,413
|
|
Depreciation expense for the three months ended June 30, 2010
and 2009 amounted to $876,664 and $830,553, respectively. Depreciation expense
for the six months ended June 30, 2010 and 2009 amounted to $1,670,321 and
$1,589,625, respectively. No interest was capitalized into construction in
progress in the six months ended June 30, 2010 and 2009.
-22-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
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).
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:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
Current assets
|
$
|
10,031,538
|
|
$
|
9,912,775
|
|
Non-current assets
|
|
10,156,189
|
|
|
10,195,357
|
|
Total assets
|
|
20,187,727
|
|
|
20,108,132
|
|
Current liabilities
|
|
3,053,180
|
|
|
4,031,033
|
|
Non-current liabilities
|
|
309,330
|
|
|
308,070
|
|
Shareholders' equity
|
|
16,825,217
|
|
|
15,769,029
|
|
Total liabilities and shareholders'
equity
|
$
|
20,187,727
|
|
$
|
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 June 30,
|
|
|
Six months
ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
2,751,345
|
|
$
|
1,812,071
|
|
$
|
5,154,096
|
|
$
|
2,971,356
|
|
Gross profit
|
|
1,446,279
|
|
|
659,211
|
|
|
2,781,598
|
|
|
1,048,741
|
|
Income before taxes
|
|
537,599
|
|
|
(200,080
|
)
|
|
1,185,019
|
|
|
(64,799
|
)
|
Net income (loss)
|
|
448,896
|
|
|
(258,255
|
)
|
|
987,585
|
|
|
(143,266
|
)
|
Companys share of net
income (loss)
|
$
|
157,114
|
|
$
|
(90,390
|
)
|
$
|
345,655
|
|
$
|
(50,143
|
)
|
-23-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
The rollforward of investment in Huitian in the balance sheet
is shown below:
|
|
Huitian - 35%
|
|
|
|
Ownership
|
|
December 31, 2008
|
$
|
-
|
|
Investment made
|
|
6,533,977
|
|
Net income from the year ended
December, 2009
|
|
566,984
|
|
Dividend declared
|
|
(473,952
|
)
|
Foreign currency translation
gain
|
|
346
|
|
December 31, 2009
|
|
6,627,355
|
|
Net income from the six months
ended June 30, 2010
|
|
345,655
|
|
Dividend declared
|
|
-
|
|
Foreign currency translation
gain
|
|
28,543
|
|
June 30, 2010 (unaudited)
|
$
|
7,001,553
|
|
Note 10 Intangible assets, net
Intangible assets consisted of the following:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Land use rights
|
$
|
4,649,456
|
|
$
|
4,163,140
|
|
Permits and licenses
|
|
11,272,405
|
|
|
11,261,611
|
|
Blood donor network
|
|
2,357
|
|
|
2,347
|
|
Software
|
|
206,828
|
|
|
145,897
|
|
GMP certificate
|
|
2,327,885
|
|
|
2,327,885
|
|
Long-term customer-relationship
|
|
6,941,170
|
|
|
6,941,170
|
|
Totals
|
|
25,400,101
|
|
|
24,842,050
|
|
Accumulated amortization
|
|
(5,412,020
|
)
|
|
(3,661,728
|
)
|
Intangible assets, net
|
$
|
19,988,081
|
|
$
|
21,180,322
|
|
Total amortization expense for the three months ended June 30,
2010 and 2009 amounted to $871,408 and $865,789 respectively. Amortization
expense for the six months ended June 30, 2010 and 2009 amounted to $1,740,659
and $1,704,248, respectively.
The amortization expense related to purchased and other
intangible assets due to the consolidation of Dalin is $793,819 and $793,278 for
the three months ended June 30, 2010 and 2009, respectively. The amortization
expense related to purchased and other intangible assets due to the
consolidation of Dalin is $1,587,205 and $1,585,907 for the six months ended
June 30, 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
|
$
|
3,367,396
|
|
$
|
3,360,845
|
|
$
|
1,596,974
|
|
$
|
1,499,243
|
|
$
|
1,177,739
|
|
$
|
8,985,884
|
|
-24-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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
|
|
|
June 30, 2010
(Unaudited)
|
|
|
December 31,
2009
|
|
Short term loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term bank loan, secured
(1)
|
|
June 1,
2010
|
|
|
5.40%
|
|
$
|
-
|
|
$
|
1,467,000
|
|
Short term
bank loan, un-secured
|
|
January 28, 2011
|
|
|
5.31%
|
|
|
2,946,000
|
|
|
2,934,000
|
|
Short term loan, un-secured
|
|
On demand
|
|
|
0.00%
|
|
|
73,650
|
|
|
73,350
|
|
Short term
bank loan, secured
(2)
|
|
March 21, 2011
|
|
|
5.84%
|
|
|
2,946,000
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
$
|
5,965,650
|
|
$
|
4,474,350
|
|
Interest expense related to the bank loans totaling $99,398 and
$921,187 were incurred during the three months ended June 30, 2010 and 2009,
respectively. Interest expense totaling $161,684 and $1,543,636 was incurred
during the six months ended June 30, 2010 and 2009, respectively.
(1)
The loan in the amount of $1,467,000 as of
December 31, 2009 is secured by Shandong Taibangs land use rights and buildings
located in Taian, Shandong Province, PRC with the carrying net value as follows:
|
|
December 31, 2009
|
|
Buildings in Taian, Shandong
|
$
|
1,238,010
|
|
Land use rights in Taian, Shandong
|
|
433,793
|
|
Total
|
$
|
1,671,803
|
|
(2)
The loan in the amount of $2,946,000 is secured
by Qianfengs buildings located in Guiyang, Guizhou Province, PRC, with carrying
net values of RMB 28,933,927 as of June 30, 2010.
Other payables and accruals
Other payables and accruals consist of the following:
-25-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Other payables
(1)
|
$
|
8,859,086
|
|
$
|
7,465,640
|
|
Accruals for promotion costs and others
(2)
|
|
4,573,108
|
|
|
5,281,843
|
|
Accruals for salaries
and welfare
|
|
1,265,973
|
|
|
2,341,874
|
|
Accruals for RTO expenses
|
|
-
|
|
|
245,657
|
|
Accruals for selling
commission and promotion fee
|
|
2,022,181
|
|
|
691,858
|
|
Other Payable - government grant
|
|
95,466
|
|
|
143,488
|
|
Other payable - deposit
received
|
|
294,185
|
|
|
160,683
|
|
Other payable - funds
(3)
|
|
3,410,812
|
|
|
2,383,501
|
|
Accrued interest
|
|
71,250
|
|
|
81,264
|
|
Others
(4)
|
|
-
|
|
|
451,006
|
|
Total
|
$
|
20,592,061
|
|
$
|
19,246,814
|
|
(1)
|
The other payables mainly comprise of deposits by potential strategic
investors with the amount of $7,506,408 (or RMB 50,960,000). As of June
30, 2010, Qianfeng has received in an aggregate amount of $7,506,408 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 shareholders
dispute as disclosed in the legal proceedings section below (Note 14).
Additional interest of $1.35 million 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, payables to employees and payables to vendors
or subcontractors for construction in plasma stations in Qianfeng.
|
|
|
(3)
|
Other payable-funds represents bonus accrual for all employees based
on the policy approved by the Board, as well as the best estimated from
the management.
|
|
|
(4)
|
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. Qianfeng has paid the contingent liability
off in full amount on May 21, 2010.
|
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 $ 324,265 and
$323,687 as of June 30, 2010 and December 31, 2009, respectively, determined
using present value of annual payments over 50 years.
-26-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Note 12 Convertible Notes
|
|
June 30, 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
|
|
(7,112,409
|
)
|
|
(8,464,380
|
)
|
Notes payables, net
|
$
|
387,591
|
|
$
|
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.
-27-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
Because the Notes and Warrants are denominated in U.S. Dollars
but the Company's functional currency is the Chinese Renminbi, in accordance
with ASC 815-40-15-7I, the Warrants and the conversion option embedded in the
Notes are not indexed only to the Company's common stock and therefore they do
not meet the requirements of ASC 815-10-15-74. As a result, the embedded
conversion option and the Warrants are accounted for as derivative instrument
liabilities, at fair value.
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, accrued interest of $8,550 and deferred fees of $134,479 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
June 30, 2010.
Interest is being recognized on the carrying value of the Notes
at an effective annual interest rate of approximately 365%. Interest expense is
expected to be approximately $2,412,000 and $6,516,000 for the years ended
December 31, 2010 and 2011, respectively.
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.
-28-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Earnings (loss) per share is as follows for the three months
ended June 30,
Basic earnings per share
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income attributable to controlling
interest for basic earnings per share
|
$
|
12,935,682
|
|
$
|
7,882,994
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic
computation
|
|
23,511,435
|
|
|
21,442,909
|
|
Earnings per share - Basic
|
$
|
0.55
|
|
$
|
0.37
|
|
Diluted earnings per share
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net income attributable to controlling
interest for basic earnings per share
|
$
|
12,935,682
|
|
$
|
7,882,994
|
|
Add: interest of convertible notes
|
|
284,190
|
|
|
-
|
|
Subtract: Gain from changes in Fair value
of derivative liabilities and warrants
|
|
(2,270,829
|
)
|
|
-
|
|
Net income attributable to controlling interest for diluted
earnings per share
|
$
|
10,949,043
|
|
$
|
7,882,994
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic computation
|
|
23,511,435
|
|
|
21,442,909
|
|
Diluted effect of convertible debentures,
warrants and options
|
|
3,087,820
|
|
|
-
|
|
Weighted average shares used in diluted computation
|
|
26,599,255
|
|
|
21,442,909
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted
|
$
|
0.41
|
|
$
|
0.37
|
|
For the three months ended June 30, 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 June 30, 2009, all outstanding
warrants, stock options and conversion options were excluded in the calculation
of diluted earnings per share because of their anti-dilutive nature.
Earnings (loss) per share is as follows for the six months
ended June 30,
Basic earnings per share
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net income attributable to controlling
interest for basic earnings per share
|
$
|
23,599,431
|
|
$
|
12,191,790
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic
computation
|
|
23,449,508
|
|
|
21,438,948
|
|
Earnings per share - Basic
|
$
|
1.01
|
|
$
|
0.57
|
|
-29-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Diluted earnings per share
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net income attributable to controlling
interest for basic earnings per share
|
$
|
23,599,431
|
|
$
|
12,191,790
|
|
Add: interest of convertible notes
|
|
456,311
|
|
|
-
|
|
Subtract: Gain from changes in Fair value
of derivative liabilities and warrants
|
|
(6,104,406
|
)
|
|
-
|
|
Net income attributable to controlling interest for diluted
earnings per share
|
$
|
17,951,336
|
|
$
|
12,191,790
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic computation
|
|
23,449,508
|
|
|
21,438,948
|
|
Diluted effect of convertible debentures,
warrants and options
|
|
3,092,177
|
|
|
-
|
|
Weighted average shares used in diluted computation
|
|
26,541,685
|
|
|
21,438,948
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted
|
$
|
0.68
|
|
$
|
0.57
|
|
For the six months ended June 30, 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 six months ended June 30, 2009, all outstanding
warrants, stock options and conversion 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.
All of the Company's plasma companies are qualified as small
scale taxpayers and are subject to a tax rate of 6% in 2010.
-30-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Starting from January 1, 2008, all dividends paid to foreign
parents are subject to a 10% income tax. As a result, Logic Express recorded $
1,835,583 and $334,877 income tax expense during the six months ended June 30,
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 and six months ended June
|
|
For the three months
|
|
|
For the six months
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
U.S. Statutory rates
|
|
34.0%
|
|
|
34.0 %
|
|
|
34.0 %
|
|
|
34.0%
|
|
Foreign Income
|
|
(34.0
|
)
|
|
(34.0
|
)
|
|
(34.0
|
)
|
|
(34.0
|
)
|
China Tax rates
|
|
25.0
|
|
|
25.0
|
|
|
25.0
|
|
|
25.0
|
|
China income tax exemption
|
|
(10.0
|
)
|
|
(10.0
|
)
|
|
(10.0
|
)
|
|
(10.0
|
)
|
Temporary differences (China)
(1)
|
|
(1.9
|
)
|
|
(2.0
|
)
|
|
(0. 8
|
)
|
|
(1.8
|
)
|
Other items
(2)
|
|
7.0
|
|
|
5.9
|
|
|
4.7
|
|
|
6.3
|
|
Effective income tax rates
|
|
20.1%
|
|
|
18.9 %
|
|
|
18.9%
|
|
|
19.5%
|
|
(1)
The -1.9% and -2.0% represent the effect of
realization of temporary difference of -$459,813 and -$124,902 for the three
months ended June 30, 2010 and June 30, 2009, respectively. The -0.8% and
-1.8% represent the effect of realization of temporary difference of -$316,042
and -$ 249,701 for the six months ended June 30, 2010 and June 30, 2009,
respectively.
(2)
The other items represent $1.2 million of income
tax expense for dividends that Shandong Taibang distributed to Logic Express,
its foreign parent and $4.3 million of expense incurred by CBP, Logic Express
and Logic Holding that are not deductible in PRC offset by $2.3 million gains
(not taxable) from fair value changes of derivative liabilities for the three
months ended June 30, 2010. The 5.9% represents the $0.3 million income tax
expense for dividends Shandong Taibang paid to Logic Express, its foreign parent
and $2.2 million expenses incurred by CBP, Logic Express and Logic Holding that
are not deductible in PRC for the three months ended June 30, 2009.
The other items represent $1.8 million of income tax expense
for dividends that Shandong Taibang distributed to Logic Express, its foreign
parent and $7.7 million of expense incurred by CBP, Logic Express and Logic
Holding that are not deductible in PRC offset by $6.1 million gains (not
taxable) from fair value changes of derivative liabilities for the six months
ended June 30, 2010. The 6.3% represents the $4.1 million expenses incurred by
CBP, Logic Express and Logic Holding that are not deductible in PRC for the six
months ended June 30, 2009.
The estimated tax savings due to the tax exemption for the
three months ending June 30, 2010 and 2009 amounted to $2,527,486 and
$1,702,681, 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 June 30, 2010 and 2009 by $0.11 and $0.08, 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 June 30, 2010 and 2009 by $0.10
and $0.08, respectively. The estimated tax savings due to the tax exemption for
the six months ending June 30, 2010 and 2009 amounted to $4,269,777 and
$2,466,012, respectively. The net effect on earnings per share if the income tax
had been applied would decrease basic earnings per share for the six months
ended June 30, 2010 and 2009 by $0.18 and $0.12, respectively. The net effect on
earnings per share if the income tax had been applied would decrease diluted
earnings per share for the six months ended June 30, 2010 and 2009 by $0.16 and
$0.11, respectively.
-31-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
The provision for income taxes consists of the following for
the unaudited three months and six months ended June 30, 2010 and 2009:
|
|
Three months ended,
|
|
|
Six months ended,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Foreign (China)
|
|
5,421,708
|
|
|
2,982,101
|
|
|
8,349,084
|
|
|
5,012,295
|
|
|
|
5,421,708
|
|
|
2,982,101
|
|
|
8,349,084
|
|
|
5,012,295
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign (China)
|
|
(459,813
|
)
|
|
(124,902
|
)
|
|
(316,042
|
)
|
|
(249,701
|
)
|
|
|
(459,813
|
)
|
|
(124,902
|
)
|
|
(316,042
|
)
|
|
(249,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
$
|
4,961,895
|
|
$
|
2,857,199
|
|
$
|
8,033,042
|
|
$
|
4,762,594
|
|
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.
The Companys deferred taxes reflect the tax effect of
temporary differences recorded as assets for financial reporting purposes and
the comparable amounts recorded for income tax purpose. The deferred tax assets
are measured using the enacted tax rates and law. Significant components of the
deferred tax assets as of June 30, 2010 and December 31, 2009 are as follows:
|
|
June
30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Deferred tax assets arising from:
|
|
|
|
|
|
|
-Accrued expenses
|
$
|
1,119,908
|
|
$
|
1,053,771
|
|
-Tax loss carryforwards
|
|
1,936,599
|
|
|
1,618,630
|
|
Gross deferred tax assets
|
|
3,056,507
|
|
|
2,672,401
|
|
Less: valuation allowance
|
|
(1,936,599
|
)
|
|
(1,618,630
|
)
|
Net deferred tax assets
|
$
|
1,119,908
|
|
$
|
1,053,771
|
|
Deferred tax liabilities arising from:
|
|
|
|
|
|
|
- Intangible assets
|
$
|
3,598,681
|
|
$
|
3,821,093
|
|
- Property, plant and equipment
|
|
443,156
|
|
|
454,202
|
|
Deferred tax liabilities
|
$
|
4,041,837
|
|
$
|
4,275,295
|
|
Classification on consolidated balance
sheets:
|
|
|
|
|
|
|
Deferred tax assets - current
|
$
|
1,119,908
|
|
$
|
1,053,771
|
|
Deferred tax liabilities - non-current
|
$
|
4,041,837
|
|
$
|
4,275,295
|
|
-32-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
CBP was incorporated in the United States and has incurred net
operating losses for income tax purposes for the period ended June 30, 2010. The
estimated net operating loss carry forwards for United States income taxes
amounted to $5,695,880 and $4,760,677 as of June 30, 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 June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
Balance of January 1,
|
$
|
1,618,630
|
|
$
|
1,018,941
|
|
Increase
|
|
317,969
|
|
|
599,689
|
|
Deferred tax valuation allowance
|
$
|
1,936,599
|
|
$
|
1,618,630
|
|
The Company has cumulative undistributed earnings of foreign
subsidiaries of approximately $67 million as of June 30, 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 $3,009,906 and $2,274,958 for the
three months ended June 30, 2010 and 2009, respectively. VAT on sales amounted
to $4,938,854 and $3,853,361 for the six months ended June 30, 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:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
|
VAT tax payable
|
$
|
1,058,943
|
|
$
|
1,110,216
|
|
Income tax payable
|
|
6,284,072
|
|
|
7,479,279
|
|
Other miscellaneous tax payable
|
|
166,556
|
|
|
184,584
|
|
|
$
|
7,509,571
|
|
$
|
8,774,079
|
|
-33-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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).
On January 28, 2010, the Companys wholly owned subsidiary,
Logic Management and Consulting (China) Co., Ltd, entered into a thirty six (36)
months, starting March 2010, lease agreement with Beijing Jialong Real Estate
Company for an office space for its Beijing office. The annual lease payment is
approximately $190,187 (RMB 1,291,152).
-34-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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 June
30, 2010 (unaudited):
|
|
6/30/2011
|
|
|
6/30/2012
|
|
|
6/30/2013
|
|
|
6/30/2014
|
|
|
6/30/2015
|
|
|
Thereafter
|
|
Property and equipment,
not yet
|
$
|
334,593
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating Lease
|
|
224,724
|
|
|
240,848
|
|
|
199,552
|
|
|
9,366
|
|
|
8,547
|
|
|
191,411
|
|
Total
|
$
|
559,317
|
|
$
|
240,848
|
|
$
|
199,552
|
|
$
|
9,366
|
|
$
|
8,547
|
|
$
|
191,411
|
|
For the three months ended June 30, 2010 and 2009, total rent
expense amounted to $37,823 and $25,192, respectively. For the six months ended
June 30, 2010 and 2009, total rent expense amounted to $58,171 and $58,326,
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).
-35-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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.
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.
-36-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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, as of
June 30, 2010, Qianfeng has set aside the strategic investors fund along with
RMB 8,673,542 (approximately $1,277,613) 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. During the second quarter of 2010, Jiean requested Qianfeng to
register its 1.8 million shares of additional capital infusion as per Equity
Purchase Agreement and it was approved by the majority shareholders in a
shareholders meeting held in the second quarter of 2010. However, the request is
still waiting the Companys Board to ratify the validity and the completion of
the registration with PRCs local AIC. If such request is granted, Dalins
ownership in Qianfeng will be diluted from 54% to 52.54%.
Dispute over Qianfeng Technical Consulting
Agreement
In 1997, Qianfeng entered into a Technical Cooperation
Agreement with Sin Kyung Ye, or Sin, a Korean individual, to provide certain
fractionation equipment and transfer processing know-how to Qianfeng. In August
2004, Sin filed a law suit against Qianfeng with the Intermediate Court in
Guiyang City, China, alleging non-payment of RMB 100,000 (approximately,
$14,670) for his fractionation equipment and RMB 5,000,000 (approximately,
$733,500) for the transfer of his technological know-how. The Intermediate Court
ruled in favor of Sin and found that Qianfeng owed Sin RMB 10,376,160
(approximately, $ 1,522,183), but Qianfeng appealed the Intermediate Court
ruling to the Guizhou High Court. The Guizhou High Court agreed in part with
Qianfeng's grounds for appeal and reduced the amount of know-how transfer fee to
RMB 1,970,413 (approximately, $289,060). In May 2007, Sin appealed the Guizhou
High Court's decision to the People's Supreme Court in Beijing. The People's
Supreme Court heard in April 2008 and ruled on December 29, 2009 for Qianfeng
pay RMB 4,700,000 (approximately, $689,490) as compensation to Sin for
technology transfer and RMB 100,000 (approximately, $14,670) for unpaid
equipment purchase. Qianfeng has accrued and accounted for all these expenses as
of December 31, 2009 and recorded a receivable $431,799 (RMB 2,931,423) for the
54% of the total liability due from the old shareholders of Dalin as agreed in equity
transfer agreement. During the second quarter of 2010, the Company wrote off the
receivable of its share of the judgment, which was anticipated to be recovered
from the previous shareholders of Qianfeng and recorded as an offset with the
investment payable previously, as the bad debt expense. Due to several changes
of the Qianfengs ownership prior the Companys acquisition, the management
believes it is more than likely that the Company will not be able to recover
such amount from the existing shareholders of Qianfeng.
-37-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
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 June 30, 2010. The liability has been
paid in full amount by Qianfeng on May 22, 2010. On June 30, 2010, Qianfeng
brought suit, to the Middle Court of Guiyang City, against Zhongxin in attempt
to recover for the full judgment amount of RMB 3,074,342 plus court fee of RMB
32,340 that Qianfeng already paid on behalf of Zhongxin.
-38-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Note 15 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.
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
|
|
1,288,018
|
|
|
4.89
|
|
|
3.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(40,000
|
)
|
|
2.84
|
|
|
2.10
|
|
June 30, 2009
(unaudited)
|
|
2,532,018
|
|
$
|
3.88
|
|
|
2. 63
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(1,244,000
|
)
|
|
2.84
|
|
|
2.10
|
|
December 31, 2009
|
|
1,288,018
|
|
$
|
4.89
|
|
|
2.44
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(237,325
|
)
|
|
4.80
|
|
|
3.95
|
|
June 30, 2010
(unaudited)
|
|
1,050,693
|
|
$
|
4.80
|
|
|
1.95
|
|
-39-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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 June 30, 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:
|
|
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 June 30, 2010 and 2009, the
Company expensed $45,948 and $27,594 in compensation expense. For the six months
ended June 30, 2010 and 2009, the Company expensed $617,841 and $54,967 in
compensation expense. As of June 30, 2010, approximately $109,759 of estimated
expense with respect to non-vested stock-based awards has yet to be recognized
and will be recognized as an expense over the employee's remaining weighted
average service period of approximately 0.61 years. 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
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
December 31, 2008
|
|
997,500
|
|
|
937,500
|
|
$
|
4.00
|
|
|
9.43
|
|
$
|
-
|
|
Granted
|
|
-
|
|
|
30,000
|
|
|
4.00
|
|
|
9.31
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
June 30, 2009
(unaudited)
|
|
997,500
|
|
|
967,500
|
|
$
|
4.00
|
|
|
8.93
|
|
$
|
-
|
|
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
|
|
$
|
7,352,800
|
|
Granted
|
|
70,000
|
|
|
50,000
|
|
|
12.05
|
|
|
9.52
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
(20,000
|
)
|
|
(20,000
|
)
|
|
4.00
|
|
|
8.07
|
|
|
-
|
|
June 30, 2010 (unaudited)
|
|
960,000
|
|
|
940,000
|
|
$
|
4.59
|
|
|
8.05
|
|
$
|
6,019,133
|
|
-40-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Note 17 Change in fair value of derivative liabilities
Loss (gain) on change in fair value of derivative liabilities
for the six months ended June 30, 2010 comprised as following:
|
|
Fair value at
|
|
|
Fair value at
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
dates of
|
|
|
Fair value at
|
|
|
|
|
|
Change in fair
|
|
|
|
2010 or
|
|
|
warrants
|
|
|
date of notes
|
|
|
Fair value at
|
|
|
value at June
|
|
Change in fair value of derivative
liabilities of:
|
|
issuance date
|
|
|
exercised
|
|
|
conversion
|
|
|
June 30, 2010
|
|
|
30, 2010
|
|
Conversion option of
convertible notes ( note 11)
|
$
|
19,960,145
|
|
$
|
-
|
|
$
|
2,627,558
|
|
$
|
13,522,842
|
|
$
|
(3,809,745
|
)
|
Warrants attached to convertible notes
(note 15)
|
|
11,804,253
|
|
|
1,078,788
|
|
|
-
|
|
|
8,658,837
|
|
|
(2,066,628
|
)
|
Warrants issued to
placement agent (note 15)
|
|
897,010
|
|
|
668,977
|
|
|
-
|
|
|
-
|
|
|
(228,033
|
)
|
Total
|
$
|
32,661,408
|
|
$
|
1,747,765
|
|
$
|
2,627,558
|
|
$
|
22,181,679
|
|
$
|
(6,104,406
|
)
|
Note 18 Interest expense (income), net
Interest expense (income), net for the three months ended June
30, 2010 and 2009 comprised as following:
Interest expense (income), net
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Interest expense bank and other loans
|
$
|
99,398
|
|
$
|
900,831
|
|
Interest expense due to strategic investors
|
|
100,339
|
|
|
-
|
|
Interest expense convertible notes
|
|
284,190
|
|
|
41,534
|
|
Interest expense other
|
|
135,542
|
|
|
-
|
|
Interest income
|
|
(180,464
|
)
|
|
(58,451
|
)
|
Total
|
$
|
439,005
|
|
$
|
883,914
|
|
Interest expense (income), net for the six months ended June
30, 2010 and 2009 comprised as following:
Interest expense (income), net
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Interest expense bank and other loans
|
$
|
161,684
|
|
$
|
1,523,280
|
|
Interest expense due to strategic investors
|
|
199,521
|
|
|
-
|
|
Interest expense convertible notes
|
|
456,311
|
|
|
41,534
|
|
Interest expense other
|
|
135,542
|
|
|
-
|
|
Interest income
|
|
(333,000
|
)
|
|
(310,047
|
)
|
Total
|
$
|
620,058
|
|
$
|
1,254,767
|
|
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.
-41-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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 June 30, 2010, approximately $23.2 million was reserved. Though Shandong
Taibang has met 50% of its registered capital, its Board decided to continue to
make such reserve. The transfer to this reserve must be made
before distribution of any dividend to shareholders. The surplus reserve fund is
non-distributable other than during liquidation and can be used to fund previous
years losses, if any, and may be utilized for business expansion or converted
into share capital by issuing new shares to existing stockholders in proportion
to their shareholding or by increasing the par value of the shares currently
held by them, provided that the remaining reserve balance after such issue is
not less than 25% of the registered capital.
Enterprise expansion fund
The enterprise fund may be used to acquire plant and equipment
or to increase the working capital to expend on production and operation of the
business. The 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 June 30, 2010 and 2009, the
Company made pension contributions in the amount of $100,324 and $124,600,
respectively. For the six months ended June 30, 2010 and 2009, the Company made
pension contributions in the amount of $209,357 and $233,476, respectively.
Note 21 - Noncontrolling interest and distribution
(Restated)
The roll forward of noncontrolling interest in the balance
sheet is shown below (other comprehensive income-translation gain was allocated
to the noncontrolling interest):
-42-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
|
|
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
|
)
|
|
5,321,062
|
|
|
(111,753
|
)
|
|
9,884,220
|
|
|
1,534,799
|
|
|
16,615,658
|
|
Foreign currency translation gain/(loss)
|
|
-
|
|
|
(187
|
)
|
|
115,238
|
|
|
330,316
|
|
|
10,421
|
|
|
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)
|
|
|
|
|
3,511,946
|
|
|
(76,681
|
)
|
|
6,618,884
|
|
|
855,865
|
|
|
10,910,014
|
|
Reverse for 20% acquisition
|
|
12,670
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
12,670
|
|
Foreign currency translation
gain/(loss)
|
|
-
|
|
|
144,325
|
|
|
34,931
|
|
|
(1,555
|
)
|
|
(37,284
|
)
|
|
140,417
|
|
Dividend declared
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,048,920
|
)
|
|
(815,652
|
)
|
|
(4,864,572
|
)
|
June 30, 2010 (unaudited)
|
$
|
-
|
|
$
|
12,569,693
|
|
$
|
2,405,938
|
|
$
|
22,772,981
|
|
$
|
2,896,411
|
|
$
|
40,645,023
|
|
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 June 30,
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.
|
|
Shandong
|
|
|
Guiyang
|
|
|
Guiyang
|
|
|
|
|
|
|
Taibang
|
|
|
Qianfeng
|
|
|
Dalin
|
|
|
Total
|
|
|
|
Noncontrolling
|
|
|
Noncontrolling
|
|
|
Noncontrolling
|
|
|
Noncontrolling
|
|
|
|
shareholder
|
|
|
shareholder
|
|
|
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
|
|
|
815,652
|
|
|
4,864,572
|
|
Dividend paid
|
|
-
|
|
|
(4,048,920
|
)
|
|
(815,652
|
)
|
|
(4,864,572
|
)
|
Foreign currency translation adjustments
|
|
2
|
|
|
-
|
|
|
-
|
|
|
2
|
|
Distribution payable, June
30, 2010 (unaudited)
|
$
|
589
|
|
$
|
-
|
|
$
|
-
|
|
$
|
589
|
|
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 Yang Gu 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.
-43-
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
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.
|
|
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 and six months ended
June 30, 2010.
No supplemental pro forma information was disclosed as Ziguang
had not commenced operations for the period ended June 30, 2010 due to that it
is under construction in preparation for the relocation of Yang Gu Plasma
Company.
Note 23 Subsequent Events
Option plan
On July 11, 2010, the Companys Board of Directors authorized
the grant to Mr. Sean Shao, Dr. Tong Jun Lin, Dr. Xiangmin Cui and Mr. Chaoming
Zhao (the Chief Executive Officers and Directors), of options to purchase
40,000 shares each of the Companys common stock, and to Mr. Y. Tristan Kuo of
options to purchase 35,000 shares of the Companys common stocks, and to Mr.
Tung Lam, the Chief Executive Officer of Shandong Taibang and certain other
employees of the Company of options to purchase 776,000 shares of the Company's
common stocks, all pursuant to the 2008 Equity Incentive Plan. These options
shall be exercisable at $12.26, the fair market price as of the grant date, and
to be vested in 12 equally quarters with the first vesting date of October 11,
2010.
Formation of two new plasma stations in Shandong
On July 7, 2010 and July 20, 2010, Shandong Taibang established
Ning Yang Taibang Plasma Company and Yi Shui Taibang Plasma Company, both 100%
owned by Shandong Taibang for the purpose of constructing and operating the two
recently approved plasma stations in Shandong Province, PRC.
Distributions declaration by Guiyang Qianfeng
On August 6, 2010, the Board of Directors of Guiyang Qianfeng
declared a RMB 50,000,000 (approximately $7,365,000) distribution to its 54%
shareholder Guiyang Dalin, the 19% shareholder Guizhou Eakan, the 18%
shareholder Shenzhen Yigongshengda, and the 9% shareholder Guizhou Jie'an. The
funds will be transferred to their separate accounts as instructed before August
12, 2010.
-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;
-
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;
-45-
Throughout this report, we have converted RMB to USD as
follows:
June 30, 2010
|
|
Balance sheet
|
RMB 6.79 to US$1.00
|
Statement of income and comprehensive income
|
RMB 6.82 to US$1.00
|
|
|
June 30, 2009
|
|
Balance sheet
|
RMB 6.83 to US$1.00
|
Statement of income and comprehensive income
|
RMB 6.82 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 46.4% and 47.4% of our total revenues, respectively, for the three
months ended June 30, 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 June 30, 2010 and 2009, our top 5 customers accounted
for approximately 11.1% and 17.5%, respectively, of our total revenue. For the
three months ended June 30, 2010 and 2009, our largest customer accounted for
approximately 2.7% and 4.2% of our revenue, respectively. As we continue to
diversify our geographic presence, customer base and product mix, we expect that
our largest customers will continue to change from year to year.
We operate and manage our business as a single segment. We do
not account for the results of our operations on a geographic or other basis.
All of 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.
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.
During the quarter ended June 30, 2010, our revenues were derived primarily from
the sale of our approved human albumin and immunoglobulin products. Our revenue
during the fiscal quarter ended June 30, 2010 increased 23.3%, or $7,726,771, to
$40,908,316 compared with $33,181,545 over the same period in 2009. All of our
approved products recorded price increases ranging from 0.1% to 433.5%.
-46-
The following chart reflects our corporate organizational structure:
Our principal executive offices are located at No. 14 East Hushan Road, Taian City, Shandong, Peoples Republic of China 271000. Our corporate telephone number is (+86) 538-620-2306 and our fax number is (+86) 538-620-3895. We maintain a
website at
http://www.chinabiologic.com
that contains information about our operating company, but that information is not part of this report.
-47-
Second Quarter of 2010 Financial Performance Highlights
We continued to experience strong demand for our products and
services during the three months ended June 30, 2010, which resulted in growth
in our revenue and net income. The following are some financial highlights for
the three months ended June 30, 2010:
-
Revenue
: Revenue increased $7,726,771, or 23.3%, to $40,908,316 for
the three months ended June 30, 2010, from $33,181,545 for the same period in
2009.
-
Gross Profit:
Gross profit increased $7,829,630, or 32.6%, to
$31,849,410 for the three months ended June 30, 2010, from $24,019,780 for the
same period in 2009.
-
Income from operations
: Income from operations increased
$6,236,588, or 37.7%, to $22,769,096 for the three months ended June 30, 2010,
from $16,532,508 for the same period in 2009.
-
Net income
: Net income increased $5,052,688, or 64.1%, to
$12,935,682 for the three months ended June 30, 2010, from $7,882,994 for the
same period in 2009.
-
Fully diluted net income per share
: Fully diluted net income per
share was $0.41 for the three months ended June 30, 2010, as compared to $0.37
for the same period in 2009.
Our net income, as reported in our result of operations for the
three months ended June 30, 2010 and 2009, was $12, 935,682 and $7,882,994,
respectively. Our results of operations in the second quarter of 2010, as
compared to the same period in 2009, was materially impacted by unit price
increases and sales volume increases of our products, as well as the reduction
of 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 June 30, 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 and still under construction for
the purpose of relocation of the Companys Yang Gu Plasma Company.
For the Three-Month Periods Ended June 30, 2010 and 2009
(Unaudited)
|
|
Three Months
|
|
|
$
|
|
|
%
|
|
|
|
Ended June 30,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Revenue
|
$
|
40,908,316
|
|
$
|
33,181,545
|
|
$
|
7,726,771
|
|
|
23.3%
|
|
Cost of revenue
|
|
9,058,906
|
|
|
9,161,765
|
|
|
(102,859
|
)
|
|
(1.1%
|
)
|
Gross profit
|
|
31,849,410
|
|
|
24,019,780
|
|
|
7,829,630
|
|
|
32.6%
|
|
Gross profit as a percentage of revenue
|
|
77.9%
|
|
|
72.4%
|
|
|
5.5%
|
|
|
|
|
Operating expenses
|
|
9,080,314
|
|
|
7,487,272
|
|
|
1,593,042
|
|
|
21.3%
|
|
Other (income) expense
|
|
(1,886,473
|
)
|
|
1,391,188
|
|
|
(3,277,661
|
)
|
|
(235.6%
|
)
|
Income before taxes and noncontrolling
interest
|
|
24,655,569
|
|
|
15,141,320
|
|
|
9,514,249
|
|
|
62.8%
|
|
Income taxes
|
|
4,961,895
|
|
|
2,857,199
|
|
|
2,104,696
|
|
|
73.7%
|
|
Net income before noncontrolling interests
|
$
|
19,693,674
|
|
$
|
12,284,121
|
|
$
|
7,409,553
|
|
|
60.3%
|
|
Revenues
. Our revenues are derived primarily from the
sales of our human albumin and immunoglobulin products. Our revenues increased
23.3%, or $7,726,771, to $40,908,316 for the three months ended June 30, 2010,
compared to revenues of $33,181,545 for the three months ended June 30, 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 0.1% to 433.5% . For
the quarter ended June 30, 2010, the average price for our approved human
albumin products, which contributed 46.4% to our total revenues, increased 0.1%,
the average price for our approved human hepatitis B immunoglobulin products,
which contributed 6.9% to our total revenues, increased 433.5%, the average
price for our approved human immunoglobulin for intravenous injection products,
which contributed 39.3% to our revenues, increased 26.9%, the average price for
our approved human rabies immunoglobulin products, which contributed 3.2% to our
revenues, increased 21.6%, the average price for our approved human tetanus
immunoglobulin products, which contributed 2.9% to our revenue, increased 2.3%,
and the average price for our approved human immunoglobulin products, which
contributed 0.5% to our revenue, increased 130.3%, as compared to the same
period in 2009.
-48-
Cost of Revenues
. Our cost of sales decreased $102,859,
or 1.1%, to $9,058,906 for the quarter ended June 30, 2010, from $9,161,765
during the same period in 2009. This decrease was mainly due to a 1.2% actual
decrease in cost of revenues as a result of the mix of the product sold. Cost of
revenues as a percentage of sales was 22.1% for the quarter ended June 30, 2010,
as compared to 27.6% during the same period in 2009.
Gross Profit
. Gross profit increased by $7,829,630, or
32.6%, to $31,849,410 for the quarter ended June 30, 2010, from $24,019,780 for
the same period in 2009. As a percentage of sales revenue, our gross profit
margin increased by 5.5% to 77.9% for the quarter ended June 30, 2010, from
72.4% for the same period in 2009. The increase in gross profit is due mainly to
the unit price increases in our products, as well as some sales volume increase,
along with slight decrease in cost of revenues during the second quarter of
2010.
Operating Expenses
. Our total operating expenses
increased by $1,593,042, or 21.3%, to $9,080,314 for the quarter ended June 30,
2010, from $7,487,272 for the same period in 2009. The increase was primarily
attributable to the 258.2% increase in our research and development expenses
during the 2010 period, as well as the 66.6% increase in selling expense, which
was offset by the 1.6% decrease in our general and administrative expenses. As a
percentage of sales revenue, total operating expenses decreased by 0.4% to 22.2%
for the quarter ended June 30, 2010, from 22.6% for the same period in 2009.
Selling Expenses
. For the quarter ended June 30, 2010,
our selling expenses increased to $1,856,881, from $1,114,614 for the quarter
ended June 30, 2009, an increase of $742,267, or 66.6% . As a percentage of
sales, our selling expenses for the quarter ended June 30, 2010 increased by
1.1%, to 4.5%, from 3.4% for second quarter 2009. The increase in selling
expenses is mainly due to an increase in promotional and conference activities
as the Company continues its efforts in expanding its penetration into hospital
and inoculation centers.
General and Administrative Expenses
. For the three
months ended June 30, 2010, our general and administrative expenses decreased
$98,852, or 1.6%, to $5,905,950, from $6,004,802 for the quarter ended June 30,
2009. General and administrative expenses as a percentage of sales decreased by
3.7% to 14.4% for the second quarter of 2010, from 18.1% for the same period in
2009. Non-cash employee compensation for the three months ended June 30, 2010
increased by $18,354 to $45,948, from $27,594 for the same period in 2009. The
slightly decrease in general and administrative expenses is due mainly to the
decreases in general payroll and employee benefits and outside services, as well
as decreases in legal expenses and office supplies, which was offset by the
increases in insurance expenses.
Research and Development Expenses
.
For the
quarter ended June 30, 2010 and 2009, our research and development expenses were
$1,317,483 and $367,856, respectively, an increase of $949,627 or 258.2% . As a
percentage of revenues, our research and development expenses for the quarter
ended June 30, 2010 and 2009 were 3.2% and 1.1%, respectively. The increase in
research and development expenses is due primarily to the allocation of cost
associated with the development of two new products that are at the end of
developing stages. We expect to receive approval from SFDA for these two new
products in late 2010 or early 2011.
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 June
30, 2010 and 2009, the Company recognized an income from the change in fair
value of derivative liabilities in the amounts of $2,270,829 and a loss of
$432,889, respectively. The recognized income from the change in the fair value
of derivative liabilities in the second quarter of 2010 is mainly due to the
Companys stock price decrease from $11.04 to $10.99 as of March 31, 2010 and
June 30, 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.
-49-
Interest Expense (Income), net.
Our net of interest
expense (income) decreased by $444,909, or 50.3%, to an expense of $439,005 for
the quarter ended June 30, 2010, from an interest expense, net of $883,914 for
the same period in 2009. The decrease in interest expenses is primarily due to
having less average amount of bank loans outstanding during the current quarter
as the Company had paid off a significant portion of the short term loans with
banks in China during the end of prior year and current quarters, and the
increase in interest income of $0.12 million from the Companys short term
deposits with financial institutions..
Income Tax Expense.
Our provision for income taxes
increased $2,104,696, or 73.7%, to $4,961,895 for the quarter ended June 30,
2010, from $2,857,199 for the same period in 2009. Our effective tax rate for
the quarter ended June 30, 2010 and 2009 was 20.1% and 18.9%, respectively.
Among the increase of $2.1 million in income taxes, $1.3 million is due to the
dividend tax imposed by PRC tax authorities on dividends distributed by the
Companys two main operating entities to their parent company, Logic Express.
Net Income before Non-Controlling Interest.
Our net
income before non-controlling interest increased $7,409,553, or 60.3%, to
$19,693,674 for the quarter ended June 30, 2010, from $12,284,121 for the same
period in 2009. Income before non-controlling interest as a percentage of
revenues was 48.1% and 37% for the quarter ended June 30, 2010 and 2009,
respectively. The increase in net income before non-controlling interest is
mainly due to the increases in selling price and volume, as well as the decrease
in change in fair value of derivative liabilities.
For the Six-Month Periods Ended June 30, 2010 and 2009
(Unaudited)
|
|
Six Months
|
|
|
$
|
|
|
%
|
|
|
|
Ended June 30,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Revenue
|
$
|
68,006,869
|
|
$
|
54,330,143
|
|
$
|
13,676,726
|
|
|
25.2%
|
|
Cost of revenue
|
|
15,857,760
|
|
|
15,376,695
|
|
|
481,065
|
|
|
3.1%
|
|
Gross profit
|
|
52,149,109
|
|
|
38,953,448
|
|
|
13,195,661
|
|
|
33.9%
|
|
Gross profit as a percentage of revenue
|
|
76.7 %
|
|
|
71.7 %
|
|
|
5.0 %
|
|
|
|
|
Operating expenses
|
|
16,154,129
|
|
|
12,357,402
|
|
|
3,796,727
|
|
|
30.7%
|
|
Other (income) expense
|
|
(6,547,507
|
)
|
|
2,182,401
|
|
|
(8,729,908
|
)
|
|
(400.0%
|
)
|
Income before taxes and noncontrolling
interest
|
|
42,542,487
|
|
|
24,413,645
|
|
|
18,128,842
|
|
|
74.3%
|
|
Income taxes
|
|
8,033,042
|
|
|
4,762,594
|
|
|
3,270,448
|
|
|
68.7%
|
|
Net income before noncontrolling interests
|
$
|
34,509,445
|
|
$
|
19,651,051
|
|
$
|
14,858,394
|
|
|
75.61%
|
|
Revenues
. Our revenues are derived primarily from the
sales of our human albumin and immunoglobulin products. Our revenues increased
25.2%, or $13,676,726, to $68,006,869 for the six months ended June 30, 2010,
compared to revenues of $54,330,143 for the six months ended June 30, 2009. The
growth in revenue is mainly due to unit price increases of our products, as well
as a 0.1% increase in foreign exchange translation. All of our approved products
recorded price increases ranging from 1.3% to 375.0% . For the six months ended
June 30, 2010, the average price for our approved human albumin products, which
contributed 46.5% to our total revenues, increased 1.3%, the average price for
our approved human hepatitis B immunoglobulin products, which contributed 9.0%
to our total revenues, increased 375.0%, the average price for our approved
human immunoglobulin for intravenous injection products, which contributed 31.5%
to our revenues, increased 31.6%, the average price for our approved human
rabies immunoglobulin products, which contributed 7.5% to our revenues,
increased 23.9%, the average price for our approved human tetanus immunoglobulin
products, which contributed 2.7% to our revenue, increased 19.9%, and the
average price for our approved human immunoglobulin products, which contributed
1.2% to our revenue, increased 119.7%, as compared to the same period in 2009.
As the imported human albumin continues to increase, the Company expects the
price of human albumin may experience some pressure in the second half of 2010,
while price of other products remain stable.
Cost of Revenues
. Our cost of sales increased $481,065,
or 3.1%, to $15,857,760 for the six months ended June 30, 2010, from $15,376,695
during the same period in 2009. This increase was mainly due to a 3.0% 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 23.3% for the six months ended June 30, 2010, as
compared to 28.3% during the same period in 2009. The increase in cost of
revenues is due to the increase in sales, while the decrease in cost of revenues
as a percentage of sales is due to the change of the product mix that were sold.
-50-
Gross Profit
. Gross profit increased by $13,195,661, or 33.9%, to $52,149,109 for the six months ended June 30, 2010, from $38,953,448 for the same period in 2009. As a percentage of sales revenue, our gross profit margin
increased by 5.0% to 76.7% for the six months ended June 30, 2010, from 71.7% for the same period in 2009. The increase in gross profit is due mainly to the increases in selling prices of our products, as well as the increase in sales volume, during
the first half of 2010, as compared to the same period last year.
Operating Expenses
. Our total operating expenses increased by $3,796,727, or 30.7%, to $16,154,129 for the six months ended June 30, 2010, from $12,357,402 for the same period in 2009. The increase was primarily attributable to
the 197.5% increase in our research and development expenses during the 2010 period, as well as the 65.3% increase in selling expense and the 10.6% increase in our general and administrative expenses. As a percentage of sales revenue, total
operating expenses increased by 1.1% to 23.8% for the six months ended June 30, 2010, from 22.7% for the same period in 2009.
Selling Expenses
. For the six months ended June 30, 2010, our selling expenses increased to $2,799,789, from $1,694,110 for the same period in 2009, an increase of $1,105,679, or 65.3%. As a
percentage of sales, our selling expenses for the six months ended June 30, 2010 increased by 1.0%, to 4.1%, from 3.1% for the same period in 2009. The increase in selling expenses for the first half of 2010 is due primarily to
the increased promotional
and conference activities as the Company continues its efforts in expanding its penetration into hospital and inoculation centers.
General and Administrative Expenses
. For the six months ended June 30, 2010, our general and administrative expenses increased $1,040,493, or 10.6%, to $10,868,202, from $9,827,709 for the same period
in 2009. General and administrative expenses as a percentage of sales decreased by 2.1% to 16.0% for the first six months of 2010, from 18.1% for the same period in 2009. Non-cash employee compensation for the six months ended June 30, 2010
increased by $562,874, from $54,967 for the same period in 2009, as a result of 617,841. The increase in general and administrative expenses in the first half of 2010, as compared to the same period of 2009, is due primarily to the increases
in traveling, insurance and general office expenses as the Company continues to its efforts in integrating two main operating entities. Compensation expenses increased by $0.6 million as a result of the grant of stock options to its director and
executive during the first quarter of 2010.
Research and Development Expenses
.
For the six months ended June 30, 2010 and 2009, our research and development expenses were $2,486,138 and $835,583, respectively, an increase of $1,650,555
or 197.5%. As a percentage of revenues, our research and development expenses for the six months ended June 30, 2010 and 2009 were 3.7% and 1.5%, respectively. The increase in research and development expenses is due primarily to the allocation of
cost associated with the development of two new products that are at the end of developing stages.
We expect to receive approval from SFDA for these two new products in late 2010 or early 2011.
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 six months ended June 30, 2010 and 2009, the Company recognized an income from the change in fair value of derivative liabilities in the amounts of $6,104,406 and a loss of $842,181, respectively. The recognized income
from the change in the fair value of derivative liabilities in the first six months of 2010 is mainly due to the Companys stock price decrease from $12.08 to $10.99 as of December 31, 2009 and June 30, 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 Expense (Income), net.
Our net of interest expense (income) decreased by $634,709, or 50.6%, to an expense of $620,058 for the six months ended June 30, 2010, from an interest expense of $1,254,767 for the same period in
2009. The decrease in net of interest expense (income) is primarily due to we have less average amount of bank loan outstanding during current quarters as the Company had paid off a significant portion of the short term loans with banks in China
during the end of the prior year and current quarters, and the increase in interest income of $0.16 million from the Companys short term deposits with financial institutions.
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 $3,270,448,
or 68.7%, to $8,033,042 for the six months ended June 30, 2010, from $4,762,594
for the same period in 2009. Our effective tax rate for the six months ended
June 30, 2010 and 2009 was 18.9% and 19.5%, respectively. Among the increase of
$3.3 million in income taxes, $1.8 million is due to the dividend tax imposed by
PRC tax authorities on dividends distributed by the Companys two main operating
entities to their parent company, Logic Express, during the first half of 2010.
-51-
Net Income before Non-Controlling Interest.
Our net
income before non-controlling interest increased $14,858,394, or 75.6%, to
$34,509,445 for the six months ended June 30, 2010, from $19,651,051 for the
same period in 2009. Income before non-controlling interest as a percentage of
revenues was 50.7% and 36.2% for the six months ended June 30, 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 June 30, 2010, we had $56,263,131 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 six months ended June 30, 2010 compared to June 30, 2009
(Unaudited):
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
Net Cash Provided by Operating
Activities
|
$
|
19,355,081
|
|
$
|
28,429,522
|
|
Net Cash Used in Investing Activities
|
$
|
(10,735,936
|
)
|
$
|
(1,901,121
|
)
|
Net Cash (Used in) Provided by
Financing Activities
|
$
|
(6,409,275
|
)
|
$
|
14,083,254
|
|
Effect of Exchange Rate Change on Cash
|
$
|
209,310
|
|
$
|
52,750
|
|
Net Increase in Cash and Cash
Equivalents
|
$
|
2,419,180
|
|
$
|
40,664,405
|
|
Cash and Cash Equivalents, Beginning
|
$
|
53,843,951
|
|
$
|
8,814,616
|
|
Cash and Cash Equivalents, Ending
|
$
|
56,263,131
|
|
$
|
49,479,021
|
|
Operating activities
Net cash provided by operating activities was $19.4 million for
the six months ended June 30, 2010, as compared to $28.4 million net cash
provided by operating activities for the same period in 2009. The net cash
provided by operating activities in the six months ended June 30, 2010 was
mainly due to the cash-related consolidated net income of $32.9 million and
offset by cash outflow for inventory, accounts receivable, accrued interest, and
taxes payable of $6.4 million, $3.9 million, $2.1 million, and $1.3 million,
respectively. The cash provided by operating activities in the same period in
2009 was mainly from the cash related net income of $24 million, advanced
receipt from customer of $4 million and other payable increased by $4.6 million,
and offset by the cash paid for inventory of $4 million resulted in $28 million
cash increase from operating activities.
Investing activities
Net cash used in investing activities for the six months ended
June 30, 2010 was $10.7 million, as compared to $1.9 million net cash used in
investing activities in the same period of 2009. We paid $1.5 million to acquire
a new Company-Ziguang Bio-tech Co. with $1.5 million net assets, paid the final
payment for Dalin acquisition to Dalins old shareholders with $2.5million,
additional $1.4million equipments in Taibang and $4.6 million for plasma
companies' buildings and CIP in Dalin, during the six months ended June 30,
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.
-52-
Financing activities
Net cash used in financing activities for the six months ended
June 30, 2010 totaled $6.4 million as compared to $14.1 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 $4.9 million, repayment of non-controlling shareholder loan of
$3.7 million, repayment of short term bank loan of $4.4 million and offset by
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 June 30, 2010:
Payment due by period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Short-Term Debt
Obligations
|
$
|
5,965,650
|
|
$
|
5,965,650
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Current Maturities of Long-Term Debt Obligations (a)
|
|
7,500,000
|
|
|
7,500,000
|
|
|
-
|
|
|
|
|
|
-
|
|
Due to Related
Companies (b)
|
|
2,131,455
|
|
|
2,131,455
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating Lease Obligations
|
|
874,448
|
|
|
224,724
|
|
|
440,400
|
|
|
17,913
|
|
|
191,411
|
|
Capital Lease
Obligations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Purchase and Other Obligations
|
|
577,638
|
|
|
378,783
|
|
|
88,380
|
|
|
88,380
|
|
|
22,095
|
|
Total
|
$
|
17,049,191
|
|
$
|
16,200,612
|
|
$
|
528,780
|
|
$
|
106,293
|
|
$
|
213,506
|
|
Below is a summary of our current obligations under material
contracts:
(a)
|
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. 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, accrued interest of $8,550 and deferred fee of
$134,479 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
June 30, 2010.
|
|
|
(b)
|
Qianfeng has payables to Guizhou Eakan Investing Corp. in
the amount of approximately $2,131,455 (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.
|
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.
-53-
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted FASB's accounting
standard related to fair value measurements and began recording financial assets
and liabilities subject to recurring fair value measurement at the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. These fair value principles prioritize
valuation inputs across three broad levels. The Company considers the carrying
amount of cash, receivables, payables including accrued liabilities and short
term loans to approximate their fair values because of the short period of time
between the origination of such instruments and their expected realization and
if applicable, their stated rates of interest are equivalent to interest rates
currently available. The fair values are measured pursuant to the three levels
defined by the FASB's accounting standard as follow:
-
Level 1: inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
-
Level 2: inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for
substantially the full term of the financial instruments.
-
Level 3: inputs to the valuation methodology are unobservable and
significant to the fair value.
Revenue Recognition
We recognize revenue when products are delivered and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the
sales price is fixed or determinable, which are generally considered to be met
upon delivery and acceptance of products at the customer site. Sales are
presented net of any discounts given to customers. As a policy, we do not accept
any product returns and based on our records, product returns, if any, are
immaterial. Sales revenue represents the invoiced value of goods, net of a
value-added tax, or VAT. All products produced by us and sold in the PRC are
subject to a Chinese VAT at a rate of 6% of the gross sales price or at a rate
approved by the Chinese local government. Products distributed by 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.
The
cost of major raw materials (plasma) used in the production are being allocated
based on the management's estimation of historical yields and market value from
the annual production for each different products.
With the anticipation of two new
products, human coagulation factor VIII and human prothrombin complex
concentrate, in late 2010 or early 2011, the Company allocated portion of the
raw material costs as R&D expense in the first half of 2010 prior to the
approval of the two products. The same allocation method will be applied to the
cost of those two products as soon as they are approved for commercial
production. At each balance sheet date, we evaluate inventories that may be
worth less than current carrying amounts. Total inventories amounted to $41.4
million as of June 30, 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.
-54-
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 fair value of stock based compensation, potential losses on outstanding receivables and slow-moving inventories, the recoverability of the carrying amount and the estimated useful lives of long-lived
assets, allocation of plasma production cost as well as bonus accruals for year end management bonus. 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 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.
-55-
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.
In April 2010, the FASB issued Accounting Standards Update 2010-13, CompensationStock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades, or ASU 2010-13. This Update provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial porting of
the entitys equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as
equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the adoption of ASU 2010-17 to have a significant impact on its
consolidated financial statements.
In April 2010, the FASB issued Accounting Standard Update 20-10-17, Revenue RecognitionMilestone Method (Topic 605): Milestone Method of Revenue Recognition or ASU 2010-17. This Update provides guidance on the recognition of
revenue under the milestone method, which allows a vendor to adopt an accounting policy to recognize all of the arrangement consideration that is contingent on the achievement of a substantive milestone (milestone consideration) in the period the
milestone is achieved. The pronouncement is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010. The adoption of ASU 2010-17 does not have a significant
impact on its consolidated financial statements.
Seasonality of our Sales
Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.
Inflation
Inflation does not materially affect our business or the results of our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our investors.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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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 June 30, 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 June 30, 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.
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 second 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).
-57-
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.
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. During the second quarter of 2010, Jiean requested Qianfeng to register its
1.8 million shares of additional capital infusion as per Equity Purchase Agreement and was approved by the majority shareholders in a shareholders meeting held in the second quarter of 2010. However, the requested is still await the Companys
Board to ratify the validity and the completion of the registration with PRCs local AIC. If such request is granted, Dalins ownership in Qianfeng
will be diluted from 54% to 52.54%.
-58-
Dispute over Qianfeng Technical Consulting Agreement
In 1997, Qianfeng entered into a Technical Cooperation Agreement with Sin Kyung Ye, or Sin, a Korean individual, to provide certain fractionation equipment and transfer processing know-how to Qianfeng. In August 2004, Sin filed a law suit against
Qianfeng with the Intermediate Court in Guiyang City, China, alleging non-payment of RMB 100,000 (approximately, $14,670) for his fractionation equipment and RMB 5,000,000 (approximately, $733,500) for the transfer of his technological
know-how. The Intermediate Court ruled in favor of Sin and found that Qianfeng owed Sin RMB 10,376,160 (approximately, $ 1,522,183), but Qianfeng appealed the Intermediate Court ruling to the Guizhou High Court. The Guizhou High Court agreed in
part with Qianfeng's grounds for appeal and reduced the amount of know-how transfer fee to RMB 1,970,413 (approximately, $289,060). In May 2007, Sin appealed the Guizhou High Court's decision to the People's Supreme Court in Beijing. The
People's Supreme Court heard in April 2008 and ruled on December 29, 2009 for Qianfeng pay RMB 4,700,000 (approximately, $689,490) as compensation to Sin for technology transfer and RMB 100,000 (approximately, $14,670) for unpaid equipment
purchase. Qianfeng has accrued and accounted for all these expenses as of December 31, 2009 and recorded a receivable $431,799 (RMB 2,931,423) for the 54% of the total liability
due from the old shareholders of Dalin as agreed in equity transfer
agreement. During the second quarter of 2010, the Company wrote off the receivable of its share of the judgment, which was anticipated to be recovered from the previous shareholders of Qianfeng and recorded as an offset with the investment payable
previously, as the bad debt expense. Due to several changes of the Qianfengs ownership prior the Companys acquisition, the management believes it is more than likely that the Company will not be able to recover such amount from the
existing shareholders of Qianfeng.
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.
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. On June 30, 2010,
Qianfeng brought suit, to the Middle Court of Guiyang City, against Zhongxin in
attempt to recover for the full judgment amount of RMB 3,074,342 plus court fee
of RMB 32,340 that Qianfeng already paid on behalf of Zhongxin.
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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 six months
ended June 30, 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.
ITEM 6.
EXHIBITS.
The following exhibits are filed as part of this report or
incorporated by reference:
Exhibit
|
|
Number
|
Description
|
21
|
Subsidiaries
*
|
* 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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