UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2011
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to _____________
Commission File Number: 001-34566
CHINA BIOLOGIC PRODUCTS,
INC.
(Exact Name of Registrant as Specified in Its
Charter)
Delaware
|
75-2308816
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
No. 14 East Hushan Road
Taian City, Shandong
271000
Peoples Republic of China
(Address of principal executive
offices, Zip Code)
(+86) 538-620-2306
(Registrants telephone number,
including area code)
____________________________________________________________________________
(Former
name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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 [X] 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
[X]
|
Non-accelerated filer [
]
|
Smaller reporting company
[ ]
|
(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 stock, as of August 5, 2011 is as follows:
Class of Securities
|
Shares Outstanding
|
Common Stock, $0.0001 par value
|
25,551,125
|
Quarterly Report on Form 10-Q
Three and Six Months Ended June 30, 2011
TABLE OF CONTENTS
PART I
|
FINANCIAL
INFORMATION
|
|
|
|
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
1
|
ITEM 2.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
21
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|
29
|
ITEM 4.
|
CONTROLS AND
PROCEDURES
|
30
|
|
|
|
PART II
|
OTHER INFORMATION
|
|
|
|
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
31
|
ITEM 1A.
|
RISK FACTORS
|
31
|
ITEM 2.
|
UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS.
|
32
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
32
|
ITEM 4.
|
(REMOVED AND
RESERVED)
|
32
|
ITEM 5.
|
OTHER INFORMATION.
|
32
|
ITEM 6.
|
EXHIBITS
|
33
|
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Contents
|
Page(s)
|
Unaudited Consolidated Balance
Sheets
|
2
|
Unaudited Consolidated Statements of Income
|
3
|
Unaudited Consolidated Statement of
Stockholders' Equity and Comprehensive Income
|
4
|
Unaudited Consolidated Statements of Cash Flows
|
5
|
Notes to Unaudited Consolidated
Financial Statements
|
7
|
1
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
76,841,679
|
|
$
|
64,941,368
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
20,392,860
|
|
|
9,922,111
|
|
Accounts
receivable - a related party
|
|
-
|
|
|
212,611
|
|
Inventories
|
|
62,598,637
|
|
|
52,300,447
|
|
Other
receivables
|
|
2,103,222
|
|
|
2,727,110
|
|
Prepayments and prepaid expenses
|
|
2,044,279
|
|
|
855,338
|
|
Deferred tax
assets
|
|
2,401,806
|
|
|
1,860,753
|
|
Total
Current Assets
|
|
166,382,483
|
|
|
132,819,738
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
39,932,006
|
|
|
39,511,731
|
|
Intangible assets, net
|
|
13,124,987
|
|
|
14,559,020
|
|
Land use rights, net
|
|
4,954,026
|
|
|
4,701,450
|
|
Prepayments and deposits for
property, plant and equipment
|
|
6,429,300
|
|
|
4,254,423
|
|
Goodwill
|
|
18,129,811
|
|
|
17,778,231
|
|
Equity method investment
|
|
8,183,215
|
|
|
7,297,201
|
|
Total Assets
|
$
|
257,135,828
|
|
$
|
220,921,794
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
Short-term bank loans
|
$
|
18,564,000
|
|
$
|
3,034,000
|
|
Accounts payable
|
|
5,593,488
|
|
|
4,392,772
|
|
Due to related
parties
|
|
3,262,995
|
|
|
3,192,140
|
|
Other payables
and accrued expenses
|
|
21,738,685
|
|
|
21,606,730
|
|
Advance from customers
|
|
4,496,574
|
|
|
3,560,018
|
|
Income tax
payable
|
|
9,555,911
|
|
|
6,659,805
|
|
Other taxes payable
|
|
2,759,165
|
|
|
2,146,868
|
|
Convertible
notes
|
|
-
|
|
|
1,196,233
|
|
Derivative liabilities -
embedded conversion option in convertible notes
|
|
-
|
|
|
14,561,661
|
|
Derivative
liabilities - warrants
|
|
5,188,004
|
|
|
11,095,592
|
|
Total
Current Liabilities
|
|
71,158,822
|
|
|
71,445,819
|
|
Other payable
|
|
338,604
|
|
|
333,008
|
|
Deferred tax liabilities
|
|
3,999,634
|
|
|
4,098,834
|
|
Total Liabilities
|
|
75,497,060
|
|
|
75,877,661
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
Common stock: par value $.0001; 100,000,000 shares
authorized; 25,551,125 and 24,351,125 shares issued and outstanding at
June 30, 2011 and December 31, 2010, respectively
|
|
2,555
|
|
|
2,435
|
|
Additional
paid-in capital
|
|
46,160,371
|
|
|
35,435,139
|
|
Retained earnings
|
|
78,647,781
|
|
|
55,739,101
|
|
Accumulated
other comprehensive income
|
|
11,129,413
|
|
|
8,023,121
|
|
Total stockholders equity
attributable to China Biologic Products, Inc.
|
|
135,940,120
|
|
|
99,199,796
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
45,698,648
|
|
|
45,844,337
|
|
|
|
|
|
|
|
|
Total
Equity
|
|
181,638,768
|
|
|
145,044,133
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
$
|
257,135,828
|
|
$
|
220,921,794
|
|
See accompanying notes to Unaudited Consolidated Financial
Statements.
2
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
$
|
41,664,996
|
|
$
|
40,580,807
|
|
$
|
76,060,234
|
|
$
|
67,442,329
|
|
Related party
|
|
462
|
|
|
327,509
|
|
|
76,046
|
|
|
564,540
|
|
Total sales
|
|
41,665,458
|
|
|
40,908,316
|
|
|
76,136,280
|
|
|
68,006,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
12,512,359
|
|
|
9,012,168
|
|
|
21,789,563
|
|
|
15,811,022
|
|
Related party
|
|
210
|
|
|
46,738
|
|
|
34,604
|
|
|
46,738
|
|
Cost of sales
|
|
12,512,569
|
|
|
9,058,906
|
|
|
21,824,167
|
|
|
15,857,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
29,152,889
|
|
|
31,849,410
|
|
|
54,312,113
|
|
|
52,149,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
3,038,143
|
|
|
1,856,881
|
|
|
5,488,056
|
|
|
2,799,789
|
|
General and administrative
expenses
|
|
7,665,306
|
|
|
5,905,950
|
|
|
15,129,447
|
|
|
10,868,202
|
|
Research and development expenses
|
|
1,218,977
|
|
|
1,317,483
|
|
|
1,929,968
|
|
|
2,486,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
17,230,463
|
|
|
22,769,096
|
|
|
31,764,642
|
|
|
35,994,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses / (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity method investee
|
|
(463,688
|
)
|
|
(157,114
|
)
|
|
(734,082
|
)
|
|
(345,655
|
)
|
Change in fair value of derivative liabilities
|
|
(11,175,384
|
)
|
|
(2,270,829
|
)
|
|
(12,197,249
|
)
|
|
(6,104,406
|
)
|
Interest expense
|
|
2,300,601
|
|
|
619,469
|
|
|
3,981,523
|
|
|
953,058
|
|
Interest income
|
|
(269,594
|
)
|
|
(180,464
|
)
|
|
(439,725
|
)
|
|
(333,000
|
)
|
Other expenses / (income), net
|
|
846,051
|
|
|
102,465
|
|
|
1,070,282
|
|
|
(717,504
|
)
|
Total other income, net
|
|
(8,762,014
|
)
|
|
(1,886,473
|
)
|
|
(8,319,251
|
)
|
|
(6,547,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense
|
|
25,992,477
|
|
|
24,655,569
|
|
|
40,083,893
|
|
|
42,542,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
5,317,249
|
|
|
4,961,895
|
|
|
9,580,465
|
|
|
8,033,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
20,675,228
|
|
|
19,693,674
|
|
|
30,503,428
|
|
|
34,509,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to the noncontrolling interest
|
|
4,075,523
|
|
|
6,757,992
|
|
|
7,594,748
|
|
|
10,910,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to China
Biologic Products, Inc.
|
$
|
16,599,705
|
|
$
|
12,935,682
|
|
$
|
22,908,680
|
|
$
|
23,599,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.67
|
|
$
|
0.55
|
|
$
|
0.94
|
|
$
|
1.01
|
|
Diluted
|
$
|
0.28
|
|
$
|
0.41
|
|
$
|
0.53
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
24,632,774
|
|
|
23,511,435
|
|
|
24,492,728
|
|
|
23,449,508
|
|
Diluted
|
|
26,738,279
|
|
|
26,599,255
|
|
|
26,802,683
|
|
|
26,541,685
|
|
See accompanying notes to Unaudited Consolidated Financial
Statements.
3
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
|
|
|
Equity attributable
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
Retained
|
|
|
comprehensive
|
|
|
to China Biologic
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
paid-in capital
|
|
|
earnings
|
|
|
income
|
|
|
Products, Inc.
|
|
|
interest
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2011
|
|
24,351,125
|
|
$
|
2,435
|
|
$
|
35,435,139
|
|
$
|
55,739,101
|
|
$
|
8,023,121
|
|
$
|
99,199,796
|
|
$
|
45,844,337
|
|
$
|
145,044,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
22,908,680
|
|
|
-
|
|
|
22,908,680
|
|
|
7,594,748
|
|
|
30,503,428
|
|
Foreign currency translation adjustments, net of nil
income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,106,292
|
|
|
3,106,292
|
|
|
719,548
|
|
|
3,825,840
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,014,972
|
|
$
|
18,314,296
|
|
$
|
34,329,268
|
|
Dividend declared by subsidiaries to noncontrolling
interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,589,920
|
)
|
|
(5,589,920
|
)
|
Acquisition of noncontrolling
interest
|
|
-
|
|
|
-
|
|
|
(4,764,935
|
)
|
|
-
|
|
|
-
|
|
|
(4,764,935
|
)
|
|
(2,870,065
|
)
|
|
(7,635,000
|
)
|
Stock compensation
|
|
-
|
|
|
-
|
|
|
2,418,287
|
|
|
-
|
|
|
-
|
|
|
2,418,287
|
|
|
-
|
|
|
2,418,287
|
|
Common stock issued in connection
with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
25,000
|
|
|
3
|
|
|
99,997
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
|
-
|
|
|
100,000
|
|
Conversion of convertible notes
|
|
1,175,000
|
|
|
117
|
|
|
12,971,883
|
|
|
-
|
|
|
-
|
|
|
12,972,000
|
|
|
-
|
|
|
12,972,000
|
|
Balance as of June 30, 2011
|
|
25,551,125
|
|
$
|
2,555
|
|
$
|
46,160,371
|
|
$
|
78,647,781
|
|
$
|
11,129,413
|
|
$
|
135,940,120
|
|
$
|
45,698,648
|
|
$
|
181,638,768
|
|
See accompanying notes to Unaudited Consolidated Financial
Statements.
4
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the six months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
$
|
30,503,428
|
|
$
|
34,509,445
|
|
Adjustments to reconcile net income
to cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
2,192,436
|
|
|
1,670,321
|
|
Amortization
|
|
1,769,484
|
|
|
1,740,659
|
|
Loss on sale of property, plant and equipment
|
|
133,218
|
|
|
3,020
|
|
(Reversal) / provision for
doubtful accounts, net
|
|
(14,674
|
)
|
|
423,922
|
|
Write-down of obsolete inventories
|
|
151,014
|
|
|
219,897
|
|
Deferred tax benefit
|
|
(677,477
|
)
|
|
(311,476
|
)
|
Stock compensation
|
|
2,418,287
|
|
|
617,841
|
|
Change in fair value of
derivative liabilities
|
|
(12,197,249
|
)
|
|
(6,104,406
|
)
|
Amortization of deferred note issuance cost
|
|
91,945
|
|
|
171,667
|
|
Amortization of discount on
convertible notes
|
|
3,503,767
|
|
|
312,259
|
|
Equity in income of equity method investee
|
|
(734,082
|
)
|
|
(345,655
|
)
|
Change in operating
assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable - third parties
|
|
(10,150,102
|
)
|
|
(3,861,953
|
)
|
Accounts receivable -
a related
party
|
|
214,587
|
|
|
(6,264
|
)
|
Other receivables
|
|
27,582
|
|
|
(95,231
|
)
|
Inventories
|
|
(9,319,703
|
)
|
|
(6,351,255
|
)
|
Prepayments and prepaid expenses
|
|
(1,299,510
|
)
|
|
(849,198
|
)
|
Accounts payable
|
|
1,200,716
|
|
|
(446,713
|
)
|
Other payables and accrued expenses
|
|
378,573
|
|
|
1,252,134
|
|
Accrued interest - noncontrolling
interest shareholders
|
|
-
|
|
|
(2,068,526
|
)
|
Advance from customers
|
|
857,251
|
|
|
169,398
|
|
Income tax payable
|
|
2,735,990
|
|
|
(1,294,805
|
)
|
Other taxes payable
|
|
563,983
|
|
|
-
|
|
Net cash provided by operating
activities
|
|
12,349,464
|
|
|
19,355,081
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
Acquisition of a subsidiary, net of
cash acquired
|
|
-
|
|
|
(4,022,288
|
)
|
Purchase of property,
plant and equipment
|
|
(4,596,500
|
)
|
|
(6,154,212
|
)
|
Purchase of intangible assets and land
use right
|
|
(413,925
|
)
|
|
(559,436
|
)
|
Net cash used in investing
activities
|
|
(5,010,425
|
)
|
|
(10,735,936
|
)
|
See accompanying notes to Unaudited Consolidated Financial
Statements.
5
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDTIED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
|
|
For the six months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from warrants exercised
|
|
-
|
|
|
689,160
|
|
Proceeds from stock
option exercised
|
|
100,000
|
|
|
-
|
|
Proceeds from short term bank loans
|
|
18,373,200
|
|
|
5,867,600
|
|
Repayment of short term
bank loans
|
|
(3,062,200
|
)
|
|
(4,449,295
|
)
|
Acquisition of noncontrolling interest
|
|
(7,635,000
|
)
|
|
-
|
|
Repayment of
noncontrolling interest shareholder loan
|
|
-
|
|
|
(3,652,500
|
)
|
Dividend paid by subsidiaries to
noncontrolling interest shareholders
|
|
(5,589,920
|
)
|
|
(4,864,240
|
)
|
Net cash used in / (provided by)
financing activities
|
|
2,186,080
|
|
|
(6,409,275
|
)
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE CHANGE IN
CASH
|
|
2,375,192
|
|
|
209,310
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
11,900,311
|
|
|
2,419,180
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning
of period
|
|
64,941,368
|
|
|
53,843,951
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
$
|
76,841,679
|
|
$
|
56,263,131
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
7,521,952
|
|
$
|
9,500,399
|
|
Cash paid for interest
expense (net of capitalized interest)
|
$
|
370,918
|
|
$
|
161,684
|
|
Noncash investing and financing
activities:
|
|
|
|
|
|
|
Convertible notes conversion
|
$
|
12,972,000
|
|
$
|
2,498,957
|
|
Reclassification
of warrant liability to paid-in capital upon warrants conversion
|
$
|
-
|
|
$
|
1,747,765
|
|
Utilization of prepayments and deposits to acquire intangible assets
|
$
|
-
|
|
$
|
440,070
|
|
Utilization of
prepayments and deposits to acquire property, plant and equipment
|
$
|
836,000
|
|
$
|
629,166
|
|
See accompanying notes to Unaudited Consolidated Financial
Statements.
6
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010
NOTE 1 ORGANIZATION BACKGROUND AND PRINCIPAL
ACTIVITIES
A. Reorganization and Principal Activities
China Biologic Products, Inc. (the Company or CBP, formerly
known as GRC Holdings, Inc.) was originally incorporated in the State of Texas
in 1989. On July 19, 2006, the Company and its principle shareholders entered
into a share exchange agreement (the Exchange Agreement) with Logic Express
Ltd. (Logic Express), a privately held investment holding company incorporated
on January 6, 2006 under the laws of the British Virgin Islands, and all the
shareholders of Logic Express (the Logic Express Shareholders). Pursuant to
the terms of the Exchange Agreement, the Logic Express Shareholders transferred
to the Company all of their shares in exchange for 18,484,715 shares of the
Companys common shares (the Share Exchange). As a result of the Share
Exchange, Logic Express became a wholly-owned subsidiary of the Company and the
Logic Express Shareholders received approximately 96.1% of the Companys issued
and outstanding common shares. Immediately prior to the date of the Share
Exchange, the Company was a publicly listed shell entity with no operations and,
Logic Express, through its 82.76% owned subsidiary, Shandong Taibang Biological
Products Co. Ltd. (Shandong Taibang), was engaged in the research,
development, commercialization, manufacture and sale of human blood products
primarily in the Peoples Republic of China (the PRC or China). The Share
Exchange was accounted for as a reverse recapitalization, equivalent to the
issuance of stock by Logic Express for the net monetary assets of the Company
accompanied by a recapitalization. After consummation of the Share Exchange, the
Company converted into a Delaware corporation and changed its name to China
Biologic Products, Inc. on January 10, 2007.
The Company, through its PRC subsidiaries, is a
biopharmaceutical company that is principally engaged in the research,
development, manufacturing and sales of plasma-based pharmaceutical products in
PRC. The PRC subsidiaries own plasma stations to purchase and collect plasma
from individual donors for a fee. The plasma is processed into finished goods
after passing through a series of fractionating processes. All of the Companys
products are prescription medicines which require government approval on the
quality before the products are sold to customers. The Company primarily sells
its products to hospitals and inoculation centers directly or through
distributors in the PRC.
On September 26, 2008, the Company, through Logic Express,
entered into an equity purchase agreement with Guiyang Dalin Biologic
Technologies Co. Ltd. (Dalin, formerly known as Chongqing Dalin Biologic
Technologies Co. Ltd.), an investment holding company, and certain equity
owners of Dalin, to acquire 90% equity interest of Dalin. The purchase
consideration for the 90% equity interest in Dalin was RMB 194,400,000 (or
approximately $28,479,600) in cash.
Dalin holds 54% equity interest in Guiyang Qianfeng Biological
Products Co., Ltd. (Qianfeng), which changed its name to Guizhou Taibang
Biological Products Co., Ltd. (Guizhou Taibang) on December 30, 2010. Qianfeng
is one of the largest plasma-based biopharmaceutical companies in China and is
the only manufacturer currently operating in Guizhou Province. Qianfeng is in
compliance with the Good Manufacturing Practices certified by State Food and
Drug Administration (SFDA) for the manufacturing, sale and distribution of
Human Albumin, Human Immunoglobulin, Human Intravenous Immunoglobulin, Human
Hepatitis B Immunoglobulin, Human Tetanus Immunoglobulin and Human Rabies Immune
Globulin.
The Company completed the acquisition of a 90% equity interest
in Dalin in January, 2009. On December 28, 2009, the Companys 90% equity
interest in Dalin was transferred to Logic Management Consulting (China) Co.,
Ltd. (Logic China), a wholly owned subsidiary of the Company. The Company
established Logic China in December 2009, for the purpose of being the holding
company of the 90% equity interest in Dalin.
On August 5, 2010, Logic China established a wholly-owned
subsidiary, Logic Taibang Biological Institute (Beijing), which changed its name
to Taibang (Beijing) Pharmaceutical Research Institute Co., Ltd. (Taibang
Beijing) on January 12, 2011, with registered capital of $149,700 (RMB 1
million). Taibang Beijing is principally engaged in the research and development
of plasma-based pharmaceutical products. The purpose of setting up Taibang
Beijing is to coordinate the research and development activities of the Company
and its subsidiaries.
On January 13, 2010, Shandong Taibang acquired the remaining
20% equity interest in Fangcheng Plasma Company from the noncontrolling interest
shareholder (see Note 15). Since the additional purchase of 20% equity interest
did not result in a change of the Companys control over Fangcheng Plasma
Company, this transaction was accounted for as an equity transaction. After the
acquisition, Fangcheng Plasma Company became a wholly-owned subsidiary of
Shandong Taibang.
7
On July 8, 2010, Logic China entered into an equity purchase
agreement with Shandong Taibang, to acquire 100% of the equity interest in
Shandong Taibang Medical Company (Taibang Medical), a wholly-owned subsidiary
of Shandong Taibang. The cash consideration of the 100% equity interest in
Taibang Medical was RMB 6,440,000 (approximately $947,327). The transaction was
completed on September 23, 2010. The purpose of this transaction is to
effectively acquire the 17.24% equity interest in Taibang Medical indirectly
held by the noncontrolling interest in Shandong Taibang, which will enable the
Company to consolidate its resources in the sales and marketing of Shandong
Taibang and Guizhou Taibangs products. This transaction was accounted for as an
equity transaction.
On November 11, 2010, the Company established Qianfeng
Biological Science Company (Qianfeng Biologic) for the purpose of research and
development of placenta based products. As of June 30, 2011, Qianfeng Biologic,
which is a wholly-owned subsidiary of Guizhou Taibang, had no operations.
On January 4, 2011, Logic China entered into an equity transfer
agreement (the Equity Transfer Agreement) with Shaowen Fan, a PRC individual.
Pursuant to the Equity Transfer Agreement, Logic China agreed to acquire the
remaining 10% noncontrolling interest in Dalin from Shaowen Fan for a purchase
price of RMB 50 million (approximately $7,635,000). The transaction was
completed on January 26, 2011 and Dalin became a wholly-owned subsidiary of
Logic China. The carrying amount of noncontrolling interest in Dalin at time of
the transaction was $2,870,065. The excess of purchase price over the carrying
amount of corresponding noncontrolling interest was recorded in additional
paid-in capital.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of
Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted as permitted by rules
and regulations of the U.S. Securities and Exchange Commission (SEC). The
December 31, 2010 consolidated balance sheet was derived from the audited
consolidated financial statements of the Company. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
December 31, 2010 audited consolidated financial statements of the Company
included in the Companys annual report on Form 10-K for the year ended December
31, 2010.
In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present a fair statement of the
financial position as of June 30, 2011, and the results of operations and cash
flows for the three and six months ended June 30, 2011 and 2010, have been made.
All significant intercompany transactions and balances are
eliminated on consolidation.
Recently Issued Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update
(ASU) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple
Deliverables). ASU 2009-13 amends FASB ASC Subtopic 605-25 to eliminate the
requirement that all undelivered elements have vendor specific objective
evidence of selling price (VSOE) or third party evidence of selling price
(TPE) before an entity can recognize the portion of an overall arrangement fee
that is attributable to items that already have been delivered. In the absence
of VSOE or TPE for one or more delivered or undelivered elements in a
multiple-element arrangement, entities will be required to estimate the selling
prices of those elements. The overall arrangement fee will be allocated to each
element (both delivered and undelivered items) based on their relative selling
prices, regardless of whether those selling prices are evidenced by VSOE or TPE
or are based on the entitys estimated selling price. Application of the
residual method of allocating an overall arrangement fee between delivered and
undelivered elements will no longer be permitted upon adoption of ASU 2009-13.
Additionally, the new guidance will require entities to disclose more
information about their multiple-element revenue arrangements. ASU 2009-13 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The adoption of ASU No. 2009-13 did not have a material impact on the
Companys consolidated financial statements.
In April 2010, the FASB issued ASU 2010-13, 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, a consensus of the
FASB Emerging Issues Task Force (Issue No. 09-J). ASU 2010-13 amends FASB ASC
Topic 718, CompensationStock Compensation, to clarify that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the 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 an award with such a
feature as a liability if it otherwise qualifies as equity. The amendments
should be applied by recording a cumulative-effect adjustment to the opening
balance of retained earnings. ASU 2010-13 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010. Early adoption is permitted. The adoption of ASU 2010-13 did not have a
material impact on the Companys consolidated financial statements.
8
In June 2011, the FASB issued Accounting Standard Update
(ASU) 2011-05, Comprehensive income (Topic 220), Presentation of Comprehensive
Income. ASU 2011-05 increases the prominence of other comprehensive income in
financial statements. Under this ASU, an entity will have the option to present
the components of net income and comprehensive income in either one or two
consecutive financial statements. The ASU eliminates the option in U.S. GAAP to
present other comprehensive income in the statement of changes in equity. An
entity should apply the ASU retrospectively. For a public entity, the ASU is
effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011. Early adoption is permitted.
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2011 and December 31, 2010
consisted of the following:
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
Accounts receivable
|
$
|
21,636,417
|
|
$
|
11,160,751
|
|
Less: Allowance for doubtful accounts
|
|
(1,243,557
|
)
|
|
(1,238,640
|
)
|
Total
|
$
|
20,392,860
|
|
$
|
9,922,111
|
|
An allowance for doubtful accounts of $10,419 and $6,762 was
reversed for the three months ended June 30, 2011 and 2010, respectively. An
allowance for doubtful accounts of $19,377 and $6,088 was reversed for the six
months ended June 30, 2011 and 2010, respectively. There were no write-off of
accounts receivable for the three and six months ended June 30, 2011 and June
30, 2010, respectively.
NOTE 4 INVENTORIES
Inventories at June 30, 2011 and December 31, 2010 consisted of
the following:
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
Raw materials
|
$
|
27,201,043
|
|
$
|
24,933,485
|
|
Work-in-process
|
|
21,525,227
|
|
|
15,262,139
|
|
Finished goods
|
|
13,872,367
|
|
|
12,104,823
|
|
Total
|
$
|
62,598,637
|
|
$
|
52,300,447
|
|
Raw materials mainly comprised the human blood plasma collected
from the Companys plasma stations. Work-in-process represented the intermediate
products in the process of production. Finished goods mainly comprised human
albumin and human immunoglobulin.
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2011 and December 31,
2010 consisted of the following:
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
Buildings
|
$
|
23,923,731
|
|
$
|
23,259,180
|
|
Machinery and equipment
|
|
27,735,598
|
|
|
27,028,171
|
|
Furniture, fixtures, office
equipment and vehicles
|
|
6,232,242
|
|
|
5,441,115
|
|
Total property, plant and equipment,
gross
|
|
57,891,571
|
|
|
55,728,466
|
|
Accumulated depreciation
|
|
(19,368,026
|
)
|
|
(17,434,512
|
)
|
Total property, plant and equipment, net
|
|
38,523,545
|
|
|
38,293,954
|
|
Construction in progress
|
|
1,408,461
|
|
|
1,217,777
|
|
Property, plant and equipment, net
|
$
|
39,932,006
|
|
$
|
39,511,731
|
|
Depreciation expense for the three months ended June 30, 2011
and 2010 was $1,083,692 and $876,664, respectively. Depreciation expense for the
six months ended June 30, 2011 and 2010 was $ 2,192,436 and $1,670,321,
respectively. No interest was capitalized into construction in progress for the
six months ended June 30, 2011 and 2010.
9
NOTE 6 INTANGIBLE ASSETS, NET
Intangible assets at June 30, 2011 and December 31, 2010
consisted of the following:
|
|
June 30, 2011
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
amortization
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
period
|
|
|
amount
|
|
|
amortization
|
|
|
amount
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits and licenses
|
|
10 years
|
|
$
|
11,894,342
|
|
$
|
(3,067,266
|
)
|
$
|
8,827,076
|
|
GMP certificate
|
|
5.8 years
|
|
|
2,462,020
|
|
|
(1,058,130
|
)
|
|
1,403,890
|
|
Long-term customer-relationship
|
|
4 years
|
|
|
7,331,993
|
|
|
(4,571,637
|
)
|
|
2,760,356
|
|
Others
|
|
|
|
|
222,767
|
|
|
(89,102
|
)
|
|
133,665
|
|
Total
|
|
|
|
$
|
21,911,122
|
|
$
|
(8,786,135
|
)
|
$
|
13,124,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
amortization
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
period
|
|
|
amount
|
|
|
Amortization
|
|
|
amount
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits and licenses
|
|
10 years
|
|
$
|
11,657,614
|
|
$
|
(2,483,386
|
)
|
$
|
9,174,228
|
|
GMP certificate
|
|
5.8 years
|
|
|
2,414,275
|
|
|
(821,015
|
)
|
|
1,593,260
|
|
Long-term customer-relationship
|
|
4 years
|
|
|
7,189,853
|
|
|
(3,549,236
|
)
|
|
3,640,617
|
|
Others
|
|
|
|
|
218,093
|
|
|
(67,178
|
)
|
|
150,915
|
|
Total
|
|
|
|
$
|
21,479,835
|
|
$
|
(6,920,815
|
)
|
$
|
14,559,020
|
|
Aggregate amortization expense for amortizing intangible assets
was $857,695 and $848,048 for the three months ended June 30, 2011 and 2010,
respectively. Aggregate amortization expense for amortizing intangible assets
was $1,710,688 and $1,693,952 for the six months ended June 30, 2011 and 2010,
respectively. Estimated amortization expenses for the next five fiscal years are
$3,476,327 in 2012, $1,614,261 in 2013, $1,522,223 in 2014, $1,183,112 in 2015,
and $1,166,200 in 2016.
NOTE 7 LAND USE RIGHTS, NET
At June 30, 2011 and December 31, 2010, land use rights
represented:
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
Land use rights
|
$
|
5,411,289
|
|
$
|
5,091,592
|
|
Accumulated amortization
|
|
(457,263
|
)
|
|
(390,142
|
)
|
Land use rights, net
|
$
|
4,954,026
|
|
$
|
4,701,450
|
|
Aggregate amortization expense for amortizing land use right
was $27,201 and $23,360 for the three months ended June 30, 2011 and 2010,
respectively. Aggregate amortization expense for amortizing land use right was
$58,796 and $46,707 for the six months ended June 30, 2011 and 2010,
respectively.
NOTE 8 SHORT-TERM BANK LOANS
The Companys bank loans as of June 30, 2011 and December 31,
2010 consisted of the following:
|
|
Maturity
|
|
|
Annual
|
|
|
June 30,
|
|
|
December 31,
|
|
Loans
|
|
date
|
|
|
interest rate
|
|
|
2011
|
|
|
2010
|
|
Short-term bank loan,
secured
|
|
March 21, 2011
|
|
|
5.84%
|
|
$
|
-
|
|
$
|
3,034,000
|
|
Short-term bank loan,
secured
(1)
|
|
March 22, 2012
|
|
|
6.06%
|
|
|
3,094,000
|
|
|
-
|
|
Short-term bank loan,
unsecured
|
|
January 29, 2012
|
|
|
5.81%
|
|
|
1,547,000
|
|
|
-
|
|
Short-term bank loan, unsecured
|
|
January 29, 2012
|
|
|
6.06%
|
|
|
1,547,000
|
|
|
-
|
|
Short-term bank loan,
unsecured
|
|
May 19, 2012
|
|
|
6.31%
|
|
|
4,641,000
|
|
|
|
|
Short-term bank loan, unsecured
|
|
June 7, 2012
|
|
|
6.31%
|
|
|
7,735,000
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
18,564,000
|
|
$
|
3,034,000
|
|
Interest expense on short-term bank loans was $167,964 and
$99,398 for the three months ended June 30, 2011 and 2010, respectively.
Interest expense on short-term bank loans was $238,340 and $161,684 for the six
months ended June 30, 2011 and 2010, respectively.
10
The Company did not have any revolving line of credit as of
June 30, 2011.
(1)
As of June 30, 2011, the secured loan is secured
by the Companys buildings with a net carrying amount of $1,616,271.
NOTE 9 INCOME TAX
In February 2009, Shandong Taibang was granted the High and New
Technology Enterprise status which entitled it to a 15% preferential income tax
rate for a period of three years from 2008 to 2010. Further, Guizhou Taibang was
entitled to the preferential income tax rate of 15% under the 10-year Western
Development Tax Concession, which also ended in 2010. Accordingly, Shandong
Taibang and Guizhou Taibang are subject to income tax at 25% from 2011 onwards.
Shandong Taibang is in the process of reapplying the High and New Technology
Enterprise qualification for an additional three years from 2011 to 2013.
Guizhou Taibang will apply for the 15% preferential income tax rate under the
extended Western Development Tax Concession from 2011 to 2020, which was
announced on July 27, 2011 (see Note 19).
The Companys effective income tax rate was 20% for the three
months ended June 30, 2011 and 2010. The Companys effective income tax rate was
24% and 19% for the six months ended June 30, 2011 and 2010, respectively. For
the three and six months ended June 30, 2011, the effective income tax rates for
the PRC entities and the non-PRC entities were approximately 25% and 0%,
respectively. The difference in the Companys overall effective income tax rates
for the three and six months ended June 30, 2011 is attributable to the
different shares of earnings before income tax expense in the PRC entities and
the non-PRC entities.
As of and for the six months ended June 30, 2011, the Company
did not have any unrecognized tax benefits and thus no interest and penalties
related to unrecognized tax benefits were recorded. In addition, the Company
does not expect that the amount of unrecognized tax benefits will change
significantly within the next 12 months.
NOTE 10 CONVERTIBLE NOTES
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
$9,554,140, 3.8% Senior Secured
Convertible Notes
|
$
|
9,554,140
|
|
$
|
9,554,140
|
|
Less:
|
portion of notes converted
|
|
(9,554,140
|
)
|
|
(4,854,140
|
)
|
|
unamortized discount
|
|
-
|
|
|
(3,503,767
|
)
|
Convertible notes
|
$
|
-
|
|
$
|
1,196,233
|
|
On June 5, 2009, the Company entered into a securities purchase
agreement (the Purchase Agreement) with certain accredited investors (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 (and together with the shares to be converted in the Notes,
the Underlying Securities). The transaction closed on June 10, 2009.
The coupon rate of the Notes is 3.8% per annum (the Interest
Rate), payable from the closing until repayment, whether on maturity on June
10, 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 on
September 30, 2009. 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 or interest on the Notes
when due, subject to 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 the Companys common stock at a conversion price of $4.00 per
share, subject to certain adjustments as specified in the Purchase Agreement.
The Warrants have a term of three years, with an exercise price
of $4.80 per share, subject to adjustments 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 partially converted, the Investors could only exercise the corresponding
portion of the Warrants.
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, equal to 6.1%
of the proceeds received in connection with the issuance of the Notes, and a
three-year warrant to purchase 93,750 shares of the Companys common stock at an
exercise price of $6.00 per share. The aggregate fee of $870,417 paid to the
placement agent, including the fair value of the warrant issued, was deferred as
a debt issuance costs and amortized over the life of the Notes.
11
The Notes are secured by 3,000,000 shares of common stock of
the Company held by Siu Ling Chan (Ms. Chan), the Companys chairwoman of the
board of directors and a principal shareholder of the Company, pursuant to the
terms of a Guarantee and Pledge Agreement signed 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 agreed to indemnify Ms. Chan
for all damages, liabilities, losses and expenses of any kind (Losses), which
may be sustained or suffered by Ms. Chan, 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 market value
of the pledged shares as of the closing of the transaction. On December 22,
2009, two of the Companys Notes holders converted $1,000,000 of their Notes
into an aggregate of 250,000 shares of the Companys common stock. On January
13, 2010, these two Notes holders converted an additional $1,054,140 of their
remaining Notes into an aggregate of 263,535 shares of the Companys common
stock. On November 10, 2010, another Notes holder converted $2,800,000 of Notes
into an aggregate of 700,000 shares of the Companys common stock. On June 10,
2011, the two Notes holders converted $4,700,000 of their Notes into an
aggregate of 1,175,000 shares of the Companys common stock. As of June 30,
2011, all Notes were converted.
The terms of the Notes and Warrants include price adjustment
provisions under which the conversion price for the Notes and the exercise price
for the Warrants could be affected by future equity offerings undertaken by the
Company. As a result, the embedded conversion option in the Notes and Warrants
are not considered indexed to the Companys own stock, and therefore accounted
for as derivatives. The economic characteristics and risks of the embedded
conversion option in the Notes are not considered clearly and closely related to
the economic characteristics and risks of the host debt contract. The embedded
conversion option in the Notes met all of the characteristics of a derivative
instrument pursuant to ASC Subtopic 815-10. In accordance with ASC Subtopic
815-15, the embedded conversion option in the Notes was separated from the host
debt contract and accounted for as a derivative.
Total principal of the Notes in the amount of $9,554,140 was
first allocated to the embedded conversion option in the Notes and to the
Warrants based on their fair value on the issuance date of $6,552,505 and
$3,826,896, respectively. As a result, the Company recognized an initial charge
to income of $825,261 for the amount by which the fair value of these
liabilities exceeded the face amount of the Notes for the year ended December
31, 2009. All changes in the fair value of the embedded conversion option in the
Notes and Warrants are recognized in the statements of income until such time as
the Notes are converted or redeemed and Warrants are exercised or expired.
The residual amount is allocated to the debt instrument in the
amount of $0.01 and is accreted to the principal amount of the Notes using an
effective annual interest rate of approximately 365% with the related interest
expense recognized in the statements of income. For the three months ended June
30, 2011 and 2010, the accreted interest expenses were $2,077,028 and $284,190,
respectively. For the six months ended June 30, 2011 and 2010, the accreted
interest expenses were $3,580,167 and $456,311, respectively.
For the three months ended June 30, 2011 and 2010, the gains
arising from the decrease in fair value of the embedded conversion option in the
Notes were $5,781,624 and $1,752,403, respectively. For the six months ended
June 30, 2011 and 2010, the gains arising from the decrease in fair value of
embedded conversion option in the Notes were $6,289,661 and $3,809,745,
respectively.
NOTE 11 WARRANTS AND OPTIONS
Warrants
In connection with the issuance of the Notes (see Note 10), the
Company issued warrants to purchase up to 1,194,268 and 93,750 shares of common
stock of the Company to the Investors and placement agent, respectively.
The fair value of the warrants outstanding as of June 30, 2011
and December 31, 2010 were determined based on the Binominal option pricing
model, using the following key assumptions:
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
0.23%
|
|
|
0.43%
|
|
Time to maturity (in years)
|
|
0.95
|
|
|
1.43
|
|
Expected volatility
|
|
55.0%
|
|
|
70.0%
|
|
Fair value of underlying common
shares (per share)
|
$
|
10.20
|
|
$
|
16.39
|
|
Changes in the managements estimates and assumptions regarding
the expected volatility could significantly impact the estimated fair value of
the warrants determined under the Binominal option pricing model and, as a
result, the net income and the net income attributable to the Companys
stockholders.
12
For the three months ended June 30, 2011 and 2010, the gains
arising from the decrease in fair value of warrants were $5,393,760 and
$518,426, respectively. For the six months ended June 30, 2011 and 2010, the
gains arising from the decrease in fair value of warrants were $5,907,588 and
$2,294,661, respectively. As of June 30, 2011 and December 31, 2010, there were
937,500 Warrants outstanding that expire if unexercised by June 2012.
Options
On May 9, 2008, the Board of Directors granted options to
certain directors and employees for the purchase of 937,500 shares of the
Companys common stock with an exercise price of $4.00 that immediate vest.
These options expire on June 1, 2018.
On July 24, 2008, the Board of Directors granted options to
three independent directors for the purchase of 60,000 shares of the Companys
common stock with an exercise price of $4.00, of which 30,000 shares vest on
January 24, 2009 and the remaining 30,000 shares vest on July 24, 2009. These
options expire on July 24, 2018.
On January 7, 2010, the Board of Directors granted options to
one employee for the purchase of 50,000 shares of the Companys common stock
with an exercise price of $12.60 that immediate vest. These options expire on
January 7, 2020.
On February 4, 2010, the Board of Directors granted options to
a newly appointed director for the purchase of 20,000 shares of the Companys
common stock with an exercise price of $10.66, of which 10,000 shares vest on
August 4, 2010 and the remaining 10,000 shares vest on February 4, 2011. These
options expire on February 4, 2020.
On July 11, 2010, the Board of Directors granted options to
four directors and certain employees for the purchase of 160,000 shares and
811,000 shares of the Companys common stock with an exercise price of $12.26,
respectively. These options vest in 12 equal quarters with an initial vesting
date of October 11, 2010. These options expire on July 11, 2020.
On January 1, 2011, the Board of Directors granted options to
each of the three independent directors for the purchase of 30,000 shares of the
Companys common stock with an exercise price of $16.39. These options vest in
four equal quarters over twelve months with an initial vesting date of April 1,
2011. These options expire on January 1, 2021.
On February 1, 2011, the Board of Directors granted options to
the Companys President for the purchase of 25,000 shares of the Companys
common stock with an exercise price of $15.97. These options vest in four equal
quarters over twelve months with an initial vesting date of May 1, 2011. These
options expire on February 1, 2021.
On February 27, 2011, the Board of Directors granted options to
each of the two new directors for the purchase of 20,000 shares of the Companys
common stock with an exercise price of $17.00. These options vest in four equal
quarters over twelve months with an initial vesting date of May 27, 2011. These
options expire on February 27, 2021.
The fair value of each option granted on each of aforementioned
dates are estimated on the respective dates of grant using the Black-Scholes
option pricing model with the following major assumptions:
Granted on
|
|
May 9,
|
|
|
July 24,
|
|
|
January 7,
|
|
|
February 4,
|
|
|
July 11,
|
|
|
January 1,
|
|
|
February 1,
|
|
|
February 27,
|
|
|
|
2008
|
|
|
2008
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
3.56%
|
|
|
3.56%
|
|
|
2.62%
|
|
|
2.29%
|
|
|
1.85%
|
|
|
2.01%
|
|
|
1.95%
|
|
|
2.16%
|
|
Expected term (in years)
|
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
6.5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Expected volatility
|
|
59.4%
|
|
|
81.2%
|
|
|
130.0%
|
|
|
130.0%
|
|
|
135.0%
|
|
|
70.0%
|
|
|
70.0%
|
|
|
70.0%
|
|
13
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 term of the
options. The expected dividend yield was based on the Companys current and
expected dividend policy. Changes in the managements estimates and assumptions
regarding the expected volatility could significantly impact the estimated fair
values of the share options determined under the Black-Scholes option pricing
model and, as a result, the net income and the net income attributable to the
Companys stockholders. The weighted average grant date fair value of options
granted during the six months ended June 30, 2011 was $9.69. During the six
months ended June 30, 2011, 25,000 shares options were exercised and no option
was forfeited. For the three months ended June 30, 2011 and 2010, the Company
recorded stock compensation expense of $1,243,405 and $45,948, respectively, in
general and administrative expenses. For the six months ended June 30, 2011 and
2010, the Company recorded stock compensation expense of $2,418,287 and
$617,841, respectively, in general and administrative expenses. As of June 30,
2011, approximately $7,882,710 of stock compensation expense with respect to
non-vested stock options is to be recognized over approximately 2.3 years.
NOTE 12 STATUTORY RESERVES
Each of the Companys PRC subsidiaries are required to allocate
at least 10% of its after tax profits, as determined under generally accepted
accounting principal in the PRC, to its statutory surplus reserve until the
reserve balance reaches 50% of the respective registered capital. The
accumulated balance of the statutory reserve as of June 30, 2011 and December
31, 2010 was $34,128,323 and $28,820,686, respectively.
NOTE 13 FAIR VALUE MEASUREMENTS
Management used the following methods and assumptions to
estimate the fair value of financial instruments at the relevant balance sheet
dates:
Short-term financial instruments (including cash and cash
equivalents, accounts receivables, other receivables, short-term bank loans,
accounts payable, other payables and accrued expenses, and amount due to related parties) The carrying amounts of the short-term financial instruments
approximate their fair values because of the short maturity of these
instruments.
Long-term other payable The fair value of the Companys
long-term other payable is estimated by discounting future cash flows using
current market interest rates offered to the Company and its subsidiaries for
debts with substantially the same characteristics and maturities.
Derivative liabilities (the embedded conversion option in the
Notes and Warrants) The estimated fair values were determined by using
Binominal Option Pricing Model with Level 2 inputs. The following table sets
forth, by level within the fair value hierarchy, the Companys financial
instruments that were measured at fair value on a recurring basis as of June 30,
2011 and December 31, 2010.
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active Markets
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Financial Assets
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
and Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
June 30, 2011
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities at fair
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilitiesembedded
conversion option in the Notes
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Derivative
liabilitiesWarrants
|
|
5,188,004
|
|
|
-
|
|
|
5,188,004
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilitiesembedded conversion option in the Notes
|
$
|
14,561,661
|
|
$
|
-
|
|
$
|
14,561,661
|
|
$
|
-
|
|
Derivative liabilitiesWarrants
|
|
11,095,592
|
|
|
-
|
|
|
11,095,592
|
|
|
-
|
|
14
NOTE 14 SALES
The Companys sales are primarily derived from the manufacture
and sale of Human Albumin and Immunoglobulin products. The Companys sales by
significant types of product for the three months ended June 30, 2011 and 2010
are as follows:
|
|
For the three months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Human Albumin
|
$
|
21,377,406
|
|
$
|
18,989,767
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
Human Hepatitis B Immunoglobulin
|
|
1,874,504
|
|
|
2,839,125
|
|
Human Immunoglobulin for Intravenous Injection
|
|
16,084,281
|
|
|
16,095,707
|
|
Human Rabies Immunoglobulin
|
|
2,451
|
|
|
1,326,275
|
|
Human Tetanus Immunoglobulin
|
|
1,951,355
|
|
|
1,168,355
|
|
Human Immunoglobulin
|
|
-
|
|
|
200,531
|
|
Others
|
|
375,461
|
|
|
288,556
|
|
Total
|
$
|
41,665,458
|
|
$
|
40,908,316
|
|
The Companys sales by significant types of product for the six
months ended June 30, 2011 and 2010 are as follows:
|
|
For the six months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Human Albumin
|
$
|
41,078,992
|
|
$
|
31,689,174
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
Human Hepatitis B Immunoglobulin
|
|
4,090,185
|
|
|
6,171,432
|
|
Human Immunoglobulin for Intravenous Injection
|
|
26,511,668
|
|
|
21,491,172
|
|
Human Rabies Immunoglobulin
|
|
752,520
|
|
|
5,104,397
|
|
Human Tetanus Immunoglobulin
|
|
3,140,291
|
|
|
1,855,670
|
|
Human Immunoglobulin
|
|
-
|
|
|
850,504
|
|
Others
|
|
562,624
|
|
|
844,520
|
|
Total
|
$
|
76,136,280
|
|
$
|
68,006,869
|
|
NOTE 15 COMMITMENTS AND CONTINGENCIES
Operating lease commitments
Total operating lease commitments for rental of offices and
land use rights and buildings of the Companys PRC subsidiaries as of June 30,
2011 is as follows:
Period ending June 30,
|
|
|
|
2012
|
$
|
389,393
|
|
2013
|
|
277,922
|
|
2014
|
|
100,993
|
|
2015
|
|
100,993
|
|
2016
|
|
77,654
|
|
Years after
|
|
148,540
|
|
Total minimum payments required
|
$
|
1,095,495
|
|
For the three months ended June 30, 2011 and 2010, total lease
expense amounted to $103,013 and $37,823, respectively. For the six months ended
June 30, 2011 and 2010, total lease expense amounted to $164,097 and $58,171,
respectively.
15
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% noncontrolling
interest shareholder of Fang Cheng Plasma Company, a 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. On January 18,
2007, Shandong Taibang signed a letter of intent to acquire the assets of the
Bobai Plasma Collection Station, which was co-owned by Mr. Lin and Mr. Keliang
Huang. However, in January 2007, Hua Lan Biological Engineering Co., Ltd. (Hua
Lan) filed suit in the District Court of Hong Qi District, Xin Xiang City,
Henan Province, alleging that Feng Lin, Keliang Huang and Shandong Taibang
established and/or sought to operate the Bobai Plasma Collection Station using a
permit for collecting and supplying human plasma in Bobai County, that was
originally granted to Hua Lan by the government of the Guangxi region, without
Hua Lan's permission. The establishment and registration of Bobai was never
realized as a result of this law suit. On January 29, 2007, on Hua Lan's motion,
the District Court entered an order to freeze funds in the amount of
approximately $386,100 (RMB3,000,000) held by the defendants in the case,
including approximately $65,750 (RMB500,000) in funds held in Shandong Taibang's
bank account in Tai'an City. A hearing was held on June 25, 2007 and judgment
was entered against the defendants along with a $226,780 (RMB1,700,000) joint
financial judgment. The Company appealed the District Court judgment to the
Xinxiang City Intermediate Court. In November 2007, the Intermediate Court
affirmed the judgment against the three defendants and increased the amount of
the joint financial judgment to approximately $405,954 (RMB3,000,000).
In January 2008, Hua Lan enforced the judgment granted by the
Intermediate Court to freeze the Company's bank accounts. Shandong Taibang 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, the full amount of the
judgment, including Feng Lin and Keliang Huang's portions of the judgment and
the related fees, of approximately $456,222 (RMB3,109,900) was withdrawn from
Shandong Taibang's account. The Company recorded Feng Lin and Keliang Huang's
portion of the judgment, of 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 for such receivable he owed to the Company. 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 since Hua Lan did not
invest, as Shandong Taibang did, in Bobai as required by the Regulation. The
Company is 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 plan
acquisition of the assets of Bobai will go forward.
Dispute among Guizhou Taibang Shareholders over Raising
Additional Capital
On May 28, 2007, 91% controlling interest of Guizhou Taibang's
shareholders approved a plan to raise additional capital from private strategic
investors through the issuance of an additional 20,000,000 shares of Guizhou
Taibang equity interests at RMB2.80 per share. The plan required all existing
Guizhou Taibang shareholders to waive their rights of first refusal to subscribe
for the additional shares. The remaining 9% noncontrolling interest shareholder
of Guizhou Taibang's shares, 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 controlling interest shareholders caused Guizhou Taibang to sign an Equity
Purchase Agreement with certain investors, pursuant to which the investors
agreed to invest an aggregate of RMB50,960,000 (approximately $7,475,832) in
exchange for 18,200,000 shares, or 21.4%, of Guizhou Taibang'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 Guizhou Taibang in accordance with the agreement.
16
In June 2007, Jie'an brought suit in the High Court of Guizhou
province, China, against Guizhou Taibang and the three other original Guizhou
Taibang 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 Guizhou Taibang 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. 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 Guizhou Taibang's
shareholders. The registration of the new investors as Guizhou Taibang's
shareholders and the related increase in registered capital of Guizhou Taibang
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 Guizhou Taibang alleging Guizhou Taibangs failure to register
their equity interest in Guizhou Taibang with the local Administration for
Industry and Commerce (AIC) and requesting the distribution of their share of
Guizhou Taibangs dividends. Dalin was also joined as a co-defendant as it is
the controlling interest shareholder and exercises control over Guizhou
Taibangs 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 Guizhou Taibang is required to return the
original investment amount to the strategic investors, Guizhou Taibang has set
aside the strategic investors initial fund along with RMB10,056,242
(approximately $1,525,532) in accrued interest, and RMB509,600 (approximately
$77,306) for the 1% penalty imposed by the agreement for any breach as of
December 31, 2010. If strategic investors prevail in their suit, Dalin's
interests in Guizhou Taibang could 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 but both parties failed to
reach a mutual agreeable term.
On October 14, 2010, the High Court of Guizhou ruled in favor
of the Company and denied the strategic investors right as shareholders of
Guizhou Taibang, as well as their entitlement to the dividends. On October 26,
2010, the strategic investors appealed to, and subsequently accepted by, the PRC
Superior Court in Beijing on the ruling. As of the date of this report, the
Company is waiting to hear the ruling from the Court.
During the second quarter of 2010, Jiean requested that
Guizhou Taibang register its 1.8 million shares of additional capital infusion
with the local AIC, pursuant to the Equity Purchase Agreement, and such request
was approved by the controlling interest shareholders of Guizhou Taibang in a
shareholders meeting held in the second quarter of 2010. However, the Board of
Directors of the Company is withholding its required ratification of the
shareholders approval of Jieans request until the outcome of the ongoing
litigations. If the Company decides to ratify the approval, Dalins ownership in
Guizhou Taibang will be diluted from 54% to 52.54% and Jiean may be entitled to
receive its pro rata share of Guizhou Taibangs profits since the date of
Jieans capital contribution became effective.
Guizhou Taibang's Guarantee to a Third Party
In 2007, as a condition to purchase Huang Ping Plasma Station,
Guizhou Taibang entered into an agreement with Guizhou Zhongxin Investment
Company, or Zhongxin, in which Guizhou Taibang agreed to repay Zhongxin's debt
out of Guizhou Taibang's payables to Zhongxin arising from plasma purchased from
Zhongxin. In the same agreement, Guizhou Taibang also delivered a guarantee to
the Huang Ping County Hospital, the former co-owner of the Huang Ping Plasma
Station, that it would pay RMB3,074,342 (approximately, $451,006) in debt that
Zhongxin owed to the hospital. On June 1, 2009, Huang Ping Hospital brought
suit, in the 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
against Guizhou Taibang as the guarantor. On November 2, 2009, the court ruled
in favor of the plaintiff and Guizhou Taibang as the guarantor became obligated
to repay the Zhongxins debt to the Huang Ping Hospital on behalf of Zhongxin.
In October 2009, Guizhou Taibang appealed to the Middle Court of Kaili District
in Guizhou Province which sustained the original judgment on April 8, 2010.
Under the Equity Transfer Agreement pursuant to which the Company acquired a 90%
interest in Dalin, Guizhou Taibang's then shareholders, provide that the sellers
will be responsible, based on their pro rata equity interest in Guizhou Taibang,
for damages incurred by Guizhou Taibang from Zhongxin's debt and that the
sellers will repay Dalin their pro rata share of payments made by Guizhou
Taibang to creditors in connection with Zhongxin's debt within 10 days after
payment by Guizhou Taibang. The RMB3,074,342 contingent liability and
proportionate share of the liability to be recovered from the sellers were
reflected in the consolidated financial statements as of December 31, 2009. On
December 31, 2010, Guizhou Taibang brought suit against Zhongxin in the Middle
Court of Guiyang City, to recover the full judgment amount of RMB3,074,342 plus
court fee of RMB32,340 that Guizhou Taibang has already paid on behalf of
Zhongxin.
On September 13, 2010, Zhongxin countersued the Company for a
consideration of RMB500,000 (approximately $74,850) for the alleged loss of its
share of income from the Huang Ping Plasma Station since the Company acquired
the station in April 2007. The Company believes Zhongxins claim is unwarranted
since the Company acquired the station from its rightful owner, the Treasury
Department of Huangping County, Guizhou Province.
17
NOTE 16 RELATED PARTY TRANSACTIONS
The material related party transactions undertaken by the
Company with related parties are presented as follows:
Assets
|
|
Purpose
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
Accounts receivable a related
party
(1)
|
|
Processing fees /sales
|
|
$
|
-
|
|
$
|
212,611
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
Purpose
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
Other payable related parties
(2)
|
|
Loan
|
|
$
|
2,238,534
|
|
$
|
2,195,123
|
|
Other payable related
parties
(3)
|
|
Contribution
|
|
|
1,024,461
|
|
|
997,017
|
|
Total other payable
related parties
|
|
|
|
$
|
3,262,995
|
|
$
|
3,192,140
|
|
(1)
Guizhou Taibang provides processing services and
sells products to Guizhou Eakan Co., Ltd. (Guizhou Eakan), an affiliate of
one of the Guizhou Taibangs noncontrolling interest shareholders. The Companys
total income from processing services and sales to Guizhou Eakan amounted to
$462 and $327,509 for the three months ended June 30, 2011 and 2010,
respectively. The Companys total income from processing services and sales to
Guizhou Eakan amounted to $76,046 and $564,540 for the six months ended June 30,
2011 and 2010, respectively. As of June 30, 2011 and December 31, 2010, accounts
receivable due from Guizhou Eakan amounted to $nil and $212,611, respectively.
(2)
Guizhou Taibang has payables to Guizhou Eakan
Investing Corp., amounting to approximately $2,238,534 (RMB14,470,160). Guizhou
Eakan Investing Corp. is one of the noncontrolling interest shareholders of the
Guizhou Taibang. Guizhou Taibang borrowed this interest free advance for working
capital purpose. The balance is due on demand.
(3)
Guizhou Taibang has payables to Guizhou Jiean,
a noncontrolling interest shareholder of Guizhou Taibang, amounting to
approximately $1,024,461 (RMB 6,619,840). In 2007, Guizhou Taibang received
additional contributions from Guizhou Jiean of $962,853 to maintain Jiean
equity interest in Guizhou Taibang at 9%. However, due to a legal dispute among
shareholders over raising additional capital as discussed in the legal
proceeding section (see Note 15), the money may be returned to Jiean. During
the second quarter of 2010, Jiean requested that Guizhou Taibang register its
1.8 million shares of additional capital infusion with the local Administration
for Industry and Commerce, pursuant to the equity purchase agreement, and such
registration was approved by the controlling interest shareholders of Guizhou
Taibang in a shareholders meeting held in the second quarter of 2010. However,
the Board of Directors of the Company is withholding its required ratification
of the shareholders approval of Jieans request until the outcome of the
ongoing litigations. If the Company decided to ratify the approval, Dalins
ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Guizhou
Jiean will be entitled to receive its pro rata share of Guizhou Taibangs
profits since the date of Jieans capital contribution became effective.
NOTE 17 - EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted income per share for the periods indicated:
|
|
For the three months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Numerator used in basic net income
per share:
|
|
|
|
|
|
|
Net income attributable to China Biologic Products,
Inc.
|
$
|
16,599,705
|
|
$
|
12,935,682
|
|
Interest on the Notes
|
|
2,077,028
|
|
|
284,190
|
|
Change in fair value of embedded conversion option
in the Notes
|
|
(5,781,624
|
)
|
|
(1,752,403
|
)
|
Change in fair value of warrants
issued to Investors and placement agent
|
|
(5,393,760
|
)
|
|
(518,426
|
)
|
Numerator used in diluted net income per share
|
$
|
7,501,349
|
|
$
|
10,949,043
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Basic
|
|
24,632,774
|
|
|
23,511,435
|
|
Effect of dilutive common share equivalents:
|
|
|
|
|
|
|
Diluted effect of the Notes
|
|
903,846
|
|
|
1,875,000
|
|
Diluted effect of warrants issued to Investors and
placement agent
|
|
598,113
|
|
|
622,648
|
|
Diluted effect of stock option
|
|
603,546
|
|
|
590,172
|
|
|
|
|
|
|
|
|
Diluted
|
|
26,738,279
|
|
|
26,599,255
|
|
|
|
|
|
|
|
|
Net income per ordinary share - basic
|
$
|
0.67
|
|
$
|
0.55
|
|
Earnings per share - diluted
|
$
|
0.28
|
|
$
|
0.41
|
|
18
During the three months ended June 30, 2011, 1,126,000 options
with an average exercise price of $12.84 are excluded from the calculation of
diluted earnings per share since they did not have any dilutive effect.
The following table sets forth the computation of basic and
diluted income per share for the periods indicated:
|
|
For the six months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Numerator used in basic net income
per share:
|
|
|
|
|
|
|
Net income attributable to China Biologic Products,
Inc.
|
$
|
22,908,680
|
|
$
|
23,599,431
|
|
Interest on the Notes
|
|
3,580,167
|
|
|
456,311
|
|
Change in fair value of embedded conversion option
in the Notes
|
|
(6,289,661
|
)
|
|
(3,809,745
|
)
|
Change in fair value of warrants
issued to Investors and placement agent
|
|
(5,907,588
|
)
|
|
(2,294,661
|
)
|
Numerator used in diluted net income per share
|
$
|
14,291,598
|
|
$
|
17,951,336
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
Basic
|
|
24,492,728
|
|
|
23,449,508
|
|
Effect of dilutive common share equivalents:
|
|
|
|
|
|
|
Diluted effect of the Notes
|
|
1,038,674
|
|
|
1,893,928
|
|
Diluted effect of warrants issued to Investors and
placement agent
|
|
631,911
|
|
|
622,539
|
|
Diluted effect of stock option
|
|
639,370
|
|
|
575,710
|
|
|
|
|
|
|
|
|
Diluted
|
|
26,802,683
|
|
|
26,541,685
|
|
|
|
|
|
|
|
|
Net income per ordinary share -
basic
|
$
|
0.94
|
|
$
|
1.01
|
|
Earnings per share - diluted
|
$
|
0.53
|
|
$
|
0.68
|
|
During the six months ended June 30, 2011, 1,126,000 options
with an average exercise price of $12.84 are excluded from the calculation of
diluted earnings per share since they did not have any dilutive effect.
NOTE 18 CONCENTRATIONS AND CREDIT 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 matters.
The Company maintains balances at financial institutions which,
from time to time, may exceed Federal Deposit Insurance Corporation insured
limits for its bank accounts located in the United States or may exceed Hong
Kong Deposit Protection Board insured limits for its bank accounts located in
Hong Kong. Cash balances maintained at financial institutions or state-owned
banks in the PRC are not covered by insurance. Total cash in banks as of June
30, 2011 and December 31, 2010 amounted to $76,546,951 and $64,443,315,
respectively, of which $49,726 and $1,473,917 are insured, respectively. The
Company has not experienced any losses in uninsured bank deposits and does not
believe that it is exposed to any significant risks on its cash in bank
accounts.
The Companys major product, human albumin: 20%/10ml, 20%/25ml,
20%/50ml, 10%/10ml, 10%/25ml and 10%/50ml, accounted for 51.3% and 46.4% of the
total sales for the three months ended June 30, 2011 and 2010, respectively, and
54.0% and 46.6% of the total sales for the six months ended June 30, 2011 and
2010, 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. As of
June 30, 2011 and 2010, the Company had no significant concentration of credit
risk. There were no customers that individually comprised 10% or more of the
sales during the three months and six months ended June 30, 2011 and 2010. No
individual customer represented 10% or more of trade receivables at June 30,
2011 and December 31, 2010. The Company performs ongoing credit evaluations of
its customers financial condition and, generally, requires no collateral from
its customers.
19
One supplier comprised 10% or more of the total purchases for
both the three months ended June 30, 2011 and 2010. There were two suppliers and
one supplier that individually comprised 10% or more of the total purchases for
the six months ended June 30, 2011 and 2010, respectively. There were four
suppliers and one supplier that represented more than 10% of accounts payables
at June 30, 2011 and 2010, respectively.
NOTE 19 SUBSEQUENT EVENT
Closure of 4 Plasma Stations in Guizhou
Province
On July 15, 2011, the Guizhou Provincial Health Department
issued the revised Plan for Guizhou Provincial Blood Collection Institutional
Setting (2011-2014) which limits the number of counties that are permitted to
set up plasma collection stations in Guizhou province to 4 counties (the
Guizhou Plan). As a result of the implementation of the Guizhou Plan, the
licenses of 4 plasma collection stations in Dan Zhai, Wei Ning, San Sui and Na
Yong counties owned by Guizhou Taibang, a 54% owned subsidiary of the Company,
were not renewed after their respective plasma collection permits expired at the
end of July 2011. The licenses of its plasma collection stations in Pu Ding and
Huang Ping counties (locations permitted under the Guizhou Plan) were renewed
until July 31, 2013. These 4 stations in Dan Zhai, Wei Ning, San Sui and Na Yong
counties together accounted for approximately 33.1% and 34.1% of the Companys
total plasma collection by volume for the six months ended June 30, 2011 and for
the year ended December 31, 2010, respectively. In addition, Guizhou Taibangs
inactive plasma collection station in Guizhou province that was purchased from
the government is unlikely to be licensed as planned, because it is in Zhengyuan
County, a location not included in the Guizhou Plan.
In connection with the closures of the 4 active plasma
collections stations, the management is in the process to evaluate the
recoverable amounts of the intangible assets, and other long-lived
assets, such as equipment, office furniture, building improvement and collection
permits that are associated with the operations of these four plasma stations for impairment. This evaluation requires the Company to make
estimates of factors that include, but are not limited to, projected future
operating results and business plans, economic projects, anticipated future cash
flows and the cost of capital. The net carrying
values of these assets are set forth below. In addition to the above assets, the
Company will engage an independent appraiser during the third quarter of 2011 to
determine the fair values of buildings and land use rights which have carrying
value of $4,204,921 and $1,555,780, respectively. Moreover, in the third
quarter of 2011, the Company will perform an impairment test on goodwill
recognized in the acquisition of Dalin. As of June 30, 2011, goodwill was
$18,129,811.
|
|
As of June 30, 2011
|
|
Equipment
|
$
|
400,211
|
|
Office furniture
|
|
242,480
|
|
Others
|
|
22,455
|
|
Building improvement
|
|
875,343
|
|
Collection permits
|
|
5,242,540
|
|
|
$
|
6,783,029
|
|
Extension of Western Development Tax
Concession
On July 27, 2011, the Ministry of Finance, the General
Administration of Customs and the State Administration of Taxation jointly
issued CaiShui [2011] No. 58 which states that enterprises within encouraged
industries and located in the Western Region are entitled to a preferential tax
rate of 15% for the period from January 1, 2011 to December 31, 2020 (Tax
Concession). Guizhou Taibang, which was entitled to a preferential income tax
rate of 15% under the previous 10-year Western Development Tax Concession ended
in 2010, will apply the Tax Concession in order to continue to enjoy the 15%
preferential income tax rate from 2011 to 2020.
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Special Note Regarding Forward Looking Statements
In addition to historical information, this report 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. We use words such as believe, expect, anticipate, project,
target, plan, optimistic, intend, aim, will or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; 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 involve risks and uncertainties, including
those identified in Item 1A, Risk Factors described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2010, as well as assumptions,
which, if they were to ever materialize or prove incorrect, could cause the
results of the Company to differ materially from those expressed or implied by
such forward-looking statements.
Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, except as required by law, 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 and for the
purposes of this report only, references in this report to:
-
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;
-
Taibang Biological are to our wholly owned subsidiary Taibang Biological
Limited, a BVI company, formerly, Logic Express Limited;
-
Taibang Holdings are to our wholly-owned subsidiary Taibang Holdings
(Hong Kong) Limited, a Hong Kong company, formerly Logic Holdings (Hong Kong)
Limited;
-
Logic China are to our wholly owned subsidiary Logic Management and
Consulting (China) Co., Ltd., a PRC company;
-
Taibang Beijing are to our wholly owned subsidiary Taibang (Beijing)
Pharmaceutical Research Institute Co., Ltd., a PRC company, formerly Logic
Taibang Bio-Tech Institute (Beijing);
-
Dalin are to our majority owned subsidiary Guiyang Dalin Biologic
Technologies Co., Ltd., a PRC company;
-
Shandong Taibang are to our majority owned subsidiary Shandong Taibang
Biological Products Co. Ltd., a sino-foreign joint venture incorporated in
China;
-
Taibang Medical are to our wholly owned subsidiary Shandong Taibang
Medical Company, a PRC company;
-
Guizhou Taibang are to our majority owned subsidiary Guizhou Taibang
Biological Products Co., Ltd., a PRC company, formerly, Guiyang Qianfeng
Biological Products Co., Ltd.;
-
Huitian are to our minority owned subsidiary Xi'an Huitian Blood
Products Co., Ltd., a PRC company;
-
BVI are to the British Virgin Islands;
-
Hong Kong are to the Hong Kong Special Administrative Region of the
Peoples Republic of China;
-
PRC and China are to the Peoples Republic of China;
-
SEC are to the Securities and Exchange Commission;
-
Securities Act are to the Securities Act of 1933, as amended;
-
Exchange Act are to the Securities Exchange Act of 1934, as amended;
-
Renminbi and RMB are to the legal currency of China; and
-
U.S. dollars, dollars and $ are to the legal currency of the United
States.
21
Overview of Our Business
We are a biopharmaceutical company, through our indirect
majority-owned PRC subsidiaries, Shandong Taibang and Guizhou Taibang, and our
minority-owned PRC investee, Huitian, principally engaged in the research,
development, manufacturing and sales of plasma-based pharmaceutical products in
China. Shandong Taibang operates from our manufacturing facility located in
Taian, Shandong Province and Guizhou Taibang operates from our manufacturing
facility located in Guiyang City, Guizhou Province. Our minority owned investee,
Huitian, operates from its facility in Shaanxi Province. The plasma-based
biopharmaceutical manufacturing industry in China is highly regulated by both
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%/50ml, 10%/10ml, 10%/25ml, 10%/50ml and 25%/50ml. Human albumin is our
top-selling product. Sales of these human albumin products represented
approximately 51.3% and 46.4% of our total sales, respectively, for each of the
three months ended June 30, 2011 and 2010, and 54.0% and 46.6% of our total
sales for the six months ended June 30, 2011 and 2010, respectively. Human
albumin is principally used to increase blood volume while immunoglobulin, one
of our other major products, is used for certain disease prevention and cures.
Our approved human albumin and immunoglobulin products use human plasma as the
basic raw material. Albumin has been used for almost 50 years to treat
critically ill patients by replacing lost fluid and maintaining adequate blood
volume and pressure. All of our products are prescription medicines administered
in the form of injections.
We sell our products to customers in the PRC, mainly hospitals
and inoculation centers directly or through approved distributors. We usually
sign short-term contracts with customers therefore our
largest customers have changed over the years. For the three months ended June
30, 2011 and 2010, our top 5 customers accounted for approximately 18.3% and
11.1%, respectively, of our total sales. For the six months ended June 30, 2011
and 2010, our largest 5 customers accounted for approximately 15.6% and 14.1% of
our total sales, 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.
Our principal executive offices are located at No. 14 East
Hushan Road, Taian City, Shandong, the 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 company, but that information is not part of this report.
Second Quarter Financial Performance Highlights
The following are some financial highlights for the three
months ended June 30, 2011:
-
Sales
: Sales increased $757,142, or 1.9%, to $41,665,458 for
the three months ended June 30, 2011, from $40,908,316 for the same period in
2010.
-
Gross profit
: Gross profit decreased $2,696,521, or 8.5%, to
$29,152,889 for the three months ended June 30, 2011, from $31,849,410 for the
same period in 2010.
-
Income from operations
: Income from operations decreased
$5,538,633, or 24.3%, to $17,230,463 for the three months ended June 30, 2011,
from $22,769,096 for the same period in 2010.
-
Net income
: Net income increased $3,664,023, or 28.3%, to
$16,599,705 for the three months ended June 30, 2011, from $12,935,682 for the
same period in 2010.
-
Fully diluted net income per share
: Fully diluted net income
per share was $0.28 for the three months ended June 30, 2011, as compared to
$0.41 for the same period in 2010.
For the three months ended June 30, 2011 and 2010, we reported
a net income of $16,599,705 and $12,935,682, respectively. Our earnings before
income tax expense in the second quarter of 2011 increased mainly due to the
non-operating gain from the change in fair value of derivative liabilities. This
was offset by the general price decrease of most of our products as the market
becomes more competitive and the increase in the unit cost of our products and
selling expenses, as compared to the same period in 2010.
22
Recent Development
As previously announced, on July 15, 2011, the Guizhou
Provincial Health Department issued the revised Plan for Guizhou Provincial
Blood Collection Institutional Setting (2011-2014) which limits the number of
counties that are permitted to set up plasma collection stations in Guizhou
province to 4 counties (the Guizhou Plan). As a result of the implementation
of the Guizhou Plan, the licenses of our subsidiary Guizhou Taibangs 4 plasma
collection stations in Dan Zhai, Wei Ning, San Sui and Na Yong counties were not
renewed after their respective plasma collection permits expired at the end of
July 2011. The licenses of Guizhou Taibangs plasma collection stations in Pu
Ding and Huang Ping counties (locations permitted under the Guizhou Plan) were
renewed until July 31, 2013. These 4 stations in Dan Zhai, Wei Ning, San Sui and
Na Yong counties together accounted for approximately 33.1% and 34.1% of our
total plasma collection by volume for the six months ended June 30, 2011 and the
year end December 31, 2010, respectively. In addition, Guizhou Taibangs
inactive plasma collection station in Guizhou province that was purchased from
the government is unlikely to be licensed as planned, because it is in Zhengyuan
County, a county not included in the Guizhou Plan. With the closures of these 4
active plasma collection stations, the management estimates that the Guizhou
Plan will have a material adverse impact on the Companys future financial
performance and operations. Please see Note 19 to the unaudited consolidated
financial statements for the Companys initial assessment of such impact.
On July 11, 2011, Shandong Taibang received the permit from the
Shandong Provincial Health Department for the newly built plasma collection
station in Ningyang county, Shandong province and began commercial plasma
collection at the Ningyang station on July 12, 2011. We received approval to
build two new plasma collection stations in Yishui and Ningyang counties in May
2010. The Yishui station began collecting plasma in December 2010. With the
opening of the Ningyang station, we currently own seven of the eight plasma
collection stations in Shandong province. The Ningyang and Yishui stations have
a combined designed annual capacity of approximately 80 metric tons of plasma.
On July 27, 2011, the Ministry of Finance, the General
Administration of Customs and the State Administration of Taxation of PRC issued
the Notice on Tax Incentives for the Development of the Western Regions (the
Notice), which extended the Western Development Tax Concession for another 10
years from 2011 onwards. Guizhou Taibang, which was entitled to a preferential
income tax rate of 15% under the previous 10-year Western Development Tax
Concession that ended in 2010, will reapply to be covered by the Tax Concession and
to continue to enjoy the 15% preferential income tax rate from 2011 to 2020.
Results of Operations
Comparison of Three Months Ended June 30, 2011 and June
30, 2010
The following table sets forth key components of our results of
operations for the periods indicated.
(All amounts, other than percentages, in U.S. dollars)
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
June 30
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
$
|
41,664,996
|
|
$
|
40,580,807
|
|
$
|
1,084,189
|
|
|
2.7%
|
|
Related party
|
|
462
|
|
|
327,509
|
|
|
(327,047
|
)
|
|
(99.9%
|
)
|
Total sales
|
|
41,665,458
|
|
|
40,908,316
|
|
|
757,142
|
|
|
1.9%
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
|
12,512,359
|
|
|
9,012,168
|
|
|
3,500,191
|
|
|
38.8%
|
|
Related party
|
|
210
|
|
|
46,738
|
|
|
(46,528
|
)
|
|
(99.6%
|
)
|
Total cost of sales
|
|
12,512,569
|
|
|
9,058,906
|
|
|
3,453,663
|
|
|
38.1%
|
|
GROSS PROFIT
|
|
29,152,889
|
|
|
31,849,410
|
|
|
(2,696,521
|
)
|
|
(8.5%
|
)
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
3,038,143
|
|
|
1,856,881
|
|
|
1,181,262
|
|
|
63.6%
|
|
General and
administrative expenses
|
|
7,665,306
|
|
|
5,905,950
|
|
|
1,759,356
|
|
|
29.8%
|
|
Research and development expenses
|
|
1,218,977
|
|
|
1,317,483
|
|
|
(98,506
|
)
|
|
(7.5%
|
)
|
Total operating expenses
|
|
11,922,426
|
|
|
9,080,314
|
|
|
2,842,112
|
|
|
31.3%
|
|
INCOME FROM OPERATIONS
|
|
17,230,463
|
|
|
22,769,096
|
|
|
(5,538,633
|
)
|
|
(24.3%
|
)
|
OTHER EXPENSES (INCOME)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity method investee
|
|
(463,688
|
)
|
|
(157,114
|
)
|
|
(306,574
|
)
|
|
195.1%
|
|
Change in
fair value of derivative liabilities
|
|
(11,175,384
|
)
|
|
(2,270,829
|
)
|
|
(8,904,555
|
)
|
|
392.1%
|
|
Interest expense
|
|
2,300,601
|
|
|
619,469
|
|
|
1,681,132
|
|
|
271.4%
|
|
Interest
Income
|
|
(269,594
|
)
|
|
(180,464
|
)
|
|
(89,130
|
)
|
|
49.4%
|
|
Other expenses, net
|
|
846,051
|
|
|
102,465
|
|
|
743,586
|
|
|
725.7%
|
|
Total other
income, net
|
|
(8,762,014
|
)
|
|
(1,886,473
|
)
|
|
(6,875,541
|
)
|
|
364.5%
|
|
EARNINGS BEFORE INCOME TAX EXPENSE
|
|
25,992,477
|
|
|
24,655,569
|
|
|
1,336,908
|
|
|
5.4%
|
|
INCOME TAX EXPENSES
|
|
5,317,249
|
|
|
4,961,895
|
|
|
355,354
|
|
|
7.2%
|
|
NET INCOME
|
$
|
20,675,228
|
|
$
|
19,693,674
|
|
$
|
981,554
|
|
|
5.0%
|
|
Less: Net income attributable to noncontrolling
interest
|
|
4,075,523
|
|
|
6,757,992
|
|
|
(2,682,469
|
)
|
|
(39.7%
|
)
|
NET INCOME ATTRIBUTABLE TO COMPANY
|
$
|
16,599,705
|
|
$
|
12,935,682
|
|
$
|
3,664,023
|
|
|
28.3%
|
|
23
Sales
. Our sales are derived primarily from the
sales of human albumin and various types of immunoglobulin. Our sales increased
by 1.9%, or $757,142, to $41,665,458 for the three months ended June 30, 2011,
compared to $40,908,316 for the three months ended June 30, 2010. Among the
factors that contributed to the growth in revenue, foreign exchange translation
accounted for 4.8% of the increase. Excluding the foreign exchange translation
impact, our sales decreased 2.9% during the second quarter of 2011 as a result
of the combined effect of the fluctuation on both price and volume of plasma
based products.
As a result of the increased market competition, most of our
approved products experienced price decreases ranging from approximately 4.2% to
16.2%, except for human immunoglobulin for intravenous injection (IVIG), which
increased by approximately 3.2%. For the quarter ended June 30, 2011, the
average price for our approved human albumin products, which contributed 51.3%
to our total sales, decreased by approximately 4.2%; the average price for our
approved human hepatitis B immunoglobulin products, which contributed 4.5% to
our total sales, decreased by approximately 16.2%; the average price for our
approved IVIG products, which contributed 38.6% to our total sales, increased by
approximately 3.2%; and the average price for our approved human tetanus
immunoglobulin products, which contributed 4.7% to our total sales, decreased by
approximately 5.3%, as compared to the same period in 2010. The increase in
average price of our IVIG was primarily attributable to the continuing shortage
in supply of such products, while the average price decrease in human albumin
products was mainly due to the continuous increase in the imported volume of
this product during the second quarter of 2011. The price decrease in human
hepatitis B immunoglobulin products was mainly due to the Companys
participation in a public health program sponsored by PRCs Ministry of Health
benefiting migrant workers. The sales price of this public health program
is lower than normal retail price in order to benefit migrant workers. The
price decrease in human tetanus immunoglobulin products was mainly the result of
the increased market competition.
Volume in sales for our human albumin and human tetanus
immunoglobulin products increased by 18.3% and 77.1%, respectively, for the
three months ended June 30, 2011, as compared to the same period in 2010. Volume
in sales for our human hepatitis B immunoglobulin, IVIG and human rabies
immunoglobulin products decreased by 20.4%, 2.7% and 99.8%, respectively, for
the three months ended June 30, 2011 as compared to the same period in 2010. As
the Hand-Foot-and-Mouth Disease (HFMD), which the outburst took
place between April and
August in 2010, was not as severe in this quarter as in 2010, the sales volume
of IVIG decreased slightly during the 2011 period as compared to the same period
in 2010. In addition, change of packaging and labeling of our products as part
of Taibang branding efforts also negatively impacted IVIGs sales volume in
this quarter. The sales volume decrease in human hepatitis B immunoglobulin and
human rabies immunoglobulin products were mainly due to the decreased
availability of raw material supply for these hyper-immune immunoglobulin.
Unlike our human albumin and IVIG products, the availability of hyper-immune
products depends on various factors, including, among others, availability of
specific vaccinated plasma and production lines. Consequently, our sales of
hyper-immune products may vary significantly from quarter to quarter.
Cost of Sales
. Our cost of sales increased by
$3,453,663, or 38.1%, to $12,512,569 for the three months ended June 30, 2011,
from $9,058,906 during the same period in 2010. Cost of sales as a percentage of
sales was 30.0% for the three months ended June 30, 2011, as compared to 22.1%
during the same period in 2010. The increase in cost of sales was mainly due to
the increase in sales volume of certain products and increase in cost of plasma
paid to donors. The cost of plasma, our main raw material, is the most
significant component of our cost of sales. In an effort to increase plasma
collection volume and expand our donor base, we increased the nutrition fees
paid to donors, as well as spending on donor promotional programs. As a result,
the cost of sales as a percentage of sales increased by 7.9% as compared to the
same period in 2010.
Gross profit and gross margin
. Our gross profit
decreased by $2,696,521, or 8.5%, to $29,152,889 for the three months ended June
30, 2011 from $31,849,410 for the same period in 2010. As a percentage of sales,
our gross profit decreased by 7.9% to 70.0% for the three months ended June 30,
2011, from 77.9% for the same period in 2010. The decrease in gross profit was
mainly due to the general price decreases of most of our products and the
increase in raw material costs as discussed above.
Operating expenses
. Our total operating expenses
increased by $2,842,112, or 31.3%, to $11,922,426 for the three months ended
June 30, 2011, from $9,080,314 for the same period in 2010. The increase was
primarily attributable to a 63.6% increase in our selling expenses and a 29.8%
increase in our general and administrative expenses during the 2011 period. As a
percentage of sales, total operating expenses increased by 6.4% to 28.6% for the
three months ended June 30, 2011 from 22.2% for the same period in 2010.
Selling expenses
. For the three months ended June 30,
2011, our selling expenses increased to $3,038,143, from $1,856,881 for the
three months ended June 30, 2010, an increase of $1,181,262, or 63.6%. As a
percentage of sales, our selling expenses for the three months ended June 30,
2011 increased by 2.8% to 7.3%, from 4.5% for the three months ended June 30,
2010. The increase in selling expenses was primarily due to the expansion of our
sales force and the increase in our promotional and conference activities. This
increase is in line with our continuing effort to expand our customer base in
hospital and inoculation centers throughout the PRC in a bid to counter the
negative impact of the general price decreases of our products caused by
heightened competitive pressures.
24
General and administrative expenses
. For the three
months ended June 30, 2011, our general and administrative expenses increased to
$7,665,306, from $5,905,950 for the three months ended June 30, 2010, a
$1,759,356, or 29.8% increase. General and administrative expenses as a
percentage of sales increased by 4.0% to 18.4% for the three months ended June
30, 2011, from 14.4% for the same period in 2010. The increase in general and
administrative expenses was mainly due to an increase in expenses related to
payroll and employee benefits, as well as an increase of approximately $1.2
million in non-cash employee stock compensation expenses. The increase in payroll was
mainly due to our efforts to enhance corporate governance with the addition of
two directors during the first quarter of 2011, the addition of a new executive
officer in December 2010, and the addition of our new corporate offices in
Beijing.
Research and development expenses
. For the three months
ended June 30, 2011 and 2010, our research and development expenses were
$1,218,977 and $1,317,483, respectively, a decrease of $98,506, or 7.5%. As a
percentage of sales, our research and development expenses for the three months
ended June 30, 2011 and 2010 were 2.9% and 3.2%, respectively. The decrease in
research and development expenses was primarily due to the decreased cost
associated with the development of two new products, which we are waiting for
the PRCs State Food and Drug Administration (SFDA) approval. Due to the delay
of SFDA approval process, we expect to receive the approval for these two new
products in early 2012.
Change in fair value of derivative
liabilities
.
The embedded derivatives (including the conversion
option) in our senior secured convertible notes and warrants issued in June 2009
are classified as derivative liabilities carried at fair value. For the three
months ended June 30, 2011 and 2010, we recognized a gain from the change in
fair value of derivative liabilities in the amounts of $11,175,384 and
$2,270,829, respectively. The recognized gain from the change in the fair value
of derivative liabilities in the second quarter of 2011 was mainly due to a
decrease in the price of our common stock from $15.96 as of March 31, 2011 to
$10.20 as of June 30, 2011. As of June 30, 2011, the embedded conversion option
in our convertible notes is no longer outstanding because the convertible notes
have been fully converted. Future changes in the market price of our common
stock could cause the fair value of the derivative financial instruments of
warrants to
change significantly in future periods.
Interest expense (income)
. Our interest expense
increased by $1,681,132 to $2,300,601 for the three months ended June 30, 2011,
from $619,469 for the same period in 2010. Our interest income increased by
$89,130 to $269,594, for the three months ended June 30, 2011, from $180,464 for
the same period in 2010. The increase in interest expense was primarily due to
the effective interest charges on convertible notes of $2,077,028 and $284,190,
respectively, for the three months ended June 30, 2011 and 2010. As of June 30,
2011, the convertible notes have been fully converted and therefore, interest
expense is expected to decrease in second half of 2011.
Income tax
.
Our effective income
tax rate remained at 20% for the three months ended June 30, 2011 and 2010.
In February 2009, Shandong Taibang was granted the High and New
Technology Enterprise qualification and was entitled to a 15% preferential
income tax rate for a period of three years from 2008 to 2010. Further, Guizhou
Taibang was entitled to the preferential income tax rate of 15% under the
10-year Western Development Tax Concession, which also ended in 2010.
Accordingly, Shandong Taibang and Guizhou Taibang are subject to income tax at
25% from 2011 onwards. Shandong Taibang is in the process of reapplying the High
and New Technology Enterprise qualification for an additional three years from
2011 to 2013.
On July 27, 2011, the Ministry of Finance, the General
Administration of Customs and the State Administration of Taxation jointly
issued CaiShui [2011] No. 58 which states that enterprises within encouraged
industries and located in the Western Region are entitled to a preferential tax
rate of 15% for the period from January 1, 2011 to December 31, 2020 (Tax
Concession). Guizhou Taibang, which was entitled to a preferential income tax
rate of 15% under the previous 10-year Western Development Tax Concession, will apply
for the Tax Concession in order to continue to enjoy the 15%
preferential income tax rate from 2011 to 2020.
Our provision for income taxes increased by $355,354, or 7.2%,
to $5,317,249 for the three months ended June 30, 2011, from $4,961,895 for the
same period in 2010. The increase of income tax provision was mainly
attributable to the increase in applicable income tax rate of Shandong Taibang
and Guizhou Taibang from 15% to 25% for the three months ended June 30, 2011,
compared with the same period in the prior year, which was partly offset by the
impact of the different levels of taxable income or losses between the PRC entities
and the non-PRC entities as the latters effective income tax rate is 0%.
Our PRC subsidiaries have cash balance of $76.3 million as of
June 30, 2011, which is planned to be permanently reinvested in the PRC. The
distributions from our PRC subsidiaries are subject to the U.S. federal income
tax at 34%, less any applicable foreign tax credits. Due to our policy of
indefinitely reinvesting our earnings in our PRC business, we have not provided
for deferred tax liabilities on undistributed earnings of our PRC subsidiaries.
Net income
.
Our net income increased by
$981,554, or 5.0%, to $20,675,228 for the three months ended June 30, 2011, from
$19,693,674 for the same period in 2010. Net income as a percentage of sales was
49.6% and 48.1% for the three months ended June 30, 2011 and 2010, respectively,
as a result of the cumulative effects of foregoing factors.
25
Comparison of Six Months Ended June 30, 2011 and June 30,
2010
The following table sets forth key components of our results of
operations for the periods indicated.
(All amounts, other than percentages, in U.S. dollars)
|
|
Six Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
June 30
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
$
|
76,060,234
|
|
$
|
67,442,329
|
|
$
|
8,617,905
|
|
|
12.8%
|
|
Related party
|
|
76,046
|
|
|
564,540
|
|
|
(488,494
|
)
|
|
(86.5%
|
)
|
Total sales
|
|
76,136,280
|
|
|
68,006,869
|
|
|
8,129,411
|
|
|
12.0%
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
|
21,789,563
|
|
|
15,811,022
|
|
|
5,978,541
|
|
|
37.8%
|
|
Related party
|
|
34,604
|
|
|
46,738
|
|
|
(12,134
|
)
|
|
(26.0%
|
)
|
Total cost of sales
|
|
21,824,167
|
|
|
15,857,760
|
|
|
5,966,407
|
|
|
37.6%
|
|
GROSS PROFIT
|
|
54,312,113
|
|
|
52,149,109
|
|
|
2,163,004
|
|
|
4.1%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
5,488,056
|
|
|
2,799,789
|
|
|
2,688,267
|
|
|
96.0%
|
|
General and
administrative expenses
|
|
15,129,447
|
|
|
10,868,202
|
|
|
4,261,245
|
|
|
39.2%
|
|
Research and development expenses
|
|
1,929,968
|
|
|
2,486,138
|
|
|
(556,170
|
)
|
|
(22.4%
|
)
|
Total operating expenses
|
|
22,547,471
|
|
|
16,154,129
|
|
|
6,393,342
|
|
|
39.6%
|
|
INCOME FROM OPERATIONS
|
|
31,764,642
|
|
|
35,994,980
|
|
|
(4,230,338
|
)
|
|
(11.8%
|
)
|
OTHER EXPENSES (INCOME)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity method investee
|
|
(734,082
|
)
|
|
(345,655
|
)
|
|
(388,427
|
)
|
|
112.4%
|
|
Change in
fair value of derivative liabilities
|
|
(12,197,249
|
)
|
|
(6,104,406
|
)
|
|
(6,092,843
|
)
|
|
99.8%
|
|
Interest expense
|
|
3,981,523
|
|
|
953,058
|
|
|
3,028,465
|
|
|
317.8%
|
|
Interest
Income
|
|
(439,725
|
)
|
|
(333,000
|
)
|
|
(106,725
|
)
|
|
32.0%
|
|
Other expenses/(income), net
|
|
1,070,282
|
|
|
(717,504
|
)
|
|
1,787,786
|
|
|
(249.2%
|
)
|
Total other
income, net
|
|
(8,319,251
|
)
|
|
(6,547,507
|
)
|
|
(1,771,744
|
)
|
|
27.1%
|
|
EARNINGS BEFORE INCOME TAX EXPENSE
|
|
40,083,893
|
|
|
42,542,487
|
|
|
(2,458,594
|
)
|
|
(5.8%
|
)
|
INCOME TAX EXPENSES
|
|
9,580,465
|
|
|
8,033,042
|
|
|
1,547,423
|
|
|
19.3%
|
|
NET INCOME
|
$
|
30,503,428
|
|
$
|
34,509,445
|
|
$
|
(4,006,017
|
)
|
|
(11.6%
|
)
|
Less: Net income attributable to noncontrolling
interest
|
|
7,594,748
|
|
|
10,910,014
|
|
|
(3,315,266
|
)
|
|
(30.4%
|
)
|
NET INCOME ATTRIBUTABLE TO COMPANY
|
$
|
22,908,680
|
|
$
|
23,599,431
|
|
$
|
(690,751
|
)
|
|
(2.9%
|
)
|
Sales
. Our sales increased by 12.0%, or
$8,129,411, to $76,136,280 for the six months ended June 30, 2011, compared to
$68,006,869 for the six months ended June 30, 2010. The increase in sales during
the 2011 period was primarily attributable to a mix of price
and volume increases in certain of our plasma based products. In addition, foreign exchange translation
accounted for 4.7% of the sales increase.
Most of our approved products recorded price increases ranging
from approximately 3.1% to 16.0%, except for human albumin products and human
tetanus immunoglobulin products, which decreased by approximately 4.8% and 2.6%,
respectively. For the six months ended June 30, 2011, the average price for our
approved human albumin products, which contributed 54.0% to our total sales,
decreased by approximately 4.8%; the average price for our approved human
hepatitis B immunoglobulin products, which contributed 5.4% to our total sales,
increased by approximately 3.1%; the average price for our approved IVIG
products, which contributed 34.8% to our total sales, increased by approximately
3.1%; the average price for our approved human rabies immunoglobulin products,
which contributed 1.0% to our total sales, increased by approximately 16.0%; and
the average price for our approved human tetanus immunoglobulin products, which
contributed 4.1% to our total sales, decreased by approximately 2.6%, as
compared to the same period in 2010. The general price increase of our
immunoglobulin product group was primarily attributable to the continuing
shortage in supply of such products, while the average price decrease in human
albumin products was mainly due to the continuous increase in the imported
volume of this product during the 2011 period. The price decrease in human
tetanus immunoglobulin products was primarily the result of the increasingly
saturated market.
Volume in sales for our human albumin, IVIG and human tetanus
immunoglobulin products increased by 36.1%, 19.7% and 73.8%, respectively, for
the six months ended June 30, 2011, as compared to the same period in 2010.
Volume in sales for our human hepatitis B immunoglobulin and human rabies
immunoglobulin products decreased by 35.7% and 87.3%, respectively, for the six
months ended June 30, 2011 as compared to the same period in 2010, mainly due to
the lack of availability of qualified raw material
supply for hyper-immune immunoglobulin products. We will continue to balance the supply of raw material and the demand of the finished products for hyper-immune immunoglobulin products in the second half of the 2011.
26
Cost of Sales
. Our cost of sales increased by $5,966,407, or 37.6%, to $21,824,167 for the six months ended June 30, 2011, from $15,857,760 during the same period in 2010. Cost of sales as a percentage of sales was 28.7%
for the six months ended June 30, 2011, as compared to 23.3% during the same period in 2010. The increase in cost of sales was mainly due to the increase in sales, while the increase in cost of sales as a percentage of sales was primarily due to the
increase in cost of plasma paid to donors along with a change in the mix of products that were sold during 2011. The increased payment to donors is part of our continuing efforts to increase plasma collections.
Gross profit and gross margin
. Our gross profit increased by $2,163,004, or 4.1%, to $54,312,113 for the six months ended June 30, 2011 from $52,149,109 for the same period in 2010. As a percentage of sales, our gross
profit margin decreased by 5.4% to 71.3% for the six months ended June 30, 2011, from 76.7% for the same period in 2010. The decrease in gross profit
margin was mainly due to the price decreases of certain of our products and the increase in raw material
costs as discussed above.
Operating expenses
. Our total operating expenses increased by $6,393,342, or 39.6%, to $22,547,471 for the six months ended June 30, 2011, from $16,154,129 for the same period in 2010. The increase was primarily
attributable to a 96.0% increase in our selling expenses and a 39.2% increase in our general and administrative expenses during the 2011 period. As a percentage of sales, total expenses increased by 5.8% to 29.6% for the six months ended June 30,
2011 from 23.8% for the same period in 2010.
Selling expenses
. For the six months ended June 30, 2011, our selling expenses increased to $5,488,056, from $2,799,789 for the six months ended June 30, 2010, an increase of $2,688,267, or 96.0%. As a percentage of sales, our
selling expenses for the six months ended June 30, 2011 increased by 3.1% to 7.2%, from 4.1% for the six months ended June 30, 2010. The increase in selling expenses was primarily due to an increase in our promotional and conference activities as we
continue our efforts in expanding our customer base into hospital and inoculation centers throughout the PRC.
General and administrative expenses
. For the six months ended June 30, 2011, our general and administrative expenses increased to $15,129,447, from $10,868,202 for the six months ended June 30, 2010, a $4,261,245, or 39.2%
increase. General and administrative expenses as a percentage of sales increased by 3.9% to 19.9% for the six months ended June 30, 2011, from 16.0% for the same period in 2010. The increase in general and administrative expenses was mainly due to
an increase in expenses related to payroll and employee benefits, non-cash employee
stock compensation and legal and auditing expenses. The increase in payroll was mainly due to our efforts to enhance corporate governance with the addition of two
directors during the first quarter of 2011, the addition of a new executive officer in December 2010, and the addition of our new corporate offices in Beijing.
Research and development expenses
. For the six months ended June 30, 2011 and 2010, our research and development expenses were $1,929,968 and $2,486,138, respectively, a decrease of $556,170, or 22.4%. As a percentage of sales,
our research and development expenses for the six months ended June 30, 2011 and 2010 were 2.5% and 3.7%, respectively. The decrease in research and development expenses was primarily due to the decreased cost associated with the development of two
new products, which we are waiting for the PRCs State Food and Drug Administration (SFDA) approval. Due to the delay of SFDA approval process, we expect to receive the approval for these two new products in early 2012.
Change in fair value of derivative liabilities
.
For the six months ended June 30, 2011 and 2010, we recognized a gain from the change in fair value of derivative liabilities in the amounts of $12,197,249 and $6,104,406,
respectively. The recognized gain from the change in the fair value of derivative liabilities in the 2011 period was mainly due to a decrease in the price of our common stock from $16.39 as of December 31, 2010 to $10.20 as of June 30, 2011.
As the convertible notes have been fully converted, future changes in the market price of our common stock could cause the fair value of
the derivative financial instrument of warrants to change significantly in future periods.
Interest expense (income)
. Our interest expense increased by $3,028,465 to $3,981,523 for the six months ended June 30, 2011, from $953,058 for the same period in 2010. Our interest income increased by $106,725 to
$439,725, for the six months ended June 30, 2011, from $333,000 for the same period in 2010. The increase in interest expense was primarily due to the effective interest charges on our convertible notes of $3,580,167 and $456,311,
respectively, for the six months ended June 30, 2011 and 2010. As of June 30,
2011, the convertible notes have been fully converted and therefore, interest
expense is expected to decrease in second half of 2011.
Income tax
.
Our provision for income taxes increased by $1,547,423, or 19.3%, to $9,580,465 for the six months ended June 30, 2011, from $8,033,042 for the same period in 2010. Our effective income tax rates
were 23.9% and 18.9% for the six months ended June 30, 2011 and 2010, respectively. The increase of income tax provision was mainly attributable to the increase in applicable income tax rate of Shandong Taibang and Guizhou Taibang from 15% to 25%,
compared with the same period in the prior year, which was partly offset by the impact of the different
levels of taxable income or losses between the PRC entities and the non-PRC entities as the latters effective income tax rate
is 0%.
27
Net income
.
Our net income decreased by
$4,006,017, or 11.6%, to $30,503,428 for the six months ended June 30, 2011,
from $34,509,445 for the same period in 2010. Net income as a percentage of
sales was 40.1% and 50.7% for the six months ended June 30, 2011 and 2010,
respectively, as a result of the cumulative effect of foregoing factors.
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, 2011, we had $76,841,679 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 periods indicated:
Cash Flow
(all amounts in U.S. dollars)
(unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by operating
activities
|
$
|
12,349,464
|
|
$
|
19,355,081
|
|
Net cash used in investing activities
|
|
(5,010,425
|
)
|
|
(10,735,936
|
)
|
Net cash provided by (used in)
financing activities
|
|
2,186,080
|
|
|
(6,409,275
|
)
|
Effects of exchange rate change on cash
|
|
2,375,192
|
|
|
209,310
|
|
Net increase in cash and cash
equivalents
|
|
11,900,311
|
|
|
2,419,180
|
|
Cash and cash equivalents at beginning of the period
|
|
64,941,368
|
|
|
53,843,951
|
|
Cash and cash equivalents at end of
the period
|
$
|
76,841,679
|
|
$
|
56,263,131
|
|
Operating activities
Net cash provided by operating activities was $12,349,464 for
the six months ended June 30, 2011, as compared to $19,355,081 for the same
period in 2010. For the six months ended June 30, 2011 and 2010, our net income
was $30,503,428 and $34,509,445, respectively. Our net non-cash operating income was $3,363,329 and $1,601,951 for the six months ended June 30, 2011 and 2010,
respectively.
Among the non-cash operating items, our depreciation and
amortization expense for the six months ended June 30, 2011 and 2010 was
$3,961,920, and $3,410,980, respectively. Our stock compensation expense for the
six months ended June 30, 2011 and 2010 was $2,418,287 and $617,841,
respectively. Our income from change in fair value of derivative liabilities for the six
months ended June 30, 2011 and 2010 was $12,197,249 and $6,104,406,
respectively. The change in fair value of derivative liabilities was due to a
decrease in the price of our common stock from $16.39 as of December 31, 2010 to
$10.20 as of June 30, 2011. The amortization of discount on convertible notes
for the six months ended June 30, 2011 and 2010 was $3,503,767 and $312,259,
respectively.
We had a net cash outflow of working capital of $14,790,632 and
$13,552,413 for the six months ended June 30, 2011 and 2010, respectively. Among
these cash outflows, inventory cash outflow for the six months ended June 30,
2011 and 2010 were $9,319,703 and $6,351,255, respectively. The cash outflow for
inventory was a direct result of the implementation of the 90-day quarantine
period by the PRC government, which caused a longer staging period for raw
material plasma inventory. Our cash outflow for accounts receivable for the six
months ended June 30, 2011 and 2010 were $10,150,102 and $3,861,953,
respectively. As we increased our sales directly to end-users, such as hospitals and
inoculation centers that have extended credit terms, we experienced a slower
turn-over with our accounts receivable.
Investing activities
Net cash used in investing activities for the six months ended
June 30, 2011 was $5,010,425, as compared to $10,735,936 for the same period of
2010. During the six months ended June 30, 2011, we paid $5,010,425 for
equipment and land for Shandong Taibang and for buildings and construction in
progress at Guizhou Taibang.
Financing activities
Net cash provided by financing activities for the six months
ended June 30, 2011 totaled $2,186,080, as compared to the net cash used
totaling $6,409,275 for the same period of 2010. The net cash provided by
financing activities was mainly due to a new short-term bank loan totaling
$18,373,200, offset by a $7,635,000 payment to acquire the remaining 10%
interest in our 90% majority-owned subsidiary and a dividend payment of
$5,589,920 to the noncontrolling interest shareholders.
28
Obligations under Material Contracts
The following table sets forth our material contractual
obligations as of June 30, 2011:
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Due to related parties
|
|
2,238,534
|
|
|
2,238,534
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating lease commitment
|
|
1,095,495
|
|
|
389,393
|
|
|
378,915
|
|
|
178,647
|
|
|
148,540
|
|
Total
|
$
|
3,334,029
|
|
$
|
2,627,927
|
|
$
|
378,915
|
|
$
|
178,647
|
|
$
|
148,540
|
|
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.
Critical Accounting Policies
Critical accounting policies are those we believe are most
important to portraying our financial conditions and results of operations and
also require the greatest amount of subjective or complex judgments by
management. Judgments and uncertainties regarding the application of these
policies may result in materially different amounts being reported under various
conditions or using different assumptions. There have been no material changes
to the critical accounting policies previously disclosed in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2010.
Recent Accounting Pronouncements
See Note 2 to our unaudited consolidated financial statements
included elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Our operations are carried out in the PRC and we are subject to
specific considerations and significant risks not typically associated with
companies in North America and Western Europe. Accordingly, our 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. Our 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.
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to
our short-term and long-term bank loans. Although our short-term loans are fixed
for the terms of the loans, the terms are typically three to twelve months for
short-term bank loans and interest rates are subject to change upon renewal.
There was no material change in interest rates for short-term bank loans renewed
during the three months ended June 30, 2011.
A hypothetical 1.0% increase in the annual interest rates for
all of our credit facilities under which we had outstanding borrowings as of
June 30, 2011, would decrease net income before provision for income taxes by
approximately $46,410 for the three months ended June 30, 2011. Management
monitors the banks prime rates in conjunction with our cash requirements to
determine the appropriate level of debt balances relative to other sources of
funds. We have not entered into any hedging transactions in an effort to reduce
our exposure to interest rate risk.
29
Foreign Exchange Risk
While our reporting currency is the U.S. Dollar, all of our consolidated revenues and consolidated costs and majority of expenses are denominated in RMB. All of our assets are denominated in RMB, except certain cash balances. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings and
assets as expressed in our U.S. Dollar financial statements will decline. Assets and liabilities
of our PRC entities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders
equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of stockholders equity. We have not
entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in Chinas political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although the
Peoples Bank of China regularly involved in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or Euro in the
medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen involvement in the foreign exchange market.
Account Balances
We maintain 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, 2011 and December 31, 2010 amounted to $76,546,951 and $64,443,315,
respectively, $49,726 and $1,473,917 of which are covered by insurance, respectively. We have not experienced any losses in such accounts and we do not believe that we are exposed to any significant risks on our cash in bank accounts.
Inflation
Inflationary factors such as increases in the cost of our sales and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to
date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin. Selling and general and administrative expenses as a percentage of net sales may also be affected if the selling
prices of our products do not increase with these increased costs.
Market for Human Albumin and IVIG
Our two major products, human albumin and IVIG, accounted for 89.9% and 85.8% of the total sales for the three months ended June 30, 2011 and 2010, respectively. If the market demands for human albumin or IVIG cannot be sustained in the future or if
there is substantial price decrease in both products, it would adversely affect our operating results.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the
reports we file or submit under the 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, 2011. 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 of our Annual Report on Form 10-K for the year ended December 31, 2010, which we are still in the process of remediating as of June 30,
2011, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2010 for the description of these weaknesses.
30
Changes in Internal Control 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, 2010, our management identified ineffective review controls on the recognition of deferred tax liabilities and derivative instrument
valuation, because of lack of resources with expertise in non-recurring transactions, which resulted an inadvertent omission of the callable feature when measuring the fair value of the warrants and misinterpretation of US GAAP regarding the
recognition of deferred tax liabilities upon business combination. We have already taken measures to remediate these material weaknesses by adding two additional qualified accountants in late 2010 and enhancing the supervision, monitoring and
reviewing of financial statement preparation processes. Furthermore, we have already engaged outside consultants specializing in income tax accounting and derivative instrument valuation, as well as in reinforcing the rigorous process for collecting
and reviewing information required for the preparation of the financial statements, including footnotes.
Management remains committed to improving its internal control over financial reporting and will continue to work to put effective
controls in place.
Other than the foregoing changes, there were no changes in our internal controls over financial reporting during the second quarter of fiscal 2011 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 described in Item 3 Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2010, 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. Investors are directed to Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2010 for the
description of these legal proceedings. There have been no material developments to these legal proceedings during the second quarter of 2011.
ITEM 1A. RISK FACTORS.
The Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010 contains a detailed discussion of risk factors that could materially adversely affect our business, our operating results, or our financial condition. The
following risk factors should be read in conjunction with that discussion.
The biopharmaceutical industry in the PRC is strictly regulated and changes in such regulations may have an adverse effect on our business.
The biopharmaceutical industry in the PRC is strictly regulated by the government. The regulatory regime, such as administrative approval of medicines and production approvals, comprises a series of regulations and administrative rules. The PRC
regulatory authorities may amend such regulations and administrative rules and promulgate new regulations and administrative rules from time to time.
In fact, on July 15, 2011, the Guizhou Health Department issued its Plan for Guizhou Provincial Blood Collection Institutional Setting (2011-2014), (Guizhou Plan), which limits the number of counties that are permitted to set up plasma
collection stations in Guizhou province to four counties. As a result of the Guizhou Plan, four of the six active plasma collection stations that we previously operated in Guizhou province were not relicensed by the regulatory authorities and ceased
operations on August 1, 2011. We do not expect these stations to resume operations prior to August 1, 2013, if at all. The remaining two stations were relicensed as of August 1, 2011, and we are required to apply for the renewal of those licenses in
two years.
While the Company is still evaluating the affect of regulatory change in Guizhou Province, we may be unable to adequately address the potential inability to find alternative sources of plasma, the potential inability to increase production at
permitted sites, the
potential inability to mitigate the financial consequences through cost cutting or other efficiencies or the potential additional regulatory restrictions on our operations, any of which could have an adverse impact on our business and financial
performance.
31
We may not be able to carry on our business if we lose any of the permits and licenses required by the PRC Government in order to carry on our business.
All pharmaceutical manufacturing and distribution enterprises in the PRC are required to obtain from various PRC governmental authorities certain permits and licenses, including, in the case of manufacturing enterprises, a Pharmaceutical
Manufacturing Permit and, in the case of distribution enterprises, a Pharmaceutical Distribution Permit. In addition, each of our plasma collection stations are required to submit to inspection and renew their plasma collection permits every two
years from their respective local governmental authorities. We have obtained permits and licenses and the GMP certificates required for the manufacturing and sales of our pharmaceutical products. These permits and licenses held by us are subject to
periodic renewal and/or reassessment by the relevant PRC Government authorities and the standards of compliance required in relation thereto may from time to time be subject to changes. We intend to apply for the renewal of such permits and licenses
when required by applicable laws and regulations. Any changes in compliance standards, or any new laws or regulations, such as the Guizhou Plan, as discussed in the above risk factor that may prohibit or render it more restrictive for us to conduct
our business or increase our compliance costs may adversely affect our operations or profitability. Any failure by us to obtain such permit, license or renewals may have a material adverse effect on the operation of our business. In addition, as is
the case in Guizhou Province with respect to four of our plasma collection stations, we may not be able to carry on business without such permits and business licenses being renewed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. (REMOVED AND RESERVED).
ITEM 5. OTHER INFORMATION.
We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees
to our board of directors.
32
ITEM 6. EXHIBITS.
The following exhibits are filed as part of this report or
incorporated by reference:
* Furnished herewith
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: August 9, 2011
|
CHINA BIOLOGIC PRODUCTS, INC.
|
|
|
|
By:
/s/ Chao Ming
Zhao
|
|
Chao Ming Zhao, Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
|
By:
/s/ Y. Tristan
Kuo
|
|
Y.
Tristan Kuo, Chief Financial Officer
|
|
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
34
China Bioligic Products (NASDAQ:CBPO)
Historical Stock Chart
From Jun 2024 to Jul 2024
China Bioligic Products (NASDAQ:CBPO)
Historical Stock Chart
From Jul 2023 to Jul 2024