UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
December 31,
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 No. 001-34566
CHINA BIOLOGIC PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
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75-2308816
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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18th Floor, Jialong International Building, 19 Chaoyang Park
Road
Chaoyang District, Beijing 100125
Peoples Republic of
China
(Address of principal executive offices)
(+86) 10-6598-3111
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which
registered
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Common Stock, par value $0.0001 per share
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NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the Exchange
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]
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 Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this ) 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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
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 [_]
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Accelerated Filer [X]
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Non-Accelerated Filer [_]
(Do not check if a smaller
reporting company)
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Smaller reporting company [_]
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Indicate by check mark whether registrant is a shell
company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]
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As of June 30, 2011 (the last business day of the
registrants most recently completed second fiscal quarter), the aggregate
market value of the shares of the registrants common stock held by
non-affiliates (based upon the closing sale price of such shares as
reported on the NASDAQ Global Select Market) was approximately $76.6
million. Shares of the registrants common stock held by each executive
officer and director and each by each person who owns 10% or more of the
outstanding common stock have been excluded from the calculation in that
such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
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There were a total of 25,601,125 shares of the
registrants common stock outstanding as of March 9, 2012.
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DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrants Proxy Statement for its 2012
Annual Meeting of Stockholders to be filed with the Commission within 120
days after the close of the Registrants fiscal year are incorporated by
reference into Part III of this Annual Report on Form 10-K.
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Annual Report on Form 10-K
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Year Ended
December 31, 2011
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TABLE OF CONTENTS
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PART I
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Item 1.
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Business.
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2
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Item 1A.
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Risk Factors.
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16
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Item 1B.
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Unresolved Staff Comments.
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28
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Item 2.
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Properties.
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28
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Item 3.
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Legal Proceedings.
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28
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Item 4.
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Mine Safety Disclosures.
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30
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PART II
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Item 5.
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Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
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31
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Item 6.
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Selected Financial Data
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32
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Item 7.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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32
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Item 7A.
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Quantitative and Qualitative
Disclosures About Market Risk.
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43
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Item 8.
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Financial Statements and Supplementary Data.
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44
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Item 9.
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Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.
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45
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Item 9A.
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Controls and Procedures.
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45
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Item 9B.
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Other information
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46
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PART III
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Item 10.
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Directors, Executive Officers and Corporate
Governance.
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46
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Item 11.
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Executive Compensation.
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47
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Item 12.
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Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
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47
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Item 13.
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Certain Relationships and
Related Transactions, and Director Independence.
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47
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Item 14.
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Principal Accounting Fees and Services
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47
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules.
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47
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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; expectations regarding
governmental approvals of our new products; expected preferential tax treatment
of our PRC subsidiary, Guizhou Taibang; 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, 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. Risks and uncertainties that could cause actual
results to differ materially from those anticipated include risks related to,
among others: our ability to overcome competition from local and overseas
pharmaceutical enterprises; decrease in the availability, or increase in the
cost, of plasma; failure to obtain PRC governmental approval to increase retail
prices of certain of our biopharmaceutical products; difficulty in servicing our
debt; loss of key members of our senior management; and unexpected changes in
the PRC governments regulation of the biopharmaceutical industry in China, or
changes in Chinas economic situation and legal environment. Additional
disclosures regarding factors that could cause our results and performance to
differ from results or performance anticipated by this report are discussed in
Item 1A Risk Factors.
Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, 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:
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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;
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Taibang Biological are to our wholly owned subsidiary Taibang Biological
Limited, a BVI company, formerly Logic Express Limited;
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Taibang Holdings are to our wholly-owned subsidiary Taibang Holdings
(Hong Kong) Limited, a Hong Kong company, formerly Logic Holdings (Hong Kong)
Limited;
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Taibang Biotech are to our wholly owned subsidiary Taibang Biotech
(Shandong) Co., Ltd., a PRC company, formerly Logic Management and Consulting
(China) Co., Ltd.;
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Taibang Beijing are to our wholly owned subsidiary Taibang (Beijing)
Pharmaceutical Research Institute Co., Ltd., a PRC company, formerly Logic
Taibang Biotech Institute (Beijing);
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Dalin are to our wholly owned subsidiary Guiyang Dalin Biologic
Technologies Co., Ltd., a PRC company;
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Shandong Taibang are to our majority owned subsidiary Shandong Taibang
Biological Products Co. Ltd., a sino-foreign joint venture incorporated in
China;
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Taibang Medical are to our wholly owned subsidiary Shandong Taibang
Medical Company, a PRC company;
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Guizhou Taibang are to our majority owned subsidiary Guizhou Taibang
Biological Products Co., Ltd., a PRC company, formerly Guiyang Qianfeng
Biological Products Co., Ltd.;
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Huitian are to our equity method investment Xian Huitian Blood Products
Co., Ltd., a PRC company;
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BVI are to the British Virgin Islands;
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Hong Kong are to the Hong Kong Special Administrative Region of the
Peoples Republic of China;
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PRC and China are to the Peoples Republic of China;
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SEC are to the Securities and Exchange Commission;
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Securities Act are to the Securities Act of 1933, as amended;
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Exchange Act are to the Securities Exchange Act of 1934, as amended;
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Renminbi and RMB are to the legal currency of China; and
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U.S. dollars, dollars and $ are to the legal currency of the United
States.
1
PART I
ITEM 1. BUSINESS.
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 human 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, Guizhou Province. Our minority owned
investee, Huitian, operates from its facility in Shaanxi Province. The human
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 with dosages of 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 54.5%, 48.0% and 49.7% of our total sales for each of the years
ended December 31, 2011, 2010 and 2009, respectively. Human albumin is
principally used to increase blood volume while immunoglobulin, one of our other
major products, is used for certain disease 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 and therefore our largest customers
have changed over the years. For the years ended December 31, 2011, 2010 and
2009, our top 5 customers accounted for approximately 13.2%, 12.3% and 10.7%,
respectively, of our total sales. 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 18th Floor,
Jialong International Building, 19 Chaoyang Park Road, Chaoyang District,
Beijing 100125, the Peoples Republic of China. Our corporate telephone number
is (86) 10-6598-3111 and our fax number is (86)10-6598-3222. We maintain a
website at
http://www.chinabiologic.com
that
contains information about our company, but that information is not part of this
report.
Our History and Background
China Biologic Products, Inc. was originally incorporated on
December 20, 1989 under the laws of the State of Texas as Shepherd Food
Equipment, Inc. On November 20, 2000, Shepherd Food Equipment, Inc. changed its
corporate name to Shepherd Food Equipment, Inc. Acquisition Corp., which is the
survivor of a May 28, 2003 merger with GRC Holdings, Inc. or GRC. In the merger,
the Company adopted the Articles of Incorporation and By-Laws of GRC and changed
its corporate name to GRC Holdings, Inc. On January 10, 2007, a Plan of
Conversion became effective pursuant to which GRC was converted into a Delaware
corporation and changed its name to China Biologic Products, Inc.
Acquisition of Taibang Biological
On July 19, 2006, we completed a reverse acquisition with
Taibang Biological, whereby we issued to the shareholders of Taibang Biological
18,484,715 shares of our common stock in exchange for 100% of the issued and
outstanding shares of capital stock of Taibang Biological and its majority-owned
Chinese operating subsidiary, Shandong Taibang. As a result of the reverse
acquisition, Taibang Biological became our 100% owned subsidiary, the former
shareholders of Taibang Biological became our controlling stockholders with
96.1% of our common stock and Shandong Taibang became our 82.76% majority-owned
indirect subsidiary. Shandong Taibang is a sino-foreign joint venture company
established on October 23, 2002 with a registered capital of RMB80 million (then
approximately $10.3 million).
Acquisition of Plasma Stations
In December 2006, our subsidiary, Shandong Taibang, acquired
all the assets of five plasma stations in Shandong Province. We obtained the
permit to operate the stations in January 2007. In April 2007, Shandong Taibang
acquired certain assets of two plasma stations in Guangxi Province. The two
plasma stations obtained their operating permits in February and April 2007,
respectively.
2
We acquired the assets of these plasma stations through
separate Shandong Taibang subsidiaries, specially formed for this purpose. The
subsidiaries holding six of our new plasma stations are the Xia Jin Plasma
Company, the Qi He Plasma Company, the He Ze Plasma Company, the Huan Jiang
Plasma Company, the Liao Cheng Plasma Company, and the Zhang Qiu Plasma Company.
The seventh plasma station is held by the Fang Cheng Plasma Company, which at
the time was 80% owned by Shandong Taibang and 20% owned by Feng Lin, an
unrelated third party. On January 13, 2010, Shandong Taibang acquired the 20%
non-controlling interest in the Fang Cheng Plasma Company, and it is now
wholly-owned by Shandong Taibang. In January 2007, Shandong Taibang also signed
a letter of intent to acquire certain assets of a plasma station in Guangxi
Province, however, we have not consummated this acquisition as the permit for
this station is in dispute, as described in Item 3, Legal Proceedings.
In June 2008, we received approval from the Guangxi Province
Bureau of Health to set up a new plasma collection station in Pu Bei County,
Guangxi Province. The new plasma collection station will be located in the
Centralized Industry Zone of Pu Bei County and when it becomes operational, it
could replace our existing Fang Cheng Plasma Collection Station with a more
strategic location to increase collection volumes. However, due to disagreement
among local government branches on the approval of the plasma station, the
management is uncertain whether this station will be approved or when it will be
approved. The management is still working with the local government for the
approval of the Pu Bei Plasma Station.
On January 22, 2010, Shandong Taibang entered into an equity
transfer agreement with Yuncheng Ziguang Biotechnology Co., Ltd., or Yuncheng
Ziguang, located in Yuncheng, Shandong Province. Under the terms of the equity
transfer agreement, Shandong Taibang agreed to purchase 100% of Yuncheng
Ziguangs equity interest at a purchase price of RMB 10,066,672 (then
approximately $1,476,781), which was paid on February 24, 2010. The purpose of
this acquisition is for relocation of Shandong Taibangs He Ze Plasma Company
into the nearby Yuncheng Ziguang facility. In February 2011, the He Ze Plasma
Company moved into the Yuncheng Ziguang facility and began collecting plasma.
Currently Yuncheng Ziguang has no other operations.
On July 7, 2010, Shandong Taibang invested RMB 6,000,000 (then
approximately $910,200) to establish a wholly-owned subsidiary, Ning Yang Plasma
Company, in Shandong Province. The Ning Yang Plasma Company obtained its
operating permits from relevant PRC authorities on July 11, 2011, and commenced
collection operation in July, 2011.
On July 20, 2010, Shandong Taibang invested another RMB
6,000,000 (then approximately $910,200) to establish a wholly-owned subsidiary,
Yishui Plasma Company, in Shandong Province. The Yi Shui Plasma Company obtained
its operating permits from relevant PRC authorities on December 6, 2010, and
commenced collection operation in December, 2010.
Establishment of Taibang Medical
In September 2006, Shandong Taibang established a wholly owned
subsidiary, Taibang Medical (known then as Shandong Missile Medical Co., Ltd.)
with registered capital of $384,600, fully paid on March 1, 2007. On February 7,
2007, Taibang Medical obtained a distribution license for biological products,
except for vaccine, from the Shandong Food and Drug Administration. The
registration of Taibang Medical was ultimately approved by Shandong Provincial
Department of Foreign Trade and Economic Cooperation on July 4, 2007 and Taibang
Medical was registered on July 19, 2007. The scope of business is wholesale of
biological products, except vaccines, with a license period of 25 years from the
date of registration.
On August 14, 2009, we changed Taibang Medicals name to
Shandong Taibang Medical Company. In addition, the registered capital of Taibang
Medical was increased by RMB 2,000,000 (then approximately $293,400) to
$733,500, and vaccine was also added to the scope of business.
On July 8, 2010, Taibang Biotech entered into an equity
transfer agreement to purchase 100% of the equity interest in Taibang Medical
from Shandong Taibang with a cash purchase price of RMB 6,440,000 (then
approximately $947,327). The equity transfer was registered with the local
Administration for Industry and Commerce, or AIC, on September 10, 2010 and the
purchase price was fully paid on September 23, 2010. With this equity transfer,
Taibang Medical is now our indirect wholly-owned subsidiary and we will be able
to consolidate its resources in the sale and marketing of Shandong Taibang and
Guizhou Taibangs products.
On September 28, 2011, Taibang Medical obtained renewed
distribution license for biological products, including vaccine, from the
Shandong Food and Drug Administration, for a license period of five years till
September 27, 2016.
Formation of Hong Kong Subsidiary
On December 12, 2008, we established Taibang Holdings, our
wholly-owned Hong Kong subsidiary, for the purpose of being a holding company
for our majority interest in Dalin.
3
Dalin Acquisition and Entrustment Agreement
We completed the acquisition of 90% interest in Dalin in April
2009 upon payment of 90% of the purchase price. We substantially paid the
remaining 10% of the purchase price, RMB 19,440,000 (then approximately
$2,844,350), on April 9, 2010, the one-year anniversary of the approval of the
equity transfer by the local AIC.
On January 4, 2011, we entered into an equity transfer
agreement with Shaowen Fan to acquire the remaining 10% minority interest in
Dalin for a purchase price of RMB 50,000,000 (then approximately $7,585,000).
The equity transfer was registered with the local AIC on January 26, 2011 and
the purchase price was fully paid as of February 22, 2011 in accordance with the
equity transfer agreement. With this equity transfer, Dalin is now the Companys
indirect wholly-owned subsidiary.
On April 6, 2009, Taibang Biological entered into an agreement
with Shandong Institute, the noncontrolling interest holders in Shandong
Taibang, pursuant to which Shandong Institute would provide an advance to assist
Taibang Biologicals purchase of 90% in Dalins equity interests. Under the
terms of the agreement, Shandong Institute agreed to provide advance of
$3,935,000 (RMB25,000,000), representing 12.86% of our purchase consideration in
Dalin to us for one year, bearing interest equal to the higher of a
proportionate share of the net income of Dalin during the year ended December
31, 2009 or 6% per annum. On April 12, 2010, we fully paid the advance from
Shandong Institute and the interest of approximately $1.3 million, which was
less than our previous estimate by approximately $0.9 million. We recorded the
difference between the previous estimate and actual payment in other income of
the consolidated statement of comprehensive income for the year ended December 31, 2010.
As part of our due diligence investigation into Dalin and its
operating subsidiary, Guizhou Taibang, we discovered that our indirect interest
in Guizhou Taibang acquired under the equity transfer agreement may be diluted
to as low as 41.3% . The local AIC records show Dalin as a 54% shareholder of
Guizhou Taibang; however, the AIC records do not reflect a potential issuance of
Guizhou Taibangs equity interests to certain investors in May 2007, pursuant to
a capital increase agreement. Guizhou Taibang has received the consideration for
the potential issuance of equity interests, but the increase in registered
capital and the related issuance of the equity interest has not yet been
registered with the local AIC, pending the outcome of a minority shareholder
suit against Guizhou Taibang and its then shareholders, alleging violation of
the shareholders right of first refusal in connection with the May 2007 equity
issuance. For details regarding the Guizhou Taibang shareholder suit and our
position with respect to the May 2007 equity issuance of Guizhou Taibangs
equity interests, see our disclosure under Item 3 Legal Proceedings herein.
Guizhou Taibang owned seven plasma collection stations at the
time of our acquisition, of which five had been in operation and collecting
approximately 300 tons of plasma supply per year, with an annual capacity of 400
tons.
On December 30, 2010, the Guiyang AIC approved Guizhou
Taibangs application to change its name to Guizhou Taibang Biological Products
Co., Ltd. We expect that the name change will facilitate our promotion of the
Taibang brand name and further the Companys integration of its marketing
efforts.
On November 11, 2010, the Company established Guiyang Guizhou
Taibang Biological Technology Co., Ltd., a wholly-owned subsidiary of Guizhou
Taibang, in Guiyang, Guizhou, for the purpose of research and development of
placenta based products.
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 four counties (the
Guizhou Plan). As a result of the implementation of the Guizhou Plan, the
licenses of four active plasma collection stations in Dan Zhai, Wei Ning, San
Sui and Na Yong counties owned by Guizhou Taibang 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 four stations in Dan Zhai, Wei Ning, San Sui and Na Yong counties together
accounted for approximately 21.0% (7 months of operation) and 34.1% of the
Companys total plasma collection by volume for the year ended December 31, 2011
and 2010, respectively. In addition, Guizhou Taibangs inactive plasma
collection station in Guizhou Province that was purchased from the government in
2007 is unlikely to be licensed as planned, because it is in Zhengyuan County, a
location not included in the Guizhou Plan. As a result of the closure of the
above plasma collection stations, certain equipment, office furniture, building
improvement and plasma collection permits were abandoned and written off during
the three months ended September 30, 2011.
Huitian Acquisition
We purchased a 35% interest in Huitian at a purchase price of
RMB 44,000,000 (then approximately $6,454,800) in October 2008. Huitian is a
manufacturer of plasma-based biopharmaceutical products in Shaanxi Province and
is one of only 30 such manufacturers in China which are government approved.
Shaanxi Province, which has a population of 37 million, has had a historically
high collection volume with approximately ten plasma collection stations in
operation, collecting approximately 300 tons of plasma supply each year. Only
four of the collection stations in Shaanxi Province are government approved and
three of these are owned by Huitian. Huitian produces about 80 tons of
plasma-based products per year and has 200 tons of annual production capacity.
We believe Huitian provides a strong long-term growth potential. Huitian is in
compliance with GMP standards and it is also approved by the SFDA for the
production of Human Albumin, Human Immunoglobulin, Human Immunoglobulin for
Intravenous Injection, and Human Hepatitis B Immunoglobulin products.
4
Formation of PRC Subsidiaries
On December 21, 2009, our Hong Kong
subsidiary, Taibang Holdings, established Taibang Biotech
for the purpose of holding our majority interest in Dalin and
to facilitate our Chinese operations at the holding
company level. On December 28, 2009, the Company
transferred its 90% equity interest in Dalin from
Taibang Holdings to Taibang Biotech to complete this
process.
On August 5, 2010, Taibang Biotech formed a
wholly-owned subsidiary, Taibang Beijing, with a
registered capital of RMB 1 million (then
approximately $149,700). Taibang Beijing was established to
operate all research and development activities of the Company and its subsidiaries.
Corporate Structure
The following chart reflects our current
corporate organizational structure:
5
Our Industry
Plasma Collection in China
The collection of human plasma in China is generally influenced
by a number of factors such as government regulations, geographical locations of
collection stations, sanitary conditions of collection stations, living
standards of the donors, and cultural and religious beliefs. Until 2006, only
licensed Plasmapheresis stations owned and operated by the government could
collect human plasma. Furthermore, each collection station was only allowed to
supply plasma to the one manufacturer that had signed the Quality
Responsibility statement with them. However, in March 2006, the Ministry of
Health promulgated certain Measures on Reforming Plasma Collection Stations,
or the Blood Collection Measures, whereby the ownership and management of PRC
plasma stations are required to be transferred to plasma-based biopharmaceutical
companies and the local government is charged with regulatory supervision and
administrative control in accordance with the policies of the central
government. Plasma stations that did not complete their reform by December 31,
2006 risked revocation of their license to collect plasma.
The supply of plasma for plasma-based products in the PRC has
been on the decline since 2003 from the historical high of annual supply of
approximately 7,000 metric tons to approximately 3,130 metric tons in 2008 and
gradually recovering to approximately 4,180 metric tons in 2010. We believe that
the decline prior to 2008 was a direct result of the governments industry
reforms of the countrys collection practices which led to the closure of many
stations that did not meet the new industry standards. Based on reports
promulgated by the PRC Ministry of Health, as well as the closure of 16 plasma
stations in Guizhou Province as described in Item 7 below, we estimate that the
current annual supply of plasma in China amounts to approximately 4,000 metric
tons, as compared to 30,000 metric tons in the global market, with the six
largest manufacturers of plasma products accounting for approximately 50% of the
annual plasma collection. In spite of the shortage of plasma supply, revenues
from the sale of plasma products in China amounted to approximately $1.3 billion
in 2010 per managements estimate, and revenues from the sale of human albumin
products accounted for about 75% in 2010.
We believe that these regulatory changes, including measures
which limit illegal selling of blood, have improved the quality of blood and
plasma by increasing cleanliness standards at blood collection stations. As the
operation of the plasma stations become more regulated and the donor population
expands, we believe that the overall quality of raw materials will continue to
improve, leading to a safer, more reliable finished product.
Plasma-Based Products Industry in China
We produce approved human albumin and immunoglobulin products,
with human plasma as the main ingredient. In addition to the low usage ratio of
such products in China as compared to other more developed countries, there is a
significant difference in the make-up and range of the plasma-based
pharmaceutical products. Based on our analysis, in most developed countries like
the United States, clotting factor products accounts for the majority of the
plasma-based biopharmaceutical products, while in China, human albumin products
accounts for the vast majority of such products. Specifically, total clotting
factor products and human albumin products, account for approximately 40% and
25%, respectively, of United States total annual plasma-derived products, and
account for approximately 3% and 75%, respectively, of Chinas.
Our Growth Strategy
Our mission is to become a first-class biopharmaceutical
enterprise in China. To achieve this objective, we have implemented the
following strategies:
-
Securing the supply of plasma
. Due to the shortage of plasma
and the reform of the ownership of plasma stations, our immediate strategy is
to negotiate and acquire plasma stations in order to secure our plasma supply.
In December 2006, we acquired five of the plasma stations in Shandong
Province. Furthermore, in January 2007, we acquired two additional plasma
stations in Guangxi Province. In January, 2010, Shandong Taibang purchased
100% of Yuncheng Ziguang Biotechnology Co., Ltd., located in Yuncheng,
Shandong Province, for the purpose of relocation of Shandong Taibangs He Ze
Plasma Company into the nearby Yuncheng Ziguang facility in hope to serve
donors better and secure higher collection volumes in the future. In February
2011, the He Ze Plasma Company moved into Yuncheng Ziguang and began
collecting plasma. In 2010, we additionally established two new plasma
companies in Shandong Province, one of which began operation in December 2010
and the other of which began operation in July 2011. Our acquisition of Dalin
and its operating subsidiary, Guizhou Taibang, and our acquisition of a
minority equity interest in Huitian, also helped in securing our plasma supply
as well as expanded production capacity and market coverage. In addition, we
continue to seek opportunities to build new plasma stations throughout China,
as well as expanding collection territories of existing plasma stations.
-
Acquisition of competitors and/or other biologic related
companies
. In addition to organic growth, acquisition is an important
part of our expansion strategy. Although there are about 30 approved
plasma-based biopharmaceutical manufacturers in the market, we believe that
there are only 24 manufacturers in operation, only about half of whom will be
competitive. The top six manufacturers in China account for more than 50%
market share. Furthermore, we believe that the regulatory authorities are
considering further reforming the industry and those smaller, less competitive
manufacturers will face the possibility of having their manufacturing permits
revoked by the regulators, making them potential targets for acquisition.
Also, if we are presented with appropriate opportunities, we may acquire
additional companies, products or technologies in the biologic related sectors
(including but not limited to medical, pharmaceutical and biopharmaceutical).
6
-
Further strengthening of research and development
capability
. We believe that, unlike other more developed countries
such as the U.S., Chinas plasma-based biopharmaceutical products are at the
initial stage of development. There are many other plasma-based products that
are being used in the U.S. which are not currently being manufactured in
China. We intend to strengthen our research and development capability so as
to expand our product line to include higher-margin, technologically more
advanced plasma-based biopharmaceutical products. We believe that our
increased focus on research and development will give us a competitive
advantage over our competitors.
-
Market development and network expansion
. Leveraging on the
high quality and excellent safety record of our products, we intend to (i)
enhance our product penetration with our existing customers by introducing new
products and (ii) extend the reach of our products from our current market to
include other provinces where we envision significant market potential.
Our Products
Our principal products are our approved human albumin and
immunoglobulin products. We are currently approved to produce 24
biopharmaceutical products in eight major categories as follows:
Approved Products
(1)(2)
|
Cure/Use
|
Human Albumin: - 20%/10ml,
20%/25ml, 20%/50ml,10%/100ml, 10%/20ml, 10%/50ml, 25%/50ml and
20%/50ml(10g Factor IV)
|
Shock caused by blood loss trauma or burn; raised
intracranial pressure caused by hydrocephalus or trauma; Oedema or ascites
caused by hepatocirrhosis and nephropathy; prevention and cure of
low-density- lipoproteinemia; and Neonatal hyperbilirubinemia.
|
Human Hepatitis B Immunoglobulin 100
International Units, or IU, 200IU, 400IU
|
Prevention of measles and contagious hepatitis. When
applied together with antibiotics, its curative effect on certain severe
bacteria or virus infection may be improved.
|
Human Immunoglobulin
10%/3ml and 10%/1.5ml
|
Original immunoglobulin deficiency, such as X chain low
immunoglobulin, familiar variable immune deficiency, immunoglobulin G
secondary deficiency; Secondary immunoglobulin deficiency: such as severe
infection, newborn sepsis; and Auto-immune deficiency diseases, such as
original thrombocytopenia purpura or kawasaki disease.
|
Human Immunoglobulin for Intravenous
Injection 5%/25ml, 5%/50ml, 5%/100ml and 5%/200ml
|
Same as above
|
Thymopolypeptides Injection
20mg/2ml,5mg/2ml
|
Cure for various original and secondary T-cell deficiency
syndromes, some auto-immune deficiency diseases and various cell immunity
deficiency diseases, and assists in the treatment for tumors.
|
Human Rabies Immunoglobulin 100IU, 200IU
and 500IU
|
Mainly for passive immunity from bites or claws by rabies
or other infected animals. All patients suspected of being exposed to
rabies will be treated with a combined dose of rabies vaccine and human
rabies immunoglobulin.
|
Human Tetanus Immunoglobulin
250IU
|
Mainly used for the prevention and therapy of tetanus.
Particularly applied to patients who have allergic reactions to Tetanus
Antitoxin.
(3)
|
Placenta Polypeptide 4ml/vial
|
Cure for cell immunity deficiency diseases, viral
infection and leucopenia caused by various reasons, and assist in
postoperative healing
|
(1)
|
% represents the degree of dosage concentration for the
product and each product has its own dosage requirement. For example,
Human Albumin 20%/10ml means 2g of Human Albumin is contained in each 10ml
packaging and Human Immunoglobulin 10%/3ml means 300mg of Human
Immunoglobulin is contained in each 3ml packaging. Under PRC law, each
variation in the packaging, dosage and concentration of medical products
requires registration and approval by the SFDA. During this process the
altered product is not commercially available for sale. For example, among
our Human Albumin products only Human Albumin 20%/10ml, 20%/25ml,
20%/50ml, 10%/10ml, 10%/25ml, 10%/50ml, and 25%/50ml products are
currently approved and are commercially available.
|
|
|
(2)
|
IU means International Units, or IU. IU is a unit used
to measure the activity of many vitamins, hormones, enzymes, and drugs. An
IU is the amount of a substance that has a certain biological effect. For
each substance there is an international agreement on the biological
effect that is expected for 1 IU. In the case of Immunoglobulin, it means
the number of effective units of antibodies in each package. When exposed
to an antigen, the body views it as foreign material, and takes steps to
neutralize the antigen. Typically, the body accomplishes this by making
antibodies, which are intended to defend the body from invasion by
potentially dangerous substances. These antibodies can be beneficial, as
is the case when the body learns to fight a virus, or they can be harmful,
in the instance of allergies. In a situation when the body cannot
effectively react with these antigens, injection of our product will
provide sufficient antibodies to neutralize the antigens.
|
|
|
(3)
|
Tetanus Antitoxin is a cheaper injection treatment for
tetanus. However it is not widely used because most people are allergic to
it.
|
______________________
7
Human albumin is principally used to increase blood volume
while immunoglobulin is used for certain disease preventions and cures. Albumin
is also used to treat critically ill patients by replacing lost fluid and
maintaining adequate blood volume and pressure. Our approved human albumin and
immunoglobulin products use human plasma as the basic raw material. All of our
approved products are prescription medicines administered in the form of
injections.
Under PRC law, each variation in the packaging, dosage and
concentration of medical products requires registration and approval by the
SFDA. During this process the altered product is not commercially available for
sale. For example, among our human albumin products only Human Albumin 20%/10ml,
20%/25ml, 20%/50ml, 10%/10ml, 10%/25ml, 10%/50ml, and 25%/50ml products are
currently approved and are commercially available. Accordingly, all references,
in this report, to our manufacture and sale of human albumin relate to our
approved human albumin products.
We have two product liability insurances covering Shandong
Taibang and Guizhou Taibangs products in the amount of approximately $3,148,000
each. Since our establishment in 2002, there has not been any product liability
claims nor has any legal action been filed against us by patients related to the
use of our products.
Raw Materials
Plasma
Plasma is the principal raw material for our biopharmaceutical
products. Until 2006, all plasma collection stations were owned by the PRC
government. Following the mandated privatization of plasma stations resulted
from the Ministry of Healths Blood Collection Measures, we acquired our plasma
collection stations. We believe that the acquisitions of plasma stations will
give us a controlled source of plasma and better control over the quality and
quantity produced. We will also be able to have increased control over the cost
of plasma. Finally, we believe that we will enjoy benefits of economies of scale
with respect to the administration and management expenses of our several plasma
stations.
We spent $48.1 million, $51.0 million and $35.6 million on the
collection of plasma in 2011, 2010 and 2009, respectively. Currently, we own
seven operating plasma collection stations in Shandong province, two in Guangxi
province and two in Guizhou province. We currently maintain sufficient plasma
supply for approximately 6 months of production.
Other Raw Materials and Packaging Materials
Other raw materials used in the production of our
biopharmaceutical products include: reagents, consumables and packaging
materials. The principal packaging materials we use include glass bottles for
our injection products, external packaging and printed instructions for our
biopharmaceutical products. We acquire our raw materials and packaging materials
from our approved suppliers in China and overseas. We select our suppliers based
on quality, consistency, price and delivery of the raw materials which they
supply.
We have not experienced any shortage of supply on these raw
materials and packaging materials and there has not been any significant problem
with the quality of materials supplied by these suppliers.
Our Major Suppliers
The table below lists our major suppliers as of December 31,
2011, showing the cumulative dollar amount of raw materials and supplies
purchased from them during the fiscal year ended December 31, 2011, and the
percentage of purchases from each supplier as compared to procurement of all raw
materials.
Rank
|
Suppliers Name
|
Cumulative
Amount Purchased
During
Fiscal Year 2011
(US$)
|
Percentage of
Total Purchases
During Fiscal
Year 2011
|
1
|
Sansui Plasma Station
|
$ 2,255,996
|
19.6%
|
2
|
Chongqing Sanda Weiye Pharmaceutical Products Company
|
1,208,456
|
10.5%
|
3
|
Taian City Ruifeng Company
|
1,118,728
|
9.7%
|
4
|
Sichuan Nangeer Biological Medical Company
|
1,067,288
|
9.2%
|
5
|
Guiyang YongLiang Chemical Material and Equipment Company
|
422,437
|
3.7%
|
6
|
Beijing Wantai Biological Pharmacy Enterprise
|
369,169
|
3.2%
|
7
|
Shandong Pharmaceutical Glass Co.,Ltd.
|
321,265
|
2.8%
|
8
|
Shanghai Sanli Pharmaceutical and Chemical Co.,Ltd.
|
302,656
|
2.6%
|
9
|
Liaoning Chengda Biotechnology Co.,Ltd.
|
297,523
|
2.6%
|
10
|
Guangzhou Maige Biologic Technology Company
|
267,672
|
2.3%
|
|
TOTAL
|
$ 7,631,190
|
66.2%
|
8
Except for the Sansui Plasma Station, none of the above
suppliers are plasma suppliers. The majority of our plasma was collected through
our majority-owned plasma stations. These stations purchase, collect, examine
and deepfreeze plasma on behalf of Shandong Taibang and Guizhou Taibang, subject
to rules and specifications that meet the Provincial SFDAs requirements for
quality, packaging and storage. The stations must only collect plasma from
healthy donors within their respective districts and in accordance with a time
table set by Shandong Taibang or Guizhou Taibang. The plasma must: be negative
HbsAg, anti-HCV, anti-HIV and reaction of serum to RPR; contain an ALT ≤25 units
(ALT), plasma protein ≥55g/l; contain no virus pollution or visible
erythrolysis, lipemia, macroscopic red blood cell or any other irregular
finding. In addition, the plasma must be packaged in 25 separate 600g bags,
boxed with a packing list and labeled to be consistent with computer records and
must be stored at -20°C within limited time after collection to ensure that it
will congeal within 6 hours. Shandong Taibang and Guizhou Taibang are fully
responsible for the overall technical guidance and quality supervision.
Our Major Customers
Due to the nature of our products and the current regulations,
almost all of our customers are located in China. We have established
relationships with most of our key customers since our establishment in 2002.
For the fiscal year ended December 31, 2011, our top five customers, based on
sales revenue and the percentage of their contribution to our revenues, were as
follows:
Rank
|
Customers Name
|
Total Sales
During Fiscal
Year 2011
(US$)
|
Percentage
of
Total Sales
During
Fiscal
Year 2011
|
1
|
Guangdong Meheco Medicine Company
|
$ 9,578,176
|
6.2%
|
2
|
Shanghai Pharmaceutical Co., Ltd.
|
2,994,306
|
2.0%
|
3
|
Shandong Provincial Hospital
|
2,860,386
|
1.9%
|
4
|
Nanjing Pharmaceutical Hubei Co.,Ltd.
|
2,742,646
|
1.8%
|
5
|
No.2 Attached Hospital Of No.4 Military Medicine
University Of PLA.(Attached Tangdu Hospital)
|
2,101,090
|
1.3%
|
|
TOTAL
|
$ 20,276,604
|
13.2%
|
Sales, Marketing and Distribution
Because all of our products are prescription drugs, we can only
sell to hospitals and inoculation centers directly or through approved
distributors. For the years ended December 31, 2011, 2010 and 2009, direct sales
to distributors represented approximately 37.2%, 48.9% and 67.3%, respectively,
of our total sales. Our five largest customers in the aggregate accounted for
approximately 13.2%, 12.3% and 10.7% of our total sales for the years ended
December 31, 2011, 2010 and 2009, respectively. Our largest customer accounted
for approximately 6.2%, 2.8% and 4.0% of our total sales for the years ended
December 31, 2011, 2010 and 2009, respectively.
As part of our effort to ensure the quality of our
distributors, we conduct due diligence to verify whether potential distributors
have obtained necessary permits and licenses and facilities (such as cold
storage) for the distribution of our biopharmaceutical products. We also assess
the distributors financial condition before appointing them as distributors.
Certain of our regional distributors are appointed on an exclusive basis within
a specified area. The supply contracts normally set out the quantity and price
of products. For distributors, they also contain guidelines for the sale and
distribution of our products, including restrictions on the geographical area to
which the products could be sold. We provide our distributors with training in
relation to our products and on sales techniques. We have implemented a coding
system for our products for easy tracking. Depending on the relationship and the
creditability of the distributors, we generally grant a credit period of no
longer than 30 days to distributors with some exceptions. For hospitals and
clinics, we generally grant a credit period of no longer than 90 days with
exceptions to customers that we believe are credit worthy up to 6 months. Due to
recovery of bad debt previously reserved, we had a bad debt credit of $0.02
million, $0.06 million and $0.01 million, respectively, for the years ended
December 31, 2011, 2010 and 2009, related to the sales of our products.
Our current key market is in Shandong province, representing
approximately 23.0%, 22.0% and 25.5% of our total sales for the years ended
December 31, 2011, 2010 and 2009, respectively. Prior to the acquisition of
Dalin and Huitian, our strategy has been to focus our marketing efforts in
Jiangsu, Zhejiang, Henan and the northeastern part of China. With the advantage
of the scale of economy, we have been expanding our sales efforts into 30
provinces and municipal cities, especially those provinces that were untapped by
Shandong Taibang previously, with Shandong and Guangdong provinces accounting
for more than 31.3% of the total sales during 2011.
Our marketing and after-sales services department currently
employs approximately 124 employees.
We believe that due to the unique nature of our products, the
key emphasis on our marketing efforts centers on product safety, brand
recognition, timely availability and pricing. As all of our products are
prescription medicines, we are not allowed to advertise our products in the mass
media. For the years ended December 31, 2011, 2010 and 2009, total sales and
marketing expenses amounted to approximately $14.6 million, $7.4 million and
$3.5 million, respectively, representing approximately 9.5%, 5.3% and 3.0%,
respectively, of our total sales.
9
Our Research and Development Efforts
The Shandong Institute was established in 1971. The Shandong
Institute is the research arm established by and directly administrated by the
Shandong Provincial health department. It was the only entity approved for the
research, development and production of biological and plasma-based
biopharmaceutical products in Shandong Province, the second largest province in
China. Since 1998, it promoted GMP management in the production process of blood
products and became one of the first blood products manufacturing enterprises to
obtain GMP Certification in China. In 2002, the Shandong Institute transferred
all of its business and the licenses necessary to carry on its business and
seconded certain of its employees to our subsidiary, Shandong Taibang. We were
awarded the advanced high-tech enterprise certification by the Department of
Science and Technology of Shandong Province in 2005 and 2008 and by the Ministry
of Science and Technology of China in 2006. In 2007, we were admitted as a
member of the Shandong Institute of Medicine and awarded the Advanced
Enterprise accolade by the Shandong Blood Center. We were also awarded the
Advanced Technology Certification for Foreign Funded Enterprises by the
Department of Foreign Trade and Economic Cooperation of Shandong Province in
2008.
We employ a market driven approach to initiate research and
development projects including both product and production technique
development. We believe that the key to the industry revolves around (i) safety
of products and (ii) maximizing the yield per unit volume of plasma. Our
research and development efforts are focused around the following areas:
-
broaden the breadth and depth of our portfolio of plasma-based
biopharmaceutical products;
-
enhance the yield per unit volume of plasma through new collection
techniques;
-
maximize manufacturing efficiency and safety;
-
promote product safety through implementation of new technologies; and
-
refine production technology for existing products.
Our research center is located on the same premises as the
factory, which is located in Taian City, Shandong Province. The research center
is equipped with specialized equipment including advanced testing and analytical
equipment, such as atomic absorptimeter, fully automated blood coagulation
analyzer, high performance liquid chromatograph, gas chromatograph,
radioimmunoassay analyzer, ultraviolet-visible spectrophotometer, and protein
chromatograph, most of which have been imported from the US, Japan, Italy,
Germany and Australia. Our research and development department is comprised of
about 37 researchers. All of them hold degrees in areas such as medicine,
pharmacy, biology, and biochemistry. Our research center carries out development
and registration of our products.
All the products we currently manufacture have been developed
in-house. The following table outlines our research and development work in
progress:
Products Currently in
Development
|
Cure/Use
|
Status of Product
Development
|
Stage*
|
Human Prothrombin Complex
Concentrate
|
Used for the prophylaxis and treatment of bleeding in
patients with single or multiple congenital deficiencies of factor II or X
and in patients with single or multiple acquired prothrombin complex
factor deficiency requiring partial or complete reversal.
|
Application made to the SFDA for official production
permit and product certification. Commercial production expected in late
2012.
|
9
|
Human Coagulation Factor VIII
|
Use for coagulopathie such as Hemophilia A and increase
concentration of coagulation factor VIII.
|
Application made to the SFDA for official production
permit and product certification. Commercial production expected in second
half of 2012.
|
9
|
Human Hepatitis B
Immunoglobulin (PH4) for Intravenous Injection
|
Prevention of measles and contagious hepatitis. When
applied together with antibiotics, its curative effect on certain severe
bacteria or virus infection may be improved.
|
Clinical trial just commenced. Commercial production
expected in 2014.
|
8
|
Human Fibrinogen
|
Cure for lack of fibrinogen and increase human fibrinogen
concentration.
|
Clinical trial program under SFDA review. Estimated
commercial production in 2015.
|
7
|
Varicella Hyperimmune
Globulins
|
Used for treatment of eczema vaccinatum, vaccinia
necrosum, and ocular vaccinia
|
Develop scope and technique for testing the new medicine.
|
3
|
Human Immunoglobulin for Intravenous
Injection 10%
|
Cure for original immunoglobulin deficiency; secondary
immunoglobulin deficiency and Auto-immune deficiency diseases
|
Develop laboratory-scale manufacturing process.
|
3
|
* These stages refer to the stages in the regulatory approval
process for our products disclosed under the heading Regulation in this
report.
10
For the fiscal years ended December 31, 2011, 2010 and 2009,
total research and development expenses amounted to approximately $4.0 million,
$2.3 million and $1.7 million, respectively, representing approximately 2.6%,
1.7% and 1.4%, respectively, of our total sales.
Our Competition
We are subject to intense competition. There are both local and
overseas pharmaceutical enterprises that are engaged in the manufacture and sale
of potential substitute or similar biopharmaceutical products as our products in
the PRC. These competitors may have more capital, better research and
development resources, manufacturing and marketing capability and experience
than we do. In our industry, we compete based upon product quality, product
cost, ability to produce a diverse range of products and logistical
capabilities.
We believe that we have strengthened our position in the
marketplace with our acquisition of Dalin and its 54% majority-owned operating
subsidiary, Guizhou Taibang and a 35% equity interest in Huitian, Xian-based
biopharmaceutical company.
Our profitability may be adversely affected if (i) competition
intensifies; (ii) competitors drastically reduce prices; or (iii) PRC
governments interference on prices; or (iv) competitors develop new products or
product substitutes having comparable medicinal applications or therapeutic
effects which are more effective and /or less costly than those produced by us.
Other approved biopharmaceutical manufacturers in the PRC are
entitled to produce many of the products produced by us. There are currently
about 30 approved manufacturers of plasma-based pharmaceutical products in
China. Many of these manufacturers are essentially producing the same type of
products that we produce: human albumin and various types of immunoglobulin.
However, due to recent Ministry of Health regulations, we believe that it is
difficult for new manufacturers to enter into the industry. We believe that our
major competitors in the albumin and immunoglobulin market in China are Hua Lan
Biological Engineering, Shanghai Institute of Biological Products, Shanghai RAAS
Blood Products Co., Ltd., Beijing Tiantan Biological Products, and Sichuan
Yuanda Shuyang Pharmaceutical Co.
In addition, competition from imported products and Chinas
admission as a member of the WTO creates increased competition. The PRC became a
member of the WTO in December 2001. Competition in the biopharmaceutical
industry in the PRC will intensify generally in two respects. With lower import
tariffs, we anticipate that imported biopharmaceutical products manufactured
overseas may become increasingly competitive with domestically produced products
in terms of pricing. We also believe that well-established foreign
biopharmaceutical manufacturers may set up production facilities in the PRC and
compete with domestic manufacturers directly. With the expected increased supply
of competitively priced biopharmaceutical products in the PRC, we may face with
increased competition from foreign biopharmaceutical products, including the
types of products manufactured by US manufacturers and other manufacturers.
Since 2009, we have seen a substantial increase in volume of imported human
albumin in China. If the trend of importation of human albumin continues, we may
face more fierce competition in domestic human albumin market.
We believe that we continued to be one of the top ranked
plasma-based biopharmaceutical companies in China in 2011 based on our analysis
of data regarding the approval for sales of plasma-derived products published by
China National Institute for the Control of Pharmaceutical and Biological
Products throughout of the year. Our past financial performance is attributable
to our market position in the industry. Furthermore, while each of the plasma
products related companies have their own product composition which include 3
main categories namely human albumin, human immunoglobulin and lyophilized human
factor, we are currently developing lyophilized human factor products which we
expect to launch in second half of 2012. We will continue to meet challenges and
secure our market position by enhancing our existing products, introducing new
products to meet customer demand, delivering quality products to our customers
in a timely manner and maintaining our established industry reputation.
Our Intellectual Property
We hold the exclusive right to a Trademark Registration
Certificate (No.5974458) issued by the PRC Industry and Commerce Administration
Trademark Bureau. The class of goods on which the trademark has been approved to
use include: plasma products, biological products, human drugs, biopreparate,
hemoglobin, serum, injection, tablet and agent. The registration will expire in
January 20, 2020.
In addition, we have registered the following domain names:
www.chinabiologic.com
and
www.ctbb.com.cn
.
Regulation
This section summarizes the major PRC regulations relating to
our business.
Due to the nature of our products, we are supervised by various
levels of the PRC Ministry of Health and/or SFDA. Such supervision includes the
safety standards regulating our source supplies (mainly plasma), our
manufacturing process through the issuance of our GMP Certification and the
inspection of our finished products.
We are also subject other PRC regulations, including those
relating to taxation, foreign currency exchange and dividend distributions.
11
Plasma Collection
Substantially all plasma donations for commercialized
plasma-based biopharmaceutical products are done through plasmapheresis donation
stations. Plasmapheresis donation means donors give only selected blood
components platelets, plasma, red cells, infection-fighting white cells called
granulocytes, or a combination of these, depending on donors blood type and the
needs of the community. Plasmapheresis stations in China are commonly used to
collect plasma. In China, current regulations only allow an individual donor to
donate blood in 14-day intervals, with a maximum quantity of 580ml (or about 600
gram) per donation.
The following are the regulatory requirements to establish a
plasmapheresis station in China:
-
meet the overall plan in terms of the total number, distribution, and
operational scale of plasmapheresis stations;
-
have the required professional health care technicians to operate a
station;
-
have the facility and a hygienic environment to operate a station;
-
have an identification system to identify donors;
-
have the equipment to operate a station; and
-
have the equipment and quality control technicians to ensure the quality
of the plasma collected.
As a result of the overhaul by the four ministries of the State
Council in May 2004, we estimate that the number of collection stations
(including plasma stations) that meet the standards imposed by the PRC has been
reduced from approximately 156 to approximately 120 then. Plasma stations were
customarily owned and managed by the PRC health authorities. In March 2006, the
Ministry of Health promulgated the Blood Collection Measures whereby the
ownership and management of the plasma stations must be transferred to
plasma-based biopharmaceutical companies while the regulatory supervision and
administrative control remain with the government. For those plasma stations
which did not complete their reform by December 31, 2006, their license to
collect plasma will be revoked. As a result, all plasma stations are now having
direct supply relationship with their parent fractionation facilities.
Set out below are some of the safety features at Chinas
collection stations:
-
Collection stations can only source plasma from donors within the assigned
district approved by the provincial health authorities.
-
Collection stations must perform a health check on the donor. Once the
donor passes the health check, a donor permit is issued to the donor. The
standards of the health check are established by the health authorities at the
State Council level.
-
The design and printing of the donor permit is administrated by the
provincial health authorities, autonomous region or municipality government,
as the case maybe. The donor permit cannot be altered, copied or assigned.
-
Before donors can donate plasma, the station must verify their identities
and the validity of their donor permits. The donors must pass the
verification procedures before they are given a health check and blood test.
For those donors who have passed the verification, health check and blood test
and whose plasma were donated according to prescribed procedures, the station
will setup a record.
-
All collection stations are subject to the regulations on transmittable
diseases prevention. They must strictly adhere to the sanitary requirements
and reporting procedures in the event of an epidemic situation.
The operation of plasma collection stations is strictly
regulated by the PRC government. With the restarts of previous stations and
newly built stations, the Company estimated that there are approximately 156
plasma stations in operation in China.
Importation of Blood Products
According to current Chinese regulations, the following blood
products are banned from importation into China:
-
Plasma frozen, liquid and freeze-dried Human Plasma;
-
Immunoglobulin Human Normal Immunoglobulin, Specific Immunoglobulin,
Human Anti-Tetanus Immunoglobulin, Human Anti-hemophilia Globulin, Human
Anti-HBs Immunoglobulin, Human Anti- D(Rho) Immunoglobulin and Immunoglobulin
For Intravenous Administration;
-
Factor VIII Cryoprecipitated Factor VIII and Factor VIII Concentrate
(only Bayer is allowed, under a special arrangement with PRC government, to
import this product into PRC, commencing November 2007);
-
Factor IX Concentrate;
-
Human Fibrinogen;
-
Platelet Concentrate;
-
Human Prothrombin Complex;
-
Whole blood or blood components.
12
Production of Plasma-based Products
The manufacture and sale of plasma-based biopharmaceutical
products is strictly regulated by the PRC government. For example, under PRC
law, each variation in the packaging, dosage and concentration of medical
products requires registration and approval by the SFDA. During this process the
altered product is not commercially available for sale. For example, among our
human albumin products only Human Albumin 20%/10ml, 20%/25ml, 20%/50ml,
10%/10ml, 10%/25ml, 10%/50ml, and 25%/50ml products are currently approved and
are commercially available. Accordingly, all references, in this report, to our
manufacture and sale of human albumin relate to our approved human albumin
products.
The table below shows the PRC approval process for the
manufacture and sale of new medicines:
Stage (Estimated Time Period)
|
Activities
|
1
|
Planning Stage (1 month)
|
Prior to the development of potential new products, our
Research & Development department will engage in a comprehensive
review of existing medical literature, patent status and market
information, including expected product demand and other competition, in
order to determine the feasibility of development and production of a new
product offering. Although this typically takes about 1 month to complete,
this stage precedes development efforts for a new product, which could
take several months or even years to complete. For products with lengthy
development periods, we may be required to periodically revisit this stage
to confirm the feasibility of continued development efforts.
|
2
|
Feasibility study and assumption clarification (2 months)
|
If we determine that development, ownership and marketing
of a potential new product is possible and potentially advantageous, we
proceed with development efforts. However, potential new products are
typically developed in a laboratory or small batch setting, and in order
to obtain approval for potential new products and to market new products,
we must develop a plan for testing and producing the new product. The
first step in developing such plan is a feasibility study and assumption
clarification. This study is conducted following or during development of
a new product, and involves a review and study of the feasibility of our
technical, production and financial capabilities, production conditions
and financial forecasts. We also review the feasibility of preparing and
conducting a clinical study, or a Clinical Trial program, during this
stage.
|
3
|
Develop scope and technique for testing the new medicine
(6 months)
|
If following completion of a Stage 2 study we make a
determination that producing and testing a potential new product is
feasible and potentially advantageous, we will develop the scope and
techniques for testing the potential new product. This involves confirming
the sourcing of materials needed for production and marketing of the
potential new product and development of the method of production, dosage
design and prescription selections. During this stage, we will also
develop a clinical research sample.
|
4
|
Preparation of a virus inactivation report and submission
to the National Institute for the Control of Pharmaceutical and Biological
Products, or NICPBP, for preliminary review (4-6 months)
|
If following development of testing methods for the
potential new product we determine that testing can be successfully
completed, we will prepare and finalize the virus inactivation method for
the potential new product. We are then required to prepare a report with
details on the production method and procedures and basis of quality
evaluation for preliminary review by the NICPBP. NICPBP staff usually
makes an onsite visit during this stage to supervise testing and
re-testing of the virus inactivation process. Tested samples will be sent
back to the NICPBP central office in Beijing for evaluation.
|
5
|
R&D test product information submitted to the SFDA
for preliminary assessment (4-6 months)
|
Before the NICPBP can determine that our clinical
research sampling and virus inactivation method and procedures are
successful, we are required to submit our clinical research sampling and
virus inactivation method and procedures to the SFDA via the provincial
FDA for preliminary assessment. We also develop the parameters for a
Clinical Trial program at this stage. Our program usually requires the
establishment of a committee comprised of our Research and Development
staff whose responsibility is to communicate with the hospitals and
doctors who are invited to participate in the trial. After our submission
of information to the SFDA we will become subject to random onsite
sampling by the SFDA as they review our reports and procedures regarding
testing of the potential product. The SFDA will usually inform us of the
exact sampling date and SFDA staff will randomly select certain samples
during their visit for additional testing. The SFDA will then provide us
with their preliminary assessment of our new product and our related
procedures. Depending on the results of its preliminary assessment the
SFDA may recommend that we alter certain aspects of our reports and
proposed Clinical Trial programs, or even repeat our Stage 3 and Stage 4
trials and resubmit related reports. The SFDA review process typically
takes 4-6 months, but this process could take longer if we are required to
amend or repeat our trials or if we amend our reports in order to obtain
more a favorable preliminary assessment.
|
13
6
|
Formal application to the NICPBP for test of virus
inactivation and for CDE certification of Clinical Trial (6-7 months)
|
Once we receive a favorable or satisfactory preliminary
assessment from the SFDA, the NICPBP will continue the process begun at
Stage 4. The NICPBP will conduct tests of virus inactivation based on
defined medical literature and on our prescribed procedures and method of
production. If the tests are successful, the NICPBP will transfer the
application to the CDE for review of our prescribed procedures and method
of production and the CDE may request additional information before making
a determination. If the CDE is satisfied with our procedures and method of
production it will certify the new product for production for Clinical
Trial.
|
7
|
SFDA review of Clinical Trial program for approval (1
month)
|
Following provision of the CDE product certification, we
must submit our Clinical Trial program (developed at Stage 5 and 6) to the
SFDA for formal approval. The SFDA may request additional information
regarding our proposed Clinical Trial program. If the SFDA rejects our
Clinical Trial program or requires changes to any of our procedures and
methods, we may be required to amend our Clinical Trial program, which may
require repeating several of the processes previously conducted. The
criteria for SFDA approval for Clinical Trial programs are based on Good
Clinical Practice which is publicly available in the PRC.
|
8
|
Clinical Trial: Phases 1 to 4 (3 years for a new drug and
2 years for a generic drug)
|
Following approval of our Clinical Trial program by the
SFDA, we will begin Clinical Trials of the potential new product. There
are four phases to the clinical trial process and any failure of the
potential new product at any of the Clinical Trial phases, could cause a
significant delay in approval of the new product, or termination of the
new product launch:
Phase 1
: Basic clinical pharmacology and human
safety evaluation studies are conducted by the Company. Prior to
determining the effectiveness of our potential new product, we must
determine that certain pharmacological and safety standards are met by our
potential new product. These standards are set in stage 4 or according to
medical literature. If the clinical trial indicates that such standards
are met, we then move on to Phase 2 of the trials. If the Phase 1
standards are not met, we may be required to conduct further R&D on
the potential new product, alter the new product formulation and amend the
Clinical Trial program, which could require that we repeat several of the
stages referenced above.
Phase 2
: A preliminary exploration of the
products therapeutic efficacy is conducted by the Company. If we
determine at this stage that the potential new product is not effective,
we may conduct further R&D on the potential new product, alter the new
product formulation and amend the Clinical Trial program, which would
require that we repeat several of the stages referenced above.
Phase 3
: If we determine that the potential new
product meets the required standards of Phases 1 and 2 above, we must then
submit a report of the Clinical Trial results to the SFDA together with an
application for trial production of the product. If the SFDA rejects
application for trial production or otherwise requires a repeat of our
Clinical Trials, we may be required to repeat all or a portion of our
Clinical Trial program, which may require repeating several of the
processes previously conducted.
Phase 4
: If we receive SFDA approval to conduct a
trial production of the new product, we will then conduct a larger test of
approximately 2,000 samples. We will conduct this test while also
conducting a new drug post- marketing study.
|
9
|
Application to the SFDA for official production permit
and product certification (8-9 months)
|
The trial production of the potential new product will be
monitored by an SFDA inspector who will also make onsite visits and assess
the results of the trial production. We will also be required to prepare
and submit to the SFDA a report of the trial production results by
gathering statistical information obtained during the trial period. The
CDE will also conduct a final review of the trial production for the
potential new product. Upon satisfactory completion of the trial
production, the CDE will inform the SFDA. The SFDA will then issue a
permit to us for official production, the issuance of which is announced
on the SFDAs website, and copied to the NICPBP and the provincial FDA.
The SFDA will also issue the new product a Good Manufacturing Practice, or
GMP, certification. The provincial FDA will follow with the issuance of a
provincial production permit for the new product. Although the SFDAs
criteria for final approval of new products are not publicly available in
the PRC, if a manufacturer makes the adjustments to its methods and
procedures recommended by the SFDA earlier on in the product approval
process, it is likely that the SFDA will approve the new product for
production.
|
10
|
Commercial Production
|
Following issuance of state and provincial production
permits and certifications, we may begin production of the new product.
|
14
Pricing
In addition, there are regulations regarding the retail price,
rather than regulations of wholesale prices, of our products. According to the
Regulations on controlling blood products promulgated by the State Council in
1996, the price (retail) setting standard and regulatory functions reside with
regional offices of the Pricing Bureau and the Ministry of Health. Presently,
there are retail pricing guidelines for hospitals which sell our human albumin
and immunoglobulin products to patients as prescribed by the relevant regulators
in each region. The retail pricing guidelines are established based on, amongst
other things, the regional living standards and the cost of production of the
manufacturers. The hospitals cannot sell the products to patients at prices
exceeding the highest retail price prescribed by the relevant regulators. There
is no pricing guideline on the ex-factory price to the hospital and the
distributors. The highest retail price guideline is revised occasionally.
Taxation
On March 16, 2007, the National Peoples Congress of China
passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28,
2007, the State Council of China passed its implementing rules, which took
effect on January 1, 2008. Before the implementation of the EIT Law, foreign
invested enterprises, or FIEs, established in the PRC, unless granted
preferential tax treatments by the PRC government, were generally subject to an
earned income tax, or EIT, rate of 33.0%, which included a 30.0% state income
tax and a 3.0% local income tax. The EIT Law and its implementing rules impose a
unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they
qualify under certain limited exceptions. However, the EIT Law gives FIEs
established before March 16, 2007, or Old FIEs, a five-year grandfather period
during which they can continue to enjoy their existing preferential tax
treatments. During this five-year grandfather period, Old FIEs that enjoyed tax
rates lower than 25% under the original EIT Law can gradually increase their EIT
rate by 2% per year until their tax rate reaches 25%. In addition, the Old FIEs
that are eligible for the two-year exemption and three-year half reduction or
five-year exemption and five-year half-reduction under the original EIT law,
are allowed to continue enjoying their preference until these holidays expire.
In addition to the changes to the current tax structure, under
the EIT Law, an enterprise established outside of China with de facto
management bodies within China is considered a resident enterprise and will
normally be subject to an EIT of 25% on its global income. The implementing
rules define the term de facto management bodies as an establishment that
exercises, in substance, overall management and control over the production,
business, personnel, accounting, etc., of a Chinese enterprise. If the PRC tax
authorities subsequently determine that we should be classified as a resident
enterprise, then our organizations global income will be subject to PRC income
tax of 25%. For detailed discussion of PRC tax issues related to resident
enterprise status, see Item 1A Risk Factors Risks Related to Doing Business
in China Under the Enterprise Income Tax Law, we may be classified as a
resident enterprise of China. Such classification will likely result in
unfavorable tax consequences to us and our non-PRC stockholders.
Foreign Currency Exchange
The principal regulation governing foreign currency exchange in
China is the Foreign Currency Administration Rules (1996), as amended (2008).
Under these Rules, RMB is freely convertible for current account items, such as
trade and service-related foreign exchange transactions, but not for capital
account items, such as direct investment, loan or investment in securities
outside China unless the prior approval of, and/or registration with, the State
Administration of Foreign Exchange of the Peoples Republic of China, or SAFE,
or its local counterparts (as the case may be) is obtained.
Pursuant to the Foreign Currency Administration Rules, FIEs in
China may purchase foreign currency without the approval of SAFE for trade and
service-related foreign exchange transactions by providing commercial documents
evidencing these transactions. They may also retain foreign exchange (subject to
a cap approved by SAFE) to satisfy foreign exchange liabilities or to pay
dividends. In addition, if a foreign company acquires a company in China, the
acquired company will also become an FIE. However, the relevant PRC government
authorities may limit or eliminate the ability of FIEs to purchase and retain
foreign currencies in the future. In addition, foreign exchange transactions for
direct investment, loan and investment in securities outside China are still
subject to limitations and require approvals from, and/or registration with,
SAFE.
Dividend Distributions
Under applicable PRC regulations, FIEs in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a FIE in
China is required to set aside at least 10% of its after-tax profit based on PRC
accounting standards each year to its general reserves until the accumulative
amount of such reserves reach 50% of its registered capital. These reserves are
not distributable as cash dividends. The board of directors of a FIE also has
the discretion to allocate a portion of its after-tax profits to staff welfare
and bonus funds, which may not be distributed to equity owners except in the
event of liquidation.
In addition, under the EIT law, the Notice of the State
Administration of Taxation on Negotiated Reduction of Dividends and Interest
Rates, which was issued on January 29, 2008, the Arrangement between the PRC and
the Hong Kong Special Administrative Region on the Avoidance of Double Taxation
and Prevention of Fiscal Evasion, or the Double Taxation Treaty, which became
effective on December 8, 2006, and the Notice of the State Administration of
Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax
Treaties, which became effective on October 27, 2009, dividends from our PRC
operating subsidiary, Taibang Biotech, paid to us through our Hong Kong
subsidiary, Taibang Holdings, may be subject to a withholding tax at a rate of
10%, or at a rate of 5% if Taibang Holdings is considered a beneficial owner
that is generally engaged in substantial business activities and entitled to
treaty benefits under the Double Taxation Treaty.
15
Our Employees
As of December 31, 2011, we employed approximately 1,499
full-time employees, including Shandong Taibang and Dalin and all of their
subsidiaries and Taibang Medical, of which approximately 99 were seconded to us
by the Shandong Institute.
We believe that we maintain a satisfactory working relationship
with our employees and we have not experienced any significant labor disputes or
any difficulties in recruiting staff for our operations. As required by
applicable Chinese law, we have entered into employment contracts with most of
our officers, managers and employees. The PRC enacted a new Labor Contract Law,
which became effective on January 1, 2008. We have updated our employment
contracts and employee handbook and are in compliance with the new law. We will
work with the employees and the labor union to insure that our employees obtain
the full benefit of the law. We do not anticipate that changes in the law will
materially impact our balance sheet and cash flows.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below, together with all
of the other information included in this report, before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could suffer. In that case, the trading price
of our common stock could decline, and you may lose all or part of your
investment. You should read the section entitled Special Note Regarding Forward
Looking Statements above for a discussion of what types of statements are
forward-looking statements, as well as the significance of such statements in
the context of this report.
RISKS RELATED TO OUR BUSINESS
We face risks related to general domestic and global
economic conditions and to the credit crisis. Disruptions in the capital and
credit markets related to the current national and worldwide financial crisis,
which may continue indefinitely or intensify, could adversely affect our results
of operations, cash flows and financial condition, or those of our customers,
suppliers and creditors.
We currently generate sufficient operating cash flows, which
combined with access to the credit markets, provide us with significant
discretionary funding capacity. However, the current uncertainty arising out of
domestic and global economic conditions, including the disruption in credit
markets, may impact our ability to manage normal relationships with our
customers, suppliers and creditors. The disruptions in the capital and credit
markets may continue indefinitely or intensify, and adversely impact our results
of operations, cash flows and financial condition, or those of our customers,
suppliers and creditors. Disruptions in the capital and credit markets as a
result of uncertainty, changing or increased regulation, reduced alternatives or
failures of significant financial institutions could adversely affect our access
to liquidity needed to conduct or expand our businesses or conduct acquisitions
or make other discretionary investments. Such disruptions may also adversely
impact the capital needs of our customers and suppliers, which, in turn, could
adversely affect our results of operations, cash flows and financial condition.
In addition, the demand for our products is largely affected by
the general economic conditions in China as our products are still not
affordable to many patients. As Chinas economy grows, we expect more Chinese
people will become consumers of medical treatments and procedures, including
procedures requiring human plasma. However, we expect that the continuation of
the global economic slowdown may result in slower economic growth in China and
an unfavorable economic environment which in turn may make our products less
affordable to more patients and result in an overall decreased demand for our
products. Such reductions and disruptions could have a material adverse effect
on our business operations.
In order to grow at the pace expected by management, we
will require additional capital to support our long-term business plan. If we
are unable to obtain additional capital in future years, we may be unable to
proceed with our long-term business plan and we may be forced to curtail or
cease our operations or further business expansion.
We will require additional working capital to support our
long-term business plan, which includes identifying suitable targets for
horizontal or vertical mergers or acquisitions, so as to enhance the overall
productivity and benefit from economies of scale. Our working capital
requirements and the cash flow provided by future operating activities, if any,
will vary greatly from quarter to quarter, depending on the volume of business
during the period and payment terms with our customers. We may not be able to
obtain adequate levels of additional financing, whether through equity
financing, debt financing or other sources, especially in light of the global
financial crisis and the market downturn. To raise funds, we may need to issue
new equities or bonds which could result in additional dilution to our
shareholders and investors. Additional financings could result in significant
dilution to our earnings per share or the issuance of securities with rights
superior to our current outstanding securities or contain covenants that would
restrict our operations and strategy. In addition, we may grant registration
rights to investors purchasing our equity or debt securities in the future. If
we are unable to raise additional financing, we may be unable to implement our
long-term business plan, develop or enhance our products and services, take
advantage of future opportunities or respond to competitive pressures on a
timely basis. In addition, a lack of additional financing could force us to
substantially curtail or cease operations.
16
We have a significant amount of debt, which could have
negative consequences to us.
We have a significant amount of debt. As of December 31, 2011,
we had, on a consolidated basis, approximately $11.0 million principal amount of
indebtedness outstanding. Our substantial indebtedness could have important
consequences, including:
-
increasing our vulnerability to adverse general economic and industry
conditions and adverse changes in governmental regulations;
-
limiting our ability to obtain additional financing to fund capital
expenditures and other general corporate requirements;
-
requiring us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the availability
of our cash flow to fund capital expenditures or other general corporate
purposes;
-
limiting our flexibility in planning for or reacting to changes in our
business and the industry in which we operate; and
-
placing us at a competitive disadvantage compared to our less leveraged
competitors.
Our ability to pay interest on our indebtedness and to satisfy
our other debt obligations will depend upon, among other things, our future
operating performance and cash flow and our ability to refinance indebtedness
when necessary. Each of these factors is, to a large extent, dependent on
general economic, financial, competitive, legislative, regulatory and other
factors beyond our control. If in the future we cannot generate sufficient cash
from operations to make scheduled payments on our indebtedness or to meet our
liquidity needs or other obligations, we will need to refinance our existing
debt, obtain additional financing or sell assets. We cannot assure you that we
will be able to renegotiate or refinance any of our debt on commercially
reasonable terms or at all. In addition, our interest expense may increase if
general economic conditions result in an increasing interest rate environment.
We cannot assure you that our business will generate cash flow, or that we will
be able to obtain funding sufficient to satisfy our debt service requirements.
Our cash flow could be negatively affected as a result of
our extension of relatively long payment terms to customers that we believe are
credit worthy.
As is customary in our industry, we extend relatively long
payment terms (up to six months) to customers that we believe are credit worthy.
The dollar amount of our accounts receivable, net of our allowance for doubtful
accounts as of December 31, 2011, 2010 and 2009 was $16,757,368, $9,922,111 and
$1,767,076, respectively. The bad debt credit for the years ended December 31,
2011, 2010 and 2009 was $19,611, $57,624 and $13,089, respectively. Although we
attempt to establish appropriate reserves for our receivables, those reserves
may not prove to be adequate in view of actual levels of bad debts. The failure
of our customers to pay us timely would negatively affect our working capital,
which could in turn adversely affect our cash flow.
If the PRC government bans or limits plasma-based
biopharmaceutical products, our operations, revenues and profitability would be
adversely affected.
The principal raw materials of our existing and planned
biopharmaceutical products is human source plasma, which, due to its unique
nature, is subject to various quality and safety control issues which include,
but are not limited to, contaminations and blood-borne diseases. In addition,
limitations of current technology pose biological hazards inherent in plasma
that have yet to be discovered which could result in a wide spread epidemic due
to blood infusion. The primary law that regulates plasma products in China is
the PRC Pharmaceutical Law, the Implementation Rules on the PRC Pharmaceutical
Law and the Regulations on the Administration of Blood Products. These rules and
regulations require entities producing blood products to strictly comply with
certain hygienic standards and specifications promulgated by the government. In
the event that human plasma is discovered to be noncompliant with the
governments hygienic standards and specifications, the health department may
revoke the registration and/or the approval of the blood product, or otherwise
limit the use of such blood product. If the PRC government bans or limits
plasma-based biopharmaceutical products, our operations, revenues and
profitability would be adversely affected.
If the plasma we source is found to be contaminated, our
operation, revenues and profitability would be adversely affected.
We currently source plasma mainly from human donations to our
plasma stations in Shandong, Guangxi and Guizhou Provinces. If any of our human
donors is infected with certain diseases, then the plasma from such donor may be
infected. If such contaminated plasma is not appropriately screened out, our
entire plasma source for the relevant collection station may become
contaminated. If the plasma from our collection stations is found to be
contaminated, our operation, revenues and profitability would be adversely
affected.
If our supply of quality plasma is interrupted, our
results of operations and profitability will be adversely affected.
The production of plasma-based biopharmaceutical products
relies on the supply of plasma of suitable quality. For the years ended December
31, 2011, 2010 and 2009, the cost of plasma used by us for production accounted
for approximately 67%, 73% and 83%, respectively, of total production cost. The
supply and market prices of plasma may be adversely affected by factors such as
regulatory restrictions, weather conditions or outbreak of diseases which would
impact our costs of production. We may not be able to pass on any resulting
increase in costs to our customers and therefore any substantial fluctuation in
supply or market prices of plasma may adversely affect our results of operations
and profitability.
17
The biopharmaceutical industry in the PRC is strictly
regulated and changes in such regulations may have an adverse effect on our
business.
The biopharmaceutical industry in the PRC is strictly regulated
by the government. The regulatory regime, such as administrative approval of
medicines and production approvals, comprises of series of regulations and
administrative rules. The PRC regulatory authorities may amend such regulations
and administrative rules and promulgate new regulations and administrative rules
from time to time. Changes in these regulations and administrative rules could
have a significant impact on our business. Such changes may have any adverse
impact on our business.
We may not be able to carry on our business if we lose
any of the permits and licenses required by the PRC Government in order to carry
on our business.
All pharmaceutical manufacturing and distribution enterprises
in the PRC are required to obtain from various PRC governmental authorities
certain permits and licenses, including, in the case of manufacturing
enterprises, a Pharmaceutical Manufacturing Permit and, in the case of
distribution enterprises, a Pharmaceutical Distribution Permit.
We have obtained permits and licenses and the GMP certificates,
required for the 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 that may prohibit or render it more
restrictive for us to conduct our business or increase our compliance costs may
adversely affect our operations or profitability. Any failure by us to obtain
such renewals may have a material adverse effect on the operation of our
business. In addition, we may not be able to carry on business without such
permits and business licenses being renewed.
If we do not receive PRC governmental approval to
increase the retail prices of certain of our biopharmaceutical products our
revenues may be adversely affected.
Retail prices of certain of our biopharmaceutical products in
the PRC are subject to the control of the relevant central and provincial price
administration authorities. The actual price for any given price-controlled
product set by manufacturers, wholesalers and retailers cannot exceed the price
ceiling imposed in accordance with the applicable government price control
rules. Pharmaceutical products which are included in Chinas National (Medical)
Insurance Catalogue, or the NIC, administered at the central or provincial level
are subject to price control by the National Reform and Development Commission
of China, or the NDRC, Chinas pricing authority.
The 2009 NIC was published by Chinas Ministry of Human
Resources and Social Security in November 2009 as part of Chinas healthcare
reform, to make more drugs affordable to PRC consumers. The NIC is Chinas
official drug reimbursement list for its universal healthcare system, which the
PRC government expected to cover 90% of PRC citizens as at the 2010 year end.
The 2009 NIC features 2,151 drugs, categorized as Class A (fully covered) or
Class B (partially covered). Five of our principal products, Human Albumin Human
Immunoglobulin for intravenous injection, Human Rabies Immunoglobulin, Human
Tetanus Immunoglobulin, Human Immunoglobulin have been included in the 2009 NIC
as Class B drugs and are subject to national price control by the NDRC.
The 2009 NIC was expected to be fully implemented in 2010, but
has been postponed. Once the 2009 NIC is fully implemented, the price of our
included products may not be increased at our discretion above the relevant
controlled retail price ceiling without prior governmental approval. This, in
turn, may affect the ex-factory prices set by us for our products and we
therefore do not have unfettered freedom to maximize our profits. It is
uncertain whether we will be able to obtain necessary approvals to increase the
price of any of our products.
If we are unable to adequately monitor our plasma
stations, our plasma supply may be tainted and we will be subject to sanctions
by the government which would have a material adverse effect on our
business.
As part of the industry reform initiative by the Chinese
government, in 2006 we acquired the assets of five of the six then existing
plasma stations in Shandong Province through our wholly owned subsidiaries, Xia
Jin Plasma Company, the Qi He Plasma Company, the He Ze Plasma Company, the
Zhang Qiu Plasma Company and the Liao Cheng Plasma Company. We received permits
to operate these subsidiaries in January 2007. In April 2007, we acquired the
assets of two additional plasma stations, one through Huan Jiang Plasma Company
and the other through Fang Cheng Plasma Company, which is then 80% owned by
Shandong Taibang and 20% owned by Feng Lin, an unrelated third party, which we
subsequently acquired in January 2010. We obtained necessary permits and
commenced their operation in July and August 2007, respectively. In 2010, we
established two plasma stations, Yi Shui Plasma Company, which begun operation
in December 2010, and Ning Yang Plasma Company, which begun operation in July
2011. Guizhou Taibang, the main operating subsidiary of Dalin, is the 85% owner
of the two plasma stations in Guizhou province, after closure of its 5 plasma
stations in compliance with Guizhou Provincial Health Departments plan in July
2011. Huitian, the 35% minority owned affiliated company by the Company, has
three plasma stations operating in Shaanxi province. While we monitor our blood
plasma intake procedures through frequent unscheduled inspections of our
stations, there remains a risk that our blood supply may become tainted during
the collection process. Our blood supply may become tainted if we accept blood
from donors whose blood shows any irregular findings including HIV, Hepatitis C
and liver disease. We pre-screen all donors in order to ensure that these
diseases are not present. If our blood supply becomes tainted, the consequences
for our business could be severe. We could be subject to civil liability from suits brought by
consumers and to criminal liability and loss of our registration if we are found
by the government to have been criminally negligent.
18
Our operations, sales, profit and cash flow will be
adversely affected if our albumin products fail inspection or are delayed by
regulators.
Each batch of our albumin products requires inspection by
Chinese government regulators before we can ship it to our customers. The SFDA
has a quality standard which considers, among other things, the appearance,
packing capacity, thermal stability, pH value, protein content and percentage of
purity of the product. In order to pass inspection, our plasma must be tested
negative for any blood irregularities, including Hepatitis C, HIV and liver
disease. The plasma must be packaged in 25 to 30 separate 600g bags and boxed
with a packing list and labeled in consistent with computer records. The plasma
must then be stored at -20°C as soon as possible after collection to ensure that
it will congeal within 6 hours. Government regulators usually take more than one
month to inspect a batch of plasma products. The process begins when the
regulator randomly selects samples of our products and delivers them to the
National Institute for the Control of Pharmaceutical and Biological Products, or
the NICBPB, for testing, and the process ends when the products are given final
approval by the NICBPB. In the event that the regulators delay the approval of
our products, change the requirements in such a way that we are unable to comply
with those requirements, our operations, sales, profit and cash flow will be
adversely affected.
We rely on a Secondment Agreement with the Shandong
Institute, which is expected to terminate upon the future privatization of the
Shandong Institute, for over 25% of our Shandong Taibang employees. If the
Secondment Agreement is breached or terminated, it could have an adverse effect
on our operations and on our financial results.
The Shandong Institute has provided us with approximately 99 of
our employees out of a total of approximately 1,499 employees, pursuant to a
secondment agreement, or Secondment Agreement, dated October 28, 2002, between
Shandong Taibang and the Shandong Institute. Pursuant to the Secondment
Agreement, we are responsible for the salaries of these employees, as well as
for their social benefits such as insurance. Our Secondment Agreement with the
Shandong Institute will expire on the sooner to occur of October 2032 or upon
the privatization of the Shandong Institute, which was originally expected to
occur before the end of 2008. However, the completion of privatization of
Shandong Institute has been further delayed indefinitely due to slower action
taken by the Shandong Ministry of Health in implementing the privatization plan.
Upon expiration or termination of the Secondment Agreement, we plan to hire the
seconded employees directly. However, we cannot be sure that all of the
employees will accept our employment offers at that time. Guang Li Pang,
Shandong Taibangs Deputy Chief Executive Officer, Yun Hua Gao and Dian Cong
Liu, our Senior Technical Advisors are employed through the Secondment
Agreement. Although none of our seconded employees have indicated that they do
not plan to continue working for our Company after the privatization, if the
Secondment Agreement is terminated or expires and we are unable to hire those
employees or replacement employees on time, our operations, as well as our
financial results, may suffer.
If the distributors who we rely on do not purchase our
products, our business and results of operations will be adversely
affected.
We sell almost half of our products in China through our
network of about 263 distributors located in about 30 provinces and municipal
cities throughout China. While we have established working relationships with
many of our distributors and strictly regulate their sales and marketing
activities by annual distribution agreements, there are no restrictions in these
distribution agreements preventing our distributors from also supplying products
produced by our competitors. Our own marketing and sales staff work to develop
and maintain relationships with our distributors, but there can be no assurance
that we will be able to maintain such relationships. For the years ended
December 31, 2011, 2010 and 2009, direct sales to distributors represented
approximately 37.2%, 48.9% and 67.3%, respectively, of our total revenues. If a
number of our distributors cease to purchase our products and we are unable to
find suitable replacements, our business and results of operations will be
adversely affected.
Our inability to successfully research and develop
new
biological pharmaceutical products could have an adverse
effect on our future growth.
We believe that the successful development of biological
pharmaceutical products can be affected by many factors. Products that appear to
be promising in the early phases of research and development may fail to be
commercialized for various reasons, including the failure to obtain the
necessary regulatory approvals. In addition, the research and development cycles
for new medicine for which we must obtain a Certificate of New Medicine from the
PRC Ministry of Health, is a relatively lengthy process. In our experience, the
process of conducting research and various tests on new products before
obtaining a Certificate of New Medicine and subsequent procedures may take
approximately three to five years. There is no assurance that our future
research and development projects will be successful or that they will be
completed within the anticipated time frame or budget. Also, there is no
guarantee that we will receive the necessary approvals from relevant authorities
for the production of our newly developed products. Even if such products could
be successfully commercialized, there is no assurance that they will be accepted
by the market as anticipated.
Our financial position and operations may be materially
and adversely affected if our product liability insurance does not sufficiently
cover our liabilities.
Under current PRC laws, manufacturers and vendors of defective
products in the PRC may incur liability for loss and injury caused by such
products. Pursuant to the General Principles of the Civil Law of the PRC, or the
PRC Civil Law, which became effective in 1987, a defective product which causes property damage or physical injury to any
person may subject the manufacturer or vendor of such product to civil
liability.
19
In 1993, the PRC promulgated the Product Quality Law of the
PRC, or the Product Quality Law, which was revised in 2000. The Product Quality
Law was enacted to protect the rights and interests of end-users and consumers
and to strengthen the supervision and control of the quality of products. Under
the Product Quality Law, manufacturers who produce defective products may be
subject to fines and required to cease production, and in severe cases, be
subject to criminal liability and may have their business licenses revoked.
In 1993, the Law of the PRC on the Protection of the Rights and
Interests of Consumers, or the Consumers Rights Law, was promulgated to further
protect the legal rights and interests of consumers in connection with the
purchase or use of goods and services. All businesses, including our business,
must observe and comply with the Consumers Rights Law.
We maintain two product liability insurances for sales in the
PRC for Shandong Taibang and Guizhou Taibangs products in the amount of RMB 20
million (approximately $3.1 million) each. Although no one has filed any claims
in relation to the use of our pharmaceutical products, our financial position
and operations may be materially and adversely affected, if our insurance
coverage is insufficient to cover a successful claim.
We may encounter increased competition from both local
and overseas pharmaceutical enterprises as a result of a relaxation of the PRC
regulatory approval process for plasma-based biopharmaceutical products or a
relaxation of international trade restrictions. A change in our competitive
environment could adversely affect our profitability and prospects.
Our continued ability to compete depends on the development of
the plasma-based biopharmaceutical manufacturing industry in China. The
plasma-based biopharmaceutical manufacturing industry in China is highly
regulated by both provincial and central governments. Prior to engaging in the
collection and production of plasma products, companies such as ours are
required to obtain collection permits from the central health department and
production permits and certificates for each new product formulation from the
various provincial food and drug authorities. We have the advantage of being
already approved by the state to collect plasma from human donors and
manufacture and sell plasma-based biopharmaceutical products in Shandong
Province, as well as in all other provinces in China, and our research and
development department has become familiar with the provincial product approval
process. However, although we believe that the regulatory requirements pose a
competitive barrier to entry into the biopharmaceutical industry, over time
there may be new entrants. If the government relaxes these restrictions and
allow more competitors to enter into the market, these competitors may have more
capital, better research and development resources, manufacturing and marketing
capability and experience than us. Our profitability may be adversely affected
if (i) competition intensifies; (ii) competitors drastically reduce prices; or
(iii) competitors develop new products having comparable medicinal applications
or therapeutic effects which are more effective or less costly than those
produced by us.
In addition we expect that competition from imported products
will increase as a result of a trend towards lower import tariffs and Chinas
admission as a member of the WTO in December 2001. We believe that lower import
tariffs will result in more affordable pricing for imported biopharmaceutical
products manufactured overseas as compared to domestically manufactured products
such as ours. In addition, Chinas membership in the WTO makes it more
accessible to foreign biopharmaceutical manufacturers who may wish to set up
production facilities in the PRC and compete directly with domestic
manufacturers. The expected increased supply of both domestic and foreign
competitively priced biopharmaceutical products in the PRC will result in
increased competition. There is no assurance that our strategies to remain
competitive can be implemented successfully as scheduled or at all. Our
inability to remain competitive may have an adverse effect on our profitability
and prospects.
We depend heavily on key personnel, and turnover of key
employees and senior management could harm our business.
Our success, to a certain extent, is attributable to the
expertise and experience of our senior management and key research and technical
personnel, including Chao-Ming Zhao, our Chief Executive Officer and Y. Tristan
Kuo, our Chief Financial Officer, who carry out key functions in our operation.
If we lose the service of any of our senior management or key research or
technical personnel or fail to attract additional personnel with suitable
experience and qualification, our business operations and research capability
may be adversely affected.
Future acquisitions may have an adverse effect on our
ability to manage our business.
Selective acquisitions form part of our strategy to further
expand our business. If we are presented with appropriate opportunities, we may
acquire additional companies, products or technologies. Future acquisitions and
the subsequent integration of new companies into ours would require significant
attention from our management. Our company has little experience with
integrating newly acquired businesses. Potential problems encountered by each
organization during mergers and acquisitions would be unique, posing additional
risks to the company. The diversion of our managements attention and any
difficulties encountered in any integration process could have an adverse effect
on our ability to manage our business. Future acquisitions would expose us to
potential risks, including risks associated with the assimilation of new
operations, technologies and personnel, unforeseen or hidden liabilities, the
diversion of resources from our existing businesses and technologies, the
inability to generate sufficient revenue to offset the costs and expenses of
acquisitions, and potential loss of, or harm to, relationships with employees,
customers and suppliers as a result of integration of new businesses.
20
We may lose our competitive advantage and our operations
may suffer if we fail to prevent the loss or misappropriation of, or disputes
over, our intellectual property.
None of our products are currently covered by patents. Our
trademark CTBB is registered with the PRC Industry and Commerce Administration
Trademark Bureau for our use until January 20, 2012in the labeling of human-use
medicine, biopreparate and blood products, pursuant to the registration. We plan
to apply for patents for our manufacturing processes. The patent application
will be subject to approval from the relevant PRC authorities. We may not be
able to successfully obtain the approval of the PRC authorities for our patent
applications. Furthermore, third parties may assert claims to our proprietary
procedures, technologies and systems. These proprietary procedures, technologies
and systems are important to our business as they allow us to maintain our
competitive edge over our competitors.
While we are not aware of any infringement on our intellectual
property and we have not been notified by any third party that we are infringing
on their intellectual property, our ability to compete successfully and to
achieve future revenue growth will depend, in significant part, on our ability
to protect our proprietary technology and operate without infringing upon the
intellectual property rights of others. The legal regime in China for the
protection of intellectual property rights is still at its early stage of
development. Intellectual property protection became a national effort in China
in 1979 when China adopted its first statute on the protection of trademarks.
Since then, China has adopted its Patent Law, Trademark Law and Copyright Law
and promulgated related regulations such as Regulation on Computer Software
Protection, Regulation on the Protection of Layout Designs of Integrated
Circuits and Regulation on Internet Domain Names. China has also acceded to
various international treaties and conventions in this area, such as the Paris
Convention for the Protection of Industrial Property, Patent Cooperation Treaty,
Madrid Agreement and its Protocol Concerning the International Registration of
Marks. In addition, when China became a party to the World Trade Organization in
2001, China amended many of its laws and regulations to comply with the
Agreement on Trade-Related Aspects of Intellectual Property Rights. Despite many
laws and regulations promulgated and other efforts made by China over the years
with a view to tightening up its regulation and protection of intellectual
property rights, private parties may not enjoy intellectual property rights in
China to the same extent as they would in many Western countries, including the
United States, and enforcement of such laws and regulations in China have not
achieved the levels reached in those countries. Both the administrative agencies
and the court system in China are not well-equipped to deal with violations or
handle the nuances and complexities between compliant technological innovation
and noncompliant infringement.
We rely on confidentiality agreements with our management and
employees to protect our confidential proprietary information. However, the
protection of our intellectual properties may be compromised as a result of:
-
departure of any of our management members or employees in possession of
our confidential proprietary information;
-
breach by such departing management member or employee of his or her
confidentiality and non- disclosure undertaking to us;
-
infringement by others of our proprietary information and intellectual
property rights; or
-
refusal by relevant regulatory authorities to approve our patent or
trademark applications.
Any of these events or occurrences may have a material adverse
effect on our operations and the measures that we have put into place to protect
our intellectual property rights may not be sufficient. Litigation to enforce
our intellectual property rights could result in substantial costs and may not
be successful. If we are not able to successfully defend our intellectual
property rights, we might lose rights to technology that we need to conduct and
develop our business. This may seriously harm our business, operating results
and financial condition, and enable our competitors to use our intellectual
property to compete against us.
Furthermore, if third parties claim that our products infringe
their patents or other intellectual property rights, we may be required to
devote substantial resources to defend against such claims. If we are
unsuccessful in defending against such infringement claims, we may be required
to pay damages, modify our products or suspend the production and sale of such
products. We cannot guarantee that we will be able to modify our products on
commercially reasonable terms.
A disruption in the supply of utilities, fire or other
calamity at our manufacturing plant would disrupt production of our products and
adversely affect our sales.
Our products are manufactured at our production facilities
located in Taian, Shandong Province and Guiyang, Guizhou Province in the PRC.
While we have not in the past experienced any calamities which disrupted
production, any disruption in the supply of utilities, in particular,
electricity or power supply, or any outbreak of fire, flood or other calamity
resulting in significant damage at our facilities would severely affect our
production and have a material adverse effect on our business, financial
condition and results of operations.
We maintain insurance policies covering losses with respect to
damages to our properties and products. We do not have insurance coverage for
inventories of raw materials or business interruption. There is no assurance
that our insurance would be sufficient to cover all of our potential losses.
There are allegations of past criminal conduct against
certain members of our Board of Directors and a significant employee. Our
business and results of operations could be adversely affected if any of these
allegations are proven true.
On January 26, 2010, certain allegations of fraud and criminal
activity involving smuggling and related activities allegedly engaged in prior
to 2005 by the CEO of the Companys primary operating subsidiary, Shandong
Taibang, and by a relative of one of our directors surfaced on certain financial websites. On January 27, 2010, in response to
these allegations, the Companys board of directors established a special
independent subcommittee comprised of the Companys independent directors, Mr.
Sean Shao and Dr. Tong Jun Lin (who were later joined by new director Dr.
Xiangmin Cui), or the Special Committee, to investigate the allegations with the
assistance of a reputable international firm, and report its findings to the
board of directors as soon as practicable. On March 1, 2010, the Special
Committee retained OMelveny & Myers LLP, an international law firm, to
advise the Special Committee and to assist in the investigation of the
allegations. On November 26, 2010, the Special Committee reported its findings
to the Companys board of directors, a summary of which the Company disclosed in
a Current Report on Form 8-K filed with the Commission on December 3, 2010. The
Special Committee could not find support for a majority of the allegations,
however, the Special Committee found support that Mr. Ze Qin Lin, the husband of
our former director Ms. Lin Ling Li, was imprisoned in China in connection with
smuggling offenses, and with respect to the allegation that Mr. Tung Lam, the
Chief Executive Officer of one of our primary operating subsidiaries, Shandong
Taibang, and spouse of Mrs. Siu Ling Chan, our board chair, was previously known
as Mr. Lin Ziping and was imprisoned for smuggling offenses in China, the
Special Committee found evidence supporting Mr. Lams denial of the allegation,
as well as conflicting evidence with respect to this claim. As a result, the
Special Committee concluded that it could neither confirm nor exclude the
allegation against Mr. Lam. The findings of the Special Committee regarding Mr.
Lin and its inability to reach a conclusion regarding the allegations against
Mr. Lam may make investing in our Company unattractive to certain investors and
may cause existing investors to end their investment in the Company, which may
cause our stock price to decline.
21
If we do not maintain strong financial controls, investor
confidence in us may decline and our stock price may decline as a
result.
The SEC as required by Section 404 of the Sarbanes-Oxley Act of
2002, or SOX 404, adopted rules requiring every public company to include a
management report on such companys internal control over financial reporting in
its annual report, which must also contain managements assessment of the
effectiveness of the companys internal control over financial reporting. In
addition, the independent registered public accounting firm auditing the
financial statements must also attest to the operating effectiveness of the
companys internal controls.
A report of our management and attestation by our independent
registered public accounting firm is included under Item 9A of this report. Our
management has concluded that that our internal controls over financial
reporting as of December 31, 2011 were effective. However, financial controls
have become increasingly complex due to constant evolution in accounting
standards and principles and changes in disclosure rules. For example, we
identified material weaknesses related to review controls on the accounting for
income taxes and derivative instrument valuation as described under Item 9A of
our annual report in form 10-K for fiscal year ended December 31, 2010, which
were subsequently remediated in our fiscal year 2011 as described under Item 9A
below. However, there is no guarantee that these remedies will continue to be
effective. Failure to achieve and maintain an effective internal control
environment could result in us not being able to accurately report our financial
results, prevent or detect fraud or provide timely and reliable financial and
other information pursuant to the reporting obligations we have as a public
company, which could have a material adverse effect on our business, financial
condition and results of operations. This could reduce investors confidence in
our reported financial information, which in turn could result in lawsuits being
filed against us by our stockholders, otherwise harm our reputation or
negatively impact the trading price of our common stock.
RISKS RELATED TO DOING BUSINESS IN CHINA
Changes in Chinas political or economic situation could
harm us and our operating results.
Economic reforms adopted by the Chinese government have had a
positive effect on the economic development of the country, but the government
could change these economic reforms or any of the legal systems at any time.
This could either benefit or damage our operations and profitability. Some of
the things that could have this effect are:
-
Level of government involvement in the economy;
-
Control of foreign exchange;
-
Methods of allocating resources;
-
Balance of payments position;
-
International trade restrictions; and
-
International conflict.
The Chinese economy differs from the economies of most
countries belonging to the Organization for Economic Cooperation and
Development, or OECD, in many ways. For example, state-owned enterprises still
constitute a large portion of the Chinese economy, and weak corporate governance
and the lack of a flexible currency exchange policy still prevail in China. As a
result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy was similar to those of the
OECD member countries.
Uncertainties with respect to the PRC legal system could
limit the legal protections available to you and us.
We conduct substantially all of our business through our
operating subsidiaries in the PRC. Our operating subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and,
in particular, laws applicable to FIEs. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference but have limited
precedential value. Since 1979, a series of new PRC laws and regulations have significantly
enhanced the protections afforded to various forms of foreign investments in
China. However, since the PRC legal system continues to evolve rapidly, the
interpretations of many laws, regulations, and rules are not always uniform, and
enforcement of these laws, regulations, and rules involve uncertainties, which
may limit legal protections available to you and us. In addition, any litigation
in China may be protracted and result in substantial costs and diversion of
resources and management attention. In addition, most of our executive officers
and directors are residents of China and not of the United States, and
substantially all the assets of these persons are located outside the United
States. As a result, it could be difficult for investors to affect service of
process in the United States or to enforce a judgment obtained in the United
States against our Chinese operations and subsidiary.
22
You may have difficulty enforcing judgments against
us.
Most of our assets are located outside of the United States and
most of our current operations are conducted in the PRC. In addition, most of
our directors and officers are nationals and residents of countries other than
the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these persons. It may
also be difficult for you to enforce in U.S. courts judgments on the civil
liability provisions of the U.S. federal securities laws against us and our
officers and directors, most of whom are not residents in the United States and
the substantial majority of whose assets are located outside of the United
States. In addition, there is uncertainty as to whether the courts of the PRC
would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law
has advised us that the recognition and enforcement of foreign judgments are
provided for under the PRC Civil Procedures Law. Courts in China may recognize
and enforce foreign judgments in accordance with the requirements of the PRC
Civil Procedures Law based on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions. China does not have
any treaties or other arrangements that provide for the reciprocal recognition
and enforcement of foreign judgments with the United States. In addition,
according to the PRC Civil Procedures Law, courts in the PRC will not enforce a
foreign judgment against us or our directors and officers if they decide that
the judgment violates basic principles of PRC law or national sovereignty,
security, or the public interest. So it is uncertain whether a PRC court would
enforce a judgment rendered by a court in the United States.
The PRC government exerts substantial influence over the
manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in China may be harmed by
changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property,
and other matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory requirements. However, the
central or local governments of the jurisdictions in which we operate may impose
new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Accordingly, government actions in the future, including any
decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof and could require us to divest
ourselves of any interest we then hold in Chinese properties or joint ventures.
Future inflation in China may inhibit our ability to
conduct business in China.
In recent years, the Chinese economy has experienced periods of
rapid expansion and highly fluctuating rates of inflation. During the past ten
years, the rate of inflation in China has been as high as 5.9% and as low as
-0.8% . These factors have led to the adoption by the Chinese government, from
time to time, of various corrective measures designed to restrict the
availability of credit or regulate growth and contain inflation. High inflation
may in the future cause the Chinese government to impose controls on credit
and/or prices, or to take other action, which could inhibit economic activity in
China, and thereby harm the market for our products and our company.
Restrictions on currency exchange may limit our ability
to receive and use our sales effectively.
The majority of our sales will be settled in RMB, and any
future restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or other
payments in U.S. dollars. Although the Chinese government introduced regulations
in 1996 to allow greater convertibility of the RMB for current account
transactions, significant restrictions still remain, including primarily the
restriction that FIEs may only buy, sell or remit foreign currencies after
providing valid commercial documents, at those banks in China authorized to
conduct foreign exchange business. In addition, conversion of RMB for capital
account items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items. We cannot be certain that
the Chinese regulatory authorities will not impose more stringent restrictions
on the convertibility of the RMB.
Fluctuations in exchange rates could adversely affect our
business and the value of our securities.
The value of our common stock will be indirectly affected by
the foreign exchange rate between the U.S. dollar and RMB and between those
currencies and other currencies in which our sales may be denominated.
Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results
reported in U.S. dollar terms without giving effect to any underlying change in
our business or results of operations. Fluctuations in the exchange rate will
also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars, as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
23
Since July 2005, the RMB has no longer been pegged to the U.S.
dollar. Although the Peoples Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange
rate, the RMB may appreciate or depreciate significantly in value against the
U.S. dollar in the medium to long term. Moreover, it is possible that in the
future PRC authorities may lift restrictions on fluctuations in the RMB exchange
rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions. While we may enter into hedging transactions in
the future, the availability and effectiveness of these transactions may be
limited, and we may not be able to successfully hedge our exposure at all. In
addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign
currencies.
Currently, some of our raw materials and major equipment are
imported. In the event that the U.S. dollars appreciate against RMB, our costs
will increase. If we cannot pass the resulting cost increases on to our
customers, our profitability and operating results will suffer. In addition, if
our sales to international customers grow, we will be increasingly subject to
the risk of foreign currency depreciation.
Restrictions under PRC law on our PRC subsidiaries
ability to make dividends and other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit
our business, pay dividends to you, and otherwise fund and conduct our
business.
Substantially all of our sales are earned by our PRC
subsidiaries. However, PRC regulations restrict the ability of our PRC
subsidiaries to make dividends and other payments to their offshore parent
companies. PRC legal restrictions permit payments of dividends by our PRC
subsidiaries only out of their accumulated after-tax profits, if any, determined
in accordance with PRC accounting standards and regulations. Our PRC
subsidiaries are also required under PRC laws and regulations to allocate at
least 10% of their annual after-tax profits determined in accordance with PRC
GAAP to a statutory general reserve fund until the amounts in said fund reaches
50% of their registered capital. Allocations to these statutory reserve funds
can only be used for specific purposes and are not transferable to us in the
form of loans, advances, or cash dividends. Any limitations on the ability of
our PRC subsidiaries to transfer funds to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be
beneficial to our business, pay dividends and otherwise fund and conduct our
business.
Failure to comply with PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may subject
our PRC resident stockholders to personal liability, limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiaries, limit our
PRC subsidiaries ability to distribute profits to us or otherwise materially
adversely affect us.
In October 2005, SAFE issued the Notice on Relevant Issues in
the Foreign Exchange Control over Financing and Return Investment Through
Special Purpose Companies by Residents Inside China, generally referred to as
Circular 75, which required PRC residents to register with the competent local
SAFE branch before establishing or acquiring control over an offshore special
purpose company, or SPV, for the purpose of engaging in an equity financing
outside of China on the strength of domestic PRC assets originally held by those
residents. Amendments to registrations made under Circular 75 are required in
connection with any increase or decrease of capital, transfer of shares, mergers
and acquisitions, equity investment or creation of any security interest in any
assets located in China to guarantee offshore obligations. In the case of an SPV
which was established, and which acquired a related domestic company or assets,
before the implementation date of Circular 75, a retroactive SAFE registration
was required Failure to comply with the requirements of Circular 75 may result
in fines and other penalties under PRC laws for evasion of applicable foreign
exchange restrictions. Any such failure could also result in the SPVs
affiliates being impeded or prevented from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
SPV, or from engaging in other transfers of funds into or out of China.
We have asked our stockholders who are PRC residents as defined
in Circular 75 to register with the relevant branch of SAFE, as currently
required, in connection with their equity interests in us and our acquisitions
of equity interests in our PRC subsidiaries. However, we cannot provide any
assurances that they can obtain the above SAFE registrations required by
Circular 75. Moreover, because of uncertainty over how Circular 75 will be
interpreted and implemented, and how or whether SAFE will apply it to us, we
cannot predict how it will affect our business operations or future strategies.
For example, our present and prospective PRC subsidiaries ability to conduct
foreign exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with Circular 75
by our PRC resident beneficial holders.
In addition, such PRC residents may not always be able to
complete the necessary registration procedures required by Circular 75. We also
have little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our
PRC resident beneficial holders or future PRC resident stockholders to comply
with Circular 75, if SAFE requires it, could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or
cross-border investment activities, limit our subsidiaries ability to make
distributions or pay dividends or affect our ownership structure, which could
adversely affect our business and prospects.
24
We may be unable to complete a business combination
transaction efficiently or on favorable terms due to complicated merger and
acquisition regulations which became effective on September 8, 2006.
On August 9, 2006, six PRC regulatory agencies, including the
China Securities Regulatory Commission, or CSRC, promulgated the Regulation on
Mergers and Acquisitions of Domestic Companies by Foreign Investors, which
became effective on September 8, 2006. This new regulation, among other things,
governs the approval process by which a PRC company may participate in an
acquisition of assets or equity interests. Depending on the structure of the
transaction, the new regulation will require the PRC parties to make a series of
applications and supplemental applications to the government agencies. In some
instances, the application process may require the presentation of economic data
concerning a transaction, including appraisals of the target business and
evaluations of the acquirer, which are designed to allow the government to
assess the transaction. Government approvals will have expiration dates by which
a transaction must be completed and reported to the government agencies.
Compliance with the new regulations is likely to be more time consuming and
expensive than in the past and the government can now exert more control over
the combination of two businesses. Accordingly, due to the new regulation, our
ability to engage in business combination transactions has become significantly
more complicated, time consuming and expensive, and we may not be able to
negotiate a transaction that is acceptable to our stockholders or sufficiently
protect their interests in a transaction.
The new regulation allows PRC government agencies to assess the
economic terms of a business combination transaction. Parties to a business
combination transaction may have to submit to the PRC Ministry of Commerce, or
MOFCOM, and other relevant government agencies an appraisal report, an
evaluation report and the acquisition agreement, all of which form part of the
application for approval, depending on the structure of the transaction. The
regulations also prohibit a transaction at an acquisition price obviously lower
than the appraised value of the PRC business or assets and in certain
transaction structures, require that consideration must be paid within defined
periods, generally not in excess of a year. The regulation also limits our
ability to negotiate various terms of the acquisition, including aspects of the
initial consideration, contingent consideration, holdback provisions,
indemnification provisions and provisions relating to the assumption and
allocation of assets and liabilities. Transaction structures involving trusts,
nominees and similar entities are prohibited. Therefore, such regulation may
impede our ability to negotiate and complete a business combination transaction
on financial terms that satisfy our investors and protect our stockholders
economic interests.
Under the Enterprise Income Tax Law, we may be classified
as a resident enterprise of China. Such classification will likely result in
unfavorable tax consequences to us and our non-PRC stockholders.
The EIT Law and its implementing rules became effective on
January 1, 2008. Under the EIT Law, an enterprise established outside of China
with de facto management bodies within China is considered a resident
enterprise, meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the EIT
Law define de facto management as substantial and overall management and
control over the production and operations, personnel, accounting, and
properties of the enterprise.
On April 22, 2009, the State Administration of Taxation issued
the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to
Criteria of de facto Management Bodies, or the Notice, further interpreting the
application of the EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a non-domestically incorporated resident
enterprise if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. A resident enterprise would be
subject to an enterprise income tax rate of 25% on its worldwide income and must
pay a withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a resident
enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the EIT
Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as tax-exempt income, we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that
are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new
resident enterprise classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC stockholders and
with respect to gains derived by our non-PRC stockholders from transferring our
shares. We are actively monitoring the possibility of resident enterprise
treatment for the 2011 tax year and are evaluating appropriate organizational
changes to avoid this treatment, to the extent possible.
If we were treated as a resident enterprise by PRC tax
authorities, we would be subject to taxation in both the U.S. and China, and our
PRC tax may not be creditable against our U.S. tax.
25
We face uncertainty from Chinas Circular on
Strengthening the Administration of Enterprise Income Tax on Non-Resident
Enterprises Share Transfer that was released in December 2009 with retroactive
effect from January 1, 2008.
The Chinese State Administration of Taxation, or SAT, released
a circular on December 15, 2009 that addresses the transfer of shares by
nonresident companies, generally referred to as Circular 698. Circular 698,
which is effective retroactively to January 1, 2008, may have a significant
impact on many companies that use offshore holding companies to invest in China.
Circular 698, which provides parties with a short period of time to comply with
its requirements, indirectly taxes foreign companies on gains derived from the
indirect sale of a Chinese company. Where a foreign investor indirectly
transfers equity interests in a Chinese resident enterprise by selling the
shares in an offshore holding company, and the latter is located in a country or
jurisdiction where the effective tax burden is less than 12.5% or where the
offshore income of his, her, or its residents is not taxable, the foreign
investor is required to provide the tax authority in charge of that Chinese
resident enterprise with the relevant information within 30 days of the
transfers. Moreover, where a foreign investor indirectly transfers equity
interests in a Chinese resident enterprise through an abuse of form of
organization and there are no reasonable commercial purposes such that the
corporate income tax liability is avoided, the PRC tax authority will have the
power to re-assess the nature of the equity transfer in accordance with PRCs
substance-over-form principle and deny the existence of the offshore holding
company that is used for tax planning purposes. There is uncertainty as to the
application of Circular 698. For example, while the term indirectly transfer
is not defined, it is understood that the relevant PRC tax authorities have
jurisdiction regarding requests for information over a wide range of foreign
entities having no direct contact with China. Moreover, the relevant authority
has not yet promulgated any formal provisions or formally declared or stated how
to calculate the effective tax in the country or jurisdiction and to what extent
and the process of the disclosure to the tax authority in charge of that Chinese
resident enterprise. In addition, there are not any formal declarations with
regard to how to decide abuse of form of organization and reasonable
commercial purpose, which can be utilized by us to balance if our Company
complies with the Circular 698. As a result, we may become at risk of being
taxed under Circular 698 and we may be required to expend valuable resources to
comply with Circular 698 or to establish that we should not be taxed under
Circular 698, which could have a material adverse effect on our financial
condition and results of operations.
We may be exposed to liabilities under the Foreign
Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our
business.
We are subject to the Foreign Corrupt Practice Act, or FCPA,
and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and
issuers as defined by the statute, for the purpose of obtaining or retaining
business. We have operations, agreements with third parties, and make most of
our sales in China. The PRC also strictly prohibits bribery of government
officials. Our activities in China create the risk of unauthorized payments or
offers of payments by the employees, consultants, sales agents, or distributors
of our Company, even though they may not always be subject to our control. It is
our policy to implement safeguards to discourage these practices by our
employees. However, our existing safeguards and any future improvements may
prove to be less than effective, and the employees, consultants, sales agents,
or distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in
which we invest or that we acquire.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving U.S.-listed Chinese companies, we may
have to expend significant resources to investigate and resolve the matter which
could harm our business operations, stock price and reputation and could result
in a loss of your investment in our stock, especially if such matter cannot be
addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of
their operations in China, particularly companies like us which have completed
so-called reverse merger transactions, have been the subject of intense
scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and
negative publicity has centered around financial and accounting irregularities
and mistakes, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in
many cases, allegations of fraud. As a result of the scrutiny, criticism and
negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become
virtually worthless. Many of these companies are now subject to shareholder
lawsuits, SEC enforcement actions and are conducting internal and external
investigations into the allegations. It is not clear what effect this
sector-wide scrutiny, criticism and negative publicity will have on our Company,
our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will
have to expend significant resources to investigate such allegations and/or
defend our company. This situation will be costly and time consuming and
distract our management from growing our company. If such allegations are not
proven to be groundless, our company and business operations will be severely
impacted and your investment in our stock could be rendered worthless.
26
The disclosures in our reports and other filings with the
SEC and our other public pronouncements are not subject to the scrutiny of any
regulatory bodies in the PRC. Accordingly, our public disclosure should be
reviewed in light of the fact that no governmental agency that is located in
China where substantially all of our operations and business are located have
conducted any due diligence on our operations or reviewed or cleared any of our
disclosure.
We are regulated by the SEC and our reports and other filings
with the SEC are subject to SEC review in accordance with the rules and
regulations promulgated by the SEC under the Securities Act and the Exchange
Act. Unlike public reporting companies whose operations are located primarily in
the United States, however, substantially all of our operations are located in
China. Since substantially all of our operations and business takes place in
China, it may be more difficult for the Staff of the SEC to overcome the
geographic and cultural obstacles that are present when reviewing our
disclosure. These same obstacles are not present for similar companies whose
operations or business take place entirely or primarily in the United States.
Furthermore, our SEC reports and other disclosure and public pronouncements are
not subject to the review or scrutiny of any PRC regulatory authority. For
example, the disclosure in our SEC reports and other filings are not subject to
the review of the CSRC, a PRC regulator that is tasked with oversight of the
capital markets in China. Accordingly, you should review our SEC reports,
filings and our other public pronouncements with the understanding that no local
regulator has done any due diligence on our company and with the understanding
that none of our SEC reports, other filings or any of our other public
pronouncements has been reviewed or otherwise been scrutinized by any local
regulator.
RISKS RELATED TO THE MARKET FOR OUR STOCK
Although publicly traded, the trading market in our
common stock has been substantially less liquid than the average trading market
for a stock quoted on the NASDAQ Stock Market and this low trading volume may
adversely affect the price of our common stock.
Our common stock is traded on the NASDAQ Global Select Market
under the symbol CBPO. The trading market in our common stock has been
substantially less liquid than the average trading market for companies trading
on the NASDAQ Stock Market. Reported average daily trading volume in our common
stock for the three months immediately prior to March 1, 2012, was approximately
27,834 shares. Limited trading volume will subject our shares of common stock to
greater price volatility and may make it difficult for you to sell your shares
of common stock at a price that is attractive to you.
The market price of our common stock is volatile, leading
to the possibility of its value being depressed at a time when you want to sell
your holdings.
The market price of our common stock is volatile, and this
volatility may continue. Numerous factors, many of which are beyond our control,
may cause the market price of our common stock to fluctuate significantly. These
factors include:
-
our earnings releases, actual or anticipated changes in our earnings,
fluctuations in our operating results or our failure to meet the expectations
of financial market analysts and investors;
-
changes in financial estimates by us or by any securities analysts who
might cover our stock;
-
speculation about our business in the press or the investment community;
-
significant developments relating to our relationships with our customers
or suppliers;
-
stock market price and volume fluctuations of other publicly traded
companies and, in particular, those that are in the our industry;
-
customer demand for our products;
-
investor perceptions of the our industry in general and our company in
particular;
-
the operating and stock performance of comparable companies;
-
general economic conditions and trends;
-
major catastrophic events;
-
announcements by us or our competitors of new products, significant
acquisitions, strategic partnerships or divestitures;
-
changes in accounting standards, policies, guidance, interpretation or
principles;
-
loss of external funding sources;
-
sales of our common stock, including sales by our directors, officers or
significant stockholders; and
-
additions or departures of key personnel.
Securities class action litigation is often instituted against
companies following periods of volatility in their stock price. This type of
litigation could result in substantial costs to us and divert our managements
attention and resources. Moreover, securities markets may from time to time
experience significant price and volume fluctuations for reasons unrelated to
operating performance of particular companies. For example, in July 2008, the
securities markets in the United States, China and other jurisdictions
experienced the largest decline in share prices since September 2001. These
market fluctuations may adversely affect the price of our common stock and other
interests in our company at a time when you want to sell your interest in us.
27
Provisions in our certificate of incorporation and bylaws
or Delaware law might discourage, delay or prevent a change of control of our
company or changes in our management and, therefore depress the trading price of
the common stock.
Delaware corporate law and our certificate of incorporation and
bylaws contain provisions that could discourage, delay or prevent a change in
control of our Company or changes in its management that our stockholders may
deem advantageous. These provisions:
-
deny holders of our common stock cumulative voting rights in the election
of directors, meaning that stockholders owning a majority of our outstanding
shares of common stock will be able to elect all of our directors; and
-
allow any vacancy on the board of directors, however the vacancy occurs,
to be filled by the directors.
In addition, Section 203 of the Delaware General Corporation
Law generally limits our ability to engage in any business combination with
certain persons who own 15% or more of our outstanding voting stock or any of
our associates or affiliates who at any time in the past three years have owned
15% or more of our outstanding voting stock. These provisions may have the
effect of entrenching our management team and may deprive you of the opportunity
to sell your shares to potential acquirers at a premium over prevailing prices.
This potential inability to obtain a control premium could reduce the price of
our common stock.
We do not intend to pay dividends for the foreseeable
future.
For the foreseeable future, we intend to retain any earnings to
finance the development and expansion of our business, and we do not anticipate
paying any cash dividends on our common stock. Accordingly, investors must be
prepared to rely on sales of their common stock after price appreciation to earn
an investment return, which may never occur. Investors seeking cash dividends
should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our board of directors and will depend
on our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
We have no outstanding or unresolved comments from the SEC
staff.
ITEM 2. PROPERTIES.
All land in China is owned by the government. Individuals and
companies are permitted to acquire land use rights for specific purposes.
Industrial land use rights are granted for a period of 50 years. This period may
be renewed at the expiration of the initial and any subsequent terms. Granted
land use rights are transferable and may be used as security for borrowings and
other obligations.
In July 2003, Shandong Taibang obtained certain land use rights
from the PRC municipal government to 43,663 square meters consisting of
manufacturing facilities, warehouses and office buildings in Taian City,
Shandong Province. Shandong Taibang is required to make payments totaling
approximately $21,855 (RMB138,848) per year to the local state-owned entity, for
the 50 year life of the rights or until the Shandong Institute completes its
privatization process. We recorded land use rights asset and a corresponding
liability, other payable land use rights, at the inception of the
transaction determined using present value of annual payments over 50 years. The
other payable-land use rights amounted to $343,477, $333,008 and $323,687 as of
December 31, 2011, 2010 and 2009, respectively.
Guizhou Taibang entered into a lease agreement on June 1, 2006
with a group of individuals in an area located next to its production facility
to lease and use the space for processing industrial wastes for 10 years. The
annual lease amount is approximately $1,643 (RMB10,438).
We believe that all of our properties have been adequately
maintained, are generally in good condition, and are suitable and adequate for
our business.
Some of our properties are leased from third parties, of which
we have entered into formal lease agreements for two of them. The remaining
leases are on a verbal basis. In all cases, the lessors have not been able to
provide copies of documentation evidencing their rights to use the leased
property. In most cases, the leased properties are small operating spaces we
leased for our sales offices in different parts of China. In the event of any
future dispute over the ownership of the leased properties, we believe we could
easily and quickly find replacement premises so that the operations would not be
affected.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits
and legal proceedings, which arise, in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these,
or other matters, may arise from time to time that may harm our business. Other
than the legal proceedings set forth below, we are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
affect on our business, financial condition or operating results.
28
Bobai County Collection Station
In January 2007, Shandong Taibang advanced approximately
$472,200 (RMB3.0 million) to Feng Lin, the 20% noncontrolling interest
shareholder in Fang Cheng Plasma Company, an indirect majority owned subsidiary
of the Company, 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., or Bobai, in Bobai County, Guangxi and on January
18, 2007, Shandong Taibang signed a letter of intent to acquire the assets of
the Bobai Plasma Collection Station, which was co-owned by Mr. Lin and Mr.
Keliang Huang. However, in January 2007, Hua Lan Biological Engineering Co.,
Ltd., or Hua Lan, filed suit in the District Court of Hong Qi District, Xin
Xiang City, Henan Province, alleging that Feng Lin, Keliang Huang and Shandong
Taibang established and/or sought to operate the Bobai Plasma Collection Station
using a permit for collecting and supplying human plasma in Bobai County, that
was originally granted to Hua Lan by the government of the Guangxi region,
without Hua Lans permission. The establishment and registration of Bobai was
never realized as a result of this law suit. On January 29, 2007, on Hua Lans
motion, the District Court entered an order to freeze funds in the amount of
approximately $472,200 (RMB3,000,000) held by the defendants in the case,
including approximately $778,700 (RMB500,000) in funds held in Shandong
Taibangs bank account in Taian City. A hearing was held on June 25, 2007 and
judgment was entered against the defendants along with a $267,580 (RMB1,700,000)
joint financial judgment. We appealed the District Court judgment to the
Xinxiang City Intermediate Court. In November 2007, the Xinxiang City
Intermediate Court affirmed the judgment against the three defendants and
increased the amount of the joint financial judgment to approximately $472,200
(RMB3,000,000).
In January 2008, Hua Lan enforced the judgment granted by the
Xinxiang City Intermediate Court to freeze our bank accounts. Shandong Taibang
has filed a separate action against Hua Lan before the Taian City District
Court to seek recovery of any losses in connection with Hua Lans claim and to
request that the Taian City District Court preserve Hua Lans property or
freeze up to approximately $472,200 (RMB 3 million) of Hua Lans assets to
secure the return of such funds to us. The matter is currently pending before
the Intermediate Court of Taian City. Pending the outcome of the proceedings,
Shandong Taibang increased its loss contingency reserve during its fourth
quarter of 2007 from approximately $89,193 (RMB566,667) to $157,400
(RMB1,000,000) to cover its share of the enforcement of this judgment. During
the fourth quarter of 2008, full amount of the judgment, including Feng Lin and
Keliang Huangs portions of the judgment and the related fees, approximately
$489,498 (RMB 3,109,900) has been withdrawn from Shandong Taibangs account. We
recorded Feng Lin and Keliang Huangs portion of the judgment, approximately
$326,327 (RMB 2,073,234), as receivable as a result of the withdrawal. As of
December 31, 2008, we determined that it is unlikely that we 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. As a result, we
are now the indirect 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 Taibangs belief that Hua Lans involvement in
Bobai was in violation of PRC Blood Products Regulations as Hua Lan did not
invest, as Shandong Taibang did, in Bobai as required by the Regulation. We were
awaiting the judgment of the Henan High Court as of the date of this report. In
light of the foregoing, it is unlikely that our planned acquisition of the
assets of Bobai will go forward.
Dispute among Guizhou Taibang Shareholders over Raising
Additional Capital
On May 28, 2007, a 91% majority of Guizhou Taibangs
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 RMB 2.80 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% minority holder of Guizhou Taibangs
shares, the Guizhou Jiean Company, or Jiean, did not support the plan and did
not agree to waive its right of first refusal. On May 29, 2007, the majority
shareholders caused Guizhou Taibang to sign an Equity Purchase Agreement with
certain investors, pursuant to which the investors agreed to invest an aggregate
of RMB 50,960,000 (approximately $8,021,104) in exchange for 18,200,000 shares,
or 21.4%, of Guizhou Taibangs equity interests. At the same time, Jiean also
subscribed for 1,800,000 shares, representing its 9% pro rata share of the
20,000,000 shares being offered. The proceeds from all parties were received by
Guizhou Taibang in accordance with the agreement.
In June 2007, Jiean 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, Jiean 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 Jiean and sustained the Equity Purchase
Agreement, but on November 2008, Jiean appealed the Guizhou High Court judgment
to the Peoples Supreme Court in Beijing. On May 13, 2009, the Peoples Supreme
Court sustained the original ruling and denied the rights of first refusal of
Jiean over the additional shares waived by the original Guizhou Taibangs
shareholders. The registration of the new investors as Guizhou Taibangs
shareholders and the related increase in registered capital of Guizhou Taibang
with the AIC 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 AIC and requesting the distribution of their share of
Guizhou Taibangs dividends. Dalin was also joined as a co-defendant as it is
the majority shareholder and exercises control over Guizhou Taibangs day-to-day
operations. We do not expect the strategic investors to prevail because, upon
evaluation of the Equity Purchase Agreement, we believe 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 their original investment amount to the strategic
investors, as of December 31, 2010, Guizhou Taibang has set aside the strategic investors fund along with RMB 10,056,242 (approximately
$1,582,852) in accrued interests, and RMB 509,600 (approximately $80,211) for
the 1% penalty imposed by the agreement for any breach. If strategic investors
prevail in their suit, Dalins interests in Guizhou Taibang may be reduced to
approximately 41.3% . The High Court of Guizhou heard the case on April 8, 2010
and encouraged, and accepted by both parties, to settle the dispute outside the
court but both parties failed to reach a mutual agreeable term.
29
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. In light of the
Guizhou ruling, in November 2010 the Company returned the proceeds in the amount
of RMB 11,200,000 (approximately $1,762,880) to one of the strategic investors.
On October 26, 2010, the other strategic investors appealed to, and subsequently
accepted by, the PRC Supreme Court in Beijing on the ruling. On October 9, 2011,
the PRC Supreme Court overruled the decision of the High Court of Guizhou and
remanded the suit to the High Court of Guizhou for retrial. On December 29,
2011, High Court of Guizhou accepted the case for retrial. On January 5, 2012,
the strategic investors re-filed their case to the High Court of Guizhou
requesting, in addition to the share distribution, the distribution of dividends
and interest in the amount of RMB 18,349,345 (approximately $2,888,187) and RMB
2,847,000 (approximately $448,118), respectively. The Company is awaiting the
hearing as of the date of this report.
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 majority 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, pending the outcome of the ongoing litigation. If
we decide 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 from the prior 4.5 years.
Guizhou Taibangs Guarantee to a Third Party
In 2007, as a condition to purchase Huang Ping Plasma Station,
Guizhou Taibang entered into an agreement with the Guizhou Zhongxin Investment
Company, or Zhongxin, in which Guizhou Taibang agreed to repay Zhongxins debt
out of Guizhou Taibangs 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, $483,901) in debt that
Zhongxin owed to the hospital. On June 1, 2009, the Huang Ping Hospital brought
suit, in the Huang Ping County Peoples 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, the sellers will be responsible, based on their pro rata
equity interest in Guizhou Taibang, for damages incurred by Guizhou Taibang from
Zhongxins debt and that they will repay Dalin their pro rata share of payments
made by Guizhou Taibang to creditors in connection with Zhongxins debt within
10 days after payment by Guizhou Taibang. The RMB 3,074,342 contingent liability
and proportionate share of the liability to be recovered from the sellers were
properly reflected in the financials as of December 31, 2009. On December 31,
2010, Guizhou Taibang brought suit against Zhongxin in the Intermediate Court of
Guiyang City, to recover the full judgment amount of RMB 3,074,342 plus court
fee of RMB 32,340 that Guizhou Taibang has already paid on behalf of Zhongxin.
On September 13, 2010, Zhongxin countersued the Company for a
consideration of RMB 500,000 (approximately $78,700) 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 Huangpin County, Guizhou Province.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is traded on the Nasdaq Global Select Market
under the symbol CBPO.
The following table sets forth, for the periods indicated, the
high and low closing prices of our common stock. These prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
|
|
Closing Prices
(1)
|
|
|
|
High
|
|
|
Low
|
|
Year Ended December 31,
2011
|
|
|
|
|
|
|
1
st
Quarter
|
$
|
17.87
|
|
$
|
15.02
|
|
2
nd
Quarter
|
|
16.47
|
|
|
9.41
|
|
3
rd
Quarter
|
|
10.83
|
|
|
6.81
|
|
4
th
Quarter
|
|
11.82
|
|
|
6.17
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2010
|
|
|
|
|
|
|
1
st
Quarter
|
$
|
13.48
|
|
$
|
7.62
|
|
2
nd
Quarter
|
|
13.95
|
|
|
10.28
|
|
3
rd
Quarter
|
|
13.95
|
|
|
9.61
|
|
4
th
Quarter
|
|
17.23
|
|
|
9.38
|
|
(1)
|
The above table sets forth the range of high and low
closing prices per share of our common stock as reported by
www.quotemedia.com
for the periods
indicated.
|
Approximate Number of Holders of Our Common Stock
As of March 5, 2012, there were approximately 443 holders of
record of our common stock. This number excludes the shares of our common stock
owned by stockholders holding stock under nominee security position listings.
Dividend Policy
We have never declared dividends or paid cash dividends. Any
future decisions regarding dividends will be made by our board of directors. We
currently intend to retain and use any future earnings for the development and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our board of directors has complete discretion on whether to
pay dividends, subject to the approval of our stockholders. Even if our board of
directors decides to pay dividends, the form, frequency and amount will depend
upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that the
board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table includes the information as of December 31,
2011 for each category of our equity compensation plan:
Plan category
|
Number of securities
to be issued upon
exercise of
outstanding
options,
warrants and rights
(a)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
|
Equity compensation plans approved by security holders
|
-
|
-
|
-
|
Equity
compensation plans not approved by security holders
|
1,994,600
|
$9.24
|
2,848,500
|
Total
|
1,994,600
|
$9.24
|
2,848,500
|
Effective May 9, 2008, our Board of Directors adopted the China
Biologic Products, Inc. 2008 Equity Incentive Plan, or the 2008 Plan. The 2008
Plan provides for grants of stock options, stock appreciation rights,
performance units, restricted stock, restricted stock units and performance
shares. A total of five million (5,000,000) shares of our common stock may be
issued pursuant to the 2008 Plan. The exercise price per share for the shares to
be issued pursuant to an exercise of a stock option will be no less than the
fair market value per share on the grant date, except that, in the case of an incentive stock
option granted to a person who holds more than 10% of the total combined voting
power of all classes of our stock or any of our subsidiaries, the exercise price
will be no less than 110% of the fair market value per share on the grant date.
No more than an aggregate of 500,000 shares (or for awards denominated in cash,
the fair market value of 5,000,000 shares on the grant date) may be subject to
awards under the 2008 Plan to any individual participant in any one fiscal year.
No awards may be granted under the 2008 Plan after May 9, 2018, except that any
award granted before then may extend beyond that date.
31
Recent Sales of Unregistered Securities
We have not sold any equity securities during the 2011 fiscal
year that were not previously disclosed in a quarterly report on Form 10-Q or a
current report on Form 8-K that was filed during the 2011 fiscal year.
Purchases of Equity Securities
No repurchases of our common stock were made during the fourth
quarter of 2011.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated statement of comprehensive income
data for the years ended December 31, 2011, 2010 and 2009 and the selected
balance sheet data as of December 31, 2011 and 2010 are derived from our audited
consolidated financial statements included elsewhere in this report. The
selected consolidated financial data for the years ended December 31, 2008 and
2007 and the selected balance sheet data as of December 31, 2009, 2008 and 2007
are derived from our audited consolidated financial statements not included in
this report.
The following selected historical financial information should
be read in conjunction with our consolidated financial statements and related
notes and the information contained in Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations.
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
$
|
153,092,289
|
|
$
|
139,695,417
|
|
$
|
118,998,155
|
|
$
|
46,751,160
|
|
$
|
32,398,669
|
|
Income From Operations
|
$
|
32,217,468
|
|
$
|
68,568,299
|
|
$
|
60,477,367
|
|
$
|
20,335,771
|
|
$
|
12,757,415
|
|
Net Income
|
$
|
18,181,710
|
|
$
|
31,542,883
|
|
$
|
2,208,126
|
|
$
|
11,985,671
|
|
$
|
8,179,376
|
|
Total Assets
|
$
|
248,892,575
|
|
$
|
220,921,794
|
|
$
|
172,611,483
|
|
$
|
67,169,392
|
|
$
|
33,305,245
|
|
Total Current Liabilities
|
$
|
67,822,285
|
|
$
|
71,445,819
|
|
$
|
51,118,179
|
|
$
|
18,927,094
|
|
$
|
6,577,522
|
|
Total Long Term Liabilities
|
$
|
2,029,249
|
|
$
|
4,431,842
|
|
$
|
37,350,149
|
|
$
|
6,193,390
|
|
$
|
446,206
|
|
Total Stockholders' equity attributable to China Biologic Products, Inc.
|
$
|
135,512,364
|
|
$
|
99,199,796
|
|
$
|
49,696,661
|
|
$
|
37,243,527
|
|
$
|
22,395,625
|
|
Total Equity
|
$
|
179,041,041
|
|
$
|
145,044,133
|
|
$
|
84,143,155
|
|
$
|
42,048,908
|
|
$
|
26,281,517
|
|
Capital Stock (excluding long term debt)
|
$
|
2,560
|
|
$
|
2,435
|
|
$
|
2,305
|
|
$
|
2,143
|
|
$
|
2,143
|
|
Number of Shares Issued and Outstanding
|
|
25,601,125
|
|
|
24,351,125
|
|
|
23,056,442
|
|
|
21,434,942
|
|
|
21,434,942
|
|
Net Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.73
|
|
$
|
1.34
|
|
$
|
0.10
|
|
$
|
0.56
|
|
$
|
0.38
|
|
Diluted
|
$
|
0.37
|
|
$
|
1.30
|
|
$
|
0.10
|
|
$
|
0.56
|
|
$
|
0.37
|
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following managements discussion and analysis should be
read in conjunction with our financial statements and the notes thereto and the
other financial information appearing elsewhere in this report. In addition to
historical information, the following discussion contains certain
forward-looking information. See Special Note Regarding Forward Looking
Statements above for certain information concerning those forward looking
statements. Our financial statements are prepared in U.S. dollars and in
accordance with United States generally accepted accounting principles.
Overview
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 with dosages of 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 54.5%, 48.0% and 49.7% of our total sales, respectively, for each
of the years ended December 31, 2011, 2010 and 2009. 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.
32
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 and therefore our largest customers
have changed over the years. For the years ended December 31, 2011, 2010 and
2009, our top 5 customers accounted for approximately 13.2%, 12.3% and 10.7%,
respectively, of our total sales. 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.
Financial Performance Highlights
The following are some financial highlights for the fiscal year
ended December 31, 2011:
-
Sales
: Sales increased by $13,396,872, or 9.6%, to
$153,092,289 for the year ended December 31, 2011, from $139,695,417 for the
year ended December 31, 2010.
-
Gross Profit
: Gross profit increased by $4,330,360, or 4.2%,
to $107,074,628 for the year ended December 31, 2011, from $102,744,268 for
the year ended December 31, 2010. As a percentage of sales, gross profit
decreased by 3.6% to 69.9% for 2011 from 73.5% for 2010.
-
Income from operations
: Income from operations decreased by
$36,350,831, or 53.0%, to $32,217,468 for the year ended December 31, 2011,
from $68,568,299 for the year ended December 31, 2010.
-
Net income attributable to Company
: Net income attributable
to Company decreased by $13,361,173, or 42.4%, to $18,181,710 for the year
ended December 31, 2011, from $31,542,883 for the year ended December 31,
2010.
-
Fully diluted net income per share
: Fully diluted net income
per share was $0.37 for the year ended December 31, 2011, as compared $1.30
for the year ended December 31, 2010.
Closure of 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), or the 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 implementation of the Guizhou Plan, the
licenses of four active plasma collection stations in Dan Zhai, Wei Ning, San
Sui and Na Yong counties owned by Guizhou Taibang 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 four stations in Dan Zhai, Wei Ning, San Sui and Na Yong counties together
accounted for approximately 21.0% (7 months of operation) and 34.1% of our total
plasma collection by volume for the years ended December 31, 2011 and 2010,
respectively. In addition, Guizhou Taibangs inactive plasma collection station
in Guizhou Province that was purchased from the government in 2007 is unlikely
to be licensed as planned, because it is in Zhengyuan County, a location not
included in the Guizhou Plan.
As a result of the closure of the above plasma collection
stations, certain equipment, office furniture, building improvement and plasma
collection permits were abandoned and written off during the third quarter of
2011. The loss on abandonment and written off of these long-lived assets is set
forth below.
Equipment
|
$
|
295,643
|
|
Office furniture
|
|
206,183
|
|
Building improvement
|
|
908,553
|
|
Plasma collection permits
|
|
5,192,649
|
|
Total
|
$
|
6,603,028
|
|
Furthermore, we wrote-off $167,604 of raw material plasma that
is expected not to qualify for production due to the 90-day quarantine period
rules as their sourcing plasma stations were closed under the Guizhou Plan.
33
Principal Factors Affecting our Financial Performance
The following are key factors that affect our financial
condition and results of operations and we believe them to be important to the
understanding of our business:
Raw Material Supply and Prices
The primary raw material used in the production of our albumin
and immunoglobulin products is human plasma. Collection of human plasma in China
is regulated and until 2006, only licensed Plasmapheresis stations owned and
operated by the government could collect human plasma. Each collection station
was only allowed to supply plasma to the one manufacturer that has signed the
Quality Responsibility statement with them. The price of human plasma is
negotiated on an annual basis and is determined by a number of factors
including, but not limited to, the cost of operating the collection stations,
the nutritional supplement fee awarded to the donors for each donation, and the
anticipated volume of total plasma donated. However, in March 2006, the Ministry
of Health promulgated certain Measures on Reforming Plasma Collection
Stations, or the Blood Collection Measures, whereby the ownership and
management of PRC plasma stations are required to be transferred to plasma-based
biopharmaceutical companies while the regulatory supervision and administrative
control remain with the State. Plasma stations that did not complete their
reform by December 31, 2006, risked revocation of their license to collect
plasma.
In December 2006, we acquired five of the six then existing
plasma stations in Shandong and on January 1, 2007 we obtained the permits to
operate these stations. These acquisitions have allowed us to have a direct
influence on the operation of these collection stations and secure a stable
source of plasma supply for production. The foregoing acquisitions, as well as
the acquisition of Dalin and its indirectly owned plasma stations, have led to
an increase in our plasma supply for production and did not result in any
material differences in our cost structure. Due to current market conditions, we
have generally been able to pass substantially all cost increases in recent
years on to our customers.
Prices of and Demand for Our Products
The demand for our products is largely affected by the general
economic conditions in China because they are still not affordable to many
patients. As Chinas economy grows, we expect more Chinese people will become
consumers of medical treatments and procedures, including procedures requiring
human plasma. A significant improvement in the economic environment in China
will likely improve consumer income which in turn would make our products more
affordable and consequently increase the demand for our products. We have been
able to expand our product range and markets by introducing new products
required by customers. We believe that our technical expertise is important in
introducing products that are in demand.
Production Capacity
Our sales volume is limited by our annual production capacity.
As we grow our business in the future, our ability to fulfill additional and
larger orders will depend on our ability to increase our production capacity.
Our plan to expand our production capacity will depend on, inter alia, the
availability of capital to meet our needs of expansion or upgrading of
production lines, and the availability of stable plasma supply.
As of December 31, 2011, the aggregate production capacity of
Shandong Taibang and Guizhou Taibang was 1,100 metric tons per annum. We
estimate that the production capacity of our major competitors ranges from 300
tons to 1,000 tons per annum. We believe that our current production capacity is
sufficient to meet the current demand for our products for the next two years.
Competition
We are subject to intense competition. There are both local and
overseas pharmaceutical enterprises that are engaged in the manufacture and sale
of potential substitute or similar biopharmaceutical products as our products in
the PRC. These competitors may have more capital, better research and
development resources, manufacturing and marketing capability and experience
than we do. In our industry, we compete based upon product quality, product
cost, ability to produce a diverse range of products and logistical
capabilities.
We believe that we have strengthened our position in the
marketplace with our acquisition of Dalin and its 54% majority-owned operating
subsidiary, Guizhou Taibang, and a 35% equity interest in Huitian, a Xian-based
biopharmaceutical company.
Our profitability may be adversely affected if (i) competition
intensifies; (ii) competitors drastically reduce prices; (iii) PRC governments
interference on prices; or (iv) competitors develop new products or product
substitutes with comparable medicinal applications or therapeutic effects which are more effective or less costly than those
produced by us. Please refer to Item 1, Business - Competition for more
information regarding this factor..
34
Taxation
China Biologic is subject to United States tax at a tax rate of
34%. No provision for income taxes in the United States has been made as China
Biologic has no taxable income.
Taibang Biological was incorporated in the BVI, but is not
subject to taxation in that jurisdiction.
Taibang Holdings was incorporated in Hong Kong and under the
current laws of Hong Kong, are subject to a Profits Tax of 16.5% . However, no
provision for Hong Kong Profits Tax has been made as Taibang Holdings has no
taxable income.
According to the PRCs central government policy, new or high
technology companies will enjoy preferential tax treatment of 15%, instead of
25% under the EIT Law. 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. On October
31, 2011, Shandong Taibang was issued the High and New Technology Enterprise
qualification for an additional three years from 2011 to 2013. According to
CaiShui [2011] No. 58 dated July 27, 2011, qualified enterprises located in the
western regions of PRC are entitled to a preferential income tax rate of 15%
effective retroactively from January 1, 2011. Management believes Guizhou
Taibang will be treated as a qualified enterprise located in the western regions
and therefore be subject to income tax at a preferential tax rate of 15% from
2011 to 2020. See Item 1 Business Regulation Taxation for a detailed
description of the EIT Law and tax regulations applicable to our PRC
subsidiaries. All other subsidiaries of the Company are subjected to the regular
25% tax rate.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2011 and
2010
The following table sets forth key components of our results of
operations for fiscal years ended December 31, 2011 and 2010.
|
|
Year Ended
|
|
|
$
|
|
|
%
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2011
|
|
|
2010
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
SALES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
$
|
152,848,726
|
|
|
138,674,983
|
|
$
|
14,173,743
|
|
|
10.2%
|
|
Related party
|
|
243,563
|
|
|
1,020,434
|
|
|
(776,871
|
)
|
|
(76.1%
|
)
|
Total sales
|
|
153,092,289
|
|
|
139,695,417
|
|
|
13,396,872
|
|
|
9.6%
|
|
COST OF SALES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
45,841,438
|
|
|
36,793,775
|
|
|
9,047,663
|
|
|
24.6%
|
|
Related party
|
|
176,223
|
|
|
157,374
|
|
|
18,849
|
|
|
12.0%
|
|
Total cost of sales
|
|
46,017,661
|
|
|
36,951,149
|
|
|
9,066,512
|
|
|
24.5%
|
|
GROSS PROFIT
|
|
107,074,628
|
|
|
102,744,268
|
|
|
4,330,360
|
|
|
4.2%
|
|
OPERATING EXPENSES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
14,595,794
|
|
|
7,372,348
|
|
|
7,223,446
|
|
|
98.0%
|
|
General and
administrative expenses
|
|
31,519,824
|
|
|
24,467,495
|
|
|
7,052,329
|
|
|
28.8%
|
|
Research and development expenses
|
|
3,978,233
|
|
|
2,336,126
|
|
|
1,642,107
|
|
|
70.3%
|
|
Impairment loss of
goodwill
|
|
18,160,281
|
|
|
-
|
|
|
18,160,281
|
|
|
-
|
|
Loss on abandonment and write off of long-lived assets
|
|
6,603,028
|
|
|
-
|
|
|
6,603,028
|
|
|
-
|
|
Total operating expenses
|
|
74,857,160
|
|
|
34,175,969
|
|
|
40,681,191
|
|
|
119.0%
|
|
INCOME FROM OPERATIONS
|
|
32,217,468
|
|
|
68,568,299
|
|
|
(36,350,831
|
)
|
|
(53.0%
|
)
|
OTHER INCOME (EXPENSES)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity method investee
|
|
1,858,171
|
|
|
1,070,241
|
|
|
787,930
|
|
|
73.6%
|
|
Change in fair
value of derivative liabilities
|
|
11,974,834
|
|
|
(3,233,288
|
)
|
|
15,208,122
|
|
|
(470.4%
|
)
|
Interest expense
|
|
(4,670,606
|
)
|
|
(2,682,482
|
)
|
|
(1,988,124
|
)
|
|
74.1%
|
|
Interest income
|
|
1,356,950
|
|
|
752,317
|
|
|
604,633
|
|
|
80.4%
|
|
Other (expenses)/income, net
|
|
(453,949
|
)
|
|
1,125,972
|
|
|
(1,579,921
|
)
|
|
(140.3%
|
)
|
Total other income/(expenses),
net
|
|
10,065,400
|
|
|
(2,967,240
|
)
|
|
13,032,640
|
|
|
(439.2%
|
)
|
EARNINGS BEFORE INCOME TAX EXPENSE
|
|
42,282,868
|
|
|
65,601,059
|
|
|
(23,318,191
|
)
|
|
(35.5%
|
)
|
INCOME TAX EXPENSES
|
|
10,899,513
|
|
|
13,608,755
|
|
|
(2,709,242
|
)
|
|
(19.9%
|
)
|
NET INCOME
|
$
|
31,383,355
|
|
$
|
51,992,304
|
|
$
|
(20,608,949
|
)
|
|
(39.6%
|
)
|
Less: Net income
attributable to noncontrolling interest
|
|
13,201,645
|
|
|
20,449,421
|
|
|
(7,247,776
|
)
|
|
(35.4%
|
)
|
NET INCOME ATTRIBUTABLE TO COMPANY
|
$
|
18,181,710
|
|
$
|
31,542,883
|
|
$
|
(13,361,173
|
)
|
|
(42.4%
|
)
|
35
Sales
.
Our total sales increased by 9.6%,
or $13,396,872, to $153,092,289 for the year ended December 31, 2011, compared
to $139,695,417 for the fiscal year ended December 31, 2010. The increase in
sales during 2011 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 5.0% of the sales increase.
Most of our approved products recorded price increases ranging
from approximately 1.4% to 10.6%, except for human tetanus immunoglobulin
products, which decreased by approximately 3.4% . For 2011 as compared to 2010,
the average price for our approved human albumin products, which contributed
54.5% to our total sales, increased by approximately 1.4% and, excluding the
foreign exchange translation effect, their average price in RMB term decreased
by approximately 3.2%; the average price for our approved human hepatitis B
immunoglobulin products, which contributed 4.8% to our total sales, increased by
approximately 2.8% and, excluding the foreign exchange translation effect, their
average price in RMB term decreased slightly by approximately 1.9%; the average
price for our approved human immunoglobulin for intravenous injection, or IVIG
products, which contributed 32.3% to our total sales, increased by approximately
7.2%, and excluding the foreign exchange translation effect, their average price
in RMB term increased by approximately 2.3%; the average price for our approved
human rabies immunoglobulin products, which contributed 1.5% to our total sales,
increased by approximately 10.6% and, excluding the foreign exchange translation
effect, their average price in RMB term increased by approximately 5.6%; and the
average price for our approved human tetanus immunoglobulin products, which
contributed 4.7% to our total sales, decreased by approximately 3.4% and,
excluding the foreign exchange translation effect, their average price in RMB
term decreased by approximately 7.8% . 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 in RMB term was mainly due to the continuous increase in the
imported volume of this product during 2011. The slight price decrease in human
hepatitis B immunoglobulin products in RMB term was mainly due to our
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 primarily the result of
the increasingly saturated market.
Volume in sales for our human albumin and human tetanus
immunoglobulin products increased by 22.7% and 82.6%, respectively, for 2011 as
compared to 2010. Volume in sales for our IVIG, human hepatitis B immunoglobulin
and human rabies immunoglobulin products decreased by 3.7%, 33.2% and 73.0%,
respectively, for 2011 as compared to 2010. As the Hand-Foot-and-Mouth Disease,
or HFMD, which the outburst took place between April and August in 2010, was not
as severe in 2011 as in 2010, the sales volume of IVIG decreased slightly during
2011 as compared to 2010. The sales volume of human hepatitis B immunoglobulin
products decreased mainly due to the decrease in demand as the new government
program emphasizes on application of the products on new-borns but not the
pre-natal mothers. The sales volume decrease in human rabies immunoglobulin
products was 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.
Cost of sales
.
Our total cost of sales
increased by $9,066,512, or 24.5%, to $46,017,661 for the year ended December
31, 2011, from $36,951,149 for the year ended December 31, 2010. Cost of sales
as a percentage of total sales was 30.1% for the year ended December 31, 2011,
as compared to 26.5% for the year ended December 31, 2010. The increase in cost
of sales, as well as the increase in cost of sales as a percentage of sales, was
mainly due to the increase in sales and the increase in cost of plasma paid to
donors along with a change in the mix of products that were sold during 2011. In
an effort to increase plasma collection volume and expand our donor base, we
increased the nutrition fees paid to donors.
Gross profit and gross margin
.
Our gross
profit increased by $4,330,360, or 4.2%, to $107,074,628 for the year ended
December 31, 2011 from $102,744,268 for the year ended December 31, 2010. As a
percentage of total sales, our gross margin decreased by 3.6% to 69.9% for the
year ended December 31, 2011, from 73.5% for the year ended December 31, 2010.
The decrease in gross profit margin was mainly due to the price decreases in
certain of our products and higher raw material costs as discussed above, which
outpaced the price increases of our other products.
Operating expenses
. Our total operating expenses
increased by $40,681,191, or 119.0%, to $74,857,160 for the year ended December
31, 2011, from $34,175,969 for the year ended December 31, 2010. The increase
was primarily attributable to a goodwill impairment loss of $18,160,281, a loss
on abandonment of long-lived assets of $6,603,028, as well as a 98.0% increase
in our selling expenses and a 28.8% increase in our general and administrative
expenses during 2011. As a percentage of total sales, total expenses increased
by 24.4% to 48.9% for the year ended December 31, 2011 from 24.5% for the year
ended December 31, 2010. Excluding the non-cash charge for impairment of
goodwill and loss on abandonment of long-lived asset, the total operating
expenses was $50,093,851, an increase of $15,917,882, or 46.6%, for the year
ended December 31, 2011 as compared to the year ended December 31, 2010.
Selling expenses
. For the year ended December 31, 2011,
our selling expenses increased to $14,595,794, from $7,372,348 for the year
ended December 31, 2010, an increase of $7,223,446, or 98.0% . As a percentage
of total sales, our selling expenses for the year ended December 31, 2011
increased by 4.2%, to 9.5%, from 5.3% for the year ended December 31, 2010. The
increase in selling expenses was primarily due to our increased promotional and
conference activities as we continued our efforts in expanding our customer base
into hospitals and inoculation centers throughout the PRC.
General and administrative expenses
. For the year ended
December 31, 2011, our general and administrative expenses increased to
$31,519,824, from $24,467,495 for the year ended December 31, 2010, a
$7,052,329, or 28.8% increase. General and administrative expenses as a percentage of total sales increased by 3.1% to
20.6% for the year ended December 31, 2011 from 17.5% for the year ended
December 31, 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 $2.6 million in non-cash employee stock
compensation, which is offset by the $1.0 million decrease in legal expenses.
The increase in payroll was mainly due to general salary increases in the
operating subsidiaries and the addition of our new corporate offices in Beijing.
36
Research and development expenses
. For the years ended
December 31, 2011 and 2010, our research and development expenses were
$3,978,233 and $2,336,126, respectively, an increase of $1,642,107, or 70.3% .
As a percentage of total sales, our research and development expenses for the
years ended December 31, 2011 and 2010 were 2.6% and 1.7%, respectively. The
increase in research and development expenses was primarily due to the increased
cost of plasma used in research and the cost in applying for the SFDA approval
of our two new products. Due to the delay of the SFDA approval process, we
expect to receive the approval for these two new products in early 2012.
Impairment loss of goodwill
. Following the closure of
plasma collection stations of Guizhou Taibang due to the regulatory notice, we
revised our earnings guidance for the year of 2011 and experienced incremental
decline in our stock price and market capitalization in the third quarter of
2011. The occurrence of these events caused us to believe that the fair value of
our reporting unit would more likely than not be below its book value.
Therefore, we performed a two-step goodwill impairment test and concluded that,
for the year ended December 31, 2011, a goodwill impairment loss of $18,160,281
was recognized in our single reporting unit since the carrying amount of the
reporting unit was greater than the fair value of the reporting unit (as
determined based on the quoted market price) and the carrying amount of the
reporting unit goodwill exceeded the implied fair value of that goodwill.
Loss on abandonment and write-off of long-lived assets
.
As a result of the closure of the plasma collection stations of Guizhou Taibang,
certain equipment, office furniture, building improvement and plasma collection
permits were abandoned or written off during the third quarter of 2011. Loss on
abandonment of Guizhou Taibangs long-lived assets of $6,603,028 was
recognized in the year ended December 31, 2011.
Change in fair value of derivative
liabilities
.
The embedded derivatives (including the conversion
option) in our senior secured convertible notes and warrants that were issued in
June 2009 are classified as derivative liabilities carried at fair value. For
the year ended December 31, 2011, we recognized a gain from the change in the
fair value of derivative liabilities in the amount of $11,974,834, as compared
to a loss in the amount of $3,233,288 for the year ended December 31, 2010. The
gain from the change in the fair value of derivative liabilities in 2011 is
mainly due to a decrease in the price of our common stock from $16.39 per share
as of December 31, 2010 to $10.46 per share as of December 31, 2011. The
convertible notes have been fully converted as of December 31, 2011. Future
changes in the market price of our common stock could cause the fair value of
the warrants to change significantly in future periods.
Interest expense (income)
. Our interest expense
increased by $1,988,124 to $4,670,606 for the year ended December 31, 2011, from
$2,682,482 for the year ended December 31, 2010. Our interest income increased
by $604,633 to $1,356,950 for the year ended December 31, 2011, from $752,317
for the year ended December 31, 2010. The increase in interest expense was
primarily due to the effective interest charges on our convertible notes of
$3,580,167 and $1,849,493, respectively, for the years ended December 31, 2011
and 2010. As of December 31, 2011, the convertible notes had been fully
converted and therefore, interest expense is expected to decrease.
Income tax expense
.
Our provision for
income taxes decreased by $2,709,242, or 19.9%, to $10,899,513 for the year
ended December 31, 2011, from $13,608,755 for the year ended December 31, 2010.
Our effective income tax rates were 25.8% and 20.7% for the years ended December
31, 2011 and 2010, respectively. The increase of the effective income tax rate
was mainly attributable to the non-deductible impairment loss of goodwill and
loss on abandonment and write-off of long-lived assets.
Net income attributable to Company
.
Our
net income attributable to Company decreased by $13,361,173, or 42.4%, to
$18,181,710 for the year ended December 31, 2011 from $31,542,883 for the year
ended December 31, 2010. Net income attributable to Company as a percentage of
total sales was 11.9% and 22.6% for the years ended December 31, 2011 and 2010,
respectively, as a result of the cumulative effect of the foregoing factors.
37
Comparison of Fiscal Years Ended December 31, 2010 and
2009
The following table sets forth key components of our results of
operations for fiscal years ended December 31, 2010 and 2009.
|
|
Year Ended
|
|
|
$
|
|
|
%
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
SALES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
$
|
138,674,983
|
|
|
118,293,137
|
|
$
|
20,381,846
|
|
|
17.2%
|
|
Related party
|
|
1,020,434
|
|
|
705,018
|
|
|
315,416
|
|
|
44.7%
|
|
Total sales
|
|
139,695,417
|
|
|
118,998,155
|
|
|
20,697,262
|
|
|
17.4%
|
|
COST OF SALES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
36,793,775
|
|
|
32,544,743
|
|
|
4,249,032
|
|
|
13.1%
|
|
Related party
|
|
157,374
|
|
|
77,165
|
|
|
80,209
|
|
|
103.9%
|
|
Total cost of sales
|
|
36,951,149
|
|
|
32,621,908
|
|
|
4,329,241
|
|
|
13.3%
|
|
GROSS PROFIT
|
|
102,744,268
|
|
|
86,376,247
|
|
|
16,368,021
|
|
|
18.9%
|
|
OPERATING EXPENSES
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
7,372,348
|
|
|
3,529,242
|
|
|
3,843,106
|
|
|
108.9%
|
|
General and
administrative expenses
|
|
24,467,495
|
|
|
20,706,948
|
|
|
3,760,547
|
|
|
18.2%
|
|
Research and development expenses
|
|
2,336,126
|
|
|
1,662,690
|
|
|
673,436
|
|
|
40.5%
|
|
Total operating expenses
|
|
34,175,969
|
|
|
25,898,880
|
|
|
8,277,089
|
|
|
32.0%
|
|
INCOME FROM OPERATIONS
|
|
68,568,299
|
|
|
60,477,367
|
|
|
8,090,932
|
|
|
13.4%
|
|
OTHER INCOME (EXPENSES)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity method investee
|
|
1,070,241
|
|
|
566,984
|
|
|
503,257
|
|
|
88.8%
|
|
Change in fair
value of derivative liabilities
|
|
(3,233,288
|
)
|
|
(28,915,328
|
)
|
|
25,682,040
|
|
|
(88.8%
|
)
|
Interest expense
|
|
(2,682,482
|
)
|
|
(4,542,063
|
)
|
|
1,859,581
|
|
|
(40.9%
|
)
|
Interest income
|
|
752,317
|
|
|
611,814
|
|
|
140,503
|
|
|
23.0%
|
|
Other income, net
|
|
1,125,972
|
|
|
638,573
|
|
|
487,399
|
|
|
76.3%
|
|
Total other expenses, net
|
|
(2,967,240
|
)
|
|
(31,640,020
|
)
|
|
28,672,780
|
|
|
(90.6%
|
)
|
EARNINGS BEFORE INCOME TAX EXPENSE
|
|
65,601,059
|
|
|
28,837,347
|
|
|
36,763,712
|
|
|
127.5%
|
|
INCOME TAX EXPENSES
|
|
13,608,755
|
|
|
10,013,563
|
|
|
3,595,192
|
|
|
35.9%
|
|
NET INCOME
|
$
|
51,992,304
|
|
$
|
18,823,784
|
|
$
|
33,168,520
|
|
|
176.2%
|
|
Less: Net income
attributable to noncontrolling interest
|
|
20,449,421
|
|
|
16,615,658
|
|
|
3,833,763
|
|
|
23.1%
|
|
NET INCOME ATTRIBUTABLE TO COMPANY
|
$
|
31,542,883
|
|
$
|
2,208,126
|
|
$
|
29,334,757
|
|
|
1328.5%
|
|
Sales
. Our total sales increased by $20,697,262,
or 17.4%, to $139,695,417 for the year ended December 31, 2010, compared to
$118,998,155 for the year ended December 31, 2009. The increase in sales during
fiscal year 2010 is primarily attributable to a general increase in the price
and volume of plasma based products. Among the factors that contributed to the
growth in revenue, foreign exchange translation accounted for 1.1% of the
increase.
Most of our approved products recorded price increases ranging
from 12.6% to 186.4%, except for human albumin products, which decreased by 1.8%
. The decrease in the price of human albumin in 2010 is primarily due to the
increased volume of imported human albumin products in the PRC market during the
period. We expect that this trend may continue as long as the volume of the
imported human albumin products continues to grow. For 2010 as compared to 2009,
the average price for our approved human albumin products, which contributed
48.0% to our total sales, decreased 1.8%, the average price for our approved
human immunoglobulin for intravenous injection, which contributed 34.4% to our
total sales, increased 26.9%, the average price for our approved human tetanus
immunoglobulin, which contributed 2.9% to our total sales, increased 12.6%, the
average price for our approved human rabies immunoglobulin, which contributed
5.3% to our total sales, increased 24.6%, and the average price for our approved
human hepatitis B immunoglobulin, which contributed 7.6% to our total sales,
increased 186.4% . The price increase of our products was primarily attributable
to the continuing shortage in supply of the plasma-based products. We were able
to adjust our production plan to take advantage of the limited market supply of
plasma resources to realize higher profit margins.
Volume in sales for our human albumin, human hepatitis B
immunoglobulin, human rabies immunoglobulin products and human tetanus
immunoglobulin products increased by 15.7%, 7.4%, 26.5% and 24.6%, respectively,
for 2010 as compared to 2009. Volume in sales for our human immunoglobulin for
intravenous injection decreased by 15.8% because in 2009 the market demand for
human immunoglobulin for intravenous injection increased due to the outbreak of
hand-foot-mouth disease and the price of human immunoglobulin for intravenous
injection was also much enhanced. As a result, we used the large amount of
Factor II+III, the material segregated from plasma and restored separately when
making centralized production of human albumin in 2008, to produce and sell high
volume of human immunoglobulin for intravenous injection in 2009. The volume in
sales for human immunoglobulin for intravenous injection decreased to a
comparatively normal level in 2010.
38
Cost of sales
. Our total cost of sales increased
by $4,329,241, or 13.3%, to $36,951,149 for the year ended December 31, 2010,
from $32,621,908 for the year ended December 31, 2009. Cost of sales as a
percentage of sales was 26.5% for the year ended December 31, 2010, as compared
to 27.4% for the year ended December 31, 2009. The increase in cost of sales is
due to the increase in sales, while the decrease in cost of sales as a
percentage of sales is due to a change in the mix of products, as well as the
price increase in most of the products that were sold during 2010.
Gross profit and gross margin
. Our gross profit
increased by $16,368,021, or 18.9%, to $102,744,268 for the year ended December
31, 2010 from $86,376,247 for the year ended December 31, 2009. As a percentage
of total sales, our gross profit increased by 0.9% to 73.5% for the year ended
December 31, 2010, from 72.6% for the year ended December 31, 2009. The increase
in gross profit is due mainly to increases in the selling price and sales volume
of our products during 2010, as compared to 2009.
Operating expenses
. Our total operating expenses
increased by $8,277,089, or 32.0%, to $34,175,969 for the year ended December
31, 2010, from $25,898,880 for the year ended December 31, 2009. The increase
was primarily attributable to a 40.5% increase in our research and development
expenses, a 108.9% increase in our selling expense and an 18.2% increase in our
general and administrative expenses during 2010. As a percentage of total sales,
total expenses increased by 2.7% to 24.5% for the year ended December 31, 2010
from 21.8% for the year ended December 31, 2009.
Selling expenses
. For the year ended December 31, 2010,
our selling expenses increased to $7,372,348, from $3,529,242 for the year ended
December 31, 2009, an increase of $3,843,106, or 108.9% . As a percentage of
total sales, our selling expenses for the year ended December 31, 2010 increased
by 2.3%, to 5.3%, from 3.0% for the year ended December 31, 2009. The increase
in selling expenses is 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 year ended
December 31, 2010, our general and administrative expenses increased to
$24,467,495, from $20,706,948 for the year ended December 31, 2009, a
$3,760,547, or 18.2% increase. General and administrative expenses as a
percentage of total sales increased by 0.1% to 17.5% for the year ended December
31, 2010 from 17.4% for the year ended December 31, 2009. The increase in
general and administrative expenses is primarily due to the increases in legal
expense, non-cash employee compensation, travel and general office expenses as
we continue to our efforts to integrate our two main operating entities, as well
as and inventory allowance, which were offset by the decrease in payroll. The
increase in legal expense is due to the $598,114 settlement of a law suit with
Henan Xintai and the $1,177,836 settlement of a law suit with Sin Kyung Ye.
Non-cash employee compensation for the fiscal year ended December 31, 2010
increased by $2,279,502 to $2,341,783, from $62,281 for 2009, as a result of the
amortization of the grant of stock options to our senior management staff in
January, February and July of 2010.
Research and development expenses
. For the years ended
December 31, 2010 and 2009, our research and development expenses were
$2,336,126 and $1,662,690, respectively, an increase of $673,436, or 40.5% . As
a percentage of total sales, our research and development expenses for the years
ended December 31, 2010 and 2009 were 1.7% and 1.4%, respectively. The increase
in research and development expenses is primarily due to the cost associated
with the development of two new products that are at the end of their respective
development stage.
Change in fair value of derivative liabilities
.
For the years ended December 31, 2010 and 2009, we recognized a loss on the
change in the fair value of derivative liabilities of $3,233,288 and
$28,915,328, respectively. The recognized loss on the change in the fair value
for the year ended December 31, 2010 is mainly due to our stock price increase
from $12.08 to $16.39, which increased the fair value of derivative instruments,
as of December 31, 2009 and December 31, 2010, respectively.
Interest expense (income), net
.
Our
interest expense decreased by $1,859,581 to $2,682,482 for the year ended
December 31, 2010, from $4,542,063 for the year ended December 31, 2009. Our
interest income increased by $140,503 to $752,317 for the year ended December
31, 2010, from $611,814 for the year ended December 31, 2009. The decrease in
interest expense is primarily due to our payment of a related party loan related
to the acquisition of Dalin in the second quarter of 2010 and conversion of $4.9
million of our outstanding convertible notes in 2009 and 2010.
Income tax expense
. Our provision for income
taxes increased $3,595,192, or 35.9%, to $13,608,755 for the year ended December
31, 2010, from $10,013,563 for the year ended December 31, 2009. Our effective
tax rate for the year ended December 31, 2010 was 20.7%, and effective tax rate
for the year ended December 31, 2009 was 34.7% . The decrease in effective tax
rate is mainly due to the decrease of $25.7 million in change in fair value of
derivative liabilities that is not tax deductible. Among the increase in income
taxes, $1.3 million is due to the dividend tax imposed by PRC tax authorities on
dividends distributed by our two main operating entities to Taibang Biological
during 2010.
Net income attributable to Company
.
Our
net income attributable to Company increased by $29,334,757, or 1328.5%, to
$31,542,883 for the year ended December 31, 2010, from $2,208,126 for the year
ended December 31, 2009. Net income as a percentage of total sales was 22.6% and
1.9% for the years ended December 31, 2010 and 2009, respectively, as a result
of the cumulative effect of the foregoing factors.
39
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 December 31, 2011, we had $89,411,835
in cash, primarily consisting of cash on hand and demand deposits.
The following table sets forth a summary of our cash flows for
the periods indicated:
Cash Flow
(all amounts in U.S. dollars)
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Net cash provided by operating activities
|
|
38,469,919
|
|
|
38,787,226
|
|
|
50,300,987
|
|
Net cash used in investing activities
|
|
(7,127,252
|
)
|
|
(15,851,475
|
)
|
|
(6,860,454
|
)
|
Net cash provided by (used in) financing
activities
|
|
(10,076,504
|
)
|
|
(14,278,870
|
)
|
|
1,564,925
|
|
Effects of exchange rate change in cash
|
|
3,204,304
|
|
|
2,440,536
|
|
|
23,877
|
|
Net increase in cash and cash equivalents
|
|
24,470,467
|
|
|
11,097,417
|
|
|
45,029,335
|
|
Cash and cash equivalents at beginning of the year
|
|
64,941,368
|
|
|
53,843,951
|
|
|
8,814,616
|
|
Cash and cash equivalent at end of the year
|
|
89,411,835
|
|
|
64,941,368
|
|
|
53,843,951
|
|
Operating Activities
Net cash provided by operating activities was $38,469,919 for
the year ended December 31, 2011, as compared to $38,787,226 and 50,300,987 for
the years ended December 31, 2010 and 2009, respectively. For the years ended
December 31, 2011, 2010 and 2009, our net income was $31,383,355, $51,992,304
and $18,823,784, respectively. Our net non-cash operating expense was
$24,883,612, $13,416,312 and $34,285,159, respectively, for the years ended
December 31, 2011, 2010 and 2009.
Among the non-cash operating items for the years ended December
31, 2011,2010 and 2009, our depreciation and amortization expense was
$7,648,469, $7,173,453 and $6,068,155, respectively, our stock compensation
expense was $4,869,232, $2,341,783 and $62,281, respectively, the amortization
of discount on convertible notes was $3,503,767, $1,590,740 and $100,253,
respectively, and our income from change in fair value of derivative liabilities
was $11,974,834 for the year ended 31 December 2011 and our expense from change
in fair value of derivative liabilities was $3,233,288 and 28,915,328 for the
years ended 31 December 2010 and 2009, respectively. Additionally, the
impairment loss for goodwill and loss on abandonment and write-off of
long-lived assets was $24,763,309 for the year ended December 31, 2011.
We had a net cash outflow of working capital of $17,797,048,
$26,621,390 and $2,807,956 for the years ended December 31, 2011, 2010 and 2009,
respectively. Among these cash outflows, the increase in inventory for the years
ended December 31, 2011, 2010 and 2009 were $17,079,263, $16,026,215 and
12,456,975, respectively. The increase in 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. The increase
in accounts receivable for the years ended December 31, 2011, 2010 and 2009 were
$6,126,742, $7,820,523 and 1,510,430, 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
Our use of cash for investing activities is primarily for the
acquisition of property, plant and equipment and intangibles, and advances on
non-current assets.
Net cash used in investing activities for the year ended
December 31, 2011 was $7,127,252, as compared to $15,851,475 and $6,860,454 for
the years ended December 31, 2010 and 2009. During the year ended December 31,
2011, we paid $7,968,870 for acquiring equipment for Shandong Taibang and for
buildings and construction in progress at Guizhou Taibang. During the year ended
December 31, 2010, we paid $1,476,781 to acquire a new Company, Ziguang Bio-tech
Company, paid the final $2,599,215 payment for the acquisition of 90% equity in
Dalin, $5,344,040 for equipment for Shandong Taibang and $6,444,110 for our
plasma companies buildings and construction in progress in Guizhou Taibang.
Financing Activities
Net cash used in financing activities for the year ended
December 31, 2011 totaled $10,076,504, as compared to $14,278,870 and net cash
provided by financing activities of $1,564,925 for the years ended December 31,
2010 and 2009, respectively. The net cash used in financing activities in 2011
was mainly due to a $10,847,200 repayment of a short-term bank loan, a
$7,635,000 payment to acquire the remaining 10% interest in our 90%
majority-owned subsidiary and a dividend payment of $10,489,504 to the
noncontrolling interest shareholders, partly offset by cash provided by a new
short-term loan totaling $18,595,200. The increase of the cash used in financing activities in 2010 was mainly attributable to the $10,446,179
dividend paid by our subsidiaries to the noncontrolling interest holder,
repayment of a non-controlling shareholder loan of $3,683,377, repayment of
short term bank loan of $7,397,000 and offset by short-term bank loans and
proceeds from warrants exercises of $5,917,600 and $1,232,486, respectively.
40
Management believes that the Company has sufficient cash on
hand and continuing positive cash inflow, from the sale of its plasma-based
products in the PRC market, for its operations.
Obligations Under Material Contracts
The following table sets forth our material contractual
obligations as of December 31, 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
|
$
|
2,764,205
|
|
$
|
2,764,205
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating lease commitment
|
|
727,572
|
|
|
335,037
|
|
|
138,651
|
|
|
108,406
|
|
|
145,478
|
|
Total
|
$
|
3,491,777
|
|
$
|
3,099,242
|
|
$
|
138,651
|
|
$
|
108,406
|
|
$
|
145,478
|
|
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
The preparation of financial statements in conformity with
United States generally accepted accounting principles, or U.S. GAAP, requires
our management to make assumptions, estimates and judgments that affect the
amounts reported in the financial statements, including the notes thereto, and
related disclosures of commitments and contingencies, if any. We consider our
critical accounting policies to be those that require the more significant
judgments and estimates in the preparation of financial statements, including
the following:
Use of Estimates
The preparation of consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Significant items
subject to such estimates and assumptions include the useful lives of fixed
assets; the allowance for doubtful accounts; the fair value determinations of
financial and equity instruments and stock compensation awards, assets acquired
and liabilities assumed in a business combination; the realizability of deferred
tax assets and inventories; the recoverability of goodwill, intangible asset,
land use right and property, plant and equipment; and accruals for income tax
uncertainties and other contingencies. The current economic environment has
increased the degree of uncertainty inherent in those estimates and assumptions.
Revenue Recognition
Revenue is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the sales price is
fixed or determinable and collectability is reasonably assured. The Company
mainly sells human albumin and human immunoglobulin to hospitals, inoculation
centers and pharmaceutical distributors. The Company requires a contract or
purchase order which specify pricing, quantity and product specifications for
all sales. Delivery of the product occurs when the product is received by the
customer, which is when the risks and rewards of ownership have been
transferred. Sales are presented net of any discounts given to customers. For
the years ended December 31, 2011, 2010 and 2009, there was no significant sales
return from the customers.
41
Fair Value Measurements
On January 1, 2008, the Company adopted FASBs accounting
standard related to fair value measurements and began recording financial assets
and liabilities subject to recurring fair value measurement at the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. These fair value principles prioritize
valuation inputs across three broad levels. The Company considers the carrying
amount of cash, receivables, payables including accrued liabilities and short
term loans to approximate their fair values because of the short period of time
between the origination of such instruments and their expected realization and
if applicable, their stated rates of interest are equivalent to interest rates
currently available. The fair values are measured pursuant to the three levels
defined by the FASBs accounting standard as follow:
-
Level 1: inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active
markets.
-
Level 2: inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or
indirectly, for substantially the full term of the financial
instruments.
-
Level 3: inputs to the valuation methodology are
unobservable and significant to the fair value.
The fair values of the warrants outstanding as of December 31,
2011, 2010 and 2009 were determined based on the Binominal option pricing model,
using the following key assumptions:
|
|
December
|
|
|
December
|
|
|
December
|
|
|
|
31, 2011
|
|
|
31, 2010
|
|
|
31, 2009
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
0.05%
|
|
|
0.43%
|
|
|
1.38%
|
|
Time to maturity (in years)
|
|
0.43
|
|
|
1.43
|
|
|
2.43
|
|
Expected volatility
|
|
80.0%
|
|
|
70.0%
|
|
|
130.0%
|
|
Fair value of underlying common shares (per
share)
|
$
|
10.46
|
|
$
|
16.39
|
|
$
|
12.08
|
|
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The Company maintains an allowance for doubtful accounts for
estimated losses inherent in its accounts receivable portfolio. In establishing
the required allowance, management considers historical losses adjusted to take
into account current market conditions and the customers financial condition,
the amount of receivables in dispute, and the current receivables aging and
current payment patterns. The Company reviews its allowance for doubtful
accounts monthly. Past due balances are reviewed individually for
collectability. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet credit
exposure related to its customers.
Depending on the relationship and the creditability of the
distributors, we generally grant a credit period of no longer than 90 days to
distributors with some exceptions. For hospitals and clinics, we generally grant
a credit period of no longer than 90 days with exceptions to customers that we
believe are credit worthy up to 6 months. Due to recovery of bad debt that we
previously provided an allowance, we had a bad debt credit of $0.02 million,
$0.06 million and $0.01 million, respectively, for the years ended December 31,
2011, 2010 and 2009.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average method. Cost of work in progress and
finished goods comprise direct materials, direct production costs and an
allocation of production overheads based on normal operating capacity.
The Company reviews its inventory periodically for possible
obsolete goods and cost in excess of net realizable value to determine if any
reserves are necessary. As of December 31, 2011, 2010 and 2009, the Company
wrote off $270,929, $451,761 and $519,333 relating to obsolete raw material
plasma that may not qualify for production due to the 90-day quarantine period
rules implemented by State Food and Drug Administration on July 1, 2008.
Stock-based Compensation
The Company measures the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award and recognizes the cost over the period during which an employee is
required to provide service in exchange for the award, which generally is the
vesting period.
The fair value of each option granted on May 9, 2008, July 24,
2008, January 7, 2010, February 4, 2010, July 11, 2010, January 1, 2011,
February 1, 2011, February 27, 2011 and October 6, 2011 are estimated on the
respective dates of grant using the Black-Scholes option pricing model with the
following major assumptions:
42
Granted on
|
|
May 9,
|
|
|
July 24,
|
|
|
January 7,
|
|
|
February 4,
|
|
|
July 11,
|
|
|
January 1,
|
|
|
February 1,
|
|
|
February 27,
|
|
|
October 6,
|
|
|
|
2008
|
|
|
2008
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
Expected dividend yield
|
|
0%
|
|
|
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%
|
|
|
0.96%
|
|
Expected term (in years)
|
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
6.5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Expected volatility
|
|
59.4%
|
|
|
81.2%
|
|
|
130.0%
|
|
|
130.0%
|
|
|
135.0%
|
|
|
70.0%
|
|
|
70.0%
|
|
|
70.0%
|
|
|
65.0%
|
|
The volatility of the Companys common stock was estimated by
management based on the historical volatility of the Companys common stock. The
risk free interest rate was based on Treasury Constant Maturity Rates published
by the U.S. Federal Reserve for periods applicable to the estimated term of the
options. The expected dividend yield was based on the Companys current and
expected dividend policy. The weighted average grant date fair value of options
granted during the year of 2011 was $8.95.
Impairment of Long-Lived Assets
In accordance with Impairment or Disposal of Long-Lived Assets
Subsections of FASB ASC Subtopic 360-10,
Property, Plant, and Equipment -
Overall
, long-lived assets, such as property, plant and equipment, and
purchased intangible asset subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If circumstances require a long-lived asset or
asset group be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by that asset or asset group to
its carrying value. If the carrying value of the long-lived asset or asset group
is not recoverable on an undiscounted cash flow basis, an impairment is
recognized to the extent that the carrying value exceeds its fair value. Fair
value is determined through various valuation techniques including discounted
cash flow models, quoted market values and third-party independent appraisals,
as considered necessary. The Company recognized a loss on abandonment and write
off of long-lived assets of $6,603,028 for the year ended December 31, 2011 as
described in Note 6 and Note 7 to our consolidated financial statements.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included
elsewhere in this report.
ITEM 7A. 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 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 changes in interest rates for short-term bank loans renewed during the
year ended December 31, 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
December 31, 2011 would decrease net income before provision for income taxes by
approximately $110,180 for the year ended December 31, 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.
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 are
translated at exchange rates at the balance sheet dates and revenue and expenses
are translated at the average exchange rates of our PRCs subsidiaries. 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.
43
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 December 31, 2011 and December 31, 2010 amounted to
$88,957,826 and $64,443,316, respectively, $236,373 and $110,693 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
and selling, general and administrative expenses as a percentage of net sales 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
54.5% and 32.3% of the total sales for the year ended December 31, 2011,
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, our operating results could be adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Financial Statements
The full text of our audited consolidated financial statements
as of December 31, 2011, 2010 and 2009 begins on page F-1 of this report.
Quarterly Financial Results
The following table sets forth certain unaudited financial
information for each of the eight quarters ended December 31, 2011. The
consolidated financial statements for each of these quarters have been prepared
on the same basis as the audited consolidated financial statements included in
this annual report and, in the opinion of management, include all adjustments
necessary for the fair presentation of the results of operations for these
periods. This information should be read together with our audited consolidated
financial statements and the related notes included elsewhere in this annual
report.
(All amounts in thousands of U.S. dollars)
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
Sales
|
$
|
35,652
|
|
$
|
41,304
|
|
$
|
41,665
|
|
$
|
34,471
|
|
$
|
35,684
|
|
$
|
36,004
|
|
$
|
40,908
|
|
$
|
27,099
|
|
Gross profit
|
|
25,234
|
|
|
27,529
|
|
|
29,153
|
|
|
25,159
|
|
|
24,860
|
|
|
25,735
|
|
|
31,849
|
|
|
20,300
|
|
Earnings before income tax
expenses
|
|
8,014
|
|
|
(5,814
|
)
|
|
25,992
|
|
|
14,091
|
|
|
768
|
|
|
22,290
|
|
|
24,656
|
|
|
17,887
|
|
Net income attributable to Company
|
|
4,635
|
|
|
(9,362
|
)
|
|
16,600
|
|
|
6,309
|
|
|
(5,992
|
)
|
|
13,801
|
|
|
13,003
|
|
|
10,731
|
|
Basic earnings per share
|
|
0.18
|
|
|
(0.37
|
)
|
|
0.67
|
|
|
0.26
|
|
|
(0.25
|
)
|
|
0.59
|
|
|
0.55
|
|
|
0.46
|
|
Diluted earnings per share
|
|
0.18
|
|
|
(0.37
|
)
|
|
0.28
|
|
|
0.23
|
|
|
(0.19
|
)
|
|
0.54
|
|
|
0.50
|
|
|
0.41
|
|
Earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net earnings per share
will not necessarily equal the total for the year.
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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) that are designed to ensure that
information that would be required to be disclosed in Exchange Act reports is
recorded, processed, summarized and reported within the time period specified in
the SECs rules and forms, and that such information is accumulated and
communicated to our management, including to our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
As required by Rule 13a-15 under the Exchange Act, our
management, including our Chief Executive Officer, Mr. Chao Ming Zhao, and our
Chief Financial Officer, Mr. Y. Tristan Kuo, evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of December
31, 2011. Based on that evaluation, Mr. Zhao and Mr. Kuo concluded that our
disclosure controls and procedures were effective as of December 31, 2011.
Internal Control over Financial Reporting
Managements Annual Report on Internal Control over
Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company, as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial
reporting refers to the process designed by, or under the supervision of, our
Chief Executive Officer and Chief Financial Officer, and effected by our Board
of Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. GAAP, and
includes those policies and procedures that:
|
(1)
|
pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of
our assets;
|
|
|
|
|
(2)
|
provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are
being made only in accordance with the authorization of our management and
directors; and
|
|
|
|
|
(3)
|
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of our internal control
over financial reporting as of December 31, 2011. In making this evaluation,
management used the framework established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, or COSO. The COSO framework summarizes each of the components of a
companys internal control system, including (i) the control environment, (ii)
risk assessment, (iii) control activities, (iv) information and communication,
and (v) monitoring. Based on our evaluation we determined that, as of December
31, 2011, our internal control over financial reporting was effective as of
December 31, 2011.
Our internal control over financial reporting as of December
31, 2011 has been audited by our registered public accounting firm as stated in
their report which is included in Part II, Item 9A of this form 10-K.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
China Biologic
Products, Inc.:
We have audited China Biologic Products, Inc.s internal
control over financial reporting as of December 31, 2011, based on criteria
established in
Internal Control - Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). China
Biologic Products, Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Companys internal control over financial
reporting based on our audit.
45
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, China Biologic Products, Inc. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2011, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of China Biologic Products, Inc. and subsidiaries as of December
31, 2011 and 2010, and the related consolidated statements of comprehensive
income, and changes in equity, and cash flows for each of the years then ended, and our
report dated March 12, 2012 expressed an unqualified opinion on those
consolidated financial statements.
/S/ KPMG
Hong Kong, China
March 12, 2012
Changes in Internal Controls over Financial Reporting
In Item 9A of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2010, 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 in inadvertently omission of the fair value of
embedded option in warrants and misinterpretation of U.S. GAAP regarding the
recognition of deferred tax liabilities upon business combination. During fiscal
2011, we completed the remediation of this material weakness by acquiring
services of third party consulting expertise in the area of derivative
instrument valuation and independent tax accountant. In addition, we expanded
the size of internal audit department and increased the frequency of internal
control testing during the year ended December 31, 2011. We have also increased
internal and external US GAAP training to our accounting personnel and
strengthened the management review of financial reporting.
Other than the control improvements discussed above, there have
been no changes in our internal control over financial reporting during the most
recent fiscal quarter that have materially affected, or as reasonably likely to
materially affect , our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
We have no information to disclose that was required to be
disclosed in a report on Form 8-K during fourth quarter of fiscal year 2011, but
was not reported.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The information required by Item 10 of Part III is included in
our Proxy Statement for our 2012 Annual Meeting of Stockholders and is
incorporated herein by reference.
46
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part III is included in
our Proxy Statement for our 2012 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by Item 12 of Part III is included in
our Proxy Statement for our 2012 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.
The information required by Item 13 of Part III is included in
our Proxy Statement for our 2012 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by Item 14 of Part III is included in
our Proxy Statement for our 2012 Annual Meeting of Stockholders and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this
annual report on Form 10-K. Financial statement schedules have been omitted
since they are either not required, not applicable, or the information is
otherwise included.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is
incorporated herein by reference.
47
SIGNATURES
In accordance with section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereto duly authorized individual.
Date: March 12, 2012
CHINA BIOLOGIC PRODUCTS, INC.
By:
/s/ Chao Ming
Zhao
Chao Ming Zhao
Chief Executive Officer
By:
/s/ Yu-Yun Tristan
Kuo
Yu-Yun Tristan Kuo
Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
Date
|
|
|
|
|
/s/ Chao Ming Zhao
|
|
Chief Executive Officer
|
March 12, 2012
|
Chao Ming Zhao
|
|
(Principal Executive Officer)
|
|
|
|
|
|
/s/ Yu-Yun Tristan Kuo
|
|
Chief Financial Officer
|
March 12, 2012
|
Yu-Yun Tristan Kuo
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
/s/ Siu Ling Chan
|
|
Chairwoman of the Board
|
March 12, 2012
|
Siu Ling Chan
|
|
|
|
|
|
|
|
/s/ Sean Shao
|
|
Director
|
March 12, 2012
|
Sean Shao
|
|
|
|
|
|
|
|
/s/ David (Xiaoying) Gao
|
|
Director
|
March 12, 2012
|
David (Xiaoying) Gao
|
|
|
|
|
|
|
|
/s/ Tong Jun Lin
|
|
Director
|
March 12, 2012
|
Tong Jun Lin
|
|
|
|
|
|
|
|
/s/ Chong Yang Li
|
|
Director
|
March 12, 2012
|
Chong Yang Li
|
|
|
|
|
|
|
|
/s/ Bing Li
|
|
Director
|
March 12, 2012
|
Bing Li
|
|
|
|
|
|
|
|
/s/ Wenfang Liu
|
|
Director
|
March 12, 2012
|
Wenfang Liu
|
|
|
|
48
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONTENTS
|
Page
|
Reports of Independent Registered Public
Accounting Firms
|
F-1 - F-2
|
Consolidated Balance Sheets
|
F-3
|
Consolidated Statements of Comprehensive
Income
|
F-4
|
Consolidated Statements of Changes in Equity
|
F-5
|
Consolidated Statements of Cash Flows
|
F-6
|
Notes to Consolidated Financial Statements
|
F-8 - F-31
|
49
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
China Biologic Products, Inc.:
We have audited the accompanying consolidated balance sheets of China Biologic Products, Inc. and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of comprehensive income, changes in
equity and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Biologic Products, Inc. and
subsidiaries as of December 31, 2011 and 2010, and the results of
their operations and their cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), China Biologic Products, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria
established in
Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2012 expressed an unqualified opinion on the effectiveness of
the Company’s internal control over financial reporting.
As discussed in Note 21 to the consolidated financial statements, Guizhou Taibang Biological Products Co., Ltd.
(Guizhou Taibang”),
a subsidiary of China Biologic Products, Inc., is a defendant in a lawsuit brought by certain potential investors with respect to Guizhou Taibang’s failure to register their capital contributions in Guizhou Taibang with the local Administration for Industry and Commerce.
/S/ KPMG
Hong Kong, China
March 12, 2012
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
China
Biologic Products, Inc.
We have audited the accompanying consolidated balance sheets of
China Biologic Products, Inc. and subsidiaries as of December 31, 2009 and 2008,
and the related consolidated statements of income and other comprehensive
income, changes in equity, and cash flows for each of the years in the two-year
period ended December 31, 2009. China Biologic Products, Inc.s management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
China Biologic Products, Inc. and subsidiaries as of December 31, 2009 and 2008,
and the results of its operations and its cash flows for each of the years in
the two-year period ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Frazer Frost, LLP
(Successor Entity of Moore
Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on January 7, 2010)
Brea, California
March 23, 2010, except for the effects on the
consolidated financial statements of the restatement
described in Note 2, as
to which the date is March 31, 2011
F-2
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
$
|
89,411,835
|
|
$
|
64,941,368
|
|
Accounts receivable, net of
allowance for doubtful accounts
|
|
16,757,368
|
|
|
9,922,111
|
|
Accounts
receivable - a related party
|
|
-
|
|
|
212,611
|
|
Inventories
|
|
71,338,590
|
|
|
52,300,447
|
|
Other
receivables
|
|
2,594,461
|
|
|
2,727,110
|
|
Prepayments and prepaid expenses
|
|
1,591,696
|
|
|
855,338
|
|
Deferred tax
assets
|
|
1,999,563
|
|
|
1,860,753
|
|
Total
Current Assets
|
|
183,693,513
|
|
|
132,819,738
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
40,546,539
|
|
|
39,511,731
|
|
Intangible assets, net
|
|
6,520,671
|
|
|
14,559,020
|
|
Land use rights, net
|
|
5,487,343
|
|
|
4,701,450
|
|
Prepayments and deposits for
property, plant and equipment
|
|
4,287,492
|
|
|
4,254,423
|
|
Goodwill
|
|
-
|
|
|
17,778,231
|
|
Equity method investment
|
|
8,357,017
|
|
|
7,297,201
|
|
Total Assets
|
$
|
248,892,575
|
|
$
|
220,921,794
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Short-term bank loans
|
$
|
11,018,000
|
|
$
|
3,034,000
|
|
Accounts payable
|
|
4,996,463
|
|
|
4,392,772
|
|
Due to related parties
|
|
3,319,938
|
|
|
3,192,140
|
|
Other payables
and accrued expenses
|
|
30,661,794
|
|
|
21,606,730
|
|
Advance from customers
|
|
4,365,523
|
|
|
3,560,018
|
|
Advance from
customers a related party
|
|
486,602
|
|
|
-
|
|
Income tax payable
|
|
5,373,633
|
|
|
6,659,805
|
|
Other taxes
payable
|
|
2,189,913
|
|
|
2,146,868
|
|
Convertible notes
|
|
-
|
|
|
1,196,233
|
|
Derivative
liabilities - embedded conversion option in convertible notes
|
|
-
|
|
|
14,561,661
|
|
Derivative liabilities -
warrants
|
|
5,410,419
|
|
|
11,095,592
|
|
Total Current Liabilities
|
|
67,822,285
|
|
|
71,445,819
|
|
Other payable
|
|
343,477
|
|
|
333,008
|
|
Deferred tax liabilities
|
|
1,685,772
|
|
|
4,098,834
|
|
Total
Liabilities
|
|
69,851,534
|
|
|
75,877,661
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
Common
stock: par value $.0001; 100,000,000 shares authorized; 25,601,125 and
24,351,125 shares issued and outstanding at December 31, 2011 and 2010
|
|
2,560
|
|
|
2,435
|
|
Additional paid-in capital
|
|
48,838,311
|
|
|
35,435,139
|
|
Retained
earnings
|
|
73,920,811
|
|
|
55,739,101
|
|
Accumulated other comprehensive
income
|
|
12,750,682
|
|
|
8,023,121
|
|
Total
stockholders equity attributable to China Biologic Products, Inc.
|
|
135,512,364
|
|
|
99,199,796
|
|
|
|
|
|
|
|
|
Noncontrolling
interest
|
|
43,528,677
|
|
|
45,844,337
|
|
|
|
|
|
|
|
|
Total Equity
|
|
179,041,041
|
|
|
145,044,133
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
$
|
248,892,575
|
|
$
|
220,921,794
|
|
See accompanying notes to Consolidated Financial Statements.
F-3
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
External
customers
|
$
|
152,848,726
|
|
$
|
138,674,983
|
|
$
|
118,293,137
|
|
Related party
|
|
243,563
|
|
|
1,020,434
|
|
|
705,018
|
|
Total sales
|
|
153,092,289
|
|
|
139,695,417
|
|
|
118,998,155
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
External customers
|
|
45,841,438
|
|
|
36,793,775
|
|
|
32,544,743
|
|
Related
party
|
|
176,223
|
|
|
157,374
|
|
|
77,165
|
|
Total
cost of sales
|
|
46,017,661
|
|
|
36,951,149
|
|
|
32,621,908
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
107,074,628
|
|
|
102,744,268
|
|
|
86,376,247
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
14,595,794
|
|
|
7,372,348
|
|
|
3,529,242
|
|
General and administrative expenses
|
|
31,519,824
|
|
|
24,467,495
|
|
|
20,706,948
|
|
Research and
development expenses
|
|
3,978,233
|
|
|
2,336,126
|
|
|
1,662,690
|
|
Impairment loss of goodwill
|
|
18,160,281
|
|
|
-
|
|
|
-
|
|
Loss on
abandonment and write-off of long-lived assets
|
|
6,603,028
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
32,217,468
|
|
|
68,568,299
|
|
|
60,477,367
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expenses)
|
|
|
|
|
|
|
|
|
|
Equity in income of an equity method investee
|
|
1,858,171
|
|
|
1,070,241
|
|
|
566,984
|
|
Change in
fair value of derivative liabilities
|
|
11,974,834
|
|
|
(3,233,288
|
)
|
|
(28,915,328
|
)
|
Interest expense, net
|
|
(3,313,656
|
)
|
|
(1,930,165
|
)
|
|
(3,930,249
|
)
|
Other
(expense)/income, net
|
|
(453,949
|
)
|
|
1,125,972
|
|
|
638,573
|
|
Total
other income/(expenses), net
|
|
10,065,400
|
|
|
(2,967,240
|
)
|
|
(31,640,020
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income tax expense
|
|
42,282,868
|
|
|
65,601,059
|
|
|
28,837,347
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
10,899,513
|
|
|
13,608,755
|
|
|
10,013,563
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
31,383,355
|
|
|
51,992,304
|
|
|
18,823,784
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net
income attributable to the noncontrolling interest
|
|
13,201,645
|
|
|
20,449,421
|
|
|
16,615,658
|
|
Net income attributable
to China Biologic Products, Inc.
|
$
|
18,181,710
|
|
$
|
31,542,883
|
|
$
|
2,208,126
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of
common stock:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.73
|
|
$
|
1.34
|
|
$
|
0.10
|
|
Diluted
|
$
|
0.37
|
|
$
|
1.30
|
|
$
|
0.10
|
|
Weighted
average shares used in computation:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
25,028,796
|
|
|
23,586,506
|
|
|
21,754,911
|
|
Diluted
|
|
26,654,662
|
|
|
24,176,432
|
|
|
21,949,638
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
31,383,355
|
|
$
|
51,992,304
|
|
$
|
18,823,784
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive
income
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment, net of nil income taxes
|
|
6,846,721
|
|
|
5,177,515
|
|
|
524,027
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
38,230,076
|
|
|
57,169,819
|
|
|
19,347,811
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Comprehensive income attributable to the noncontrolling interest
|
|
15,320,805
|
|
|
21,831,352
|
|
|
17,071,446
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to China Biologic
Products, Inc.
|
$
|
22,909,271
|
|
$
|
35,338,467
|
|
$
|
2,276,365
|
|
See accompanying notes to Consolidated Financial Statements.
F-4
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
attributable
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
to China Biologic
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
capital
|
|
|
earnings
|
|
|
income
|
|
|
Products, Inc.
|
|
|
interest
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of January 1, 2009
|
|
21,434,942
|
|
$
|
2,143
|
|
$
|
10,099,743
|
|
$
|
21,988,092
|
|
$
|
4,159,298
|
|
$
|
36,249,276
|
|
$
|
4,805,381
|
|
$
|
41,054,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,208,126
|
|
|
-
|
|
|
2,208,126
|
|
|
16,615,658
|
|
|
18,823,784
|
|
Other comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
68,239
|
|
|
68,239
|
|
|
455,788
|
|
|
524,027
|
|
Dividends
declared by subsidiaries to noncontrolling interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,955,392
|
)
|
|
(8,955,392
|
)
|
Acquisition of Dalin
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21,525,059
|
|
|
21,525,059
|
|
Stock
compensation
|
|
-
|
|
|
-
|
|
|
62,281
|
|
|
-
|
|
|
-
|
|
|
62,281
|
|
|
-
|
|
|
62,281
|
|
Common stock issued in
connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exercise of warrants
|
|
1,284,000
|
|
|
128
|
|
|
8,571,281
|
|
|
-
|
|
|
-
|
|
|
8,571,409
|
|
|
-
|
|
|
8,571,409
|
|
- Exercise
of stock options
|
|
87,500
|
|
|
9
|
|
|
349,991
|
|
|
-
|
|
|
-
|
|
|
350,000
|
|
|
-
|
|
|
350,000
|
|
- Conversion of convertible notes
|
|
250,000
|
|
|
25
|
|
|
2,187,305
|
|
|
-
|
|
|
-
|
|
|
2,187,330
|
|
|
-
|
|
|
2,187,330
|
|
Balance as of December 31,
2009
|
|
23,056,442
|
|
$
|
2,305
|
|
$
|
21,270,601
|
|
$
|
24,196,218
|
|
$
|
4,227,537
|
|
$
|
49,696,661
|
|
$
|
34,446,494
|
|
$
|
84,143,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
31,542,883
|
|
|
-
|
|
|
31,542,883
|
|
|
20,449,421
|
|
|
51,992,304
|
|
Other
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,795,584
|
|
|
3,795,584
|
|
|
1,381,931
|
|
|
5,177,515
|
|
Dividend declared by
subsidiaries to noncontrolling interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(10,446,179
|
)
|
|
(10,446,179
|
)
|
Acquisition of
noncontrolling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,670
|
|
|
12,670
|
|
Stock compensation
|
|
-
|
|
|
-
|
|
|
2,341,783
|
|
|
-
|
|
|
-
|
|
|
2,341,783
|
|
|
-
|
|
|
2,341,783
|
|
Common stock
issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exercise
of warrants
|
|
294,018
|
|
|
30
|
|
|
4,278,160
|
|
|
-
|
|
|
-
|
|
|
4,278,190
|
|
|
-
|
|
|
4,278,190
|
|
- Exercise of stock options
|
|
37,130
|
|
|
4
|
|
|
97,596
|
|
|
-
|
|
|
-
|
|
|
97,600
|
|
|
-
|
|
|
97,600
|
|
-
Conversion of convertible notes
|
|
963,535
|
|
|
96
|
|
|
7,446,999
|
|
|
-
|
|
|
-
|
|
|
7,447,095
|
|
|
-
|
|
|
7,447,095
|
|
Balance as
of December 31, 2010
|
|
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
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,181,710
|
|
|
-
|
|
|
18,181,710
|
|
|
13,201,645
|
|
|
31,383,355
|
|
Other comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,727,561
|
|
|
4,727,561
|
|
|
2,119,160
|
|
|
6,846,721
|
|
Dividend
declared by subsidiaries to noncontrolling interest
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(14,766,400
|
)
|
|
(14,766,400
|
)
|
Acquisition of noncontrolling
interests
|
|
-
|
|
|
-
|
|
|
(4,764,935
|
)
|
|
-
|
|
|
-
|
|
|
(4,764,935
|
)
|
|
(2,870,065
|
)
|
|
(7,635,000
|
)
|
Stock
compensation
|
|
-
|
|
|
-
|
|
|
4,896,232
|
|
|
-
|
|
|
-
|
|
|
4,896,232
|
|
|
-
|
|
|
4,896,232
|
|
Common stock issued in
connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Exercise of stock options
|
|
75,000
|
|
|
8
|
|
|
299,992
|
|
|
-
|
|
|
-
|
|
|
300,000
|
|
|
-
|
|
|
300,000
|
|
-
Conversion of convertible notes
|
|
1,175,000
|
|
|
117
|
|
|
12,971,883
|
|
|
-
|
|
|
-
|
|
|
12,972,000
|
|
|
-
|
|
|
12,972,000
|
|
Balance as
of December 31, 2011
|
|
25,601,125
|
|
$
|
2,560
|
|
$
|
48,838,311
|
|
$
|
73,920,811
|
|
$
|
12,750,682
|
|
$
|
135,512,364
|
|
$
|
43,528,677
|
|
$
|
179,041,041
|
|
See accompanying notes to Consolidated Financial Statements.
F-5
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
31,383,355
|
|
$
|
51,992,304
|
|
$
|
18,823,784
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
4,253,661
|
|
|
3,607,184
|
|
|
2,709,623
|
|
Impairment loss of
goodwill
|
|
18,160,281
|
|
|
-
|
|
|
-
|
|
Loss on abandonment and write-off
of long-lived assets
|
|
6,603,028
|
|
|
-
|
|
|
-
|
|
Amortization
|
|
3,394,808
|
|
|
3,566,269
|
|
|
3,358,532
|
|
Loss on sale of property, plant
and equipment
|
|
166,934
|
|
|
120,224
|
|
|
224,548
|
|
Reversal of
allowance for doubtful accounts, net
|
|
(19,611
|
)
|
|
(57,624
|
)
|
|
(13,089
|
)
|
(Reversal of)/provision for doubtful accounts - other receivables and
prepayments
|
|
(10,254
|
)
|
|
475,346
|
|
|
280,796
|
|
Write-down of
obsolete inventories
|
|
270,929
|
|
|
451,761
|
|
|
519,333
|
|
Deferred tax benefit, net
|
|
(2,595,103
|
)
|
|
(1,101,171
|
)
|
|
(1,552,661
|
)
|
Stock compensation
|
|
4,896,232
|
|
|
2,341,783
|
|
|
62,281
|
|
Change in fair value of
derivative liabilities
|
|
(11,974,834
|
)
|
|
3,233,288
|
|
|
28,915,328
|
|
Amortization of
deferred note issuance cost
|
|
91,945
|
|
|
258,753
|
|
|
247,199
|
|
Amortization of discount on
convertible notes
|
|
3,503,767
|
|
|
1,590,740
|
|
|
100,253
|
|
Equity in income of
an equity method investee
|
|
(1,858,171
|
)
|
|
(1,070,241
|
)
|
|
(566,984
|
)
|
Change in
operating assets and liabilities, net of acquisition in Dalin:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
third parties
|
|
(6,343,922
|
)
|
|
(7,837,681
|
)
|
|
(1,707,714
|
)
|
Accounts receivable a related
party
|
|
217,180
|
|
|
17,158
|
|
|
197,284
|
|
Other receivables
|
|
134,623
|
|
|
182,686
|
|
|
(1,744,794
|
)
|
Inventories
|
|
(17,079,263
|
)
|
|
(16,026,215
|
)
|
|
(12,456,975
|
)
|
Prepayments and
prepaid expenses
|
|
(846,363
|
)
|
|
(91,307
|
)
|
|
(248,794
|
)
|
Accounts payable
|
|
431,836
|
|
|
505,407
|
|
|
(58,467
|
)
|
Other payables and
accrued expenses
|
|
6,098,105
|
|
|
(596,938
|
)
|
|
7,058,773
|
|
Accrued interest - noncontrolling
interest shareholders
|
|
-
|
|
|
(2,086,010
|
)
|
|
2,068,526
|
|
Advance from
customers
|
|
661,327
|
|
|
(429,497
|
)
|
|
274,768
|
|
Advance from customers a
related party
|
|
479,059
|
|
|
-
|
|
|
-
|
|
Income tax payable
|
|
(1,512,591
|
)
|
|
(1,046,906
|
)
|
|
2,943,767
|
|
Other taxes payable
|
|
(37,039
|
)
|
|
787,913
|
|
|
865,670
|
|
Net cash provided by
operating activities
|
|
38,469,919
|
|
|
38,787,226
|
|
|
50,300,987
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Dividends received
|
|
1,209,880
|
|
|
-
|
|
|
384,087
|
|
Acquisition of a
subsidiary, net of cash acquired
|
|
-
|
|
|
(4,063,325
|
)
|
|
1,573,079
|
|
Acquisition of equity method
investment
|
|
-
|
|
|
-
|
|
|
(3,225,420
|
)
|
Payment for
property, plant and equipment
|
|
(7,968,870
|
)
|
|
(10,313,432
|
)
|
|
(3,522,768
|
)
|
Payment for intangible assets
and land use right
|
|
(424,971
|
)
|
|
(1,474,718
|
)
|
|
(2,106,203
|
)
|
Proceeds from
sale of property, plant and equipment
|
|
56,709
|
|
|
-
|
|
|
36,771
|
|
Net cash used in investing activities
|
|
(7,127,252
|
)
|
|
(15,851,475
|
)
|
|
(6,860,454
|
)
|
See accompanying notes to Consolidated Financial Statements.
F-6
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from warrants exercised
|
|
-
|
|
|
1,232,486
|
|
|
3,649,770
|
|
Proceeds from
stock option exercised
|
|
300,000
|
|
|
97,600
|
|
|
350,000
|
|
Proceeds from issuance of
convertible notes
|
|
-
|
|
|
-
|
|
|
8,967,516
|
|
Acquisition of
noncontrolling interest
|
|
(7,635,000
|
)
|
|
-
|
|
|
-
|
|
Repayment of former shareholders
loan in a subsidiary
|
|
-
|
|
|
-
|
|
|
(2,841,302
|
)
|
Proceeds from
short term bank loans
|
|
18,595,200
|
|
|
5,917,600
|
|
|
13,536,688
|
|
Repayment of short term bank
loans
|
|
(10,847,200
|
)
|
|
(7,397,000
|
)
|
|
(18,355,572
|
)
|
Repayment of
noncontrolling interest shareholder loan
|
|
-
|
|
|
(3,683,377
|
)
|
|
(772,803
|
)
|
Dividends paid by subsidiaries
to noncontrolling interest shareholders
|
|
(10,489,504
|
)
|
|
(10,446,179
|
)
|
|
(2,969,372
|
)
|
Net cash (used
in)/provided by financing activities
|
|
(10,076,504
|
)
|
|
(14,278,870
|
)
|
|
1,564,925
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF FOREIGN EXCHANGE
RATE CHANGES ON CASH
|
|
3,204,304
|
|
|
2,440,536
|
|
|
23,877
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
24,470,467
|
|
|
11,097,417
|
|
|
45,029,335
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
64,941,368
|
|
|
53,843,951
|
|
|
8,814,616
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
$
|
89,411,835
|
|
$
|
64,941,368
|
|
$
|
53,843,951
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
15,007,206
|
|
$
|
15,756,832
|
|
$
|
8,021,981
|
|
Cash paid for
interest expense
|
$
|
890,312
|
|
$
|
810,643
|
|
$
|
1,131,271
|
|
Noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
Reclassification
of warrant liability to paid-in capital upon warrants exercise
|
$
|
-
|
|
$
|
3,045,704
|
|
$
|
4,921,639
|
|
Convertible notes conversion
|
$
|
12,972,000
|
|
$
|
7,447,095
|
|
$
|
2,187,330
|
|
Distribution paid by offsetting accounts
receivable - related party
|
$
|
-
|
|
$
|
-
|
|
$
|
944,036
|
|
Distribution paid in exchange of noncontrolling interest
shareholders loan
|
$
|
-
|
|
$
|
-
|
|
$
|
3,665,250
|
|
Distribution
paid by offsetting loan and interest due from holder of noncontrolling
interest
|
$
|
-
|
|
$
|
-
|
|
$
|
4,647,924
|
|
Net assets acquired with prepayments made in prior periods
|
$
|
-
|
|
$
|
-
|
|
$
|
14,250,492
|
|
Net assets acquired with unpaid investment
|
$
|
-
|
|
$
|
-
|
|
$
|
2,850,098
|
|
Transfer
from prepayments and deposits to property, plant and equipment
|
$
|
959,660
|
|
$
|
1,078,348
|
|
$
|
2,296,113
|
|
Land use right acquired with prepayments made
in prior periods
|
$
|
312,060
|
|
$
|
-
|
|
$
|
146,610
|
|
Acquisition of property, plant and equipment included in
payables
|
$
|
429,564
|
|
$
|
2,605,583
|
|
$
|
373,397
|
|
See accompanying notes to Consolidated Financial Statements.
F-7
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 2010 AND 2009
NOTE 1 ORGANIZATION BACKGROUND 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 then principle shareholders
entered into a share exchange agreement (the Exchange Agreement) with Taibang
Biological Ltd. (Taibang Biological, formerly known as Logic Express Ltd.),
a privately held investment holding company incorporated on January 6, 2006
under the laws of the British Virgin Islands, and all the shareholders of
Taibang Biological (the Taibang Biological Shareholders). Pursuant to the
terms of the Exchange Agreement, the Taibang Biological 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, Taibang Biological became a wholly-owned subsidiary of the Company and
the Taibang Biological 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, Taibang Biological, 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 Taibang Biological 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
the PRC. The PRC subsidiaries own and operate plasma stations that 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 that require government
approval 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 Taibang Biological,
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.
At the date of entering into the equity purchase agreement,
Dalin held 54% equity interest in Guiyang Qianfeng Biological Products Co., Ltd.
(Qianfeng), which subsequently changed its name to Guizhou Taibang Biological
Products Co., Ltd. (Guizhou Taibang) on December 30, 2010. Guizhou Taibang 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 Taibang Biotech (Shandong) Co., Ltd.
(Taibang Biotech, formerly known as Logic Management Consulting (China) Co.,
Ltd.), a wholly owned subsidiary of the Company. The Company established
Taibang Biotech in December 2009, for the purpose of being the holding company
of the 90% equity interest in Dalin.
On August 5, 2010, Taibang Biotech established a wholly-owned
subsidiary, Logic Taibang Biological Institute (Beijing), which subsequently
changed its name to Taibang (Beijing) Pharmaceutical Research Institute Co.,
Ltd. (Taibang Beijing) on January 12, 2011. The registered capital of Taibang
Beijing is $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 Companys PRC subsidiaries.
On January 13, 2010, Shandong Taibang acquired the remaining
20% equity interest in Fangcheng Plasma Company from the noncontrolling interest
shareholder (see Note 21). 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.
F-8
On July 8, 2010, Taibang Biotech 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 holder of Shandong Taibang, and to enable the Company to consolidate its resources in the sales and marketing of Shandong Taibang and Guizhou Taibang’s 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 December 31, 2011, Qianfeng Biologic, which is a
wholly-owned subsidiary of Guizhou Taibang, did not commence operations.
On January 4, 2011, Taibang Biotech entered into an equity transfer agreement (the “Equity Transfer Agreement”) with Shaowen Fan, a PRC individual. Pursuant to the Equity Transfer Agreement, Taibang Biotech 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 Taibang Biotech.
The carrying amount of noncontrolling interest in Dalin at time of the transaction was $2,870,065. The excess of the purchase price over the carrying amount of corresponding noncontrolling interest was recorded in additional paid-in capital.
On July 15, 2011, the Guizhou Provincial Health Department issued the revised “Plan for Guizhou Provincial Blood Collection Institutional Setting (2011-2014)”, which stipulates the number of counties that are permitted to set up plasma
collection stations in Guizhou Province is limited to four counties (the “Guizhou Plan”). As a result of the implementation of the Guizhou Plan, the licenses of four plasma collection stations in Dan Zhai, Wei Ning, San Sui and Na Yong
counties owned by Guizhou Taibang 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. In addition, Guizhou Taibang’s inactive plasma collection station in Guizhou Province that was purchased from the government in 2007 is unlikely to obtain a license as planned, because it is in
Zhengyuan County, a county not included in the Guizhou Plan.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), and include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the
useful lives of fixed assets; the allowance for doubtful accounts; the fair value determinations of financial and equity instruments and stock compensation awards, assets acquired and liabilities assumed in a business combination; the realizability
of deferred tax assets and inventories; the recoverability of goodwill, intangible asset, land use right and property, plant and equipment; and accruals for income tax uncertainties and other contingencies. The current economic environment has
increased the degree of uncertainty inherent in those estimates and assumptions.
Foreign Currency Translation
The accompanying consolidated financial statements of the Company are reported in US dollar. The financial position and results of operations of the Company’s subsidiaries in the PRC are measured using the Renminbi, which is the local and
functional currency of these entities. Assets and liabilities of the subsidiaries are translated at the prevailing exchange rate in effect at each period end. Income statement accounts are translated at the average rate of exchange during the
period. Translation adjustments are included in other comprehensive income in the consolidated statements of comprehensive income.
F-9
Revenue Recognition
Revenue is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the sales price is
fixed or determinable and collectability is reasonably assured. The Company
mainly sells human albumin and human immunoglobulin to hospitals, inoculation
centers and pharmaceutical distributors. For all sales, the Company requires a
contract or purchase order, which specify pricing, quantity and product
specifications. Delivery of the product occurs when the customer receives the
product, which is when the risks and rewards of ownership have been transferred.
A signed customer acceptance form evidences delivery of the product. Sales are
presented net of any discounts given to customers. For the years ended December
31, 2011, 2010 and 2009, there was no sales return from the customers.
Fair Value Measurements
The Company applies the provisions of ASC Subtopic 820-10,
Fair Value Measurements
, for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that
are recognized or disclosed at fair value in the financial statements. ASC
Subtopic 820-10 also establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The Company has included
these disclosures in Note 19 of the consolidated financial statements.
ASC Subtopic 820-10 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or
most advantageous market in which it would transact and it considers assumptions
that market participants would use when pricing the asset or liability.
ASC Subtopic 820-10 establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. ASC Subtopic 820-10
establishes three levels of inputs that may be used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to measurements involving significant unobservable inputs (Level
3 measurements). The three levels of the fair value hierarchy are as follows:
-
Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Company has the ability to access at
the measurement date.
-
Level 2 inputs are inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or indirectly.
-
Level 3 inputs are unobservable inputs for the asset or liability.
The level in the fair value hierarchy within which a fair value
measurement in its entirety falls is based on the lowest level input that is
significant to the fair value measurement in its entirety.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and demand
deposits. The Company considers all highly liquid investments with original
maturities of three-month or less at the time of purchase to be cash
equivalents. As of December 31, 2011 and 2010, the Company maintained cash at
banks in the following locations:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
PRC, excluding Hong Kong
|
$
|
88,721,453
|
|
$
|
64,332,623
|
|
Hong Kong
|
|
-
|
|
|
6,799
|
|
U.S.
|
|
236,373
|
|
|
103,894
|
|
Total
|
$
|
88,957,826
|
|
$
|
64,443,316
|
|
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do
not bear interest. The Company maintains an allowance for doubtful accounts for
estimated losses inherent in its accounts receivable portfolio. In establishing
the required allowance, management considers historical losses, the customers
financial condition, the amount of accounts receivables in dispute, the accounts
receivables aging and customers payment patterns. The Company reviews its
allowance for doubtful accounts monthly. Past due balances are reviewed
individually for collectability. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. The Company does not have any
off-balance-sheet credit exposure related to its customers.
F-10
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the weighted average method. Cost of work in progress and
finished goods comprise direct materials, direct production costs and an
allocation of production overheads based on normal operating capacity.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation on property, plant and equipment is
calculated on the straight-line method over the estimated useful lives of the
assets. Estimated useful lives of the assets are as follows:
Buildings
|
30 years
|
Machinery and equipment
|
10 years
|
Furniture, fixtures, office equipment and
vehicles
|
5-10 years
|
Equity method investment
Investment in an investee in which the Company has the ability
to exercise significant influence, but does not have a controlling interest is
accounted for using the equity method. Significant influence is generally
presumed to exist when the Company has an ownership interest in the voting stock
between 20% and 50%, and other factors, such as representation on the board of
directors and participation in policy-making processes, are considered in
determining whether the equity method of accounting is appropriate. Under the
equity method of accounting, the Companys share of the investees results of
operations is included in other income (expense) in the Companys consolidated
statements of comprehensive income. The Company recognizes a loss if it is
determined that other than temporary decline in the value of the investment
exists.
Intangible Assets
Intangible assets are stated at cost less accumulated
amortization. Amortization expense is recognized on the straight-line basis over
the assets estimated useful life, as the pattern in which the economic benefits
of the intangible assets are used up cannot be reliably determined. The
estimated useful live is the period over which the intangible asset is expected
to contribute directly or indirectly to the future cash flows of the Company.
The Company has no intangible assets with indefinite useful lives. The estimate
useful lives of intangible assets are as follows:
Permits and licenses
|
10 years
|
GMP Certificate
|
5.8 years
|
Long-term customer-relationship
|
4 years
|
Land use right
s
Land use rights represent the exclusive right to occupy and use
a piece of land in the PRC for a specified contractual term. Land use rights are
carried at cost, less accumulated amortization. Amortization is calculated using
the straight-line method over the lives of the rights ranging from 39 to 50
years.
Goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the net assets acquired. Goodwill is not amortized, but
is instead tested for impairment. Goodwill is reviewed for impairment annually
at reporting unit level in accordance with the provisions of FASB ASC Topic
350,
Intangibles - Goodwill and Other.
The goodwill impairment test is a
two-step test. Under the first step, the fair value of the reporting unit is
compared with its carrying value (including goodwill). If the fair value of the
reporting unit is less than its carrying value, an indication of goodwill
impairment exists for the reporting unit and the enterprise must perform step
two of the impairment test (measurement). Under step two, an impairment loss is
recognized for any excess of the carrying amount of the reporting units
goodwill over the implied fair value of that goodwill. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit in a
manner similar to a purchase price allocation and the residual fair value after
this allocation is the implied fair value of the reporting unit goodwill. The
Company determines it has one reporting unit, which is the Company as a whole.
Fair value of the reporting unit is determined using the quoted market price of
the Companys common stock. If the fair value of the reporting unit exceeds its
carrying value, step two does not need to be performed.
The Company performs its annual impairment review of goodwill
at each December 31, and when a triggering event occurs between annual
impairment tests. The Company recognized a goodwill impairment loss of
$18,160,281 for the year ended December 31, 2011 as described in Note 9. No
impairment of goodwill was recorded for the years ended December 31, 2010 and
2009.
F-11
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses for the years ended December 31, 2011, 2010 and 2009 were $3,978,233, $2,336,126 and $1,662,690, respectively. These expenses include the costs of
the Company’s internal research and development activities.
Product Liability
The Company’s products are covered by two separate product liability insurances each with coverages of approximately $3,148,000 (RMB 20,000,000) for the products sold by Shandong Taibang and Guizhou Taibang, respectively. There were no
product liability claims as of December 31, 2011 and 2010.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and tax loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of comprehensive income in the period that includes the enactment date. A valuation
allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax
positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to
unrecognized tax benefits in interest expense and penalties in general and administrative expenses.
Stock-based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the period during which an employee is required to provide
service in exchange for the award, which generally is the vesting period.
Impairment of Long-Lived Assets
In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10,
Property, Plant, and Equipment - Overall
, long-lived assets, such as property, plant and equipment, and purchased intangible asset subject
to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible
impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow
basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent
appraisals, as considered necessary. The Company recognized a loss on abandonment and write-off of long-lived assets of $6,603,028 for the year ended December 31, 2011 as described in Note 6 and Note 7.
Net income per Share
Basic net income per share of common stock is computed by dividing net income attributable to the Company by the weighted average number of common shares outstanding during the period. Diluted net income per share of common stock reflects the
potential dilution that would occur upon the exercise of outstanding warrants, options and the conversion of the convertible notes. Common share equivalents are excluded from the computation of the diluted net income per share of common stock when
their effect would be anti-dilutive.
Segment Reporting
The Company has one operating segment, which is the manufacture and sales of human blood products. Substantially all of the Company’s operations and customers are located in the PRC, and therefore, no geographic information is presented.
F-12
Contingencies
In the normal course of business, the Company is subject to
loss contingencies, such as legal proceedings and claims arising out of its
business, that cover a wide range of matters, including, among others,
government investigations and tax matters. An accrual for a loss contingency is
recognized when it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated.
Recently Issued Accounting Pronouncements
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. The Company early adopted ASU 2011-05 in the year ended
December 31, 2011.
In September 2011, the FASB issued ASU 2011-08,
Intangibles-Goodwill and Other (Topic 350). ASU 2011-08 permits an entity to
make a qualitative assessment of whether it is more likely than not that a
reporting units fair value is less than its carrying amount before applying the
two-step goodwill impairment test. If an entity concludes it is not more likely
than not that the fair value of a reporting unit is less than its carrying
amount, it need not perform the two-step impairment test. The ASU is effective
for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. Early adoption is permitted.
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2011 and 2010 consisted of
the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
17,171,460
|
|
$
|
11,160,751
|
|
Less: Allowance for doubtful accounts
|
|
(414,092
|
)
|
|
(1,238,640
|
)
|
Total
|
$
|
16,757,368
|
|
$
|
9,922,111
|
|
The activities in the allowance for doubtful accounts for the
years ended December 31, 2011, 2010 and 2009 are as follows:
|
|
For
the Years Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
December 31,2009
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts at beginning of year
|
$
|
1,238,640
|
|
$
|
1,254,955
|
|
$
|
1,268,052
|
|
Charged to bad debt expense
|
|
-
|
|
|
4,684
|
|
|
18,737
|
|
Recoveries of amounts
previously reserved
|
|
(19,611
|
)
|
|
(62,308
|
)
|
|
(31,826
|
)
|
Written-off
|
|
(837,975
|
)
|
|
-
|
|
|
-
|
|
Foreign currency translation
adjustment
|
|
33,038
|
|
|
41,309
|
|
|
(8
|
)
|
Allowance for doubtful accounts at end of
year
|
$
|
414,092
|
|
$
|
1,238,640
|
|
$
|
1,254,955
|
|
NOTE 4 INVENTORIES
Inventories at December 31, 2011 and 2010 consisted of the
following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
29,403,776
|
|
$
|
24,933,485
|
|
Work-in-process
|
|
21,385,806
|
|
|
15,262,139
|
|
Finished goods
|
|
20,549,008
|
|
|
12,104,823
|
|
Total
|
$
|
71,338,590
|
|
$
|
52,300,447
|
|
Raw materials are mainly comprised of 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, human immunoglobulin.
F-13
NOTE 5 OTHER RECEIVABLES
Other receivables at December 31, 2011 and 2010 consisted of
the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Advance to employees (1)
|
$
|
1,212,615
|
|
$
|
1,370,381
|
|
Dividends receivable
|
|
550,900
|
|
|
653,477
|
|
Deposits
|
|
627,584
|
|
|
403,702
|
|
Others
|
|
203,362
|
|
|
299,550
|
|
Total
|
$
|
2,594,461
|
|
$
|
2,727,110
|
|
(1)
|
In 2009, 107 employees of the Company entered into
agreements with developers in two housing projects. According to these
agreements, the employees placed deposits equal to 80% of the purchase
price of the residential units in these two housing projects with the
developers. To assist with their deposits, the Company entered into
separate agreements with the employees and provided employee advances up
to 50% of the purchase price of the residential units. The advances bear
an annual interest rate of 4.59%. As of December 31, 2011, these two
housing projects were still in construction stage. The Company expects the
employees to settle these advances by the end of
2012.
|
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2011 and 2010
consisted of the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Buildings
|
$
|
25,296,828
|
|
$
|
23,259,180
|
|
Machinery and equipment
|
|
29,891,291
|
|
|
27,028,171
|
|
Furniture, fixtures, office
equipment and vehicles
|
|
6,445,851
|
|
|
5,441,115
|
|
Total property, plant and equipment, gross
|
|
61,633,970
|
|
|
55,728,466
|
|
Accumulated depreciation
|
|
(21,744,060
|
)
|
|
(17,434,512
|
)
|
Total property, plant and equipment, net
|
|
39,889,910
|
|
|
38,293,954
|
|
Construction in progress
|
|
656,629
|
|
|
1,217,777
|
|
Property, plant and equipment, net
|
$
|
40,546,539
|
|
$
|
39,511,731
|
|
Depreciation expense for the years ended December 31, 2011,
2010 and 2009 was $4,253,661, $3,607,184 and $2,709,623, respectively. No
interest was capitalized into construction in progress for the years ended
December 31, 2011, 2010 and 2009. For the year ended December 31, 2011, the
Company recognized loss on abandonment of property, plant and equipment of
$1,410,379 as a result of the closure of the plasma collection stations of
Guizhou Taibang, as disclosed in Note 1.
NOTE 7 INTANGIBLE ASSETS, NET
Intangible assets at December 31, 2011 and 2010 consisted of
the following:
|
|
December 31, 2011
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
amortization
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
period
|
|
|
amount
|
|
|
amortization
|
|
|
amount
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits and licenses
|
|
10 years
|
|
$
|
4,946,791
|
|
|
(1,562,105
|
)
|
|
3,384,686
|
|
GMP certificate
|
|
5.8 years
|
|
|
2,504,990
|
|
|
(1,364,070
|
)
|
|
1,140,920
|
|
Long-term customer-relationship
|
|
4 years
|
|
|
7,457,612
|
|
|
(5,593,209
|
)
|
|
1,864,403
|
|
Others
|
|
|
|
|
233,030
|
|
|
(102,368
|
)
|
|
130,662
|
|
Total
|
|
|
|
$
|
15,142,423
|
|
|
(8,621,752
|
)
|
|
6,520,671
|
|
F-14
|
|
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 $3,270,131, $3,422,418 and $3,218,274, for the years ended December 31,
2011, 2010 and 2009, respectively. Estimated amortization expenses for the next
five years are $3,001,093 in 2012, $1,106,529 in 2013, $552,915 in 2014,
$552,862 in 2015, and $535,656 in 2016. For the year ended December 31, 2011,
the Company recognized loss on the write off of collection permits and licenses
of $5,192,649 as a result of the closure of the plasma collection stations of
Guizhou Taibang, as disclosed in Note 1.
NOTE 8 LAND USE RIGHTS, NET
At December 31, 2011 and 2010, land use rights represented:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Land use rights
|
$
|
6,018,783
|
|
$
|
5,091,592
|
|
Accumulated amortization
|
|
(531,440
|
)
|
|
(390,142
|
)
|
Land use rights, net
|
$
|
5,487,343
|
|
$
|
4,701,450
|
|
Aggregate amortization expense for land use right was $124,677,
$143,851 and $140,258, for the years ended December 31, 2011, 2010 and 2009,
respectively.
NOTE 9 GOODWILL
The changes in the carrying amount of goodwill for the years
ended December 31, 2011, 2010 and 2009 is as follows:
|
|
For the Years ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1
|
$
|
17,778,231
|
|
$
|
17,200,728
|
|
$
|
-
|
|
Addition
|
|
-
|
|
|
-
|
|
|
17,203,983
|
|
Impairment loss
|
|
(18,160,281
|
)
|
|
-
|
|
|
-
|
|
Foreign currency exchange difference
|
|
382,050
|
|
|
577,503
|
|
|
(3,255
|
)
|
Balance as of December 31
|
$
|
-
|
|
$
|
17,778,231
|
|
$
|
17,200,728
|
|
In accordance with FASB ASC Subtopic 350-20, Goodwill (ASC
350-20), goodwill is required to be tested for impairment annually and if an
event or conditions occur that is more likely than not would cause the fair
value of a reporting unit to be less than its carrying value.
The Company performs its annual goodwill impairment test on
December 31 and when a triggering event occurs between annual impairment tests.
As disclosed in Note 1, four active plasma stations of the Company were closed
from August 1, 2011 as a result of a regulatory order. Following the closure,
the Company revised its earnings guidance for the year of 2011 and experienced
incremental decline in its stock price and market capitalization in the third
quarter of 2011. Therefore the Company performed goodwill impairment test as of
September 30, 2011 to identify if goodwill should be impaired.
F-15
A two step process is used to test for goodwill impairment
under ASC 350-20. The first step is to determine if there is an indication of
impairment by comparing the estimated fair value of the reporting unit to its
carrying value including existing goodwill. Goodwill is considered impaired if
the carrying value of a reporting unit exceeds the estimated fair value. If an
indication of impairment exists under the first step, a second step is performed
to determine the amount of the impairment. This involves calculating the implied
fair value of goodwill by allocating the fair value of the reporting unit to all
assets and liabilities other than goodwill and comparing it to the carrying
amount of goodwill.
The fair value of the reporting unit for step one was
determined based on the quoted market price of the Companys common stock. The first step of the impairment test concluded that the carrying value of
the Companys reporting unit exceeded its fair value. As a result, the Company
performed the second step of the goodwill impairment test for its reporting
unit. The Company determined that the implied fair value of goodwill was nil.
Therefore, a goodwill impairment loss of $18,160,281 was recognized in the
quarter ended September 30, 2011. No impairment was recognized in the years
ended December 31, 2010 and 2009.
The testing of goodwill for impairment requires the Company to
make significant estimates about its future performance and cash flows, as well
as other assumptions. These estimates can be affected by numerous factors,
including changes in economic, industry or market conditions, changes in
business operations, changes in competition or potential changes in the share
price of its common stock and market capitalization.
NOTE 10 EQUITY METHOD INVESTMENT
The Companys equity method investment as of December 31, 2011
and 2010 represented 35% equity interest investment in Xian Huitian Blood
Products Co., Ltd. (Huitian).
In October 2008, Shandong Taibang entered into an equity
purchase agreement with one of the equity owners of Huitian (Seller) to
acquire 35% equity interest in Huitian, for cash consideration of $6,454,800 (or
RMB 44,000,000). In connection with this transaction, in October 2008, Taibang
Biological entered into an entrust agreement (the Entrust Agreement) with
Shandong Taibang and the noncontrolling interest holder of Shandong Taibang,
pursuant to which, Taibang Biological would pay the cash consideration,
including interest, of $6,502,901 to the Seller, and would bear the risks and
benefits as a 35% equity owner in Huitian. In addition, Taibang Biological would
pay Shandong Taibang $18,204 (or RMB 120,000) per year as compensation for the
administrative costs of Shandong Taibangs holding of the 35% equity interest in
Huitian on behalf of Taibang Biological. Such amount paid and received is
eliminated upon consolidation. Taibang Biological agreed to indemnify the
noncontrolling interest holder of Shandong Taibang for any loss arising from the
Entrust Agreement and has pledged the Companys equity interest in Shandong
Taibang as collateral against such loss.
The excess of cost over the Companys share of net assets of
equity method investees is $1,170,921 and $1,145,966 at December 31, 2011 and
2010, respectively. This equity method goodwill is not amortized; however, the
investment is reviewed for impairment.
The unaudited financial information for Huitian as of December
31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 is as
follows:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
15,356,410
|
|
$
|
12,406,517
|
|
Non-current assets
|
|
10,253,314
|
|
|
10,312,678
|
|
Total assets
|
|
25,609,724
|
|
|
22,719,195
|
|
Current liabilities
|
|
4,747,481
|
|
|
4,825,668
|
|
Non-current liabilities
|
|
330,540
|
|
|
318,570
|
|
Total liabilities
|
|
5,078,021
|
|
|
5,144,238
|
|
Owners equity
|
|
20,531,703
|
|
|
17,574,957
|
|
Total liabilities and owners equity
|
$
|
25,609,724
|
|
$
|
22,719,195
|
|
|
|
For the Years Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
Net sales
|
$
|
15,872,542
|
|
$
|
10,729,345
|
|
$
|
8,951,234
|
|
Earnings before income tax expense
|
|
6,200,032
|
|
|
3,694,582
|
|
|
2,100,164
|
|
Net income
|
|
5,309,059
|
|
|
3,057,831
|
|
|
1,619,951
|
|
Companys share of net income
|
$
|
1,858,171
|
|
$
|
1,070,241
|
|
$
|
566,984
|
|
F-16
NOTE 11 SHORT-TERM BANK LOANS
The Companys bank loans at December 31, 2011 and 2010
consisted of the following:
|
|
Maturity
|
|
|
Annual
|
|
|
December 31,
|
|
|
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%
|
|
|
3,148,000
|
|
|
-
|
|
Short-term bank loan,
unsecured
|
|
January 29, 2012
|
|
|
5.81%
|
|
|
1,574,000
|
|
|
-
|
|
Short-term bank loan, unsecured
|
|
January 29, 2012
|
|
|
6.06%
|
|
|
1,574,000
|
|
|
-
|
|
Short-term bank loan,
unsecured
|
|
May 19, 2012
|
|
|
6.31%
|
|
|
4,722,000
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
$
|
11,018,000
|
|
$
|
3,034,000
|
|
Interest expense totaling $705,426, $291,725 and $1,098,939 was
incurred during the years ended December 31, 2011, 2010 and 2009, respectively.
The Company did not have any revolving line of credit as of
December 31, 2011 and 2010.
(1) As of December 31, 2011, the secured loan was secured by
the Companys buildings with a net carrying amount of $1,644,480.
NOTE 12 OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses at December 31, 2011 and
2010 consisted of the following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Payables to potential
investors
(1)
|
$
|
8,259,232
|
|
$
|
7,634,430
|
|
Salaries and bonuses payable
|
|
7,259,978
|
|
|
4,588,641
|
|
Accruals for selling
commission and promotion fee
|
|
7,999,892
|
|
|
3,113,516
|
|
Dividends payable to non-controlling interest
holders
|
|
4,344,240
|
|
|
-
|
|
Payable for construction work
|
|
429,564
|
|
|
2,605,583
|
|
Accruals for legal and penalties
|
|
-
|
|
|
857,899
|
|
Others
|
|
2,368,888
|
|
|
2,806,661
|
|
Total
|
$
|
30,661,794
|
|
$
|
21,606,730
|
|
(1)
|
The payables to potential investors comprise deposits
received from potential strategic investors of $6,258,224 (or RMB
39,760,000) and $6,031,592 (or RMB 39,760,000) as of December 31, 2011 and
2010, respectively, and related interest on these deposits of $2,001,008
and $1,602,838 as of December 31, 2011 and 2010, respectively.
|
|
|
|
In 2007, Guizhou Taibang received an aggregate amount of
RMB 50,960,000 (or $7,506,408) from certain potential strategic investors
in connection with their subscription to purchase shares in Guizhou
Taibang. The registration of the new investors as Guizhou Taibangs
shareholders and the related increase in registered capital of Guizhou
Taibang with the Administration for Industry and Commerce are pending due
to shareholders dispute as described in the legal proceeding section (see
Note 21). During the year ended December 31, 2010, the Company refunded
RMB 11,200,000 (or $1,699,040) to one of the potential
investors.
|
F-17
NOTE 13 INCOME TAX
The Company and each of its subsidiaries file separate income
tax returns.
The United States of America
The Company is incorporated in the State of Delaware in the
U.S., and is subject to U.S. federal corporate income tax at gradual rates of up
to 35%.
British Virgin Islands
Taibang Biological is incorporated in the British Virgin
Islands. Under the current laws of the British Virgin Islands (BVI), Taibang
Biological is not subject to tax on income or capital gains. In addition, upon
payments of dividends by Taibang Biological, no British Virgin Islands
withholding tax is imposed.
Hong Kong
Taibang Holdings (Hong Kong) Limited (Taibang Holdings,
formerly known as Logic Holdings (Hong Kong) Limited) is incorporated in Hong
Kong and is subject to Hong Kongs profits tax rate of 16.5% for the years ended
December 31, 2011, 2010 and 2009. Taibang Holdings did not earn any income that
was derived in Hong Kong for the years ended December 31, 2011, 2010 and 2009.
The payments of dividends by Hong Kong companies are not subject to any Hong
Kong withholding tax.
PRC
The PRCs statutory income tax rate is 25%. The Companys PRC
subsidiaries are subject to income tax at 25% unless otherwise specified.
On February 12, 2009, Shandong Taibang received the High and
New Technology Enterprise certificate from the Shandong provincial government.
This certificate entitled Shandong Taibang to pay income taxes at a 15%
preferential income tax rate for a period of three years from 2008 to 2010. On
October 31, 2011, Shandong Taibang was issued a notice from the Shandong
provincial government that the High and New Technology Enterprise qualification
has been renewed for an additional three years from 2011 to 2013.
Guizhou Taibang was entitled to the preferential income tax
rate of 15% under the 10-year Western Development Tax Concession, which ended in
2010. According to CaiShui [2011] No. 58 dated July 27, 2011, qualified
enterprises located in the western regions of PRC are entitled to continue to
pay income taxes at a preferential income tax rate of 15% effective
retroactively from January 1, 2011. Management believes Guizhou Taibang is a
qualified enterprise located in the western regions and therefore is subject to
a preferential tax rate of 15% from 2011 to 2020.
The components of earnings (losses) before income taxes by
jurisdictions are as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
PRC, excluding Hong Kong
|
$
|
42,616,865
|
|
$
|
78,868,026
|
|
$
|
63,888,439
|
|
U.S.
|
|
(1,403,437
|
)
|
|
(11,948,208
|
)
|
|
(32,201,127
|
)
|
BVI
|
|
1,645,364
|
|
|
(474,777
|
)
|
|
(778,293
|
)
|
Hong Kong
|
|
(575,924
|
)
|
|
(843,982
|
)
|
|
(2,071,672
|
)
|
Total
|
$
|
42,282,868
|
|
$
|
65,601,059
|
|
$
|
28,837,347
|
|
Income tax expense for the years ended December 31, 2011, 2010
and 2009 represents PRC current income tax expense and deferred tax benefit:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense
|
$
|
13,494,616
|
|
$
|
14,709,926
|
|
$
|
11,566,224
|
|
Deferred tax benefit
|
|
(2,595,103
|
)
|
|
(1,101,171
|
)
|
|
(1,552,661
|
)
|
|
$
|
10,899,513
|
|
$
|
13,608,755
|
|
$
|
10,013,563
|
|
F-18
Reconciliation between income tax expense and the amounts
computed by applying the PRC statutory tax rate of 25% to earnings before income
tax expense is as follows:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Computed expected tax expense
|
$
|
10,570,717
|
|
$
|
16,400,263
|
|
$
|
7,209,337
|
|
Non-taxable income
|
|
(957,791
|
)
|
|
(215,874
|
)
|
|
(19,035
|
)
|
Non-deductible expenses:
|
|
|
|
|
|
|
|
|
|
Salary and welfare
|
|
51,575
|
|
|
429,134
|
|
|
434,323
|
|
Share-based
compensation
|
|
1,664,719
|
|
|
796,206
|
|
|
21,176
|
|
Fair value change of derivatives
|
|
-
|
|
|
-
|
|
|
9,831,212
|
|
Convertible
notes interest
|
|
-
|
|
|
-
|
|
|
102,683
|
|
Bad debt expense
|
|
-
|
|
|
887,320
|
|
|
-
|
|
Impairment loss
on goodwill
|
|
4,540,070
|
|
|
-
|
|
|
-
|
|
Loss on write-off of long-lived
assets
|
|
352,595
|
|
|
-
|
|
|
-
|
|
Others
|
|
237,497
|
|
|
752,722
|
|
|
497,394
|
|
Tax rate differential
|
|
671,657
|
|
|
(745,649
|
)
|
|
(2,185,610
|
)
|
Effect of change in tax rate
on deferred tax
|
|
(776,497
|
)
|
|
(721,584
|
)
|
|
-
|
|
Effect of PRC preferential tax rate
|
|
(7,710,376
|
)
|
|
(8,126,918
|
)
|
|
(6,722,020
|
)
|
Bonus deduction on research
and development expenses
|
|
(502,122
|
)
|
|
(175,210
|
)
|
|
(124,702
|
)
|
Change in valuation allowance
|
|
830,497
|
|
|
2,806,835
|
|
|
477,944
|
|
PRC dividend withholding tax
|
|
1,295,194
|
|
|
1,331,631
|
|
|
490,861
|
|
Tax effect of equity method investment
|
|
631,778
|
|
|
189,879
|
|
|
-
|
|
Income tax expense
|
$
|
10,899,513
|
|
$
|
13,608,755
|
|
$
|
10,013,563
|
|
The PRC tax rate has been used because the majority of the
Companys consolidated pre-tax earnings arise in the PRC.
As of December 31, 2011 and 2010, significant temporary
differences between the tax basis and financial statement basis of assets and
liabilities that gave rise to deferred taxes were principally related to the
following:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Deferred tax assets arising
from:
|
|
|
|
|
|
|
-Accrued expenses
|
$
|
1,999,563
|
|
$
|
1,860,753
|
|
-Derivative liabilities
|
|
1,839,542
|
|
|
5,881,778
|
|
-Tax loss carryforwards
|
|
5,328,444
|
|
|
2,575,574
|
|
Gross deferred tax assets
|
|
9,167,549
|
|
|
10,318,105
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
(7,167,986
|
)
|
|
(8,457,352
|
)
|
Net deferred tax assets
|
$
|
1,999,563
|
|
$
|
1,860,753
|
|
|
|
|
|
|
|
|
Deferred tax liabilities arising from:
|
|
|
|
|
|
|
- Intangible assets
|
|
924,527
|
|
|
3,458,903
|
|
- Property, plant and
equipment
|
|
292,111
|
|
|
445,226
|
|
- Equity method investment
|
|
469,134
|
|
|
194,705
|
|
Deferred tax liabilities
|
$
|
1,685,772
|
|
$
|
4,098,834
|
|
|
|
|
|
|
|
|
Classification on
consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
current, net
|
$
|
1,999,563
|
|
$
|
1,860,753
|
|
|
|
|
|
|
|
|
Deferred tax liabilities -
non-current, net
|
$
|
1,685,772
|
|
$
|
4,098,834
|
|
F-19
The deferred tax assets of $5,328,444 for tax loss
carryforwards as of December 31, 2011, of which $1,571,284 and $3,757,160 relate
to tax loss carryforwards of certain PRC subsidiaries and the Company,
respectively. For PRC income tax purposes, certain of the Companys PRC
subsidiaries had tax loss carryforwards of $6,285,136, of which $1,118,311 and
$5,166,825 would expire in December 2015 and 2016, respectively, if unused. For
United States federal income tax purposes, the Company had tax loss
carryforwards of approximately $11,050,469, of which $1,268,307, $614,982,
$1,113,597, $1,405,718, $2,350,326 and $4,297,539 would expire on December 31,
2026, 2027, 2028, 2029, 2030 and 2031, respectively, if unused. In view of their
cumulative losses positions, management determined it is more likely than not
that deferred tax assets of these PRC subsidiaries and the Company will not be
realized, and therefore full valuation allowances were provided as of December
31, 2011 and 2010. The increase in valuation allowance during the
years ended December 31, 2011, 2010 and 2009 was $830,497, $2,806,835 and
$477,944, respectively. Management believes it is more likely than not that the
Company will realize the benefits of the deferred tax assets, net of the
valuation allowances, as of December 31, 2011 and December 31, 2010.
According to the prevailing PRC income tax law and relevant
regulations, dividends relating to earnings accumulated beginning on January 1,
2008 that are received by non-PRC-resident enterprises from PRC-resident
enterprises are subject to withholding tax at 10%, unless reduced by tax
treaties or similar arrangement. Dividends relating to undistributed earnings
generated prior to January 1, 2008 are exempt from such withholding tax.
Further, dividends received by the Company from its overseas subsidiaries are
subject to the U.S. federal income tax at 34%, less any qualified foreign tax
credits. Due to the Companys plan and intention of reinvesting its earnings in
its overseas business, the Company has not provided for the related deferred tax
liabilities on undistributed earnings of $103 million and $90 million as of
December 31, 2011 and 2010, respectively. It is not practicable to estimate the
amounts of unrecognized deferred tax liabilities thereof.
As of January 1, 2009 and for each of the years ended December
31, 2009, 2010 and 2011, the Company and its subsidiaries did not have any
unrecognized tax benefits, and therefore no interest or penalties related to
unrecognized tax benefits were accrued. The Company does not expect that the
amount of unrecognized tax benefits will change significantly within the next 12
months.
The Company and each of its PRC subsidiaries file income tax
returns in the United States and the PRC, respectively. The Company is subject
to U.S. federal income tax examination by tax authorities for tax years
beginning in 2007. According to the PRC Tax Administration and Collection Law,
the statute of limitations is three years if the underpayment of taxes is due to
computational errors made by the taxpayer or the withholding agent. The statute
of limitations is extended to five years under special circumstances where the
underpayment of taxes is more than RMB100,000 ($15,000). In the case of transfer
pricing issues, the statute of limitations is ten years. There is no statute of
limitations in the case of tax evasion. The PRC tax returns for the Companys
PRC subsidiaries are open to examination by the PRC tax authorities for the tax
years beginning in 2006.
NOTE 14 CONVERTIBLE NOTES
|
|
December 31, 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 (the Warrant Shares 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 5,
2011, by acceleration or otherwise. Interest on the Notes is due and payable in
cash semi-annually on September 30 and March 31 of each year, commencing 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.
F-20
The Warrants have a term of 3 years, with an exercise price of
$4.80 per share, subject to adjustments as provided in the Warrants, from time
to time pursuant to anti-dilution and other customary provisions, and are
exercisable by the Investors at any time after the date on which their related
Notes are converted, except that if any of the Notes is 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, representing
6.1% of the proceeds received in connection with the issuance of the Notes, and
a 3-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
and amortized over the life of the Notes.
The Notes are secured by 3,000,000 shares of common stock of
the Company held by Siu Ling Chan (Ms. Chan), the Companys board of directors
chairwoman 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, 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 December 31, 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 are
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 (see Note 15) 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 consolidated statements
of comprehensive 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 comprehensive income. For the years
ended December 31, 2011, 2010 and 2009, the interest expenses were $3,582,648,
$1,849,493 and $302,010, respectively.
NOTE 15 WARRANTS AND OPTIONS
Warrants
In connection with the issuance of the Notes (see Note 14), 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.
F-21
The summary of warrant activities is as follows:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
Warrants
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2009
|
|
1,284,000
|
|
|
2.84
|
|
|
2.55
|
|
Granted
|
|
1,288,018
|
|
|
4.89
|
|
|
2.44
|
|
Exercised
|
|
(1,284,000
|
)
|
|
2.84
|
|
|
1.80
|
|
December 31, 2009
|
|
1,288,018
|
|
|
4.89
|
|
|
2.44
|
|
Granted
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised-cash
|
|
(256,768
|
)
|
|
4.80
|
|
|
1.44
|
|
Exercised-cashless
|
|
(93,750
|
)
|
|
6.00
|
|
|
1.44
|
|
December 31, 2010
|
|
937,500
|
|
|
4.80
|
|
|
1.44
|
|
Granted
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
-
|
|
December 31, 2011
|
|
937,500
|
|
|
4.80
|
|
|
0.44
|
|
During the year ended December 31, 2010, the placement agents
executed cashless exercise of all the 93,750 placement agent warrants and
received 37,250 shares of the Companys common stock.
The fair values of the warrants outstanding as of December 31,
2011 and 2010 were determined based on the Binominal option pricing model, using
the following key assumptions:
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
0.05%
|
|
|
0.43%
|
|
Time to maturity (in years)
|
|
0.43
|
|
|
1.43
|
|
Expected volatility
|
|
80.0%
|
|
|
70.0%
|
|
Fair value of underlying
common shares (per share)
|
$
|
10.46
|
|
$
|
16.39
|
|
Changes in the managements estimates and assumptions regarding
the expected volatility and valuation of Companys common stock could
significantly impact the estimated fair values 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.
Change in fair value of derivative liabilities for the years
ended December 31, 2009, 2010 and 2011 is set forth below:
|
|
|
|
|
Increase/(decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
in fair value
|
|
|
Fair value at
|
|
|
Fair value at
|
|
|
Fair value
|
|
|
|
at January
|
|
|
for the year ended
|
|
|
date of warrants
|
|
|
date of Notes
|
|
|
at December
|
|
|
|
1, 2009
|
|
|
December 31, 2009
|
|
|
exercise
|
|
|
conversion
|
|
|
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion option in
the Notes
|
$
|
6,552,505
|
|
$
|
15,575,928
|
|
$
|
-
|
|
$
|
(2,168,288
|
)
|
$
|
19,960,145
|
|
Warrants issued to Investors
|
|
3,826,896
|
|
|
7,977,356
|
|
|
-
|
|
|
-
|
|
|
11,804,252
|
|
Warrants issued to placement
agent
|
|
287,615
|
|
|
609,395
|
|
|
-
|
|
|
-
|
|
|
897,010
|
|
2006 Warrants
|
|
994,251
|
|
|
3,927,388
|
|
|
(4,921,639
|
)
|
|
-
|
|
|
-
|
|
Loss upon issuance of the
Notes (see Note 14)
|
|
-
|
|
|
825,261
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
11,661,267
|
|
$
|
28,915,328
|
|
$
|
(4,921,639
|
)
|
$
|
(2,168,288
|
)
|
$
|
32,661,407
|
|
|
|
|
|
|
Increase/(decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
in fair value
|
|
|
Fair value at
|
|
|
Fair value at
|
|
|
Fair value
|
|
|
|
at January
|
|
|
for the year ended
|
|
|
date of warrants
|
|
|
date of Notes
|
|
|
at December
|
|
|
|
1, 2010
|
|
|
December 31, 2010
|
|
|
exercise
|
|
|
conversion
|
|
|
31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion option in
the Notes
|
$
|
19,960,145
|
|
$
|
1,793,254
|
|
$
|
-
|
|
$
|
(7,191,738
|
)
|
$
|
14,561,661
|
|
Warrants issued to Investors
|
|
11,804,252
|
|
|
1,668,067
|
|
|
(2,376,727
|
)
|
|
-
|
|
|
11,095,592
|
|
Warrants issued to placement
agent
|
|
897,010
|
|
|
(228,033
|
)
|
|
(668,977
|
)
|
|
-
|
|
|
-
|
|
Total
|
$
|
32,661,407
|
|
$
|
3,233,288
|
|
$
|
(3,045,704
|
)
|
$
|
(7,191,738
|
)
|
$
|
25,657,253
|
|
F-22
|
|
|
|
|
Increase/(decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
in fair value
|
|
|
Fair value at
|
|
|
Fair value at
|
|
|
Fair value
|
|
|
|
at January
|
|
|
for the year ended
|
|
|
date of warrants
|
|
|
date of Notes
|
|
|
at December
|
|
|
|
1,
2011
|
|
|
December 31, 2011
|
|
|
exercise
|
|
|
conversion
|
|
|
31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion option in the Notes
|
$
|
14,561,661
|
|
$
|
(6,289,661
|
)
|
$
|
-
|
|
$
|
(8,272,000
|
)
|
$
|
-
|
|
Warrants issued to Investors
|
|
11,095,592
|
|
|
(5,685,173
|
)
|
|
-
|
|
|
-
|
|
|
5,410,419
|
|
Total
|
$
|
25,657,253
|
|
$
|
(11,974,834
|
)
|
$
|
-
|
|
$
|
(8,272,000
|
)
|
$
|
5,410,419
|
|
Options
Effective May 9, 2008, the Board of Directors adopted the China
Biologic Products, Inc. 2008 Equity Incentive Plan, or the 2008 Plan. The 2008
Plan provides for grants of stock options, stock appreciation rights,
performance units, restricted stock, restricted stock units and performance
shares. A total of five million (5,000,000) shares of the Companys common stock may be
issued pursuant to the 2008 Plan. The exercise price per share for the shares to
be issued pursuant to an exercise of a stock option will be no less than the
fair market value per share on the grant date, except that, in the case of an
incentive stock option granted to a person who holds more than 10% of the total
combined voting power of all classes of the Companys stock or any of its subsidiaries,
the exercise price will be no less than 110% of the fair market value per share
on the grant date. No more than an aggregate of 500,000 shares (or for awards
denominated in cash, the fair market value of 5,000,000 shares on the grant
date) may be subject to awards under the 2008 Plan to any individual participant
in any one fiscal year. No awards may be granted under the 2008 Plan after May
9, 2018, except that any award granted before then may extend beyond that date.
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 at an exercise price of $4.00 that vest immediately.
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 at an exercise price of $4.00, of which 30,000 shares vested on
January 24, 2009 and the remaining 30,000 shares vested 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 at
an exercise price of $12.60 that vested immediately. 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 at an exercise price of $10.66, of which 10,000 shares vested on
August 4, 2010 and the remaining 10,000 shares vested 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 at 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 at 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 at 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 at an exercise price of $17.00, of which 10,000 shares vested on
August 27, 2011 and the remaining 10,000 shares vested on February 27, 2012.
These options expire on February 27, 2021.
On October 6, 2011, the Board of Directors granted options to a
newly appointed director for the purchase of 20,000 shares of the Companys
common stock at an exercise price of $5.97, of which 10,000 shares vest on April
7, 2012 and the remaining 10,000 shares vest on October 7, 2012. These options
expire on October 6, 2021.
The fair value of each option granted on May 9, 2008, July 24,
2008, January 7, 2010, February 4, 2010, July 11, 2010, January 1, 2011,
February 1, 2011, February 27, 2011 and October 6, 2011 are estimated on the
respective dates of grant using the Black-Scholes option pricing model with the
following major assumptions:
F-23
Granted on
|
|
May 9,
|
|
|
July 24,
|
|
|
January 7,
|
|
|
February
|
|
|
July 11,
|
|
|
January 1,
|
|
|
February 1,
|
|
|
February 27,
|
|
|
October 6,
|
|
|
|
2008
|
|
|
2008
|
|
|
2010
|
|
|
4, 2010
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
Expected dividend yield
|
|
0%
|
|
|
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%
|
|
|
0.96%
|
|
Expected term (in years)
|
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
6.5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Expected volatility
|
|
59.4%
|
|
|
81.2%
|
|
|
130.0%
|
|
|
130.0%
|
|
|
135.0%
|
|
|
70.0%
|
|
|
70.0%
|
|
|
70.0%
|
|
|
65.0%
|
|
The volatility of the Companys common stock was estimated by
management based on the historical volatility of the Companys common stock. The
risk free interest rate was based on Treasury Constant Maturity Rates published
by the U.S. Federal Reserve for periods applicable to the estimated 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 and valuation of the Companys common stock
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 was $8.95 and $10.70
during 2011 and 2010, respectively. The total intrinsic value of options
exercised during the years ended December 31, 2011, 2010 and 2009 was $635,250,
$386,332 and $437,474, respectively. For the years ended December 31, 2011, 2010
and 2009, the Company recorded stock compensation expense of $4,896,232,
$2,341,783 and $62,281, respectively, in general and administrative expenses. As
of December 31, 2011, approximately $5,379,040 of stock compensation expense
with respect to non-vested stock-based awards is to be recognized over
approximately 2.5 years. The options activity is as follows:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Options
|
|
|
Average Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Contractual Life
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2010
|
|
910,000
|
|
$
|
4.00
|
|
|
8.43
|
|
$
|
7,352,800
|
|
Granted
|
|
1,041,000
|
|
|
12.25
|
|
|
9.22
|
|
|
|
|
Exercised - cash
|
|
(24,400
|
)
|
|
4.00
|
|
|
7.42
|
|
|
|
|
Exercised - cashless
|
|
(20,000
|
)
|
|
4.00
|
|
|
7.42
|
|
|
|
|
December 31, 2010
|
|
1,906,600
|
|
$
|
8.50
|
|
|
8.55
|
|
$
|
15,039,114
|
|
Granted
|
|
175,000
|
|
|
15.28
|
|
|
9.15
|
|
|
|
|
Exercised
|
|
(75,000
|
)
|
|
4.00
|
|
|
6.41
|
|
|
|
|
Forfeited
|
|
(12,000
|
)
|
|
12.26
|
|
|
8.53
|
|
|
|
|
December 31, 2011
|
|
1,994,600
|
|
$
|
9.24
|
|
|
7.71
|
|
$
|
5,197,076
|
|
Vested and expected to vest
|
|
1,994,600
|
|
$
|
9.24
|
|
|
7.71
|
|
$
|
5,197,076
|
|
Exercisable
|
|
1,366,433
|
|
$
|
7.79
|
|
|
7.29
|
|
$
|
5,107,276
|
|
During the year ended December 31, 2010, a holder of the share
options executed cashless exercise of 20,000 share options and received 12,730
shares of common stock of the Company.
NOTE 16 INTEREST EXPENSE (INCOME)
Interest expense (income), net for the years ended December 31,
2011, 2010 and 2009 comprised as following:
Interest expense (income), net
|
|
For the Years Ended
|
|
|
|
December 31, 2011
|
|
|
December 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
bank loans
|
$
|
735,728
|
|
$
|
291,725
|
|
$
|
1,098,939
|
|
Interest expense noncontrolling
interest holder
|
|
-
|
|
|
-
|
|
|
2,068,897
|
|
Interest expense
potential investors
|
|
332,705
|
|
|
405,778
|
|
|
1,072,216
|
|
Interest expense Notes
|
|
3,582,648
|
|
|
1,849,493
|
|
|
302,010
|
|
Interest expense
other
|
|
19,525
|
|
|
135,486
|
|
|
-
|
|
Interest income
|
|
(1,356,950
|
)
|
|
(752,317
|
)
|
|
(611,813
|
)
|
Total
|
$
|
3,313,656
|
|
$
|
1,930,165
|
|
$
|
3,930,249
|
|
NOTE 17 STATUTORY RESERVES
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 respective registered capital. The accumulated
balance of the statutory reserve as of December 31, 2011 and 2010 was
$30,753,726 and $28,820,686, respectively.
F-24
NOTE 18 BUSINESS COMBINATION
As disclosed under Note 1, on September 26, 2008, the Company
entered into an equity purchase agreement with Dalin and certain equity owners
of Dalin (Equity Owners of Dalin), to purchase 90% equity interest in Dalin,
for cash consideration of RMB194,400,000 (approximately $28.9 million)
(Consideration), payable in four installments. Dalin in turns held a 54%
equity interest in Qianfeng and subsequently renamed as Guizhou Taibang on
December 30, 2010. Pursuant to the equity purchase agreement (i) if the Company
pays RMB 174,960,000 (approximately $25.6 million), representing 90% of the
Consideration, on or before April 7, 2009, the Company will be entitled to share
Dalins portion of the profit generated by Qianfeng starting from January 1,
2009, and (ii) if the Company fails to pay RMB174,960,000 on or before April 7,
2009, the profit generated by Qianfeng from January 1, 2009 until the day of
payment of RMB174,960,000 will be shared by the Company and the Equity Owners of
Dalin on a proportionate basis. In addition, the final installment, representing
the 10% of the Consideration, should be paid on or before April 9, 2010 with
interest accruing at 5.31% per annum.
The Company initiated payment of the third installment of the
Consideration on April 7, 2009, in accordance with the instructions provided by
Equity Owners of Dalin, which was subsequently paid on April 8 and April 14,
2009. The payment was deemed by Equity Owners of Dalin to have fulfilled the
Companys obligations under the equity purchase agreement. As a result, the
Company was entitled to all the rights and privileges of a 90% shareholder in
Dalin, including the right to receive its pro rata share of the profits
generated by Dalins 54% owned subsidiary, Qianfeng, since January 2009. As
disclosed in note 21, the Companys effective equity interest in Qianfeng is
subject to a possible dilution to as low as 41.3%, if potential investors of
Qianfeng prevail in a lawsuit to obtain additional equity interests in Qianfeng,
or to 52.45%, if the Company decides to ratify a dissenting Qianfeng
shareholders request to register its additional capital infusion. The Company
paid a substantial portion of the final installment, representing 10% of the
Consideration, on April 9, 2010.
According to the equity purchase agreement, as amended, the
Company can exercise its shareholders rights, as well as to take control over
all the corporate seals and license of Dalin upon the payment of the second
installment, which was paid by the Company on December 14, 2008. However,
Dalins related voting power over its subsidiary, Qianfeng, was not transferred
to the Company until the Companys nominees gained control of the board of
directors and the management positions of Qianfeng on January 16, 2009. The
Companys four nominees were elected to Qianfengs seven-member Board of
Directors in a special meeting on January 16, 2009. In addition, on the same
date, Qianfengs Board of Directors elected a new management team consisting of
all Companys appointees, including Chief Executive Officer, Executive Senior
Vice President, Chief Financial Officer and Director of Sales. Therefore, the
Company believes that January 16, 2009, the date on which the Company legally
obtained control, acquired the assets, assumed the liabilities and became
entitled to Dalins share of the profit generated by Qianfeng, as the
acquisition date. The results of Dalins and its subsidiaries operations from
January 1, 2009 through December 31, 2009 are included in the Companys
consolidated statements of comprehensive income.
The following table summarizes the fair value of the assets
acquired and liabilities assumed at the date of acquisition:
Considerations:
|
|
|
|
Cash consideration payable by the Company
|
$
|
28,891,932
|
|
Fair value of noncontrolling interest
|
|
21,525,059
|
|
|
$
|
50,416,991
|
|
|
|
|
|
Current assets
|
$
|
26,883,246
|
|
Property, plant and equipment, net
|
|
8,098,959
|
|
Intangibles
|
|
|
|
- Plasma collection permits
|
|
10,891,092
|
|
- Land use rights
|
|
1,285,968
|
|
- Long-term
customer-relationship
|
|
6,955,384
|
|
- GMP Certificate
|
|
2,332,652
|
|
- Software
|
|
6,312
|
|
Other non-current assets
|
|
3,449,162
|
|
Total assets
|
|
59,902,775
|
|
Total liabilities
|
|
(21,911,373
|
)
|
Deferred tax liabilities
|
|
(4,749,099
|
)
|
Total identifiable net assets acquired
|
|
33,242,303
|
|
Goodwill
|
|
17,174,688
|
|
Total
|
$
|
50,416,991
|
|
F-25
The fair values of the assets acquired and liabilities assumed
were determined by management with the assistance of an independent appraisal.
The fair values of the assets acquired, liabilities assumed and noncontrolling
interest were primarily estimated using a combination of income approach, cost
approach and market approach valuation techniques. A goodwill of $17.2 million,
representing the excess of the consideration and fair value of noncontrolling
interest over the fair values assigned to assets acquired and liabilities
assumed, was recognized at the acquisition date. The goodwill is mainly for the
synergies and cost reduction expected to be achieved. The acquired goodwill is
not deductible for tax purposes. The transaction costs of the acquisition were
not material, and have been recorded in general and administrative expenses.
NOTE 19 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 accounts receivables, other
receivables, short-term loans, accounts payable, other payables and accrued
expenses, accrued interest, and amounts 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. The carrying amounts of
the long-term payable approximate their fair values.
-
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 December 31, 2011
and 2010.
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active Markets
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Financial Assets
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
and Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
December 31, 2011
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities Warrants
|
$
|
5,410,419
|
|
$
|
-
|
|
$
|
5,410,419
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
-
|
|
NOTE 20 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 years ended December 31, 2011, 2010 and
2009 are as follows:
|
|
For the Years Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Human Albumin
|
$
|
83,433,691
|
|
$
|
67,069,080
|
|
$
|
59,160,664
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
|
|
|
Human Hepatitis B Immunoglobulin
|
|
7,298,062
|
|
|
10,622,455
|
|
|
3,462,979
|
|
Human Immunoglobulin for Intravenous Injection
|
|
49,482,514
|
|
|
47,952,716
|
|
|
43,748,854
|
|
Human Rabies Immunoglobulin
|
|
2,225,812
|
|
|
7,458,151
|
|
|
4,745,205
|
|
Human Tetanus Immunoglobulin
|
|
7,145,195
|
|
|
4,051,535
|
|
|
2,600,071
|
|
Human Immunoglobulin
|
|
-
|
|
|
1,037,429
|
|
|
2,159,246
|
|
Others
|
|
3,507,015
|
|
|
1,504,051
|
|
|
3,121,136
|
|
Totals
|
$
|
153,092,289
|
|
$
|
139,695,417
|
|
$
|
118,998,155
|
|
F-26
The Company sells its human blood products to customers in
China and India. The amount of human blood products sold to customers in India
was less than 10% of total sales for the years ended December 31, 2011, 2010 and
2009, respectively.
NOTE 21 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 December
31, 2011 is as follows:
Year ending December 31,
|
|
|
|
2012
|
$
|
335,037
|
|
2013
|
|
83,976
|
|
2014
|
|
54,675
|
|
2015
|
|
54,675
|
|
2016
|
|
53,731
|
|
Years after
|
|
145,478
|
|
Total minimum payments required
|
$
|
727,572
|
|
For the years ended December 31, 2011, 2010 and 2009, total
lease expense amounted to $359,506, $216,943 and $172,922, respectively.
Legal proceedings
Bobai County Collection Station
In January 2007, the Companys PRC subsidiary, Shandong
Taibang, advanced $413,697 (RMB3.0 million) to Feng Lin, the 20% noncontrolling
interest shareholder of Fang Cheng Plasma Company, an indirect majority owned
subsidiary of the Company, 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 Lans permission. The establishment and registration of Bobai was never
realized as a result of this law suit. On January 29, 2007, on Hua Lans motion,
the District Court entered an order to freeze funds in the amount of
approximately $386,100 (RMB3,000,000) held by the defendants in the case,
including approximately $65,750 (RMB500,000) in funds held in Shandong Taibangs
bank account in Taian City. A hearing was held on June 25, 2007 and judgment
was entered against the defendants along with a $226,780 (RMB1,700,000) joint
financial judgment. The Company appealed the District Court judgment to the
Xinxiang City Intermediate Court. In November 2007, the Xinxiang City
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
Xinxiang City Intermediate Court to freeze the Companys bank accounts. Shandong
Taibang filed a separate action against Hua Lan before the Taian City District
Court to seek recovery of any losses in connection with Hua Lans claim and to
request that the Taian City District Court preserve Hua Lans property or
freeze up to approximately $411,300 (RMB 3 million) of Hua Lans assets to
secure the return of such funds to the Company. The matter is currently pending
before the Intermediate Court of Taian City. Pending the outcome of the
proceedings, Shandong Taibang increased its loss contingency reserve during its
fourth quarter of 2007 from approximately $75,593 (RMB566,667) to $133,400
(RMB1,000,000) to cover its share of the enforcement of this judgment. During
the fourth quarter of 2008, full amount of the judgment, including Feng Lin and
Keliang Huangs portions of the judgment and the related fees, of approximately
$456,222 (RMB3,109,900) was withdrawn from Shandong Taibangs account. The
Company recorded Feng Lin and Keliang Huangs 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
indirect 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 Taibangs 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 Companys plan acquisition of the assets of
Bobai will go forward.
F-27
Dispute among Guizhou Taibang Shareholders over Raising
Additional Capital
On May 28, 2007, a 91% majority of Guizhou Taibangs
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% minority holder of Guizhou Taibangs
shares, the Guizhou Jiean Company, or Jiean, did not support the plan and did
not agree to waive its right of first refusal. On May 29, 2007, the majority
shareholders caused 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 Taibangs equity interests. At the same time, Jiean also
subscribed for 1,800,000 shares, representing its 9% pro rata share of the
20,000,000 shares being offered. The proceeds from all parties were received by
Guizhou Taibang in accordance with the agreement.
In June 2007, Jiean 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, Jiean 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 Jiean and sustained the Equity Purchase
Agreement. On November 2008, Jiean appealed the Guizhou High Court judgment to
the Peoples Supreme Court in Beijing. On May 13, 2009, the Peoples Supreme
Court sustained the original ruling and denied the rights of first refusal of
Jiean over the additional shares waived by the original Guizhou Taibangs
shareholders. The registration of the new investors as Guizhou Taibangs
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 majority 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 their original investment
amount to the strategic investors, Guizhou Taibang has set aside the strategic
investors initial fund along with RMB12,203,280 (approximately $1,920,796) in
accrued interest, and RMB509,600 (approximately $80,212) for the 1% penalty
imposed by the agreement for any breach as of December 31, 2011. If strategic
investors prevail in their suit, Dalins 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. In light of the
Guizhou ruling, in November 2010 the Company returned the proceeds in the amount
of RMB 11,200,000 (approximately $1,699,040) to one of the strategic investors.
On October 26, 2010, the other strategic investors appealed to, and subsequently
accepted by, the PRC Supreme Court in Beijing on the ruling. On October 9, 2011,
the PRC Supreme Court overruled the decision of the High Court of Guizhou and
remanded the suit to the High Court of Guizhou for retrial. On December 29,
2011, High Court of Guizhou accepted the case for retrial. On January 5, 2012,
the strategic investors re-filed their case to the High Court of Guizhou
requesting, in addition to the share distribution, the distribution of dividends
and interest in the amount of RMB 18,349,345 (approximately $2,888,187) and RMB
2,847,000 (approximately $448,118), respectively. The Company is awaiting the
hearing as of the date of this report.
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 majority 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 from the prior 4.5 years.
Guizhou Taibangs 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 Zhongxins debt
out of Guizhou Taibangs 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 Peoples 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, the sellers will be responsible, based on their pro rata equity
interest in Guizhou Taibang, for damages incurred by Guizhou Taibang from
Zhongxins debt and that they will repay Dalin their pro rata share of payments
made by Guizhou Taibang to creditors in connection with Zhongxins 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
properly reflected in the financials as of December 31, 2009. On December 31,
2010, Guizhou Taibang brought suit against Zhongxin in the Intermediate 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.
F-28
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 Huangpin County, Guizhou Province.
NOTE 22 RELATED PARTY TRANSACTIONS
The material related party transactions undertaken by the
Company with related parties for the years ended December 31, 2011 and 2010 are
presented as follows:
Assets
|
|
Purpose
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Accounts receivable related
party
(1)
|
|
Processing fees /sales
|
|
$
|
-
|
|
$
|
212,611
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
Purpose
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
Other payable related
parties
(2)
|
|
Loan
|
|
$
|
2,277,603
|
|
$
|
2,195,123
|
|
Other payable related parties
(3)
|
|
Contribution
|
|
$
|
1,042,335
|
|
$
|
997,017
|
|
Advance from customers a related
party
(1)
|
|
Sales
|
|
$
|
486,602
|
|
$
|
-
|
|
(1)
Guizhou Taibang provides processing services for
Guizhou Eakan Co., Ltd. (Guizhou Eakan), the affiliate of one of Guizhou
Taibangs noncontrolling interest holders. The Companys total processing
services income from Guizhou Eakan amounted to $243,563, $499,128 and $705,018
for the years ended December 31, 2011, 2010 and 2009, respectively. In addition,
Guizhou Taibang made sales to Guizhou Eakan, amounting to $nil, $521,306 and
$nil for the years ended December 31, 2011, 2010 and 2009, respectively. During
the year ended December 31, 2011, Guizhou Taibang had signed a sales contract
with Guizhou Eakan and received $486,602 (RMB 3,091,499) in advance for the
product Placenta Polypeptide that has not yet been delivered.
(2)
Guizhou Taibang has payables to Guizhou Eakan
Investing Corp., amounting to approximately $2,277,603 (RMB14,470,160). Guizhou
Eakan Investing Corp. is one of the noncontrolling interest holders of Guizhou
Taibang. The Company borrowed this interest free advance for working capital
purpose for Guizhou Taibang. The balance is due on demand.
(3)
Guizhou Taibang has payables to Jiean, a
noncontrolling interest holder of Guizhou Taibang, amounting to approximately
$1,042,335 (RMB 6,622,205). In 2007, Guizhou Taibang received additional
contributions from Jiean of $962,853 to maintain Jieans 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 21), the contribution is subject to be returned to Jiean. During the
second quarter of 2010, Jiean requested that Guizhou Taibang register its 1.8
million shares of additional capital contribution with the local Administration
for Industry and Commerce, pursuant to the equity purchase agreement, and such
registration was approved by the majority 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 completion 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 Jiean will be entitled
to receive its pro rata share of Guizhou Taibangs profits from the prior 4.5
years.
F-29
NOTE 23 - NET INCOME PER SHARE
The following table sets forth the computation of basic and
diluted net income per share of common stock for the periods indicated:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Numerator used in basic net
income per share of common stock:
|
|
|
|
|
|
|
|
|
|
Net income attributable to China Biologic
Products, Inc.
|
$
|
18,181,710
|
|
$
|
31,542,883
|
|
$
|
2,208,126
|
|
Interest on the Notes
|
|
3,582,648
|
|
|
-
|
|
|
-
|
|
Change in fair value of embedded conversion
option in the Notes
|
|
(6,289,661
|
)
|
|
-
|
|
|
-
|
|
Change in fair value of
warrants issued to Investors and placement agent
|
|
(5,685,173
|
)
|
|
(228,033
|
)
|
|
-
|
|
Numerator used in diluted net income per
share of common stock
|
$
|
9,789,524
|
|
$
|
31,314,850
|
|
$
|
2,208,126
|
|
Weighted average shares:
|
|
For the Years Ended
|
|
|
|
December 31, 2011
|
|
|
December 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
25,028,796
|
|
|
23,586,506
|
|
|
21,754,911
|
|
Effect of dilutive common share equivalents:
|
|
|
|
|
|
|
|
|
|
Diluted effect of the Notes
|
|
515,068
|
|
|
-
|
|
|
-
|
|
Diluted effect of warrants issued to
Investors
|
|
551,686
|
|
|
-
|
|
|
-
|
|
Diluted effect of placement
agent warrants
|
|
-
|
|
|
8,472
|
|
|
-
|
|
Diluted effect of stock options
|
|
559,112
|
|
|
581,454
|
|
|
194,727
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
26,654,662
|
|
|
24,176,432
|
|
|
21,949,638
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock - basic
|
$
|
0.73
|
|
$
|
1.34
|
|
$
|
0.10
|
|
Net income per share of
common stock - diluted
|
$
|
0.37
|
|
$
|
1.30
|
|
$
|
0.10
|
|
During the year ended December 31, 2011, 1,164,000 options with
an average exercise price of $12.84 were excluded from the calculation of
diluted net income per share of common stock since they are antidilutive.
During the year ended December 31, 2010, the Subscribed
Securities and 1,021,000 options at an average exercise price of $12.43 were
excluded from the calculation of diluted net income per share of common stock
since they are antidilutive.
During the year ended December 31, 2009, both the Subscribed
Securities and all of the warrants were excluded from the calculation of diluted
net income per share of common stock since they are antidilutive.
NOTE 24 CONCENTRATIONS AND CREDIT RISKS
The Companys operations are carried out in the PRC and are
subject to specific considerations and significant risks not typically
associated with companies in North America and Western Europe. Accordingly, the
Companys business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC economy. The Companys results may be adversely
affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
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
December 31, 2011 and 2010 amounted to $88,957,826 and $64,443,316,
respectively, of which $236,373 and $110,693 are covered by insurance,
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 54.5%%, 48.0% and 49.7%
of the total sales for the years ended December 31, 2011, 2010 and 2009,
respectively. If the market demands for human albumin cannot be sustained in the
future or if the price of human albumin decreases, the Companys operating
results could be adversely affected.
F-30
All of the Companys customers are located in the PRC and
India. As of December 31, 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 years ended December 31, 2011,
2010 and 2009. No individual customer represented 10% or more of trade
receivables at December 31, 2011 and 2010. The Company performs ongoing credit
evaluations of its customers financial condition and, generally, requires no
collateral from its customers.
There were two vendors that individually comprised 10% or more
of the Companys total purchase during the year ended December 31, 2011, one
vendor that individually comprised 10% or more of the Companys total purchase
during the year ended December 31, 2010 and two vendors that individually
comprised 10% or more of the Companys total purchase during the ended December
31, 2009. There was one individual vendor that represented more than 10% of
accounts payables at December 31, 2011 and 2010, respectively.
NOTE 25 CHINA BIOLOGIC PRODUCTS, INC. (PARENT COMPANY)
The following represents condensed unconsolidated financial
information of the Parent Company only:
Condensed Balance Sheets
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Cash
|
$
|
236,373
|
|
$
|
103,894
|
|
Prepayments and prepaid expenses
|
|
66,821
|
|
|
126,555
|
|
Property, plant and
equipment, net
|
|
9,195
|
|
|
11,644
|
|
Investment in and amounts due from
subsidiaries
|
|
144,641,845
|
|
|
130,004,635
|
|
Total Assets
|
|
144,954,234
|
|
|
130,246,728
|
|
|
|
|
|
|
|
|
Other payables and accrued
expenses
|
|
4,031,451
|
|
|
4,193,446
|
|
Convertible notes
|
|
-
|
|
|
1,196,233
|
|
Derivative
liabilities-embedded conversion option in the Notes
|
|
-
|
|
|
14,561,661
|
|
Derivative liabilities- Warrants
|
|
5,410,419
|
|
|
11,095,592
|
|
Total Liabilities
|
|
9,441,870
|
|
|
31,046,932
|
|
|
|
|
|
|
|
|
Total Equity
|
|
135,512,364
|
|
|
99,199,796
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
$
|
144,954,234
|
|
$
|
130,246,728
|
|
Condensed Statement of Income:
|
|
For the Years Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of
subsidiaries
|
$
|
19,848,119
|
|
$
|
43,680,970
|
|
$
|
34,409,253
|
|
General and administrative expenses
|
|
(9,669,494
|
)
|
|
(6,667,836
|
)
|
|
(2,975,114
|
)
|
Other expenses
|
|
(3,708,776
|
)
|
|
(2,047,084
|
)
|
|
(310,685
|
)
|
Change in fair value of derivative
liabilities
|
|
11,974,834
|
|
|
(3,233,288
|
)
|
|
(28,915,328
|
)
|
Profit before income tax
expense
|
|
18,444,683
|
|
|
31,732,762
|
|
|
2,208,126
|
|
Income tax expense
|
|
(262,973
|
)
|
|
(189,879
|
)
|
|
-
|
|
Net Income
|
$
|
18,181,710
|
|
$
|
31,542,883
|
|
$
|
2,208,126
|
|
Condensed Statement of Cash Flows:
|
|
For the Years Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
operating activities
|
$
|
(165,551
|
)
|
$
|
86,060
|
|
$
|
-
|
|
Net cash used in investing activities
|
|
(1,970
|
)
|
|
-
|
|
|
-
|
|
Net cash used in financing
activities
|
|
300,000
|
|
|
(12,441
|
)
|
|
-
|
|
Net increase in cash
|
|
132,479
|
|
|
73,619
|
|
|
-
|
|
Cash at beginning of year
|
|
103,894
|
|
|
30,275
|
|
|
30,275
|
|
Cash at end of year
|
$
|
236,373
|
|
$
|
103,894
|
|
$
|
30,275
|
|
F-31
EXHIBIT INDEX
Exhibit No.
|
Description
|
2.1
|
Share Exchange Agreement between the Company, Logic
Express Limited and the selling stockholders signatory thereto, dated as
of July 18, 2006 (incorporated by reference to Exhibit 2 of the
registration statement on Form SB-2 filed by the Company on September 5,
2007)
|
3.1
|
Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 of the registration statement on Form SB-2
filed by the Company on September 5, 2007)
|
3.2
|
Amended and Restated By-Laws of the Company (incorporated
by reference to Exhibit 3.2 of the annual report on Form 10-K filed by the
Company on March 31, 2009)
|
4.1
|
Form of Registration Rights Agreement, dated June 5, 2009
(incorporated by reference to Exhibit 4.1 of the Current Report on Form
8-K filed by the Company on June 5, 2009).
|
4.2
|
Form of 3.8% Convertible Senior Secured Note due 2011
(incorporated by reference to Exhibit 4.2 of the Current Report on Form
8-K filed by the Company on June 5, 2009).
|
4.3
|
Form of Warrant (incorporated by reference to Exhibit 4.3
of the Current Report on Form 8-K filed by the Company on June 5, 2009)
|
10.1
|
China Biologic Products, Inc. 2008 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 of the current report on Form
8-K filed by the Company on May 13, 2008)
|
10.2
|
Form of Stock Option Award Agreement of China Biologic
Products, Inc. (incorporated by reference to Exhibit 10.5 of
the current report on Form 8-K filed by the Company on May 13, 2008)
|
10.3
|
Group Secondment Agreement, dated October 28, 2002,
between Shandong Taibang Biological Products Co., Ltd. and the Shandong
Institute (English Translation) (incorporated by reference to Exhibit 10.1
of the registration statement on Form SB-2/A filed by the Company on
December 3, 2007)
|
10.4
|
Amended and Restated Joint Venture Agreement, between
Logic Express Limited and the Shandong Institute, dated as of March 12,
2006 (English Translation) (incorporated by reference to Exhibit 10.2 of
the registration statement on Form SB-2 filed by the Company on September
5, 2007)
|
10.5
|
Letter of Intent for Equity Transfer, between Logic
Express Limited and the Shandong Institute, dated as of June 10, 2006
(English Translation) (incorporated by reference to Exhibit 10.3 of the
registration statement on Form SB-2 filed by the Company on September 5,
2007)
|
10.6
|
Joint Venture and Cooperation Agreement between Mr. Fan
Qingchun, Shandong Taibang Biological Products Co., Ltd. and Shaanxi Power
Construction Corporation, dated September 12, 2008 (incorporated by
reference to Exhibit 10.2 of the current report on Form 8-K filed by the
Company on October 16, 2008)
|
10.7
|
Agreement on Equity Transfer, Acquisition, Joint Venture
and Cooperation, among Shandong Taibang Biological Products Co., Ltd.,
Shaanxi Power Construction Corporation and Mr. Fan Qingchun, dated
September 12, 2008 (incorporated by reference to Exhibit 10.3 of the
current report on Form 8-K filed by the Company on October 16, 2008)
|
10.8
|
(Shareholder) Agreement among Shandong Taibang Biological
Products Co., Ltd., Logic Express Limited and Biological Institute dated
September 12, 2008 (incorporated by reference to Exhibit 10.4 of the
current report on Form 8-K, filed by the Company on October 16, 2008)
|
10.9
|
Equity Transfer Agreement, dated September 26, 2008,
among Logic Express Limited, Chongqing Dalin Biologic Technologies Co.,
Ltd. and certain shareholders of Chongqing Dalin Biologic Technologies
Co., Ltd. (incorporated by reference to Exhibit 10.1 of the current report
on Form 8-K filed by the Company on October 2, 2008)
|
10.10
|
Equity Transfer Agreement, between Shandong Taibang
Biological Products Co., Ltd. and Mr. Fan Qingchun, dated October 10, 2008
(incorporated by reference to Exhibit 10.1 of the current report on Form
8-K filed by the Company on October 16, 2008)
|
10.11
|
Supplemental Agreement, dated November 3, 2008, among
Logic Express Limited, Fan Shaowen, as representative of the shareholders
of Chongqing Dalin Biologic Technologies Co., Ltd. and Chongqing Dalin
Biologic Technologies Co., Ltd. (English Translation) (incorporated by
reference to Exhibit 10.2 of the current report on Form 8-K filed by the Company on
November 7, 2008)
|
Exhibit No.
|
Description
|
10.12
|
Second Supplemental Agreement, dated November 14, 2008,
among Logic Express Limited, Fan Shaowen as representative of the
shareholders of Chongqing Dalin Biologic Technologies Co., Ltd. and
Chongqing Dalin Biologic Technologies Co., Ltd. (English Translation)
(incorporated by reference to exhibit 10.3 of the current report on Form
8-K filed by the Company on November 20, 2008)
|
10.13
|
Amended Equity Transfer Agreement, dated December 12,
2008, among Logic Express Limited, Chongqing Dalin Biologic Technologies
Co., Ltd., and certain shareholders of Chongqing Dalin Biologic
Technologies Co., Ltd. (English Translation) (incorporated by reference to
exhibit 10.4 of the current report on Form 8-K filed by the Company on
December 18, 2008)
|
10.14
|
Equity Transfer and Entrustment Agreement, dated April 6,
2009, among Logic Express, Shandong Taibang Biological Products Co., Ltd.
and the Shandong Institute of Biological Products (English Translation)
(incorporated by reference to Exhibit 10.6 of the current report on Form
8-K filed by the Company on April 13, 2009)
|
10.15
|
Raw Plasma Supply Agreement, between Shandong Taibang
Biological Products Co., Ltd. and Qi He Plasma Collection Station, dated
as of December 30, 2005 (English Translation) (incorporated by reference
to Exhibit 10.4 of the registration statement on Form SB-2 filed by the
Company on September 5, 2007)
|
10.16
|
Raw Plasma Supply Agreement, between Shandong Taibang
Biological Products Co., Ltd. and the Xia Jin Plasma Collection Station,
dated as of December 30, 2005 (English Translation) (incorporated by
reference to Exhibit 10.5 of the registration statement on Form SB-2 filed
by the Company on September 5, 2007)
|
10.17
|
Raw Plasma Supply Agreement, between Shandong Taibang and
the Zhang Qiu Plasma Collection Station, dated as of December 30, 2005
(English Translation) (incorporated by reference to Exhibit 10.6 of the
registration statement on Form SB-2 filed by the Company on September 5,
2007)
|
10.18
|
Plasma Processing Agreement, between Shandong Taibang
Biological Products Co., Ltd. and Qi He An Tai Plasma Collection Co.,
Ltd., dated as of January 2, 1007 (English Translation) (incorporated by
reference to Exhibit 10.9 of the registration statement on Form SB-2/A
filed by the Company on December 3, 2007)
|
10.19
|
Plasma Processing Agreement, between Shandong Taibang
Biological Products Co., Ltd. and the Xia Jin An Tai Plasma Collection
Co., Ltd., dated as of January 2, 2007 (English Translation) (incorporated
by reference to Exhibit 10.10 of the registration statement on Form SB-2/A
filed by the Company on December 3, 2007)
|
10.20
|
Plasma Processing Agreement, between Shandong Taibang
Biological Products Co., Ltd. and the Zhang Qiu An Tai Plasma Collection
Co., Ltd., dated as of January 2, 2007 (English Translation) (incorporated
by reference to Exhibit 10.11 of the registration statement on Form SB-2/A
filed by the Company on December 3, 2007)
|
10.21
|
Raw Plasma Supply Agreement, between Shandong Taibang
Biological Products Co., Ltd. and Liao Cheng Tiantan Plasma Collection Co.
Ltd., dated as of November 1, 2007 (English Translation) (incorporated by
reference to Exhibit 10.23 of the registration statement on Form SB-2/A
filed by the Company on December 28, 2007)
|
10.22
|
Asset Purchase Agreement, between Xia Jin An Tai Plasma
Collection Co., Ltd. and Xia Jin County Plasma Collection Station, dated
as of October 20, 2006 (English Translation) (incorporated by reference to
Exhibit 10.15 of the registration statement on Form SB-2/A filed by the
Company on December 3, 2007)
|
10.23
|
Asset Purchase Agreement, between Liao Cheng An Tai
Plasma Collection Co., Ltd. and Yang Gu County Plasma Collection Station,
dated as of November 3, 2006 (English Translation) (incorporated by
reference to Exhibit 10.16 of the registration statement on Form SB-2/A
filed by the Company on December 3, 2007)
|
10.24
|
Asset Purchase Agreement, between Qi He An Tai Plasma
Collection Co., Ltd. and Qi He County Plasma Collection Station, dated as
of November 9, 2006 (English Translation) (incorporated by reference to Exhibit 10.14 of the registration statement on Form
SB-2/A filed by the Company on December 3, 2007)
|
Exhibit No.
|
Description
|
10.25
|
Asset Purchase Agreement, between He Ze An Tai Plasma
Collection Co., Ltd and Yun Cheng County Plasma Collection Station, dated
as of December 15, 2006 (English Translation) (incorporated by reference
to Exhibit 10.22 of the registration statement on Form SB-2/A filed by the
Company on December 3, 2007)
|
10.26
|
Asset Purchase Agreement, between Zhang Qiu An Tai Plasma
Collection Co., Ltd. and Zhang Qiu Plasma Collection Station, dated as of
December 31, 2006 (English Translation) (incorporated by reference to
Exhibit 10.12 of the registration statement on Form SB-2/A filed by the
Company on December 3, 2007)
|
10.27
|
Asset Purchase Agreement, between Guang Xi Huan Jiang
Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan Autonomous
County Plasma Collection Station, dated as of April 24, 2007 (English
Translation) (incorporated by reference to Exhibit 10.13 of the
registration statement on Form SB-2/A filed by the Company on December 3,
2007)
|
10.28
|
Asset Purchase Agreement, between Fang Cheng Plasma
Collection Co., Ltd. and Fang Cheng Plasma Company, dated as of April 30,
2007 (English Translation) (incorporated by reference to Exhibit 10.21 of
the registration statement on Form SB-2/A filed by the Company on December
3, 2007)
|
10.29
|
Asset Purchase Agreement, between Guang Xi Huan Jiang
Missile Plasma Collection Co., Ltd. and Huan Jiang Maonan Autonomous
County Plasma Collection Station, dated as of August 5, 2007 (English
Translation) (incorporated by reference to Exhibit 10.13 of the
registration statement on Form SB-2/A filed by the Company on December 3,
2007)
|
10.30
|
Trademark Licensing Agreement, dated as of February 27,
2007 (English Translation) (incorporated by reference to Exhibit 10.17 of
the registration statement on Form SB-2/A filed by the Company on December
3, 2007)
|
10.31
|
Loan Agreement, dated as of November 30, 2006, among
Shandong Taibang and the Shandong Institute and Logic Express (English
Translation) (incorporated by reference to Exhibit 10.18 of the
registration statement on Form SB-2/A filed by the Company on December 3,
2007)
|
10.32
|
Supplementary Agreement, dated as of September 1, 2007,
among Shandong Taibang Biological Products Co., Ltd., the Shandong
Institute and Logic Express Limited (English Translation) (incorporated by
reference to Exhibit 10.19 of the registration statement on Form SB-2/A
filed by the Company on December 3, 2007)
|
10.33
|
Form of Bank of Communications Loan Contract, among
Shandong Taibang and the Taian Branch of the Bank of Communications
(English Translation) (incorporated by reference to Exhibit 10.20 of the
registration statement on Form SB-2/A filed by the Company on December 3,
2007)
|
10.34
|
China Bank of Communications Loan Contract, dated October
28, 2008, between Shandong Taibang Biological Products Co. Ltd. and Bank
of Communications, Taian Branch (English Translation) (incorporated by
reference to Exhibit 10.1 of the current report on Form 8-K filed by the
Company on November 3, 2008)
|
10.35
|
Loan Agreement between Shandong Taibang Biological
Products Co., Ltd. and Bank Of China, dated January 8, 2009 (English
Translation) (incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K filed by the Company on January 13, 2009)
|
10.36
|
Employment Agreement, between Y. Tristan Kuo and the
Company, dated May 9, 2008 (incorporated by reference to Exhibit 10.3 of
the current report on Form 8-K filed by the Company on May 13, 2008)
|
10.37
|
Employment Agreement, between Chao Ming Zhao and the
Company, dated May 9, 2008 (incorporated by reference to Exhibit 10.4 of
the current report on Form 8-K filed by the Company on May 13, 2008)
|
10.38
|
Form of Directors Employment Agreement (incorporated by
reference to Exhibit 10.8 of the registration statement on Form SB-2 filed
by the Company on September 5, 2007)
|
10.39
|
Form of Independent Director Agreement (incorporated by
reference to Exhibit 10.1 of the current report on Form 8-K filed by the
Company on July 30, 2008)
|
10.40
|
Form of Indemnity Agreement (incorporated by reference to
Exhibit 10.2 of the current report on Form 8-K filed by the Company on July 30, 2008)
|
Exhibit No.
|
Description
|
10.41
|
Form of Guarantee and Pledge Agreement, dated June 10,
2009 (incorporated by reference to Exhibit 10.2 of the current report on
Form 8-K filed by the Company on June 5, 2009).
|
10.42
|
Form of Indemnification Agreement, dated June 10, 2009
(incorporated by reference to Exhibit 10.3 of the current report on Form
8-K filed by the Company on June 5, 2009).
|
14
|
Code of Ethics (incorporated by reference to Exhibit 14
of the annual report on Form 10-KSB filed by the Company on March 28,
2008)
|
21
|
Subsidiaries of the Company (incorporated by reference to
Exhibit 21 of the annual report on Form 10-K, filed by the Company on
March 31, 2011)
|
23.1*
|
Consent of KPMG, an independent registered
public accounting firm
|
23.2*
|
Consent of Frazer Frost, LLP, an independent
registered public accounting firm
|
31.1*
|
Certifications of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
Certifications of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1*
|
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2*
|
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
101*
|
Interactive data files pursuant to Rule 405 of Regulation
S-T (furnished herewith).
|
*Filed herewith.
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