UNITED STATES
|
SECURITIES AND EXCHANGE
COMMISSION
|
Washington, D.C. 20549
|
|
FORM 10
-
Q
|
(Mark One)
|
[ X ]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
For the quarterly period ended: September 30,
2012
|
|
|
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
For the transition period from
_____________to ______________
|
Commission File Number: 001-34566
CHINA BIOLOGIC PRODUCTS,
INC.
(Exact Name of Registrant as Specified in Its
Charter)
Delaware
|
75-2308816
|
(State or other jurisdiction of
|
(I.R.S. Employer Identification No.)
|
incorporation or organization)
|
|
18th Floor, Jialong International Building
19
Chaoyang Park Road
Chaoyang District, Beijing 100125
Peoples Republic of China
(Address of principal executive
offices, Zip Code)
(+86) 10-6598-3111
(Registrants telephone number,
including area code)
____________________________________________________
(Former
name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ]
|
Accelerated filer [X]
|
Non-accelerated
filer [ ]
(Do not check if a smaller
reporting company)
|
Smaller reporting company [ ]
|
Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares outstanding of each of the
issuers classes of common stock, as of November 8, 2012 is as follows:
Class of Securities
|
|
Shares Outstanding
|
Common Stock, $0.0001 par value
|
|
26,568,625
|
Quarterly Report on Form 10-Q
|
Three and Nine Months Ended September 30, 2012
|
|
|
TABLE OF CONTENTS
|
|
|
PART I
|
FINANCIAL INFORMATION
|
|
|
Item 1.Financial Statements
|
1
|
Item 2.Managements Discussion and Analysis of Financial
Condition and Results of Operations
|
14
|
Item 3.Quantitative and Qualitative
Disclosures About Market Risk
|
24
|
Item 4.Controls and Procedures
|
25
|
|
|
PART II
|
OTHER INFORMATION
|
|
|
Item 1.Legal Proceedings
|
25
|
Item 1A.Risk Factors
|
27
|
Item 2.Unregistered Sales of Equity
Securities and Use of Proceeds
|
28
|
Item 3.Defaults Upon Senior Securities
|
28
|
Item 4.Mine Safety Disclosures
|
28
|
Item 5.Other Information
|
28
|
Item 6.Exhibits
|
28
|
i
PART I
FINANCIAL INFORMATION
ITEM 1.
|
FINANCIAL STATEMENTS.
|
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Contents
|
Page(s)
|
Unaudited Condensed Consolidated Balance
Sheets
|
1
|
Unaudited Condensed Consolidated Statements of
Comprehensive Income
|
2
|
Unaudited Condensed Consolidated Statement
of Changes in Equity
|
3
|
Unaudited Condensed Consolidated Statements of Cash Flows
|
4
|
Notes to Unaudited Condensed Consolidated
Financial Statements
|
5
|
ii
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash
|
$
|
131,723,186
|
|
$
|
89,411,835
|
|
Short-term investment
|
|
2,727,509
|
|
|
-
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
14,961,521
|
|
|
16,757,368
|
|
Inventories
|
|
68,243,398
|
|
|
71,338,590
|
|
Other
receivables
|
|
1,574,434
|
|
|
2,594,461
|
|
Prepayments and prepaid expenses
|
|
2,557,452
|
|
|
1,591,696
|
|
Deferred tax
assets
|
|
1,905,210
|
|
|
1,999,563
|
|
Total Current Assets
|
|
223,692,710
|
|
|
183,693,513
|
|
Property, plant and
equipment, net
|
|
39,153,534
|
|
|
40,546,539
|
|
Intangible assets, net
|
|
4,279,035
|
|
|
6,520,671
|
|
Land use rights, net
|
|
5,838,420
|
|
|
5,487,343
|
|
Prepayments and deposits for property, plant
and equipment
|
|
9,391,850
|
|
|
4,287,492
|
|
Receivable related to land
use right
|
|
13,202,220
|
|
|
-
|
|
Equity method investment
|
|
10,066,951
|
|
|
8,357,017
|
|
Total
Assets
|
$
|
305,624,720
|
|
$
|
248,892,575
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Short-term bank
loans
|
$
|
11,081,000
|
|
$
|
11,018,000
|
|
Accounts payable
|
|
3,922,947
|
|
|
4,996,463
|
|
Due to related
parties
|
|
4,047,780
|
|
|
3,319,938
|
|
Other payables and accrued
expenses
|
|
25,583,002
|
|
|
30,661,794
|
|
Advance from
customers
|
|
3,941,270
|
|
|
4,365,523
|
|
Advance from customers a
related party
|
|
-
|
|
|
486,602
|
|
Income tax
payable
|
|
5,921,081
|
|
|
5,373,633
|
|
Other taxes payable
|
|
2,322,662
|
|
|
2,189,913
|
|
Derivative
liabilities - warrants
|
|
-
|
|
|
5,410,419
|
|
Total Current Liabilities
|
|
56,819,742
|
|
|
67,822,285
|
|
Other payable
|
|
343,821
|
|
|
343,477
|
|
Deferred tax liabilities
|
|
1,074,380
|
|
|
1,685,772
|
|
Total Liabilities
|
$
|
58,237,943
|
|
$
|
69,851,534
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
Common stock: par value
$.0001; 100,000,000 shares authorized; 26,568,625 and 25,601,125 shares
issued and outstanding at September 30, 2012 and December 31, 2011,
respectively
|
$
|
2,657
|
|
$
|
2,560
|
|
Additional
paid-in capital
|
|
60,173,625
|
|
|
48,838,311
|
|
Retained earnings
|
|
113,334,038
|
|
|
73,920,811
|
|
Accumulated
other comprehensive income
|
|
13,654,977
|
|
|
12,750,682
|
|
Total stockholders equity
attributable to China Biologic Products, Inc.
|
|
187,165,297
|
|
|
135,512,364
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
60,221,480
|
|
|
43,528,677
|
|
|
|
|
|
|
|
|
Total Equity
|
$
|
247,386,777
|
|
$
|
179,041,041
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
$
|
305,624,720
|
|
$
|
248,892,575
|
|
See accompanying notes to Unaudited Condensed Consolidated
Financial Statements.
1
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
$
|
53,124,050
|
|
$
|
41,137,473
|
|
$
|
150,817,850
|
|
$
|
117,197,707
|
|
Related
party
|
|
-
|
|
|
166,228
|
|
|
-
|
|
|
242,274
|
|
Total sales
|
|
53,124,050
|
|
|
41,303,701
|
|
|
150,817,850
|
|
|
117,439,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
External
customers
|
|
16,921,284
|
|
|
13,741,811
|
|
|
48,767,900
|
|
|
35,531,374
|
|
Related
party
|
|
-
|
|
|
32,698
|
|
|
-
|
|
|
67,302
|
|
Cost of sales
|
|
16,921,284
|
|
|
13,774,509
|
|
|
48,767,900
|
|
|
35,598,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
36,202,766
|
|
|
27,529,192
|
|
|
102,049,950
|
|
|
81,841,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
3,545,378
|
|
|
3,703,683
|
|
|
12,536,727
|
|
|
9,191,739
|
|
General
and administrative expenses
|
|
11,599,779
|
|
|
8,110,693
|
|
|
26,677,945
|
|
|
23,240,140
|
|
Research
and development expenses
|
|
637,397
|
|
|
509,061
|
|
|
2,277,474
|
|
|
2,439,029
|
|
Impairment
loss of goodwill
|
|
-
|
|
|
18,064,183
|
|
|
-
|
|
|
18,064,183
|
|
Loss
on abandonment of long-lived assets
|
|
-
|
|
|
6,536,517
|
|
|
-
|
|
|
6,536,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
20,420,212
|
|
|
(9,394,945
|
)
|
|
60,557,804
|
|
|
22,369,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) / expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income of equity method investee
|
|
(744,976
|
)
|
|
(712,320
|
)
|
|
(2,219,279
|
)
|
|
(1,446,402
|
)
|
Change
in fair value of derivative liabilities
|
|
-
|
|
|
(2,863,870
|
)
|
|
(1,769,140
|
)
|
|
(15,061,119
|
)
|
Interest
expense
|
|
223,992
|
|
|
404,349
|
|
|
990,190
|
|
|
4,385,872
|
|
Interest
income
|
|
(561,761
|
)
|
|
(473,278
|
)
|
|
(1,870,873
|
)
|
|
(913,003
|
)
|
Other
(income) / expenses, net
|
|
(449,815
|
)
|
|
63,773
|
|
|
(347,029
|
)
|
|
1,134,055
|
|
Total other income, net
|
|
(1,532,560
|
)
|
|
(3,581,346
|
)
|
|
(5,216,131
|
)
|
|
(11,900,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings / (loss) before income tax expense
|
|
21,952,772
|
|
|
(5,813,599
|
)
|
|
65,773,935
|
|
|
34,270,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
3,479,683
|
|
|
1,022,310
|
|
|
9,990,014
|
|
|
10,602,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
18,473,089
|
|
|
(6,835,909
|
)
|
|
55,783,921
|
|
|
23,667,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to the
noncontrolling interest
|
|
4,855,939
|
|
|
2,525,768
|
|
|
16,370,694
|
|
|
10,120,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to China
Biologic Products, Inc.
|
|
13,617,150
|
|
|
(9,361,677
|
)
|
|
39,413,227
|
|
|
13,547,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.51
|
|
$
|
(0.37
|
)
|
$
|
1.51
|
|
$
|
0.55
|
|
Diluted
|
$
|
0.50
|
|
$
|
(0.37
|
)
|
$
|
1.41
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
26,546,929
|
|
|
25,551,125
|
|
|
26,009,707
|
|
|
24,849,403
|
|
Diluted
|
|
27,018,904
|
|
|
25,551,125
|
|
|
26,741,713
|
|
|
26,707,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive income, net of nil income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
(86,731
|
)
|
|
2,064,884
|
|
|
1,226,404
|
|
|
5,890,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income / (loss)
|
|
18,386,358
|
|
|
(4,771,025
|
)
|
|
57,010,325
|
|
|
29,558,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income
attributable to the noncontrolling interest
|
|
4,926,035
|
|
|
3,656,716
|
|
|
16,692,803
|
|
|
11,971,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income / (loss)
attributable to China Biologic Products, Inc.
|
|
13,460,323
|
|
|
(8,427,741
|
)
|
|
40,317,522
|
|
|
17,587,231
|
|
See accompanying notes to Unaudited Condensed Consolidated
Financial Statements.
2
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
attributable to
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
Retained
|
|
|
comprehensive
|
|
|
China Biologic
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Shares
|
|
|
Par value
|
|
|
paid-in capital
|
|
|
earnings
|
|
|
income
|
|
|
Products, Inc.
|
|
|
interest
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1,
2012
|
|
25,601,125
|
|
$
|
2,560
|
|
$
|
48,838,311
|
|
$
|
73,920,811
|
|
$
|
12,750,682
|
|
$
|
135,512,364
|
|
$
|
43,528,677
|
|
$
|
179,041,041
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,413,227
|
|
|
-
|
|
|
39,413,227
|
|
|
16,370,694
|
|
|
55,783,921
|
|
Other
comprehensive income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
904,295
|
|
|
904,295
|
|
|
322,109
|
|
|
1,226,404
|
|
Stock compensation
|
|
-
|
|
|
-
|
|
|
3,074,132
|
|
|
-
|
|
|
-
|
|
|
3,074,132
|
|
|
-
|
|
|
3,074,132
|
|
Common stock issued in connection with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Exercise of warrants
|
|
937,500
|
|
|
94
|
|
|
8,141,185
|
|
|
-
|
|
|
-
|
|
|
8,141,279
|
|
|
-
|
|
|
8,141,279
|
|
-Exercise of
options
|
|
30,000
|
|
|
3
|
|
|
119,997
|
|
|
-
|
|
|
-
|
|
|
120,000
|
|
|
-
|
|
|
120,000
|
|
Balance as of September
30, 2012
|
|
26,568,625
|
|
$
|
2,657
|
|
$
|
60,173,625
|
|
$
|
113,334,038
|
|
$
|
13,654,977
|
|
$
|
187,165,297
|
|
$
|
60,221,480
|
|
$
|
247,386,777
|
|
See accompanying notes to Unaudited Condensed Consolidated
Financial Statements.
3
CHINA BIOLOGIC PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
$
|
64,786,061
|
|
$
|
25,792,830
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Dividend
received
|
|
1,109,115
|
|
|
663,987
|
|
Payment for property, plant and
equipment
|
|
(7,436,719
|
)
|
|
(5,878,973
|
)
|
Payment for
intangible assets and land use right
|
|
(796,707
|
)
|
|
(424,971
|
)
|
Purchase of short-term
investment
|
|
(2,731,300
|
)
|
|
-
|
|
Payment related
to land used right
|
|
(13,220,568
|
)
|
|
-
|
|
Net cash used in investing activities
|
|
(23,076,179
|
)
|
|
(5,639,957
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from
warrants exercised
|
|
4,500,000
|
|
|
-
|
|
Proceeds from stock option
exercised
|
|
120,000
|
|
|
100,000
|
|
Proceeds from
short term bank loans
|
|
11,076,100
|
|
|
18,373,200
|
|
Repayment of short term bank
loans
|
|
(11,106,200
|
)
|
|
(10,871,200
|
)
|
Acquisition of
noncontrolling interest
|
|
-
|
|
|
(7,635,000
|
)
|
Dividend paid by subsidiaries to
noncontrolling interest shareholders
|
|
(4,379,016
|
)
|
|
(7,744,100
|
)
|
Net cash provided by /
(used in) financing activities
|
|
210,884
|
|
|
(7,777,100
|
)
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE
CHANGE IN CASH
|
|
390,585
|
|
|
2,983,158
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
42,311,351
|
|
|
15,358,931
|
|
|
|
|
|
|
|
|
Cash at the beginning of
period
|
|
89,411,835
|
|
|
64,941,368
|
|
|
|
|
|
|
|
|
Cash at the end of period
|
$
|
131,723,186
|
|
$
|
80,300,299
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information
|
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
9,988,536
|
|
$
|
11,175,285
|
|
Cash paid for
interest expense
|
$
|
296,901
|
|
$
|
690,755
|
|
Noncash investing and financing
activities:
|
|
|
|
|
|
|
Convertible notes conversion
|
$
|
-
|
|
$
|
12,972,000
|
|
Utilization of prepayments and deposits to acquire
intangible assets
|
$
|
-
|
|
$
|
128,861
|
|
Utilization of prepayments and deposits
to acquire property, plant and equipment
|
$
|
-
|
|
$
|
526,328
|
|
Exercise of warrants that were liability classified
|
$
|
3,641,279
|
|
$
|
-
|
|
See accompanying notes to Unaudited Condensed Consolidated
Financial Statements.
4
CHINA BIOLOGIC PRODUCTS INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND
2011
NOTE 1 BASIS OF PRESENTATION, SIGNIFICANT CONCENTRATION
AND RISKS
(a)
|
Basis of Presentation
|
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. GAAP have been condensed or omitted as permitted by rules
and regulations of the U.S. Securities and Exchange Commission (SEC). The
December 31, 2011 consolidated balance sheet was derived from the audited
consolidated financial statements of China Biologic Products, Inc. (the
Company). The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the December 31, 2011 audited
consolidated financial statements of the Company included in the Companys
annual report on Form 10-K for the year ended December 31, 2011.
In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present a fair statement of the
financial position as of September 30, 2012, the results of operations for the
three and nine months ended September 30, 2012 and 2011, and cash flows for the
nine months ended September 30, 2012 and 2011, have been made.
All significant intercompany transactions and balances are
eliminated on consolidation.
The preparation of the unaudited condensed consolidated
financial statements in conformity with U.S. GAAP requires management of the
Company to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the unaudited condensed consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Significant items subject to such estimates and assumptions include the
useful lives of property, plant and equipment and intangibles with definite
lives, 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.
(b)
|
Significant Concentration and
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 environment 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 matters.
The Company maintains cash 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 at banks as of
September 30, 2012 and December 31, 2011 amounted to $131,396,049 and
$88,957,826, respectively, of which $116,771 and $236,373 are insured,
respectively. The Company has not experienced any losses in uninsured bank
deposits and does not believe that it is exposed to any significant risks on
cash held in bank accounts.
The Companys major product, human albumin, accounted for 43.3%
and 54.4% of the total sales for the three months ended September 30, 2012 and
2011, respectively, and 45.3% and 54.1% of the total sales for the nine months
ended September 30, 2012 and 2011, respectively. If the market demands for human
albumin cannot be sustained in the future or the price of human albumin
decreases, the Companys operating results could be adversely affected.
All of the Companys customers are located in the PRC and
India. As of September 30, 2012 and 2011, the Company had no significant
concentration of credit risk. There were no customers that individually
comprised 10% or more of the total sales during the three and nine months ended
September 30, 2012 and 2011, respectively. No individual customer represented
10% or more of trade receivables at September 30, 2012 and December 31, 2011,
respectively. The Company performs ongoing credit evaluations of its customers
financial condition and, generally, requires no collateral from its customers.
There were no suppliers that comprised 10% or more of the total
purchases for the three and nine months ended September 30, 2012 and 2011,
respectively. There were no suppliers that represented more than 10% of accounts
payables at September 30, 2012 and 2011, respectively.
5
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable at September 30, 2012 and December 31, 2011
consisted of the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Accounts receivable
|
$
|
15,399,826
|
|
$
|
17,171,460
|
|
Less: Allowance for doubtful accounts
|
|
(438,305
|
)
|
|
(414,092
|
)
|
Total
|
$
|
14,961,521
|
|
$
|
16,757,368
|
|
A provision for doubtful accounts of nil and $59,765 was
recorded in the three months ended September 30, 2012 and 2011, respectively. A
provision for doubtful accounts of $21,876 and $79,142 was recorded in the nine
months ended September 30, 2012 and 2011, respectively. There were no write-off
of accounts receivable for the nine months ended September 30, 2012 and
September 30, 2011, respectively.
NOTE 3 INVENTORIES
Inventories at September 30, 2012 and December 31, 2011
consisted of the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Raw materials
|
$
|
32,199,435
|
|
$
|
29,403,776
|
|
Work-in-process
|
|
17,001,666
|
|
|
21,385,806
|
|
Finished goods
|
|
19,042,297
|
|
|
20,549,008
|
|
Total
|
$
|
68,243,398
|
|
$
|
71,338,590
|
|
There were no write down of inventories for the three and nine
months ended September 30, 2012 and 2011.
NOTE 4 RECEIVABLE RELATED TO LAND USE RIGHT
As of September 30, 2012, the receivable represented a
$13,202,220 refundable payment made by Guizhou Taibang Biological Products Co.,
Ltd. (Guizhou Taibang) to the local government in connection with the public
bidding for a land use right in the Guizhou Province. The payment will be
refunded within one year following the completion of the bidding process.
Management believes the bidding process will be completed in early 2013. If the Company is successful in the bid, the land
use right will be used for the construction of a new manufacturing facility. The
existing manufacturing facility producing plasma-based pharmaceutical products
in Guizhou Taibang will be abandoned by the end of 2013 when the current Good
Manufacturing Practice certificate of Guizhou Taibang expires. All the related
assets in the existing manufacturing facility to be abandoned are depreciated
over the shortened use period.
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2012 and
December 31, 2011 consisted of the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Buildings
|
$
|
25,173,074
|
|
$
|
25,296,828
|
|
Machinery and equipment
|
|
31,764,040
|
|
|
29,891,291
|
|
Furniture, fixtures, office
equipment and vehicles
|
|
6,467,148
|
|
|
6,445,851
|
|
Total property, plant and equipment, gross
|
|
63,404,262
|
|
|
61,633,970
|
|
Accumulated depreciation
|
|
(25,435,799
|
)
|
|
(21,744,060
|
)
|
Total property, plant and equipment, net
|
|
37,968,463
|
|
|
39,889,910
|
|
Construction in progress
|
|
1,185,071
|
|
|
656,629
|
|
Property, plant and equipment, net
|
$
|
39,153,534
|
|
$
|
40,546,539
|
|
Depreciation expense for the three months ended September 30,
2012 and 2011 was $2,045,202 and $1,072,526, respectively. Depreciation expense
for the nine months ended September 30, 2012 and 2011 was $4,326,425 and
$3,264,962, respectively.
6
NOTE 6 INTANGIBLE ASSETS, NET
Intangible assets at September 30, 2012 and December 31, 2011
consisted of the following:
|
|
September 30, 2012
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
amortization
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
period
|
|
|
amount
|
|
|
amortization
|
|
|
amount
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permits and licenses
|
|
10 years
|
|
$
|
4,975,076
|
|
$
|
(1,896,731
|
)
|
$
|
3,078,345
|
|
GMP certificate
|
|
5 years
|
|
|
2,519,313
|
|
|
(1,888,939
|
)
|
|
630,374
|
|
Long-term customer relationship
|
|
4 years
|
|
|
7,500,254
|
|
|
(7,038,595
|
)
|
|
461,659
|
|
Others
|
|
|
|
|
217,867
|
|
|
(109,210
|
)
|
|
108,657
|
|
Total
|
|
|
|
$
|
15,212,510
|
|
$
|
(10,933,475
|
)
|
$
|
4,279,035
|
|
|
|
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 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
|
|
Amortization expense for intangible assets was $730,994 and
$771,070 for the three months ended September 30, 2012 and 2011, respectively.
Amortization expense for intangible assets was $2,187,804 and $2,481,758 for the
nine months ended September 30, 2012 and 2011, respectively. Estimated
amortization expenses for the next five fiscal years are $1,047,545 in 2013,
$535,342 in 2014, $534,657 in 2015, $529,155 in 2016 and $495,250 in 2017.
NOTE 7 SHORT-TERM BANK LOANS
The Companys bank loans as of September 30, 2012 and December
31, 2011 consisted of the following:
|
|
Maturity
|
|
|
Annual
|
|
|
|
|
|
|
|
Loans
|
|
date
|
|
|
interest rate
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Short-term bank loan, secured
|
|
March 22, 2012
|
|
|
6.06%
|
|
|
-
|
|
|
3,148,000
|
|
Short-term bank loan, unsecured
|
|
July 19, 2013
|
|
|
6.00%
|
|
|
3,166,000
|
|
|
-
|
|
Short-term bank loan,
unsecured
|
|
August 1, 2013
|
|
|
6.00%
|
|
|
3,166,000
|
|
|
-
|
|
Short-term bank loan, unsecured
|
|
September 3, 2013
|
|
|
6.00%
|
|
|
3,166,000
|
|
|
-
|
|
Short-term bank loan,
unsecured
|
|
September 3,
2013
|
|
|
6.00%
|
|
|
1,583,000
|
|
|
-
|
|
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
|
|
|
|
|
|
|
$
|
11,081,000
|
|
$
|
11,018,000
|
|
Interest expense on short-term bank loans was $91,919 and
$272,637 for the three months ended September 30, 2012 and 2011, respectively.
Interest expense on short-term bank loans was $296,901 and $510,977 for the nine
months ended September 30, 2012 and 2011, respectively.
The Company did not have any revolving line of credit as of
September 30, 2012.
NOTE 8 INCOME TAX
On October 31, 2011, Shandong Taibang received a notice from
the Shandong provincial government that the High and New Technology Enterprise
qualification has been renewed for an additional three years which entitled it
to a 15% preferential income tax rate from 2011 to 2013.
According to CaiShui [2011] No. 58 dated July 27, 2011, Guizhou
Taibang, being a qualified enterprise located in the western region of PRC,
enjoys a preferential income tax rate of 15% effective retroactively from
January 1, 2011 to December 31, 2020.
7
The Companys effective income tax rates were 16% and negative
18% for the three months ended September 30, 2012 and 2011, respectively. The
Companys effective income tax rates were 15% and 31% for the nine months ended
September 30, 2012 and 2011, respectively.
For the three and nine months ended September 30, 2012, the
effective tax rates for the PRC entities and the non-PRC entities were
approximately 15% and 0%, respectively.
As of and for the nine months ended September 30, 2012, the
Company did not have any unrecognized tax benefits and thus no interest and
penalties related to unrecognized tax benefits were recorded. In addition, the
Company does not expect that the amount of unrecognized tax benefits to change
significantly within the next 12 months.
NOTE 9 WARRANTS, OPTIONS AND NONVESTED SHARES
Warrants
In connection with the issuance of convertible notes in 2009,
the Company issued warrants to purchase 1,194,268 shares of its common stock to
the investors at an exercise price of $4.80 per share.
In June 2012, the warrants to purchase 937,500 shares of common
stock of the Company were exercised and the Company received proceeds of
$4,500,000. At the time of the exercise, the fair value of the warrants was
$3,641,279. For the three months ended September 30, 2012 and 2011, the gains
arising from the decrease in fair value of warrants were nil and $2,863,870,
respectively. For the nine months ended September 30, 2012 and 2011, the gains
arising from the decrease in fair value of warrants were $1,769,140 and
$8,771,458, respectively. As of December 31, 2011, there were 937,500 warrants
outstanding. As of September 30, 2012, there were no warrants outstanding.
The fair value of the warrants that were exercised on June 6
and June 4, 2012, and outstanding as of December 31, 2011 was determined based
on the Binominal option pricing model, using the following key assumptions:
|
|
June 6, 2012
|
|
|
June 4, 2012
|
|
|
December 31, 2011
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
Risk-free interest rate
|
|
0.05%
|
|
|
0.04%
|
|
|
0.05%
|
|
Time to maturity (in years)
|
|
-
|
|
|
-
|
|
|
0.43
|
|
Expected volatility
|
|
47.4%
|
|
|
37.3%
|
|
|
80.0%
|
|
Fair value of underlying
common shares (per share)
|
$
|
9.22
|
|
$
|
8.55
|
|
$
|
10.46
|
|
Changes in the managements estimates and assumptions regarding
the expected volatility could significantly impact the estimated fair value of
the warrants determined under the Binominal option pricing model and, as a
result, the net income and the net income attributable to the Companys
stockholder.
Options
A summary of stock options activity for nine months ended
September 30, 2012 is as follow:
|
|
|
|
|
|
|
|
Weighted average
|
|
|
Aggregate
|
|
|
|
Number of stock
|
|
|
Weighted average
|
|
|
remaining
|
|
|
intrinsic
|
|
|
|
options
|
|
|
exercise price
|
|
|
contractual term
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December
31, 2011
|
|
1,994,600
|
|
$
|
9.24
|
|
|
7.71 years
|
|
$
|
5,197,076
|
|
Granted
|
|
890,000
|
|
|
9.61
|
|
|
|
|
|
|
|
Exercised
|
|
(30,000
|
)
|
|
4.00
|
|
|
|
|
|
|
|
Forfeited
|
|
(94,667
|
)
|
|
12.68
|
|
|
|
|
|
|
|
Outstanding as of September
30, 2012
|
|
2,759,933
|
|
$
|
9.30
|
|
|
7.81 years
|
|
$
|
4,341,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
2,759,933
|
|
$
|
9.30
|
|
|
7.81 years
|
|
$
|
4,341,700
|
|
Exercisable as of September 30, 2012
|
|
1,639,587
|
|
$
|
8.64
|
|
|
6.86 years
|
|
$
|
4,228,750
|
|
The 890,000 stock options granted during the nine months ended
September 30, 2012 had a weighted average fair value of $7.58 per share or an
aggregate of $6,742,954 on the date of grant, determined based on the
Black-Scholes option pricing model using the following weighted average
assumptions:
8
|
|
For nine months ended
|
|
|
|
September 30, 2012
|
|
Expected volatility
|
|
104%
|
|
Expected dividends yield
|
|
0%
|
|
Expected term
|
|
6 years
|
|
Risk-free interest rate (per annum)
|
|
0.83%
|
|
Fair value of underlying
ordinary shares (per share)
|
$
|
9.61
|
|
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 expected
term of the options. The expected dividend yield was based on the Companys
current and expected dividend policy. Changes in the managements estimates and
assumptions regarding the expected volatility could significantly impact the
estimated fair values of the share options determined under the Black-Scholes
option pricing model and, as a result, the net income and the net income
attributable to the Companys stockholders.
For the three months ended September 30, 2012 and 2011, the
Company recorded stock compensation expense of $1,028,860 and $1,229,968,
respectively, in general and administrative expenses. For the nine months ended
September 30, 2012 and 2011, the Company recorded stock compensation expense of
$3,021,818 and $3,648,255, respectively, in general and administrative expenses.
As of September 30, 2012, approximately $8,510,344 of stock
compensation expense with respect to the non-vested stock options is to be
recognized over approximately 2.83 years.
Nonvested shares
On August 31, 2012, the Company granted 45,000 nonvested shares
to certain directors and 75,000 nonvested shares to certain employees
(collectively, the Participant). Pursuant to the nonvested share grant
agreements between the Company and the Participant, the Participant will have
all the rights of a stockholder with respect to the nonvested shares. The
nonvested shares granted to directors vest on August 31, 2013. The nonvested
shares granted to employees vest in four years with an initial vesting date of
September 1, 2013. As of September 30, 2012, the nonvested shares are not yet
vested and not included in the Companys common stock.
A summary of nonvested shares activity for the nine months
ended September 30, 2012 is as follow:
|
|
Number of
|
|
|
Grant date weighted
|
|
|
|
nonvested shares
|
|
|
average fair value
|
|
Outstanding as of December
31, 2011
|
|
-
|
|
$
|
-
|
|
Granted
|
|
120,000
|
|
|
9.85
|
|
Vested
|
|
-
|
|
|
-
|
|
Forfeited
|
|
-
|
|
|
-
|
|
Outstanding as of September
30, 2012
|
|
120,000
|
|
$
|
9.85
|
|
For the three and nine months ended September 30, 2012, the
Company recorded stock compensation expense of $52,314 and $52,314 in general
and administrative expenses, respectively.
As of September 30, 2012, approximately $1,129,686 of stock
compensation expense with respect to nonvested shares is to be recognized over
approximately 2.84 years.
NOTE 10 FAIR VALUE MEASUREMENTS
Management used the following methods and assumptions to
estimate the fair value of financial instruments at the relevant balance sheet
dates:
-
Short-term financial instruments (including cash, short-term
investment, accounts receivables, other receivables, short-term bank loans,
accounts payable, other payables and accrued expenses, and amount due to related
parties) The carrying amounts of the short-term financial instruments
approximate their fair values because of the short maturity of these
instruments.
-
Long-term other payable The fair value of the Companys
long-term other payable is estimated by discounting future cash flows using
current market interest rates offered to the Company and its subsidiaries for
debts with substantially the same characteristics and maturities. The carrying
amounts of long-term payable approximate their fair values.
-
Derivative liabilities (the 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.
9
|
|
|
|
|
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 liabilitiesWarrants
|
$
|
5,410,419
|
|
$
|
-
|
|
$
|
5,410,419
|
|
$
|
-
|
|
NOTE 11 SALES
The Companys sales are primarily derived from the manufacture
and sale of Human Albumin and Immunoglobulin products. The Companys sales by
significant types of product for the three months ended September 30, 2012 and
2011 are as follows:
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Human Albumin
|
$
|
22,990,891
|
|
$
|
22,448,845
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
Human Hepatitis B Immunoglobulin
|
|
1,249,809
|
|
|
1,810,756
|
|
Human
Immunoglobulin for Intravenous Injection
|
|
23,412,548
|
|
|
12,805,150
|
|
Human Rabies Immunoglobulin
|
|
184,007
|
|
|
774,737
|
|
Human Tetanus
Immunoglobulin
|
|
1,579,620
|
|
|
3,081,909
|
|
Human Immunoglobulin
|
|
672,177
|
|
|
-
|
|
Placenta Polypeptide
|
|
2,726,801
|
|
|
-
|
|
Others
|
|
308,197
|
|
|
382,304
|
|
Total
|
$
|
53,124,050
|
|
$
|
41,303,701
|
|
The Companys sales by significant types of product for the
nine months ended September 30, 2012 and 2011 are as follows:
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Human Albumin
|
$
|
68,320,593
|
|
$
|
63,527,838
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
Human Hepatitis B Immunoglobulin
|
|
4,856,309
|
|
|
5,900,941
|
|
Human
Immunoglobulin for Intravenous Injection
|
|
59,913,448
|
|
|
39,316,818
|
|
Human Rabies Immunoglobulin
|
|
3,281,579
|
|
|
1,527,257
|
|
Human Tetanus
Immunoglobulin
|
|
4,893,019
|
|
|
6,222,200
|
|
Human Immunoglobulin
|
|
1,427,807
|
|
|
-
|
|
Placenta Polypeptide
|
|
7,346,812
|
|
|
-
|
|
Others
|
|
778,283
|
|
|
944,927
|
|
Total
|
$
|
150,817,850
|
|
$
|
117,439,981
|
|
NOTE 12 COMMITMENTS AND CONTINGENCIES
Operating lease commitments
Total operating lease commitments for rental of offices and
land use rights and buildings as of September 30, 2012 are as follows:
12-month period ending September 30,
|
|
|
|
2013
|
$
|
131,625
|
|
2014
|
|
5,522
|
|
2015
|
|
5,522
|
|
2016
|
|
4,970
|
|
2017
|
|
3,867
|
|
Years after
|
|
88,866
|
|
Total minimum payments
required
|
$
|
240,372
|
|
For the three months ended September 30, 2012 and 2011, total
lease expense amounted to $101,584 and $110,122, respectively. For the nine
months ended September 30, 2012 and 2011, total lease expense amounted to
$265,173 and $274,219, respectively.
10
Legal proceedings
Dispute among Guizhou Taibang Shareholders over Raising Additional Capital
On May 28, 2007, 91% of Guizhou Taibang’s shareholders approved a plan to raise additional capital from private strategic investors through the issuance of an additional 20,000,000 shares of Guizhou Taibang equity interests at RMB2.80 per
share. The plan required all existing Guizhou Taibang shareholders to waive their rights of first refusal to subscribe for the additional shares. The remaining 9% shareholder of Guizhou Taibang, 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 91% shareholders of Guizhou Taibang 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 $8,066,968) in exchange for 18,200,000 shares, or 21.4%, of Guizhou Taibangs equity interests. At the same time, Jie’an also subscribed for 1,800,000 shares, representing its 9% pro rata share
of the 20,000,000 shares being offered. The proceeds from all parties were received by Guizhou Taibang in accordance with the agreement.
In June 2007, Jie’an brought suit in the High Court of Guizhou Province, China, against Guizhou Taibang and the three other original Guizhou Taibang shareholders, alleging the illegality of the Equity Purchase Agreement. In its complaint,
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
Jie’an 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 Taibang’s 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 Taibang’s dividends. Dalin was also joined as a
co-defendant as it is the controlling interest shareholder and exercises control over Guizhou Taibang’s day-to-day operations. The Company does not expect the strategic investors to prevail because, upon evaluation of the Equity Purchase
Agreement, the Company believes that the Equity Purchase Agreement is void due to certain invalid pre-conditions and the absence of shareholder authorization of the initial investment. In the event that Guizhou Taibang is required to return the
original investment amount to the strategic investors, Guizhou Taibang has set aside the strategic investors’ initial fund along with RMB14,138,284 (approximately $2,238,090) in accrued interest, and RMB509,600 (approximately $80,670)
for the 1% penalty imposed by the agreement for any breach as of September 30, 2012. 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 both parties to settle the dispute outside the court, which was accepted by both parties. However, 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 RMB11,200,000 (approximately $1,772,960) to one of the strategic investors. On October 26, 2010, the other strategic investors appealed to, and subsequently accepted by, the PRC
Superior 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
issuance, the distribution of dividends and interest in the amount of RMB18,349,345
(approximately $2,904,701) and RMB2,847,000 (approximately $450,680), respectively. The Company is awaiting the hearing as of the date of this report.
During the second quarter of 2010, Jie’an 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 unanimously by
Guizhou Taibang’s shareholders 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 Jie’an’s
request until the outcome of the ongoing litigations. On March 20, 2012, the Company received a subpoena that Jie’an brought suit in the People’s Court of Huaxi District, Guizhou Province against Guizhou Taibang, alleging Guizhou
Taibang’s withholding of its request. Jie’an requested that Guizhou Taibang registers its 1.8 million shares of capital infusion, pay dividends associated with these shares, as well as the related interest and penalty from May 2007 to
December 2011 amounting to RMB25,000,000 (approximately $3,957,500) in aggregate, and return the over-paid subscription of RMB1,440,000 (approximately $227,952), as well as the interest and penalty, amounting to RMB10,000,000 (approximately
$1,583,000) in aggregate. The People’s Court of Huaxi District, Guizhou Province, China has accepted Jie’an’s suit. If the Company decides to ratify the approval or the case is ruled in Jie’an’s favor, Dalin’s
ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jie’an may be entitled to receive its pro rata share of Guizhou Taibang’s profits since the date of Jie’an’s capital contribution became effective. As this
case is closely tied to the outcome of the strategic investors’ dispute stated above, the Company does not expect Jie’an to prevail. As of September 30, 2012, the Company had recorded, in its balance sheet, payables to Jie’an in
the amounts of RMB5,040,000 (approximately $797,832) for the additional funds received in relation to the 1.8 million shares of capital infusion, RMB1,440,000 (approximately $227,952) for the over-paid subscription and RMB2,490,853
(approximately $394,302) for the accrued interest. On May 15 and May 29, 2012, Guizhou Taibang was informed by the court that the case was postponed upon the request from Jie’an and no exact hearing date has been provided.
11
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, $486,668) 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, Guizhou Taibangs then shareholders, provide that the sellers
will be responsible, based on their pro rata equity interest in Guizhou Taibang,
for damages incurred by Guizhou Taibang from Zhongxins debt and that the
sellers 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
reflected in the consolidated financial statements as of December 31, 2009. The
Company settled the debt of RMB3,074,342 on behalf of Zhongxin in 2009.
On December 31, 2010, Guizhou Taibang brought suit against
Zhongxin in the Middle Court of Guiyang City, to recover the full judgment
amount of RMB3,074,342 plus court fee of RMB32,340 that Guizhou Taibang has
already paid on behalf of Zhongxin. On June 22, 2011, the Company applied to the
Middle Court of Guiyang City for the compulsory execution due to the non-payment
from Zhongxin during the agreed period of time.
On September 13, 2010, Zhongxin countersued the Company
alleging that the Equity Transfer Agreement is void due to the absence of
Zhongxins authorization of the initial equity transfer related to Huang Ping
Plasma Station. As a result, Zhongxin claimed for a consideration of RMB500,000
(approximately $79,150) for the alleged loss of its share of income from the
Huang Ping Plasma Station since the Company acquired the station in April 2007.
On September 12, 2012, the Middle Court of Miao-Dong Autonomous Prefecture of
Qiandongnan in Guizhou Province made the final judgment against Zhongxin and
affirmed the validity of the Equity Transfer Agreement.
NOTE 13 RELATED PARTY TRANSACTIONS
The related party balances resulting from transactions
undertaken by the Company with related parties are presented as follows:
Liabilities
|
|
Purpose
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
Advance from customers a
related party
(1)
|
|
Advance
|
|
$
|
-
|
|
$
|
486,602
|
|
Other payable a related party
(2)
|
|
Loan
|
|
$
|
2,304,848
|
|
$
|
2,277,603
|
|
Other payable a related
party
(3)
|
|
Contribution
|
|
$
|
1,420,086
|
|
$
|
1,042,335
|
|
Other payable a related party
(1)
|
|
Commission
|
|
$
|
322,846
|
|
$
|
-
|
|
(1)
During the year ended December 31, 2011, Guizhou
Taibang signed an agency contract with Guizhou Eakan Co., Ltd. (Guizhou
Eakan), an affiliate of one of the Guizhou Taibangs noncontrolling interest
shareholders, pursuant to which Guizhou Taibang would pay commission to Guizhou
Eakan for the promotion of the product of Placenta Polypeptide. As of September
30, 2012, Guizhou Taibang accrued commission payable of $322,846 for service
rendered by Guizhou Eakan. For the three and nine months ended September 30,
2012, commission expense for service rendered by Guizhou Eakan was $1,014,193
and $2,594,281, respectively.
As of December 31, 2011, Guizhou Taibang received $486,602 in
advance from Guizhou Eakan for the product Placenta Polypeptide that has not yet
been delivered by Guizhou Taibang. The payment was made by Guizou Eakan on
behalf of the customers.
Prior to the signing of the agency contract with Guizhou Eakan,
Guizhou Taibang provided processing services to Guizhou Eakan. The Companys
total income from processing services to Guizhou Eakan amounted to nil and
$166,228 for the three months ended September 30, 2012 and 2011, respectively.
The Companys total income from processing services to Guizhou Eakan amounted to
nil and $242,274 for the nine months ended September 30, 2012 and 2011,
respectively.
(2)
Guizhou Taibang has payables to Guizhou Eakan
Investing Corp., amounting to approximately $2,304,848 (RMB14,560,000). Guizhou
Eakan Investing Corp. is one of the noncontrolling interest shareholders of
Guizhou Taibang. Guizhou Taibang borrowed this interest free advance for working
capital purpose. The balance is due on demand.
(3)
In 2007, Guizhou Taibang received additional
contributions from Jiean of $962,853 to maintain Jiean equity interest in
Guizhou Taibang at 9%. However, due to a legal dispute among shareholders over
raising additional capital as discussed in the legal proceeding section (see
Note 12), the money received was not registered as additional capital
contributions. 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 unanimously by Guizhou
Taibangs shareholders in a shareholder meeting held in the second quarter of
2010. However, the Board of Directors of the Company is withholding its required
ratification of the shareholders approval of Jieans request until the outcome
of the ongoing litigations. If the Company decided to ratify the approval,
Dalins ownership in Guizhou Taibang will be diluted from 54% to 52.54% and
Jiean will be entitled to receive its pro rata share of Guizhou
Taibangs profits since the date of Jieans capital contribution became
effective. As this case is closely tied to the outcome of the strategic
investors dispute stated above, the Company has set aside Jieans additional
fund of RMB5,040,000 (approximately $797,832), the over-paid subscription of
RMB1,440,000 (approximately $227,952) along with RMB2,490,853 (approximately
$394,302) in accrued interest and penalty as of September 30, 2012.
12
NOTE 14 - NET INCOME / (LOSS) PER SHARE
The following table sets forth the computation of basic and
diluted net income / (loss) per share for the periods indicated:
|
|
For the three months ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
Net income/(loss)
attributable to China Biologic Products, Inc.
|
$
|
13,617,150
|
|
$
|
(9,361,677
|
)
|
Earnings allocated to participating nonvested
shares
|
|
(20,709
|
)
|
|
-
|
|
Net income/(loss) for basic
net income/(loss) per common stock
|
$
|
13,596,441
|
|
$
|
(9,361,677
|
)
|
|
|
|
|
|
|
|
Weighted average shares used
in computing basic net income/(loss) per common stock
|
|
26,546,929
|
|
|
25,551,125
|
|
Diluted effect of stock option
|
|
471,975
|
|
|
-
|
|
Weighted average shares used
in computing diluted net income/(loss) per common stock
|
|
27,018,904
|
|
|
25,551,125
|
|
|
|
|
|
|
|
|
Net income/(loss) per common
stock basic
|
$
|
0.51
|
|
$
|
(0.37
|
)
|
Net income/(loss) per common stock diluted
|
$
|
0.50
|
|
$
|
(0.37
|
)
|
|
|
For the nine months ended
|
|
|
|
September 30, 2012
|
|
|
September 30, 2011
|
|
|
|
|
|
|
|
|
Net income attributable to
China Biologic Products, Inc.
|
$
|
39,413,227
|
|
$
|
13,547,003
|
|
Earnings allocated to participating nonvested
shares
|
|
(20,562
|
)
|
|
-
|
|
Net income allocated to
common stockholders for computing basic net income per common stock
|
|
39,392,665
|
|
|
13,547,003
|
|
Interest on the Notes
|
|
-
|
|
|
3,580,167
|
|
Change in fair value of
embedded conversion option in the Notes
|
|
-
|
|
|
(6,289,661
|
)
|
Change in fair value of warrants
|
|
(1,769,140
|
)
|
|
(8,771,458
|
)
|
Net income for diluted net
income per common stock
|
$
|
37,623,525
|
|
$
|
2,066,051
|
|
|
|
|
|
|
|
|
Weighted average shares used
in computing basic net income per common stock
|
|
26,009,707
|
|
|
24,849,403
|
|
Diluted effect of the Notes
|
|
-
|
|
|
688,645
|
|
Diluted effect of warrants
|
|
266,999
|
|
|
582,252
|
|
Diluted effect of stock option
|
|
465,007
|
|
|
587,540
|
|
Weighted average shares used
in computing diluted net income per common stock
|
|
26,741,713
|
|
|
26,707,840
|
|
|
|
|
|
|
|
|
Net income per common stock
basic
|
$
|
1.51
|
|
$
|
0.55
|
|
Net income per common stock diluted
|
$
|
1.41
|
|
$
|
0.08
|
|
During the three months ended September 30, 2012, 1,979,333
options with an average exercise price of $11.37 were excluded from the
calculation of diluted net income per common stock since they were antidilutive.
During the three months ended September 30, 2011, diluted net
loss per common stock was computed in the same manner as basic net loss per
share of common stock since the Company had a loss from continuing operations
and therefore it would be antidilutive.
During the nine months ended September 30, 2012, 1,979,333
options with an average exercise price of $11.37 were excluded from the
calculation of diluted net income per common stock since they were antidilutive.
During the nine months ended September 30, 2011, 1,126,000
options with an average exercise price of $12.84 are excluded from the
calculation of diluted net income per common stock since they are antidilutive.
13
|
|
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
Special Note Regarding Forward Looking
Statements
In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as believe, expect, anticipate, project,
target, plan, optimistic, intend, aim, will or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and
demand and acceptance of new and existing products; expectations regarding
governmental approvals of our new products; any projections of sales, earnings,
revenue, margins or other financial items; any statements of the plans,
strategies and objectives of management for future operations; any statements
regarding future economic conditions or performance; as well as all assumptions,
expectations, predictions, intentions or beliefs about future events. You are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, including those identified in
Item 1A Risk Factors described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2011, as well as assumptions, which, if they were
to ever materialize or prove incorrect, could cause the results of the Company
to differ materially from those expressed or implied by such forward-looking
statements.
Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, except as required by law, to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.
Use of Terms
Except as otherwise indicated by the context and for the
purposes of this report only, references in this report to:
-
China Biologic, the Company, we, us, or our, are to the combined
business of China Biologic Products, Inc., a Delaware corporation, and its
direct and indirect subsidiaries;
-
Taibang Biological are to our wholly owned subsidiary Taibang Biological
Limited, a BVI company, formerly Logic Express Limited;
-
Taibang Holdings are to our wholly-owned subsidiary Taibang Holdings
(Hong Kong) Limited, a Hong Kong company, formerly Logic Holdings (Hong Kong)
Limited;
-
Taibang Biotech are to our wholly owned subsidiary Taibang Biotech
(Shandong) Co., Ltd., a PRC company, formerly Logic Management and Consulting
(China) Co., Ltd.;
-
Taibang Beijing are to our wholly owned subsidiary Taibang (Beijing)
Pharmaceutical Research Institute Co., Ltd., a PRC company, formerly Logic
Taibang Biotech Institute (Beijing);
-
Dalin are to our wholly owned subsidiary Guiyang Dalin Biologic
Technologies Co., Ltd., a PRC company;
-
Shandong Taibang are to our majority owned subsidiary Shandong Taibang
Biological Products Co. Ltd., a sino-foreign joint venture incorporated in
China;
-
Taibang Medical are to our wholly owned subsidiary Shandong Taibang
Medical Company, a PRC company;
-
Guizhou Taibang are to our majority owned subsidiary Guizhou Taibang
Biological Products Co., Ltd., a PRC company, formerly Guiyang Qianfeng
Biological Products Co., Ltd.;
-
Huitian are to our minority owned investee Xian Huitian Blood Products
Co., Ltd., a PRC company;
-
BVI are to the British Virgin Islands;
-
Hong Kong are to the Hong Kong Special Administrative Region of the
Peoples Republic of China;
-
PRC and China are to the Peoples Republic of China;
-
SEC are to the Securities and Exchange Commission;
-
Securities Act are to the Securities Act of 1933, as amended;
-
Exchange Act are to the Securities Exchange Act of 1934, as amended;
-
Renminbi and RMB are to the legal currency of China; and
-
U.S. dollars, dollars and $ are to the legal currency of the United
States.
14
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,
production and sales
of human plasma-based pharmaceutical products in China. Shandong Taibang operates from our
production facility located in Taian, Shandong Province and Guizhou Taibang operates from our
production 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. Human albumin is principally used to treat critically ill patients by replacing lost fluid and maintaining adequate blood volume and pressure while immunoglobulin
is used for certain disease prevention and treatment. Our approved human albumin and immunoglobulin products use human plasma as the basic raw material. 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 human albumin products represented approximately 43.3% and 54.4% of our total sales for each of the three months ended September 30, 2012 and 2011, respectively, and
45.3% and 54.1% of our total sales for the nine months ended September 30, 2012 and 2011, respectively. All of our products are prescription medicines administered in the form of injections.
We sell our products directly or through approved distributors to customers in the PRC, mainly hospitals and inoculation centers. We usually sign short-term contracts with customers and therefore our largest customers have changed over the years.
For the three months ended September 30, 2012 and 2011, our top 5 customers accounted for approximately 8.5% and 16.3%, respectively, of our total sales. For the nine months ended September 30, 2012 and 2011, our largest 5 customers accounted for
approximately 11.6% and 15.0% of our total sales, respectively. As we continue to expand our geographic presence and diversify our 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 18
th
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.
Third Quarter Financial Performance Highlights
The following are some financial highlights for the three months ended September 30, 2012:
-
Sales
: Sales increased by $11,820,349, or 28.6%, to $53,124,050 for the three months ended September 30, 2012, from $41,303,701 for the same period in 2011.
-
Gross profit
: Gross profit increased by $8,673,574, or 31.5%, to $36,202,766 for the three months ended September 30, 2012, from $27,529,192 for the same period in 2011.
-
Income /(loss) from operations
: Income from operations increased by $29,815,157, or 317.4%, to $20,420,212 for the three months ended September 30, 2012, from loss of $9,394,945 for the same period in 2011.
-
Net income /(loss) attributable to the Company
: Net income increased by $22,978,827 , or 245.5%, to $13,617,150 for the three months ended September 30, 2012, from net loss attributable to the Company of $9,361,677 for the
same period in 2011.
-
Diluted net income /(loss) per share
: Diluted net income per share was $0.50 for the three months ended September 30, 2012, as compared to diluted net loss per share of $0.37 for the same period in 2011.
Recent Development
In June 2012, we received the manufacturing approval certificate from the State Food and Drug Administration (SFDA) for human coagulation factor VIII (FVIII). In October 2012, we obtained the GMP certification for our
production facility of FVIII from SFDA and commenced the commercial production of FVIII shortly thereafter.
In an announcement published in September 2012 (the September Announcement), Chinese National Development and Reform Commission (NDRC) adjusted retail price ceilings for 95 oncology, immunology and hematology drug products,
which came into effect on October 8, 2012. Two of our approved products, human immunoglobulin for intravenous injection (IVIG) and FVIII are
affected by the September Announcement. According to the September Announcement, the new retail price ceilings for our IVIG products are RMB327 (5%/25ml), RMB561 (5%/50ml), RMB954 (5%/100ml) and RMB1,622 (5%/200ml), and the
new retail price ceilings for
our FVIII products are RMB396 (200IU) and RMB540 (300IU). The new retail price ceilings for IVIG products are lower than the current prevailing market prices in some of our regional markets while those for FVIII
are close to the current prevailing
market prices. As a result, some of local governments start to impose tender
price ceilings for IVIG products. We are in the process of appealing to local governments for favorable pricing
policy in selective regional markets. So far, we have successfully gained support from Guizhou and Shandong provincial governments in lifting the tender price ceilings for IVIG
products. We are in the process of evaluating the impact of the new price ceiling on our future IVIG sales and margin.
15
By the end of year 2013, a more stringent Good Manufacturing Practice standard (the 2013 GMP Standard) enacted by SFDA will become applicable to all of our production facilities. We do not expect the current plasma production facilities
of Guizhou Taibang and Huitian would be able to meet the 2013 GMP Standard and therefore will cease
the production in these facilities by the end of 2013. We plan to construct a new production facility for Guizhou Taibang at a new site to meet the 2013
GMP Standard. We expect to commence preparation work for this project in late 2012 and complete the project in mid 2014. The existing production facility producing plasma-based pharmaceutical products in Guizhou Taibang will be abandoned by the end
of 2013, and as a result, all related assets in such facility to be abandoned are depreciated over a shortened use period. Huitian is also considering constructing a new production facility. We
plan to take appropriate actions to minimize the impact of production
suspension to ensure a smooth transition.
16
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Three Months Ended
September 30, 2012 and September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth key
components of our results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(All amounts, other than percentages, in U.S.
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
$
|
53,124,050
|
|
$
|
41,137,473
|
|
$
|
11,986,577
|
|
|
29.1%
|
|
Related party
|
|
-
|
|
|
166,228
|
|
|
(166,228
|
)
|
|
(100.0%
|
)
|
Total sales
|
|
53,124,050
|
|
|
41,303,701
|
|
|
11,820,349
|
|
|
28.6%
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
16,921,284
|
|
|
13,741,811
|
|
|
3,179,473
|
|
|
23.1%
|
|
Related party
|
|
-
|
|
|
32,698
|
|
|
(32,698
|
)
|
|
(100.0%
|
)
|
Total cost of sales
|
|
16,921,284
|
|
|
13,774,509
|
|
|
3,146,775
|
|
|
22.8%
|
|
GROSS PROFIT
|
|
36,202,766
|
|
|
27,529,192
|
|
|
8,673,574
|
|
|
31.5%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
3,545,378
|
|
|
3,703,683
|
|
|
(158,305
|
)
|
|
(4.3%
|
)
|
General and
administrative expenses
|
|
11,599,779
|
|
|
8,110,693
|
|
|
3,489,086
|
|
|
43.0%
|
|
Research and development expenses
|
|
637,397
|
|
|
509,061
|
|
|
128,336
|
|
|
25.2%
|
|
Impairment loss of
goodwill
|
|
-
|
|
|
18,064,183
|
|
|
(18,064,183
|
)
|
|
(100.0%
|
)
|
Loss on abandonment of long-lived assets
|
|
-
|
|
|
6,536,517
|
|
|
(6,536,517
|
)
|
|
(100.0%
|
)
|
Total operating expenses
|
|
15,782,554
|
|
|
36,924,137
|
|
|
(21,141,583
|
)
|
|
(57.3%
|
)
|
INCOME/(LOSS) FROM OPERATIONS
|
|
20,420,212
|
|
|
(9,394,945
|
)
|
|
29,815,157
|
|
|
(317.4%
|
)
|
OTHER (INCOME) / EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity method investee
|
|
(744,976
|
)
|
|
(712,320
|
)
|
|
(32,656
|
)
|
|
4.6%
|
|
Change in fair
value of derivative liabilities
|
|
-
|
|
|
(2,863,870
|
)
|
|
2,863,870
|
|
|
(100.0%
|
)
|
Interest expense
|
|
223,992
|
|
|
404,349
|
|
|
(180,357
|
)
|
|
(44.6%
|
)
|
Interest income
|
|
(561,761
|
)
|
|
(473,278
|
)
|
|
(88,483
|
)
|
|
18.7%
|
|
Other (income)/expenses, net
|
|
(449,815
|
)
|
|
63,773
|
|
|
(513,588
|
)
|
|
(805.3%
|
)
|
Total other income, net
|
|
(1,532,560
|
)
|
|
(3,581,346
|
)
|
|
2,048,786
|
|
|
(57.2%
|
)
|
EARNINGS/(LOSS) BEFORE INCOME TAX EXPENSE
|
|
21,952,772
|
|
|
(5,813,599
|
)
|
|
27,766,371
|
|
|
(477.6%
|
)
|
INCOME TAX EXPENSE
|
|
3,479,683
|
|
|
1,022,310
|
|
|
2,457,373
|
|
|
240.4%
|
|
NET INCOME/(LOSS)
|
$
|
18,473,089
|
|
$
|
(6,835,909
|
)
|
$
|
25,308,998
|
|
|
(370.2%
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
4,855,939
|
|
|
2,525,768
|
|
|
2,330,171
|
|
|
92.3%
|
|
NET INCOME/(LOSS) ATTRIBUTABLE TO THE
COMPANY
|
$
|
13,617,150
|
|
$
|
(9,361,677
|
)
|
$
|
22,978,827
|
|
|
(245.5%
|
)
|
Sales
. Our sales increased by 28.6%, or
$11,820,349, to $53,124,050 for the three months ended September 30, 2012,
compared to $41,303,701 for the three months ended September 30, 2011. The
increase in sales during 2012 was primarily attributable to a mix of price and
volume increases in certain of our plasma based products, as well as a
substantial increase in sales of placenta polypeptide products. In addition,
foreign exchange translation accounted for 1.8% of the sales increase.
During the three months ended September 30, 2012 as compared to
the three months ended September 30, 2011, most of our approved plasma products
recorded price increases ranging from approximately 7.6% to 68.7%, except for
human hepatitis B immunoglobulin products, which decreased by approximately
37.5% . For the three months ended September 30, 2012 as compared to the three
months ended September 30, 2011:
-
The average price for our approved human albumin products, which accounted
for 43.3% of our total sales for the three months ended September 30, 2012,
increased by approximately 7.6% and, excluding the foreign exchange
translation effect, their average price in RMB term increased by approximately
6.2%.
-
The average price for our approved IVIG products, which accounted for
44.1% of our total sales for the three months ended September 30, 2012,
increased by approximately 8.4%, and excluding the foreign exchange
translation effect, their average price in RMB term increased by approximately
7.1%.
17
-
The average price for our approved human tetanus immunoglobulin products, which accounted for 3.0% of our total sales for the three months ended September 30, 2012, increased by approximately 16.7% and, excluding the foreign exchange translation
effect, their average price in RMB term increased by approximately 14.5%.
-
The average price for our approved human hepatitis B immunoglobulin products, which accounted for 2.4% of our total sales for the three months ended September 30, 2012, decreased by approximately 37.5% and, excluding the foreign exchange translation
effect, their average price in RMB term decreased by approximately 38.2%.
The general price increase of our human albumin products and immunoglobulin products other than human hepatitis B immunoglobulin products was primarily attributable to the shortage in supply of such products in 2012 as a result of the closure of
several plasma collection stations in Guizhou. The price decrease of human
hepatitis B immunoglobulin products was mainly due to newly implemented government program sponsored by PRC Ministry of Health with respect to these products.
The sales prices of participating products in this program are generally lower than normal retail prices for public interest purposes.
The sales volumes of our products in general depend on market demands and our production volumes. The production volumes of our IVIG and human albumin products depend primarily on general plasma supply. The production volumes of our hyper-immune
products, which include human rabies immunoglobulin, human hepatitis B immunoglobulin and human tetanus immunoglobulin products, are subject to the availabilities of specific vaccinated plasma and our production capacity. The supply of specific
vaccinated plasma in general requires several months of lead time. Our production facility currently can only accommodate the production of one type of hyper-immune products at any given time and we rotate the production of different types of
hyper-immune products from time to time in response to market demand. As such, the sales volume of any given type of hyper-immune products may vary significantly from quarter to quarter.
During the three months ended September 30, 2012, sales volumes for our IVIG products and human hepatitis B immunoglobulin products increased by 68.4% and 10.5%, respectively, while human tetanus immunoglobulin
products and human albumin products decreased by 56.2% and 4.8%, respectively, as compared to the three months ended September 30, 2011.
The increase of sales volumes of IVIG products was primarily due to the increased market demand in the three months ended September 30, 2012 and our increased inventory level in the later part of 2011 in anticipation of such
demand increase. Since IVIG products are the primary medicine for treating Hand-Foot-and-Mouth Disease (HFMD), which often has outbreaks in late spring and summer time, the market demand for IVIG products is generally higher during
these periods as well. The increase of the sales volumes of hepatitis B immunoglobulin products was primarily due to the increase of market demand and the fact that the Company successfully secured several major provincial government contracts. The
decrease of sales volumes of human tetanus immunoglobulin products was primarily due to the decrease of its production volumes. The decrease of sales volumes of human albumin products was primarily due to the decrease of its production volumes
caused by the reduced raw material supply as a result of the closure of several plasma collection stations in Guizhou.
Sales of placenta polypeptide products increased substantially during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. We began manufacturing and selling placenta polypeptide products since December
2011. Prior to December 2011, we provided processing service for Guizhou Eakan Co., Ltd. (Eakan), an affiliate of one of Guizhou Taibangs noncontrolling interest holders, for placenta polypeptide products. The revenue we derived
from the sales of placenta polypeptide products is substantially higher than the processing fees we used to charge for these products.
Cost of sales
. Our cost of sales increased by $3,146,775, or 22.8%, to $16,921,284 for the three months ended September 30, 2012, from $13,774,509 for the same period in 2011. Cost of sales as a percentage of sales was
31.9% for the three months ended September 30, 2012, as compared to 33.3% for the same period in 2011. The increase in cost of sales was mainly due to the increase in sales volumes and the increase in cost of plasma. In an effort to increase plasma
collection volume and expand our donor base, we increased the nutrition fees paid to donors, which was in line with the industry practice. The decrease in cost of sales as a percentage of sales was mainly due to the change of our product mix to
include higher margin products.
Gross profit and gross margin
. As a result of the foregoing
factors, our gross profit increased by $8,673,574, or 31.5%, to $36,202,766 for the three months ended September 30, 2012, from $27,529,192 for the same period in 2011. As
a percentage of sales, our gross profit margin increased by 1.4% to 68.1% for the three months ended September 30, 2012, from 66.7% for the same period in 2011.
Operating expenses
. Our total operating expenses decreased by $21,141,583, or 57.3%, to $15,782,554, for the three months ended September 30, 2012, from $36,924,137 for the same period in 2011 primarily due to decrease in
impairment loss. We incurred an impairment loss of $24,600,700, including both goodwill and abandonment of long-lived assets as a result of the closure of several plasma collection stations in Guizhou in August 2011. No impairment loss was
recorded during the three months ended September 30, 2012. As a percentage of sales, total expenses decreased by 59.7% to 29.7% for the three months ended September 30, 2012, from 89.4% for the same period in 2011.
18
Selling expenses
. For the three months ended September 30, 2012, our selling expenses decreased to $3,545,378, from $3,703,683 for the three months ended September 30, 2011, a decrease of $158,305, or 4.3% . As a percentage of
sales, our selling expenses for the three months ended September 30, 2012 decreased by 2.3% to 6.7%, from 9.0% for the three months ended September 30, 2011. The decrease in selling expenses as a percentage of sales was primarily due to the decrease
in commission expenses paid to distributors as a result of the change of our sales strategy to focus more on direct sales to hospitals and inoculation centers.
General and administrative expenses
. For the three months ended September 30, 2012, our general and administrative expenses increased to $11,599,779, from $8,110,693 for the three months ended September 30, 2011, an increase of
$3,489,086, or 43.0% . General and administrative expenses as a percentage of sales increased by 2.2% to 21.8% for the three months ended September 30, 2012, from 19.6% for the three months ended September 30, 2011. The increase in general and
administrative expenses was mainly due to new business development cost in connection with exploring additional growth opportunities during the three months ended September 30, 2012. Additionally, we incurred higher payroll expenses associated
with hiring of several senior management team members since the second quarter of 2012.
Research and development expenses
. For the three months ended September 30, 2012 and 2011, our research and development expenses were $637,397 and $509,061, respectively, representing an increase of $128,336, or 25.2% . As a
percentage of sales, our research and development expenses for the three months ended September 30, 2012 and 2011 were 1.2% and 1.2%, respectively. The increase in research and development expenses was mainly due to the expenditure paid to a
research and development institute in relation to a project during the three months ended September 30, 2012.
Impairment loss of goodwill
. Following the closure of plasma collection stations of Guizhou Taibang in August 2011, we revised our earnings guidance for the year of 2011 and experienced decrease in our stock price and market capitalization
in the third quarter of 2011. The closure of the plasma collection stations was considered to be a triggering event that may cause the fair value of the Companys reporting unit to fall below its book value. Therefore we performed two-step
goodwill impairment test and concluded that the carrying amount of our single 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. As a result, we recognized a goodwill impairment loss of $18,064,183 for the three months ended September 30, 2011.
Loss on abandonment 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 during the
three months ended September 30, 2011. Loss on these long-lived assets of $6,536,517 was recognized in the three months ended September 30, 2011.
Change in fair value of derivative liabilities
. The embedded derivatives (including the conversion option) in our senior secured convertible notes and warrants issued in June 2009 are classified as derivative liabilities carried at
fair value. For the three months ended September 30, 2012 and 2011, we recognized a gain from the change in fair value of derivative liabilities in the amounts of nil and $2,863,870, respectively. The recognized gain from the change in the fair
value of derivative liabilities in the third quarter of 2011 was mainly due to a decrease in the price of our common stock from $10.20 as of June 30, 2011 to $6.81 as of September 30, 2011. The warrants have been fully exercised by the end
of June 2012 and there were no warrants outstanding as of September 30, 2012.
Interest (income) expense
. Our interest expense decreased by $180,357 to $223,992 for the three months ended September 30, 2012, from $404,349 for the same period in 2011. Our interest income increased by $88,483 to
$561,761, for the three months ended September 30, 2012, from $473,278 for the same period in 2011. The decrease in interest expense was primarily due to the fact that all previous short-term bank loans were fully repaid in May 2012 and most
of the current short-term bank loans were made in August and early September 2012, resulting in a decrease in the average bank loan balances for the three months ended September 30, 2012 as compared to the same period in 2011. The increase in
interest income is primarily due to short-term investment with higher interest rates held by the Company as well as the increase in the cash deposit.
Income tax
. Our provision for income taxes increased by $2,457,373, or 240.4%, to $3,479,683 for the three months ended September 30, 2012, from $1,022,310 for the same period in 2011. Our effective income tax rates were
15.9% and negative 17.6% for the three months ended September 30, 2012 and 2011, respectively. As compared to the PRC statutory tax rate applicable to our major operating subsidiaries, the difference in the effective income tax rates was primarily
due to the impairment loss of goodwill and change in fair value of derivative liabilities recorded during the three months ended September 30, 2011, which were not tax deductible or subject to income taxes and therefore had an effect on the
effective income tax rate for this period.
According to the PRCs central government policy, new or high technology companies will enjoy a preferential tax treatment of 15%, instead of 25% under the Enterprise Income Tax Law. In October 2011, Shandong Taibang obtained the High and New
Technology Enterprise qualification for the period from 2011 to 2013. According to CaiShui [2011] No. 58 dated July 27, 2011, Guizhou Taibang, a qualified enterprise located in the western region of PRC, is entitled to a preferential income tax rate
of 15% effective retroactively from January 1, 2011 to December 31, 2020. All other PRC subsidiaries of the Company are subjected to the regular 25% tax rate.
19
Our Companys PRC subsidiaries have cash balance of $128.1
million as of September 30, 2012, which is intended to be permanently reinvested
in the PRC. Any distribution from our PRC subsidiaries is subject to the U.S.
federal income tax at the rate of 34%, less any applicable foreign tax credits.
Due to our intention to indefinitely reinvest our earnings in PRC, we have not
provided for deferred tax liabilities on undistributed earnings of our PRC
subsidiaries.
Net income/(loss) attributable to the Company
. As
a result of the cumulative effects of the foregoing factors, our net income
attributable to the Company increased by $22,978,827, or 245.5%, to $13,617,150 for
the three months ended September 30, 2012, from net loss attributable to the
Company of $9,361,677 for the same period in 2011, and our net income
attributable to the Company as a percentage of total sales was 25.6% and negative
22.7% for the three months ended September 30, 2012 and 2011, respectively.
Comparison of Nine Months Ended
September 30, 2012 and September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth key
components of our results of operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(All amounts, other than percentages, in U.S.
dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
September 30,
|
|
|
Increase
|
|
|
Increase
|
|
|
|
2012
|
|
|
2011
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
$
|
150,817,850
|
|
$
|
117,197,707
|
|
$
|
33,620,143
|
|
|
28.7%
|
|
Related party
|
|
-
|
|
|
242,274
|
|
|
(242,274
|
)
|
|
(100.0%
|
)
|
Total sales
|
|
150,817,850
|
|
|
117,439,981
|
|
|
33,377,869
|
|
|
28.4%
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
48,767,900
|
|
|
35,531,374
|
|
|
13,236,526
|
|
|
37.3%
|
|
Related party
|
|
-
|
|
|
67,302
|
|
|
(67,302
|
)
|
|
(100.0%
|
)
|
Total cost of sales
|
|
48,767,900
|
|
|
35,598,676
|
|
|
13,169,224
|
|
|
37.0%
|
|
GROSS PROFIT
|
|
102,049,950
|
|
|
81,841,305
|
|
|
20,208,645
|
|
|
24.7%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
12,536,727
|
|
|
9,191,739
|
|
|
3,344,988
|
|
|
36.4%
|
|
General and
administrative expenses
|
|
26,677,945
|
|
|
23,240,140
|
|
|
3,437,805
|
|
|
14.8%
|
|
Research and development expenses
|
|
2,277,474
|
|
|
2,439,029
|
|
|
(161,555
|
)
|
|
(6.6%
|
)
|
Impairment loss of
goodwill
|
|
-
|
|
|
18,064,183
|
|
|
(18,064,183
|
)
|
|
(100%
|
)
|
Loss on abandonment of long-lived assets
|
|
-
|
|
|
6,536,517
|
|
|
(6,536,517
|
)
|
|
(100%
|
)
|
Total operating expenses
|
|
41,492,146
|
|
|
59,471,608
|
|
|
(17,979,462
|
)
|
|
(30.2%
|
)
|
INCOME FROM OPERATIONS
|
|
60,557,804
|
|
|
22,369,697
|
|
|
38,188,107
|
|
|
170.7%
|
|
OTHER (INCOME) / EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of equity method investee
|
|
(2,219,279
|
)
|
|
(1,446,402
|
)
|
|
(772,877
|
)
|
|
53.4%
|
|
Change in fair
value of derivative liabilities
|
|
(1,769,140
|
)
|
|
(15,061,119
|
)
|
|
13,291,979
|
|
|
(88.3%
|
)
|
Interest expense
|
|
990,190
|
|
|
4,385,872
|
|
|
(3,395,682
|
)
|
|
(77.4%
|
)
|
Interest income
|
|
(1,870,873
|
)
|
|
(913,003
|
)
|
|
(957,870
|
)
|
|
104.9%
|
|
Other (income)/expenses, net
|
|
(347,029
|
)
|
|
1,134,055
|
|
|
(1,481,084
|
)
|
|
(130.6%
|
)
|
Total other (income)/expenses, net
|
|
(5,216,131
|
)
|
|
(11,900,597
|
)
|
|
6,684,466
|
|
|
(56.2%
|
)
|
EARNINGS BEFORE INCOME TAX EXPENSE
|
|
65,773,935
|
|
|
34,270,294
|
|
|
31,503,641
|
|
|
91.9%
|
|
INCOME TAX EXPENSE
|
|
9,990,014
|
|
|
10,602,775
|
|
|
(612,761
|
)
|
|
(5.8%
|
)
|
NET INCOME
|
$
|
55,783,921
|
|
$
|
23,667,519
|
|
$
|
32,116,402
|
|
|
135.7%
|
|
Less: Net income attributable to noncontrolling interest
|
|
16,370,694
|
|
|
10,120,516
|
|
|
6,250,178
|
|
|
61.8%
|
|
NET INCOME ATTRIBUTABLE TO THE COMPANY
|
$
|
39,413,227
|
|
$
|
13,547,003
|
|
$
|
25,866,224
|
|
|
190.9%
|
|
Sales
. Our sales increased by 28.4%, or
$33,377,869, to $150,817,850 for the nine months ended September 30, 2012,
compared to $117,439,981 for the nine months ended September 30, 2011. The
increase in sales during 2012 was primarily attributable to a mix of price and
volume increases in certain of our plasma based products, as well as substantial
increase in sales of placenta polypeptide products. In addition, foreign
exchange translation accounted for 3.5% of the sales increase.
During the nine months ended September 30, 2012 as compared to
the nine months ended September 30, 2011, most of our approved plasma products
recorded price increases ranging from approximately 9.7% to 20.9%, except for
human hepatitis B immunoglobulin products, which decreased by approximately
46.2% . For the nine months ended September 30, 2012 as compared to the nine
months ended September 30, 2011:
20
-
The average price for our approved human albumin products, which accounted for 45.3% of our total sales for the nine months ended September 30, 2012, increased by approximately 9.7% and, excluding the foreign exchange translation effect, their
average price in RMB term increased by approximately 6.7%.
-
The average price for our approved IVIG products, which accounted for 39.7% of our total sales for the nine months ended September 30, 2012, increased by approximately 11.2% and, excluding the foreign exchange translation effect, their average price
in RMB term increased by approximately 8.1%.
-
The average price for our approved human tetanus immunoglobulin products, which accounted for 3.2% of our total sales for the nine months ended September 30, 2012, increased by approximately 13.5% and, excluding the foreign exchange translation
effect, their average price in RMB term increased by approximately 10.4%.
-
The average price for our approved human hepatitis B immunoglobulin products, which accounted for 3.2% of our total sales for the nine months ended September 30, 2012, decreased by approximately 46.2% and, excluding the foreign exchange translation
effect, their average price in RMB term decreased by approximately 47.7%.
The general price increase of our human albumin products and immunoglobulin products other than human hepatitis B immunoglobulin products was primarily attributable to the shortage in supply of such products in 2012 as a result of the closure of
several plasma collection stations in Guizhou. The price decrease of human
hepatitis B immunoglobulin products was mainly due to newly implemented government program with respect to these products sponsored by PRC Ministry of Health.
The sales prices of participating products in this program are generally lower than normal retail prices for public interest purposes.
The sales volumes of our products in general depend on market demands and our production volumes. The production volumes of our IVIG and human albumin products depend primarily on general plasma supply. The production volumes of our hyper-immune
products, which include human rabies immunoglobulin, human hepatitis B immunoglobulin and human tetanus immunoglobulin products, are subject to the availabilities of specific vaccinated plasma and our production capacity. The supply of specific
vaccinated plasma in general requires several months of lead time. Our production facility currently can only accommodate the production of one type of hyper-immune product at any given time and we rotate the production of different types of
hyper-immune products from time to time in response to market demand. As such, the sales volume of any given type of hyper-immune products may vary significantly from quarter to quarter.
During the nine months ended September 30, 2012, sales volumes for our human
hepatitis B immunoglobulin and IVIG increased by 52.8% and 36.9%, respectively, and sales volumes for our human albumin and human
tetanus immunoglobulin products decreased by 1.9% and 30.8%, respectively, as compared to the nine months ended September 30, 2011.
The increase of sales volumes of IVIG products was primarily due to the increased market demand in 2012 and our increased inventory level in the later part of 2011 in anticipation of such demand increase. Since IVIG products
are the primary medicine for treating HFMD, which often has outbreaks in late spring and summer time, the market demand for IVIG products is generally higher during these periods as well. The increase of the sales volumes of hepatitis B
immunoglobulin products was primarily due to the increase of market demand and the fact that the Company successfully secured several major provincial government contracts. The decrease of sales volumes of human tetanus immunoglobulin products was
primarily due to the decrease of its production volumes. The decrease of sales volumes of human albumin products was primarily due to the decrease of its production volumes, which were in turn due to reduced raw material supply as a result of the
closure of several plasma collection stations in Guizhou.
Sales of placenta polypeptide products increased substantially during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. We began manufacturing and selling placenta polypeptide products since December
2011. Prior to December 2011, we provided processing service for Eakan, an affiliate of one of Guizhou Taibangs noncontrolling interest holders, for placenta polypeptide products. The revenue we derived from the sales of placenta polypeptide
products is substantially higher than the processing fees we used to charge for these products.
Cost of sales
. Our cost of sales increased by $13,169,224, or 37.0%, to $48,767,900 for the nine months ended September 30, 2012, from $35,598,676 for the same period in 2011. Cost of sales as a percentage of sales was
32.3% for the nine months ended September 30, 2012, as compared to 30.3% for the same period in 2011. 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. In an effort to increase plasma collection volume and expand our donor base, we increased the nutrition fees paid to donors, which was in line with the industry practice.
Gross profit and gross margin
. As a result of the foregoing
factors, our gross profit increased by $20,208,645, or 24.7%, to $102,049,950 for the nine months ended September 30, 2012, from $81,841,305 for the same period in 2011.
As a percentage of sales, our gross profit margin decreased by 2.0% to 67.7% for the nine months ended September 30, 2012, from 69.7% for the same period in 2011.
Operating expenses
. Our total operating expenses decreased by $17,979,462, or 30.2%, to $41,492,146, for the nine months ended September 30, 2012, from $59,471,608 for the same period in 2011. We incurred an impairment loss
of $24,600,700, including both goodwill and abandonment of long-lived assets as a result of the closure of several plasma collection stations in Guizhou in August 2011.
21
No impairment loss was recorded during the nine months ended September 30, 2012. As a percentage of sales, total expenses decreased by 23.1% to 27.5% for the nine months ended September 30, 2012, from 50.6% for the same period in 2011.
Selling expenses
. For the nine months ended September 30, 2012, our selling expenses increased to $12,536,727, from $9,191,739 for the nine months ended September 30, 2011, an increase of $3,344,988, or 36.4% . As a percentage of
sales, our selling expenses for the nine months ended September 30, 2012 increased by 0.5% to 8.3%, from 7.8% for the nine months ended September 30, 2011. The increase of selling expenses as a percentage of sales was primarily due to the increase
of selling expenses associated with the placenta polypeptide products. In December 2011, we entered into an agency agreement with Eakan for the promotion of placenta polypeptide products. We incurred higher selling expenses for placenta polypeptide
products as compared to our other products.
General and administrative expenses
. For the nine months ended September 30, 2012, our general and administrative expenses increased to $26,677,945, from $23,240,140 for the nine months ended September 30, 2011, an increase of
$3,437,805, or 14.8% . General and administrative expenses as a percentage of sales decreased by 2.1% to 17.7% for the nine months ended September 30, 2012, from 19.8% for the nine months ended September 30, 2011. The increase in general and
administrative expenses was mainly due to business development cost in connection with exploring additional growth opportunities during the nine months ended September 30, 2012. Additionally, we incurred higher payroll expenses associated with
hiring of several senior management team members since the second quarter of 2012.
Research and development expenses
. For the nine months ended September 30, 2012 and 2011, our research and development expenses were $2,277,474 and $2,439,029, respectively, representing a decrease of $161,555, or 6.6% . As a
percentage of sales, our research and development expenses for the nine months ended September 30, 2012 and 2011 were 1.5% and 2.1%, respectively. The research and development expenses did not fluctuate significantly for the nine months ended
September 30, 2012, as compared to the same period in 2011.
Impairment loss of goodwill
. Following the closure of plasma collection stations of Guizhou Taibang in August 2011, we revised our earnings guidance for the year of 2011 and experienced decrease in our stock price and market capitalization
in the third quarter of 2011. The closure of the plasma collection stations was considered to be a triggering event that may cause the fair value of our reporting unit to fall below its book value. Therefore we performed two-step goodwill impairment
test and concluded that the carrying amount of our single 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. As a result, we recognized a goodwill impairment loss of $18,064,183 for the nine months ended September 30, 2011.
Loss on abandonment 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 during the
nine months ended September 30, 2011. Loss on these long-lived assets of $6,536,517 was recognized in the nine months ended September 30, 2011.
Interest (income) expense
. Our interest expense decreased by $3,395,682 to $990,190 for the nine months ended September 30, 2012, from $4,385,872 for the same period in 2011. The decrease in interest expense was primarily
due to the fact that the convertible notes were fully converted in June 2011, the previous short-term bank loans were fully repaid in May 2012 and most of the current short-term bank loans were obtained in August or early September, resulting in the
decrease of the average loan balances for the nine months ended September 30, 2012 as compared to the same period in 2011. Our interest income increased by $957,870 to $1,870,873, for the nine months ended September 30, 2012, from
$913,003 for the same period in 2011. The increase in interest income is primarily due to short-term investment with higher interest rates held by the Company as well as the increase in the cash deposit.
Income tax
. Our provision for income taxes decreased by $612,761, or 5.8%, to $9,990,014 for the nine months ended September 30, 2012, from $10,602,775 for the same period in 2011. Our effective income tax rates were 15.2%
and 30.9% for the nine months ended September 30, 2012 and 2011, respectively. The decrease of the effective income tax rate was mainly attributable to the decrease in applicable income tax rate of Shandong Taibang from 25% for the nine months ended
September 30, 2011 to 15% for the same period in 2012 due to the fact that Shandong Taibang has been recognized as a High and New Technology Enterprise and thus granted a preferential income tax rate of 15% from 2011 to 2013 in October
2011.
Net income attributable to the Company
. As a result of the cumulative effects of the foregoing factors, our net income attributable to the Company increased by $25,866,224, or 190.9%, to $39,413,227 for the nine months ended
September 30, 2012, from $13,547,003 for the same period in 2011, and our net income attributable to the Company as a percentage of total sales was 26.1% and 11.5% for the nine months ended September 30, 2012 and 2011, respectively.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash flows from operations, augmented by short-term bank borrowings and equity contributions by our stockholders. As of September 30, 2012, we had $131,723,186 in cash, primarily
consisting of cash on hand and demand deposits.
22
The following table provides the summary of our cash
flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Net cash provided by operating activities
|
$
|
64,786,061
|
|
$
|
25,792,830
|
|
Net cash used in investing activities
|
|
(23,076,179
|
)
|
|
(5,639,957
|
)
|
Net cash provided by/ (used in) financing
activities
|
|
210,884
|
|
|
(7,777,100
|
)
|
Effects of exchange rate change on cash
|
|
390,585
|
|
|
2,983,158
|
|
Net increase in cash
|
|
42,311,351
|
|
|
15,358,931
|
|
Cash at beginning of the period
|
|
89,411,835
|
|
|
64,941,368
|
|
Cash at end of the period
|
$
|
131,723,186
|
|
$
|
80,300,299
|
|
Operating Activities
Net cash provided by operating activities for the nine months
ended September 30, 2012 was $64,786,061, as compared to $25,792,830 for the
same period in 2011. The increase in net cash provided by operating activities
was mainly in line with the increase of the net income for the nine months ended
September 30, 2012, as compared to the same period in 2011. Further, as compared
to December 31, 2011, accounts receivable and inventory levels also noticeably
improved with a 10.7% decrease in accounts receivable and a 4.3% decrease in
inventories, which also contributed to the increase of the net cash provided by
operating activities.
Investing Activities
Our use of cash for investing activities is primarily for the
acquisition of property, plant and equipment and intangibles.
Net cash used in investing activities for the nine months ended
September 30, 2012 was $23,076,179, as compared to $5,639,957, for the nine
months ended September 30, 2011. During the nine months ended September 30, 2012
and 2011, we paid $8,233,426 and $6,303,944, respectively, for acquisition of
property, plant and equipment, intangible assets and land use right at Shandong Taibang and Guizhou Taibang. During the nine months ended September 30, 2012, we
made a refundable payment of $13,220,568 to the local government in connection
with our bid for the land use right for the site which we plan to use for the
new production facility for Guizhou Taibang. The payment will be refunded within
one year following the completion of the bidding process. Management believes
the bidding process will be completed in early 2013.
Financing Activities
Net cash provided by financing activities for the nine months
ended September 30, 2012 totaled $210,884, as compared to net cash used in
financing activities of $7,777,100 for the same period in 2011. The net cash
provided by financing activities for the nine months ended September 30, 2012
was mainly due to the net proceeds of $4,500,000 from warrants exercised and new
short-term bank loans of $11,076,100, partially offset by a $11,106,200
repayment of previous short-term bank loans and a $4,379,016 dividend paid by
our subsidiaries to the noncontrolling interest shareholders. The net cash used
in financing activities for the nine months ended September 30, 2011 was mainly
due to a $10,871,200 repayment of short-term bank loans, a $7,635,000 payment to
acquire the remaining 10% interest in our 90% majority-owned subsidiary and a
dividend payment of $7,744,100 to the noncontrolling interest shareholders,
partly offset by cash provided by new short-term loans totaling $18,373,200.
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 September 30, 2012:
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
4,047,780
|
|
$
|
4,047,780
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating lease commitment
|
|
240,372
|
|
|
131,625
|
|
|
11,044
|
|
|
8,837
|
|
|
88,866
|
|
Total
|
$
|
4,288,152
|
|
$
|
4,179,405
|
|
$
|
11,044
|
|
$
|
8,837
|
|
$
|
88,866
|
|
23
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our investors.
Critical Accounting Policies
Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties
regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Our operations are carried out in the PRC and we are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. Accordingly, our business, financial condition and results of
operations may be influenced by the political, economic and legal environment 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 were no material changes in interest rates for short-term bank loans acquired during the three months ended September 30, 2012.
A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings as of September 30, 2012 would decrease net income before provision for income taxes by approximately $27,703
for the three months ended September 30, 2012.
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 and shareholders
equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income but are included in determining other comprehensive income, a component of stockholders equity. We have not
entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.
The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in Chinas political and economic conditions. Since July 2005, the RMB has not been pegged to the U.S. dollar. Although the
Peoples Bank of China regularly involved in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar or Euro in the
medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in RMB exchange rate and lessen involvement in the foreign exchange market.
24
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 September 30, 2012 and December 31, 2011 amounted to $131,396,049 and $88,957,826,
respectively, $116,771 and $236,373 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 43.3% and 44.1% of the total sales for the three months ended September 30, 2012, respectively. If the market demands for human albumin or IVIG cannot be sustained in the future or if
there is substantial price decrease in either or both products, our operating results could be materially and adversely affected.
ITEM 4.
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CONTROLS AND PROCEDURES.
|
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the
reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. David (Xiaoying) Gao and our Chief Financial Officer, Mr. Ming Yang, of the
effectiveness of the design and operation of our disclosure controls and procedures, as of September 30, 2012. Based on that evaluation, Mr. Gao and Mr. Yang concluded that our disclosure controls and procedures were effective as of September 30,
2012.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1.
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LEGAL PROCEEDINGS.
|
From time to time, we may become involved in various lawsuits and legal proceedings. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business.
Other than the legal proceedings described in Item 3 Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2011, we are currently not aware of any such legal proceedings or claims that we believe will have a
material adverse affect on our business, financial condition or operating results. Investors are directed to Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2011 for the description of these legal proceedings. There have
been no material developments to these legal proceedings except for the following.
25
Dispute among Guizhou Taibang Shareholders over Raising Additional Capital
In May 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 by Guizhou Taibang at RMB2.80 per share. The plan
required all existing shareholders of Guizhou Taibang to waive their rights of first refusal to subscribe for such additional shares. The 9% minority holder of Guizhou Taibang, the Guizhou Jiean Company (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 $8,066,968) 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 in 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 shareholders of Guizhou Taibang. The registration of the new investors as Guizhou Taibangs shareholders and the related
increase of registered capital of Guizhou Taibang with the local administration for industry and commerce (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 dividend with respect to their share of Guizhou Taibang. 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, as of
September 30, 2012, Guizhou Taibang has set aside the strategic investors fund along with RMB14,138,284 (approximately $2,238,090) in accrued interests, and RMB509,600 (approximately $80,670) for the 1% penalty imposed by the Equity
Purchase 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 parties to
settle the dispute outside the court, but the parties failed to reach a mutually satisfactory 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 RMB11,200,000 (approximately $1,772,960) to one of the strategic investors. On October 26, 2010, the other strategic investors appealed to, which was 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 issuance, the distribution of dividends and interest in the amount of RMB18,349,345
(approximately $2,904,701) and RMB2,847,000 (approximately $450,680), 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 additional shares with the local AIC, pursuant to the Equity Purchase Agreement, and such request was approved unanimously by Guizhou
Taibangs shareholders 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 on Jieans request,
pending the outcome of the ongoing litigation with the strategic investors.
In March 2012, the Company received a subpoena that Jiean brought suit in the Peoples Court of Huaxi District, Guizhou Province against Guizhou Taibang, alleging Guizhou Taibangs withholding of its request. Jiean requested that Guizhou Taibang registers its
additional 1.8 million shares, pay dividends associated with these shares, as well as the related interest and penalty from May 2007 to December 2011 amounting to RMB25,000,000 (approximately $3,957,500) in aggregate, and refund the over-paid
subscription of RMB1,440,000 (approximately $227,952), as well as the interest and penalty, amounting to RMB10,000,000 (approximately $1,583,000) in aggregate. The Peoples Court of Huaxi District, Guizhou Province, China has accepted
Jieans suit. If the Company decides to ratify the approval or the case is ruled in Jieans favor, Dalins ownership in Guizhou Taibang will be diluted from 54% to 52.54% and Jiean may be entitled to receive its pro
rata share of Guizhou Taibangs profits since the date of Jieans capital contribution became effective. As this case is closely tied to the outcome of the strategic investors dispute, the Company does not expect Jiean to
prevail. As of September 30, 2012, the Company had recorded, in its balance sheet, payables to Jiean in the amounts of RMB5,040,000 (approximately $797,832) for the additional funds received in relation to the 1.8 million shares of capital
infusion, RMB1,440,000 (approximately $227,952) for the over-paid subscription and RMB2,490,853 (approximately $394,302) for the accrued interest. On May 15 and May 29, 2012, Guizhou Taibang was informed by the court that the case was
postponed upon the request from Jiean and no exact hearing date has been provided.
26
Guizhou Taibang's Guarantee to a Third Party
In 2007, as a condition to purchase Huang Ping Plasma Station, Guizhou Taibang entered into an agreement with Guizhou Zhongxin Investment Company, or Zhongxin. In 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 $486,668) in debt that Zhongxin owed to the hospital. In 2009, Huang Ping County Hospital won judgment against Zhongxin for
non-payment of its debt owed to Huang Ping County Hospital and against Guizhou Taibang as the guarantor. Guizhou Taibang paid the full judgment amount of RMB3,074,342 on behalf of Zhongxin. On December 31, 2010, Guizhou Taibang brought suit against
Zhongxin in the Middle Court of Guiyang City, to recover the amount that Guizhou Taibang has paid to Huang Ping County hospital on behalf of Zhongxin plus court fee of RMB32,340. On September 13, 2010, Zhongxin countersued the Company alleging that
the Equity Transfer Agreement is void due to the absence of Zhongxins authorization of the initial equity transfer related to Huang Ping Plasma Station. As a result, Zhongxin claimed for a consideration of RMB500,000 (approximately
$79,150) for the alleged loss of its share of income from the Huang Ping Plasma Station since the Company acquired the station in April 2007. On September 12, 2012, the Middle Court of Miao-Dong Autonomous Prefecture of Qiandongnan in Guizhou
Province made the final judgment against Zhongxin and affirmed the validity of the Equity Transfer Agreement.
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 contains a detailed discussion of risk factors that could materially adversely affect our business, our operating results, or our financial condition. The following risk
factors should be read in conjunction with that discussion. Except for these additional risk factors, there are no material changes from the risk factors previously disclosed in Item 1A Risk Factors of our Annual Report on Form 10-K for
the year ended December 31, 2011.
Our independent registered public accounting firms audit documentation related to their audit reports included in our annual report may include audit documentation located in the Peoples Republic of China. The Public Company
Accounting Oversight Board (PCAOB) currently cannot inspect audit documentation located in China and, as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issued an audit opinion in the financial statements included in our annual report for the fiscal year ended December 31, 2011 filed with the U.S. Securities and Exchange Commission, or SEC, as
auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB. Since the significant portion of the audit is
conducted in China and the work papers related to such portion are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, the work papers of our auditors that are
located in China are not currently inspected by the PCAOB.
Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve
future audit quality. However, the PCAOB is currently unable to inspect an auditors audit work related to a companys operations in China and where such documentation of the audit work is located in China. As a result, our investors may
be deprived of the benefits of PCAOBs oversight of our auditors through such inspections.
The inability of the PCAOB to conduct inspections of our auditors work papers in China makes it more difficult to evaluate the effectiveness of our auditors audit procedures or quality control procedures as compared to auditors outside
of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.
Our operation, sales, profit and cash flow will be adversely affected if we fail to meet the 2013 GMP Standard
All of our production facilities are required to obtain Good Manufacturing Practice (GMP) certificates for their pharmaceutical production activities. In February 2011, Chinese SFDA enacted the more stringent 2013 GMP Standard, which has
greatly raised the bar for quality control, documentation, and overall manufacturing processes. The 2013 GMP will become applicable to all of our production facilities by the end of 2013.
In order for us to meet the 2013 GMP Standard, we would need to upgrade some of our production facilities and therefore expect to incur a substantial amount of capital expenditure. In addition, we expect our on-going compliance cost to increase
under the 2013 GMP Standard as compared to the current GMP standard. As a result, our business and financial condition may be materially and adversely affected.
We do not expect the current plasma production facilities of Guizhou Taibang and Huitian would be able to meet the 2013 GMP Standard and therefore will have to cease the production at these facilities and abandon the building of and part of the
equipment in these facilities
by the end of 2013. We plan to construct a new production facility for Guizhou Taibang at a new site to meet the 2013 GMP Standard. We expect to commence preparation work
for this project in late 2012 and complete the project in mid 2014. Huitian is also considering constructing a new production facility. As a result, our production volume is expected to decrease during the period when Guizhou Taibang and Huitian
suspend production and we expect to incur a substantial amount of capital expenditure for constructing these new facilities, which in turn may materially and adversely affect our business, financial condition and result of operations.
27
Further, there is no guarantee that all of our production facilities, including the new planned facilities, can meet the 2013 GMP Standard. If any of our production facility fails to meet the 2013 GMP Standard, we may be subject to fine or other
penalties and/or may be forced to cease production at such facility. As a result our business, results of operations and financial condition will be materially and adversely affected.
Changes in government control on prices of our products may limit our profitability.
The prices of certain pharmaceutical products are subject to the control of the NDRC of the PRC and the relevant provincial or local price control authorities, either in the form of fixed prices or price ceilings. Four of our major products are
subject to national price control by the NDRC. In the September Announcement, NDRC adjusted the retail price ceilings for 95 oncology, immunology and hematology drug products, which came into effect on October 8, 2012. Two of our approved products,
IVIG and FVIII are affected by the September Announcement. The new retail price ceilings for IVIG products set forth in the September Announcement are lower than the current prevailing retail market price for these products in some of our regional
markets. As a result, it may be difficult for us to raise or maintain the current ex-factory price of our IVIG products. Since this may prevent us from absorbing or offsetting the effect resulting from any increase in the cost of raw materials or
other costs, our revenue and profitability could be adversely affected. If the margin of any of these products becomes prohibitively low, we may be forced to stop manufacturing such product, in which case our revenue and profitability would be
adversely affected further.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
In June 2012, two warrants holders exercised their warrants to purchase 937,500 shares of common stock of the Company and the Company received proceeds of $4,500,000 from such exercise. Other than this, we have not sold any equity securities
during the third quarter of 2012 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 quarter. No repurchases of our common stock were made during the third quarter of 2012.
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
None.
ITEM 4.
|
MINE SAFETY DISCLOSURES.
|
Not applicable.
ITEM 5.
|
OTHER INFORMATION.
|
We have no information to disclose that was required to be in a report on Form 8-K during the third quarter of 2012, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our
board of directors.
The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 8, 2012
|
CHINA BIOLOGIC PRODUCTS, INC.
|
|
|
|
|
By:
|
/s/
David (Xiaoying) Gao
|
|
|
David (Xiaoying) Gao, Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
|
By:
|
/s/
Ming Yang
|
|
|
Ming Yang, Chief Financial Officer
|
|
|
(Principal Financial Officer and
Principal
|
|
|
Accounting Officer)
|
29
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