RISK FACTORS
You should carefully
consider the risks described below, and all of the other information contained or incorporated by reference in this prospectus
supplement, the accompanying prospectus and any free writing prospectus we may provide you in connection with this offering before
deciding to invest in our common stock. If any of these risks actually occurs, it could have a material adverse effect on our business,
financial condition and results of operations. In addition, such risks are not the only risks facing us. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial could, in the future, also materially and adversely affect our business,
financial condition or results of operations. As a result, the trading price of our common stock could decline and you may lose
all or part of your investment.
Risks Relating to Our Business
The biopharmaceutical industry
in China is strictly regulated and changes in such regulations, including banning or limiting plasma products, may have a material
adverse effect on our operations, revenues and profitability.
The principal raw material
of our existing and planned biopharmaceutical products is human source plasma, which, due to its unique nature, is subject to various
quality and safety control risks which include, but are not limited to, contaminations and blood-borne diseases. In addition, current
technology cannot eliminate entirely the risk of biological hazards inherent in plasma that are not currently known or for which
screens are currently commercially available, which could result in a widespread epidemic due to blood infusion. As a result, the
biopharmaceutical industry in China is strictly regulated by the government. The regulatory regime regulates the process of administrative
approval of medicine and its production, and includes laws and regulations such as the PRC Pharmaceutical Law, the Implementation
Rules on the PRC Pharmaceutical Law and the Regulations on the Administration of Blood Products. These laws and regulations require
entities producing blood products to comply strictly with certain hygienic standards and specifications promulgated by the government.
In the event that human plasma is discovered to be not compliant with the government’s hygienic standards and specifications,
the health department may revoke its approval of the blood product, or otherwise limit the use of such blood product. Changes in
these laws and regulations, including banning or limiting plasma products, could have a material adverse effect on our operations,
revenues and profitability.
If the biopharmaceutical
products we sell are found to be contaminated, our operation, revenues and profitability would be severely and adversely affected
and we may be subject to civil and criminal liabilities.
We currently collect plasma
from human donations to our plasma stations in Shandong, Guangxi and Guizhou Provinces. If any of our human donors is infected
with diseases, then the plasma from such donor may be infected. Although we pre-screen all donors in order to ensure that they
are not infected with HIV and hepatitis C and have not contracted liver disease, screening tests may fail to identify and exclude
from our supply the plasma from infected donors due to technical limitation and human errors. If such contaminated plasma is not
appropriately screened out, our entire plasma supply for the relevant plasma station may become contaminated. In 2015, we purchased
source plasma and plasma pastes totaling 143 tonnes from Xinjiang Deyuan Bioengineering Co., Ltd., or Xinjiang Deyuan. We performed
screening tests on the purchased plasma before putting it into production. However, we may fail to identify the contaminated plasma
from Xinjiang Deyuan due to the technical limitation and/or human errors. If the plasma from our collection or purchased from Xinjiang
Deyuan is found to be contaminated and we sell biopharmaceutical products made from that plasma, we could be subject to civil liability
from suits brought by consumers. Further, we may lose our registration and have criminal liability if we are found by the government
to have been criminally negligent. If this occurs, our business, prospects, results of operations and financial condition will
be materially and adversely affected.
If our supply of quality
plasma is interrupted, our results of operations and profitability will be adversely affected. In addition, if we experience any
shortage of raw materials in the future, we may be unable to proceed with our long-term business plan and we may be forced to curtail
or cease our operations or further business expansion.
The production of plasma
products relies on the supply of plasma of suitable quality. For the three months ended March 31, 2016 and 2015, and 2015, 2014,
and 2013, the cost of plasma we used for production accounted for approximately 80.4%, 80.1%, 82.3%, 80.1% and 74.1%, respectively,
of total production cost. The supply and market prices of plasma may be adversely affected by factors such as heightened or new
regulatory restrictions, higher living standards or outbreaks of diseases, any of which would affect our costs of production. We
may not be able to pass on any resulting increase in costs to our customers and therefore any substantial fluctuation in supply
or market prices of plasma may adversely affect our results of operations and profitability.
Our production volume,
capacity utilization and future expansion are affected by a contraction in the supply of raw materials, especially plasma. In addition
to the plasma collected from our own plasma stations, we also outsource plasma from Xinjiang Deyuan pursuant to a cooperation agreement
entered into in August 2015. Under this cooperation agreement, Xinjiang Deyuan agreed to sell to us no less than 500 tonnes
of source plasma in batches over the next three years. We cannot assure you, however, that Xinjiang Deyuan will always deliver
the source plasma on schedule or such plasma will always pass our quality inspection. If we experience any shortage of plasma supply
or fail to secure sufficient plasma supply for our production, we may not be able to fully utilize our production capacity or proceed
with our expansion plans.
We may not be able to carry
on our business if we lose any of the required permits and licenses.
We and Huitian are required
to obtain from various PRC governmental authorities certain permits and licenses, including permits for pharmaceutical manufacturing
and GMP, or the good manufacturing practice, certificates for each of our plants, as well as pharmaceutical distribution permits.
Each of the production
facilities operated by us and Huitian is required to obtain a GMP certificate for its pharmaceutical production activities. In
February 2011, China Food and Drug Administration, or the CFDA, enacted the new GMP standard, which has significantly increased
standards for quality control, documentation, and overall manufacturing processes that applied to each of the production facilities
operated by us and Huitian as of December 31, 2013. In order for us to meet the new GMP standard, we have upgraded the related
production facilities of Shandong Taibang and Guizhou Taibang, which obtained the renewed GMP certificates and resumed commercial
production of plasma products in June 2013 and March 2014, respectively. Huitian suspended its production in late 2013
and obtained the GMP certification for its new plasma production facility in Xi’an in February 2016 and commenced commercial
production thereafter.
We have also obtained permits
and licenses and GMP certificates required for the manufacturing and sales of our products. Our permits and licenses are subject
to periodic renewal and/or reassessment by the relevant PRC governmental authorities, and the compliance standards may be subject
to change from time to time. We intend to apply for the renewal of such permits and licenses when required by applicable laws and
regulations. However, we cannot guarantee that we may renew such permits and licenses in a timely manner, or at all. If we are
unable to renew our permits and licenses or fail an inspection which would impair our permits and licenses, our business, prospects,
financial condition and results of operations may be materially and adversely affected.
In addition, any changes
in compliance standards, or any new laws or regulations that may prohibit or render it more restrictive for us to conduct our business
or increase our compliance costs may adversely affect our operations and profitability. For example, we expect our on-going compliance
cost to increase under the new GMP standard as compared to the previous standard. As a result, our business and financial condition
may be materially and adversely affected.
We may fail to obtain, maintain
or renew required licenses and permits for our plasma stations. In addition, if we fail to adequately monitor our plasma stations,
follow proper procedures or comply with safety requirements, we may be subject to sanctions by the government, civil and criminal
liability. Any of these events could have a material adverse effect on our business, reputation and prospects.
We currently operate 11
plasma stations (including one branch collection facility) through Shandong Taibang and two plasma stations through Guizhou Taibang.
Huitian, a company in which we hold a minority interest, operates three plasma stations in Shaanxi Province. To enable growth in
our sales, we are seeking opportunities to build more plasma stations. In October 2014, we received the regulatory approval to
build two new plasma collection stations in Hebei Province. These new plasma collection stations were under construction as of
the date of this prospectus supplement. In September 2015, we received the regulatory approval to build a new branch collection
facility to operate under our Ningyang plasma collection station in Shandong Province. We obtained the operating permit for this
new plasma collection facility in October 2015 and commenced plasma collection thereafter. The operation of plasma stations, however,
is highly regulated and we cannot assure you that we will be able to obtain, maintain and renew the required licenses and permits
for existing and new plasma stations in desirable locations or in a timely manner, if at all. For example, we have experienced
difficulties and delays in obtaining and/or renewing the business licenses and collection permits for a new plasma station in Pu
Bei, Guangxi Province and five existing plasma stations we acquired in Guizhou Province. While we monitor our plasma intake procedures
through frequent unscheduled inspections of our stations, there remain risks that our plasma stations may fail to comply with hygiene
and procedural requirements for plasma screening, collection, storage and tracking. If we fail to comply with any of these requirements,
we may lose our plasma collection permits or incur criminal liability if we are found by the government to have been criminally
negligent. In the case of plasma contamination, we may also be subject to civil liability from suits brought by consumers of our
biopharmaceutical products. In addition, failure to comply with hygiene and procedural requirements may cause harm to donors, who
may contract diseases from other donors, among other things. Any such incident may subject us to government sanctions, civil or
criminal liabilities. If any of these events were to occur, our business, reputation and prospects would be materially and adversely
affected.
Our operations, sales, profit
and cash flow will be adversely affected if our plasma products fail to pass inspection in a timely manner.
The PRC government inspects
each batch of our plasma products before we can ship it to our customers. The CFDA has quality standards which require the regulators
to assess, among other things, the appearance, packing capacity, thermal stability, pH value, protein content and percentage of
purity of the product. We must strictly comply with relevant rules and regulations throughout the lifecycle of each product including
plasma collection, delivery, production and packaging. Government regulators typically take more than a month to inspect one batch
of plasma products. The process begins when the regulator randomly selects samples of our products and delivers them to the PRC
National Institute for the Control of Pharmaceutical and Biological Products, or NICBPB, for testing, and the process ends when
the products are given final approval by NICBPB. In the event that the regulators delay the approval of or reject our products
or change the requirements such that we are unable to comply, our operations, sales, profit and cash flow will be adversely affected.
Current or worsening economic
conditions may adversely affect our business and financial condition.
We currently generate sufficient
operating cash flows which provide us with significant working capital. However, any uncertainty arising out of economic conditions
may affect our ability to manage normal relationships with our customers, suppliers and creditors and adversely affect our results
of operations, cash flows and financial condition, or those of our customers, suppliers and creditors. Current or worsening economic
conditions may adversely affect the ability of our customers to pay for our products, and curtail their spending on healthcare
generally. This could result in a decrease in the demand for our products, declining cash flows, longer sales cycles, slower adoption
of new technologies and increased price competition. These conditions may also adversely affect certain of our suppliers, which
could cause a disruption in our production capacities. Such reductions and disruptions could have a material adverse effect on
our business operations.
Our inability to successfully
research and develop new biopharmaceutical products could have an adverse effect on our future growth.
We believe that the successful
development of biopharmaceutical products can be affected by many factors. Products that appear to be promising in the early phases
of research and development may fail to be commercialized for various reasons, including the failure to obtain the necessary regulatory
approvals. In addition, the research and development cycle for any new medicine is a relatively lengthy process. In our experience,
the process of conducting research and various tests on new products before obtaining a new medicine certificate from the CFDA
and subsequent procedures may take approximately three to five years. We cannot assure you that our future research and development
projects will be successful or that they will be completed within the anticipated time frame or budget. Also, we cannot guarantee
that we will receive the necessary approvals from relevant authorities for the production of our newly developed products. Even
if such products could be successfully commercialized, we cannot assure you that they will be accepted by the market as anticipated.
As mandated by a CFDA notice
promulgated on July 22, 2015, all pharmaceutical enterprises that are in the process of registration application are required
to inspect the data from the clinical trials and report the inspection results to the CFDA and to withdraw the registration application
should any deficiency surface from such inspection. Since July 22, 2015, a total of 1,184 (including 1,150 withdrawn and 34
rejected) or 81.3% of 1,457 drugs on the self-inspection list for clinical trials have ceased the application process.
The three typical reasons
for applications withdrawals include:
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insufficiency of application documents;
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quality issue uncovered from trial data;
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voluntary withdrawal to improve the quality of clinical trial data.
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We withdrew the registration
application for human hepatitis B immunoglobulin (pH4) for intravenous injection as a result of our self-inspection in December 2015
with the aim to improve the quality of clinical trial data.
Given the uncovered quality
issues and rising costs for clinical trials, certain small drug manufacturers may face increased difficulty in submitting new registration
applications, which could accelerate the CFDA’s overall review process. We cannot assure you, however, that our registration
applications will benefit from this new CFDA practice. Our new product launches might be delayed or aborted due to our withdrawal
in December 2015 and any forced or voluntary withdrawal of our other products in the process of registration application in
the future should quality issues be uncovered from the inspection of the relevant clinical trial data. Such delay or abortion could
have a material adverse effect on our results of operations, financial condition and prospects.
Significant uncertainties
remain with respect to the implementation of the recently announced deregulation on price controls over drug products, and we may
not have discretion to increase the prices of our products until implementation rules are in place. Our ability to increase the
prices of our products is also subject to ongoing government supervision and limited by general market conditions and intense competition.
Prior to the deregulation
of price controls, retail prices of certain pharmaceutical products were subject to various price-related regulations. In accordance
with these price-related regulations, seven of our principal products (i.e., human albumin, IVIG, human rabies immunoglobulin,
human tetanus immunoglobulin, factor VIII, PCC and human immunoglobulin) were included in the NIC and were subject to tender price
ceilings. Two other principal products (i.e., placenta polypeptide and human hepatitis B immunoglobulin), although not included
in the NIC, were also subject to tender price ceilings in certain PRC provinces. See “Business — Regulation”
for further details.
Effective on June 1,
2015, the PRC National Development and Reform Commission, or the NDRC, removed the retail price ceilings for all drug products
(except for anesthetics and category I antipsychotics) in China. As of the date of this prospectus supplement, it remains unclear,
however, how and to what extent such deregulation will have a positive impact on our pricing strategies and ultimately our revenue
and profitability. Until implementation rules are in place to enforce the deregulation, we still may not have discretion to increase
the prices we charge hospitals, inoculation centers and distributors for price-controlled products above the relevant controlled
tender price ceiling under the former regulatory regime, which may adversely affect our revenue and profitability. In addition,
despite the announced deregulation on price controls, the PRC government continues to closely supervise and monitor drug products
pricing. For example, on May 4, 2015, the NDRC issued a notice to local regulators in order to strengthen the supervision
of pricing activities in the drug products market. Among other objectives, this NDRC notice aims to monitor price inflations and
fraudulent pricing practices, promote a transparent market pricing system, and establish a multi-tiered supervisory system to maintain
an orderly drug products market. Although we believe that the deregulation on price controls should be a favorable policy development
for our industry and business in the long term, we cannot assure you that the retail prices of our products will increase in the
absence of price ceilings due to such ongoing government supervision and monitoring.
In addition, our pricing
practices may also be affected by the general market conditions and intense competition. To the extent the demand for our products
declines or competition intensifies, we may decide to respond by reducing our prices in order to capture the declining market demand
and maintain the competitiveness of our products. See also “—We are subject to intense competition and may encounter
increased competition from both local and overseas pharmaceutical enterprises if PRC regulators relax the approval process for
plasma products or international trade restrictions. A change in our competitive environment could adversely affect our profitability
and prospects” below. If the margin of any of our products becomes prohibitively low, we may stop manufacturing such product,
which may further adversely affect our revenue and profitability.
If reimbursement or other
payment for our current or future products is reduced or modified in the PRC, including through the implementation of government-sponsored
healthcare reform or other similar actions, cost containment measures, or changes to policies with respect to pricing, then our
business could suffer.
Sales of our products depend,
in part, on the extent to which the costs of our products are paid by the public payors. These public payors mainly consist of
local governments which reimburse the medicines covered by the NIC. The local governments update the NIC on a regularly basis and
may remove certain medicines from the NIC. These public payors may also reduce the reimbursement amounts for certain medicines
under the NIC. These measures by local governments may limit, reduce or eliminate payments for our products and adversely affect
both pricing flexibility and demand for our products.
Legislation and regulations
affecting reimbursement for our products may change at any time and in ways that may be adverse to us. We cannot predict the impact
of these pressures and initiatives, or any negative effects of any additional regulations that may affect our business.
Some of our owned or leased
properties have title defects or non-compliance, which could adversely affect our business operations.
Some of our owned or leased
properties have title defects or non-compliance. For example, we use properties built on collectively owned rural land for one
of our plasma collection stations. We are also in the process of obtaining the property ownership certificate for another one of
our plasma collection stations. Although such title defects and non-compliance have not adversely affected our business operations,
we cannot assure you that we will be able to rectify such defects and non-compliance in a timely manner or at reasonable costs,
if at all. For example, under PRC laws, collectively owned rural land may not be used for commercial purposes and we may be required
to vacate and seek other space to house our collection facilities. For the collection station built on collectively owned rural
land, under the lease agreement for the collectively owned rural land among us, the local government and the economic collective
which owns the land, the economic collective is required to assist us in securing legal rights to use such land. If the economic
collective fails to perform its obligations under the lease agreement, or the lease agreement is deemed to be void, voidable or
otherwise unenforceable, or if ownership disputes or claims regarding the land otherwise arise, we may be required to relocate
our collection station. Any disputes or claims relating to our owned or leased properties or land or any efforts in securing alternative
sites and properties could divert our resources and management’s attention from our regular business operations. In addition,
we may not be able to secure alternative sites and properties, if required, in a timely manner or at reasonable costs, which could
adversely affect our business operations.
Our financial position and
operations may be materially and adversely affected if our product liability insurance does not sufficiently cover our liabilities.
Under current PRC laws,
manufacturers and vendors of defective products in China may incur liability for loss and injury caused by such products. Pursuant
to the General Principles of the Civil Law of the PRC, or the PRC Civil Law, which became effective in 1987, a defective product
that causes property damage or physical injury to any person may subject the manufacturer or vendor of such product to civil liability.
The Product Quality Law
of the PRC, or the Product Quality Law, was enacted in 1993 and revised in 2000. The Product Quality Law was enacted to protect
the rights and interests of end-users and consumers and to strengthen the supervision and control of the quality of products. Under
the Product Quality Law, manufacturers who produce defective products may be subject to fines and production suspension, and in
severe cases, be subject to criminal liability and may have their business licenses revoked.
The PRC Law on the Protection
of the Rights and Interests of Consumers, or the Consumers’ Rights Law, was enacted in 1993 to further protect the legal
rights and interests of consumers in connection with the purchase or use of goods and services. All businesses, including our business,
must observe and comply with the Consumers’ Rights Law.
The Tort Liability Law
of the PRC was enacted in December 2009, which imposes liability on manufacturers for damages caused by defects in their products.
If the defects are caused by third parties such as transporters or storekeepers, manufactures may be entitled to claim for indemnification
or contribution from such third parties for making compensation to the consumers.
We maintain two product
liability insurance policies for sales in China for Shandong Taibang and Guizhou Taibang’s products in the amount of $3.1 million
(RMB20 million) each. If our products are found to be defective and our insurance coverage is insufficient to cover a successful
claim against us, our financial position and operations may be materially and adversely affected.
Product liability claims
or product recalls involving our products could have a material adverse effect on our business.
Our business exposes us
to the risk of product liability claims that are inherent in the manufacturing, distribution and sale of plasma products. Plasma
is a biological substance that is capable of transmitting viruses and pathogens, whether known or unknown. Therefore, our plasma
and plasma products, if not properly collected, tested, pathogen-inactivated, processed, stored or transported, could cause serious
disease and possibly death to patients. Further, there are viral and other infections of plasma which may escape detection using
current testing methods and which are not susceptible to inactivation methods. Any infection of disease by persons using our products
could result in claims against us. Since our establishment in 2002, we have been subject to four lawsuits filed by patients who
were treated with our products and received blood and/or plasma transfusions. In three of these cases, we were ordered to contribute
a portion of the compensation for the patients even though the courts did not find that our products were defective or caused the
patients’ illness. The required contribution by us was immaterial in these three cases. The fourth case is pending in an
ongoing litigation, which we vigorously defend. We cannot assure you that there will be no future claims against us or that we
will always succeed in defending against such claims. Furthermore, the presence of a defect in a product could require us to carry
out a recall of such product.
A product liability claim,
regardless of merit or eventual outcome, or a product recall could result in substantial financial losses, civil and criminal liabilities,
administrative sanctions, revocation of business and product permits and licenses, negative reputational repercussions and an inability
to retain customers. If our products are found to be defective and our insurance coverage is insufficient to cover a successful
claim against us, our financial position and operations may be materially and adversely affected.
We are subject to intense
competition and may encounter increased competition from both local and overseas pharmaceutical enterprises if PRC regulators relax
the approval process for plasma products or international trade restrictions. A change in our competitive environment could adversely
affect our profitability and prospects.
We face intense competition
from local and foreign entities that manufacture and sell products that compete with ours in China. These competitors may have
more capital, better research and development resources, expanded manufacturing and marketing capabilities and more experience
than we do. The plasma-based biopharmaceutical manufacturing industry in China is highly regulated, and although we believe that
compliance with the regulatory requirements pose a competitive barrier to enter into the Chinese market, over time, however, there
may be new entrants. If the government relaxes these restrictions and allows more competitors to enter into the market, these competitors
may have more capital, better research and development resources, more manufacturing and marketing capability and experience than
us. Our operating results and financial condition may be adversely affected if competition intensifies, competitors reduce prices
to gain market share, or competitors develop new products having comparable medicinal applications or therapeutic effects which
are more effective or less costly than ours.
In addition, we also face
competition from imported products. Since 2009, there has been a substantial increase in volume of imported human albumin in China,
which competes in domestic human albumin market. In addition, we compete with foreign biopharmaceutical manufacturers that set
up production facilities in China and compete directly with us. The increased supply of both domestic and foreign biopharmaceutical
products in China may result in lower sales or lower prices for our products. We cannot assure you that we will remain competitive
or that our profitability and prospects will not be adversely affected.
We depend heavily on key
personnel, and turnover of key employees and senior management could harm our business.
Our success, to a certain
extent, is attributable to the expertise and experience of our senior management and key research and technical personnel who carry
out key functions in our operation. If we lose the service of any of our senior management or key research or technical personnel
or fail to attract additional personnel with suitable experience and qualification, our business operations and research capability
may be adversely affected.
We have a secondment agreement
with the Shandong Institute, which is expected to terminate upon its future privatization, for certain of our employees. If the
secondment agreement is breached or terminated, it could have an adverse effect on our operations and on our financial results.
Shandong Institute of Biological
Products, or the Shandong Institute, provided us with 57 of our employees, including certain key management personnel, out of our
total of approximately 1,713 employees as of March 31, 2016, pursuant to a secondment agreement dated October 28, 2002, between
Shandong Taibang and the Shandong Institute. Pursuant to the secondment agreement, we are responsible for the salaries of these
employees, as well as for their social benefits such as insurance. Our secondment agreement with the Shandong Institute will expire
on the earlier of October 2032 or the privatization of the Shandong Institute, which was originally scheduled to occur before the
end of 2008. However, the privatization of the Shandong Institute has been delayed indefinitely due to delay by the Shandong Department
of Health in implementing the privatization plan. Upon expiration or termination of the secondment agreement, we plan to hire the
seconded employees directly. However, we cannot assure you that all of the employees will accept our employment offers at that
time. Guangli Pang, Shandong Taibang’s chief executive officer is employed through the secondment agreement. Although none
of our seconded employees have indicated that they do not plan to continue working for us after the privatization, if the secondment
agreement is terminated or expires and we are unable to hire those employees or their replacements on time, our operations, as
well as our financial results, may be materially and adversely affected.
Future acquisitions may have
an adverse effect on our ability to manage our business.
Selective acquisitions
form part of our strategy to further expand our business. If we are presented with appropriate opportunities, we may acquire additional
companies, products or technologies. Future acquisitions and the subsequent integration of new companies into ours would require
significant attention from our management. The diversion of our management’s attention and any difficulties encountered in
any integration process could have an adverse effect on our ability to manage our business. Future acquisitions would expose us
to potential risks, including risks associated with the integration of new operations, technologies and personnel, unforeseen or
hidden liabilities, the diversion of resources from our existing businesses and technologies, the inability to generate sufficient
revenue to offset the costs and expenses of acquisitions, and potential loss of, or harm to, relationships with employees, customers
and suppliers as a result.
We may lose our competitive
advantage and our operations may suffer if we fail to prevent the loss or misappropriation of, or disputes over, our intellectual
property or proprietary information.
We regard our intellectual
property, particularly our patents and trade secrets, to be of considerable value and importance to our business and our success.
We rely on a combination of patent, trademark and trade secret laws, as well as confidentiality agreements to protect our intellectual
property rights. Failure to protect our intellectual property rights could harm our brands and our reputation, and adversely affect
our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our patents and
trade secrets, could result in the expenditure of significant financial and managerial resources.
As of March 31, 2016, we
held 53 issued patents and had 12 pending patent applications in China for certain manufacturing processes and packaging designs.
We may not be able to successfully obtain the approval of the PRC authorities for our patent applications. As of March 31, 2016,
we also had eight trademarks registered in China.
While we are not aware
of any infringement on our intellectual property and we have not been notified by any third party that we are infringing on their
intellectual property, our ability to compete successfully and to achieve future revenue growth will depend, in significant part,
on our ability to protect our proprietary technologies and operate without infringing upon the intellectual property rights of
others. Policing unauthorized use of proprietary technologies is difficult and expensive. The steps we have taken may not be adequate
to prevent unauthorized use of our intellectual property rights.
The legal regime in China
for the protection of intellectual property rights is still at its early stage of development. Despite many laws and regulations
promulgated and other efforts made by China over the years to tighten up its regulation and protection of intellectual property
rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many more developed
countries, including the United States, and the enforcement of such laws and regulations in China has not achieved the levels reached
in those countries. The administrative agencies and the court system in China are not well-equipped to deal with violations or
handle the nuances and complexities between compliant technological innovation and noncompliant infringement.
We also rely on confidentiality
agreements with our management and employees to protect our confidential proprietary information. However, the protection of our
intellectual property may be compromised as a result of:
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departure of any of our management members or employees in possession of our confidential proprietary
information;
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breach by such departing management member or employee of his or her confidentiality and non-disclosure
undertaking to us;
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infringement by others of our proprietary information and intellectual property rights; or
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refusal by relevant regulatory authorities to approve our patent or trademark applications.
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Any of these events or
occurrences may have a material adverse effect on our operations.
We cannot assure you that
the steps taken by us to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate
our patents, trademarks, confidential proprietary information or similar proprietary rights. Litigation may be necessary to enforce
our intellectual property rights and the outcome of any such litigation may not be in our favor. Given the relative unpredictability
of China’s legal system and potential difficulties enforcing a court judgment in China, we cannot guarantee that we would
be able to halt any unauthorized use of our intellectual property through litigation in a timely manner.
Furthermore, we cannot
assure you that other parties will not assert infringement claims against us, and we may have to pursue litigation against other
parties to assert our rights. Any such claim or litigation could be costly and we may lack the resources required to defend against
such claims. If we are unsuccessful in defending against such infringement claims, we may be required to pay damages, modify our
products or suspend the production and sale of such products. We cannot guarantee that we will be able to modify our products on
commercially reasonable terms.
Finally, any event that
would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse effect on
our ability to market or sell our brands, and profitably exploit our products.
A disruption in the supply
of utilities, fire or other calamity at our manufacturing plant would disrupt production of our products and adversely affect our
sales.
Our products are manufactured
at our production facilities located in Tai’an, Shandong Province and Guiyang, Guizhou Province in China. While we have not
in the past experienced any calamities which disrupted production, any disruption in the supply of utilities, in particular, electricity
or power supply, or any outbreak of fire, flood or other calamity resulting in significant damage at our facilities would severely
affect our production and have a material adverse effect on our business, financial condition and results of operations.
We maintain insurance policies
covering losses with respect to damages to our properties and products. We do not have insurance coverage for inventories of raw
materials or business interruption. We cannot assure you that our insurance would be sufficient to cover all of our potential losses.
If we do not maintain strong
financial controls, investor confidence in us may decline and our stock price may decline as a result.
As required by Section 404
of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring every public company to include a management report on such
company’s internal control over financial reporting in its annual report, which must also contain management’s assessment
of the effectiveness of our company’s internal control over financial reporting. In addition, the independent registered
public accounting firm auditing the financial statements must also attest to the operating effectiveness of our company’s
internal controls.
A report of our management
and attestation by our independent registered public accounting firm is included in our Annual Report on Form 10-K for the year
ended December 31, 2015. Our management has concluded that our internal controls over financial reporting as of December 31,
2015 were effective. We have in the past discovered, and may in the future discover, material weakness in our internal controls.
For example, we identified material weaknesses related to review controls on the accounting for income taxes and derivative instrument
valuation as described under Item 9A of our Annual Report on Form 10-K for year ended December 31, 2010, which were subsequently
remediated in 2011 as described under Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2011. However,
we cannot guarantee that these remedies will continue to be effective. Failure to achieve and maintain an effective internal control
environment could result in us not being able to accurately report our financial results, prevent or detect fraud or provide timely
and reliable financial and other information pursuant to the reporting obligations we have as a public company, which could have
a material adverse effect on our business, financial condition and results of operations. This could reduce investors’ confidence
in our reported financial information, which in turn could result in lawsuits being filed against us by our stockholders, otherwise
harm our reputation or negatively affect the trading price of our common stock.
Pending disputes regarding
Guizhou Taibang’s equity ownership against us, if not resolved in our favor, could result in dilution to our shareholding
percentage in Guizhou Taibang.
Guizhou Jie’an
Company, or Jie’an, a minority shareholder of Guizhou Taibang, filed several lawsuits against Guizhou Taibang over the
years, seeking to, among other requests, register 1.8 million shares in Guizhou Taibang, approximately 2% of Guizhou
Taibang’s registered capital, under Jie’an’s name with the local Administration of Industry and Commerce,
or AIC. Some of these cases were ruled in our favor and others were still pending as of the date of this prospectus
supplement. See “Item 1—Legal Proceedings—Dispute with Jie’an over Certain Capital Injection into
Guizhou Taibang” in our Quarterly Report on Form 10-Q for the three months ended March 31, 2016, which is
incorporated by reference in this prospectus supplement and the accompanying prospectus, for details. In May 2016, an
appellate court vacated the trial court’s decisions to uphold Guizhou Taibang’s shareholders resolutions passed
in November 2013 and March 2014, and remanded the cases for retrial. In addition, as a result of the appellate court’s
unfavorable ruling in one of the lawsuit with Jie’an in December 2014, Guizhou Taibang paid
RMB22.6 million (approximately $3.5 million) in 2015 into an escrow held by the trial court pending further appeal for
such case. In June 2015, Guizhou Taibang appealed to the High Court of Guizhou, which overruled the decision of the
appellate court and remanded the case to the trial court for retrial in September 2015. Although we, based on our PRC
litigation counsel’s assessment, do not expect Jie’an to prevail in these pending litigations, we cannot assure
you that the final judgment will be in our favor. If Guizhou Taibang is ordered to register the 1.8 million shares for
Jie'an, our ownership interest in Guizhou Taibang will be diluted to 80%, and we may be required to pay Jie’an
accumulated dividends of RMB18.3 million (approximately $2.8 million) and related interest expenses (being its claimed
share of Guizhou Taibang’s accumulated dividend distributions associated with the 1.8 million shares and the
accrued interest from the date when Jie’an’s capital contribution was deemed effective till December 31,
2014) from Guizhou Taibang. As of March 31, 2016, Guizhou Taibang had maintained, on its balance sheet, payables to
Jie’an of RMB5.0 million (approximately $0.8 million) as received funds in respect of the 1.8 million shares
in dispute, RMB1.4 million (approximately $0.2 million) for the over-paid subscription price paid by Jie’an
and RMB3.8 million (approximately $0.6 million) for the accrued interest.
Risks Relating to Doing Business in China
Changes in China’s
political or economic situation could harm us and our operating results.
Economic reforms adopted
by the PRC government have had a positive effect on the economic development of the country. The reformed economic infrastructure
and legal systems, however, may be subject to abrupt adjustments by the government. These adjustments, especially that in the following
areas, could either benefit or damage our operations and profitability:
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level of government involvement in the economy;
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control of foreign exchange;
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methods of allocating resources;
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international trade restrictions; and
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international conflict.
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The PRC economy differs
from the economies of most member countries of the Organization for Economic Cooperation and Development, or the OECD, in many
ways. For example, state-owned enterprises still constitute a large portion of the Chinese economy, and weak corporate governance
and the lack of a flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop
in the same way or at the same rate as might be expected if the PRC economy was similar to those of the OECD member countries.
Uncertainties with respect
to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially
all of our business through our operating subsidiaries in China. Our operating subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system
is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979,
a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments
in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules
are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections
available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of
resources and management attention. In addition, most of our executive officers and directors are residents of China and not of
the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could
be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States
against our PRC operations and subsidiary.
You may have difficulty enforcing
judgments against us.
Most of our assets are
located outside of the United States and most of our current operations are conducted in China. In addition, most of our directors
and officers are nationals and residents of countries other than the United States and substantially all the assets of these persons
are located outside the United States. As a result, it may be difficult for you to effect service of process within the United
States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions
of the U.S. federal securities laws against us and our officers and directors.
There is also uncertainty
as to whether the PRC courts would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that
although recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law, recognition and
enforcement of a foreign judgment by PRC courts depend on treaties or reciprocity between China and the country where the judgment
is made. China does not have any treaties or other arrangements with the United States that provide for the reciprocal recognition
and enforcement of U.S. judgments. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign
judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national
sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court
in the United States.
The PRC government exerts
substantial influence over the manner in which we must conduct our business activities.
The PRC government has
exercised and continues to exercise substantial control over virtually every sector of the PRC economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations
in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments
of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government
actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally
planned economy and any regional or local variations in the implementation of economic policies, could have a significant effect
on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then
hold in PRC-based properties or joint ventures.
Restrictions on currency
exchange may limit our ability to receive and use our sales effectively.
Substantially all of our
sales are settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB
to fund any future business activities outside China or other payments in U.S. dollars. Although the PRC government introduced
regulations in 1996 to allow greater convertibility of RMB for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing
valid commercial documents at those banks in China authorized to conduct foreign exchange business. In addition, conversion of
RMB for capital account items, including direct investments and loans, is subject to governmental approval and companies are required
to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the PRC regulatory
authorities will not impose more stringent restrictions on the convertibility of RMB.
Fluctuations in exchange
rates could adversely affect our business and the value of our securities.
The value of our common
stock will be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other
currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to U.S. dollars
would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business
or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividends we issue that
will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make
in the future.
Since July 2005, RMB
has no longer been pegged to U.S. dollars. Although the People’s Bank of China regularly intervenes in the foreign exchange
market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly in value
against U.S. dollars in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions
on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions
are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions.
While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified
by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Currently, some of our
raw materials and major equipment are imported. In the event that the U.S. dollars appreciate against RMB, our costs will increase.
If we cannot pass the resulting cost increases on to our customers, our profitability and operating results will suffer. In addition,
if our sales to international customers grow, we will be increasingly subject to the risk of foreign currency depreciation.
Restrictions under PRC law
on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability
to grow, make investments or acquisitions, pay dividends to you and otherwise fund and conduct our business.
Substantially all of our
profits are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends
and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries
only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations.
Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10.0% of their annual after-tax profits
determined in accordance with PRC generally accepted accounting principles to a statutory general reserve fund until the amounts
in such fund reaches 50.0% of their registered capital. Allocations to these statutory reserve funds can only be used for specific
purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of our
PRC subsidiaries to transfer funds to us could materially limit our ability to grow, make investments or acquisitions that could
be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Failure to comply with PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders
to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit the ability
of our PRC subsidiaries to distribute profits to us or otherwise materially adversely affect us.
Pursuant to the Circular
on Relevant Issues concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted
by Domestic Residents through Overseas Special Purpose Vehicle, or Circular 37, which was promulgated by the PRC State Administration
of Foreign Exchange , or SAFE, and became effective on July 4, 2014, (1) a PRC resident must register with the local SAFE
branch before he or she contributes assets or equity interests in an overseas special purpose vehicle, or an Overseas SPV, that
is directly established or controlled by the PRC resident for the purpose of conducting investment or financing; and (2) following
the initial registration, the PRC resident is also required to register with the local SAFE branch for any major change, in respect
of the Overseas SPV, including, among other things, a change in the Overseas SPV’s PRC resident shareholder, name of the
Overseas SPV, term of operation, or any increase or reduction of the Overseas SPV’s registered capital, share transfer or
swap, and merger or division.
We have requested the beneficial
holders of our stock who are PRC residents to register with the relevant branch of SAFE in connection with their equity interests
in us and our acquisitions of equity interests in our PRC subsidiaries pursuant to Circular 37 or the predecessor regulation of
Circular 37, namely the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing
and Roundtrip Investments via Overseas Special Purpose Vehicles, as the case may be. As Circular 37 was recently promulgated, it
remains unclear how it will be interpreted and implemented, and how or whether SAFE will apply it to us. Therefore, we cannot predict
how it will affect our business operations or future strategies. For example, the ability of our present and prospective PRC subsidiaries
to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be
subject to compliance with Circular 37 by our PRC resident beneficial holders.
In addition, such PRC residents
may not always be able to complete the necessary registration procedures required by Circular 37. We also have little control over
either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. Failure of our
present or future PRC resident beneficial holders to comply with Circular 37 could subject these PRC resident beneficial holders
to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit the ability of our PRC subsidiaries
to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
We may be unable to complete
a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations.
In August 2006, six
PRC regulatory agencies, including the China Securities Regulatory Commission, or CSRC, promulgated the Regulation on Mergers
and Acquisitions of Domestic Companies by Foreign Investors, or Circular 10, which became effective in September 2006 and
was amended in June 2009. This regulation, among other things, governs the approval process by which a PRC company may participate
in an acquisition of assets or equity interests. Depending on the structure of the transaction, Circular 10 requires the PRC parties
to make a series of applications and supplemental applications to the government agencies. In some instances, the application process
may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations
of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration
dates by which a transaction must be completed and reported to the government agencies. Compliance with Circular 10 is likely to
be more time-consuming and expensive than in the past and the government can now exert more control over the combination of two
businesses. Accordingly, due to Circular 10, our ability to engage in business combination transactions has become significantly
more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders
or sufficiently protect their interests in a transaction.
Circular 10 allows PRC
government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction
may have to submit to the PRC Ministry of Commerce, or MOFCOM, and other relevant government agencies an appraisal report, an evaluation
report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the
transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the
PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally
not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects
of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating
to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities
are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction
on financial terms that satisfy our investors and protect our stockholders’ economic interests.
Under the Enterprise Income
Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non-PRC stockholders.
The Enterprise Income Tax
Law, or the EIT Law, and its implementing rules became effective on January 1, 2008. Under the EIT Law, an enterprise established
outside of China with “de facto management bodies” within China is considered a “resident enterprise,”
meaning that it can be treated in a manner similar to a PRC enterprise for enterprise income tax purposes. The implementing rules
of the EIT Law define de facto management as “substantial and overall management and control over the production and operations,
personnel, accounting, and properties” of the enterprise.
On April 22, 2009,
The PRC State Administration of Tax, or SAT, issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the
Notice, further interpreting the application of the EIT Law and its implementation on non-PRC enterprise or group controlled offshore
entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a PRC enterprise or
group will be classified as a “non-domestically incorporated resident enterprise” if (1) its senior management in charge
of daily operations reside or perform their duties mainly in China; (2) its financial or personnel decisions are made or approved
by bodies or persons in China; (3) its substantial assets and properties, accounting books, corporate chops, board and shareholder
minutes are kept in China; and (4) at least half of its directors with voting rights or senior management often resident in China.
A resident enterprise would be subject to an enterprise income tax rate of 25.0% on its worldwide income and must pay a withholding
tax at a rate of 10.0% when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice
is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax
from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine
tax residency based on the facts of each case. If a withholding tax were imposed on dividend payments to our non-PRC shareholders
under the EIT Law, U.S. holders may be able to credit such withholding tax against their U.S. tax. U.S. holders should consult
their tax advisors regarding the applicability of this credit.
We may be deemed to
be a resident enterprise by PRC tax authorities. If the PRC tax authorities determine that we are a “resident enterprise”
for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to
the enterprise income tax at a rate of 25.0% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations.
In our case, this would mean that income such as interest on financing proceeds and non-PRC source income would be subject to PRC
enterprise income tax at a rate of 25.0%. Second, although under the EIT Law and its implementing rules dividends paid to us from
our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject
to a 10.0% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes. Finally, it is possible that future guidance issued with respect to the “resident enterprise”
classification could result in a situation in which a 10.0% withholding tax is imposed on dividends we pay to our non-PRC stockholders
and with respect to gains derived by our non-PRC stockholders from transferring our shares. Finally, if we were treated as a “resident
enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax. We are actively monitoring the possibility of “resident enterprise” treatment and
are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
We face uncertainties
with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
SAT released a circular
on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698.
Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use
offshore holding companies to invest in China. Circular 698 has the effect of taxing foreign companies on gains derived from the
indirect sale of a PRC company. Where a foreign investor indirectly transfers equity interests in a PRC resident enterprise by
selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction that has an effective
tax rate less than 12.5% or does not tax foreign income of its residents, the foreign investor must report this indirect transfer
to the tax authority in charge of that PRC resident enterprise. Using a “substance over form” principle, the PRC tax
authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established
for the purpose of avoiding PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax
at a rate of up to 10.0%.
SAT subsequently released
public notices to clarify issues relating to Circular 698, including the Announcement on Several Issues concerning the Enterprise
Income Tax on the Indirect Transfers of Properties by Non-resident Enterprises, or SAT Notice 7, which became effective on February 3,
2015. SAT Notice 7 abolished the compulsive reporting obligations originally set out in Circular 698. Under SAT Notice 7, if a
nonresident enterprise transfers its shares in an overseas holding company, which directly or indirectly owns PRC taxable properties,
including shares in a PRC company, via an arrangement without reasonable commercial purpose, such transfer shall be deemed as indirect
transfer of the underlying PRC taxable properties. Accordingly, the transferee shall be deemed as a withholding agent with the
obligation to withhold and remit the enterprise income tax to the competent PRC tax authorities. Factors that may be taken into
consideration when determining whether there is a “reasonable commercial purpose” include, among other factors, the
economic essence of the transferred shares, the economic essence of the assets held by the overseas holding company, the taxability
of the transaction in offshore jurisdictions, and economic essence and duration of the offshore structure. SAT Notice 7 also sets
out safe harbors for the “reasonable commercial purpose” test.
There is little guidance
and practical experience regarding the application of Circular 698 and the related SAT notices. For example, while the term “indirectly
transfer” is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for
information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not
yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax rates in foreign tax jurisdictions.
As a result, we may become at risk of being taxed under Circular 698 and the related SAT notices and we may be required to expend
valuable resources to comply with Circular 698 and the related SAT notices or to establish that we should not be taxed under Circular
698 and the related SAT notices, which could have a material adverse effect on our financial condition and results of operations.
We may be exposed to
liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these
laws could have a material adverse effect on our business.
We are subject to the
Foreign Corrupt Practice Act, or FCPA, and other U.S. laws that prohibit improper payments or offers of payments to foreign governments
and their officials and political parties by U.S. persons and issuers as defined by the relevant statute, for the purpose of obtaining
or retaining business. We have operations, agreements with third parties, and make most of our sales in China. PRC anti-corruption
laws also strictly prohibit bribery of government officials. Our activities in China create the risk of unauthorized payments or
offers of payments by the employees, consultants, sales agents, or distributors, even though they may not always be subject to
our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards
and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors
may engage in conduct for which we might be held responsible. Particularly, most of the hospitals and inoculation centers in China
are state-owned entities, whose employees may be recognized as foreign government officials for the purpose of FCPA. Therefore,
any payments, expensive gifts or other benefits provided to an employee of the state-owned hospital or inoculation center may be
deemed violation of FCPA. Violations of FCPA or PRC anti-corruption laws may result in severe criminal or civil sanctions, and
we may be subject to other liabilities, which could negatively affect our business, prospects, operating results and financial
condition. In addition, the U.S. government may seek to hold us liable for successor liability under FCPA violations committed
by companies in which we invest or that we acquire.
If we become directly
subject to the scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant
resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could
result in a loss ofyour investment in our stock, especially if such matter cannot be addressed and resolved favorably.
In recent years, U.S.
public companies that have substantially all of their operations in China, particularly companies like us which have completed
the “reverse merger” transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors,
financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered
around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny,
criticism and negative publicity, the publicly traded stock of many U.S.-listed PRC-based companies has sharply decreased in value
and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on us, our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate
such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing
our company. If such allegations are not proven to be groundless, our company and our business operations will be severely impacted
and your investment in our stock could be rendered worthless.
The disclosures in our
reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies
in China. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located
in China where substantially all of our operations and business are located have conducted any due diligence on our operations
or reviewed or cleared any of our disclosure.
We are regulated by
the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated
by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily
in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations
and business takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles
that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or
business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements
are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other
filings are not subject to the review of the CSRC, a PRC regulator that is tasked with oversight of the capital markets in China.
Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local
regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any
of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
Our independent registered
public accounting firm may be temporarily suspended from practicing before the SEC if unable to continue to satisfy SEC investigation
requests in the future. If a delay in completion of our audit process occurs as a result, we could be unable to timely file certain
reports with the SEC, which may lead to the delisting of our stock.
On January 22,
2014, Judge Cameron Elliot, an SEC administrative law judge, issued an initial decision suspending the Chinese member firms of
the “Big Four” accounting firms, including our independent registered public accounting firm, from practicing before
the SEC for six months. In February 2014, the initial decision was appealed. While under appeal and in February 2015,
the Chinese member firms of “Big Four” accounting firms reached a settlement with the SEC. As part of the settlement,
each of the Chinese member firms of “Big Four” accounting firms agreed to settlement terms that include a censure,
undertakings to make a payment to the SEC, procedures and undertakings as to future requests for documents by the SEC, and possible
additional proceedings and remedies should those undertakings not be adhered to.
If the settlement terms
are not adhered to, Chinese member firms of “Big four” accounting firms may be suspended from practicing before the
SEC which could in turn delay the timely filing of our financial statements with the SEC. In addition, it could be difficult for
us to timely identify and engage another qualified independent auditor to replace our independent registered public accounting
firm. A delinquency in our filings with the SEC may result in NASDAQ initiating procedures, which could adversely harm our reputation
and have other material adverse effects on our overall growth and prospects.
Our independent registered
public accounting firm’s audit documentation related to their audit reports included in our Annual Report is located in China.
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 issued an audit opinion on the financial statements included in our Annual Report filed with the SEC. As
auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, our auditor is required
by the laws of the United States to undergo regular inspections by the PCAOB. However, work papers located in China are not currently
inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.
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 auditor’s audit work related to a company’s 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 the PCAOB’s
oversight of auditors that are located in China through such inspections.
The inability of the
PCAOB to conduct inspections of an auditor’s work papers in China makes it more difficult to evaluate the effectiveness of
any of our auditor’s audit procedures or quality control procedures that may be located in China 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.
Risks Relating to Our Stock and This Offering
The market price of our
common stock is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of
our common stock is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause
the market price of our common stock to fluctuate significantly. These factors include, among others:
|
·
|
our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating
results or our failure to meet the expectations of financial market analysts and investors;
|
|
·
|
changes in financial estimates by us or by any securities analysts who might cover our stock;
|
|
·
|
speculation about our business in the press or the investment community, including negative publicity
and short seller reports that make allegations against us, even if unfounded;
|
|
·
|
significant developments relating to our relationships with our customers or suppliers;
|
|
·
|
stock market price and volume fluctuations of other publicly traded companies and, in particular,
those that are in our industry;
|
|
·
|
customer demand for our products;
|
|
·
|
investor perceptions of our industry in general and our company in particular;
|
|
·
|
the operating and stock performance of comparable companies;
|
|
·
|
general economic conditions and trends;
|
|
·
|
major catastrophic events;
|
|
·
|
announcements by us or our competitors of new products, significant acquisitions, strategic partnerships
or divestitures;
|
|
·
|
changes in accounting standards, policies, guidance, interpretation or principles;
|
|
·
|
loss of external funding sources;
|
|
·
|
sales of our common stock, including sales by our directors, officers or significant stockholders;
|
|
·
|
additions or departures of key personnel; and;
|
|
·
|
investor perception of litigation, investigation or other legal proceedings involving us or certain
of our individual stockholders or their family members.
|
Securities class action
litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation
could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities markets
may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular
companies. For example, in July 2008, the securities markets in the United States, China and other jurisdictions experienced
the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our
common stock and other interests in our company at a time when you want to sell your interest in us.
The provisions in our
currently effective certificate of incorporation and bylaws and our preferred shares rights agreement might discourage, delay or
prevent a change of control of our company or changes in our management and, therefore depress the trading price of the common
stock.
Upon stockholders’
approval on July 20, 2012, we have adopted amended and restated certificate of incorporation and bylaws, which contained provisions
that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably
expensive to the raider and to encourage prospective acquirers to negotiate with our board of directors, rather than to attempt
a hostile takeover.
These provisions include,
among others:
|
·
|
the right of our board of directors to issue preferred stock without stockholder approval;
|
|
·
|
division of our board of directors into three classes with staggered terms;
|
|
·
|
elimination of the right of our stockholders to act by written consent;
|
|
·
|
prohibiting stockholders from calling a special meeting of the stockholders;
|
|
·
|
rules regarding how stockholders may present proposals or nominate directors for election at stockholder
meetings; and
|
|
·
|
requiring super majority stockholder vote to amend certain provisions of the amended and restated
certificate of incorporation and bylaws.
|
Approved on June 20,
2014, our currently-in-effect bylaws authorize our stockholders who hold 25.0% of our entire capital stock issued and outstanding
and are entitled to vote to call a special meeting of the stockholders.
On January 8,
2015, our board of directors adopted a preferred shares rights agreement between us and the Securities Transfer Corporation, as
the rights agent. This agreement provides, among other things, that when specified events occur, our stockholders will be entitled
to purchase from us a fraction of a share of series A participating preferred stock for each share of common stock they own. Such
preferred stock purchase rights are triggered by the earlier to occur of (1) 10 business days (or a later date determined by our
board of directors before the rights are separated from our common stock) after the public announcement that a person or group
has become an “acquiring person” by acquiring beneficial ownership of 15.0% or more of our outstanding common stock
or (2) 10 business days (or a later date determined by our board of directors before the rights are separated from our common stock)
after a person or group begins a tender or exchange offer that, if completed, would result in that person or group becoming an
acquiring person. The issuance of preferred stock pursuant to this preferred shares rights agreement would cause substantial dilution
to a person or group that attempts to acquire us on terms not approved by our board of directors. Our board of directors had previously
adopted a similar preferred shares rights agreement on November 19, 2012, which expired on November 20, 2014.
We do not intend to pay
dividends for the foreseeable future.
For the foreseeable
future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying
any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price
appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common
stock. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend
on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors
our board of directors deems relevant.
The sale or availability
for sale of substantial amounts of our common stock could adversely affect their market price.
Sales of
substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely
affect the market price of our common stock and could materially impair our future ability to raise capital through offerings
of our common stock. As of May 31, 2016, there were 26,802,926 shares of common stock outstanding, and the selling
stockholders will offer 2,775,000 shares of common stock in this offering.
Subject to certain
exceptions described under the caption “Underwriting,” we have agreed with the underwriter not to sell, transfer or
dispose of any common stock or similar securities for a period of 60 days after the date of this prospectus supplement, and the
selling stockholders and one director affiliated with the selling stockholders have agreed with the underwriter not to sell, transfer
or dispose of any common stock or similar securities for a period of 90 days after the date of this prospectus supplement. When
the lock-up period expires, our locked-up security holders will be able to sell shares in the public market. Moreover, the underwriter
may, in its discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the
applicable lock-up period.
Subject to the applicable
restrictions and limitations under Rule 144 of the Securities Act and other than restricted shares that certain stockholders
hold, all of our common stock outstanding is eligible for sale in the public market. In addition, holders of a substantial number
of shares of our common stock have rights, subject to some conditions, to require us to file registration statements covering their
shares or to include their shares in registration statements that we may file for public offering of our securities. If such holders,
by exercising their registration rights, cause a large number of securities to be registered and sold into the public market, these
sales could have an adverse effect on the market price for our common stock.
We cannot predict the
effect, if any, that future sales of shares of our common stock into the market, or the availability of shares of common stock
for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares
issued upon the exercise, conversion or exchange of other securities), or the perception that such sales could occur, may materially
and adversely affect prevailing market prices for our common stock.
Stock prices of companies
with business operations primarily in China have fluctuated widely in recent years, and the trading prices of our common stock
are likely to be volatile, which could result in substantial losses to investors.
The trading prices
of our common stock are likely to be volatile and could fluctuate widely in response to factors beyond our control. For example,
if one or more of the industry analysts or ratings agencies who cover us downgrades us or our common stock, or publishes unfavorable
research about us, the price of our common stock may decline. If one or more of these analysts or agencies cease to cover our company
or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price of our
common stock or trading volume to decline. In addition, the performance and fluctuation of the market prices of other China-based,
U.S.-listed healthcare companies may affect the volatility in the price of and trading volume for our common stock. In recent years,
a number of PRC-based companies have listed their securities, or are in the process of preparing for listing their securities,
on U.S. stock markets. Some of these companies have experienced significant volatility, including significant price declines following
their initial public offerings. The trading performances of the securities of these PRC-based companies at the time of or after
their offerings may affect the overall investor sentiment towards PRC-based companies listed in the United States and consequently
may impact the trading performance of our common stock. These broad market and industry factors may significantly affect the market
price and volatility of our common stock, regardless of our actual operating performance.
In addition to market
and industry factors, the price and trading volume for our common stock may be highly volatile for specific business reasons. Any
of these factors may result in large and sudden changes in the volume and price at which our common stock will trade. We cannot
give any assurance that these factors will not occur in the future again. In the past, following periods of volatility in the market
price of a company’s securities, stockholders have often instituted securities class action litigation against that company.
If we were involved in a class action lawsuit, it could divert the attention of senior management, and, if adversely determined,
could have a material and adverse effect on our business, financial condition and results of operations.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following management’s discussion and analysis should be read in conjunction with our financial statements and the notes
thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly Report on Form 10-Q for
the three months ended March 31, 2016, both of which are incorporated by reference in this prospectus supplement and the accompanying
prospectus. In addition to historical information, the following discussion contains certain forward-looking information. See “Special
Note Regarding Forward-Looking Statements” included elsewhere in this prospectus supplement for certain information concerning
those forward looking statements. Our financial statements are prepared in U.S. dollars and in accordance with United States generally
accepted accounting principles
.
Overview
We are a biopharmaceutical
company principally engaged in the research, development, manufacturing and sales of plasma products in China. We have a strong
product portfolio with over 20 different dosage forms of plasma products and other biopharmaceutical products across nine categories.
Our principal products are human albumin and IVIG. These products use human plasma as their principal raw material. For the three
months ended March 31, 2016 and 2015, sales of human albumin products represented approximately 38.1% and 38.2% of our total sales,
respectively, and sales of IVIG products represented approximately 39.9% and 46.7% of our total sales, respectively. For 2015,
2014 and 2013, sales of human albumin products represented approximately 37.6%, 39.3% and 44.1% of our total sales, respectively,
and sales of IVIG products represented approximately 42.2%, 40.4% and 38.0% of our total sales, respectively. All of our products
are prescription medicines administered in the form of injections.
Our sales model focuses
on direct sales to hospitals and inoculation centers and is complemented by distributor sales. In the three months ended March
31, 2016, we generated sales of $85.6 million, an increase of 21.6% from the same period of 2015, and recorded net income attributable
to our company of $26.2 million, an increase of 12.9% from the same period of 2015. In 2015, we generated sales of $296.5 million,
an increase of 21.9% from 2014, and recorded net income attributable to our company of $89.0 million, an increase of 25.5% from
2014.
Recent Development
In February 2016,
Huitian obtained the GMP certificate from the CFDA for its new plasma production facility in Xi’an, Shaanxi Province, and
commenced commercial production thereafter.
In April 2016, our
wholly owned subsidiary, Guiyang Dalin Biologic Technologies Co., Ltd., increased its equity interest in Guizhou Taibang from 81.81%
as of December 31, 2015 to 85.27% following a series of capital injections.
Principal Factors Affecting our Financial Performance
The following are key
factors that affect our financial condition and results of operations and we believe them to be important to the understanding
of our business:
Raw material supply and prices
The primary raw material
used in the production of our albumin and immunoglobulin products is human plasma. The collection of human plasma in China is generally
influenced by a number of factors such as government regulations, geographical locations of plasma collection stations, sanitary
conditions of plasma stations, living standards of the donors, and cultural and religious beliefs. If we experience any shortage
of plasma supply, we may not be able to fully utilize our production capacity. We currently operate 11 plasma collection stations
(including one branch collection facility) through Shandong Taibang and two plasma stations through Guizhou Taibang. These plasma
stations provide us with a stable source of plasma supply.
Prices of and demand for our products
The demand for our
products is largely affected by the general economic conditions in China because the prices of our products are still not affordable
to many patients. A significant improvement in the economic environment in China will likely improve consumer income which in turn
would make our products more affordable and consequently increase the demand for our products. We have been able to expand our
product range and consumer base by introducing new products required by customers. We believe that our technical expertise is important
in introducing products that are in demand.
Production Capacity
Our sales volume is
limited by our annual production capacity. As we grow our business in the future, our ability to fulfill additional and larger
orders will depend on our ability to increase our production capacity. Our plan to expand our production capacity will depend on
the availability of capital to meet our needs of expansion or upgrading of production lines, and the availability of stable plasma
supply. To comply with applicable PRC laws and regulations, we have maintained permits and licenses necessary for the current operations
of our plasma collection stations and production plants, and are required to apply for such permits and licenses to operate new
plasma collection stations and production plants. As a result, our expansion plan also depends on our ability to renew existing
permits and licenses and obtain new permits and licenses.
Competition
We face intense competition
from local and foreign entities that manufacture and sell products that compete with ours in the PRC. These competitors may have
more capital, better research and development resources, expanded manufacturing and marketing capabilities and more experience
than we do. In our industry, we compete based upon product quality, production cost, ability to produce a diverse range of products
and logistical capabilities.
Our profitability may
be adversely affected if competition intensifies, competitors reduce prices, PRC government requires us to reduce the prices of
our products, or competitors develop new products or product substitutes with comparable medicinal applications or therapeutic
effects which are more effective or less costly than ours.
Taxation
China Biologic is subject
to United States tax at gradual rates of up to 35.0%. No provision for income taxes in the United States has been made as China
Biologic has no U.S. taxable income.
Taibang Biological
was incorporated in the BVI, but is not subject to taxation in that jurisdiction.
Taibang Holdings was
incorporated in Hong Kong, and under the current laws of Hong Kong, is subject to a Profits Tax of 16.5% on profits arising in
Hong Kong. However, no provision for Hong Kong Profits Tax has been made as Taibang Holdings has no taxable income.
According to the PRC
government policy, new or high technology companies may enjoy a preferential income tax rate of 15.0%, instead of 25.0% under the
EIT Law. In 2011, Shandong Taibang renewed its high and new technology enterprise qualification, which entitled it to the preferential
income tax rate of 15.0% for a period of three years from 2011 to 2013. In October 2014, Shandong Taibang renewed its high
and new technology enterprise qualification, which entitled it to enjoy a preferential income tax rate of 15.0% for a period of
three years from 2014 to 2016. Shandong Taibang may apply for a renewal for an additional three years from 2017 to 2019 upon the
expiration of its high and new technology enterprise certificate. According to Notice on Issues Concerning Relevant Tax Policies
in Deepening the Implementation of the Western Development Strategy jointly promulgated by the PRC Ministry of Finance, the PRC
General Administration of Customs and SAT dated July 27, 2011, Guizhou Taibang, being a qualified enterprise located in the
western region of China, enjoys a preferential income tax rate of 15.0% effective from January 1, 2011 to December 31,
2020. All of our other PRC subsidiaries are subject to the statutory income tax rate of 25.0%.
Results of Operations
The following table
sets forth a summary of our consolidated statements of comprehensive income for the periods indicated. Our historical results presented
below are not necessarily indicative of the results that may be expected for any other future period.
|
|
Year
Ended December 31,
|
|
|
Three
Months Ended March 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
%
of
Total
Sales
|
|
|
Amount
|
|
|
%
of
Total
Sales
|
|
|
Amount
|
|
|
%
of
Total
Sales
|
|
|
Amount
|
|
|
%
of
Total
Sales
|
|
|
Amount
|
|
|
%
of
Total
Sales
|
|
|
|
(U.S. dollars in thousands, except
per share data)
|
|
Sales
|
|
|
296,458
|
|
|
|
100.0
|
|
|
|
243,252
|
|
|
|
100.0
|
|
|
|
203,357
|
|
|
|
100.0
|
|
|
|
85,588
|
|
|
|
100.0
|
|
|
|
70,354
|
|
|
|
100.0
|
|
Cost of sales
|
|
|
106,483
|
|
|
|
35.9
|
|
|
|
80,026
|
|
|
|
32.9
|
|
|
|
65,484
|
|
|
|
32.2
|
|
|
|
34,043
|
|
|
|
39.8
|
|
|
|
24,462
|
|
|
|
34.8
|
|
Gross
margin
|
|
|
189,975
|
|
|
|
64.1
|
|
|
|
163,226
|
|
|
|
67.1
|
|
|
|
137,873
|
|
|
|
67.8
|
|
|
|
51,545
|
|
|
|
60.2
|
|
|
|
45,892
|
|
|
|
65.2
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
9,973
|
|
|
|
3.4
|
|
|
|
10,707
|
|
|
|
4.4
|
|
|
|
10,643
|
|
|
|
5.2
|
|
|
|
1,228
|
|
|
|
1.4
|
|
|
|
1,951
|
|
|
|
2.8
|
|
General and administrative
expenses
|
|
|
41,392
|
|
|
|
14.0
|
|
|
|
32,130
|
|
|
|
13.2
|
|
|
|
36,074
|
|
|
|
17.7
|
|
|
|
11,328
|
|
|
|
13.2
|
|
|
|
7,853
|
|
|
|
11.2
|
|
Research and development
expenses
|
|
|
6,024
|
|
|
|
2.0
|
|
|
|
4,162
|
|
|
|
1.7
|
|
|
|
4,223
|
|
|
|
2.1
|
|
|
|
1,095
|
|
|
|
1.3
|
|
|
|
1,342
|
|
|
|
1.9
|
|
Provision
for other receivables in respect of an employee housing development project
|
|
|
-
|
|
|
|
-
|
|
|
|
5,068
|
|
|
|
2.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
57,389
|
|
|
|
19.4
|
|
|
|
52,067
|
|
|
|
21.4
|
|
|
|
50,940
|
|
|
|
25.0
|
|
|
|
13,651
|
|
|
|
15.9
|
|
|
|
11,146
|
|
|
|
15.8
|
|
Income
from operations
|
|
|
132,586
|
|
|
|
44.7
|
|
|
|
111,159
|
|
|
|
45.7
|
|
|
|
86,933
|
|
|
|
42.7
|
|
|
|
37,894
|
|
|
|
44.3
|
|
|
|
34,746
|
|
|
|
49.4
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (loss) income
of equity method investee
|
|
|
(1,311
|
)
|
|
|
(0.4
|
)
|
|
|
8,646
|
|
|
|
3.6
|
|
|
|
2,170
|
|
|
|
1.1
|
|
|
|
(216
|
)
|
|
|
(0.3
|
)
|
|
|
(95
|
)
|
|
|
(0.1
|
)
|
Interest expense
|
|
|
(1,727
|
)
|
|
|
(0.6
|
)
|
|
|
(3,698
|
)
|
|
|
(1.5
|
)
|
|
|
(1,135
|
)
|
|
|
(0.6
|
)
|
|
|
(89
|
)
|
|
|
(0.1
|
)
|
|
|
(757
|
)
|
|
|
(1.1
|
)
|
Interest
income
|
|
|
5,551
|
|
|
|
1.9
|
|
|
|
6,645
|
|
|
|
2.7
|
|
|
|
4,433
|
|
|
|
2.2
|
|
|
|
1,751
|
|
|
|
2.0
|
|
|
|
1,377
|
|
|
|
2.0
|
|
Total
other income, net
|
|
|
2,513
|
|
|
|
0.9
|
|
|
|
11,593
|
|
|
|
4.8
|
|
|
|
5,468
|
|
|
|
2.7
|
|
|
|
1,446
|
|
|
|
1.6
|
|
|
|
525
|
|
|
|
0.7
|
|
Earnings before income
tax expense
|
|
|
135,099
|
|
|
|
45.6
|
|
|
|
122,752
|
|
|
|
50.5
|
|
|
|
92,401
|
|
|
|
45.4
|
|
|
|
39,340
|
|
|
|
45.9
|
|
|
|
35,271
|
|
|
|
50.1
|
|
Income
tax expense
|
|
|
20,993
|
|
|
|
7.1
|
|
|
|
26,639
|
|
|
|
11.0
|
|
|
|
15,540
|
|
|
|
7.6
|
|
|
|
6,607
|
|
|
|
7.7
|
|
|
|
5,616
|
|
|
|
8.0
|
|
Net income
|
|
|
114,106
|
|
|
|
38.5
|
|
|
|
96,113
|
|
|
|
39.5
|
|
|
|
76,861
|
|
|
|
37.8
|
|
|
|
32,733
|
|
|
|
38.2
|
|
|
|
29,655
|
|
|
|
42.2
|
|
Less:
Net income attributable to non-controlling interest
|
|
|
25,063
|
|
|
|
8.5
|
|
|
|
25,196
|
|
|
|
10.3
|
|
|
|
22,259
|
|
|
|
10.9
|
|
|
|
6,536
|
|
|
|
7.6
|
|
|
|
6,493
|
|
|
|
9.2
|
|
Net
income attributable to company
|
|
|
89,043
|
|
|
|
30.0
|
|
|
|
70,917
|
|
|
|
29.2
|
|
|
|
54,602
|
|
|
|
26.9
|
|
|
|
26,197
|
|
|
|
30.6
|
|
|
|
23,162
|
|
|
|
32.9
|
|
Net income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3.40
|
|
|
|
|
|
|
|
2.85
|
|
|
|
|
|
|
|
2.05
|
|
|
|
|
|
|
|
0.96
|
|
|
|
|
|
|
|
0.91
|
|
|
|
|
|
Diluted
|
|
|
3.27
|
|
|
|
|
|
|
|
2.71
|
|
|
|
|
|
|
|
1.96
|
|
|
|
|
|
|
|
0.94
|
|
|
|
|
|
|
|
0.87
|
|
|
|
|
|
Comparison of Three Months Ended March
31, 2016 and March 31, 2015
Sales
Our sales increased
by $15.2 million, or 21.6%, to $85.6 million for the three months ended March 31, 2016, compared to $70.4 million for the same
period in 2015. Excluding the foreign exchange impact resulting from the depreciation of the RMB against the U.S. dollar, our sales
would have increased by 29.4% for the three months ended March 31, 2016 as compared to the same period in 2015. The increase in
sales for the three months ended March 31, 2016 was primarily attributable to the sales volume increases in major plasma products
and human tetanus immunoglobulin products.
The following table
summarizes the breakdown of sales by significant types of product:
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Human albumin
|
|
|
32.6
|
|
|
|
38.1
|
|
|
|
26.9
|
|
|
|
38.2
|
|
|
|
5.7
|
|
|
|
21.2
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IVIG
|
|
|
34.2
|
|
|
|
39.9
|
|
|
|
32.9
|
|
|
|
46.7
|
|
|
|
1.3
|
|
|
|
4.0
|
|
Other immunoglobulin products
|
|
|
8.9
|
|
|
|
10.4
|
|
|
|
4.3
|
|
|
|
6.2
|
|
|
|
4.6
|
|
|
|
107.0
|
|
Placenta polypeptide
|
|
|
5.7
|
|
|
|
6.7
|
|
|
|
4.6
|
|
|
|
6.5
|
|
|
|
1.1
|
|
|
|
23.9
|
|
Others
|
|
|
4.2
|
|
|
|
4.9
|
|
|
|
1.7
|
|
|
|
2.4
|
|
|
|
2.5
|
|
|
|
147.1
|
|
Totals
|
|
|
85.6
|
|
|
|
100.0
|
|
|
|
70.4
|
|
|
|
100.0
|
|
|
|
15.2
|
|
|
|
21.6
|
|
During the three months
ended March 31, 2016 as compared to the three months ended March 31, 2015:
|
·
|
the average price for our approved human albumin products, which accounted for 38.1% of our total
sales for the three months ended March 31, 2016, increased by 2.8% in RMB term and decreased by 3.4% in USD term; and
|
|
·
|
the average price for our approved IVIG products, which accounted for 39.9% of our total sales
for the three months ended March 31, 2016, increased by 2.7% in RMB term and decreased by 3.4% in USD term; and
|
The average sales price
of our human albumin products and IVIG products increased in RMB term for the three months ended March 31, 2016 as compared to
the same period in 2015 following the removal of the retail price ceiling for drug products effective on June 1, 2015.
The sales volume of
our products depends on market demand and our production volume. The production volume of our human albumin products and IVIG products
depends primarily on the general plasma supply. The production volume of our hyper-immune products, which include human rabies
immunoglobulin, human hepatitis B immunoglobulin and human tetanus immunoglobulin products, is subject to the availabilities of
specific vaccinated plasma and our production capacity. The supply of specific vaccinated plasma 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.
The sales volume of
our human albumin products and IVIG products increased by 25.6% and 7.6% for the three months ended March 31, 2016 as compared
to the same period in 2015 as a result of the increased production volume at Shandong Taibang and Guizhou Taibang. The slower sales
growth of IVIG products for the three months ended March 31, 2016 was primarily due to the depletion of IVIG pastes we reserved
from previous years to be processed and sold in 2015 in anticipation of favorable market conditions and our improved sales capabilities
at that time.
The sales increase
of other immunoglobulin products for the three months ended March 31, 2016 as compared to the same period in 2015 was mainly attributable
to the increase in both sales volume and sales price of human tetanus immunoglobulin products. The sales of human tetanus immunoglobulin
products increased by $5.0 million for the three months ended March 31, 2016 as compared to the same period in 2015. The average
sales price of human tetanus immunoglobulin products increased significantly for the three months ended March 31, 2016 as compared
to the same period in 2015 due to the strong market demand coupled by the removal of the retail price ceiling for drug products
effective on June 1, 2015.
The sales increase
of other products for the three months ended March 31, 2016 as compared to the same period in 2015 was mainly due to the increase
in sales volume of human prothrombin complex concentrate, or PCC and factor VIII. We launched PCC to the market in early 2015 and
experienced the sales ramp-up for the three months ended March 31, 2016.
Cost of sales and gross profit
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Cost of sales
|
|
$
|
34.1
|
|
|
$
|
24.5
|
|
|
$
|
9.6
|
|
|
|
39.2
|
|
as a percentage of total sales
|
|
|
39.8
|
%
|
|
|
34.8
|
%
|
|
|
|
|
|
|
5.0
|
|
Gross Profit
|
|
$
|
51.5
|
|
|
$
|
45.9
|
|
|
$
|
5.6
|
|
|
|
12.2
|
|
Gross Margin
|
|
|
60.2
|
%
|
|
|
65.2
|
%
|
|
|
|
|
|
|
(5.0
|
)
|
Our cost of sales was
$34.1 million, or 39.8% of our sales for the three months ended March 31, 2016, as compared to $24.5 million, or 34.8% of our sales
for the same period in 2015. Our gross profit was $51.5 million and $45.9 million for the three months ended March 31, 2016 and
2015, respectively, representing gross margins of 60.2% and 65.2%, respectively. The decrease of the gross margin was mainly due
to the sales derived from the raw material purchased from Xinjiang Deyuan Bioengineering Co., Ltd., or Xinjiang Deyuan, whose cost
is moderately higher than plasma from our own collection stations. Excluding this impact, our gross margin remained consistent
for the three months ended March 31, 2016 as compared to the same period in 2015.
Our cost of sales and
gross margin are affected by the volume and pricing of our sold products, raw material costs, production mix and respective yields,
inventory provisions, production cycles and routine maintenance costs. In an effort to increase plasma collection volume and expand
our donor base, we increased the nutrition fees paid to donors consistent with the industry practice. We expected the nutrition
fees to be paid to donors continue to increase as a result of improving living standards in China. Consequently, future improvements
on margins will need to be derived from increases in product pricing and volume, product mix, yields and manufacturing efficiency.
The increase in cost
of sales for the three months ended March 31, 2016 as compared to the same period in 2015 was generally in line with the increases
in sales volume and cost of plasma. The increase in cost of sales as a percentage of sales for the three months ended March 31,
2016 as compared to the same period in 2015 was mainly due to the moderately higher cost of plasma purchased from Xinjiang Deyuan
partially offset by the increase in the average sales price of certain plasma products.
Operating expenses
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Operating expenses
|
|
$
|
13.6
|
|
|
$
|
11.1
|
|
|
$
|
2.5
|
|
|
|
22.5
|
|
as a percentage of total sales
|
|
|
15.9
|
%
|
|
|
15.8
|
%
|
|
|
|
|
|
|
0.1
|
|
Our total operating
expenses increased by $2.5 million, or 22.5%, to $13.6 million for the three months ended March 31, 2016, from $11.1 million for
the same period in 2015. As a percentage of sales, total expenses increased by 0.1% to 15.9% for the three months ended March 31,
2016, from 15.8% for the same period in 2015. The increase of the total operating expenses was mainly due to the increase of the
general and administrative expenses as discussed below.
Selling expenses
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Selling expenses
|
|
$
|
1.2
|
|
|
$
|
2.0
|
|
|
$
|
(0.8
|
)
|
|
|
(40.0
|
)
|
as a percentage of total sales
|
|
|
1.4
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
(1.4
|
)
|
Our selling expenses
decreased by $0.8 million, or 40.0%, to $1.2 million for the three months ended March 31, 2016, from $2.0 million for the same
period in 2015. As a percentage of sales, our selling expenses decreased by 1.4% to 1.4% for the three months ended March 31, 2016,
from 2.8% for the same period in 2015 primarily due to the promotion activities on human rabies immunoglobulin products we carried
out in the three months ended March 31, 2015.
General and administrative expenses
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
General and administrative expenses
|
|
$
|
11.3
|
|
|
$
|
7.9
|
|
|
$
|
3.4
|
|
|
|
43.0
|
|
as a percentage of total sales
|
|
|
13.2
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
2.0
|
|
Our general and administrative
expenses increased by $3.4 million, or 43.0%, to $11.3 million for the three months ended March 31, 2016, from $7.9 million for
the same period in 2015. General and administrative expenses as a percentage of sales increased by 2.0% to 13.2% for the three
months ended March 31, 2016, from 11.2% for the same period in 2015. The increase in general and administrative expenses was mainly
due to the increase of share-based compensation expenses totaling $2.6 million.
Research and development expenses
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Research and development expenses
|
|
$
|
1.1
|
|
|
$
|
1.3
|
|
|
$
|
(0.2
|
)
|
|
|
(15.4
|
)
|
as a percentage of total sales
|
|
|
1.3
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
(0.6
|
)
|
Our research and development
expenses decreased by $0.2 million, or 15.4%, to $1.1 million for the three months ended March 31, 2016, from $1.3 million for
the same period in 2015. We received government grants of RMB 0.9 million (approximately $0.14 million) and recognized it as a
reduction of research and development expenses for the three months ended March 31, 2016. Excluding this impact, our research and
development expenses remained consistent in RMB term for the three months ended March 31, 2016 as compared to the same period in
2015. As a percentage of sales, our research and development expenses for the three months ended March 31, 2016 and 2015 were 1.3%
and 1.9%, respectively.
Income tax
|
|
Three Months Ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Income tax
|
|
$
|
6.6
|
|
|
$
|
5.6
|
|
|
$
|
1.0
|
|
|
|
17.9
|
|
as a percentage of total sales
|
|
|
7.7
|
%
|
|
|
8.0
|
%
|
|
|
|
|
|
|
(0.3
|
)
|
Our provision for income
taxes increased by $1.0 million, or 17.9%, to $6.6 million for the three months ended March 31, 2016, from $5.6 million for the
same period in 2015. Our effective income tax rate was 16.8% and 15.9% for the three months ended March 31, 2016 and 2015, respectively.
The statutory tax rate applicable to our major operating subsidiaries in the PRC for 2016 and 2015 is 15.0%.
Comparison of 2015 and 2014
Sales
Our total sales increased
by 21.9%, or $53.2 million, to $296.5 million for 2015, compared to $243.3 million for 2014, primarily due to increases
in the sales volumes of human albumin and IVIG. Excluding the foreign exchange impact resulting from the depreciation of the RMB
against the U.S. dollar, our sales would have increased by 23.4% for 2015 as compared to 2014. Such increase of sales was mainly
due to the increase in sales volume in major plasma products.
The following table summarizes the breakdown
of sales by major types of products:
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Human albumin
|
|
|
111.4
|
|
|
|
37.6
|
|
|
|
95.6
|
|
|
|
39.3
|
|
|
|
15.8
|
|
|
|
16.5
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IVIG
|
|
|
125.1
|
|
|
|
42.2
|
|
|
|
98.4
|
|
|
|
40.4
|
|
|
|
26.7
|
|
|
|
27.1
|
|
Other immunoglobulin products
|
|
|
22.5
|
|
|
|
7.6
|
|
|
|
19.7
|
|
|
|
8.1
|
|
|
|
2.8
|
|
|
|
14.2
|
|
Placenta polypeptide
|
|
|
27.2
|
|
|
|
9.2
|
|
|
|
24.0
|
|
|
|
9.9
|
|
|
|
3.2
|
|
|
|
13.3
|
|
Others Totals
|
|
|
10.3
|
|
|
|
3.4
|
|
|
|
5.6
|
|
|
|
2.3
|
|
|
|
4.7
|
|
|
|
83.9
|
|
|
|
|
296.5
|
|
|
|
100.0
|
|
|
|
243.3
|
|
|
|
100.0
|
|
|
|
53.2
|
|
|
|
21.9
|
|
For 2015 as compared
to 2014:
|
·
|
the average price for our approved human albumin products, which represented 37.6% of our total
sales, remained stable and, excluding the foreign exchange effect, their average price in RMB increased by approximately 1.3%;
and
|
|
·
|
the average price for our approved IVIG products, which represented 42.2% of our total sales, remained
stable, and excluding the foreign exchange effect, their average price in RMB increased by approximately 1.2%.
|
The average sales price
of our human albumin and IVIG products increased in RMB term for 2015 as compared to 2014, as a result of the combined effects
of the reduced value added tax, or VAT, rate, strong market demand and our sales effort to increase market shares in tier-one cities
and new markets. The VAT rate on sales of plasma products was reduced from 6.0% to 3.0%, effective on July 1, 2014. The reduction
in the VAT rate had a positive impact on our sales prices as our sales are recognized as the invoiced price of the products sold
minus VAT. All other factors being equal, the reduction in the VAT rate had the effect of increasing our sales price of plasma
products by 2.9%. Excluding this impact, the average sales price of our human albumin and IVIG products in RMB term would have
remained stable in 2015 as compared to 2014. The average sales price of our human albumin and IVIG products increased slightly
in RMB term in response to the strong market demand following the removal of the retail price ceilings for drug products, effective
on June 1, 2015. This increase is partially offset by our effort to increase the market share of our human albumin products
and IVIG products in tier-one cities and new markets in 2015, whereby we increased sales to distributors with lower invoiced prices
compared to direct sales to hospitals and inoculation centers.
The sales volume of
our products depends on market demand and our production volume. The production volume of our human albumin products and IVIG products
depends primarily on the general plasma supply. The production volume of our hyper-immune products, which include human rabies
immunoglobulin, human hepatitis B immunoglobulin and human tetanus immunoglobulin products, is subject to the availability of specific
vaccinated plasma and our production capacity. The supply of specific vaccinated plasma 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 period to period.
The sales volume of
our human albumin products increased by 16.6% for 2015 as compared to 2014, as a result of the increased production volume at Shandong
Taibang and Guizhou Taibang. The sales volume of our IVIG products increased by 27.0% for 2015 as compared to 2014, mainly due
to the increased sales through distributors in tier-one cities and new markets supported by the increased output following the
production resumption at Guizhou Taibang in March 2014. Further, in anticipation of a favorable market environment and our
increased sales capabilities this year, we reserved a large volume of IVIG pastes from previous years to be processed and sold
in early 2015, which also contributed to our increased sales volume in 2015.
The sales increase
of other immunoglobulin products for 2015 as compared to 2014 was mainly attributable to the increase in average sales price of
human tetanus immunoglobulin products. The increase in average sales price of human tetanus immunoglobulin products was primarily
due to the strong market demand coupled by the removal of the retail price ceiling for drug products effective on June 1,
2015.
The sales increase
of placenta polypeptide products was generally in line with the volume increase for 2015 as compared to 2014. The sales volume
of placenta polypeptide products increased by 12.8% for 2015 as compared to 2014, primarily due to the ramp-up of the production
capacities for placenta polypeptide at Guizhou Taibang after receiving the GMP certification for the upgraded production facilities
in January 2014.
The sales increase
of other products for 2015 as compared to 2014 was mainly due to the increase in sales volume of both factor VIII and PCC.
Cost of sales and gross profit
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Cost of sales
|
|
$
|
106.5
|
|
|
$
|
80.0
|
|
|
$
|
26.5
|
|
|
|
33.1
|
|
as a percentage of total sales
|
|
|
35.9
|
%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
3.0
|
|
Gross Profit
|
|
$
|
190.0
|
|
|
$
|
163.2
|
|
|
$
|
26.8
|
|
|
|
16.4
|
|
Gross Margin
|
|
|
64.1
|
%
|
|
|
67.1
|
%
|
|
|
|
|
|
|
(3.0
|
)
|
Our cost of sales was
$106.5 million, or 35.9% of our sales, for 2015, as compared to $80.0 million, or 32.9% of our sales for 2014. Our gross profit
was $190.0 million and $163.2 million for 2015 and 2014, respectively, representing gross margins of 64.1% and 67.1%,
respectively. Excluding the sales of the products derived from raw plasma outsourced from Xinjiang Deyuan, whose cost is moderately
higher than plasma from our own collection stations, our gross margin would have been 65.4% for 2015. Our cost of sales and gross
margin are affected by the volume and pricing of our finished products, raw material costs, production mix and yields, inventory
impairments, production cycles and routine maintenance costs.
The increase in cost
of sales for 2015 as compared to 2014 was generally in line with the increases in sales volume and cost of plasma. In an effort
to increase plasma collection volume and expand our donor base, we increased the nutrition fees paid to donors consistent with
the industry practice. We expect the nutrition fees to be paid to donors continue to increase as a result of improving living standards
in China. Consequently, future improvements on margins will need to be derived from increases in product pricing, product mix,
yields and manufacturing efficiency. The increase in cost of sales as a percentage of sales for 2015 as compared to 2014 was mainly
due to the increase in cost of plasma partially offset by the increase in the average sales price of major plasma products.
Operating expenses
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Operating expenses
|
|
$
|
57.4
|
|
|
$
|
52.1
|
|
|
$
|
5.3
|
|
|
|
10.2
|
|
as a percentage of total sales
|
|
|
19.4
|
%
|
|
|
21.4
|
%
|
|
|
|
|
|
|
(2.0
|
)
|
Our total operating
expenses increased by $5.3 million, or 10.2%, to $57.4 million for 2015 from $52.1 million for 2014. As a percentage
of total sales, total expenses decreased by 2.0% to 19.4% for 2015 from 21.4% for 2014. The operating expenses for 2014 included
a provision of $5.1 million for all the receivables in respect of an employee housing development project at Shandong Taibang
as discussed below. Excluding the effect of this provision, our operating expenses increased by $10.4 million, or 22.1%, for 2015
as compared to 2014, primarily due to the combined effect of the increase of the general and administrative expenses and research
and development expenses and the decrease of selling expenses as discussed below.
Selling expenses
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Selling expenses
|
|
$
|
10.0
|
|
|
$
|
10.7
|
|
|
$
|
(0.7
|
)
|
|
|
(6.5
|
)
|
as a percentage of total sales
|
|
|
3.4
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
(1.0
|
)
|
For 2015, our selling
expenses decreased by $0.7 million, or 6.5%, to $10.0 million from $10.7 million for 2014. As a percentage of total sales,
our selling expenses for 2015 decreased by 1.0% to 3.4% from 4.4% for 2014. The decrease was mainly due to the decreased selling
expense of placenta polypeptide for 2015 as compared to 2014. We began to utilize internal resources instead of third-party service
providers to promote sales of placenta polypeptide products, and did not renew a third-party engagement upon its expiration in
May 2014.
General and administrative expenses
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
General and administrative expenses
|
|
$
|
41.4
|
|
|
$
|
32.1
|
|
|
$
|
9.3
|
|
|
|
29.0
|
|
as a percentage of total sales
|
|
|
14.0
|
%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
0.8
|
|
For 2015, our general
and administrative expenses increased by $9.3 million, or 29.0%, to $41.4 million from $32.1 million for 2014. As a percentage
of total sales, general and administrative expenses increased by 0.8% to 14.0% for 2015 from 13.2% for 2014. The increase in general
and administrative expenses was mainly due to the increase of share-based compensation expenses totaling $6.7 million. In addition,
the disposal losses on assets increased by $2.7 million for 2015 as compared to 2014.
Research and development expenses
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Research and development expenses
|
|
$
|
6.0
|
|
|
$
|
4.2
|
|
|
$
|
1.8
|
|
|
|
42.9
|
|
as a percentage of total sales
|
|
|
2.0
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
0.3
|
|
For 2015, our research
and development expenses increased by $1.8 million, or 42.9%, to $6.0 million from $4.2 million for 2014. In 2015 and
2014, we received government grants totaling $1.2 million and $2.1 million respectively and recognized them as a reduction
of research and development expenses. Excluding this impact, our research and development expenses increased by $0.9 million
for 2015 from 2014. As a percentage of total sales, our research and development expenses, excluding the impact of the government
grants, decreased by 0.2% to 2.4% for 2015 from 2.6% for 2014. The increase of our research and development expenses was mainly
due to the expenditures paid for certain clinical trial programs in 2015.
Provision for other receivables in respect
of an employee housing development project
In 2014, we made a
full provision of $5.1 million for all the receivables in respect of an employee housing development project at Shandong Taibang
because it became probable that these receivables may not be recoverable after all legal means of collection were exhausted.
Equity in (loss) income of equity method investee
Our equity method investment
represented our 35.0% equity interest in Huitian, our equity method investee. For 2015, our equity in (loss) income of equity method
investee decreased by $9.9 million to a loss of $1.3 million from income of $8.6 million for 2014. Huitian suspended
its production and began to construct a new production facility to meet the new GMP standard in late 2013. Huitian incurred operation
losses during the suspension period in 2015 as it did not commence production at its new facility until February 2016. In
2014, Huitian disposed a subsidiary, recognizing a gain of RMB116.7 million (approximately $19.0 million).
Income tax expense
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2015
|
|
|
2014
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Income tax expense
|
|
$
|
21.0
|
|
|
$
|
26.6
|
|
|
$
|
(5.6
|
)
|
|
|
(21.1
|
)
|
Effective income tax rate
|
|
|
15.5
|
|
|
|
21.7
|
|
|
|
|
|
|
|
(6.2
|
)
|
Our provision for income
taxes decreased by $5.6 million, or 21.1%, to $21.0 million for 2015 from $26.6 million for 2014. For 2014, we incurred
the dividend withholding income tax of $8.9 million in respect of the dividends declared or to be declared by Shandong Taibang.
With our plan to reinvest Shandong Taibang's earnings in its business operations, we no longer incurred dividend withholding income
tax in respect of Shandong Taibang since 2015 following an internal corporate restructuring.
Excluding the impact
of dividend withholding income tax, our effective income tax rates were 15.5% and 14.4% for 2015 and 2014, respectively. The statutory
tax rate applicable to our major operating subsidiaries in the PRC for 2015 and 2014 was 15.0%.
Comparison of 2014 and 2013
Sales
Our total sales increased
by 19.6%, or $39.9 million, to $243.3 million for 2014, compared to $203.4 million for 2013, primarily due to increases
in the sales volumes of human albumin, IVIG and placenta polypeptide products. In addition, the effect resulted from the foreign
exchange appreciation of RMB against U.S. dollars contributed 0.9% of the sales increase in U.S. dollars.
The following table
summarizes the breakdown of sales by major types of products:
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Human albumin
|
|
|
95.6
|
|
|
|
39.3
|
|
|
|
89.7
|
|
|
|
44.1
|
|
|
|
5.9
|
|
|
|
6.6
|
|
Immunoglobulin products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IVIG
|
|
|
98.4
|
|
|
|
40.4
|
|
|
|
77.3
|
|
|
|
38.0
|
|
|
|
21.1
|
|
|
|
27.3
|
|
Other immunoglobulin products
|
|
|
19.7
|
|
|
|
8.1
|
|
|
|
19.7
|
|
|
|
9.7
|
|
|
|
-
|
|
|
|
-
|
|
Placenta polypeptide
|
|
|
24.0
|
|
|
|
9.9
|
|
|
|
12.2
|
|
|
|
6.0
|
|
|
|
11.8
|
|
|
|
96.7
|
|
Others Totals
|
|
|
5.6
|
|
|
|
2.3
|
|
|
|
4.5
|
|
|
|
2.2
|
|
|
|
1.1
|
|
|
|
24.4
|
|
|
|
|
243.3
|
|
|
|
100.0
|
|
|
|
203.4
|
|
|
|
100.0
|
|
|
|
39.9
|
|
|
|
19.6
|
|
For 2014 as compared
to 2013:
|
·
|
the average price for our approved human albumin products, which represented 39.3% of our total
sales, increased by approximately 1.4% and, excluding the foreign exchange effect, their average price in RMB increased by approximately
0.6%; and
|
|
·
|
the average price for our approved IVIG products, which represented 40.4% of our total sales, decreased
by approximately 0.2%, and excluding the foreign exchange effect, their average price in RMB decreased by approximately 0.9%.
|
The average sales price
of human albumin products increased slightly for 2014 as compared to 2013, as a result of the combined effects of the higher government-imposed
retail price ceiling, the reduced VAT rate and our sales effort to increase market shares in tier-one cities and new markets. The
higher retail price ceiling announced by NDRC that became effective on February 1, 2013 provided us with more flexibility
in pricing our human albumin products and allowed us to increase our ex-factory prices in certain regional markets. The reduction
of VAT rate from 6.0% to 3.0% effective on July 1, 2014 also had a positive effect on our sales price of plasma products as
our sales are recognized as the invoiced price of the products sold minus VAT. We lowered sales price of human albumin products,
however, in order to expand our market shares in tier-one cities and certain new markets in 2014. The price decrease of IVIG products
was mainly attributable to the increased sales through distributors in tier-one cities and new markets, partially offset by the
reduced VAT rate. To improve our brand recognition and the market share of IVIG products in tier-one cities and new markets, we
reduced our sales prices to distributors in 2014.
The sales volume of
our human albumin products increased by 5.1% for 2014 as compared to 2013, mainly due to the sales volume increase in Shandong
Taibang, partially offset by the sales volume decrease in Guizhou Taibang as a result of the planned production suspension at Guizhou
Taibang from June 2013 to March 2014. The sales volume of our IVIG products increased by 27.4% for 2014 as compared to
2013, mainly due to the increased market demand resulted from the outbursts of Hand, Foot and Mouth Disease and the increased sales
through distributors in tier-one cities and new markets during 2014. In anticipation of a favorable market environment and our
increased sales capabilities in 2014, we had reserved a large volume of our 2013 IVIG inventories to be sold throughout 2014.
The sales increase
of placenta polypeptide products was generally in line with the volume increase for 2014 as compared to 2013. The sales volume
of placenta polypeptide products increased significantly for 2014 as compared to 2013, primarily due to the expanded production
of placenta polypeptide at Guizhou Taibang after receiving the GMP certification for the upgraded production facilities in January 2014.
Cost of sales and gross profit
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Cost of sales
|
|
$
|
80.0
|
|
|
$
|
65.5
|
|
|
$
|
145
|
|
|
|
22.1
|
|
as a percentage of total sales
|
|
|
32.9
|
%
|
|
|
32.2
|
%
|
|
|
|
|
|
|
0.7
|
|
Gross Profit
|
|
$
|
163.2
|
|
|
$
|
137.9
|
|
|
|
25.3
|
|
|
|
18.3
|
|
Gross Margin
|
|
|
67.1
|
%
|
|
|
67.8
|
%
|
|
|
|
|
|
|
(0.7
|
)
|
Our cost of sales was
$80.0 million, or 32.9% of our sales, for 2014, as compared to $65.5 million, or 32.2% of our sales for 2013. Our gross profit
was $163.2 million and $137.9 million for 2014 and 2013, respectively, representing gross margins of 67.1% and 67.8%,
respectively. Our cost of sales and gross margin are affected by the volume and pricing of our finished products, raw material
costs, production mix and respective yields, inventory impairments, production cycles and routine maintenance costs.
The increase in cost
of sales for 2014 as compared to 2013 was primarily due to the increases in sales volume, cost of plasma and overhead. In an effort
to increase plasma collection volume and expand our donor base, we increased the nutrition fees paid to donors consistent with
the industry practice. We expect that the nutrition fees to be paid to donors will continue to increase as a result of the rising
living standards in China. Consequently, future improvements on margins will need to be derived from increases in product pricing
and volume, product mix, yields and manufacturing efficiency. The increase in cost of sales as a percentage of sales for 2014 as
compared to 2013 was mainly due to the increase in cost of plasma and the increase in overhead, especially depreciation expenses,
at Guizhou Taibang after its production resumption, partially offset by the change of our product mix to include more products
with higher margins.
Operating expenses
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Operating expenses
|
|
$
|
52.1
|
|
|
$
|
50.9
|
|
|
$
|
1.2
|
|
|
|
2.4
|
|
as a percentage of total sales
|
|
|
21.4
|
%
|
|
|
25.0
|
%
|
|
|
|
|
|
|
(3.6
|
)
|
Our total operating
expenses increased by $1.2 million, or 2.4%, to $52.1 million for 2014 from $50.9 million for 2013. As a percentage of
total sales, total expenses decreased by 3.6% to 21.4% for 2014 from 25.0% for 2013. The operating expenses for 2014 included a
provision of $5.1 million for all the receivables in respect of the employee housing development project at Shandong Taibang
as discussed above. Excluding the effect of this provision, our operating expenses decreased by $3.9 million, or 7.7%, for 2014
as compared to 2013, primarily due to the decrease in general and administrative expenses.
Selling expenses
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Selling expenses
|
|
$
|
10.7
|
|
|
$
|
10.6
|
|
|
$
|
0.1
|
|
|
|
0.9
|
|
as a percentage of total sales
|
|
|
4.4
|
%
|
|
|
5.2
|
%
|
|
|
|
|
|
|
(0.8
|
)
|
For 2014, our selling
expenses increased by $0.1 million, or 0.9%, to $10.7 million from $10.6 million for 2013. As a percentage of total sales,
our selling expenses for 2014 decreased by 0.8% to 4.4% from 5.2% for 2013. This decrease was mainly due to a decrease in the per-unit
selling expenses of placenta polypeptide during 2014. We began to utilize internal resources instead of third party service providers
to promote sales of placenta polypeptide products, and did not renew a third-party engagement upon its expiration in May 2014.
General and administrative expenses
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
General and administrative expenses
|
|
$
|
32.1
|
|
|
$
|
36.1
|
|
|
$
|
(4.0
|
)
|
|
|
(11.1
|
)
|
as a percentage of total sales
|
|
|
13.2
|
%
|
|
|
17.7
|
%
|
|
|
|
|
|
|
(4.5
|
)
|
For 2014, our general
and administrative expenses decreased by $4.0 million, or 11.1%, to $32.1 million from $36.1 million for 2013. As a percentage
of total sales, general and administrative expenses decreased by 4.5% to 13.2% for 2014 from 17.7% for 2013, mainly due to a decrease
in legal expenses and the amortization expenses of intangible assets. In 2013, we incurred legal expenses in relation to the take-over
defense against a competitor in China and the legal disputes regarding the shares of Guizhou Taibang. We did not incur similar
legal expenses for 2014. In addition, we incurred amortization expenses in 2013 in relation to the acquisition of GMP certificates
and other intangible assets when we acquired a majority stake in Guizhou Taibang in 2008. Because these intangible assets had been
fully amortized by the end of 2013, we did not incur corresponding expenses in 2014.
Research and development expenses
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Research and development expenses
|
|
$
|
4.2
|
|
|
$
|
4.2
|
|
|
$
|
-
|
|
|
|
-
|
|
as a percentage of total sales
|
|
|
1.7
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
(0.4
|
)
|
For 2014, our research
and development expenses remained stable, as compared to 2013. In 2014, we received government grants totaling $2.1 million
and recognized them as a reduction of research and development expenses. Excluding this impact, our research and development expenses
increased by $2.1 million for 2014 from 2013. As a percentage of total sales, our research and development expenses, excluding
the impact of the government grants, increased by 0.5% to 2.6% for 2014 from 2.1% for 2013. The increase was mainly due to the
expenditures paid for certain clinical trial programs and the engagement of external experts for certain pipeline products in 2014.
Equity in income of equity method investee
For 2014, our equity
in income of equity method investee increased by $6.4 million to $8.6 million from $2.2 million for 2013. As a percentage
of total sales, equity in income of equity method investee increased by 2.5% to 3.6% for 2014 from 1.1% for 2013. Huitian contributed
its land use right to its subsidiary as capital in 2013 and disposed the subsidiary in 2014, recognizing a gain of RMB116.7 million
(approximately $19.0 million) for 2014. As a result, our equity income in Huitian increased by $6.7 million.
Income tax expense
|
|
Year Ended December 31,
|
|
|
Change
|
|
|
|
2014
|
|
|
2013
|
|
|
Amount
|
|
|
%
|
|
|
|
(U.S. dollars in millions, except percentage)
|
|
Income tax expense
|
|
$
|
26.6
|
|
|
$
|
15.5
|
|
|
$
|
11.1
|
|
|
|
71.6
|
|
Effective income tax rate
|
|
|
21.7
|
%
|
|
|
16.8
|
%
|
|
|
|
|
|
|
4.9
|
|
Our provision for income
taxes increased by $11.1 million, or 71.6%, to $26.6 million for 2014 from $15.5 million for 2013. For 2014, the dividend
withholding income tax attributable to Shandong Taibang increased by $6.2 million, as compared to 2013, due to an increase in dividend
distribution in Shandong Taibang. The dividends from Shandong Taibang are subject to withholding tax at a rate of 10.0%.
Excluding the impact
of dividend withholding income tax, our effective income tax rates were 14.4% and 13.9% for 2014 and 2013, respectively. The statutory
tax rate applicable to our major operating subsidiaries in China for 2014 and 2013 was 15.0%.
Liquidity and Capital Resources
To date, we have financed
our operations primarily through cash flows from operations, augmented by bank borrowings and equity contributions by our stockholders.
As of March 31, 2016, we had $180.1 million in cash and cash equivalents, primarily consisting of cash on hand and demand deposits.
The
following table sets forth a summary of our cash flows for
the periods indicated:
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2016
|
|
|
2015
|
|
|
|
(U.S. dollars in millions)
|
|
Net cash provided by operating activities
|
|
$
|
109.4
|
|
|
$
|
93.5
|
|
|
$
|
74.3
|
|
|
$
|
24.2
|
|
|
$
|
16.5
|
|
Net cash used in investing activities
|
|
|
(89.8
|
)
|
|
|
(13.4
|
)
|
|
|
(25.6
|
)
|
|
|
(19.9
|
)
|
|
|
(8.5
|
)
|
Net cash provided by (used in) financing activities
|
|
|
51.6
|
|
|
|
(142.8
|
)
|
|
|
(38.5
|
)
|
|
|
29.8
|
|
|
|
(2.1
|
)
|
Effects of exchange rate change in cash
|
|
|
(7.1
|
)
|
|
|
(0.6
|
)
|
|
|
4.3
|
|
|
|
1.1
|
|
|
|
(0.7
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
64.1
|
|
|
|
(63.3
|
)
|
|
|
14.5
|
|
|
|
35.2
|
|
|
|
5.2
|
|
Cash and cash equivalents at beginning of the year
|
|
|
80.8
|
|
|
|
144.1
|
|
|
|
129.6
|
|
|
|
144.9
|
|
|
|
80.8
|
|
Cash and cash equivalents at end of the year
|
|
$
|
144.9
|
|
|
$
|
80.8
|
|
|
$
|
144.1
|
|
|
$
|
180.1
|
|
|
$
|
86.0
|
|
Operating Activities
Net cash provided by
operating activities for the three months ended March 31, 2016 was $24.2 million, as compared to $16.5 million for the same period
in 2015. The increase in net cash provided by operations activities was largely consistent with the improvements in our results
of operations, the speed-up of accounts receivable collection and the increase of net non-cash operating expense for the three
months ended March 31, 2016 as compared to the same period in 2015, partially offset by an increase in inventories during the relevant
period.
Cash inflows from operating
activities totaled $109.4 million in 2015, $93.5 million in 2014, and $74.3 million in 2013. Cash inflows increased
by $15.9 million in 2015 as compared to 2014 and increased by $19.2 million in 2014 as compared to 2013. Such increases
in cash inflows from operations were mainly in line with the improvements in our results of operations in 2015 and 2014, partially
offset by an increase in accounts receivable and inventories during the relevant years.
Accounts receivable
We sped up our collection
of accounts receivable for the three months ended March 31, 2016 as compared to the same period in 2015. The accounts receivable
turnover days for plasma products were 33 days and 38 days for the three months period ended March 31, 2016 and March 31, 2015,
respectively. For the three months ended March 31, 2015, in order to penetrate the market for human rabies immunoglobulin product,
we granted credit terms ranging from two to three months to the distributors rather than requiring them to make full payments prior
to deliveries. We no longer implemented such credit policy in the three months ended March 31, 2016.
Our average collection
speed of accounts receivable slowed down slightly in 2015 as compared to 2014. The accounts receivable turnover days for plasma
products were 34 days, 31 days, and 30 days for 2015, 2014, and 2013, respectively. The increase in turnover days for 2015 was
primarily due to the extended credit terms granted to certain distributors for human rabies immunoglobulin products. In 2015, we
adjusted our sales strategy by granting extended credit terms to certain qualified distributors of human rabies immunoglobulin
products to assist in their bidding efforts with provincial centers for disease control and prevention. In prior years, these distributors
were required to make the payments in advance of our product deliveries. Excluding this impact, the turnover days would have been
32 days for both 2015 and 2014.
Inventories
Inventories increased
by $3.9 million during the three months ended March 31, 2016, as compared to $1.9 million during the same period in 2015, primarily
due to the increase of plasma purchased from Xinjiang Deyuan.
Cash outflows for inventories
increased in both 2015 and 2014. The increases in inventory for 2015, 2014 and 2013 were $32.1 million, $13.4 million and
$10.4 million, respectively. As compared to 2014, the increase of inventories in 2015 was mainly attributable to the source plasma
and plasma pastes purchased from Xinjiang Deyuan. As compared to 2013, the increase of inventories in 2014 was mainly attributable
to an increase in work-in-process and finished goods at Guizhou Taibang following its resumption of production in March 2014
and, to a lesser extent, an increase in raw materials consistent with our expanded plasma collection volume.
Net non-cash operating
expenses
Net non-cash operating
expenses increased by $1.5 million during the three months ended March 31, 2016, as compared to the same period in 2015, primarily
due to the increase of share-based compensation expenses totaling $2.6 million.
Investing Activities
Our use of cash for
investing activities is primarily for the acquisition of property, plant and equipment, intangibles and long-term loan to a third
party.
Net cash used in investing
activities for the three months ended March 31, 2016 was $19.9 million, as compared to $8.5 million for the same period in 2015.
During the three months ended March 31, 2016, we paid $14.6 million for the acquisition of property, plant and equipment, intangible
assets and land use right for Shandong Taibang and Guizhou Taibang, and granted a loan of $6.3 million to Xinjiang Deyuan pursuant
to a cooperation agreement we entered into with Xinjiang Deyuan in August 2015. During the three months ended March 31, 2015, we
paid $8.5 million for the acquisition of property, plant and equipment, for Shandong Taibang and Guizhou Taibang.
Cash outflows from
investing activities for 2015 was $89.8 million, as compared to $13.4 million and $25.6 million for 2014 and 2013, respectively.
In 2015, we paid $52.3 million for the acquisition of property, plant and equipment, intangible assets and land use rights
and provided a long-term loan of $40.7 million to Xinjiang Deyuan, partially offset by government grants of $2.5 million
in connection with our purchase of property, plant and equipment.
In 2014, we paid $21.9 million
for the acquisition of property, plant and equipment, intangible assets and land use rights, partially offset by a $1.6 million
refund of deposits from the local government due to a decrease in the size of a land parcel purchased by Guizhou Taibang and proceeds
of $6.6 million from the maturity of a time deposit made in 2013.
In 2013, we paid $21.8 million
for the acquisition of property, plant and equipment, intangible assets and land use right, partially offset by a $2.1 million
refund of deposits from the local government due to a decrease in the size of a land parcel purchased by Guizhou Taibang.
Financing Activities
Net cash provided by
financing activities for the three months ended March 31, 2016 was $29.8 million, as compared to net cash used in financing activities
of $2.1 million for the same period in 2015. The net cash provided by financing activities for the three months ended March 31,
2016 mainly consisted of the maturity of a $37.8 million time deposit as a security for a 24-month loan which was fully repaid
in June 2015, partially offset by dividend of $7.9 million paid to the minority shareholder by Shandong Taibang. The net cash used
in financing activities for the three months ended March 31, 2015 mainly consisted of a repayment of $31.6 million on a short-term
bank loan and a dividend of $3.0 million to be held in escrow by a trial court in connection with disputes with a minority shareholder
of Guizhou Taibang, partially offset by the maturity of a $32.0 million deposit as security for the same short-term bank loan.
Cash inflows from financing
activities for 2015 totaled $51.6 million, as compared to cash outflows from financing activities totaled $142.8 million and
$38.5 million for 2014 and 2013, respectively. Cash inflows from financing activities in 2015 mainly consisted of net proceeds
of $80.6 million from a follow-on offering of our company’s common stock in June 2015, proceeds of $63.2 million
from the maturity of deposits used as security for bank loans, proceeds of $15.8 million from a short-term bank loan and proceeds
of $7.7 million from stock options exercised, partially offset by repayments of bank loans totaling $113.5 million and
a dividend of $3.7 million held in escrow by a trial court in connection with disputes with a minority shareholder of Guizhou
Taibang.
Cash outflows from
financing activities in 2014 mainly consisted of a payment of $86.8 million for acquisition of noncontrolling interest in
Guizhou Taibang, a dividend payment of $8.8 million by our subsidiaries to noncontrolling interest shareholders and a payment
of $70.0 million for repurchase of shares from an individual stockholder, partially offset by proceeds of $33.2 million
from a follow-on offering of our company’s common stock.
Cash outflows from
financing activities in 2013 mainly consisted of a payment of $29.6 million for share repurchase and a dividend payment of
$16.9 million by our subsidiaries to the noncontrolling interest shareholders.
Management believes
that our company has sufficient cash on hand and will continue to have positive cash inflow for its operations from the sale of
its products in the PRC market.
Obligations under Material Contracts
The following table
sets forth our material contractual obligations as of March 31, 2016:
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
one year
|
|
|
One to three
years
|
|
|
Three to five
years
|
|
|
More than
five years
|
|
|
|
(U.S. dollars in millions)
|
|
Operating lease commitment
|
|
|
1.4
|
|
|
|
0.4
|
|
|
|
0.8
|
|
|
|
—
|
|
|
|
0.2
|
|
Purchase commitment
|
|
|
76.1
|
|
|
|
29.8
|
|
|
|
46.3
|
|
|
|
—
|
|
|
|
—
|
|
Capital commitment Total
Seasonality of our Sales
|
|
|
34.1
|
|
|
|
30.7
|
|
|
|
3.4
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
111.6
|
|
|
|
60.9
|
|
|
|
50.5
|
|
|
|
—
|
|
|
|
0.2
|
|
Seasonality of our Sales
Our operating results
and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result
of new market opportunities or new product introductions.
Inflation
Inflation does not
materially affect our business or the results of our operations.
Off-Balance Sheet Arrangements
We do not have any
off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that are material to our investors.
Critical Accounting Policies
The preparation of
financial statements in conformity with United States generally accepted accounting principles, or U.S. GAAP, requires our management
to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes
thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those
that require the more significant judgments and estimates in the preparation of financial statements, including the following:
Use of Estimates
The preparation of
consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant and
equipment and intangibles with definite lives, the allowances for doubtful accounts, the fair value determinations of stock compensation awards, the realizability of deferred tax assets and inventories, the recoverability of intangible assets,
land use rights, property, plant and equipment, equity method investment and loan receivable, 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.
Allowance for doubtful
accounts
We maintain an allowance
for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance,
management considers historical losses, the customers’ financial condition, the amount of accounts receivable in dispute,
the accounts receivable aging and customers’ payment patterns. We review our allowance for doubtful accounts monthly. Past
due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit
exposure related to our customers.
We generally ask our
distributors to pay in advance before we deliver products, with few exceptions for a credit period of no longer than 60 days. For
hospitals and clinics, depending on the relationship and the creditability, we generally grant a credit period of no longer than
90 days with exceptions to customers, which we believe are credit worthy, of up to six months. We have provided a bad debt allowance
of nil, $23,656, $34,902, $6,211 and $31,567 for the three months ended March 31, 2016 and 2015, and 2015, 2014 and 2013, respectively.
Due to recovery of bad debt that we previously provided an allowance, the recoveries of bad debt provision was nil, nil, nil, $30,673
and nil for the three months ended March 31, 2016 and 2015, and 2015, 2014 and 2013, respectively.
Inventories
Inventories are stated
at the lower of cost or market. Adjustments are recorded to write down the carrying amount of any obsolete and excess inventory
to its estimated net realizable value based on historical and forecasted demand.
We review the inventory
periodically for possible obsolete goods and cost in excess of net realizable value to determine if any reserves are necessary.
Provisions to write-down the carrying amount of obsolete inventory to its estimated net realizable value amounted to $59,560, $4,576,
$76,587, $324,584 and nil for the three months ended March 31, 2016 and 2015, and 2015, 2014 and 2013, respectively, and were recorded
as cost of sales in the consolidated statements of comprehensive income.
Long-Lived Assets
Long-lived assets,
such as property, plant and equipment, and purchased intangible asset subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require
a long-lived asset or asset group be tested for possible impairment, we first compares undiscounted cash flows expected to be generated
by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable
on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair
value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary.
UNDERWRITING
Under the terms and
subject to the conditions in an underwriting agreement dated the date of this prospectus supplement, Morgan Stanley &
Co. International plc, as the sole underwriter, has agreed to purchase, and the selling stockholders have agreed to sell to it
2,775,000 shares of our common stock.
The underwriting agreement
provides that the obligations of the underwriter to pay for and accept delivery of the shares of common stock offered by this prospectus
supplement are subject to the approval of certain legal matters by its counsel and to certain other conditions. The underwriter
reserves the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Subject to the
terms and conditions set forth in the underwriting agreement, the underwriter is obligated to take and pay for all of the shares
of common stock offered by this prospectus supplement if any such shares are taken.
The underwriter is
purchasing the shares of common stock from the selling stockholders at $ per share (representing $
of aggregate proceeds to the selling stockholders). The underwriter may offer the shares of common stock from time to time for
sale in one or more transactions on NASDAQ Global Select Market, in the over-the-counter market, through negotiated transactions
or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices.
In connection with the sale of the shares of common stock offered hereby, the underwriter may be deemed to have received compensation
in the form of underwriting discounts. The underwriter may effect such transactions by selling shares of common stock to or through
dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriter and/or
purchasers of shares of common stock for whom it may act as an agent or to whom it may sell as a principal. The underwriter
is expected to make offers and sales both inside and outside the United States through its selling agents. Morgan Stanley &
Co. International plc will offer the shares of common stock in the United States through its registered broker-dealer affiliate
in the United States, Morgan Stanley & Co. LLC. The offering of the shares of common stock by the underwriter is subject
to receipt and acceptance and subject to the underwriter’ right to reject any order in whole or in part.
The selling stockholders
agreed to pay for all reasonable fees and expenses incurred by us in connection with the sale of the shares offered under this
prospectus supplement.
Our common stock has
been approved for quotation on the NASDAQ Global Select Market under the trading symbol “CBPO.”
We have agreed that, without the prior written consent of the
underwriter, we will not, during the period ending 60 days after the date of this prospectus supplement, and the selling stockholders
and one director affiliated with the selling stockholders have agreed that, without the prior written consent of the underwriter,
they will not, during the period ending 90 days after the date of this prospectus supplement:
|
·
|
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly,
any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock;
|
|
·
|
file any registration statement with the Securities and Exchange Commission relating to the offering
of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; and
|
|
·
|
enter into any swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the common stock.
|
In addition, we
and each such person agrees that, without the prior written consent of the underwriter, we or such other person will not,
during the applicable restricted period, make any demand for, or exercise any right with respect to, the registration of any
shares of common stock or any security convertible into or exercisable or exchangeable for common stock.
The restrictions described
in the immediately preceding paragraph are subject to certain exceptions, which include, among other things:
|
·
|
the sale of shares in this offering;
|
|
·
|
the issuance by our company of shares of common stock upon the exercise of an option or a warrant
or the conversion of a security outstanding on the date of this prospectus supplement of which the underwriter has been advised
in writing;
|
|
·
|
transactions by any person other than us relating to shares of common stock or other securities
acquired in open market transactions after the completion of the offering of the shares; provided that no filing under Section 16(a)
of the Securities Exchange Act, is required or voluntarily made in connection with subsequent sales of the common stock or other
securities acquired in such open market transactions;
|
|
·
|
the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for
the transfer of shares of common stock, provided that (1) such plan does not provide for the transfer of common stock
during the applicable restricted period and (2) to the extent a public announcement or filing under the Exchange Act, if
any, is required or voluntarily made regarding the establishment of such plan, such announcement or filing shall include a
statement to the effect that no transfer of common stock may be made under such plan during the applicable restricted period;
and
|
|
·
|
with respect to the director, the sale of shares in connection with the vesting of shares of restricted
stock to satisfy their tax obligations or with the exercise of options to cover tax withholding obligations in connection with
such exercise.
|
The underwriter, in
its sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole
or in part at any time with or without notice.
In order to facilitate
the offering of the common stock, the underwriter may engage in transactions that stabilize, maintain or otherwise affect the price
of the common stock. Specifically, the underwriter may sell more shares than it is obligated to purchase under the underwriting
agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available
for purchase by the underwriter under the option. The underwriter can close out a covered short sale by exercising the option or
purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriter will
consider, among other things, the open market price of shares compared to the price available under the option. The underwriter
may also sell shares in excess of the option, creating a naked short position. The underwriter must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that
there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors
who purchase in this offering. As an additional means of facilitating this offering, the underwriter may bid for, and purchase,
shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the
market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common
stock. The underwriter is not required to engage in these activities and may end any of these activities at any time without notice.
Neither we nor the underwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock.
We and the selling
stockholders have agreed to indemnify the underwriter against certain liabilities under the Securities Act. If we or the selling
shareholders are unable to provide this indemnification, we and the selling stockholders will contribute to payments that the underwriter
may be required to make for these liabilities.
The address of Morgan
Stanley & Co. International plc is 25 Cabot Square, Canary Wharf, London E14 4QA, United Kingdom.
A prospectus supplement
in electronic format may be made available on websites maintained by the underwriter, or selling group members, if any, participating
in this offering.
The underwriter and
its affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial
and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing
and brokerage activities. The underwriter and its affiliates have, from time to time, performed, and may in the future perform,
various financial advisory and investment banking services for us in the ordinary course of business, for which they received or
will receive customary fees and expenses.
In addition, in the
ordinary course of their various business activities, the underwriter and its affiliates may make or hold a broad array of investments
and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans)
for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities
and instruments. Such investment and securities activities may involve securities and instruments of ours or our affiliates. The
underwriter and its affiliates may also make investment recommendations or publish and/or express independent research views in
respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions
in such securities and instruments.
Selling Restrictions
No action has been
taken in any jurisdiction (except in the United States) that would permit a public offering of the common stock, or the possession,
circulation or distribution of this prospectus supplement or any other material relating to us or the common stock in any jurisdiction
where action for that purpose is required. Accordingly, the common stock may not be offered or sold, directly or indirectly, and
neither this prospectus supplement nor any other offering material or advertisements in connection with the common stock may be
distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations
of any such country or jurisdiction.
European Economic Area
In relation to each
Member State of the European Economic Area which has implemented the Prospectus Directive, or each a Relevant Member State, an
offer to the public of any shares of our common stock may not be made in that Relevant Member State, except that an offer to the
public in that Relevant Member State of any shares of our common stock may be made at any time under the following exemptions under
the Prospectus Directive, if they have been implemented in that Relevant Member State:
|
·
|
to any legal entity which is a qualified investor as defined in the Prospectus Directive;
|
|
·
|
to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the
2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive),
as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representative for any such offer; or
|
|
·
|
in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that
no such offer of shares of our common stock shall result in a requirement for the publication by us or any underwriter of a prospectus
pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
|
Each person in a Relevant
Member State who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and
agreed that it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing Article
2(1)(e) of the Prospectus Directive. In the case of any shares being offered to a financial intermediary as that term is used in
Article 3(2) of the Prospectus Directive, each such financial intermediary will be deemed to have represented, acknowledged and
agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they
been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares to
the public other than their offer or resale in a Relevant Member State to qualified investors as so defined or in circumstances
in which the prior consent of the underwriter has been obtained to each such proposed offer or resale.
Our company, the underwriter
and their affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgements and agreements.
This prospectus has
been prepared on the basis that any offer of shares in any Relevant Member State will be made pursuant to an exemption under the
Prospectus Directive from the requirement to publish a prospectus for offers of shares. Accordingly any person making or intending
to make an offer in that Relevant Member State of shares which are the subject of the offering contemplated in this prospectus
may only do so in circumstances in which no obligation arises for our company or the underwriter to publish a prospectus pursuant
to Article 3 of the Prospectus Directive in relation to such offer. Neither our company nor the underwriter has authorized, nor
do they authorize, the making of any offer of shares in circumstances in which an obligation arises for our company or the underwriter
to publish a prospectus for such offer.
For the purposes of
this provision, the expression an “offer to the public” in relation to any shares of our common stock in any Relevant
Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares
of our common stock to be offered so as to enable an investor to decide to purchase any shares of our common stock, as the same
may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus
Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented
in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression
“2010 PD Amending Directive” means Directive 2010/73/EU.
United Kingdom
In the United Kingdom,
this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons
who are “qualified investors” (as defined in the Prospectus Directive) (1) who have professional experience in
matters relating to investments falling within Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion)
Order 2005, as amended (the “Order”) and/or (2) who are high net worth companies (or persons to whom it may otherwise
be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to
as “relevant persons”). This document must not be acted on or relied on in the United Kingdom by persons who are not
relevant persons. In the United Kingdom, any investment or investment activity to which this document relates is only available
to, and will be engaged in with, relevant persons.
Switzerland
The common stock may
not be offered or sold to any investors in Switzerland other than on a non-public basis and will not be listed on the SIX Swiss
Exchange, or SIX, or on any other stock exchange or regulated trading facility in Switzerland. This prospectus supplement does
not constitute a prospectus within the meaning of Article 652a and Art.1156 of the Swiss Code of Obligations (Schweizerisches Obligationenrecht)
or the disclosure standards for listing prospectuses under art.27 ff. of the SIX Listing Rules or the listing rules of any other
stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material
relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document
nor any other offering or marketing material relating to the offering, our company, the shares have been or will be filed with
or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will
not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of shares has not been and
will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection
afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.
Australia
This prospectus supplement
is not a formal disclosure document and has not been, nor will be, lodged with the Australian Securities and Investments Commission.
It does not purport to contain all information that an investor or their professional advisers would expect to find in a prospectus
or other disclosure document (as defined in the Corporations Act 2001 (Australia)) for the purposes of Part 6D.2 of the Corporations
Act 2001 (Australia) or in a product disclosure statement for the purposes of Part 7.9 of the Corporations Act 2001 (Australia),
in either case, in relation to the common stock.
The common stock is
not being offered in Australia to “retail clients” as defined in sections 761G and 761GA of the Corporations Act 2001
(Australia). This offering is being made in Australia solely to “wholesale clients” for the purposes of section 761G
of the Corporations Act 2001 (Australia) and, as such, no prospectus, product disclosure statement or other disclosure document
in relation to the common stock has been, or will be, prepared.
This prospectus supplement
does not constitute an offer in Australia other than to wholesale clients. By submitting an application for our common stock, you
represent and warrant to us that you are a wholesale client for the purposes of section 761G of the Corporations Act 2001 (Australia).
If any recipient of this prospectus supplement is not a wholesale client, no offer of, or invitation to apply for, our common stock
shall be deemed to be made to such recipient and no applications for our common stock will be accepted from such recipient. Any
offer to a recipient in Australia, and any agreement arising from acceptance of such offer, is personal and may only be accepted
by the recipient. In addition, by applying for our common stock you undertake to us that, for a period of 12 months from the date
of issue of the common stock, you will not transfer any interest in our common stock to any person in Australia other than to a
wholesale client.
Japan
This offering has not
been and will not be registered under the Financial Instruments and Exchange Law (Law No. 25 of 1948 of Japan, as amended, or the
FIEL). The underwriter has represented and agreed that the common stock being offered hereby which they purchase will be purchased
by them as principal and that they will not, directly or indirectly, offer or sell any common stock in Japan or to, or for the
benefit of, any Japanese Person or to others for reoffer or resale, directly or indirectly, in Japan or to, or for the benefit
of, any Japanese Person, except pursuant to an exemption from the registration requirements under the FIEL and otherwise in compliance
with such law and any other applicable laws, regulations and ministerial guidelines of Japan. For the purposes of this paragraph,
“Japanese Person” shall mean any “Person Resident in Japan” (kyojusha) as defined in Section 6, Paragraph
1, Item 5 of the Foreign Exchange and Foreign Trade Law of Japan (Law No. 228 of 1949, as amended), including any corporation or
other entity organized under the laws of Japan.
Hong Kong
This prospectus supplement
has not been approved by or registered with the Securities and Futures Commission of Hong Kong or the Registrar of Companies of
Hong Kong. No person may offer or sell in Hong Kong, by means of any document, any common stock being offered hereby other than
(1) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and
any rules made under that Ordinance, or (2) in other circumstances which do not result in the document being a “prospectus”
as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer or invitation to the public within
the meaning of the Companies Ordinance. No advertisement, invitation or document relating to the common stock being offered hereby
will be issued or will be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere)
which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong except if permitted
under the securities laws of Hong Kong, other than with respect to the common stock which is or is intended to be disposed of only
to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance
and any rules made thereunder.
Singapore
This prospectus supplement
has not been registered as a prospectus with the Monetary Authority of Singapore under the Securities and Futures Act, Chapter
289 of Singapore, or the SFA. Accordingly, no person may offer or sell the common stock being offered hereby or cause such common
stock to be made the subject of an invitation for subscription or purchase, or circulate or distribute, this prospectus supplement
or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of such common
stock, whether directly or indirectly, to persons in Singapore other than (1) to an institutional investor under Section 274
of the SFA, (2) to a relevant person pursuant to Section 275(1), or (3) to any person pursuant to Section 275(1A),
and in accordance with the conditions specified in Section 275 of the SFA, or otherwise pursuant to, and in accordance with
the conditions of, any other applicable provision of the SFA.
Where the common stocks
are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
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a corporation (which is not an accredited investor (as defined in Section 4A of the SFA))
the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each
of whom is an accredited investor; or
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a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments
and each beneficiary of the trust is an individual who is an accredited investor,
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securities (as defined
in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in
that trust shall not be transferred within six months after that corporation or that trust has acquired the common stocks pursuant
to an offer made under Section 275 of the SFA except:
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to an institutional investor or to a relevant person defined in Section 275(2) of the SFA,
or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;
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where no consideration is or will be given for the transfer;
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where the transfer is by operation of law;
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as specified in Section 276(7) of the SFA; or
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as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares
and Debentures) Regulations 2005 of Singapore.
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People’s Republic
of China
This prospectus supplement
may not be circulated or distributed in the PRC and the common stock may not be offered or sold, and may not be offered or sold
to any person for re-offering or resale, directly or indirectly, to any resident of the PRC except pursuant to applicable laws
and regulations of the PRC. For the purpose of this paragraph, PRC does not include Taiwan and the special administrative regions
of Hong Kong and Macau.
Canada
The shares of common
stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined
in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients,
as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of
the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of
applicable securities laws.
Securities legislation
in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus
supplement (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages
are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province
or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province
or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section
3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National
Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriter is not required to comply with the disclosure requirements
of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.