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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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 $111.00 per share (representing $308,025,000
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.